UNITEDTable STATESof Contents

~~SECURITIES~~ UNITED ~~AND~~STATES ~~EXCHANGE COMMISSION~~

~~WASHINGTON,~~SECURITIES ~~D.C.~~AND ~~20549~~EXCHANGE COMMISSION

~~FORM~~WASHINGTON, ~~10-Q~~D.C. 20549

~~(Mark~~FORM ~~One)~~10-Q

~~x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15~~(d)Mark ~~OF THE SECURITIES EXCHANGE ACT OF 1934~~One)

~~For~~x ~~the~~QUARTERLY ~~quarterly~~REPORT ~~period~~PURSUANT ~~ended~~TO ~~December~~SECTION ~~31,~~13 ~~2004~~OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

ORFor the quarterly period ended September 30, 2005

~~¨ TRANSITION REPORT PURSUANT TO SECTION 13~~ OR ~~15(d) OF THE SECURITIES EXCHANGE ACT OF 1934~~

~~For~~¨ ~~the~~TRANSITION ~~transition~~REPORT ~~period~~PURSUANT ~~from to .~~TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

~~Commission~~For ~~File~~the ~~Number:~~transition ~~0-20720~~period from to .

~~PROVIDE~~Commission ~~COMMERCE,~~File ~~INC.~~Number: 000-20720

~~(Exact~~PROVIDE ~~Name~~COMMERCE, ofINC. ~~Registrant as Specified in its Charter)~~

Delaware		84-1450019
(State or Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification No.)
5005 Wateridge Vista Drive San Diego, CA		92121
(Address of Principal Executive Offices)		(Zip Code)

(Exact Name of Registrant as Specified in its Charter)

Registrant’s Telephone Number, Including Area Code: (858) 638-4900


Delaware		84-1450019
(State or Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification No.)

5005 Wateridge Vista Drive San Diego, CA		92121
(Address of Principal Executive Offices)		(Zip Code)

~~Indicate~~Registrant’s Telephone byNumber, ~~check~~Including ~~mark~~Area ~~whether the registrant~~Code: (1858) 638-4900 has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes ¨x No x ¨

AsIndicate ofby ~~December~~check ~~31,~~mark whether ~~2004,~~ the registrant ~~had~~is ~~12,151,581~~a ~~shares~~shell company (as defined in Rule 12b-2 of ~~common~~the ~~stock outstanding~~Exchange Act). Yes ¨ No x

~~PROVIDE~~As ~~COMMERCE~~of October 31, ~~INC~~2005, the registrant had 11,997,283 shares of common stock, par value $0.001 per share, outstanding.

QUARTERLYTable REPORTof Contents

~~FORM~~ PROVIDE ~~10-Q~~COMMERCE, INC.

~~TABLE~~QUARTERLY OFREPORT ~~CONTENTS~~

COVER PAGE
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
	ITEM 1.	Financial Statements (unaudited)	1
	Balance Sheets as of December 31, 2004 and June 30, 2004		2
	Statements of Operations for the three and six months ended December 31, 2004 and 2003		3
	Statements of Cash Flows for the six months ended December 31, 2004 and 2003		4
	Notes to Financial Statements		5
	ITEM 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	8
	ITEM 3.	Quantitative and Qualitative Disclosures about Market Risk	32
	ITEM 4.	Controls and Procedures	33
PART II. OTHER INFORMATION			34
	ITEM 1.	Legal Proceedings *	34
	ITEM 2.	Unregistered Sales of Equity Securities and Use of Proceeds	34
	ITEM 3.	Defaults upon Senior Securities *	34
	ITEM 4.	Submission of Matters to a Vote of Security Holders	35
	ITEM 5.	Other Information *	35
	ITEM 6.	Exhibits	35
SIGNATURE			37

FORM 10-Q

*TABLE NoOF ~~information~~CONTENTS ~~provided due to inapplicability of item.~~

PROVIDE COMMERCE, INC.


COVER PAGE		1

TABLE OF CONTENTS		2

PART I. FINANCIAL INFORMATION

ITEM 1. Financial Statements (unaudited)

Balance Sheets as of September 30, 2005 and June 30, 2005		3

Statements of Operations for the three months ended September 30, 2005 and 2004		4

Statements of Cash Flows for the three months ended September 30, 2005 and 2004		5

Notes to Financial Statements		6

ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		14

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 2. Unregistered Sales of Equity Securities and Use of Proceeds		40

ITEM 3. Defaults upon Senior Securities *		41

ITEM 4. Submission of Matters to a Vote of Security Holders *		41

ITEM 5. Other Information *		42

ITEM 6. Exhibits		42

SIGNATURE		43

~~FINANCIAL~~* ~~STATEMENTS~~No information provided due to inapplicability of item.

~~Index~~2

PARTTable I.of FINANCIAL INFORMATION Contents

~~ITEM~~PROVIDE 1COMMERCE, INC. ~~Financial Statements (unaudited):~~

~~Balance~~ BALANCE ~~Sheets~~SHEETS ~~– December 31, 2004 and June 30, 2004~~

~~Statements~~(Unaudited) ~~of Operations – Three and six months ended December 31, 2004 and 2003~~

~~Statements~~(in ofthousands, ~~Cash~~except ~~Flows~~share –and ~~Six~~per ~~months~~share ~~ended~~data) ~~December 31, 2004 and 2003~~

Notes to Financial Statements


	September 30, 2005			June 30, 2005
Assets
Current assets:
Cash and cash equivalents	$	4,243		$	12,308
Marketable securities		55,741			53,116
Accounts receivable, net of allowance for doubtful accounts of $44 and $54 at September 30, 2005 and June 30, 2005, respectively		1,931			1,649
Inventory, net		3,766			3,719
Prepaid expenses and other current assets		1,454			1,082
Income tax receivable		1,022			76
Deferred tax assets		4,800			4,810

Total current assets		72,957			76,760
Property and equipment, net		7,176			6,871
Deferred tax assets		1,775			1,775
Other assets		5,008			4,802

Total assets	$	86,916		$	90,208

Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable and other accrued liabilities	$	10,477		$	13,198
Accrued compensation		2,766			3,416
Deferred revenue		443			592

Total current liabilities		13,686			17,206
Accrued pension costs		1,262			1,186
Deferred compensation		1,746			1,181
Commitments and contingencies
Stockholders’ equity:
Preferred stock, $0.001 par value, 5,000,000 shares authorized, none issued and outstanding at September 30, 2005 and June 30, 2005.		—			—
Common stock, $0.001 par value, 50,000,000 shares authorized, 11,984,985 and 12,356,220 shares issued and outstanding at September 30, 2005 and June 30, 2005, respectively.		12			12
Additional paid-in capital		103,462			104,666
Treasury stock, at cost		(11,094	)		(8,849	)
Deferred stock-based compensation		—			(3,068	)
Accumulated other comprehensive loss		(105	)		(96	)
Accumulated deficit		(22,053	)		(22,030	)

Total stockholders’ equity		70,222			70,635

Total liabilities and stockholders’ equity	$	86,916		$	90,208

1See accompanying notes.

~~PROVIDE~~3 ~~COMMERCE, INC.~~

BALANCETable SHEETSof Contents

~~(Unaudited)~~ PROVIDE COMMERCE, INC.

~~(in~~STATEMENTS ~~thousands,~~OF ~~except~~OPERATIONS ~~share and per share data)~~

	December 31,2004			June 30,2004
Assets
Current assets:
Cash and cash equivalents	$	25,681		$	18,210
Marketable securities		40,272			41,218
Accounts receivable, net of allowance for doubtful accounts of $60 and $105 at December 31, 2004 and June 30, 2004, respectively		970			1,372
Inventory, net		1,745			1,343
Prepaid expenses and other current assets		1,313			652
Deferred tax assets		4,558			4,482
Total current assets		74,539			67,277
Property and equipment, net		6,590			4,626
Deferred tax assets		6,334			5,953
Other assets		2,349			2,369
Total assets	$	89,812		$	80,225
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable and other accrued liabilities	$	17,615		$	13,010
Accrued compensation		2,261			2,812
Income tax payable		—			943
Deferred revenue		532			325
Current portion of capital lease		—			48
Total current liabilities		20,408			17,138
Accrued pension costs		772			576
Deferred compensation		894			186
Commitments
Stockholders’ equity:
Preferred stock, $0.001 par value, 5,000,000 shares authorized, none issued and outstanding at December 31, 2004 and June 30, 2004.		—			—
Common stock, $0.001 par value, 50,000,000 shares authorized, 12,151,581 shares and 11,665,913 shares issued and outstanding at December 31, 2004 and June 30, 2004, respectively.		12			12
Additional paid-in capital		101,397			95,974
Deferred stock-based compensation		(3,076	)		(2,663	)
Accumulated other comprehensive loss		(137	)		(53	)
Accumulated deficit		(30,458	)		(30,945	)
Total stockholders’ equity		67,738			62,325
Total liabilities and stockholders’ equity	$	89,812		$	80,225

(Unaudited)

~~See~~(in ~~accompanying~~thousands, ~~notes.~~except share and per share data)


	Three Months Ended September 30,
	2005			2004
Net sales	$	26,782		$	19,921
Cost of sales		14,727			10,875

Gross profit		12,055			9,046
Operating expenses:
Selling and marketing		5,983			4,843
General and administrative		5,703			4,196
Information technology systems		1,712			1,223

Total operating expenses		13,398			10,262

Loss from operations		(1,343	)		(1,216	)
Other income, net		509			270

Loss from operations before income tax benefit		(834	)		(946	)
Income tax benefit		(367	)		(449	)

Net loss before cumulative effect of a change in accounting principle		(467	)		(497	)
Cumulative effect of a change in accounting principle		444			—

Net loss	$	(23	)	$	(497	)

Net loss per share before cumulative effect of a change in accounting principle:
Basic	$	(0.04	)	$	(0.04	)

Diluted	$	(0.04	)	$	(0.04	)

Cumulative effect of a change in accounting principle per share:
Basic	$	0.04		$	—

Diluted	$	0.03		$	—

Net loss per share:
Basic	$	—		$	(0.04	)

Diluted	$	—		$	(0.04	)

Weighted average common shares outstanding:
Basic		11,978,739			11,844,949

Diluted		13,454,914			11,844,949

~~PROVIDE~~See ~~COMMERCE,~~accompanying ~~INC~~notes.

~~STATEMENTS~~4 ~~OF OPERATIONS~~

(Unaudited)Table of Contents

~~(in~~ PROVIDE ~~thousands~~COMMERCE, ~~except~~INC. ~~share and per share data)~~

	Three Months Ended December 31,				Six Months Ended December 31,
	2004		2003		2004		2003
Net sales	$	33,458	$	23,278	$	53,379	$	36,228
Cost of sales		17,833		13,110		28,441		20,445
Gross profit		15,625		10,168		24,938		15,783
Operating expenses:
Selling and marketing		7,529		5,308		12,418		8,123
General and administrative		4,565		3,127		8,440		5,676
Information technology systems		1,217		1,020		2,356		1,832
Stock-based compensation		752		569		1,378		757
Total operating expenses		14,063		10,024		24,592		16,388
Operating income (loss)		1,562		144		346		(605	)
Other income, net		313		26		582		38
Income (loss) before income tax		1,875		170		928		(567	)
Income tax provision		891		—		441		—
Net income (loss)		984		170		487		(567	)
Preferred stock dividend		—		—		—		(1,500	)
Net income (loss) attributable to common stockholders	$	984	$	170	$	487	$	(2,067	)
Net income (loss) per common share:
Basic	$	0.08	$	0.03	$	0.04	$	(0.33	)
Diluted	$	0.07	$	0.01	$	0.04	$	(0.33	)
Weighted average common shares outstanding:
Basic		11,965,133		6,738,803		11,905,417		6,270,108
Diluted		13,813,430		11,365,470		13,618,705		6,270,108
Stock-based compensation is allocated as follows:
Cost of sales	$	5	$	—	$	10	$	—
Selling and marketing		278		220		494		324
General and administrative		360		312		681		381
Information technology systems		109		37		193		52
Total stock-based compensation	$	752	$	569	$	1,378	$	757

STATEMENTS OF CASH FLOWS

~~See~~(Unaudited) ~~accompanying notes.~~

3(in thousands, except share and per share data)

PROVIDE COMMERCE, INC.


	Three Months Ended September 30,
	2005			2004
Operating activities:
Net loss	$	(23	)	$	(497	)
Adjustments to reconcile net loss to cash used in operating activities:
Depreciation and amortization		802			599
Stock-based compensation		839			626
Cumulative effect of a change in accounting principle		(444	)		—
Changes in operating assets and liabilities:
Accounts receivable		(282	)		(256	)
Inventory		(47	)		142
Prepaid expenses and other current assets		(372	)		(228	)
Accounts payable and other accrued liabilities		(2,722	)		(2,852	)
Accrued compensation		(650	)		(1,092	)
Accrued pension costs		76			98
Long term deferred compensation		565			502
Deferred revenue		(149	)		(80	)
Accrued and deferred income taxes		(946	)		(1,120	)
Other assets		(206	)		248

Net cash used in operating activities		(3,559	)		(3,910	)

Investing activities:
Purchases of property and equipment		(1,107	)		(1,529	)
Purchases of marketable securities		(28,658	)		(7,599	)
Sales/maturities of marketable securities		26,019			13,950

Net cash provided by (used in) investing activities		(3,746	)		4,822

Financing activities:
Payment of long-term debt and capital lease obligations		—			(32	)
Common stock issued in connection with secondary public offering		—			1,299
Tax benefit from the exercise of stock options		555			340
Proceeds from exercise of common stock options and warrants		930			229
Repurchase of common stock		(2,245	)		—

Net cash provided by (used in) financing activities		(760	)		1,836

Net increase (decrease) in cash and cash equivalents		(8,065	)		2,748

Cash and cash equivalents at beginning of the period		12,308			18,210

Cash and cash equivalents at end of the period	$	4,243		$	20,958

Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest	$	—		$	1
Income taxes	$	23		$	516
Non-cash financing activities:
Stock-based compensation associated with employee and consultant stock options	$	839		$	626
Unrealized gain (loss) on marketable securities	$	(9	)	$	25
Tax benefit from the exercise of stock options	$	555		$	340

~~STATEMENTS~~See OFaccompanying notes. ~~CASH FLOWS~~

~~(Unaudited)~~5

(inTable thousands,of except share and per share data) Contents

	Six months ended December 31,
	2004			2003
Operating activities:
Net income (loss)	$	487		$	(567	)
Adjustments to reconcile net income (loss) to cash provided by operating activities:
Depreciation and amortization		1,275			749
Stock-based compensation		1,378			757
Tax benefit from the exercise of stock options		1,556			—
Non-cash interest expense in connection with issuance of warrants for line of credit		—			24
Changes in operating assets and liabilities:
Accounts receivable		401			(64	)
Inventory		(402	)		(38	)
Prepaid expenses and other current assets		(427	)		15
Accounts payable and other accrued liabilities		4,605			5,189
Accrued compensation		(551	)		(642	)
Accrued pension costs		196			—
Deferred compensation		709			—
Deferred revenue		208			196
Accrued and deferred income taxes		(1,633	)		—
Other assets		20			(27	)
Net cash provided by operating activities		7,822			5,592
Investing activities:
Purchases of property and equipment		(3,239	)		(1,584	)
Proceeds from note receivable		—			27
Purchases of marketable securities		(20,614	)		—
Sales/maturities of marketable securities		21,475			—
Net cash used in investing activities		(2,378	)		(1,557	)
Financing activities:
Payment of long-term debt and capital lease obligations		(48	)		(61	)
Common stock issued in connection with public offerings		1,353			34,592
Dividend paid to preferred stockholders		—			(1,500	)
Proceeds from exercise of common stock options and warrants		722			101
Net cash provided by financing activities		2,027			33,132
Net increase in cash and cash equivalents		7,471			37,167
Cash and cash equivalents at beginning of the period		18,210			11,496
Cash and cash equivalents at end of the period	$	25,681		$	48,663
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest	$	1		$	4
Income taxes	$	517		$	335
Non-cash financing activities:
Stock-based compensation associated with employee and consultant stock options	$	1,378		$	757
Conversion of preferred stock to common stock in connection with initial public offering	$	—		$	6
Tax benefit from the exercise of stock options	$	1,556		$	—
Unrealized gain (loss) on marketable securities	$	(84	)	$	—

PROVIDE COMMERCE, INC.

~~See~~NOTES ~~accompanying notes.~~TO FINANCIAL STATEMENTS

4(Unaudited)

~~PROVIDE~~(in ~~COMMERCE~~thousands, ~~INC.~~except share and per share data)

~~NOTES~~1. Description TOof ~~FINANCIAL~~Business ~~STATEMENTS~~

Provide Commerce, Inc. (~~Unaudited~~the “Company”) was incorporated in the State of Delaware and commenced operations on February 6, 1998. The Company operates in one business segment. The Company operates an e-commerce marketplace for perishable goods, such as fresh-cut floral arrangements, potted plants, high quality meat, seafood and fruit, and related merchandise. The Company’s e-commerce marketplace currently consists of www.proflowers.com, www.cherrymoonfarms.com, www.flowerfarm.com, and www.uptownprime.com. Products are purchased by customers and shipped directly from the growers/producers for overnight or other prompt delivery.

~~(in~~2. Summary ~~thousands,~~of ~~except~~Significant ~~share~~Accounting ~~and~~Policies ~~per share data)~~

1.Basis ~~Description~~ of ~~Business~~Presentation and Interim Financial Information

~~Provide Commerce,~~The ~~Inc.~~accompanying (unaudited financial statements of the “Company”) ~~was~~have ~~incorporated~~been prepared in accordance with United States generally accepted accounting principles for interim financial information and pursuant to the ~~State~~rules and regulations of ~~Delaware~~the Securities and ~~commenced~~Exchange ~~operations~~Commission, onand ~~February~~do 6,not ~~1998~~contain all information included in the audited financial statements and notes thereto. The ~~Company~~interim ~~operates~~unaudited anfinancial ~~e-commerce~~statements ~~marketplace~~should ~~for~~be ~~perishable~~read ~~goods,~~in ~~such~~conjunction aswith ~~fresh~~the financial statements and notes thereto included in the Company’s annual report on Form 10-~~cut~~K. ~~floral~~In ~~arrangements,~~the ~~potted~~opinion of ~~plants~~management, ~~high~~the ~~quality~~information ~~meats~~furnished ~~and~~herein ~~fruits,~~reflects ~~and~~all ~~related~~adjustments ~~merchandise.~~(consisting ~~Products~~only ~~are~~of ~~purchased~~normal, byrecurring ~~customers~~adjustments) ~~and~~necessary ~~shipped~~for ~~directly~~a ~~from~~fair presentation of the ~~growers/producers~~financial ~~for~~position, ~~overnight~~results orof ~~other~~operations ~~prompt~~and ~~delivery~~cash flows for the interim periods presented.

2.The ~~Summary~~balance ofsheet ~~Significant~~at ~~Accounting~~June 30, ~~Policies~~2005 has been derived from the audited financial statements at that date.

~~Basis~~Net ofLoss ~~Presentation~~Per ~~and~~Share ~~Interim Financial Information~~

~~The~~Basic ~~accompanying~~net ~~unaudited~~loss ~~financial~~per ~~statements~~common share ofis ~~the~~calculated ~~Company~~by ~~have~~dividing ~~been~~net ~~prepared~~loss ~~in accordance~~for ~~with~~the ~~United~~period ~~States~~by ~~generally~~the ~~accepted~~weighted ~~accounting~~average ~~principles~~common ~~for~~shares ~~interim~~outstanding ~~financial~~during ~~information~~the ~~and~~period, ~~pursuant~~less toshares ~~the~~subject ~~rules~~to ~~and~~repurchase. ~~regulations~~Diluted ofnet ~~the~~loss ~~Securities~~per ~~and~~share ~~Exchange~~is ~~Commission,~~calculated ~~and~~by dodividing ~~not~~the ~~contain~~net ~~all~~loss ~~information~~for ~~included~~the inperiod ~~the~~by ~~audited~~the ~~financial~~weighted ~~statements~~average ~~and~~common ~~notes~~shares ~~thereto.~~outstanding, ~~The~~adjusted ~~interim~~for ~~unaudited~~all ~~financial~~dilutive ~~statements~~potential ~~should~~common beshares, ~~read~~which inincludes ~~conjunction~~shares ~~with~~issuable upon the ~~financial~~exercise ~~statements~~of ~~and~~outstanding ~~notes~~common ~~thereto~~stock ~~included~~options, inconvertible ~~the~~preferred ~~Company’s~~stock ~~annual~~and ~~report~~other oncontingent ~~Form~~issuances ~~10-K. In the opinion~~ of ~~management,~~common ~~the~~stock ~~information~~to ~~furnished~~the ~~herein~~extent ~~reflects~~these ~~all~~shares ~~adjustments~~are ~~(consisting~~dilutive. ~~only~~The ofCompany ~~normal,~~incurred ~~recurring~~losses ~~adjustments) necessary~~ for athe ~~fair~~three ~~presentation~~months ofended ~~the financial position~~September 30, ~~results~~2005 ~~of operations~~ and ~~cash~~2004, ~~flows for the interim periods presented.~~

In6 December 2003, the Company effected a 1-for-3.037716 reverse stock split of its common stock. The accompanying financial statements give retroactive effect to the reverse stock split for all periods presented.

TheTable balanceof sheet at June 30, 2004 has been derived from the audited financial statements at that date. Contents

~~Net~~PROVIDE ~~Income~~COMMERCE, ~~(Loss)~~INC. ~~Per Share~~

~~Basic~~NOTES ~~net~~TO ~~income~~FINANCIAL STATEMENTS—(~~loss~~Continued) per common share is calculated by dividing net income (loss) for the period by the weighted average common shares outstanding during the period, less shares subject to repurchase. Diluted income (loss) per share is calculated by dividing the net income (loss) for the period by the weighted average common shares outstanding, adjusted for all dilutive potential common shares, which includes shares issuable upon the exercise of outstanding common stock options, convertible preferred stock and other contingent issuances of common stock to the extent these shares are dilutive. The Company incurred a loss for the six months ended December 31, 2003 and, accordingly, has excluded all convertible preferred stock, shares issuable upon exercise of common stock options, warrants and shares subject to repurchase from the calculation of diluted net loss per common share for that period as follows:

	Three months endedDecember 31,					Six months endedDecember 31,
	2004		2003			2004		2003
Numerator
Net income (loss)	$	984	$	170		$	487	$	(567	)
Preferred stock dividends		—		—			—		(1,500	)
Net income (loss) attributable to common stockholders	$	984	$	170		$	487	$	(2,067	)
Denominator
Basic:
Weighted average common shares outstanding		11,965		6,750			11,906		6,283
Less: Weighted average shares subject to repurchase		—		(11	)		—		(13	)
Denominator on basic calculation		11,965		6,739			11,906		6,270
Basic net income (loss) per common share	$	0.08	$	0.03		$	0.04	$	(0.33	)
Diluted:
Weighted average common shares outstanding		11,965		6,739			11,906		6,270
Weighted average dilutive effect of convertible Series A preferred stock		—		636			—		—
Weighted average dilutive effect of convertible Series B preferred stock		—		1,707			—		—
Weighted average dilutive effect of warrants		388		721			367		—
Weighted average dilutive effect of common stock options		1,460		1,563			1,346		—
Denominator on diluted calculation		13,813		11,366			13,619		6,270
Diluted net income (loss) per common share	$	0.07	$	0.01		$	0.04	$	(0.33	)

and, accordingly, has excluded all shares issuable upon exercise of common stock options or warrants and shares subject to repurchase from the calculation of diluted net loss per share for that period, except for the cumulative effect of a change in accounting principle, as follows:


	Three Months Ended September 30,
	2005			2004
Calculations for net losses
*Numerator*
Net loss before cumulative effect of a change in accounting principle	$	(467	)	$	(497	)

Net loss		(23	)	$	(497	)


*Denominator*
Basic for net loss before cumulative effect of a change in accounting principle and net loss:
Weighted average common shares outstanding		11,978,842			11,845,851
Less: Weighted average shares subject to repurchase		(103	)		(902	)

Denominator on basic calculation		11,978,739			11,844,949

Basic net loss before cumulative effect of a change in accounting principle per share	$	(0.04	)	$	(0.04	)

Basic net loss per share	$	—		$	(0.04	)


Diluted for net loss before cumulative effect of a change in accounting principle and net loss:
Weighted average common shares outstanding		11,978,739			11,844,949

Denominator on diluted calculation		11,978,739			11,844,949

Diluted net loss before cumulative effect of a change in accounting principle per share	$	(0.04	)	$	(0.04	)

Diluted net loss	$	—		$	(0.04	)

Calculations for income related to cumulative effect of a change in accounting principle
*Numerator*
Cumulative effect of a change in accounting principle	$	444		$	—


*Denominator*
Basic for cumulative effect of a change in accounting principle:
Weighted average common shares outstanding		11,978,842
Less: Weighted average shares subject to repurchase		(103	)

Denominator on basic calculation		11,978,739

Basic cumulative effect of a change in accounting principle per share	$	0.04		$	—

Diluted for cumulative effect of a change in accounting principle:
Weighted average common shares outstanding		11,978,739

Denominator on diluted calculation		13,454,914

Diluted cumulative effect of a change in accounting principle per share	$	0.03		$	—

~~PROVIDE~~7 ~~COMMERCE, INC.~~

NOTESTable TOof FINANCIAL STATEMENTS Contents

~~(Unaudited)~~PROVIDE COMMERCE, INC.

~~(in~~NOTES ~~thousands,~~TO ~~except~~FINANCIAL ~~share and per share data~~STATEMENTS—(Continued)

The following table summarizes potential common shares that are not included in the denominator used in net loss per ~~common~~share before cumulative effect of a change in accounting principle and net loss per share for the ~~six~~three months ended ~~December 31~~September 30, ~~2003~~2005 and 2004, because to do so would be anti-dilutive for the ~~period~~periods presented:

	Six months endedDecember 31,2003
	Three Months Ended September 30,
Options to purchase common stock	2,217
	2005	2004
Warrants to purchase common stock	975
Options to purchase common stock	1,123,451	1,242,204
Total	3,192
Warrants to purchase common stock	352,725	502,449
Total	1,476,176	1,744,653

Stock-~~based~~Based Employee Compensation

~~Effective~~Stock-based ~~July~~awards 1,are ~~2002,~~granted under the ~~Company~~terms ~~adopted~~of the ~~fair~~2003 ~~value recognition~~Stock ~~provisions~~Incentive ofPlan ~~Statement of Financial Accounting Standards~~ (~~“SFAS”~~2003 Plan) ~~No.~~and ~~123,~~the ~~Accounting~~employee ~~for~~stock ~~Stock-Based~~purchase ~~Compensation~~plan (~~“SFAS 123”~~ESPP). ~~The Company selected the prospective method~~Additionally, ~~which is one of~~ the ~~six~~Company ~~transition methods~~has ~~allowed~~outstanding bystock ~~SFAS~~options ~~No.~~under ~~148,~~its ~~Accounting~~1998 ~~for~~and 1999 Stock~~-based~~ ~~Compensation—Transition~~Option ~~and Disclosure~~Plans, toalthough ~~transition~~these toPlans ~~the~~terminated ~~fair value method of measuring stock-based compensation expense~~in 2003. Under the ~~prospective~~2003 ~~method~~Plan, the Company ~~expensed only~~grants ~~those~~both ~~employee~~incentive stock options ~~that~~and ~~were~~non-qualified ~~granted or modified after July 1, 2002. The majority of awards under the Company’s plans vest over a period of four years. The expense associated with~~ stock ~~compensation is amortized over the vesting period of the individual award using an accelerated method of amortization consistent with the method described in FASB Interpretation No~~options. ~~28.~~

~~The~~Prior ~~effect~~to ofJuly 1, ~~applying~~2002, the ~~fair~~Company accounted for its stock-based awards using the intrinsic value method under the recognition ~~provisions~~and measurement principles of ~~SFAS~~Accounting ~~123~~Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees (APB No. 25) and related Interpretations. Under the provisions of APB No. 25, no stock-based employee compensation cost ~~for~~was ~~all~~reflected ~~outstanding~~in ~~and~~net ~~unvested~~income ~~awards~~upon ingrant ~~periods~~of ~~prior~~the ~~to July 1~~options, ~~2002,~~as onall ~~net~~options ~~income~~granted ~~(loss)~~under ~~and~~those ~~earnings~~plans ~~per~~had ~~common~~an ~~share~~exercise ~~for~~price equal to the ~~three~~market orvalue ~~six~~of ~~months~~the ~~ended~~underlying ~~December~~stock ~~31,~~on ~~2004~~the ~~did~~date ~~not~~of ~~result~~grant. inStock-based ~~pro~~employee ~~forma~~compensation ~~income~~cost was reflected for options which isbecame ~~materially~~variable ~~different~~price ~~from~~options ~~the~~due ~~reported~~to ~~amount.~~a ~~Therefore,~~change ~~such~~in ~~pro~~the ~~forma~~strike ~~information~~price ~~is not~~of ~~presented~~those ~~herein~~options.

~~The~~Effective ~~fair~~July 1, ~~value~~2002, ofthe ~~each~~Company ~~option~~adopted ~~granted~~the ~~was~~fair ~~estimated~~value ~~on the~~recognition ~~date~~provisions of ~~grant~~Statement ~~using~~of ~~the~~Financial ~~Black-Scholes~~Accounting ~~option~~Standard ~~pricing model~~No. As123, Accounting ~~the~~for ~~Black~~Stock-~~Scholes~~Based ~~option~~Compensation ~~valuation~~(SFAS ~~model~~No. 123), ~~requires~~as ~~the~~amended, ~~input~~using ofthe ~~subjective~~prospective ~~assumptions,~~transition method. Under the ~~resulting~~prospective ~~pro~~method, ~~forma~~the ~~compensation~~Company ~~cost~~expensed ~~may~~only ~~not~~those beemployee ~~representative~~stock ofoptions that towere begranted ~~expected~~or inmodified after ~~future~~July 1, ~~periods~~2002. The ~~Company~~majority ~~used~~of ~~the~~awards ~~minimum~~under ~~value~~the ~~method~~Company’s toplans ~~determine~~vest ~~the~~over ~~fair~~a ~~value~~period of ~~options~~four ~~granted~~years. ~~prior~~The toexpense ~~its~~associated ~~initial~~with ~~filing~~stock incompensation ~~September~~is ~~2003~~amortized ofover athe ~~registration~~vesting ~~statement~~period ~~under~~of the ~~Securities~~individual ~~Act~~award using an accelerated method of amortization ~~1933~~consistent ~~relating~~with tothe anmethod ~~initial~~described ~~public offering~~in ofFinancial ~~the~~Accounting ~~Company’s~~Standards ~~common~~Board ~~stock~~(FASB) Interpretation No. 28.

~~Recently~~Effective July 1, 2005, the Company adopted SFAS No. 123 (revised 2004), Share-Based Payment (SFAS 123(R)), using the modified ~~Issued~~prospective ~~Accounting~~method ~~Standards~~of application. Under this method, compensation expense is recognized both for (i) the remaining vesting periods of awards granted, subsequent to July 1, 2002 and (ii) the remaining vesting periods of awards granted prior to July 1, 2002.

The ~~Company~~impact ~~adopted the fair-value-based method~~ of ~~accounting~~adopting ~~for stock-based payments effective July 1, 2002 using the prospective method described in FASB Statement~~ SFAS No. 123(R) ~~148, Accounting~~ for ~~Stock-Based Compensation—Transition and Disclosure. Currently,~~ the Company’s ~~uses~~first ~~the Black-Scholes~~quarter ~~formula to estimate the value~~ of ~~stock~~fiscal ~~options~~2006 ~~granted~~was toa ~~employees~~decrease ~~and~~in ~~expects~~compensation toexpense ~~continue to use this acceptable option valuation model upon the required adoption~~ of ~~Statement~~ $123 (R)$69 onafter ~~July 1, 2005. Because Statement 123(R~~tax) ~~must~~and ~~be applied~~an ~~not~~increase ~~only~~of to$0.01 ~~new~~for ~~awards~~both ~~but~~basic toand ~~previously~~diluted ~~granted~~earnings ~~awards~~per ~~that~~share. The ~~are not fully vested on the effective date, and because the~~ Company ~~adopted~~expects ~~Statement 123 using~~ the ~~prospective~~total ~~transition~~expense ~~method (which applied only to awards granted, modified or~~for ~~settled~~stock-based ~~after the adoption date), compensation cost for some previously granted~~ awards ~~that~~during ~~were~~fiscal ~~not~~year ~~recognized~~2006 ~~under~~to ~~Statement~~be ~~123~~approximately ~~will~~$4.0 bemillion. The ~~recognized~~adoption ~~under~~of ~~Statement~~SFAS No. 123(R). ~~The~~is ~~Company~~expected ~~does~~to ~~not~~incrementally ~~anticipate~~decrease ~~that~~before ~~this~~tax ~~will~~compensation ~~have~~expense aby ~~material~~approximately ~~effect~~$500 ~~on its~~during ~~financial~~fiscal ~~statements~~2006. SFAS ~~However, had the Company adopted Statement~~ 123(R) also inrequires ~~prior periods,~~ the ~~impact~~cash offlows ~~that~~resulting ~~standard~~from ~~would have approximated~~ the ~~impact~~tax ofbenefits ~~Statement~~resulting ~~123~~from astax ~~described~~deductions in ~~the~~excess ~~disclosure~~ of ~~pro~~the ~~forma~~compensation ~~net~~cost ~~income~~recognized ~~and~~for ~~earnings~~those ~~per share~~options ~~in Note 2 to our annual consolidated financial statements. Statement 123~~(R)except ~~also~~tax ~~requires the~~ benefits) ~~of tax deductions in excess of recognized compensation cost~~ to be ~~reported~~classified as a financing cash ~~flow,~~flows. ~~rather~~In ~~than~~prior asperiods, ansuch ~~operating~~amounts were ~~cash~~presented ~~flow~~ as ~~required~~an ~~under~~operating ~~current literature~~activity. ~~This~~For ~~requirement~~the ~~will~~three ~~reduce~~months ~~net~~ended ~~operating~~September 30, ~~cash~~2005 ~~flows~~ and ~~increase~~2004, ~~net~~$555 ~~financing~~and ~~cash~~$340 ~~flows~~was inreported ~~periods~~as ~~after~~“Tax ~~adoption.~~benefit ~~While~~from the ~~Company~~exercise ~~cannot~~of ~~estimate~~stock ~~what~~options” ~~those amounts will be~~ in the ~~future~~financing ~~(because~~activities ~~they depend~~of ~~on, among other things, when employees exercise stock options),~~ the ~~amount~~Statement of ~~operating cash flows recognized in prior periods for such excess tax deductions were $1,556 for the six months ended December 31, 2004 and $246, $0, and $0 in~~Cash ~~fiscal years ended June 30, 2004, 2003 and 2002, respectively.~~

~~3. Stockholders’~~8 ~~Equity~~

CommonTable Stockof Contents

InPROVIDE ~~September 2003~~COMMERCE, the Company’s Board of Directors approved an amendment to the certificate of incorporation and increased the authorized common stock to 50,000,000 shares, which became effective December 22, 2003 in connection with the Company’s initial public offeringINC. ~~During the six months ended December 31, 2004, the Company issued 385,668 shares of common stock upon the exercise of outstanding options and warrants.~~

AtNOTES ~~December~~TO ~~31,~~FINANCIAL ~~2004,~~STATEMENTS—(Continued) 155 shares were subject to repurchase at the original issuance price. The shares are subject to repurchase at the election of the company in the event the employees are terminated. There will be little or no consideration paid for these shares in the event they are repurchased.

On Flows. ~~July~~At 7adoption, ~~2004,~~ the Company ~~completed~~recognized a ~~secondary~~cumulative ~~public~~effect ~~offering~~of ~~whereby~~change ~~1,981,019~~in ~~shares~~accounting ofprinciple ~~common~~resulting ~~stock~~in ~~were~~a ~~sold~~net atincome anbenefit ~~offering price~~ of $~~19.63~~444, ~~per~~which corresponded ~~share.~~to Of the ~~1,981,019~~requirement ~~shares~~of ~~sold,~~estimating ~~100,000~~forfeitures ~~shares~~at ~~were~~the ~~sold~~date byof ~~the~~grant. ~~Company~~SFAS 123(R) ~~and~~also ~~an aggregate~~eliminated the presentation of 1the contra-equity account,~~881,019~~ ~~shares~~“Deferred ~~were~~stock-based ~~sold~~compensation,” byfrom ~~selling~~the ~~stockholders.~~face ~~The~~of ~~Company~~the ~~received~~Balance ~~net~~Sheet resulting ~~proceeds~~in ofa ~~approximately~~reclassification of $13,~~353~~068 into ~~connection~~“Additional ~~with~~paid-in ~~the secondary offering~~capital.”

~~Preferred~~The ~~Stock~~effect of applying the fair value recognition provisions of SFAS 123(R) to stock-based compensation for all outstanding and unvested awards in periods prior to July 1, 2002, on net income and earnings per common share for the three months ended September 30, 2005 and 2004, did not result in pro forma income or loss which is materially different from the reported amount. Therefore, such pro forma information is not presented herein.

InThe ~~August~~following ~~2003,~~weighted-average ~~the~~assumptions ~~Company~~were ~~declared~~used ~~and~~for ~~paid~~options agranted in ~~cash~~the ~~dividend~~three tomonths ~~the~~ended ~~holders~~September 30, of2005 ~~the~~and ~~then~~2004 ~~issued~~ and ~~outstanding~~a ~~Series~~discussion Aof ~~and~~our ~~Series~~methodology Bfor ~~preferred~~developing ~~stock~~each of the assumptions used in the ~~aggregate amount~~valuation ofmodel ~~$1,500.~~follows:

In September 2003, the Company’s Board of Directors approved an amendment to the certificate of incorporation setting the authorized preferred stock to 5,000,000 shares which became effective December 22, 2003 in connection with the Company’s initial public offering. The preferred stock is “blank check preferred,” which can be created and issued by the Board of Directors without stockholder approval, with rights senior to those of common stock. Prior to December 22, 2003, the Company’s Board of Directors was authorized to issue 7,300,000 shares of preferred stock and had designated 300,000 shares of the Company’s preferred stock as “Series A preferred stock” and 7,000,000 shares as “Series B preferred stock.”


	Three Months Ended September 30,
	2005		2004
Dividend yield	0.0	%	0.0	%
Expected volatility	45.0	%	54.4	%
Risk-free interest rate	3.99	%	4.43	%
Expected life of the option term (in years)	4.1		5.0
Forfeiture rate	10.0	%	N/A

6• Dividend Yield—The Company has never declared or paid dividends on common stock and has no plans to do so in the foreseeable future.

~~PROVIDE~~• ~~COMMERCE,~~Expected ~~INC~~Volatility—Volatility is a measure of the amount by which a financial variable such as a share price has fluctuated (historical volatility) or is expected to fluctuate during a period based on comparisons with the implied volatility of traded options of companies which are similar to the Company and other factors which may effect the volatility of the Company’s stock (expected volatility). The Company considered the historical volatility from its initial public offering through the dates of grants, in combination with the implied volatility of options of similar companies, and business and economic considerations in order to estimate the expected volatility, due to the limited time of being a public company.

~~NOTES~~• TORisk-Free ~~FINANCIAL~~Interest ~~STATEMENTS~~Rate—This is the U.S. Treasury rate for the week of each option grant during the quarter having a term that most closely resembles the expected life of the option.

~~(Unaudited)~~• Expected Life of the Option Term—This is the period of time that the options granted are expected to remain unexercised. Options granted during the quarter have a maximum term of ten years. The Company estimates the expected life of the option term based on actual past behavior for similar options with further consideration given to the class of employees to whom the options were granted.

~~(in~~• ~~thousands,~~Forfeiture ~~except~~Rate—This ~~share~~is ~~and~~the ~~per~~estimated ~~share~~percentage of options granted that are expected to be forfeited or canceled on an annual basis before becoming fully vested. The Company estimates the forfeiture rate based on past turnover data) ranging between zero to four years.

OnAs ~~December~~of 22September 30, ~~2003,~~2005 ~~in connection with~~ the ~~Company’s~~total ~~initial~~unrecognized ~~public~~compensation ~~offering,~~cost ~~the Series~~related Ato ~~preferred~~unvested ~~stock~~share-based ~~outstanding~~compensation ofarrangements ~~221,715 shares~~ was ~~converted into 760,383 shares of common stock~~$5.4 ~~In addition~~million, onand ~~December~~the related ~~22,~~weighted ~~2003,~~average inperiod ~~connection~~over ~~with~~which ~~the~~it ~~Company’s~~is ~~initial~~expected ~~public~~to ~~offering,~~be ~~the~~recognized ~~Series~~is Bapproximately ~~preferred stock outstanding of~~ 3.5~~,816,285~~ ~~shares was reclassified into 2,104,853 shares of common stock~~years.

~~4. Deferred~~9 ~~Compensation Plan~~

InTable November 2003, the compensation committee of the Board of Directors approved a Deferred Compensation Plan which became effective in January 2004. The Deferred Compensation Plan is an unfunded non-qualified plan for the benefit of non-employee directors and certain designated management and highly compensated employees of the Company. The plan permits participants to defer receipt of certain compensation, as well as certain income for stock option exercises. In addition, the Company may elect to make a matching contribution to any or all of the participants in an amount of fifty percent (50%) of the participant’s deferred annual base salary or annual bonus, but in no event shall the matching contributions exceed ten percent (10%) of the participant’s annual base salary with respect to deferrals of base salary or ten percent (10%) of the participant’s annual bonus with respect to deferrals of annual bonus. As of June 30, 2004 and December 31, 2004, the Company had deferred compensation of $186 and $894, respectively, related to the Deferred Compensation Plan. Contents

5.PROVIDE ~~Supplemental Executive~~COMMERCE, ~~Retirement~~INC. ~~Plan~~

InNOTES ~~November~~TO ~~2003,~~FINANCIAL ~~the compensation committee of the Board of Directors approved a Supplemental Executive Retirement Plan~~ STATEMENTS—(~~the “SERP”~~Continued) which became effective in January 2004. The SERP is an unfunded non-qualified plan for the benefit of certain non-employee directors, designated management and highly compensated employees of the Company. Participants under the SERP will be due a benefit (as defined for purposes of the SERP) upon early or normal retirement, disability, death or other termination of employment. The ordinary benefit is a benefit equal to 0.015 multiplied by the number of years of service to the Company and multiplied by the participant’s final average compensation, and reduced by amounts paid under the Deferred Compensation Plan. Amounts due under the SERP will be paid in equal installments over 15 years commencing at normal retirement (age 65). If an ordinary benefit commences prior to normal retirement, the participant will receive the actuarial equivalent of his or her vested benefit at normal retirement, generally to be paid over 15 years. The benefit for our chairman as of December 31, 2004 is $232 payable annually over 20 years commencing upon retirement. The following is a summary of our net periodic benefit cost included the following components for the three and six months ended December 31, 2004:

	Three Months EndedDecember 31, 2004		Six Months EndedDecember 31,2004
Service Cost	$	73	$	147
Interest Cost		16		32
Amortization		9		17
Net periodic benefit cost	$	98	$	196

SFAS 123(R) requires that stock-based compensation expense be reported on the same line on the Statement of Operations as the related cash wages. Historically, the Company has reported stock-based compensation expense as a separate line in the operating expenses section of the Statement of Operations. Under SFAS 123(R), the Company has reported the following amounts of stock-based compensation expense in the Statements of Operations as follows:

The SERP is an unfunded obligation of the Company in which earned plan benefits will be paid out of general operating funds as they come due. To offset the cost of the plan, the Company has purchased life insurance policies on all of the participants within the plan. The Company is the sole beneficiary on these policies. Using this structure and professional actuarial guidance, the Company anticipates that there will be no net cost over the full life of the plan.


	Three Months Ended September 30,
	2005		2004
Cost of sales	$	4	$	5
Selling and marketing		281		216
General and administrative		359		321
Information technology systems		195		84

Total stock-based compensation	$	839	$	626

6.Stock ~~Income Tax~~ Options

~~During~~In September 2003, the ~~three~~Company’s Board of Directors approved the 2003 Stock Incentive Plan for issuance of stock options and ~~six~~stock ~~months~~purchase ~~ended~~rights ~~December~~to 31employees, ~~2004~~directors, ~~the~~and ~~Company~~consultants, ~~recognized~~which abecame ~~tax~~effective ~~expense~~in December 2003. Upon effectiveness of ~~$891~~the 2003 plan, the options under the predecessor 1998 and ~~$441~~1999 plans were transferred to the 2003 plan, ~~respectively~~and no further options will be granted under the predecessor plans. In addition, the Company has reserved an ~~effective~~aggregate ~~tax~~of ~~rate~~4,608,375 shares of ~~47.5%.~~common ~~The~~stock ~~high~~for issuance under the 2003 plan which ~~effective~~includes ~~tax~~the ~~rate~~number ~~anticipated~~of ~~for~~shares carried over from the ~~year~~predecessor isplans. aThe ~~result~~number of ~~the~~shares of common stock~~-based~~ ~~compensation~~reserved ~~recognized~~for issuance under ~~SFAS~~the ~~123.~~2003 Noplan ~~benefit~~will orautomatically ~~expense~~be ~~was~~increased ~~recorded~~on ~~during~~ the ~~three~~first ~~and~~day ~~six~~in ~~months~~January ~~ended~~each ~~December~~calendar 31year, ~~2003~~beginning ~~due~~in calendar year 2004, by an amount equal to the ~~valuation~~lesser ~~allowance~~of ~~against~~(i) 3% ~~net~~of the total number of shares of the Company’s common stock outstanding on the last trading day in December of the preceding year or (ii) the lesser of 625,000 shares of ~~deferred~~the ~~tax~~Company’s ~~assets~~common ~~during~~stock ~~those~~or ~~periods~~such amount as determined by the Company’s Board of Directors.

7In fiscal year 1998, the Company adopted the 1998 Stock Option/Stock Issuance Plan (the “1998 Plan”) and in fiscal year 2000, the Company adopted the 1999 Stock Option/Stock Issuance Plan (the “1999 Plan”) (collectively, the “Plans”). Under the Plans, employees, directors and consultants may be granted options and stock purchase rights to purchase common shares.

Both Plans provide for the issuance of up to 5,000,000 shares ~~ITEM~~of 2common stock. ~~MANAGEMENT’S~~Options ~~DISCUSSION~~granted ~~AND~~under ~~ANALYSIS~~the OFPlans ~~FINANCIAL~~generally ~~CONDITION~~expire ~~AND~~no ~~RESULTS~~later OFthan ~~OPERATIONS~~ten years from the date of grant (five years for a 10% stockholder). Options generally vest and become fully exercisable over a period of five years under the 1998 Plan and over a period of four years under the 1999 Plan.

~~Caution: You should read the following discussion of our financial condition and results of operations in conjunction with the financial statements and the~~Stock ~~related~~option ~~notes to those statements included elsewhere in this report. This discussion may contain predictions~~activity, ~~estimates~~including ~~and other forward-looking statements that involve a number of risks and uncertainties~~163,463 ~~including~~shares ~~those~~issued ~~discussed~~outside ~~at “Risks and Uncertainties” below. This discussion represents our current judgment on~~ the ~~future~~Plans, direction of our business. Such risks and uncertainties could cause actual results to differ materially from any future performance suggested. We undertake no obligation to release publicly the results of any revisions to these forward-looking statements to reflect events or circumstances arising after the date of this quarterly report. This caution is ~~made~~as ~~under~~follows: ~~the safe harbor provisions of the Private Securities Litigation Reform Act of 1995.~~

PROVIDE COMMERCESM, PROFLOWERS®, UPTOWN PRIME® and CHERRY MOON FARMSSM, are trademarks or service marks of Provide Commerce, Inc. We have trademark rights in these marks in the U.S. and have registrations issued and pending in the U.S. We also have registrations issued or pending for the trademark PROFLOWERS in Australia, Brazil, Canada, the European Union, Japan, Mexico, New Zealand and Switzerland. This report also refers to brand names, trademarks, service marks and trade names of other companies and organizations, and these brand names, trademarks, service marks and trade names are the property of their respective holders.


	Shares		Weighted- Average Exercise Price
Balance at June 30, 2005	2,109,370		$	6.40
Granted	472,259			25.63
Exercised	(126,965	)		7.32
Cancelled	(65,557	)		14.36

Balance at September 30, 2005	2,389,107			9.93

~~Overview~~10

WeTable operate an e-commerce marketplace of websites for perishable goods that consistently delivers fresh, high-quality products direct from the supplier to the customer at competitive prices. We combine an online storefront, proprietary supply chain management technology, established supplier relationships and integrated logistical relationships with FedEx and UPS to create a market platform that bypasses traditional supply chains of wholesalers, distributors and retailers. The benefits to our customers include freshness, quality, price and selection, all with a guaranteed delivery date. The benefits to our suppliers include enhanced margins, broader customer reach and better inventory management. We believe our business model is highly scalable with low capital investment requirements beyond our existing technology and systems and minimal inventory carrying costs. Contents

WePROVIDE ~~were incorporated in February 1998 and officially launched our website~~COMMERCE, ~~www.proflowers.com,~~ ~~in August 1998~~INC. Since inception, we have focused on developing our supply chain management technology, refining and broadening our relationships with our delivery partners, generating flower sales, establishing and promoting our brands, pursuing relationships with other retailers, and preparing to launch websites featuring additional product offerings.

WeNOTES ~~plan~~TO toFINANCIAL ~~assess~~STATEMENTS—(Continued) and target additional categories based on our market platform’s ability to add value by streamlining the supply chain for the benefit of customers and suppliers. We have identified premium meat and fresh fruit as initial categories where we believe we can leverage our customer base, marketing and distribution relationships and infrastructure. In October 2003, we launched and are now operating Uptown Prime at www.uptownprime.com, offering premium meats and seafood, and Cherry Moon Farms at www.cherrymoonfarms.com, offering fresh premium fruits.

InThe ~~July~~shares ~~2004,~~granted weduring ~~completed~~the athree ~~secondary~~months ~~public~~ended ~~offering whereby 1~~September 30,~~981,019~~ ~~shares~~2005 ofhave ~~our~~a ~~common~~weighted-average grant-date ~~stock~~fair ~~were~~value ~~sold at an offering price~~ of $1910.~~63 per share~~32. OfThe ~~the~~total ~~1,981,019 shares~~intrinsic ~~sold,~~value ~~100,000~~of ~~shares~~options ~~were~~exercised ~~sold~~during bythe usthree ~~and~~months anended ~~aggregate of 1~~September 30,~~881,019~~ ~~shares~~2005 ~~were~~was ~~sold by selling stockholders~~$930. WeThe ~~received~~total ~~net~~fair ~~proceeds~~value of ~~approximately~~shares ~~$1.3~~vested ~~million~~at inSeptember 30, ~~connection~~2005 ~~with~~was ~~the secondary offering~~$352.

ToThe ~~date,~~following wetable ~~have~~summarizes ~~derived~~information ~~our~~about ~~net~~stock ~~sales~~options ~~primarily~~outstanding ~~from the sale of flowers, plants and gifts~~at ~~from our www.proflowers.com website and the sale of gourmet food from our www.uptownprime.com and www.cherrymoonfarms.com websites. For the three months ended December 31~~September 30, ~~2004,~~2005: we reported net sales of $33.5 million, an increase of 43.8% from $23.3 million for the three months ended December 31, 2003 and net income of $1.0 million as compared to net income of $0.2 million for the three months ended December


	Options Outstanding				Options Exercisable
Range of Exercise Prices	Outstanding as of September 30, 2005	Weighted- Average Remaining Contractual Life	Weighted- Average Exercise Price		Exercisable as of September 30, 2005	Weighted- Average Exercise Price		Aggregate Intrinsic Value
$ 0.36	617,100	2.6	$	0.36	617,100	$	0.36	$	222
1.51	711,926	5.6		1.51	668,465		1.51		1,009
2.27	69,302	7.3		2.27	36,984		2.27		84
12.15	8,389	7.9		12.15	4,955		12.15		60
15.00-15.61	259,937	8.2		15.04	98,909		15.00		1,484
18.20-19.69	55,335	8.9		18.96	13,365		19.24		257
21.92-22.94	108,537	9.0		22.15	22,326		21.92		489
23.35-28.76	488,791	9.8		25.74	416		23.35		10
30.01-36.00	69,790	9.3		31.96	—		—		—

	2,389,107	6.4		9.93	1,462,520		9.93	$	3,615

~~31,~~Employee ~~2003. For the six months ended December 31, 2004, we reported net sales of $53.4 million, an increase of 47.5% from $36.2 million for the six months~~Stock ~~ended~~Purchase ~~December~~Plan ~~31, 2003, and net income of $0.5 million as compared to a net (loss) of $(0.6) million for the six months ended December 31, 2003.~~

~~Results~~In December 2003, the Company’s board of ~~Operations~~director’s approved an employee stock purchase plan (“ESPP”), a non-compensatory employee stock purchase plan under Section 423 of the Internal Net sales Code, to provide all qualifying employees an opportunity to purchase shares of the Company’s common stock. Employees may contribute a maximum of 10% of his or her total earnings through payroll deductions. The accumulated deductions will be applied to the purchase of shares on each semi-annual purchase date. However, an employee may not purchase more than 1,500 shares on any purchase date.

The ~~following~~plan ~~table~~has ~~sets~~a ~~forth~~series ~~our~~of ~~results~~successive overlapping offering periods, with a new offering period beginning on the first business day of ~~operations~~June ~~expressed~~and asDecember each year and will have a ~~percentage~~duration of ~~net~~24 ~~sales~~months. ~~for~~The purchase price per share will be equal to 85% of the ~~three~~fair market value per share on the start date of the offering period in which the participant is enrolled or, if lower, 85% of the fair market value per share on the semi-annual purchase date. The purchase price discount is significant enough to be considered compensatory under SFAS 123. As a result, the Company recorded $216 and ~~six~~$90, in stock based compensation for the three months ended ~~December 31~~September 30, 2005 and 2004, ~~and~~respectively, ~~2003:~~related to the ESPP.

	Three Months EndedDecember 31,				Six Months EndedDecember 31,
	2004		2003		2004		2003
Statements of Operations Data:
Net sales	100.0	%	100.0	%	100.0	%	100.0	%
Cost of sales	53.3		56.3		53.3		56.4
Gross profit	46.7		43.7		46.7		43.6
Operating expenses:
Selling and marketing	22.5		22.8		23.3		22.4
General and administrative	13.6		13.5		15.8		15.7
Information technology systems	3.6		4.4		4.4		5.1
Stock-based compensation	2.2		2.4		2.6		2.1
Total operating expenses	42.0		43.1		46.1		45.3
Operating income (loss)	4.7		0.6		0.6		(1.7	)
Other income, net	0.9		0.1		1.1		0.1
Income (loss) before income tax	5.6		0.7		1.7		(1.6	)
Income tax provision	2.7		—		0.8		—
Net income (loss)	2.9	%	0.7	%	0.9	%	(1.6	)%

At September 30, 2005, the Company has authorized an aggregate of 280,000 shares of common stock for issuance under its ESPP. The number of shares of the Company’s common stock reserved for issuance under the plan will automatically increase on the first trading day in January of each calendar year by an amount equal to the lesser of (i) 3% of the total number of shares of the Company’s common stock outstanding on the last trading day in December in the preceding calendar year, (ii) 40,000 shares or (iii) such amount as determined by the Company’s board of directors.

~~Net~~11 ~~Sales~~

	Three Months EndedDecember 31,						Six Months Ended December 31,
	2004		2003		% Increase(Decrease)		2004		2003		% Increase(Decrease)
	(In millions, except percentages)
Net sales	$	33.5	$	23.3	43.8	%	$	53.4	$	36.2	47.5	%

~~Our~~PROVIDE ~~net sales are derived primarily from the sale of flowers~~COMMERCE, ~~plants and gifts from our www~~INC.~~proflowers.com~~ website and the sale of gourmet food from our www.uptownprime.com and www.cherrymoonfarms.com websites. We also generate net sales from fees that we receive from retailers for whom we design and operate websites to sell perishable products under their own brands.

~~The~~NOTES ~~increase~~TO inFINANCIAL ~~net~~STATEMENTS—(Continued) sales for the three and six months ended December 31, 2004, compared to the same period last year resulted primarily from an increases in the number of orders by new and existing customers and average order values, as shown below.

93. Stockholders’ Equity

	Three Months Ended December 31,						Six Months Ended December 31,
	2004		2003		% Increase(Decrease)		2004		2003		% Increase(Decrease)
	(in thousands, except percentages and average order values)
Database of customers at period end		3,400		2,400	41.7	%		3,400		2,400	41.7	%
Orders placed by existing customers		431		301	43.2	%		701		465	50.8	%
Revenue from repeat orders	$	20,600	$	13,100	57.3	%	$	33,600	$	21,100	59.2	%
New customers		202		162	24.7	%		319		253	26.1	%
Average order value	$	45.33	$	44.79	1.2	%	$	45.95	$	45.50	1.0	%

Common Stock

~~Growth~~In inSeptember 2003, the ~~number~~Company’s Board of ~~new~~Directors ~~customers for~~approved ~~the~~an ~~three~~amendment ~~and~~to ~~six~~the ~~months~~certificate ~~ended~~of ~~December~~incorporation ~~31,~~and ~~2004~~increased isthe aauthorized ~~result~~common stock ofto ~~our~~50,000,000 ~~advertising~~shares, ~~and~~which ~~marketing~~became ~~campaigns~~effective ~~which~~December 22, ~~are~~2003 ~~designed~~in toconnection ~~attract~~with ~~and~~the ~~maintain~~Company’s ~~customers~~initial public offering. WeDuring ~~believe~~the ~~continued~~three ~~strength~~months inended ~~repeat~~September 30, ~~orders~~2005, isthe aCompany ~~result~~issued 126,965 shares of ~~our~~common ~~strong~~stock ~~customer~~upon ~~satisfaction~~exercise ~~and~~of ~~our~~outstanding ~~retention marketing efforts~~options.

InPreferred ~~October 2003, we launched~~Stock and are now operating Uptown Prime at www.uptownprime.com, offering premium meats, and Cherry Moon Farms at www.cherrymoonfarms.com, offering fresh premium fruits. We expect premium meat and fresh premium fruit net sales to grow in significance to our business as we develop and deploy our premium meat and fresh premium fruit websites. We expect that approximately 3% of our net sales will be derived from premium meats and fresh premium fruits in fiscal 2005. You must consider our prospects for expanding our premium meat and fresh premium fruit net sales during fiscal 2005 and beyond in light of the risks associated with expanding into new product categories and the other risks outlined in “Risks and Uncertainties” below.

WeIn ~~intend~~September ~~to grow our existing flower and meat~~2003, ~~fruit~~the ~~and~~Company’s ~~other~~Board ~~product~~of Directors ~~categories~~approved ~~via~~an ~~arrangements~~amendment ~~with~~to ~~other~~the ~~branded~~certificate ~~retailers and direct marketers. We offer a variety~~ of ~~arrangements~~incorporation ~~for~~setting ~~branded~~the ~~retailers~~authorized orpreferred ~~direct~~stock ~~marketers that want~~ to ~~use our market platform to offer perishable products~~5,000,000 ~~including a co-branded website~~shares, awhich ~~private~~became ~~label~~effective ~~website~~December 22, or2003 ain ~~hybrid~~connection ofwith the ~~two.~~Company’s ~~The~~initial ~~arrangements~~public ~~are currently structured to involve a combination of revenue sharing and fee-based agreements~~offering. ~~For~~The ~~revenue~~preferred ~~sharing~~stock ~~agreements, we pay the retailer a portion of the revenues~~is ~~generated~~“blank ~~from~~check ~~its~~preferred,” ~~website.~~which ~~Fee-based~~can ~~retailer~~be ~~arrangements~~created ~~involve a combination of up-front development costs~~ and ~~per-transaction~~issued ~~fees paid to us~~ by the ~~retailer.~~Board ~~Our branded retailer arrangements regardless~~ of ~~the~~Directors ~~payment~~without ~~structure~~stockholder ~~represent an immaterial percentage of our net sales for the three and six months ended December 31~~approval, ~~2004. You must consider our prospects for expanding through relationships~~ with ~~other~~rights ~~branded~~senior ~~retailers~~to ~~and~~those ~~direct marketers in light~~ of ~~the~~common ~~risks outlined in “Risks and Uncertainties” below~~stock.

~~Gross~~4. Deferred ~~Profit~~ Compensation Plan

	Three Months Ended December 31,								Six Months Ended December 31,
	2004			2003			% Increase(Decrease)		2004			2003			% Increase(Decrease)
	(In millions, except percentages)
Gross profit	$	15.6		$	10.2		52.9	%	$	24.9		$	15.8		57.6	%
Gross profit percentage		46.7	%		43.7	%				46.7	%		43.6	%

In November 2003, the compensation committee of the Board of Directors approved a Deferred Compensation Plan which became effective in January 2004. The Deferred Compensation Plan is an unfunded non-qualified plan for the benefit of non-employee directors and certain designated management and highly compensated employees of the Company. The plan permits participants to defer receipt of certain compensation, as well as certain income for stock option exercises. In addition, the Company may elect to make a matching contribution to any or all of the participants in an amount of fifty percent (50%) of the participant’s deferred annual base salary or annual bonus, but in no event shall the matching contributions exceed ten percent (10%) of the participant’s annual base salary with respect to deferrals of base salary or ten percent (10%) of the participant’s annual bonus with respect to deferrals of annual bonus. As of September 30, 2005, the Company had deferred compensation of $1,746 related to the Deferred Compensation Plan.

~~Our gross profit consists of net sales less cost of sales~~5. ~~Our~~Supplemental ~~cost~~Executive ofRetirement sales consists primarily of flower and other product costs and shipping charges. Other costs included in cost of sales are producer and delivery supply costs, distribution facility labor costs and the cost of replacement products. Plan

~~The~~In ~~increase~~November in2003, the ~~gross~~compensation ~~margin~~committee of the Board of Directors approved a Supplemental Executive Retirement Plan (SERP) which became effective in ~~absolute~~January ~~dollars~~2004. The SERP is an unfunded non-qualified plan for the ~~quarter~~benefit ~~ended~~of ~~December~~certain 31non-employee directors, ~~2004~~designated ~~compared~~management toand highly compensated employees of the ~~same~~Company. ~~period~~Participants ~~last~~under ~~year~~the ~~was~~SERP will be due a ~~result~~benefit (as defined for purposes of the ~~increase~~SERP) inupon ~~net~~early ~~sales~~or ~~combined~~normal ~~with~~retirement, adisability, ~~higher~~death ~~gross~~or ~~profit~~other ~~percentage~~termination of employment. The ~~increase~~ordinary inbenefit ~~cost~~is ofa ~~sales~~benefit inequal ~~terms~~to of0.015 ~~gross~~multiplied by ~~dollars~~the ~~was~~number ~~principally~~of ~~attributable~~ years of service to the ~~variable~~Company ~~costs~~and ~~associated~~multiplied ~~with~~by ~~purchasing~~the participant’s final average compensation, and ~~shipping~~reduced ~~products~~by amounts paid under the Deferred Compensation Plan. Amounts due under the SERP will be paid in equal installments over 15 years commencing at normal retirement (age 65). If an ordinary benefit commences prior to ~~our~~normal ~~customers~~retirement, ~~and~~the ~~packaging~~participant ~~costs~~will receive the actuarial equivalent of his or her vested benefit at normal retirement, generally to be paid over 15 years.

1012

TheTable increase in the gross margin in absolute dollars for the six months ended December 31, 2004 compared to the same period last year was a result of the increase in net sales combined with a higher gross profit percentage. The increase in cost of sales in terms of gross dollars was principally attributable to the variable cost associated with shipping products to our customers, the direct cost of purchasing products and packaging costs. Contents

~~The increase~~PROVIDE ~~in the gross profit percentage for the three and six months ended December 31~~COMMERCE, ~~2004 compared to the same periods last year was a result of reduction in shipping costs relative to net sales as a result of implementing ground delivery for many of our products~~INC. In addition, we experienced cost savings in accessory costs due to product cost savings and a more profitable product mix. These savings were partially offset by an increase in the costs of replacement products which were sent to our customers affected by severe weather conditions the week of Christmas.

WeNOTES ~~expect~~TO ~~that~~FINANCIAL ~~our~~STATEMENTS—(Continued) gross profit will fluctuate in the future as we expand into new product categories based upon our product mix, average order value, product costs, shipping costs, product replacement and refund rates and handling and packaging costs for the various products.

~~Selling~~The ~~and~~following is a summary of the Company’s net periodic benefit cost including the components ~~Marketing~~for the three months ended September 30:

	Three Months Ended December 31,									Six Months Ended December 31,
	2005			2004
	2004				2003			% Increase(Decrease)		2004			2003			% Increase(Decrease)
Service cost	$	57		$	74
	(In millions, except percentages)
Interest cost		12			16
Selling and marketing	$	7.5			$	5.3		41.5	%	$	12.4		$	8.1		53.1	%
Amortization of prior service cost		7			8
As a percent of net sales		22.5	%			22.8	%				23.3	%		22.4	%
Net periodic benefit cost	$	76		$	98

~~Our~~The ~~selling~~SERP ~~and~~is ~~marketing expenses~~an ~~consist~~unfunded ~~primarily~~obligation of ~~advertising~~the ~~costs,~~Company ~~payroll~~in ~~and~~which ~~payroll~~earned ~~related~~plan benefits ~~for~~will ~~our~~be ~~category~~paid ~~development~~out ~~and~~of ~~marketing~~general ~~and~~operating ~~customer~~funds ~~service~~as ~~staff,~~they ~~focus~~come ~~groups~~due. ~~and~~To ~~other~~offset ~~marketing~~the ~~research~~cost ~~and~~of ~~promotional~~the ~~expenses.~~plan, ~~Advertising~~the ~~costs~~Company ~~are~~has ~~generally expensed~~purchased aslife ~~incurred.~~insurance ~~For~~policies ~~advertising~~on ~~contracts~~all ~~which cover an extended period~~ of ~~time,~~ the ~~costs~~participants ~~are~~within ~~expensed over~~ the plan. ~~life~~The ofCompany is the ~~contract~~sole ~~based~~beneficiary on ~~the~~these ~~specifics~~policies. ofUsing ~~the~~this ~~contract,~~structure ~~such~~and asprofessional ~~orders~~actuarial ~~placed~~guidance, ~~radio~~the ~~spots~~Company ~~run~~anticipates orthat ~~Internet~~there ~~advertisements placed.~~will ~~Our~~be ~~advertising~~no ~~efforts~~net ~~target~~cost over the ~~acquisition~~full life of ~~new~~the ~~customers and repeat orders from existing customers~~plan.

The increase in the selling and marketing expenses for the three and six months ended December 31, 2004 compared to the same periods last year was primarily due to an increase in online and offline advertising and promotional costs as a result of our marketing activities designed to generate additional net sales through increases in our number of new customers and repeat purchases by existing customers6. ~~In addition,~~Income weTax experienced an increase in payroll and payroll related expenses as our marketing staff headcount has increased in an effort to drive increases in net sales. We also experienced an increase in the cost of our customer service personnel as the increase in net sales has increased headcount of permanent and seasonal customer service representatives.

~~The~~During ~~decrease in selling and marketing expenses for~~ the three months ended ~~December 31~~September 30, ~~2004~~2005 asand a2004, ~~percentage of sales compared to~~ the ~~same~~Company ~~period~~recognized ~~last year was primarily~~ a ~~result~~ oftax ~~reductions~~benefit ~~in online marketing spending and payroll and payroll related costs as a percentage~~ of ~~net~~$367 ~~sales. These reduced expenses were partially offset by increased spending in offline~~ and ~~direct mail advertising. In addition we experienced a reduction~~$449, ~~as a percentage of net sales, in our fixed marketing and advertising costs as these costs do not increase proportionately to the increase in net sales~~ respectively. The ~~increase~~effective intax ~~selling~~rate ~~and~~anticipated ~~marketing expenses~~ for the ~~six~~year ~~months~~ending ~~ended December 31~~June 30, ~~2004~~2006 ~~as a percentage~~ of ~~net~~44% ~~sales~~is ~~compared to the same period last year was primarily~~ a result of ~~increased~~the ~~costs~~statutory ~~related~~rates ~~to offline~~ and ~~direct~~the ~~mail~~permanent ~~advertising,~~book/tax differences including ~~increased~~stock-based ~~utilization~~compensation ofrecognized ~~catalogs.~~under ~~These~~SFAS costs were partially offset by a reduction, as a percentage of net sales, in our online marketing expenditures and in our fixed marketing and advertising costs as these costs do not increase proportionately to the increase in net sales123(R).

We13 expect selling and marketing expenses to continue to increase in absolute dollars in the future as a result of continued expansion of our sales and marketing infrastructure in support of a broader product portfolio and expanded sales efforts. While we currently expect selling and marketing expenses to increase in absolute dollars, we expect them to remain generally comparable to prior years as a percentage of net sales for the remainder of fiscal 2005. However, as we identify opportunities to increase our growth in net sales, we may increase our marketing expense to take advantage of additional potential net sales.

11Table of Contents

~~General~~ITEM ~~and~~2. ~~Administrative~~MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

	Three Months Ended December 31,								Six Months Ended December 31,
	2004			2003			% Increase(Decrease)		2004			2003			% Increase(Decrease)
	(In millions, except percentages)
General and administrative	$	4.6		$	3.1		48.4	%	$	8.4		$	5.7		47.4	%
As a percent of net sales		13.6	%		13.5	%				15.8	%		15.7	%

You should read the following discussion of our financial condition and results of operations in conjunction with the financial statements and the related notes to those statements included elsewhere in this report. This discussion may contain forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of the factors described in the “Risks and Uncertainties” section below and elsewhere in this report. Except as may be required by applicable law, we undertake no obligation to publicly update any forward-looking statements for any reason, even if new information becomes available or other events occur in the future.

~~Our~~PROVIDE ~~general~~COMMERCESM, PROFLOWERS®, ~~and~~UPTOWN ~~administrative expenses~~PRIME®, ~~consist~~FLOWERFARM.COM® ~~primarily~~and ofCHERRY ~~payroll~~MOON ~~and~~FARMSSM ~~payroll~~are ~~related~~trademarks ~~benefits~~or ~~for~~service marks ~~our~~of ~~employees~~Provide Commerce, ~~except~~Inc. ~~those~~We ~~associated~~have ~~with~~trademark ~~fulfillment,~~rights ~~customer~~in ~~service,~~these ~~technology~~and other marks in the U.S. and ~~sales~~have registrations issued and ~~marketing~~pending ~~employees.~~in ~~These~~the ~~expenses~~U.S. We also ~~include~~have ~~depreciation~~registrations ofissued ~~fixed~~or ~~assets, facilities~~pending ~~costs~~for ~~(other~~the ~~than~~trademark ~~facilities~~PROFLOWERS® ~~costs~~in ~~associated~~Australia, ~~with~~Brazil, ~~cost~~Canada, ofChina, ~~goods~~the ~~sold)~~European Union, ~~credit~~India, ~~card fees~~Japan, ~~insurance~~Mexico, ~~legal~~New Zealand and ~~accounting~~Switzerland. This report also refers to brand names, trademarks, service marks and trade names of other ~~professional~~companies ~~fees,~~and ~~travel~~organizations, ~~phone~~and these brand names, ~~utilities~~trademarks, ~~bad~~service ~~debt~~marks ~~expense~~ and ~~other~~trade ~~general~~names ~~corporate~~are ~~expenses~~the property of their respective holders.

~~The~~Overview increase in absolute general and administrative expenses for the three months ended December 31, 2004 compared to the same period last year was primarily due to increases in expenses related to being a public company including insurance costs, legal and accounting and other professional fees, and an increase in payroll and payroll related benefits as our administrative headcount has increased to meet the demands of our growing company. In addition, we experienced an increase in variable credit card transaction fees as our sales volume has increased. These increases were partially offset by a decrease in chargeback activity from credit card transactions as we have implemented additional security features on our website to combat the use of fraudulant credit cards.

~~The~~We ~~increase~~operate inan ~~absolute~~e-commerce ~~general~~marketplace ~~and~~of ~~administrative~~websites ~~expenses~~ for ~~the~~perishable ~~six~~goods ~~months~~that ~~ended December~~consistently 31delivers fresh, ~~2004~~high-quality products ~~compared~~direct tofrom the ~~same~~supplier ~~period~~to ~~last~~the ~~year~~customer ~~was~~at ~~primarily~~competitive ~~due~~prices. toWe ~~increases~~combine inan ~~expenses~~online ~~related~~storefront, toproprietary ~~being~~supply achain ~~public~~management ~~company~~technology, ~~including~~established ~~insurance~~supplier ~~costs,~~relationships ~~legal~~ and ~~accounting~~integrated ~~and~~logistical ~~other~~relationships ~~professional~~with ~~fees,~~FedEx and ~~increases~~UPS to increate ~~payroll~~a ~~and~~market ~~payroll related~~platform ~~benefits~~that ~~and~~bypasses ~~depreciation~~traditional ofsupply ~~fixed~~chains ~~assets.~~of ~~The~~wholesalers, ~~increase~~distributors ~~in payroll~~ and ~~payroll~~retailers. ~~related~~The benefits ~~was~~to aour ~~result~~customers ofinclude ~~increasing~~value, ~~headcount~~freshness, inquality, ~~order~~accurate tofulfillment, ~~support~~direct ~~the~~customer ~~growth~~service ofand ~~our~~selection, ~~company.~~all ~~The~~with ~~increase in depreciation was~~ a guaranteed ~~result~~delivery ofdate. ~~investments~~The ~~in fixed~~benefits ~~assets~~ to ~~support~~ our ~~increased~~suppliers ~~sales~~include ~~volumes.~~enhanced ~~These~~margins, ~~increases~~broader ~~were~~customer ~~partially~~reach ~~offset~~and bybetter ainventory ~~decrease~~management. inWe ~~chargeback~~believe ~~activity~~our ~~from~~business ~~credit~~model ~~card~~is ~~transactions~~highly asscalable wewith ~~have~~low ~~implemented~~capital ~~additional~~investment ~~security~~requirements ~~features~~beyond on our ~~website~~existing technology toand ~~combat~~systems ~~the~~and ~~use~~minimal ~~of fraudulent~~inventory ~~credit~~carrying ~~cards~~costs.

~~The~~We ~~slight~~were ~~increase~~incorporated in ~~general~~February ~~and~~1998 ~~administrative expenses as a percentage of net sales for the three~~ and ~~six~~officially ~~months~~launched ~~ended~~our ~~December 31~~website, ~~2004 compared to the same periods last year was primarily a result of increases in expenses related to being a public company including insurance costs~~www.proflowers.com, ~~legal and accounting and other professional fees, and increased depreciation of fixed assets necessary to support the growth~~ in ~~transactional~~August ~~volume~~1998. InSince ~~addition~~inception, ~~for~~we ~~the~~have ~~six~~focused ~~months~~on ~~ended~~developing ~~December~~our ~~31,~~supply ~~2004~~chain ~~compared~~management ~~to last year~~technology, anrefining ~~increase in retirement benefit costs contributed to the increase in general~~ and ~~administrative~~broadening ~~expense~~our asrelationships with aour ~~percentage~~delivery ofpartners, ~~net~~generating flower sales., ~~For~~establishing ~~both the three~~ and ~~six~~promoting ~~months~~our ~~ended December 31~~brands, ~~2004,~~pursuing ~~these~~relationships ~~increases~~with ~~were~~other ~~partially~~retailers, ~~offset~~and bypreparing ato ~~decrease~~launch inwebsites ~~credit~~featuring ~~card chargeback activity from credit card transactions as we have implemented~~ additional ~~security~~product ~~features on our website to combat the use of fraudulent credit cards~~offerings.

We ~~expect~~plan ~~general~~to assess and ~~administrative~~target ~~expenses~~additional tocategories ~~continue~~based toon ~~increase~~our inmarket platform’s ~~absolute~~ability ~~dollars~~to inadd ~~the~~value ~~future~~by asstreamlining athe ~~result~~supply ofchain ~~continued~~for ~~expansion~~the benefit of ~~our~~customers ~~administrative infrastructure~~and insuppliers. ~~support~~We ofhave aidentified ~~broader~~premium ~~technology~~meat, seafood and ~~product~~fresh ~~portfolio.~~fruit ~~However,~~as initial categories where we ~~also~~believe ~~anticipate~~we ~~that~~can ~~general~~leverage our customer base, marketing and ~~administrative~~distribution ~~expenses~~relationships ~~will~~and ~~decrease~~infrastructure. asIn aOctober ~~percentage~~2003, ofwe ~~net~~launched ~~sales~~and asare anow ~~result~~operating ofUptown ~~net~~Prime ~~sales~~at ~~growing~~www.uptownprime.com, ~~faster~~offering ~~than~~premium ~~general~~meat and ~~administrative~~ ~~expenses~~seafood, ~~particularly~~and inCherry ~~high~~Moon ~~sales~~Farms ~~volume~~at ~~quarters~~www.cherrymoonfarms.com, offering fresh premium fruit.

~~Information~~In ~~Technology~~December ~~Systems~~2003, we completed an initial public offering whereby 4,334,000 shares of our common stock were sold at an offering price of $15 per share. Of the 4,334,000 shares sold, 2,666,667 were sold by us and an aggregate of 1,667,333 shares were sold by selling stockholders. In January 2004, the underwriter’s over-allotment option was exercised whereby 316,100 shares of our common stock were sold at an offering price of $15 per share; all of said shares were sold by selling stockholders. We received net proceeds of approximately $34.8 million in connection with the offering. In addition, 221,715 shares of outstanding Series A preferred stock were converted into 760,383 shares of common stock and 5,816,285 shares of outstanding Series B preferred stock were converted into 2,104,853 shares of common stock.

	Three Months Ended December 31,								Six Months Ended December 31,
	2004			2003			% Increase(Decrease)		2004			2003			% Increase(Decrease)
	(In millions, except percentages)
Information technology systems	$	1.2		$	1.0		20.0	%	$	2.4		$	1.8		33.3	%
As a percent of net sales		3.6	%		4.4	%				4.4	%		5.1	%

OurTable information technology systems expenses consist primarily of payroll and payroll related benefits for information technology personnel, engineering consulting expenses, and outside services, including hosting of our Internet servers. Information technology system expenses are expensed as incurred. Information technology system expenses are net of software capitalization of major site and product development efforts under Statement of Position 98-1, Accounting for Costs of Computer Software Developed or Obtained for Internal Use. Contents

12In July 2004, we completed a secondary public offering whereby 1,981,019 shares of our common stock were sold at an offering price of $19.63 per share. Of the 1,981,019 shares sold, 100,000 shares were sold by us and an aggregate of 1,881,019 shares were sold by selling stockholders. We received net proceeds of approximately $1.4 million in connection with the secondary offering.

~~The~~To ~~increase~~date, inwe ~~information~~have ~~technology~~derived ~~costs~~our revenues inprimarily ~~absolute~~from ~~dollars for~~ the ~~three~~sale ~~and~~of ~~six months ended December 31~~flowers, ~~2004 compared~~plants toand ~~the~~gifts ~~same~~from ~~periods~~our ~~last~~www.proflowers.com ~~year~~website. ~~was~~For athe ~~result~~three ofmonths anended ~~increase~~September 30, in2005, ~~payroll~~we ~~and~~reported ~~payroll~~net ~~related~~sales ~~benefits~~of ~~necessary~~$26.8 tomillion, ~~support~~an ~~the~~ increase inof ~~sales~~34.4% ~~volumes~~from ~~and~~$19.9 ~~the~~million ~~growth~~for of the ~~company.~~three months ~~These~~ended ~~costs~~September 30, ~~were~~2004, ~~partially~~and ~~offset~~a bynet anloss ~~increase~~of in$(23,000) ~~the capitalized~~as ~~costs~~compared ~~associated~~to ~~with~~a ~~internally~~net ~~developed~~loss ~~software~~ of ~~approximately~~ $~~290~~(497,000) ~~and $267,000~~ for the three months ended ~~December 31~~September 30, 2004. ~~and~~Since ~~2003,~~inception ~~respectively~~through fiscal 2002, ~~and~~we ~~approximately~~have ~~$624,000~~incurred ~~and~~significant ~~$513,000~~losses. ~~for~~As ~~the~~of September 30, ~~six~~2005, ~~months~~we ~~ended~~have ~~December~~an ~~31, 2004~~accumulated ~~and~~deficit ~~2003,~~of ~~respectively~~$22.1 million.

~~The~~We ~~decline~~use inour ~~information~~market ~~technology~~platform ~~expense~~to ~~as a~~manage ~~percentage~~the delivery of ~~net~~flowers ~~sales~~from ~~for~~ the ~~three~~supplier ~~and~~to ~~six~~the ~~months~~consumer ~~ended~~in ~~December~~a ~~31,~~manner ~~2004~~that ~~compared~~reduces toour ~~the~~inventory ~~same~~risk. ~~periods~~We ~~last~~do ~~year~~not ~~was~~take ~~caused~~title ~~primarily~~to byflowers ~~our~~shipped ~~net~~direct ~~sales~~from ~~growth,~~our ~~which~~growers ~~outpaced~~to our customers ~~growth~~until inpick-up ~~information~~by ~~technology~~our ~~system~~third-party ~~expenses combined with capitalized information technology expenditures~~carriers. We ~~expect~~take ~~information~~title ~~technology~~to ~~system~~flowers ~~expenses~~from togrowers ~~increase~~outside inthe ~~absolute~~U.S. ~~dollars~~that ~~for~~we ~~the~~briefly ~~remainder~~maintain ofas ~~fiscal~~inventory ~~2005~~while ~~compared~~in-transit to ~~fiscal~~one ~~2004~~of ~~but~~our todistribution ~~remain~~facilities atand awhile ~~relatively~~being ~~constant~~prepared ~~percentage~~and ofpackaged ~~net sales~~for ~~compared~~shipping. toOur ~~fiscal~~longer-term ~~2004~~inventory asconsists weof ~~continue~~grower toshipping ~~invest~~supplies, inincluding ~~our~~boxes, ~~infrastructure~~and toaccessories, ~~support~~including ~~the~~flower ~~growth~~vases, ofchocolates ~~our~~and ~~business~~plush toys.

~~Stock-Based~~Results ~~Compensation~~of Operations

	Three Months Ended December 31,								Six Months Ended December 31,
	2004			2003			% Increase(Decrease)		2004			2003			% Increase(Decrease)
	(In millions, except percentages)
Stock-based compensation	$	0.8		$	0.6		33.3	%	$	1.4		$	0.8		75.0	%
As a percent of net sales		2.2	%		2.4	%				2.6	%		2.1	%

The following table sets forth our results of operations expressed as a percentage of net sales for the three months ended September 30, 2005, and 2004:

Stock-based compensation increased during the three and six months ended December 31, 2004 compared to the same periods last year due to the amortization of compensation expense related to options granted in connection with the retention of key employees and hiring of new employees. The increase was due to both an increase in the number of options issued and a higher cost per option as a result of the increase in the market price of our common stock. As a percent of net sales, stock-based compensation decreased during the quarter ended December 31, 2004 as the increase in stock-based compensation expense was less than the increase in net sales. The increase in stock-based compensation as a percentage of net sales for the six months ended December 31, 2004, was due to significantly higher amortization during the first quarter of fiscal 2005 compared to the first quarter of fiscal 2004. Prior to fiscal 2003, we accounted for stock-based employee compensation arrangements under the recognition and measurement provisions of APB Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations. Effective July 1, 2002, we adopted the fair value recognition provisions of SFAS No. 123. We selected the prospective method of adoption described in SFAS No. 148, Accounting for Stock-Based Compensation—Transition and Disclosure. This method applies fair value accounting to all new grants and modification or settlement of old grants after the beginning of the year of adoption. All grants prior to our adoption of SFAS No. 123 will continue to be accounted for under the intrinsic value provision of APB No. 25.


	Three Months Ended September 30,
	2005		2004
Statement of Operations Data:
Net sales	100.0	%	100.0	%
Cost of sales(1)	55.0		54.6

Gross profit(1)	45.0		45.4

Operating expenses:
Selling and marketing(1)	22.3		24.3
General and administrative	21.3		21.1
Information technology systems	6.4		6.1

Total operating expenses(1)	50.0		51.5

Operating loss	(5.0	)	(6.1	)
Other income, net	1.9		1.3

Loss before income tax	(3.1	)	(4.8	)
Income tax (benefit)	(1.4	)	(2.3	)

Net loss before cumulative effect of a change in accounting principle	(1.7	)	(2.5	)
Cumulative effect of a change in accounting principle	1.7		—

Net loss	(0.0	)	(2.5	)

~~Other~~(1) ~~Income~~Under EITF 01-9, ~~Net~~Accounting for Consideration Given by a Vendor to a Customer, the cost of a “free offer” at purchase, such as a free glass vase, should be included in cost of sales. Historically, these promotional costs have been included as a marketing expense. We have reclassified these costs into cost of sales for all periods presented. The accompanying financial statements give retroactive effect to the reclassification for all periods presented.

	Three Months Ended December 31,							Six Months Ended December 31,
	2004			2003			% Increase(Decrease)	2004			2003			% Increase(Decrease)
	(In millions, except percentages)
Other income, net	$	0.3		$	0.0		N/A	$	0.6		$	0.0		N/A	%
As a percent of net sales		0.9	%		0.1	%			1.1	%		0.1	%

OtherTable income, net included in the statements of operations primarily consists of interest income and interest expense. Contents

13Net Sales

The increase in other income, net for the three and six months ended December 31, 2004 compared to the same periods last year was a result of an increase in investment income from our cash and marketable securities following our initial and secondary public offerings and additions to cash levels generated through continuing operations. In addition, we incurred less interest expense related to our obligation under a capital lease, which lease expired in the second quarter of fiscal 2005.


	Three Months Ended September 30,
	2005		2004		% Increase
	(in thousands, except percentages)
Net sales	$	26,782	$	19,921	34.4	%

~~Income~~Our ~~Tax~~net ~~Provision~~sales are derived primarily from the sale of flowers, plants and gifts from our www.proflowers.com website and the sale of gourmet foods from our www.uptownprime.com and www.cherrymoonfarms.com websites. We also generate net sales from fees that we receive from retailers for whom we design and operate websites to sell perishable products under their own brands.

	Three Months Ended December 31,					Six Months EndedDecember 31,
	2004			2003	% Increase(Decrease)	2004			2003	% Increase(Decrease)
	(In millions, except percentages)
Income tax provision	$	0.9		—	N/A	$	0.4		—	N/A
As a percent of net sales		2.7	%				0.8	%

The increase in net sales for the three months ended September 30, 2005 compared to the same period last year resulted primarily from an increase in the number of orders by new and existing customers.

~~The~~In ~~income~~order to ~~tax~~provide ~~expense~~better ~~reflects~~comparability ~~the anticipated~~between ~~effective~~accounting ~~tax~~periods, ~~rate~~the ~~for~~information presented in the ~~year~~following ~~applied~~table torepresents the ~~income~~numbers ~~before~~of ~~tax~~customers ~~for~~included ~~the~~in ~~three~~our ~~and~~database ~~six~~at ~~months~~period ~~ended~~end, ~~December~~orders 31placed by existing customers, ~~2004.~~net ~~The~~sales ~~high~~from ~~effective~~existing customers, ~~tax~~new ~~rate~~customers ~~anticipated~~and ~~for~~average ~~the~~order ~~year~~value isin aour ~~result~~core offloral ~~the~~business, ~~stock-based~~which ~~compensation~~is ~~recognized~~defined ~~under~~as ~~SFAS 123~~consumer sales from the ProFlowers business. NoResults ~~benefit~~from orour ~~expense~~activities ~~was~~other ~~recorded~~than ~~during~~our ~~the~~core ~~three~~floral orbusiness ~~six~~are ~~months~~not ~~ended~~reflected ~~December~~as ~~31,~~they ~~2003~~are ~~due~~not material relative to ~~the~~our ~~valuation~~floral ~~allowance~~activities. ~~against~~Information ~~net~~for ~~deferred~~our ~~tax~~other ~~assets~~activities ~~during~~will ~~those~~be ~~periods~~presented in the future when they become material.

Net Income (Loss)


	Three Months Ended September 30,
	2005		2004		% Increase
	(in thousands, except percentages and average order values)
Database of customers at period end		4,457		3,211	38.8	%
Orders placed by existing customers		359		270	32.9	%
Net sales from existing customers	$	16,957	$	13,008	30.4	%
New customers		150		117	28.2	%
Average order value	$	49.32	$	46.96	5.0	%

	Three Months Ended December 31,								Six Months Ended December 31,
	2004			2003			% Increase(Decrease)		2004			2003			% Increase(Decrease)
	(In millions, except percentages)
Net income (loss)	$	1.0		$	0.2		400.0	%	$	0.5		$	(0.6	)	N/A
As a percent of net sales		2.9	%		0.7	%				0.9	%		(1.6	)%

Growth in the number of new customers for the three months ended September 30, 2005 is a result of our advertising and marketing campaigns which are designed to attract and maintain customers. We believe continued strength in repeat orders is a result of our strong customer satisfaction and our retention marketing efforts.

~~The~~In October ~~change~~2003, inwe ~~net~~launched ~~income~~and ~~(loss)~~are isnow aoperating Uptown Prime at www.uptownprime.com, offering premium meat and seafood, and Cherry Moon Farms at www.cherrymoonfarms.com, offering fresh premium fruit. We expect premium meat, seafood, and fresh ~~result~~premium fruit net sales to grow in significance to our business as we develop and deploy our premium meat, seafood, and fresh premium fruit websites. We expect that between 5% and 7% of ~~the~~our ~~changes~~net sales will be derived from premium meat and fresh premium fruit in fiscal 2006. You must consider our prospects for expanding our premium meat, seafood and fresh premium fruit net sales during fiscal 2006 and ~~expenses~~beyond asin ~~previously~~light ~~discussed~~of the risks associated with expanding into new product categories and the other risks outlined in “Risks and Uncertainties” below.

~~Liquidity~~We offer a variety of arrangements for branded retailers or direct marketers that want to use our market platform to offer perishable products, including a co-branded website, a private label website or a hybrid of the two. The arrangements are currently structured to involve a combination of revenue sharing and ~~Capital~~fee-based ~~Resources~~agreements. For revenue sharing agreements, we pay the retailer a portion of the net sales generated from its website. Fee-based retailer arrangements involve a combination of up-front development costs and per-transaction fees paid to us by the retailer. Our branded retailer arrangements regardless of the payment structure represented an immaterial percentage of our net sales for the three months ended September 30, 2005.

	December 31,2004		June 30,2004		% Increase(Decrease)
	(In millions, except percentages)
Working capital	$	54.1	$	50.1	8.0	%
Cash and cash equivalents	$	25.7	$	18.2	41.1	%
Marketable securities	$	40.3	$	41.2	(2.2	)%

SinceTable our inception, we have financed our operations through sales of stock, and, more recently, internally generated cash flows from operations. The increases in working capital and cash and cash equivalents at December 31, 2004 over June 30, 2004 resulted primarily from working capital generated by operations of approximately $7.8 million combined with the receipt of the net proceeds of $1.4 million from our secondary public offering of common stock, completed in July 2004, reduced by the purchase of fixed assets of approximately $3.2 million. Contents

~~Net~~Gross ~~cash~~Profit provided by operating activities was $7.8 million for the six months ended December 31, 2004. The generation of cash from operations during the period was primarily a result of an increase in accounts payable and other accrued liabilities in combination with cash flow from revenues, less expenses, net of non-cash expenses such as depreciation and stock-based compensation. The increase in accounts payable and other current liabilities was primarily due to the increase in costs associated with increased sales activity during the period compared to the same period last year.


	Three Months Ended September 30,
	2005			2004			% Increase
	(in thousands, except percentages)
Gross profit	$	12,055		$	9,046		33.3	%
Gross profit percentage		45.0	%		45.4	%

WeOur ~~use~~gross ~~cash~~profit consists inof ~~investing~~net ~~activities~~sales ~~primarily~~less tocost ~~purchase~~of ~~computer hardware and software, office equipment and furniture~~sales. ~~Investing~~ ~~activities~~Our ~~also~~cost ~~includes~~of ~~the~~sales ~~purchase~~consists ~~and~~primarily ~~sale~~ of ~~marketable~~flower ~~securities~~and inother ~~order~~product tocosts ~~provide~~and ~~for~~shipping ~~cash flow needs or invest excess cash~~charges. ~~Cash~~Other ~~used~~costs included in ~~investing~~cost ~~activities~~of ~~during~~sales ~~the~~are ~~six~~producer ~~months~~and ~~ended~~delivery ~~December~~supply 31costs, ~~2004~~distribution ~~was~~facility ~~primarily~~labor ~~a result~~costs ofand the ~~purchase~~cost of ~~fixed~~promotional ~~assets~~and replacement products.

~~Net~~The slight ~~cash~~decrease ~~provided~~in bythe ~~financing~~gross ~~activities~~profit ~~was $2.0~~percentage ~~million~~ for the ~~six~~three months ended ~~December~~September 30, 312005 compared to the three months ended September 30, 2004 was a result of an increase in our product and product delivery costs due to higher fuel costs which was partially offset by a higher average order value. We ~~currently~~also ~~intend~~experienced toa ~~retain~~slightly ~~all~~less ~~available~~profitable ~~funds~~product tosales ~~support~~mix in our ~~operations~~core ~~and~~floral tobusiness. ~~finance~~In ~~the~~addition, ~~growth~~we ~~and~~experienced ~~development~~an ofincrease in fixed costs associated with the distribution centers which support our ~~business~~operations.

InWe ~~July~~expect ~~2004,~~our wegross profit ~~completed~~in aabsolute ~~secondary~~dollars ~~public~~to ~~offering~~increase ~~whereby~~in ~~1,981,019~~the ~~shares~~future ofas we increase our ~~common stock~~net ~~were~~sales. ~~sold~~We atexpect anthat ~~offering~~our ~~price~~gross ofprofit ~~$19.63~~percentage ~~per~~will ~~share.~~fluctuate Ofin the 1future as we expand into new product categories based upon our product mix,~~981,019~~ ~~shares~~average ~~sold~~order value, product ~~100~~costs,~~000~~ ~~shares~~shipping ~~were~~costs, ~~sold~~product byreplacement us and anrefund ~~aggregate~~rates ofand ~~1,881,019~~handling ~~shares~~and ~~were~~packaging ~~sold~~costs byfor ~~selling~~the ~~stockholders~~various products. WeOur ~~received~~gross ~~net~~profit ~~proceeds~~may ofalso ~~approximately~~fluctuate ~~$1.4~~in ~~million~~the future as a result of fluctuations in ~~connection~~ ~~with~~carrier ~~the~~costs ~~secondary~~due ~~offering.~~to fuel surcharges.

~~The~~Selling ~~change~~and inMarketing ~~marketable securities is a result of the net sales or purchases of marketable securities to meet our cash requirements or invest additional cash.~~

We believe that our available cash and cash flows from operations will be sufficient to satisfy our working capital and capital expenditure requirements for at least the next twelve months. Changes in our operating plans, lower than anticipated net sales, increased expenses or other events, including those described in “Risks and Uncertainties” below, may cause us to seek additional debt or equity financing in the future. Financing may not be available on acceptable terms, or at all, and our failure to raise capital when needed could negatively impact our growth plans and our financial condition and results of operations. Additional equity financing may be dilutive to the holders of our common stock and debt financing, if available, may involve significant cash payment obligations and covenants and/or financial ratios that restrict our ability to operate our business.


	Three Months Ended September 30,
	2005			2004			% Increase
	(in thousands, except percentages)
Selling and marketing	$	5,983		$	4,843		23.6	%
As a percent of net sales		22.3	%		24.3	%

~~Critical~~Our ~~Accounting~~selling ~~Policies~~and marketing expenses consist primarily of payroll and payroll related costs for our category development and marketing and customer service staff, online and offline advertising costs, and market and customer research costs. Advertising expenses are generally expensed as incurred. For advertising contracts which cover an extended period of time, the costs are expensed over the life of the contract based on the terms of the contract, such as orders placed, radio spots run or Internet advertisements placed. Our advertising efforts target the acquisition of new customers and repeat orders from existing customers.

~~Management’s~~The ~~Discussion~~increase ~~and Analysis of Financial Condition and Results of Operations is based upon our financial statements, which have been prepared~~ in ~~accordance with accounting principles generally accepted in~~ the ~~U.S.~~selling ~~The preparation of our financial statements requires us to make estimates~~ and ~~judgments~~marketing ~~that~~expenses ~~affect~~for the ~~reported amounts~~three ofmonths ~~assets,~~ended ~~liabilities~~September 30, ~~net~~2005 ~~sales~~compared ~~and~~to ~~expenses~~the ~~and~~same ~~related~~period ~~disclosure~~last ofyear ~~contingent~~is ~~assets~~primarily due ~~and~~to ~~liabilities. On~~ an ~~on-going~~increase ~~basis,~~in ~~estimates~~payroll ~~are~~and ~~evaluated,~~payroll ~~including those~~ related tocosts ~~the~~as ~~timing~~our of marketing ~~expense,~~staff ~~lives~~headcount ~~and~~has ~~depreciation~~increased ~~of fixed~~in ~~assets,~~an ~~reserves~~effort ~~for~~to ~~bad~~drive ~~debts~~increases ~~and~~in ~~credit~~net ~~card chargebacks~~sales, ~~reserves~~an ~~for~~increase ~~inventory~~in ~~and~~customer ~~impairment~~service ofseasonal ~~long-lived~~labor ~~assets. These estimates are based on historical experience and on various other assumptions that are believed~~ to besupport ~~reasonable under~~our ~~the~~increased ~~circumstances,~~customer ~~the~~sales ~~results of which form the basis for making judgments about the carrying values of assets~~ and ~~liabilities that are not readily apparent from other sources. Actual results may differ from these estimates. Management~~ ~~believes~~satisfaction ~~there~~activity ~~have been no material changes during the three~~ and ~~six~~an ~~month~~increase ~~periods ended December 31, 2004 to the critical accounting policies reported~~ in ~~the~~targeted ~~Management’s Discussion and Analysis of Financial Condition and Results of Operations section of our Annual Report on Form 10~~business-Kto-business ~~for the year ended June 30, 2004 as filed with the Securities and Exchange Commission on September 28, 2004~~advertising.

~~Recently~~The ~~Issued~~decrease ~~Accounting~~in ~~Standards~~marketing costs for the three months ended September 30, 2005 as a percentage of sales compared to the same period last year is primarily a result of decreased costs related to online and offline direct marketing and advertising. These costs were partially offset by an increase, as a percentage of sales, in our customer service seasonal labor to support our increased customer sales and satisfaction activities.

We ~~adopted~~expect ~~the~~selling fair-value-based method of accounting for stock-based payments effective July 1, 2002 using the prospective method described in FASB Statement No. 148, Accounting for Stock-Based Compensation—Transition and ~~Disclosure.~~marketing ~~Currently,~~expenses ~~we use the Black-Scholes formula~~ to ~~estimate the value of stock options granted to employees and expects to~~ continue to ~~use~~increase ~~this~~in ~~acceptable option valuation~~absolute ~~model~~dollars ~~upon~~in the ~~required~~future ~~adoption~~as of Statement 123(R) on July 1, 2005. Because Statement 123(R) must be applied not only to new awards but to previously granted awards that are not fully vested on the effective date, and because we adopted Statement 123 using the prospective transition method (which applied only to awards granted, modified or settled after the adoption date), compensation cost for some previously granted awards that were not recognized under Statement 123 will be recognized under Statement 123(R). We do not anticipate that this will have a ~~material~~result ~~effect on its financial statements. However, had we adopted Statement 123(R) in prior periods, the impact~~ of ~~that~~continued ~~standard~~expansion ~~would have approximated the impact~~ of ~~Statement 123 as described in the disclosure of pro forma net income and earnings per share in Note 2 to~~ our ~~annual~~sales consolidated financial statements. Statement 123(R) also requires the benefits of tax deductions in excess of recognized compensation cost to be reported as a financing cash flow, rather than as an operating cash flow as required under current literature. This requirement will reduce net operating cash flows and ~~increase~~marketing ~~net financing cash flows in periods after adoption~~efforts. While we ~~cannot estimate~~currently ~~what~~expect ~~those~~selling ~~amounts~~and ~~will~~marketing beexpenses into ~~the~~increase ~~future (because they depend on, among other things, when employees exercise stock options), the amount of operating cash flows recognized~~ in ~~prior~~absolute ~~periods for such excess tax deductions were $1~~dollars,~~556~~ ~~for~~we ~~the six~~expect ~~months~~them ~~ended~~to ~~December~~remain ~~31,~~generally ~~2004~~comparable ~~and~~to ~~$246, $0, and $0 in~~ fiscal ~~years~~2005 ~~ended~~as ~~June 30, 2004, 2003 and 2002, respectively.~~ a

1517

RisksTable andof Uncertainties Contents

~~The~~ percentage ~~following~~of ~~information~~net ~~sets~~sales ~~forth~~for ~~factors~~fiscal ~~that~~2006. ~~could~~However, ~~cause~~as ~~our~~we ~~actual~~identify ~~results~~opportunities to ~~differ~~increase ~~materially~~our ~~from~~growth ~~those contained~~ in ~~forward-looking~~net ~~statements~~sales, we ~~have made in this report and those we~~ may ~~make~~increase ~~from time to time. If any of the following risks actually occurs,~~ our ~~business,~~marketing ~~financial~~expense ~~condition or results of operations could suffer. In addition, there may be other risks of which we are currently~~to ~~unaware~~take oradvantage ~~that we do not currently believe are material that could become important factors that harm our business, financial condition or results~~ of ~~operations.~~those ~~You should also consider the other information described in this report~~opportunities.

~~Risks~~General ~~Related~~and Administrative ~~to Our Business~~

Our quarterly operating results may fluctuate significantly. You should not rely on them as an indication of our future results.


	Three Months Ended September 30,
	2005			2004			% Increase
	(in thousands, except percentages)
General and administrative	$	5,703		$	4,196		35.9	%
As a percent of net sales		21.3	%		21.1	%

Our general and ~~future~~administrative ~~net~~expenses consist primarily of payroll and payroll related costs for our employees, (except those associated with fulfillment, customer service, technology and sales and ~~results~~marketing employees), depreciation of ~~operations~~fixed ~~may~~assets, ~~fluctuate~~credit ~~significantly~~card fees, ~~from~~facilities ~~quarter~~costs to(other ~~quarter~~than ~~due~~facilities tocosts aassociated ~~combination~~with cost of ~~factors~~goods sold), ~~many~~legal ofand ~~which~~accounting ~~are~~professional ~~outside~~fees, ofinsurance, ~~our~~bad ~~control.~~debt ~~The~~expense, ~~most~~phone, ~~important~~travel, ofdeferred ~~these~~compensation ~~factors~~and ~~include:~~retirement plan expenses and other general corporate expenses.

•The ~~seasonality;~~increase in absolute general and administrative expenses for the quarter ended September 30, 2005 compared to the same quarter last year is primarily due to increases in payroll and payroll related costs, depreciation of fixed assets and legal expenses. The increase in payroll and payroll related costs is a result of increasing headcount in order to support the growth of our company and payment of severance to terminated employees. The increase in depreciation is a result of investments in fixed assets to support our increased sales volumes. The increase in legal expenses is a result of the costs incurred to defend ourselves in various lawsuits and general corporate legal expenses.

•The increase as a percentage of net sales was caused primarily by the ~~timing~~increases in payroll and ~~effectiveness~~payroll related costs and legal expenses which were partially offset by a decrease in the net cost of ~~marketing~~deferred ~~programs;~~retirement compensation and retirement plan expenses and related investment income or expense.

•We ~~our~~expect ~~ability~~general and administrative expenses to ~~enter~~continue ~~into~~to increase in absolute dollars in the future as a result of continued expansion of our administrative infrastructure in support of a broader technology and ~~renew~~product ~~key~~portfolio and general corporate expenses. However, we also anticipate that annual general and ~~strategic~~administrative ~~partnerships;~~expenses will remain relatively constant or decrease as a percentage of net sales as a result of net sales growing faster than general and administrative expenses.

•Information ~~our~~Technology ~~ability~~Systems ~~to enter into or renew key marketing arrangements;~~

• our ability to compete with traditional and Internet retailers;


	Three Months Ended September 30,
	2005			2004			% Increase
	(in thousands, except percentages)
Information technology systems	$	1,712		$	1,223		39.9	%
As a percent of net sales		6.4	%		6.1	%

•Our ~~our~~information technology ~~ability~~system expenses consist primarily of payroll and ~~the~~payroll ~~ability~~related costs for information technology personnel, software support services and other general information technology expenses. Information technology system expenses are expensed as incurred. Information technology system expenses are net of ~~our~~software ~~competitors~~capitalization toof ~~deliver~~major ~~high~~site and product development efforts under Statement of Position 98-~~quality~~1, ~~perishable~~Accounting ~~products~~for toCosts ~~customers~~of inComputer aSoftware ~~timely~~Developed ~~manner;~~or Obtained for Internal Use.

•The increase in information technology costs in absolute dollars for the ~~condition~~quarter ofended September 30, 2005 compared to the ~~retail~~same ~~economy;~~quarter last year is a result of an increase in payroll and payroll related costs and an increase in stock-based compensation. These costs were partially offset by an increase in the capitalized costs

•18 ~~the timing and effectiveness of capital expenditures.~~

WeTable may be unable to adjust spending quickly enough to offset any unexpected sales shortfall resulting from any of these or other factors. If we have a shortfall in net sales in relation to our expenses, our operating results will suffer. Our operating results for any particular period may not be indicative of future operating results. You should not rely on quarter-to-quarter comparisons of results of operations as an indication of our future performance. In future periods, it is possible that our results of operations may be below the expectations of public market analysts and investors. This could cause the trading price of our common stock to fall. Contents

We associated ~~achieved~~with ~~annual~~internally ~~net~~developed ~~income~~software of approximately $410,000 and approximately $334,000 for the ~~first~~three ~~time~~months ~~during fiscal~~ended ~~2003~~September 30, 2005 and 2004, werespectively. ~~cannot~~We ~~assure~~incurred ~~you~~the weincreased ~~will~~payroll ~~continue~~and payroll related costs and stock-based compensation in order to ~~operate~~support ~~profitably~~the infrastructure necessary for continued growth of our business.

WeThe ~~achieved~~increase ~~annual~~in ~~net~~information ~~income~~technology ~~for~~system ~~the~~expenses, ~~first~~as ~~time~~a inpercentage ~~our~~of net ~~corporate~~sales, ~~history~~for ~~during~~the ~~fiscal~~three ~~2003~~months ofended ~~$4.3~~September 30, ~~million~~2005 ~~and~~compared ~~achieved~~to ~~annual~~the ~~net~~same ~~income~~period ~~attributable~~last toyear ~~common~~was ~~stockholders~~primarily ~~for~~a ~~fiscal~~result ~~2004~~ of ~~$18.0~~our ~~million.~~growth ~~However,~~in wepayroll ~~may~~and ~~not~~payroll berelated ~~able~~costs ~~to continue~~and tostock-based ~~achieve~~compensation, ~~positive~~which ~~net~~outpaced ~~income~~our growth in ~~future~~net ~~fiscal~~sales. ~~years~~In addition, ~~especially~~the asrate weof ~~introduce~~increase ~~new~~in ~~product~~capitalized ~~categories.~~information Wetechnology ~~expect~~expenditures ~~our~~was ~~operating~~less ~~expenses~~than ~~to increase in~~ the ~~future,~~rate asof ~~we,~~growth ~~among~~in ~~other~~net ~~things:~~sales.

•We ~~expand~~expect ~~into~~information ~~new~~technology ~~product~~system ~~categories~~expenses ~~and~~to ~~accessories~~increase in absolute dollars in fiscal 2006 compared to fiscal 2005 but to remain at a relatively constant percentage of net sales for fiscal 2006 compared to fiscal 2005 as we continue to invest in our ~~existing~~infrastructure ~~product~~to ~~lines;~~support the growth of our business. Our information technology expenses may fluctuate in the future should we capitalize either greater or fewer expenses associated with capital software projects.

•Other ~~continue~~Income, ~~with~~Net ~~our marketing efforts to build our brand names;~~

• expand our customer base;


	Three Months Ended September 30,
	2005			2004			% Increase
	(in thousands, except percentages)
Other income, net	$	509		$	270		88.8	%
As a percent of net sales		1.9	%		1.3	%

16Other income, net includes primarily investment income. The increase for the three months ended September 30, 2005 compared to the same quarter last year was a result of improved returns on invested assets and higher invested balances.

•Income ~~establish~~Tax ~~research~~Benefit ~~and development efforts to advance our proprietary supply chain technology and develop new technology;~~

• upgrade our operational and financial systems, procedures and controls;


	Three Months Ended September 30,
	2005			2004			% Increase (Decrease)
	(in thousands, except percentages)
Income tax benefit	$	(367	)	$	(449	)	(18.3	)%
As a percent of net sales		(1.4	)%		(2.3	)%

•The ~~continue~~income totax ~~absorb~~benefit reflects a reduction in anticipated income tax payable as a result of the ~~costs~~loss incurred in the first fiscal quarter of 2006 and ~~implement~~a decrease in the ~~responsibilities~~estimated effective rate. The effective tax rate anticipated for fiscal year 2006 of ~~being~~44% is a ~~public~~result ~~company;~~of the statutory tax rates and stock-based compensation recognized under SFAS 123(R).

•Net ~~retain~~Loss ~~existing personnel and hire additional personnel.~~

After investment in items including those described above, we expect to maintain profitability for fiscal 2005 and for the foreseeable future, although no assurances can be made that we will be profitable. In order to maintain profitability as we expand into new product categories, we will need to generate net sales exceeding historical levels and/or reduce relative operating expenditures. We do not have significant experience offering product categories other than flowers. We may not be able to generate the required net sales from flowers and other perishable products or reduce operating expenses sufficiently to sustain or increase operating profitability. If we have a shortfall in net sales without a corresponding reduction to our expenses, our operating results may suffer. It is possible that results of operations may be below the expectations of public market analysts and investors, which could cause the trading price of our common stock to fall.


	Three Months Ended September 30,
	2005			2004			% Increase (Decrease)
	(in thousands, except percentages)
Net loss	$	(23	)	$	(497	)	(95.4	)%
As a percent of net sales		(0.0	)%		(2.5	)%

WeThe ~~have~~change in net loss ~~operated~~is ~~our~~a ~~flower~~result ~~category~~of ~~for~~the ~~approximately~~changes ~~six~~in ~~years~~net sales and ~~our~~expenses ~~premium~~as ~~meat~~previously discussed and ~~fresh~~the ~~fruit~~cumulative ~~categories~~effect ~~for~~of ~~approximately~~a ~~one~~change ~~year.~~in ~~This~~accounting ~~limited~~principle ~~operating~~of ~~history~~$444,000 ~~makes~~associated ~~evaluating~~with ~~our~~the ~~business~~adoption ~~and~~of ~~its~~SFAS ~~prospects difficult~~123(R).

We19 have a limited operating history on which an investor can evaluate our business. We were incorporated in February 1998 and officially launched our website, www.proflowers.com, in August 1998. To date, we have derived our net sales primarily from the sale of flowers, plants and gifts from our www.proflowers.com website. We began selling premium meat and fresh premium fruit in October 2003. An investor in our common stock must consider the risks, uncertainties and difficulties frequently encountered by companies in new and rapidly evolving online retail markets such as these we have targeted. If we do not successfully manage these risks or successfully execute our business strategy, our business, results of operations and financial condition will be adversely affected.

UtilizationTable of our deferred tax assets is dependent on future taxable income. Contents

WeLiquidity ~~have a federal tax net operating loss carryforwards at June 30, 2004 of approximately $25.1 million, which represents a substantial amount of our deferred tax assets. In calculating our tax provision,~~ and ~~assessing~~Capital ~~the~~Resources likelihood that we will be able to utilize the deferred tax assets, we have considered and weighed all of the evidence, both positive and negative, and both objective and subjective. We have factored in the inherent risk of forecasting net sales and expenses over an extended period of time. We have also considered the potential risks associated with our business, as outlined in other risk factors in this report, and have taken into account material permanent differences in the treatment of net sales and expenses for purposes of financial reporting and tax accounting, such as the treatment of stock options, limitation on meals and entertainment and stock-based compensation.

Based on information available through our third quarter of fiscal 2004, and sufficient positive evidence, particularly the fact that we reported taxable income for the past three fiscal years and forecasted future book and tax income, we reversed the valuation allowance during fiscal 2004. Although we anticipate generating future taxable income, we cannot guarantee that we will generate sufficient taxable income to fully utilize our deferred tax assets.


	September 30, 2005		June 30, 2005		% Increase (Decrease)
	(in thousands, except percentages)
Working capital	$	59,273	$	59,554	(0.5	)%
Cash and cash equivalents	$	4,243	$	12,308	(65.5	)%

IfSince our inception, ~~customers~~we dohave ~~not~~financed ~~find~~ our ~~expanded~~operations ~~product~~through ~~categories~~sales ~~appealing~~of orstock, ifand, more recently, internally generated cash flows from operations. The decreases in cash at September 30, 2005 over June 30, 2005 resulted primarily from net cash used in operations of approximately $3.5 million reduced further by the purchase of fixed assets of approximately $1.1 million and repurchases of $2.2 million of shares of our common stock. In May 2005, we ~~are~~announced ~~unable~~that our board of directors authorized a stock repurchase program under Rule 10b-18 of the Exchange Act of up to ~~successfully~~$25 ~~leverage~~million of shares of our ~~business~~common ~~strategy~~stock ~~into~~in ~~our~~the ~~new~~open ~~product~~market ~~categories~~and negotiated purchases over a period of one year. For the three months ended September 30, 2005, we had repurchased 89,700 shares of our ~~business~~common ~~may~~stock ~~suffer~~in open market transactions at varying prices for an aggregate purchase price of approximately $2.2 million, which together with prior repurchases leaves approximately $13.9 million available for potential future repurchases of common stock.

WeNet ~~have~~cash ~~recently~~used ~~expanded~~in ~~our product lines into other categories of perishable goods. In~~operating ~~October~~activities ~~2003,~~was we launched and are now operating two additional websites under our gourmet food business unit: Uptown Prime, offering premium meats and now premium seafood; and Cherry Moon Farms, offering fresh premium fruits$(3.6) Inmillion ~~any possible future expansion of our categories, we intend to leverage our e-commerce platform, marketing and shipping relationships and customer base to develop opportunities~~ for ~~us and other retailers using our platform to offer perishable products. While our market platform has been incorporated into and tested in~~ the ~~online~~three ~~floral~~months ~~retail~~ended ~~market~~September 30, we2005 ~~cannot~~as ~~predict~~compared ~~whether it can be successfully applied~~ to ~~other perishable product categories over time~~$(3.9) Inmillion ~~addition,~~for ~~expansion~~the ofthree ~~our~~months ~~business~~ended ~~strategy into new product categories may require us to incur significant marketing expenses~~September 30, ~~develop relationships with new suppliers and comply with new regulations~~2004. ~~These requirements could strain our management, financial and operational resources. Additional challenges that may affect our ability to expand into new product categories include our ability to:~~

17We use cash in investing activities primarily to purchase computer hardware and software, office equipment and furniture. Investing activities also includes the purchase and sale of marketable securities in order to provide for cash flow needs or invest excess cash. Net cash provided by (used in) investing activities totaled $(3.7) million and $4.8 million in the three months ended September 30, 2005 and 2004, respectively.

•Net ~~establish~~cash orprovided ~~increase~~by ~~awareness~~(used ofin) ~~our~~financing ~~new~~activities ~~brands~~was $(0.8) million and ~~product~~$1.8 ~~categories;~~million for the three months ended September 30, 2005 and 2004, respectively.

•The ~~acquire,~~change ~~attract~~in ~~and~~marketable ~~retain~~securities ~~customers~~is at a ~~reasonable~~result ~~cost;~~of the net sales or purchases of marketable securities to meet our cash requirements or invest additional cash.

•We ~~achieve~~believe that our available cash and ~~maintain~~cash aflows ~~critical~~from ~~mass~~operations ofwill ~~customers~~be sufficient to satisfy our working capital and ~~orders~~capital ~~across~~expenditure requirements for at least the next 12 months. Changes in our operating plans, lower than anticipated net sales, increased expenses or other events, including those described in “Risks and Uncertainties” below may cause us to seek debt or additional equity financing in the future. Financing may not be available on acceptable terms, or at all, and our failure to raise capital when needed could negatively impact our growth plans and our financial condition and results of operations. Additional equity financing may be dilutive to the holders of our ~~product~~common ~~categories;~~stock and debt financing, if available, may involve significant cash payment obligations and covenants and/or financial ratios that restrict our ability to operate our business.

•Critical ~~maintain~~Accounting orPolicies ~~improve our gross margins and fulfillment costs;~~

•Management’s ~~compete~~Discussion ~~effectively~~and Analysis of Financial Condition and Results of Operations is based upon our financial statements, which have been prepared in ~~highly~~accordance ~~competitive~~with ~~markets~~accounting principles generally accepted in the U.S. The preparation of our financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities. On an on-going basis, estimates are evaluated, including those related to the timing of marketing expense, lives and depreciation of fixed assets, reserves for bad debts and credit card chargebacks, reserves for inventory and impairment of long-lived assets. These estimates are based on historical experience and on various other assumptions that are believed to be reasonable under the ~~sale~~circumstances, the results of ~~perishable~~which ~~goods~~form ~~online;~~the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates. Management believes there have been no material

•20 ~~attract and retain suppliers to provide our expanded line of perishable products to our customers on terms that are acceptable to us; and~~

•Table establishof ourselves as an important participant in the market for perishable products, such as premium meat and fresh fruit.Contents

We changes ~~cannot~~during bethe ~~certain~~three ~~that~~month weperiod ~~will~~ended beSeptember 30, ~~able~~2005 to ~~successfully~~the ~~address~~critical ~~any~~accounting orpolicies ~~all~~reported ~~of these challenges~~ in athe ~~manner~~Management’s ~~that~~Discussion ~~will enable us to expand our business into new product categories in a cost-effective or timely manner. If our new product categories are not received favorably by consumers, our reputation~~ and Analysis ~~the value~~ of ~~the~~Financial ~~applicable new~~Condition ~~brand~~ and ~~our~~Results ~~other brands could be damaged. The lack~~ of ~~market~~Operations ~~acceptance~~section of our ~~new~~Annual ~~product~~Report ~~categories~~on orForm ~~our~~10-K ~~inability~~for tothe ~~generate~~year ~~satisfactory~~ended ~~net~~June 30, ~~sales~~2005 ~~from~~as ~~any~~filed ~~expanded~~with ~~product~~the ~~categories~~Securities toand ~~offset~~Exchange ~~their~~Commission ~~cost~~on ~~could~~September 13, ~~harm our business~~2005.

WeRecently ~~depend~~Issued onAccounting ~~two~~Standards ~~third-party carriers, and the failure of these carriers to deliver our product offerings in a timely or accurate manner could harm our business.~~

We ~~currently~~adopted ~~rely~~SFAS ~~primarily~~No. 123(R), ~~on two third~~Share-~~party~~Based ~~carriers~~Payments, effective ~~FedEx and UPS~~July 1, ~~for~~2005 ~~shipments~~using ofthe ~~our~~modified ~~products~~prospective ~~to customers~~method. We ~~are~~had ~~therefore~~adopted ~~subject~~the tofair-value-based ~~the~~method ~~risks,~~of ~~including capacity~~accounting ~~and~~for ~~volume~~stock-based ~~constraints,~~payments ~~security~~effective ~~concerns~~July 1, ~~employee~~2002 ~~strikes~~using orthe ~~other~~prospective ~~labor~~method ~~stoppages,~~described ~~inclement~~in ~~weather~~FASB Statement No. 148, ~~equipment~~Accounting ~~failures~~for orStock-Based ~~other~~Compensation—Transition ~~delays~~ and ~~fluctuations~~Disclosure. inWe ~~fuel~~use ~~costs,~~the ~~associated~~Black-Scholes ~~with~~formula to estimate the ~~carriers’~~value ~~ability~~of stock options granted to ~~provide~~employees. ~~timely~~We ~~and cost-effective~~applied ~~order~~SFAS ~~fulfillment~~123(R) ~~and~~not ~~delivery~~only ~~services~~to new awards but also to ~~meet~~previously ~~our~~granted ~~distribution~~awards ~~and~~that ~~shipping~~were ~~needs.~~not ~~Under~~fully ~~our~~vested ~~contracts~~on ~~with~~the ~~both~~effective ~~parties,~~date. Because we ~~have~~adopted ~~agreed~~SFAS 123(R) using the prospective transition method (which applied only to ~~waive~~awards ~~specified~~granted, ~~refunds~~modified ~~and~~or ~~guarantees~~settled ~~for~~after ~~service~~the ~~failures~~adoption ~~and~~date), compensation cost for ~~commitment~~some ~~times~~previously ~~during our~~granted ~~seasonal~~awards ~~peak~~that ~~periods~~were innot ~~exchange~~recognized ~~for~~under ~~favorable~~SFAS ~~pricing~~123 onwill ~~our~~be ~~shipments~~recognized ~~with~~under ~~them~~SFAS 123(R). ~~Failure~~SFAS to123(R) ~~deliver~~also ~~products~~requires tothe ~~our~~benefits ~~customers~~of tax deductions in aexcess ~~timely~~of ~~and~~recognized ~~accurate~~compensation ~~manner~~cost ~~would~~to ~~harm~~be ~~our~~reported ~~reputation~~as a financing cash flow, ~~our~~rather ~~brands~~than ~~and~~as ~~our~~an ~~results~~operating ofcash ~~operations~~flow as required under previous literature.

WeThe ~~re-negotiate~~impact ~~various~~of ~~provisions~~adopting ofSFAS No. 123(R) for our ~~agreements~~first ~~with~~quarter ~~FedEx~~of ~~and~~fiscal ~~UPS~~2006 onwas a ~~periodic~~decrease ~~basis and~~in ~~are~~compensation ~~subject~~expense toof ~~possible~~$123,000 ~~terminations~~($69,000 ~~upon~~after ~~sixty~~tax) and ~~days~~an ~~prior~~increase ~~notice~~of ~~with~~$0.01 ~~FedEx~~for ~~and~~both ~~thirty~~basic ~~days~~and ~~prior~~diluted ~~notice~~earnings ~~with~~per ~~UPS~~share. We ~~may~~expect ~~face~~the ~~substantial~~total ~~increases~~expense infor ~~the~~stock-based ~~cost~~awards ofduring ~~delivery~~fiscal ~~services~~year ~~from~~2006 ~~our~~to ~~delivery~~be ~~partners~~approximately as$4.0 amillion. The ~~result~~adoption of ~~increases~~SFAS inNo. 123(R) ~~the~~is expected to ~~prices~~incrementally ofdecrease ~~gasoline~~before ~~and~~tax ~~fuel,~~compensation ~~heightened~~expense ~~security~~by ~~measures~~approximately or$0.5 ~~other~~million ~~factors~~during fiscal 2006. SFAS If123(R) inalso requires the ~~future~~cash weflows ~~fail~~resulting tofrom ~~negotiate~~the ~~rates~~tax orbenefits ~~other~~resulting ~~terms~~from astax ~~favorable~~deductions toin usexcess asof the ~~existing~~compensation ~~terms~~cost recognized offor ~~our~~those ~~agreement~~options (excess tax benefits) to be classified as financing cash flows. In prior periods, such ~~failure~~amounts ~~will~~were ~~adversely~~presented ~~affect~~as ~~our~~an ~~business~~operating activity. For the three months ended September 30, 2005 and 2004, $0.6 million and ~~results~~$0.3 million was reported as “Tax benefit from the exercise of ~~operations~~stock options” in the financing activities of the Statement of Cash Flows. InAt ~~addition~~adoption, ifwe ~~for~~recognized ~~any~~a ~~reason~~cumulative ~~FedEx~~effect orof ~~UPS~~change isin ~~unable~~accounting orprinciple ~~unwilling~~resulting toin ~~deliver~~a ~~products~~net income benefit of $0.4 million, which corresponded to ~~our~~the ~~customers~~requirement inof aestimating ~~timely~~forfeitures ~~manner~~at orthe ondate ~~acceptable~~of ~~terms,~~grant. weSFAS ~~may~~123(R) ~~not~~also beeliminated ~~able~~the topresentation ~~secure~~of ~~alternative~~the ~~shipping~~contra-equity ~~partners~~account, on“Deferred ~~acceptable~~stock-based ~~terms~~compensation,” from the face of the Balance Sheet resulting in a ~~timely~~reclassification ~~manner,~~of or$3.1 atmillion ~~all~~to “Additional paid-in capital.”

WeThe ~~depend~~following onweighted-average ~~three suppliers~~assumptions were used for ~~approximately~~options ~~50%~~granted ofin ~~our~~the ~~flower~~three ~~products~~months ended September 30, 2005 and ~~the~~2004 ~~loss~~and a discussion of our ~~any~~methodology for developing each of ~~these~~the ~~suppliers~~assumptions ~~could~~used ~~harm~~in ~~our~~the ~~business.~~valuation model and how they differ from the assumptions used under SFAS 123 follows:

For the six months ended December 31, 2004, and for fiscal year 2004 we depended upon three suppliers for approximately 48.1% and 44.2 % of our flower products, respectively. If any one of these three flower suppliers were to become unable or unwilling to continue to supply flowers to our customers, our business could be harmed. We do not have long-term contracts with any of our flower suppliers for order fulfillment, and these suppliers can terminate their relationships with us at any time. If a flower supplier discontinues its relationship with us, we will be required to obtain a suitable replacement, which may cause delays in delivery or a decline in product quality, leading to customer dissatisfaction and loss of customers. We expect to encounter similar risks as we develop our premium meat and fruit and other perishable product supplier relationships.


	Three Months Ended September 30,
	2005	2004
Dividend yield	0.0%	0.0%
Expected volatility	45.0%	54.4%
Risk-free interest rate	3.99%	4.43%
Expected life of the option term (in years)	4.1	5.0
Forfeiture rate	10.0%	N/A

18• Dividend Yield—We have never declared or paid dividends on common stock and have no plans to do so in the foreseeable future. Under SFAS a dividend yield of 0.0% was also used.

If• ~~our~~Expected ~~marketing~~Volatility—Volatility ~~efforts~~is ~~are~~a ~~not~~measure ~~effective,~~of ~~our~~the ~~brands~~amount ~~may~~by ~~not~~which ~~achieve~~a financial variable such as a share price has fluctuated (historical volatility) or is expected to fluctuate during a period based on comparisons with the ~~broad~~implied ~~recognition necessary~~volatility of traded options of companies which are similar to ~~succeed.~~us and other

We21 believe that broader recognition and a favorable consumer perception of our brands, including our Provide Commerce, ProFlowers, Uptown Prime and Cherry Moon Farms brands, are essential to our future success. Accordingly, we intend to pursue an aggressive brand-enhancement strategy through a variety of online and offline marketing and promotional techniques, involving the Internet, print, radio, email, direct mail, public relations and television. These initiatives will involve significant expense. If our brand enhancement strategy is unsuccessful, these expenses may never be recovered and we may be unable to increase future net sales. Successful positioning of the Provide Commerce, ProFlowers, Uptown Prime and Cherry Moon Farms brands will largely depend on:

•Table the success of our advertising and promotional efforts;Contents

•factors which may effect the volatility of our ~~ability~~stock to(expected ~~provide~~volatility). aWe ~~consistent~~considered the historical volatility from our initial public offering through the dates of grants, ~~high-quality~~in ~~customer~~combination ~~experience;~~with the implied volatility of options of similar companies, and business and economic considerations in order to estimate the expected volatility. Under SFAS 123, only the historical volatility was considered for purposes of the volatility assumption.

• ~~our~~Risk-Free ~~ability~~Interest toRate—This ~~continue~~is tothe ~~provide~~U.S. ~~high-quality~~Treasury ~~products~~rate tofor ~~our~~the ~~customers~~week inof each option grant during the quarter having a ~~timely~~term ~~manner~~that most closely resembles the expected life of the option. The same Treasury rate was also used under SFAS 123.

~~Due~~• toExpected ~~the~~Life ~~change~~of inthe ~~our~~Option ~~corporate~~Term—This ~~name~~is inthe ~~September~~period ~~2003 and expansion~~ of ~~our~~time ~~product categories in October 2003, our ProFlowers brand is our only brand~~ that ~~has~~the ~~received~~options ~~broader~~granted ~~recognition~~are byexpected ~~customers~~to ~~who~~remain ~~associate it with our www~~unexercised.~~proflowers.com~~ ~~website~~Options ~~and~~granted during the ~~sale~~quarter ofhave ~~flowers~~a ~~and~~maximum ~~floral~~term ~~products. To increase awareness~~ of ~~our~~ten ~~new~~years. ~~corporate~~The ~~name~~Company ~~and~~estimates ~~brands~~the ~~and~~expected ~~our~~life ~~other~~of ~~proposed brands~~the ~~and~~option ~~product~~term ~~offerings,~~based ~~we will need to continue to spend significant amounts~~ on ~~advertising~~actual ~~and~~past ~~promotions.~~behavior ~~These~~for ~~expenditures~~similar ~~may~~options ~~not~~with ~~result~~further inconsideration agiven ~~sufficient increase in net sales~~ to ~~cover such advertising and promotional expenses. In addition, even if brand recognition increases,~~ the ~~number~~class of ~~new~~employees ~~customers~~to orwhom the ~~number~~options ofwere ~~transactions~~granted. onUnder ~~our~~SFAS ~~branded websites may not increase. Also~~123, ~~even~~an ifexpected ~~the~~life ~~number~~ of ~~new~~the ~~customers~~option ~~increases,~~term ~~those~~of ~~customers~~five ~~may~~years ~~not~~was ~~purchase products through our branded websites on a regular basis~~used.

We• ~~have historically~~Forfeiture ~~experienced~~Rate—This ~~seasonality~~is inthe ~~our~~estimated ~~business,~~percentage ~~which~~of weoptions ~~expect~~granted that are expected to ~~continue~~be ~~and~~forfeited ~~which~~or ~~could~~canceled ~~cause~~on ~~our~~an ~~operating~~annual ~~results~~basis before becoming fully vested. We estimate the forfeiture rate based on past turnover data ranges between zero to ~~fluctuate~~four years. No forfeiture rate was assumed under SFAS 123. Instead, forfeitures were recognized as they occurred.

WeRisks ~~have historically experienced seasonality in our ProFlowers business due to the nature of our products,~~ and weUncertainties expect this seasonality to continue. Our net sales and earnings are generally lowest in the third calendar quarter, our first fiscal quarter. Sales of our products are highly concentrated in the first calendar quarter, due to Valentine’s Day, the second calendar quarter, due to Mother’s Day and Easter, and the fourth calendar quarter, due to the Thanksgiving and end-of-year holidays. In addition, due to variability in the date for Easter, earnings comparability between years can be impacted since Easter can occur in either the first or second calendar quarter. In anticipation of increased sales activity during these periods, we utilize a significant number of temporary employees to supplement our permanent staff. We also increase our inventory levels at our distribution facilities. If net sales during these periods do not meet our expectations, we may not generate sufficient net sales to offset these increased costs and our operating results may suffer.

InThe ~~addition,~~following information sets forth factors that could cause our ~~business~~actual ~~may~~results ~~also~~to bediffer ~~adversely~~materially ~~affected~~from bythose contained in forward-looking statements we have made in this report, the ~~particular~~information ~~day~~incorporated herein by reference and those we may make from time to time. If any of the ~~week~~following onrisks ~~which~~actually ~~certain~~occurs, ~~major~~our ~~holidays~~business, ~~fall.~~financial ~~For~~condition or ~~example~~results of operations could suffer. In addition, ~~because~~there ~~Valentine’s~~may ~~Day~~be ~~will~~other ~~fall~~risks onof awhich ~~Monday~~we inare ~~2005,~~currently unaware or that we ~~may~~do ~~experience~~not ~~less~~currently ~~demand~~believe ~~for~~are ~~our~~material ~~product~~that ~~related~~could tobecome important factors that harm our ~~logistical~~business, ~~challenges~~financial incondition ~~delivering~~or ~~shipments~~results of onoperations. ~~the~~You ~~actual~~should ~~date~~also orconsider the ~~dates~~other ~~immediately~~information ~~prior~~described toin ~~such~~this ~~holiday~~report.

~~The~~Risks ~~relatively~~Related ~~recent launch of our new branded websites targeting premium meat and fresh fruit makes it difficult for us~~ to assess the impact of seasonal factors on our business in the future. We expect that our new product categories will also be subject to seasonal fluctuations, reflecting a combination of seasonality trends for the products and services offered by our new branded websites and seasonality patterns affecting Internet use generally. For example, demand for our current and new product offerings is likely to increase during holiday periods, such as Father’s Day and Christmas, while Internet use in general may decline during the summer months. Our ~~results~~Business may also be affected by seasonal fluctuations in the products made available to us for sale by participating suppliers. Cyclical variations for new products we plan to offer may either smooth or increase our existing seasonality. Unanticipated fluctuations in seasonality could adversely affect our operating results and cause us to miss our internal and third-party earnings projections, which could cause our stock price to decline.

19Our quarterly operating results may fluctuate significantly. You should not rely on them as an indication of our future results.

WeOur ~~face~~future ~~intense~~net ~~competition~~sales ~~from~~and ~~both~~results ~~traditional~~of ~~and~~operations ~~online~~may ~~retail~~fluctuate ~~companies~~significantly ~~with~~from ~~greater~~quarter ~~brand recognition~~to ~~and~~quarter ~~resources~~due to a combination of factors, ~~which~~many ~~may~~of ~~adversely~~which ~~affect~~are outside of our ~~business~~control. The most important of these factors include:

~~The~~• ~~e-commerce~~seasonality ~~market segments in which we currently compete are intensely competitive,~~ and wetiming ~~have many competitors in different industries. Many~~ of the products we offer can be purchased at supermarkets and warehouse stores as well as specialty markets. Our floral competitors include traditional florists, catalog and online floral providers such as Hallmark Flowers, and floral wire services such as FTD, 1-800-FLOWERS and Teleflora. In the premium meat and seafood category, we believe our competitors include specialty butchers, mail order companies, seafood specialty catalogs and other online premium meat providers, such as Omaha Steaks Company. We believe competitors in the fresh fruit category include local farmers’ markets and specialty catalog companies, such as Harry & David. Additionally, we compete with specialty food companies and general gift companies. holidays;

~~Competition~~• in the ~~e-commerce channel may intensify~~timing, ~~especially~~costs asand weeffectiveness ~~expand into product categories in addition to flowers. The nature~~ of ~~the~~ ~~Internet~~marketing as an electronic marketplace facilitates competitive entry and comparison shopping and renders it inherently more competitive than conventional retailing formats. This increased competition may reduce our ability to expand our business, and thus reduce our sales and operating profits, or both. programs;

~~Many~~• of our ~~current and~~ability ~~potential~~to ~~competitors~~enter ~~enjoy~~into ~~substantial~~and ~~competitive~~renew ~~advantages,~~key ~~including:~~corporate and strategic partnerships;

• ~~greater~~our ~~name~~ability ~~recognition~~to enter into or renew key marketing arrangements;

• aour ~~longer~~ability ~~operating~~to ~~history~~compete with traditional and Internet retailers;

• aour ~~more~~ability ~~extensive~~and ~~customer~~the ~~base~~ability of our competitors to deliver high-quality perishable products to customers in a timely manner;

• ~~broader~~the ~~product~~performance ~~and~~of ~~service~~our ~~offerings;~~third-party carriers, FedEx and UPS;

• ~~greater~~the ~~resources~~condition ~~for~~of ~~competitive~~the ~~activities,~~retail ~~such~~economy; ~~as sales~~ and ~~marketing, research and development, strategic acquisitions, alliances and joint ventures.~~

As• a result, these current and potential competitors may be able to secure merchandise from suppliers on more favorable terms, and may be able to adopt more aggressive pricing policies. Other companies in the ~~retail~~timing and ~~e-commerce~~effectiveness service industries may enter into business combinations or alliances that strengthen their competitive positions. These business combinations or alliances might prevent them from also entering into relationships with us or prevent us from taking advantage of ~~such~~capital ~~combinations or alliances~~expenditures. ~~They also may be able to respond more quickly and effectively than we can to new or changing opportunities, technologies, standards or customer requirements. Intense competition may lead to:~~

•22 ~~price reductions, decreased net sales and lower profit margins;~~

•Table loss of market share; orContents

•We ~~increased~~may ~~marketing~~be ~~expenditures~~unable to adjust spending quickly enough to offset any unexpected sales shortfall resulting from any of these or other factors. If we have a shortfall in net sales in relation to our expenses, our operating results will suffer. Our operating results for any particular period may not be indicative of future operating results. You should not rely on quarter-to-quarter comparisons of results of operations as an indication of our future performance. In future periods, it is possible that our results of operations may be below the expectations of public market analysts and investors. This could cause the trading price of our common stock to fall.

~~Failure~~We toachieved annual ~~provide~~net ~~our~~income ~~customers~~for ~~with~~the ~~high-quality~~first ~~products~~time ~~and~~during ~~customer~~fiscal ~~service~~2003, ~~may~~and ~~harm~~we ~~our~~cannot ~~brand~~assure ~~and~~you ~~cause~~we ~~our~~will ~~net~~continue ~~sales~~ to ~~decline~~operate profitably.

We ~~believe~~achieved ~~that~~annual ~~our~~net ~~success~~income infor ~~promoting~~the ~~and~~first ~~enhancing~~time ~~our brands will depend on our success~~ in ~~providing~~ our ~~customers~~corporate ~~high-quality~~history ~~products~~during ~~and~~fiscal a2003 ~~high level~~ of ~~customer service~~$4.3 ~~Product~~million ~~orders~~and ~~placed~~achieved byannual ~~our~~net ~~customers~~income ~~are~~attributable to ~~fulfilled~~common bystockholders ~~our~~of ~~third-party suppliers~~$18.0 Wemillion ~~work~~in ~~with~~fiscal ~~our~~2004, ~~suppliers~~which toincluded ~~develop~~a ~~best~~release ~~practices for~~of ~~quality~~a ~~assurance;~~valuation ~~however,~~allowance weagainst dodeferred ~~not~~tax ~~directly~~assets ~~or constantly control any~~ of ~~our~~$14.0 ~~suppliers~~million. IfOur ~~our~~annual ~~suppliers~~net doincome ~~not~~was ~~fulfill orders to our customers’ satisfaction, our customers may not shop with us again~~$8.9 Inmillion ~~addition, because we do not have constant, direct control over these third-party suppliers, interruptions or delays~~ in ~~the~~fiscal ~~products they supply may be difficult to remedy in a timely fashion~~2005. ~~If any of our suppliers is incapable of or unwilling to fulfill our product orders~~However, we ~~will~~ ~~attempt to ship the products from another source to guarantee right-day delivery; however, we~~ may not be able to ~~ship~~continue ~~the~~to achieve ~~products~~positive ~~from~~net anincome ~~alternate source~~ in afuture ~~timely~~fiscal ~~manner or at all. Furthermore~~years, weespecially ~~depend~~as ~~on our customer service department to respond to our customers should they have questions or problems with their orders. During peak periods,~~ we ~~also~~introduce ~~rely~~new onproduct ~~temporary employees and outsourced staff to respond to customer inquiries~~categories. ~~Temporary~~We ~~employees~~expect ~~and outsourced staff may not have the same level of commitment to~~ our ~~customers~~operating asexpenses ~~our full-time employees. If our customers are dissatisfied with the quality of the products or the customer service they receive, or if we are unable~~ to ~~deliver~~increase ~~products to our customers~~ in ~~a timely manner or at all, our customers may stop purchasing products in~~ the ~~related category from us. Also~~future, ~~they~~as ~~may choose not to purchase products from another of our product categories~~we, ~~which~~among ~~could~~other ~~adversely~~things: ~~affect our business and results of operations.~~

20• expand into new product categories and accessories for our existing product lines;

We• ~~are~~continue ~~dependent~~with on our ~~strategic~~marketing ~~relationships~~efforts to ~~help~~build ~~promote~~ our ~~branded~~brand ~~websites and expand our product offerings~~names; ~~if we fail to maintain or enhance these relationships, our development could be hindered.~~

We• ~~believe~~expand ~~that~~ our strategic relationships with leading Internet portal companies, other online retailers, radio advertisers and direct marketers are critical to attract customers, facilitate broad market acceptance of our products and brands and enhance our sales and marketing capabilities. For example, 31.5% of our total customer orders placed in fiscal 2004 were generated from customers who linked to our website from websites operated by other retailers or Internet portal companies with whom we have a strategic relationship. A failure to maintain existing and to establish additional strategic online relationships that generate a significant amount of traffic from other websites could limit the growth of our business. Establishing and maintaining relationships with leading Internet portal companies, other online retailers, radio advertisers and direct marketers is competitive and expensive. In particular, many Internet portal companies have significantly increased their rates. We may not successfully enter into additional relationships or renew existing ones beyond their current terms. We may also be required to pay significant fees to maintain and expand existing relationships. Further, many Internet portal companies, other online retailers, radio advertisers and direct marketers that we may approach to establish an advertising presence or with whom we already have an existing relationship may also provide advertising services for our competitors. As a result, these companies may be reluctant to enter into, maintain or expand a relationship with us. Our net sales may suffer if we fail to enter into new relationships or maintain or expand existing relationships, or if these relationships do not result in traffic sufficient to justify their costs. base;

In• ~~addition,~~establish weresearch ~~are~~and ~~subject~~development toefforts ~~many risks beyond our control that influence the success or failure of our strategic partners. For example, traffic~~ to ~~our~~advance ~~branded websites could decrease if the traffic to the website of an Internet portal company on which we advertise decreases. Our business could be harmed if any of~~ our ~~strategic~~proprietary ~~partners~~supply ~~experience~~chain ~~financial~~technology orand ~~operational~~develop ~~difficulties~~new ~~or if they experience other corporate developments that adversely affect their performance under our agreements.~~ technology;

We• ~~are~~upgrade ~~dependent on other retailers using~~ our ~~marketplace~~operational toand ~~sell~~financial ~~perishable products to their customers. Any failure by us to recruit additional retailers to use our marketplace~~systems, orprocedures ~~any~~and ~~loss of our current users, could harm our business.~~ controls;

We• ~~intend~~continue to ~~grow~~absorb athe ~~portion~~costs ~~of our business~~ and ~~product~~implement categories through relationships with other branded retailers and direct marketers that use our platform to sell under their brands. We currently have arrangements with Martha Stewart Living Omnimedia, Albertson’s, Inc., another two Fortune 100 retailers and other retailers. Under our agreement with Martha Stewart Living Omnimedia, we use our platform to operate the ~~floral~~responsibilities ~~website~~ of ~~Martha~~being Stewart Living Omnimedia. Our agreement with Martha Stewart Living Omnimedia may be terminated by either party upon 120 days prior notice. Under our agreement with Albertson’s, we provide our market platform and products for Albertson’s online floral business. Our agreement with Albertson’s is for a ~~three-year term,~~public ~~automatically~~company; renewable for additional one-year periods, unless prior notice is given. Our agreement with Albertson’s may be terminated by either party for specified reasons, including bankruptcy or cessation of business by the other party. It may also be terminated by the non-breaching party sixty days after notification of an uncured breach of the agreement. While we are not dependent on these agreements and while these agreements represented an immaterial percentage of our net sales in fiscal 2004 and 2003, any termination of these agreements, or failure to enter into similar agreements, could adversely affect this aspect of our business model.

21• retain existing personnel and hire additional personnel.

IfAfter ~~the~~investment ~~supply~~in ofitems ~~flowers~~including orthose ~~any~~described ~~other~~above, ~~perishable~~we ~~product~~expect weto ~~offer~~maintain profitability for ~~sale~~the ~~becomes~~foreseeable ~~limited~~future, ~~the~~although no assurances can be ~~price~~made ofthat ~~these~~we ~~products~~will ~~could~~be ~~rise~~profitable. In order to maintain profitability as we expand into new product categories, we will need to generate net sales exceeding historical levels and/or ~~these~~reduce ~~products~~relative operating expenditures. We do not have significant experience offering product categories other than flowers. We may not be ~~unavailable~~able to generate the required net sales from flowers and ~~our~~other perishable products or reduce operating expenses sufficiently to sustain or increase operating profitability. If we have a shortfall in net sales without a corresponding reduction to our expenses, our operating results may suffer. It is possible that results of operations may be below the expectations of public market analysts and ~~gross~~investors, ~~margins~~which could ~~decline.~~cause the trading price of our common stock to fall.

~~Many~~We ~~factors,~~have ~~such~~operated ~~as weather conditions, agricultural limitations and restrictions relating to the management of pests and disease, affect the supply of flowers and the~~our ~~price~~flower ofcategory ~~our floral products. If the supply of flowers available~~ for ~~sale~~approximately isseven ~~limited,~~years ~~prices for flowers could rise, which could cause customer demand for our floral products to be reduced~~ and our ~~net~~premium ~~sales~~meat and ~~gross~~fresh ~~margins~~fruit tocategories ~~decline. Alternatively,~~for weapproximately ~~may~~two ~~not be able to obtain high-quality flowers in an amount sufficient to meet customer demand~~years. ~~Even~~This iflimited ~~available,~~operating ~~flowers~~history ~~from~~makes ~~alternate~~evaluating ~~sources~~our ~~may~~business ~~be of lesser quality~~ and~~/or~~ ~~may~~its beprospects ~~more expensive than those currently offered by us~~difficult. ~~We expect that we will encounter similar risks with premium meat, fresh fruit and other perishable products as we expand our e-commerce platform into these product categories.~~

InWe ~~the~~have ~~second~~a ~~quarter~~limited ofoperating ~~fiscal~~history ~~2005~~on ~~and~~which inan ~~fiscal~~investor ~~2004,~~can 61evaluate our business.5% We were incorporated in February 1998 and 60officially launched our website, www.0%proflowers.com, ~~respectively~~in August 1998. To date, ofwe have derived our net sales primarily from the sale of flowers, weplants ~~sold~~and ~~were~~gifts ~~grown~~from byour ~~farmers~~www.proflowers.com ~~located~~website. ~~abroad,~~We ~~primarily~~began inselling ~~Colombia,~~premium ~~Ecuador~~meat and ~~Holland,~~fresh ~~and~~premium wefruit ~~expect~~in ~~that~~October ~~this~~2003. ~~will~~An ~~continue~~investor in our common stock must consider the ~~future.~~risks, Weuncertainties ~~also~~and ~~may~~difficulties ~~purchase~~frequently ~~premium~~encountered ~~meat,~~by ~~fresh~~companies ~~fruit~~in new and ~~other~~rapidly ~~perishable~~evolving ~~products~~online ~~from~~retail ~~suppliers~~markets insuch as ~~foreign~~these ~~countries~~we have targeted. ~~The~~If ~~availability~~we ~~and~~do ~~price~~not of successfully manage these ~~products~~risks ~~could~~or besuccessfully ~~affected~~execute byour abusiness ~~number~~strategy, our business, results of ~~other~~operations ~~factors~~and ~~affecting~~financial ~~foreign~~condition ~~suppliers,~~will ~~including:~~be adversely affected.

•23 ~~import duties and quotas;~~

•Table time-consumingof import regulations or controls at airports;Contents

•If ~~changes~~our incustomers ~~trading~~do ~~status;~~not find our expanded product categories appealing or if we are unable to successfully leverage our business strategy into our new product categories, our business may suffer.

•We ~~economic~~have ~~uncertainties~~recently expanded our product lines into other categories of perishable goods. In October 2003, we launched and ~~currency~~are ~~fluctuations~~now operating two additional websites under our gourmet food business unit: Uptown Prime, offering premium meat and seafood; and Cherry Moon Farms, offering fresh premium fruit. In any possible future expansion of our categories, we intend to leverage our e-commerce platform, marketing and shipping relationships and customer base to develop opportunities for us and other retailers using our platform to offer perishable products. While our market platform has been incorporated into and tested in the online floral retail market, we cannot predict whether it can be successfully applied to other perishable product categories over time. In addition, expansion of our business strategy into new product categories may require us to incur significant marketing expenses, develop relationships with new suppliers and comply with new regulations. These requirements could strain our management, financial and operational resources. Additional challenges that may affect our ability to expand into new product categories include our ability to:

• ~~changes~~establish or ~~uncertainties~~increase inawareness ~~oil~~of our new brands and ~~fuel~~product ~~prices~~categories;

• ~~local~~acquire, attract and ~~regional~~retain ~~weather~~customers ~~patterns~~at a reasonable cost;

• ~~foreign~~achieve ~~government~~and ~~regulations~~maintain ~~with~~a ~~respect~~critical tomass ~~diseases~~of ~~such~~customers asand ~~mad~~orders ~~cow~~across all of our product categories;

• ~~political~~maintain ~~unrest~~or improve our gross margins and fulfillment costs;

• ~~governmental~~compete ~~bans~~effectively orin ~~quarantines;~~highly orcompetitive markets for the sale of perishable goods online;

• ~~trade~~attract ~~restrictions,~~and ~~including~~retain ~~U.S.~~suppliers ~~retaliation~~to ~~against~~provide ~~foreign~~our ~~trade~~expanded ~~practices.~~line of perishable products to our customers on terms that are acceptable to us; and

If• ~~the~~establish ~~number~~ourselves ofas ~~customers~~an ~~using~~important ~~our~~participant ~~satisfaction~~in ~~guarantee~~the ~~increases~~market for perishable products, ~~our~~such ~~net~~as ~~income~~premium ~~could~~meat, ~~decrease~~seafood and fresh fruit.

We ~~guarantee~~cannot ~~that~~be ~~all~~certain ofthat ~~our~~we ~~flowers~~ will ~~last~~be atable ~~least~~to ~~seven~~successfully ~~days and~~address ~~our~~any ~~plants~~or atall of ~~least~~these 14challenges ~~days.~~in Wea ~~offer~~manner ~~our~~that ~~customers~~will aenable ~~100%~~us ~~satisfaction~~to ~~guarantee~~expand on our ~~floral,~~business ~~meat~~into ~~and~~new ~~fruit~~product ~~products~~categories ~~during~~in ~~the relevant periods. We expect to offer~~ a ~~similar~~cost-effective ~~100%~~or ~~satisfaction~~timely ~~guarantee~~manner. onIf our ~~other~~new ~~products.~~product Ifcategories ~~customers~~ are not ~~satisfied~~received ~~with~~favorably ~~the~~by ~~products~~consumers, ~~they~~our ~~receive,~~reputation weand ~~either~~the ~~send~~value ~~them~~of athe applicable ~~replacement~~new ~~product~~brand orand ~~issue~~our aother ~~refund~~brands could be damaged. IfThe alack ~~significant~~of ~~number~~market acceptance of ~~customers~~our ~~request~~new ~~replacement~~product ~~products~~categories or ~~refunds,~~ our ~~net~~inability ~~income~~to ~~could~~generate ~~decrease~~satisfactory ~~and~~net ~~our~~sales ~~reputation~~from asany ~~a provider~~expanded ofproduct ~~high-quality~~categories ~~products~~to offset their cost could beharm ~~harmed~~our business.

~~System~~We ~~interruptions,~~depend ~~natural~~on ~~disasters~~two third-party carriers, and ~~other~~the ~~unexpected~~failure ~~problems~~of these ~~could~~carriers ~~prevent~~to usdeliver ~~from~~our ~~fulfilling~~product ~~orders~~offerings ~~for~~in a timely or accurate manner could harm our ~~customers~~business.

~~Our~~We ~~computer~~currently ~~and~~rely ~~telecommunications~~primarily ~~systems~~on ~~and~~two ~~operations~~third-party ~~are~~carriers, ~~vulnerable~~FedEx toand ~~damage~~UPS, orfor ~~interruption~~shipments ~~from~~of ~~fire,~~our ~~flood,~~products ~~power~~to ~~loss,~~customers. ~~telecommunications~~We ~~failure,~~are ~~failure~~therefore ~~in the~~subject ~~Internet~~to ~~backbone~~the ~~service~~risks, including ~~providers~~capacity orand ~~Internet~~volume ~~service providers~~constraints, ~~earthquakes~~security concerns, ~~acts~~employee ofstrikes ~~war~~ or ~~terrorism,~~other ~~acts~~labor ~~of God~~stoppages, ~~human~~inclement ~~error~~weather, ~~computer~~equipment ~~viruses,~~failures ~~physical~~ or ~~electronic~~other ~~break-ins~~delays and ~~similar~~fluctuations ~~events.~~in ~~Any~~fuel ofcosts, ~~these~~associated ~~events~~with ~~could~~the ~~lead~~carriers’ ability to ~~system~~provide ~~interruptions,~~timely ~~delays~~ and ~~loss~~cost-effective oforder ~~critical~~fulfillment ~~data,~~ and ~~make~~delivery ~~our websites or toll-free customer service centers inaccessible to our customers or prevent us from efficiently fulfilling orders or providing~~ services to ~~other~~meet ~~retailers who rely on~~ our ~~market~~ ~~platform~~distribution toand ~~assist~~shipping ~~them~~needs. inUnder ~~operating~~our ~~their~~contracts ~~online~~with ~~businesses.~~both ~~For instance~~parties, inwe ~~January~~have ~~2004,~~agreed ato ~~router~~waive ~~failure~~specified atrefunds ~~our~~and ~~Internet~~guarantees for service ~~provider~~failures ~~caused two hours of degraded website response times~~ and ~~availability.~~for ~~This effect would be~~commitment ~~magnified~~times ~~if interruptions were to occur~~ during ~~one of~~ our seasonal peak ~~selling~~ periods, ~~such~~in asexchange ~~Valentine’s~~for ~~Day~~favorable orpricing ~~Mother’s~~on ~~Day.~~our Weshipments dowith ~~not~~them. ~~have~~Failure ~~fully~~to ~~redundant~~deliver ~~systems~~products into ~~different~~our ~~geographical~~customers ~~areas~~in or a ~~formally~~timely ~~tested~~and ~~disaster~~accurate ~~recovery~~manner ~~plan. Our~~would ~~business~~harm ~~interruption~~our ~~insurance~~reputation, ~~may~~our bebrands ~~inadequate~~and toour ~~compensate~~results ~~for~~of ~~all losses that may occur~~operations.

22We re-negotiate various provisions of our agreements with FedEx and UPS on a periodic basis and are subject to possible terminations by either party upon 60 days prior notice from or to FedEx and 30 days prior notice from or to UPS. We may face substantial increases in the cost of delivery services from our delivery partners as a result of increases in the prices of gasoline and fuel, heightened security measures or other factors. If in the future we fail to negotiate rates or other terms as favorable to us as the existing terms of our agreement,

~~Despite~~24 any precautions we may take, the occurrence of a natural disaster, the closure of a hosting facility we are using without adequate notice for financial reasons or other unanticipated problems could result in lengthy interruptions in our services. In addition, the failure by our hosting facilities to provide our required data communications capacity could result in interruptions in our service. Any slowdown, damage to or failure of our systems could result in interruptions in our service. We cannot assure you that we will adequately, and in a timely manner, implement systems to improve the speed, security and availability of our Internet and telecommunications systems. Frequent or long service delays or interruptions in our service or disruptions during a peak holiday season will reduce our net sales and profits, and our reputation and future net sales and profits will be harmed if our customers believe that our system is unreliable.

WeTable mayof not be able to increase capacity or introduce enhancements to our branded websites in a timely manner or without service interruptions. Contents

A such ~~key~~failure ~~element~~will ofadversely affect our ~~strategy~~business isand toresults ~~generate a high volume~~ of ~~traffic on our branded websites~~operations. AsIn ~~traffic on our branded websites grows~~addition, weif ~~may~~for ~~not~~any bereason ~~able~~FedEx toor ~~accommodate~~UPS ~~all~~is ofunable ~~the~~or ~~growth~~unwilling ~~in user demand on our branded websites and in our toll-free customer service center. Our inability~~ to ~~add~~deliver products ~~additional hardware and software~~ to ~~upgrade~~ our ~~existing~~customers ~~technology or network infrastructure to accommodate~~ in a timely manner ~~increased~~or ~~traffic~~ on ~~our~~acceptable ~~branded websites~~terms, inwe ~~our toll-free customer service centers and increased sales volume,~~ may ~~cause~~not ~~decreased~~be ~~levels~~able ofto ~~customer service~~secure ~~and~~alternative ~~satisfaction.~~shipping ~~Failure~~partners toon ~~implement~~acceptable ~~new~~terms ~~systems~~in ~~effectively or within~~ a ~~reasonable~~timely ~~period of time could adversely affect our business~~manner, ~~results~~or ofat ~~operations and financial condition~~all.

We ~~also~~depend ~~intend~~on tothree ~~introduce~~flower ~~additional~~suppliers orfor ~~enhanced~~approximately ~~features~~57% ~~and~~of ~~services to retain current customers and attract new customers to~~ our ~~branded~~core ~~websites.~~floral Ifbusiness ~~we introduce a feature or a service that is not favorably received~~products, ~~our current customers may not use our branded websites as frequently,~~ and wethe ~~may~~loss ~~not~~of beany ~~successful~~of inthese ~~attracting new~~suppliers ~~customers. We may also experience difficulties that~~ could ~~delay~~harm or prevent us from introducing new services and features. Furthermore, these new services or features may contain errors that are discovered only after they are introduced. We may need to significantly modify the design of these services or features to correct errors. If customers encounter difficulty with or do not accept new services or features, our business~~, results of operations and financial condition could be adversely affected~~.

For the three months ended September 30, 2005 and for fiscal 2005, we depended on three flower suppliers for approximately 59.3% and 56.9%, respectively, of all of our core floral business products, which are defined as all products associated with consumer sales from our ProFlowers business. If any one of these three flower suppliers were to become unable or unwilling to continue to supply flowers to our customers, our business could be harmed. We ~~fulfill~~do anot ~~significant~~have ~~portion~~long-term contracts with any of our flower suppliers ~~orders~~for ~~through~~order fulfillment, and these suppliers can terminate their relationships with us at any time. If a flower supplier discontinues its relationship with us, we will be required to obtain a suitable replacement, which may cause delays in delivery or a decline in product quality, leading to customer dissatisfaction and loss of customers. We expect to encounter similar risks as we develop our ~~Miami~~premium ~~distribution~~meat, ~~facility~~seafood and fruit and other perishable product supplier relationships.

WeIf ~~fulfilled 21.7% of~~ our ~~total~~marketing ~~flower~~efforts ~~orders~~are innot ~~the six months ended December 31~~effective, ~~2004 and 19.4% of~~ our ~~total~~brands ~~flower orders in fiscal year 2004 through our Miami distribution facility. In the future, we~~ may benot ~~unable~~achieve ~~to fulfill our customers’ orders through~~ the broad ~~Miami~~recognition ~~distribution~~necessary ~~facility in a timely manner, or at all, due~~ to asucceed. ~~number of factors, including:~~

•We believe that broader recognition and a ~~failure~~favorable toconsumer ~~maintain~~perception orof ~~renew~~our brands, including our ~~existing~~Provide ~~lease~~Commerce, ~~agreement~~ProFlowers, ~~for~~Uptown Prime and Cherry Moon Farms brands, are essential to our ~~Miami~~future ~~distribution~~success. ~~facility;~~Accordingly, we intend to pursue an aggressive brand-enhancement strategy through a variety of online and offline marketing and promotional techniques, involving the Internet, print, radio, email, direct mail, public relations and television. These initiatives will involve significant expense. If our brand enhancement strategy is unsuccessful, these expenses may never be recovered and we may be unable to increase future net sales. Successful positioning of the Provide Commerce, ProFlowers, Uptown Prime and Cherry Moon Farms brands will largely depend on:

• athe ~~prolonged~~success ~~power~~of orour ~~equipment~~advertising ~~failure~~and promotional efforts;

• anour ~~employee~~ability ~~strike~~to orprovide ~~other~~a ~~labor~~consistent, ~~stoppage~~high-quality customer experience; and

• aour ~~disruption~~ability into ~~the~~continue ~~transportation~~to ~~infrastructure~~provide ~~including~~high-quality ~~bridges~~products ~~and~~to ~~roads;~~our customers in a timely manner.

•Due to the change in our corporate name in September 2003 and expansion of our product categories in October 2003, our ProFlowers brand is our only brand that has received broader recognition by customers who associate it with our www.proflowers.com website and the sale of flowers and floral products. To increase awareness of our new corporate name and brands and our other proposed brands and product offerings, we will need to continue to spend significant amounts on advertising and promotions. These expenditures may not result in a ~~refrigeration~~sufficient ~~failure;~~increase in net sales to cover such advertising and promotional expenses. In addition, even if brand recognition increases, the number of new customers or the number of transactions on our branded websites may not increase. Also, even if the number of new customers increases, those customers may not purchase products through our branded websites on a regular basis.

•We ahave historically ~~fire,~~experienced ~~flood~~seasonality in our business, ~~hurricane~~which orwe ~~other~~expect ~~disaster~~to continue and which could cause our operating results to fluctuate.

23We have historically experienced seasonality in our ProFlowers business due to the nature of our products, and we expect this seasonality to continue. Our net sales and earnings are generally lowest in the third calendar quarter, which is our first fiscal quarter. Sales of our products are highly concentrated in the first calendar quarter due to Valentine’s Day, in the second calendar quarter due to Mother’s Day and generally Easter, and in the fourth calendar quarter due to the Thanksgiving and end-of-year holidays. In addition, due to variability in the date for Easter, comparisons of quarterly earnings between years can be impacted since Easter can occur in either the first or second calendar quarters, which are our third and fourth fiscal quarters. In anticipation of increased

In25 the event that we are unable to fulfill our customers’ orders through the Miami distribution facility, we will attempt to re-ship the orders from another source to ensure timely delivery. However, we cannot guarantee that our other suppliers and distribution facilities will have the capacity or the variety of flowers to fulfill all orders from the Miami distribution facility or that we will be able to deliver the affected orders in a timely manner. In addition, if operations from our Miami distribution facility become permanently disrupted due to any of the above or other factors, we may not be able to secure a replacement distribution facility in a location on terms acceptable to us or at all. Our business and results of operations could be materially and adversely affected if we experience temporary or permanent disruptions at our Miami distribution facility.

IfTable weof fail to protect our intellectual property rights, our ability to compete could be harmed. Contents

~~Protection~~ sales ofactivity ~~our~~during ~~intellectual~~these ~~property~~periods, iswe ~~critical~~utilize toa ~~our~~significant ~~success.~~number ~~Patent,~~of ~~trademark,~~temporary ~~copyright~~employees ~~and~~to ~~trade~~supplement ~~secret~~our ~~laws~~permanent ~~and~~staff. ~~confidentiality~~We ~~and~~also ~~other~~increase ~~contractual~~our ~~provisions~~inventory levels ~~afford~~at ~~only~~our ~~limited~~distribution ~~protection~~facilities. ~~and~~If ~~may~~net ~~not~~sales ~~adequately~~during ~~protect~~these ~~our rights~~periods ordo ~~permit~~not usmeet toour ~~gain~~expectations, orwe ~~keep~~may ~~any~~not ~~competitive~~generate ~~advantage.~~sufficient Wenet ~~face~~sales ~~numerous~~to ~~risks~~offset inthese ~~protecting~~increased ~~our~~costs ~~intellectual~~and ~~property~~our ~~rights,~~operating ~~including~~results ~~the~~may ~~following:~~suffer.

•In addition, our ~~pending~~business ~~patent~~may ~~applications,~~be ~~copyrights,~~adversely ~~trademarks,~~affected ~~trade~~by ~~secrets~~the ~~and~~particular ~~other~~day ~~intellectual~~of the ~~property~~week ~~rights~~on ~~may~~which becertain ~~challenged~~major holidays fall due to logistical challenges in delivering shipments on the actual date or ~~invalidated~~the bydates ~~our~~immediately ~~competitors;~~prior to such holiday.

•The werelatively ~~only~~recent ~~have~~launch ~~three~~of Uour new branded websites targeting premium meat, seafood and fresh fruit makes it difficult for us to assess the impact of seasonal factors on our business in the future.S We expect that our new product categories will also be subject to seasonal fluctuations, reflecting a combination of seasonality trends for the products and services offered by our new branded websites and seasonality patterns affecting Internet use generally. ~~patent~~For ~~applications~~example, ~~pending~~demand for our current and new product offerings is likely to increase during holiday periods, such as Father’s Day and Christmas, while Internet use in general may decline during the ~~United~~summer ~~States~~months. ~~Patent~~Our results may also be affected by seasonal fluctuations in the products made available to us for sale by participating suppliers. Cyclical variations for new products we plan to offer may either smooth or increase our existing seasonality. Unanticipated fluctuations in seasonality could adversely affect our operating results and ~~Trademark~~cause ~~Office~~us to miss our internal and ~~none~~third-party ofearnings ~~the~~projections, ~~patent~~which ~~applications~~could ~~have~~cause ~~yet~~our stock price to ~~issue;~~decline.

•We ~~our~~face ~~pending~~intense ~~patent~~competition ~~applications~~from ~~may~~both ~~not~~traditional ~~issue,~~and ~~or,~~online retail ifcompanies ~~issued,~~with ~~may~~greater ~~not~~brand ~~provide~~recognition ~~meaningful~~and ~~protection~~resources, ~~for~~which ~~related~~may ~~products~~adversely oraffect ~~proprietary~~our ~~rights;~~business.

•The e-commerce market segments in ~~the~~which ~~event~~we ~~one~~currently orcompete ~~more~~are intensely competitive, and we have many competitors in different industries. Many of the products we offer can be purchased at supermarkets and warehouse stores as well as specialty markets. Our floral competitors include traditional florists, catalog and online floral providers such as 1-800-FLOWERS and Hallmark Flowers, and floral wire services such as FTD and Teleflora. In the premium meat and seafood category, we believe our ~~pending~~competitors ~~patent~~include ~~applications~~specialty ~~issue~~butchers, ~~into~~mail aorder ~~patent~~companies, ~~there~~seafood ~~may~~specialty becatalogs ~~prior~~and ~~art~~other inonline ~~existence~~meat ~~that~~providers, such as Omaha Steaks Company. We believe competitors in the ~~United~~fresh ~~States~~fruit ~~Patent~~category include local farmers’ markets and ~~Trademark~~specialty ~~Office~~catalog ~~has~~companies, ~~not~~such ~~considered~~as ~~which~~Harry & ~~may~~David. ~~invalidate~~Additionally, ~~one~~we orcompete ~~more~~with ~~patent~~specialty ~~claims;~~food companies and general gift companies.

•Competition wein the e-commerce channel may ~~not~~intensify, beespecially ~~able~~as we expand into product categories in addition to ~~prevent~~flowers. The nature of the ~~unauthorized~~Internet ~~disclosure~~as an electronic marketplace facilitates competitive entry and comparison shopping and renders it inherently more competitive than conventional retailing formats. This increased competition may reduce our ability to expand our business, and thus reduce our sales and operating profits, or ~~use~~both. Many of our ~~technical~~current ~~knowledge~~and orpotential ~~other~~competitors ~~trade~~enjoy ~~secrets~~substantial bycompetitive ~~employees~~advantages, ~~consultants~~including: ~~or advisors;~~

• ~~the~~greater ~~laws~~name of foreign countries, including Australia, Brazil, Canada, the European Union, Japan, Mexico, New Zealand and Switzerland where we have issued or pending trademarks, may not protect our intellectual property rights to the same extent as the laws of the U.S., and mechanisms for enforcement of intellectual property rights may be inadequate in foreign countriesrecognition;

• ~~our~~a ~~competitors~~longer ~~may~~operating ~~lawfully develop proprietary software or other technology that competes with our proprietary supply chain technology~~history; ~~and~~

• wea ~~may~~more beextensive ~~unable~~customer ~~to successfully identify or prosecute unauthorized uses of our proprietary technology.~~base;

As• abroader ~~result,~~product ~~our means of protecting our intellectual property rights~~ and ~~brands~~service ~~may~~offerings; ~~not be adequate. Furthermore, despite our efforts, third parties may have violated~~ and may in the future violate, or attempt to violate, our intellectual property rights. Infringement claims and lawsuits would likely be expensive to resolve and would require substantial management time and resources. In addition, we have not sought, and do not intend to seek, trademark, patent and other intellectual property protections in most foreign countries. In countries where we do not have such protection, businesses may use our trademarks to sell products or to develop a distribution method that incorporates our patented technology.

We• ~~may~~greater beresources ~~sued~~for bycompetitive ~~third~~activities, ~~parties~~such ~~for~~as ~~alleged~~sales ~~infringement~~and ofmarketing, ~~their~~research ~~proprietary~~and ~~rights.~~development, strategic acquisitions, alliances and joint ventures.

~~Companies~~As ~~that~~a ~~participate~~result, these current and potential competitors may be able to secure merchandise from suppliers on more favorable terms, and may be able to adopt more aggressive pricing policies. Other companies in the retail and e-commerce ~~and~~service ~~supply~~industries ~~chain~~may ~~management~~enter ~~industries~~into orbusiness ~~others~~combinations ~~may~~or ~~hold~~alliances athat ~~large~~strengthen ~~number~~their competitive ofpositions. ~~patents,~~These ~~patent~~business ~~applications,~~combinations ~~trademarks~~or ~~and copyrights.~~alliances ~~Participants~~might inprevent ~~these~~them ~~industries~~from ~~are~~also ~~involved~~entering ininto

2426

litigationTable based on allegations of patent infringement or other violations of intellectual property rights. Intellectual property disputes frequently involve highly complex and costly technical or scientific matters, and each party generally has the right to seek a trial by jury which adds additional costs and uncertainty. Accordingly, intellectual property contests, with or without merit, could be costly and time-consuming to litigate or settle, and could divert management’s attention from executing our business plan. In addition, our distribution technology may not be able to withstand any third-party claims against its use. If we were unable to obtain any necessary license following a determination of infringement or an adverse determination in litigation or in interference or other administrative proceedings, we may need to redesign some of our distribution technology to avoid infringing a third-party’s patent and could be required to temporarily or permanently discontinue using the related aspect of our technology. Contents

~~Current~~ relationships ~~and~~with ~~future~~us ~~governmental~~or ~~and~~prevent ~~industry~~us ~~regulations~~from taking advantage of such combinations or alliances. They also may ~~significantly~~be ~~limit~~able ~~our~~to ~~business~~respond more quickly and effectively than we can to new or changing opportunities, technologies, standards or customer requirements. Intense competition may lead to:

~~New~~• ~~laws~~price ~~or regulations may be enacted with respect to the Internet or existing laws may be applied or interpreted to apply to the Internet~~reductions, ~~which~~decreased ~~may~~net ~~decrease~~sales ~~the growth in the use of the Internet or our branded websites. As use of the Internet continues to evolve, we expect that there will be an increasing number of laws~~ and ~~regulations pertaining~~lower toprofit the Internet in the U.S. and throughout the world. These laws and regulations may relate to liability for information received from or transmitted over the Internet, online content regulation, user privacy, taxation and quality of products and services sold over the Internet. Moreover, the applicability to the Internet of existing laws governing intellectual property ownership and infringement, copyright, trademark, trade secret, obscenity, libel, employment, personal privacy and other issues is uncertain and developing. Further, the growth and development of online commerce may prompt calls for more stringent consumer protection laws, both in the U.S. and abroad. We also may be subject to regulation not specifically related to the Internet, including laws affecting direct marketers and advertisers. The adoption of or modification of laws applicable to the Internet could affect our ability to market our products, decrease the demand for our products, increase our costs or otherwise adversely affect our business. margins;

~~We are~~• ~~affected~~loss ~~by regulations applicable to the importation~~ of ~~flowers~~market ~~and~~share; ~~the sale and handling of food items.~~ or

~~Our~~• ~~importation~~increased ofmarketing certain flower offerings and our sale and handling of premium meat and fresh fruit offerings subject us to various federal, state and local government regulations, including regulations imposed by the United States Food & Drug Administration, or FDA, the United States Department of Labor, Occupational Safety and Health Administration, or OSHA, the United States Department of Agriculture, or USDA, and Animal and Plant Health Inspection Service, or APHISexpenditures. We have designed our importation procedures and our food handling operations to comply with such regulations. However, the FDA, OSHA, USDA, APHIS or another federal, state or local food regulatory authority may require changes to our importation procedures and food sales and handling operations. We may not be able to make the requested governmental changes or obtain any required permits, licenses or approvals in a timely manner, or at all. Failure to make requested changes or to obtain or maintain a required permit, license or approval could cause us to incur substantial compliance costs and delay the availability of, or cancel, certain product offerings. In addition, any inquiry or investigation from a regulatory authority could have a negative impact on our reputation. Any of these events would harm our business and adversely affect our results of operations.

~~Various~~Utilization ~~legal rules and regulations related to the collection, dissemination and security~~ of ~~personal information may affect~~ our ~~ability~~deferred totax ~~solicit~~assets ~~our~~is ~~customers~~dependent ~~and~~on ~~potential~~future ~~customers~~taxable ~~with emails or telephone calls and to collect or disseminate personal data about our customers~~income.

AWe ~~growing~~have ~~body~~a offederal ~~laws~~tax ~~designed~~net tooperating ~~protect~~loss ~~the~~carryforwards ~~privacy~~at ofJune 30, ~~personally~~2005 ~~identifiable information~~of asapproximately ~~well~~$13.9 asmillion, towhich represents ~~protect~~a ~~against~~substantial ~~its~~amount ~~misuse may adversely affect the growth~~ of our ~~business~~deferred ~~and~~tax ~~our marketing efforts~~assets. ~~These~~In ~~laws~~calculating ~~include~~our ~~the~~tax ~~Federal Trade Commission Act~~provision, ~~the Children’s Online Privacy Protection Act~~ and ~~Federal~~assessing ~~Trade Commission,~~the orlikelihood ~~FTC, regulations implementing~~ that ~~act,~~we ~~the~~will ~~Fair~~be ~~Credit~~able ~~Reporting Act, the Gramm Leach Bliley Act and related regulations as well as other legal provisions. The FTC has the authority~~ to ~~protect~~utilize ~~against~~ the ~~misuse~~deferred oftax ~~consumer information by targeting companies that collect~~assets, ~~disseminate~~we orhave ~~maintain~~considered ~~personal~~and ~~information~~weighed inall anof ~~unfair~~the ~~or deceptive manner~~evidence, asboth ~~well~~positive ~~as companies that fail to notify parents~~ and ~~obtain parental consent before collecting information from children.~~ ~~The~~negative, ~~FTC~~and ~~has~~both ~~conducted~~objective ~~dozens of investigations into the privacy~~ and ~~security~~subjective. ~~practices~~We ofhave ~~companies~~factored ~~that~~in ~~collect information on~~ the ~~Internet.~~inherent ~~The~~risk ~~provisions~~ of ~~these~~forecasting ~~laws~~net ~~and~~sales ~~related regulations are complicated,~~ and weexpenses doover ~~not~~an ~~have~~extended ~~extensive experience~~period inof ~~complying with them~~time. ~~The~~We ~~evolving~~have ~~nature~~also ofconsidered the ~~FTC’s~~potential ~~and~~risks ~~other~~associated ~~governmental~~with ~~bodies’~~our ~~enforcement efforts~~business, ~~and~~as ~~the~~outlined ~~possibility~~in ofother risk ~~new~~factors ~~laws~~ in this ~~area~~report, ~~may~~and ~~adversely~~have ~~affect~~taken ~~our~~into ~~ability~~account tomaterial ~~collect~~permanent ~~and~~differences ~~disseminate~~in orthe ~~share demographic~~treatment ~~and~~of ~~personal~~net ~~information~~sales ~~from users~~ and ~~our~~expenses ~~ability~~for topurposes ~~email or telephone users, all~~ of ~~which~~financial ~~could~~reporting ~~adversely affect our marketing efforts~~ and ~~business.~~tax ~~In addition~~accounting, ~~even~~such ~~technical~~as ~~violations of these laws can result in significant penalties. Given~~ the ~~volume~~treatment of ~~transactions~~stock ~~we process as a consumer-focused e-commerce company~~options, ~~any~~limitation ~~violations~~on ofmeals and ~~applicable~~entertainment ~~privacy~~and ~~laws~~stock-based ~~could expose us to significant liability~~compensation.

25Based on information available through our third quarter of fiscal 2004, and sufficient positive evidence, particularly the fact that we reported taxable income for the prior three fiscal years and forecasted future book and tax income, we reversed the valuation allowance during fiscal 2004. Although we anticipate generating future taxable income, we cannot guarantee that we will generate sufficient taxable income to fully utilize our deferred tax assets.

~~Our~~Failure branded websites use various “cookies” without the customer’s knowledge or consent. These cookies may or may not be saved on customer’s hard drives. We use cookies for a variety of reasons, including the collection of data derived from the customer’s Internet activity. Most currently available web browsers allow users to ~~remove~~provide ~~cookies~~our ~~at any~~customers ~~time~~with orhigh-quality toproducts ~~prevent cookies from being stored on their hard drive. Some commentators, privacy advocates~~ and ~~governmental~~customer ~~bodies~~service ~~have suggested limiting or eliminating the use of cookies or other data collecting tools. Any reduction or limitation~~may inharm ~~the use of cookies or other data collecting tools could limit the effectiveness of~~ our ~~sales~~brand and ~~marketing~~cause ~~efforts. We could incur expenses if new regulations concerning the use of personal information are introduced or if~~ our ~~privacy~~net ~~practices are~~sales ~~investigated~~to decline.

We believe that our success in promoting and enhancing our brands will depend on ~~continued~~our ~~use~~success in providing our customers high-quality products and a high level of customer service. Product orders placed by our customers are fulfilled by our third-party suppliers. We work with our suppliers to develop best practices for quality assurance; however, we do not directly or constantly control any of our suppliers. If our suppliers do not fulfill orders to our customers’ satisfaction, our customers may not shop with us again. In addition, because we do not have constant, direct control over these third-party suppliers, interruptions or delays in the ~~Internet~~products they supply may be difficult to remedy in a timely fashion. If any of our suppliers is incapable of or unwilling to fulfill our product orders, we will attempt to ship the products from another source to guarantee right-day delivery; however, we may not be able to ship the products from an alternate source in a timely manner or at all. Furthermore, we depend on our customer service department to respond to our customers should they have questions or problems with their orders. During peak periods, we also rely on temporary employees and ~~growth~~outsourced staff to respond to customer inquiries. Temporary employees and outsourced staff may not have the same level of commitment to our customers as our full-time employees. If our customers are dissatisfied with the ~~online~~quality ~~perishables~~of ~~retail~~the ~~market~~products or the customer service they receive, or if we are unable to deliver products to our customers in a timely manner or at all, our customers may stop purchasing products in the related category from us. Also, they may choose not to purchase products from another of our product categories, which could adversely affect our business and results of operations.

~~Our~~If ~~net sales may not grow if~~ the number ~~Internet does not continue to grow as an accepted medium for commerce in flowers and other perishable product categories. Consumer use~~ of ~~the~~customers ~~Internet~~using asour asatisfaction ~~medium~~guarantee ~~for commerce~~increases, ~~and~~our ~~especially~~net ~~commerce~~income ~~in perishable~~could ~~products, is a recent phenomenon that is subject to a level of uncertainty~~decrease. ~~A number of factors may inhibit Internet usage, including:~~

•We ~~inadequate~~guarantee ~~network~~that ~~infrastructure;~~all of our flowers will last at least seven days and our plants at least 14 days. We offer our customers a 100% satisfaction guarantee on our floral, meat, seafood and fruit products during the relevant periods. We expect to offer a similar 100% satisfaction guarantee on other products that we may offer in the future. If our customers are not satisfied with the products they receive, we either send them a replacement

•27 ~~consumer concerns for Internet privacy and security;~~

•Table inconsistent quality of service;Contents

• product ~~lack~~or ofissue ~~availability~~a refund. If a significant number of ~~cost-effective~~customers request replacement products or refunds, our net income could decrease and our reputation as a provider of high-~~speed~~quality ~~service;~~products ~~and~~could be harmed.

•We ~~consumer~~are ~~concerns~~dependent ~~over~~on our ~~purchasing~~strategic ~~perishable~~relationships ~~goods~~to ~~over~~help ~~the~~promote ~~Internet~~our branded websites and expand our product offerings; if we fail to maintain or enhance these relationships, our development could be hindered.

IfWe ~~use~~believe ofthat ~~the~~our strategic relationships with leading Internet asportal companies, aother ~~medium~~online ~~for~~retailers, ~~commerce~~radio inadvertisers ~~perishable~~and ~~products~~direct ~~does~~marketers ~~not~~are ~~continue~~critical to ~~grow~~attract customers, facilitate broad market acceptance of our products and brands and enhance our sales and marketing capabilities. For example, 25.5% of our total customer orders placed in fiscal 2005, and 31.5% of our total customer orders placed in fiscal 2004, were generated from customers who linked to our website from websites operated by other retailers or ~~grows~~Internet atportal companies with whom we have or had a ~~slower~~strategic ~~rate~~relationship. ~~than~~A wefailure ~~anticipate,~~to maintain existing and to establish additional strategic online relationships that generate a significant amount of traffic from other websites could limit the growth of our ~~sales~~business. ~~will~~Establishing and maintaining relationships with leading Internet portal companies, other online retailers, radio advertisers and direct marketers is competitive and expensive. In particular, many Internet portal companies have significantly increased their rates. We may not successfully enter into additional relationships or renew existing ones beyond their current terms. We may also be ~~lower~~required to pay significant fees to maintain and expand existing relationships. Further, many Internet portal ~~than~~companies, ~~expected~~other online retailers, radio advertisers and direct marketers that we may approach to establish an advertising presence or with whom we already have an existing relationship may also provide advertising services for our ~~business~~competitors. ~~will~~As a result, these companies may be ~~harmed~~reluctant to enter into, maintain or expand a relationship with us. Our net sales may suffer if we fail to enter into new relationships or maintain or expand existing relationships, or if these relationships do not result in traffic sufficient to justify their costs.

In addition, we are subject to many risks beyond our control that influence the success or failure of our strategic partners. For example, traffic to our branded websites could decrease if the traffic to the website of an Internet portal company on which we advertise decreases. Our ~~accounting~~business ~~and~~could be harmed if any of our strategic partners experience financial ~~system~~or isoperational ~~not~~difficulties ~~integrated~~or ~~with~~if ~~our~~they ~~transaction~~experience ~~processing~~other ~~system~~corporate developments that adversely affect their performance under our agreements.

WeIf ~~use~~the ansupply ~~internally developed system for substantially all aspects~~ of ~~transaction~~flowers ~~processing,~~or ~~including~~any ~~order~~other ~~management,~~perishable ~~credit~~product card processing and shipping. Our accounting and financial system is purchased from a third-party. Because our current transaction processing system, which provides frequent operational reports, is not integrated with our accounting and financial system, we ~~must manually input data~~ inoffer ~~order to prepare information~~ for ~~accounting~~sale ~~and~~becomes ~~financial~~limited, ~~reporting.~~the ~~This~~price ~~manual input~~ of ~~data~~these ~~may~~products ~~make~~could itrise ~~more~~or ~~difficult~~these ~~for~~products ~~management~~may tobe ~~obtain~~unavailable ~~accurate financial statements~~ and ~~reporting information on a timely basis. We intend to integrate~~ our ~~transaction~~net ~~processing~~sales and ~~accounting~~gross ~~systems.~~margins Wecould ~~cannot guarantee that we will complete this integration in a fast and effective manner~~decline. ~~Any inability to do so may have a material adverse effect on our business, financial condition and results of operations.~~

~~Online~~Many ~~security~~factors, ~~breaches~~such as weather conditions, agricultural limitations and restrictions relating to the management of pests and disease, affect the supply of flowers and the price of our floral products. If the supply of flowers available for sale is limited, prices for flowers could rise, which could cause customer demand for our floral products to be reduced and our net ~~harm~~sales and gross margins to decline. Alternatively, we may not be able to obtain high-quality flowers in an amount sufficient to meet customer demand. Even if available, flowers from alternate sources may be of lesser quality and/or may be more expensive than those currently offered by us. We expect that we will encounter similar risks with premium meat, seafood, fresh fruit and other perishable products as we expand our ~~business~~e-commerce platform into these product categories.

~~The~~In ~~secure transmission of confidential information over~~ the ~~Internet~~first isquarter ~~essential~~of infiscal ~~maintaining~~2006 ~~consumer~~and ~~confidence~~ in ~~our~~fiscal ~~branded websites~~2005, 62.3% ~~Even occasional security breaches of our system or other Internet-based systems could significantly harm our business~~ and ~~damage our reputation~~58.4%, ~~Any~~respectively, ~~penetration~~ of ~~our~~the ~~network~~flowers ~~security~~we orsold ~~other~~were ~~misappropriation~~grown ofby ~~our~~farmers ~~customer’s~~located ~~personal~~abroad, ~~information~~primarily ~~could~~in ~~subject~~Colombia, usEcuador toand ~~potential liability. We may be subject to claims based on unauthorized purchases with credit card information~~Holland, ~~or aiding~~ and ~~abetting~~we ~~identity~~expect ~~theft~~that orthis ~~other~~will ~~similar~~continue ~~fraud~~in ~~claims~~the future. ~~Claims~~We ~~could~~ also bemay ~~based~~purchase onpremium ~~other~~meat, ~~misuses of personal information~~seafood, ~~such~~fresh asfruit ~~for~~and ~~unauthorized~~other ~~marketing~~perishable products ~~purposes.~~from ~~These~~suppliers ~~claims could result~~ in ~~litigation~~foreign ~~and financial liability~~countries. ~~We rely~~The onavailability ~~licensed encryption~~ and ~~authentication~~price ~~technology to effect the secure transmission~~ of ~~confidential~~these ~~information,~~products ~~including credit card numbers. It is possible that advances in computer capabilities, new discoveries or other developments~~ could ~~result~~be inaffected by a ~~compromise~~number ~~or breach~~ of ~~the~~other ~~technology~~factors ~~that~~affecting weforeign ~~use~~suppliers, toincluding: ~~protect customer transaction data.~~

26• import duties and quotas;

We• ~~may~~time-consuming ~~incur~~import ~~substantial~~regulations ~~expense to protect against and remedy security breaches and their consequences. A party that is able to circumvent our security systems could steal proprietary information~~ or ~~cause~~controls ~~interruptions~~at in our operations. Our insurance policies’ limits may not be adequate to reimburse us for losses caused by security breaches. We cannot guarantee that our security measures will prevent security breaches. airports;

~~Consumer~~• ~~spending~~changes ~~on flowers and other perishable products we sell or intend to sell may vary with general economic conditions~~ in ~~the~~trading ~~U.S.~~ status;

~~Negative~~28 trends in the general economy, including trends resulting from actual or threatened military action by the U.S. and threats of terrorist attacks on the U.S. and abroad, could cause a decrease in consumer spending on flowers, premium meats, fresh fruits and perishable products in general. Also, any reduction in consumer confidence or disposable income in general may affect the demand for our products. If general economic conditions do not improve or deteriorate further and our customers have less disposable income, consumers may spend less on our products and our quarterly operating results may suffer.

RecentlyTable enactedof and proposed changes in securities laws and regulations are likely to increase our costs. Contents

~~Recently~~• ~~enacted and~~economic ~~proposed~~uncertainties ~~changes in the laws~~ and ~~regulations~~currency affecting public companies, including the provisions of the Sarbanes-Oxley Act of 2002, will increase our expenses as we evaluate the implications of new rules and devote resources to respond to the new requirements. The Sarbanes-Oxley Act mandates, among other things, that companies adopt new corporate governance measures and imposes comprehensive reporting and disclosure requirements, sets stricter independence and financial expertise standards for audit committee members and imposes increased civil and criminal penalties for companies, their chief executive officers and chief financial officers and directors for securities law violations. In particular, we expect to incur additional administrative expense and devote substantial management time as we implement Section 404 of the Sarbanes-Oxley Act, which requires management to report on, and our independent registered public accounting firm to attest to, our internal controls. In addition, The Nasdaq National Market, on which our common stock is listed, has also adopted comprehensive rules and regulations relating to corporate governance. These laws, rules and regulations have increased and will continue to increase the scope, complexity and cost of our corporate governance, reporting and disclosure practices, which could harm our results of operations and divert management’s attention from business operations. We also expect these developments to make it more difficult and more expensive for us to obtain director and officer liability insurance in the future, and we may be required to accept reduced coverage or incur substantially higher costs to obtain coverage. Further, our directors and executive officers could face an increased risk of personal liability in connection with the performance of their duties. As a result, we may have difficultly attracting and retaining qualified directors and executive officers, which would adversely affect our business. fluctuations;

We• ~~may~~changes ~~not~~or ~~successfully address~~uncertainties ~~problems encountered~~ in ~~connection~~oil ~~with~~and ~~any~~fuel ~~future acquisitions.~~ prices;

In• ~~December~~local ~~1999, we purchased Flower Farm Direct, Inc. Subsequently, we amortized~~ and ~~wrote~~regional ~~off~~weather approximately $9.0 million of goodwill related to the acquisition. We expect to continue to consider opportunities to acquire or make investments in other technologies, products and businesses that could enhance our technical capabilities, complement our current products and services or expand the breadth of our markets or customer base. We have limited experience in acquiring other businesses and technologies. Potential and completed acquisitions and strategic investments involve numerous risks, including: patterns;

• ~~problems~~foreign ~~assimilating~~government ~~the~~regulations ~~purchased~~with ~~technologies,~~respect ~~products~~to ordiseases ~~business~~such ~~operations~~as mad cow;

• ~~problems~~political ~~maintaining uniform standards, procedures, controls and policies~~unrest;

• ~~unanticipated~~governmental ~~costs~~bans ~~associated~~or ~~with the acquisition, including accounting charges and transaction expenses~~quarantines; or

• ~~diversion~~trade ofrestrictions, ~~management’s~~including ~~attention~~U.S. ~~from~~retaliation ~~our~~against ~~core~~foreign ~~business;~~trade practices.

•System ~~adverse~~interruptions, ~~effects~~natural ondisasters ~~existing~~and ~~business~~other ~~relationships~~unexpected ~~with~~problems ~~suppliers~~could ~~and~~prevent us from fulfilling orders for our customers;.

27Our computer and telecommunications systems and operations are vulnerable to damage or interruption from fire, flood, power loss, telecommunications failure, failure in the Internet backbone service providers or Internet service providers, earthquakes, acts of war or terrorism, acts of God, human error, computer viruses, physical or electronic break-ins and similar events. Any of these events could lead to system interruptions, delays and loss of critical data, and make our websites or toll-free customer service centers inaccessible to our customers or prevent us from efficiently fulfilling orders or providing services to other retailers who rely on our market platform to assist them in operating their online businesses. For instance, in January 2004, a router failure at one of our Internet service providers caused approximately two hours of degraded website response times and availability, and in July 2005, a circuit failure at one of our Internet service providers caused approximately nine minutes of degraded website response times and availability. This effect would be magnified if interruptions were to occur during one of our peak selling periods, such as Valentine’s Day or Mother’s Day. We do not have fully redundant systems in different geographical areas or a formally tested disaster recovery plan. Our business interruption insurance may be inadequate to compensate for all losses that may occur.

•Despite ~~risks~~any ~~associated~~precautions ~~with~~we ~~entering~~may ~~markets~~take, the occurrence of a natural disaster, the closure of a hosting facility we are using without adequate notice for financial reasons or other unanticipated problems could result in ~~which~~lengthy interruptions in our services. In addition, the failure by our hosting facilities to provide our required data communications capacity could result in interruptions in our service. Any slowdown, damage to or failure of our systems could result in interruptions in our service. We cannot assure you that we ~~have~~will noadequately, and in a timely manner, implement systems to improve the speed, security and availability of our Internet and telecommunications systems. Frequent or ~~limited~~long ~~prior~~service ~~experience;~~delays or interruptions in our service or disruptions during a peak holiday season will reduce our net sales and profits, and our reputation and future net sales and profits will be harmed if our customers believe that our system is unreliable.

•We ~~potential~~may ~~loss~~not ofbe ~~key~~able ~~employees~~to ofincrease ~~acquired~~capacity ~~organizations~~or introduce enhancements to our branded websites in a timely manner or without service interruptions.

IfA wekey ~~fail~~element of our strategy is to ~~properly~~generate ~~evaluate~~a ~~and~~high ~~execute~~volume ~~acquisitions~~of ~~and~~traffic ~~strategic~~on ~~investments,~~our branded websites. As traffic on our ~~management~~branded ~~team~~websites grows, we may not be ~~distracted~~able ~~from~~to accommodate all of the growth in user demand on our ~~day~~branded websites and in our toll-free customer service center. Our inability to~~-day~~ ~~operations,~~add ~~our~~additional ~~business~~hardware ~~may~~and besoftware ~~disrupted~~to upgrade our existing technology or network infrastructure to accommodate in a timely manner increased traffic on our branded websites, ~~and~~in our ~~operating~~toll-free ~~results~~customer ~~may~~service ~~suffer.~~centers Inand ~~addition~~increased sales volume, ifmay wecause ~~finance~~decreased ~~acquisitions~~levels byof customer ~~issuing~~service ~~equity~~and satisfaction. Failure to implement new systems effectively or ~~convertible~~within ~~debt~~a ~~securities,~~reasonable period of time could adversely affect our ~~existing~~business, ~~stockholders~~results ~~would~~of beoperations ~~diluted~~and financial condition.

We ~~may~~also ~~have~~intend ~~difficulty~~to ~~managing~~introduce ~~any~~additional ~~growth~~or enhanced features and services to retain current customers and attract new customers to our branded websites. If we introduce a feature or a service that is not favorably received, our current customers may not use our branded websites as frequently, and we ~~might~~may ~~experience~~not be successful in attracting new customers. We may also experience difficulties that could delay or prevent us from introducing

We29 expect to continue to experience growth in the scope of our operations and the number of our employees. If this growth continues, it will place a significant strain on our management team and on our operational and financial systems, procedures and controls. Our future success will depend in part on the ability of our management team to manage any growth effectively. This will require our management to:

•Table maintainof our cost structure at an appropriate level based on the net sales we generate;Contents

• new ~~manage~~services ~~multiple~~and features. Furthermore, ~~concurrent~~these ~~development~~new ~~projects;~~services or features may contain errors that are discovered only after they are introduced. We may need to significantly modify the design of these services or features to correct errors. If customers encounter difficulty with or do not accept new services or features, our business, results of operations and financial condition could be adversely affected.

•We ~~hire~~rely on suppliers and ~~train~~distribution ~~additional~~facilities ~~personnel;~~to fulfill our customer’s orders and to distribute our products into the carrier delivery system.

•In ~~implement~~the ~~and~~future, ~~improve~~we may be unable to fulfill our ~~operational~~customers’ ~~and~~orders ~~financial~~through ~~systems~~one or more of our various suppliers or distribution facilities in a timely manner, ~~procedures~~or ~~and~~at ~~controls;~~all, ~~and~~due to a number of factors that may affect one or more of such suppliers or distribution facilities, including:

• ~~manage~~a ~~operations~~failure into ~~multiple~~maintain ~~time~~or ~~zones.~~renew one or more of our existing lease agreements for any of our company-operated distribution facilities;

~~Any~~• ~~failure~~a toprolonged ~~successfully~~power ~~manage~~or ~~our~~equipment ~~growth could distract management’s attention, and result in our~~ failure ~~to execute our business plan.~~ ;

If• wean ~~are~~employee ~~required~~strike toor ~~collect~~other ~~sales~~labor ~~and use taxes on the products we sell in additional jurisdictions, we may be subject to liability for past sales and our future sales may decrease.~~ stoppage;

In• accordance with current industry practice and our interpretation of current law, as of December 31, 2004, we did not collect sales and use taxes or other such taxes with respect to shipments of goods into states other than California, Florida, Indiana, Kansas, Massachusetts, Mississippi, Minnesota, North Carolina, New Jersey, Ohio, Pennsylvania, Tennessee, Texas and Washington. The operation of our distribution facilities, the operations of any future distribution facilities and other aspects of our evolving business may, however, result in increased sales and use tax obligations. Some states have sought or are now seeking to impose sales or other tax collection obligations on companies that engage in electronic commerce as we do. Federal legislation limits the imposition of U.S. state and local taxes on Internet-related sales. In 1998, Congress passed the Internet Tax Freedom Act, which placed a ~~moratorium~~ ondisruption ~~state and local taxes on Internet access, unless such tax was already imposed prior to October 1, 1998, and on discriminatory taxes on electronic commerce. This moratorium expired~~ in ~~November 2003. Congress is currently debating several proposals to retain~~ the ~~moratorium.~~transportation Ifinfrastructure noincluding ~~moratorium~~bridges ~~proposals are adopted, state~~ and local governments may be free to impose new taxes on electronically purchased goods. Congress could also pass alternative proposals allowing state and local governments to impose taxes on electronic commerce. In either event, we could be required to pay past and collect future sales and use taxes in states other than those in which we already collect such taxes. roads;

We• ~~are~~a ~~dependent~~refrigeration onfailure; ~~our management team and key employees, and the loss of any of them could harm our business.~~ or

~~Our~~• ~~success depends,~~a ~~in part~~fire, ~~upon the continued availability and contributions of our senior management team~~flood, ~~particularly William Strauss~~hurricane, ~~our~~tornado ~~chief~~or ~~executive~~other ~~officer, and Abraham Wynperle, our president and chief operating officer~~disaster. ~~Important factors that could cause the loss of key personnel include:~~

•In ~~members~~the event that we are unable to fulfill our customers’ orders through one or more of our ~~management~~suppliers ~~team~~or distribution facilities, we will attempt to re-ship the orders from another source to ensure timely delivery. However, we cannot guarantee that our other suppliers and distribution facilities will have the capacity or the variety of flowers to fulfill all orders from a given supplier or distribution facility or that we will be able to deliver the affected orders in a timely manner. In addition, if operations from one or more of our suppliers or distribution facilities become permanently disrupted due to any of the above or other factors, we may ~~terminate~~not ~~their~~be ~~employment~~able ~~with~~to secure a replacement distribution facility in a location on terms acceptable to us or at ~~any~~all. ~~time;~~Our business and results of operations could be materially and adversely affected if we experience temporary or permanent disruptions at one or more of our suppliers or distribution facilities.

28If we fail to protect our intellectual property rights, our ability to compete could be harmed.

•Protection weof doour intellectual property is critical to our success. Patent, trademark, copyright and trade secret laws and confidentiality and other contractual provisions afford only limited protection and may not ~~maintain~~adequately ~~key-man~~protect ~~life~~our ~~insurance~~rights onor permit us to gain or keep any ofcompetitive advantage. We face numerous risks in protecting our ~~employees;~~intellectual property rights, including the following:

• ~~significant~~our ~~portions~~pending ofpatent ~~the~~applications, ~~stock~~copyrights, ~~options~~trademarks, ~~held~~trade bysecrets ~~the~~and ~~members~~other ofintellectual ~~our~~property ~~management~~rights ~~team~~may ~~are~~be ~~vested;~~challenged ~~and~~or invalidated by our competitors;

• ~~many~~we ofonly ~~the~~have ~~stock~~six ~~options~~U.S. ~~held~~patent byapplications ~~our~~pending ~~executive~~in ~~officers~~the ~~provide~~United ~~for~~States ~~accelerated~~Patent ~~vesting~~and inTrademark ~~the~~Office ~~event~~and none of athe ~~sale~~patent orapplications ~~change~~have ofyet ~~control~~to ~~of our company.~~issue;

~~The~~• ~~loss~~our ofpending ~~key~~patent ~~personnel~~applications ormay annot ~~inability~~issue, toor, ~~attract~~if ~~qualified~~issued, ~~personnel~~may innot aprovide ~~timely~~meaningful ~~manner could~~protection ~~slow~~for ~~our~~related ~~technology~~products ~~and~~or ~~product~~proprietary ~~development and harm our ability to execute our business plan.~~ rights;

If• ~~third~~in ~~parties~~the ~~acquire~~event ~~rights~~one toor ~~use~~more ~~similar~~of ~~domain~~our ~~names~~pending orpatent ~~phone~~applications ~~numbers~~issue orinto ifa wepatent, ~~lose~~there ~~the~~may ~~right~~be toprior ~~use~~art ~~our~~in ~~domain~~existence ~~names~~that orthe ~~phone~~United ~~numbers,~~States ~~our brands~~Patent ~~may~~and beTrademark ~~damaged~~Office ~~and~~has wenot considered which may ~~lose~~invalidate ~~sales.~~one or more patent claims;

~~Our~~• ~~Internet~~we ~~domain names~~may ~~are~~not anbe ~~important~~able ~~aspect of our brand recognition. We cannot practically acquire rights~~ to ~~all~~prevent ~~domain~~the ~~names~~unauthorized ~~similar~~disclosure ~~to www.providecommerce.com, www.proflowers.com, www.uptownprime.com~~ or ~~www.cherrymoonfarms.com.~~use Ifof ~~third parties obtain rights to similar domain names, these third parties may confuse~~ our ~~customers~~technical ~~and~~knowledge ~~cause~~or ~~our~~other ~~customers~~trade tosecrets ~~inadvertently~~by ~~place orders with these third parties~~employees, ~~which~~consultants ~~would~~or ~~result in lost sales for us and could damage our brand.~~ advisors;

~~The~~• ~~phone~~the ~~number~~laws ~~that~~of ~~spells~~foreign ~~1-888-FRESHEST~~countries, isincluding ~~also~~Australia, ~~important~~Brazil, toCanada, ~~our~~China, ~~brand and business. While we have obtained~~ the ~~right~~European toUnion, ~~use~~India, ~~the~~Japan, ~~phone numbers 1-888-FRESHEST~~Mexico, ~~1-800-FRESHEST~~New Zealand and ~~1-800-PROFLOW,~~Switzerland aswhere ~~well~~we ashave ~~common~~issued ~~toll-free~~or ~~“FRESHEST”~~pending ~~and “PROFLOW” misdials~~trademarks, we may not beprotect ~~able~~our tointellectual ~~obtain~~property rights to ~~use~~ the ~~FRESHEST and~~same ~~PROFLOW~~extent ~~phone numbers~~ as ~~new toll-free prefixes are issued, or~~ the ~~rights~~laws toof ~~all similar and potentially confusing numbers. If third parties obtain~~ the ~~phone number which spells “FRESHEST” or “PROFLOW” with a different prefix~~U.S., ~~these parties may also confuse our customers~~ and ~~impede~~mechanisms ~~our~~for ~~customer~~enforcement ~~service~~of ~~efforts,~~intellectual ~~causing~~property ~~lost sales and potential damage to our brands. In addition, under applicable Federal Communication Commission, or FCC, rules, ownership~~ rights ~~to phone~~may ~~numbers cannot~~ be ~~acquired.~~inadequate ~~Accordingly,~~in ~~the~~foreign ~~FCC may rescind our right to use any of its phone numbers, including 1-888-FRESHEST and 1-800-PROFLOW.~~ countries;

If30 ~~our third-party technology providers do not adequately maintain our telephone service, we may experience system failures and our business may suffer.~~

WeTable are largely dependent on AT&T and SBC Pacific Bell to provide telephone service to our customer service centers. If AT&T or SBC Pacific Bell experience system failures or fail to adequately maintain our systems, we would experience interruptions and our customers might not continue to utilize our services. Frequent or long system failures or interruptions in our service or disruptions during a peak holiday season could materially harm our business and results of operations. Contents

If• ~~we lose~~ our ~~telephone~~competitors ~~service,~~may welawfully ~~will~~develop beproprietary ~~unable~~software to operate a significant portion of our customer service. Our future success depends upon these third-party relationships because we do not have the resources to maintain telephone services without these or other ~~third~~technology ~~parties.~~that ~~Failure~~competes towith ~~maintain these relationships or replace them on financially attractive terms may disrupt~~ our ~~operations~~ orproprietary ~~require~~supply uschain totechnology; ~~incur significant unanticipated costs.~~ and

~~Our~~• ~~business~~we ~~would~~may be ~~injured~~unable byto ~~extensive~~successfully ~~credit~~identify ~~card~~or ~~fraud.~~prosecute unauthorized uses of our proprietary technology.

~~Our~~As ~~general~~a ~~and~~result, ~~administrative~~our ~~expense~~means ~~would~~of ~~increase~~protecting ifour weintellectual ~~experience~~property ~~significant~~rights ~~credit~~and ~~card~~brands ~~fraud~~may ornot ~~fraud~~be ~~with~~adequate. ~~respect~~Furthermore, to despite our ~~bill-me-later functionality~~efforts, a third ~~party~~parties ~~payment~~may ~~option~~have ~~similar~~violated toand ~~traditional~~may ~~credit~~in ~~cards.~~the Afuture ~~failure~~violate, ~~to adequately control fraudulent credit card transactions~~ or ~~bill-me-later~~attempt ~~transactions~~to ~~would~~violate, ~~increase~~ our ~~general~~intellectual ~~and~~property ~~administrative~~rights. ~~expense~~Infringement ~~because~~claims weand dolawsuits ~~not~~would ~~carry~~likely ~~insurance~~be ~~against~~expensive ~~this~~to ~~risk.~~resolve Weand ~~have~~would ~~developed~~require ~~technology~~substantial tomanagement ~~help detect the~~time ~~fraudulent~~and ~~use of credit card information~~resources. ~~Nonetheless,~~In ~~to date~~addition, we have ~~suffered~~not ~~losses~~sought, asand ado ~~result~~not ofintend ~~orders~~to ~~placed~~seek, ~~with~~trademark, ~~fraudulent~~patent ~~credit~~and ~~card~~other ~~data~~intellectual ~~even~~property ~~though~~protections ~~the~~in ~~associated~~most ~~financial~~foreign ~~institution~~countries. orIn ~~bill-me-later~~countries ~~service~~where ~~provider~~we ~~approved payment~~do ofnot ~~the~~have ~~orders.~~such ~~Under~~protection, ~~current~~businesses ~~credit~~may ~~card~~use ~~practices,~~our wetrademarks to ~~are~~sell ~~liable~~products ~~for~~or ~~fraudulent~~to ~~credit~~develop ~~card~~a ~~transactions~~distribution ifmethod wethat doincorporates ~~not~~our ~~obtain~~patented ~~a cardholder’s signature~~technology.

29We may be sued by third parties for alleged infringement of their proprietary rights.

~~Product~~Companies ~~liability~~that ~~claims~~participate in the e-commerce and supply chain management industries or others may ~~subject~~hold usa large number of patents, patent applications, trademarks and copyrights. Participants in these industries are involved in litigation based on allegations of patent infringement or other violations of intellectual property rights. Intellectual property disputes frequently involve highly complex and costly technical or scientific matters, and each party generally has the right to ~~increased~~seek a trial by jury which adds additional costs and uncertainty. Accordingly, intellectual property contests, with or without merit, could be costly and time-consuming to litigate or settle, and could divert management’s attention from executing our business plan. In addition, our distribution technology may not be able to withstand any third-party claims against its use. If we were unable to obtain any necessary license following a determination of infringement or an adverse determination in litigation or in interference or other administrative proceedings, we may need to redesign some of our distribution technology to avoid infringing a third-party’s patent and could be required to temporarily or permanently discontinue using the related aspect of our technology.

~~Several~~Recently ofenacted ~~the products we sell~~ and ~~intend~~proposed tochanges ~~sell, including perishable food products, may expose us to product liability claims~~ in ~~the~~securities ~~event~~laws that the use or consumption of these products results in personal injury. We may incur significant costs in defense of product liability claims. Product liability claims often create negative publicity, which could materially damage our reputation and ~~our~~regulations ~~brands.~~are ~~Although~~likely weto ~~maintain~~increase ~~insurance against product liability claims,~~ our ~~coverage may be inadequate to cover any liabilities we may incur~~costs.

~~Health~~Recently ~~concerns~~enacted ~~relating~~and toproposed changes in the ~~consumption~~laws and regulations affecting public companies, including the provisions of ~~beef~~the Sarbanes-Oxley Act of 2002, ~~fruit~~will orincrease our expenses as we evaluate the implications of new rules and devote resources to respond to the new requirements. The Sarbanes-Oxley Act mandates, among other things, that companies adopt new corporate governance measures and imposes comprehensive reporting and disclosure requirements, sets stricter independence and financial expertise standards for audit committee members and imposes increased ~~food~~civil ~~products~~and ~~could~~criminal penalties for companies, their chief executive officers and chief financial officers and directors for securities law violations. In particular, we have aincurred ~~negative~~and ~~impact~~expect to incur additional administrative expense and have devoted and expect to continue to devote substantial management time as we have implemented controls and procedures required by Section 404 of the Sarbanes-Oxley Act, which requires management to report on, and our ~~premium~~independent ~~meat~~registered public accounting firm to attest to, ~~fruit~~our ~~and~~internal ~~related~~control ~~product~~over ~~offerings~~financial ~~and~~reporting. Although in connection with this report we have not identified any material weaknesses in our internal control over financial reporting under Section 404 of the Sarbanes-Oxley Act, any significant deficiencies that are not adequately addressed could ~~negatively~~lead ~~impact~~to material weaknesses in our ~~results~~internal control over financial reporting in the future. If our internal control over financial reporting is determined to be ineffective, investors could lose confidence in the reliability of ~~operations~~our financial reporting, which could adversely affect our stock price.

~~The~~In ~~success~~addition, ofThe ~~our~~Nasdaq ~~premium~~National ~~meat~~Market, ~~website~~on ~~and~~which ~~other~~our ~~planned~~common ~~perishable~~stock ~~product~~is ~~offerings~~listed, ~~could~~has bealso ~~affected~~adopted bycomprehensive ~~health~~rules ~~concerns~~and ~~related~~regulations relating to ~~the~~corporate ~~consumption~~governance. ofThese ~~beef~~laws, orrules ~~fruit~~and orregulations ~~negative~~have ~~publicity~~increased ~~concerning~~and ~~food~~will ~~quality~~continue to increase the scope, ~~illness~~complexity and ~~injury~~cost ~~generally,~~of ~~such~~our ascorporate ~~negative~~governance, ~~publicity~~reporting ~~concerning~~and ~~e-coli~~disclosure practices, ~~“mad~~which ~~cow”~~could orharm ~~“foot-~~our results of operations and~~-mouth”~~ ~~disease~~divert management’s attention from business operations. ~~This~~We ~~negative~~also ~~publicity~~expect ~~may~~these ~~adversely affect~~developments ~~demand~~to ~~for~~make ~~our~~it ~~premium~~more ~~meat~~difficult orand ~~fruit~~more ~~products~~expensive ~~which~~for ~~could~~us ~~materially~~to ~~harm~~obtain ~~our~~director ~~business~~and officer liability insurance in the future, and ~~results~~we ofmay ~~operations.~~be required to accept reduced coverage or incur

~~Risks~~31 ~~Related to the Securities Markets~~

AnTable activeof trading market for our common stock may not develop. Contents

~~Prior~~ substantially tohigher ~~our~~costs ~~initial~~to ~~public~~obtain ~~offering~~coverage. ~~in December 2003~~Further, ~~there was no public market for~~ our ~~common~~directors ~~stock.~~and Anexecutive ~~active~~officers ~~trading~~could ~~market~~face ~~may not develop or, if developed, may not be sustained. The lack of~~ an ~~active~~increased ~~market~~risk ~~may impair your ability to sell your shares at the time you wish to sell them or at a price that you consider reasonable. The lack~~ of anpersonal ~~active~~liability ~~market~~in ~~may~~connection with ~~also reduce~~ the ~~fair~~ ~~market~~performance ~~value~~ of ~~your~~their ~~shares~~duties. AnAs ~~inactive~~a ~~market~~result, we may ~~also~~have ~~impair~~difficultly ~~our~~attracting ~~ability~~and toretaining ~~raise~~qualified ~~capital~~directors ~~by selling shares of capital stock~~ and ~~may~~executive ~~impair~~officers, ~~our~~which ~~ability~~would toadversely ~~acquire~~affect ~~other companies or technologies by using~~ our ~~shares as consideration~~business.

WeCurrent ~~expect~~and ~~that~~future ~~the~~governmental ~~price~~and ofindustry ~~our~~regulations ~~common~~may ~~stock~~significantly ~~will fluctuate~~limit ~~substantially~~our business opportunities.

~~The~~New ~~market~~laws ~~price~~or regulations may be enacted with respect to the Internet or existing laws may be applied or interpreted to apply to the Internet, which may decrease the growth in the use of the Internet or our ~~common~~branded ~~stock~~websites. ~~has~~As use of the Internet continues to evolve, we expect that there will be an increasing number of ~~been~~laws and regulations pertaining to the Internet in the U.S. and throughout the world. These laws and regulations may relate to liability for information received from or transmitted over the Internet, online content regulation, user privacy, taxation and quality of products and services sold over the Internet. Moreover, the applicability to the Internet of existing laws governing intellectual property ownership and infringement, copyright, trademark, trade secret, obscenity, libel, employment, personal privacy and other issues is ~~likely~~uncertain and developing. Further, the growth and development of online commerce may prompt calls for more stringent consumer protection laws, both in the U.S. and abroad. We also may be subject to regulation ~~continue~~not specifically related to bethe Internet, ~~highly~~including ~~volatile~~laws affecting direct marketers and advertisers. The ~~market~~adoption ~~price~~of ~~may~~or ~~fluctuate~~modification ~~substantially~~of ~~due~~laws applicable to ~~many~~the ~~factors~~Internet could affect our ability to market our products, ~~including:~~decrease the demand for our products, increase our costs or otherwise adversely affect our business.

•We ~~actual~~are oraffected ~~anticipated~~by ~~fluctuations~~regulations inapplicable ~~our~~to ~~results~~the importation of ~~operations;~~flowers and the sale and handling of food items.

•Our importation of certain flower offerings and our sale and handling of premium meat, seafood and fresh fruit offerings subject us to various federal, state and local government regulations, including regulations imposed by the United States Food & Drug Administration, or FDA, the United States Department of Labor, Occupational Safety and Health Administration, or OSHA, the United States Department of Agriculture, or USDA, and Animal and Plant Health Inspection Service, or APHIS. We have designed our importation procedures and our food handling operations to comply with such regulations. However, the FDA, OSHA, USDA, APHIS or another federal, state or local food regulatory authority may require changes to our importation procedures and food sales and handling operations. We may not be able to make the requested governmental changes or obtain any required permits, licenses or approvals in ~~securities~~a ~~analysts’~~timely ~~expectations~~manner, or ~~our~~at ~~failures~~all. Failure to ~~meet~~make ~~those~~requested ~~expectations;~~changes or to obtain or maintain a required permit, license or approval could cause us to incur substantial compliance costs and delay the availability of, or cancel, certain product offerings. In addition, any inquiry or investigation from a regulatory authority could have a negative impact on our reputation. Any of these events would harm our business and adversely affect our results of operations.

•Various ~~announcements~~legal rules and regulations related to the collection, dissemination and security of ~~significant~~personal ~~contracts~~information bymay usaffect our ability to solicit our customers and potential customers with emails or telephone calls and to collect or disseminate personal data about our ~~competitors;~~customers.

•A ~~changes~~growing inbody of laws designed to protect the privacy of personally identifiable information as well as to protect against its misuse may adversely affect the growth of our ~~pricing~~business ~~policies~~and our marketing efforts. These laws include the Federal Trade Commission Act, the Children’s Online Privacy Protection Act and Federal Trade Commission, or FTC, regulations implementing that act, the ~~pricing~~Fair ~~policies~~Credit Reporting Act, the Gramm Leach Bliley Act and related regulations, California’s Online Privacy Protection Act of 2003 as well as other legal federal, state, and local provisions. The FTC has the authority to protect against the misuse of consumer information by targeting companies that collect, disseminate or maintain personal information in an unfair or deceptive manner, as well as companies that fail to notify parents and obtain parental consent before collecting information from children. The FTC has conducted dozens of investigations into the privacy and security practices of companies that collect information on the Internet. The provisions of these laws and related regulations are complicated, and we do not have extensive experience in complying with them. The evolving nature of the FTC’s and other governmental bodies’ enforcement efforts, and the possibility of new laws in this area, may adversely affect our ~~competitors;~~

•32 ~~inability to maintain our current relationship with our delivery carriers, FedEx and UPS;~~

•Table developmentsof with respect to intellectual property rights;Contents

• ability to collect and disseminate or share demographic and personal information from users and our ability to email or telephone users, all of which could adversely affect our marketing efforts and business. In addition, even technical violations of these laws can result in significant penalties. Given the ~~introduction~~volume of ~~new~~transactions ~~products~~we orprocess ~~product~~as ~~enhancements~~a byconsumer-focused e-commerce company, any violations of applicable privacy laws could expose us orto ~~our~~significant ~~competitors;~~liability.

•Our branded websites use various “cookies” without the ~~commencement~~customer’s knowledge or consent. These cookies may or may not be saved on customer’s hard drives. We use cookies for a variety of reasons, including the collection of data derived from the customer’s Internet activity. Most currently available web browsers allow users to remove cookies at any time or ~~our~~to ~~involvement~~prevent cookies from being stored on their hard drive. Some commentators, privacy advocates and governmental bodies have suggested limiting or eliminating the use of cookies or other data collecting tools. Any reduction or limitation in ~~litigation;~~the use of cookies or other data collecting tools could limit the effectiveness of our sales and marketing efforts. We could incur expenses if new regulations concerning the use of personal information are introduced or if our privacy practices are investigated.

•We ~~our~~depend ~~sale~~on ofcontinued ~~common~~use ~~stock~~of orthe ~~other~~Internet ~~securities~~and ingrowth of the ~~future;~~online perishables retail market.

•Our ~~conditions~~net ~~and~~sales ~~trends~~may not grow if the Internet does not continue to grow as an accepted medium for commerce in flowers and other perishable product categories. Consumer use of the e-Internet as a medium for commerce, ~~industry;~~and especially commerce in perishable products, is a recent phenomenon that is subject to a level of uncertainty. A number of factors may inhibit Internet usage, including:

30• inadequate network infrastructure;

• ~~changes~~consumer inconcerns ~~market~~for ~~valuation~~Internet orprivacy ~~earnings~~and ~~of our competitors~~security;

• ~~the~~inconsistent ~~trading~~quality ~~volume~~ of ~~our common stock~~service;

• ~~changes~~lack ~~in the estimation~~ of ~~the~~availability ~~future size and growth rate~~ of ~~our~~cost-effective, ~~markets~~high-speed service; and

• ~~general~~consumer ~~economic~~concerns ~~conditions~~over purchasing perishable goods over the Internet.

InIf ~~addition,~~use ~~the~~of ~~stock market in general, and~~ the ~~Nasdaq~~Internet ~~National~~as ~~Market~~a ~~and~~medium ~~the market~~ for ~~technology~~commerce ~~companies~~ in ~~particular,~~perishable ~~have~~products ~~experienced~~does ~~extreme~~not ~~price~~continue ~~and volume fluctuations that have often been unrelated or disproportionate~~ to ~~the operating performance of those companies. Further~~grow, ~~the~~or ~~market~~grows ~~prices~~at ofa ~~securities~~slower ofrate ~~e-commerce~~than ~~companies~~we ~~have been particularly volatile~~anticipate, ~~including~~ our ~~stock~~sales will ~~price~~be ~~since~~lower ~~our~~than ~~initial~~expected ~~public offering in December 2003. These broad market~~ and ~~industry factors may materially harm the market price of~~ our ~~common~~business ~~stock,~~will ~~regardless~~be ~~of our operating performance~~harmed. In the past, following periods of volatility in the market price of a company’s securities, securities class-action litigation has often been instituted against that company. Such litigation, if instituted against us, could result in substantial costs and a diversion of management’s attention and resources.

~~Because of the significant stock ownership of our largest stockholder,~~Our ~~our~~business ~~largest~~would ~~stockholder will~~ be ~~able~~injured toby ~~exert~~extensive ~~significant~~credit ~~influence~~card ~~over us and our significant corporate decisions~~fraud.

AsOur ofgeneral ~~December~~and ~~31,~~administrative ~~2004,~~expense ~~our~~would ~~largest~~increase ~~stockholder~~if ~~and~~we ~~persons~~experience ~~affiliated~~significant ~~with~~credit ~~our~~card ~~largest~~fraud ~~stockholder~~or ~~beneficially~~fraud ~~owned~~with ~~34.1%~~respect ofto our ~~outstanding~~bill-me-later ~~common~~functionality, ~~stock.~~a ~~In addition,~~third asparty ofpayment ~~the~~option ~~same~~similar ~~date,~~to ~~our~~traditional ~~executive~~credit ~~officers,~~cards. ~~directors~~A ~~and~~failure ~~other~~to adequately ~~stockholders~~control ~~holding~~fraudulent ~~more~~credit ~~than~~card 5%transactions ofor ~~our~~bill-me-later ~~outstanding~~transactions ~~capital~~would ~~stock~~increase ~~and~~our ~~their~~general ~~affiliates,~~and inadministrative ~~the~~expense ~~aggregate,~~because ~~beneficially~~we ~~owned~~do ~~approximately~~not ~~43.6%~~carry ofinsurance ~~our~~against ~~outstanding~~this ~~common stock~~risk. ~~These~~We ~~persons, acting together, may~~ have ~~the~~developed ~~ability~~technology to ~~control~~help ~~our~~detect ~~management~~the fraudulent ~~and~~use ~~affairs.~~of ~~Our~~credit ~~majority~~card ~~stockholder~~information. ~~and~~Nonetheless, ~~persons~~to ~~affiliated~~date, ~~with~~we ~~our majority stockholder will~~ have ~~the~~suffered ~~ability~~losses toas ~~exert~~a ~~significant~~result ~~influence over the outcome~~ of ~~all~~ ~~matters~~orders ~~submitted~~placed towith ~~our~~fraudulent ~~stockholders~~credit ~~for~~card ~~approval,~~data ~~including~~even though the ~~election~~associated ~~and~~financial ~~removal~~institution ofor ~~directors~~bill-me-later ~~and~~service ~~any~~provider ~~merger,~~approved payment ~~consolidation or sale~~ of ~~all~~the ororders. ~~substantially~~Under ~~all~~current ofcredit ~~our~~card ~~assets.~~practices, ~~This~~we ~~concentration~~are ofliable ~~ownership~~for ~~may~~fraudulent ~~harm~~credit ~~the~~card ~~market~~transactions ~~price~~if ofwe ~~our common~~do ~~stock~~not ~~by,~~obtain ~~among~~a ~~other~~cardholder’s ~~things:~~signature.

•Online ~~delaying,~~security ~~deferring~~breaches orcould ~~preventing~~harm ~~a change in control of~~ our ~~company;~~business.

•The ~~impeding~~secure atransmission ~~merger,~~of ~~consolidation,~~confidential ~~takeover~~information over the Internet is essential in maintaining consumer confidence in our branded websites. Even occasional security breaches of our system or other Internet-based systems could significantly harm our business ~~combination~~and ~~involving~~damage our ~~company;~~reputation. Any penetration of our network security or other misappropriation of our customer’s personal information could subject us to potential liability. We may be subject to claims based on unauthorized purchases with credit card information, or aiding and abetting identity theft or other similar fraud claims. Claims could also be based on other misuses of personal information, such as for unauthorized marketing purposes. These claims could result in litigation and financial liability. We rely on licensed encryption and authentication technology to effect the secure transmission of

•33 ~~causing us to enter into transactions or agreements that are not in the best interests of all stockholders; or~~

•Table discouraging a potential acquirer from making a tender offer or otherwise attempting to obtain control of our company.Contents

~~Future~~ confidential ~~sales~~information, including credit card numbers. It is possible that advances in computer capabilities, new discoveries or other developments could result in a compromise or breach of ~~our~~the ~~common~~technology ~~stock~~that ~~may~~we ~~depress~~use ~~our~~to ~~stock~~protect ~~price~~customer transaction data.

IfWe ~~our~~may ~~common~~incur ~~stockholders sell~~ substantial ~~amounts~~expense ofto ~~common~~protect ~~stock in~~against ~~the public market, or if the market perceives that these sales may occur, the market price of our common stock may decline. Certain of our directors~~ and ~~executive~~remedy ~~officers,~~security ~~including~~breaches ~~our chairman~~ and ~~our~~their ~~chief executive officer, have established programmed selling plans under Rule 10b5-1 for the purpose of effecting sales of common stock~~consequences. WeA ~~have~~party ~~also registered all shares of common stock~~ that weis ~~may~~able ~~issue~~to ~~under~~circumvent our ~~employee~~security systems ~~benefits~~could ~~plans.~~steal Asproprietary ainformation ~~result,~~or ~~these~~cause ~~shares~~interruptions ~~can be freely sold~~ in ~~the~~ ~~public~~our ~~market upon issuance, subject to restrictions under the securities laws~~operations. InOur ~~addition,~~insurance ~~the holders of up to 5,720,234 shares of common stock, based upon shares outstanding as of December 31, 2004 and assuming exercise of such holders~~policies’ ~~outstanding~~ ~~options~~limits ~~and~~may ~~warrants,~~not ~~will~~be ~~have~~adequate ~~rights, subject~~ to ~~some~~reimburse ~~conditions, to require~~ us tofor ~~file~~losses ~~registration~~caused ~~statements~~by ~~covering~~security ~~the~~breaches. ~~resale~~We ofcannot ~~their~~guarantee ~~shares or to include their shares in registration statements~~ that weour ~~may~~security ~~file~~measures ~~for ourselves or~~will ~~other~~prevent ~~stockholders.~~security ~~These registration rights of our stockholders could impair our ability to raise capital by depressing the price at which we could sell our common stock~~breaches.

31Consumer spending on flowers and other perishable products we sell or intend to sell may vary with general economic conditions in the U.S.

~~Our~~Negative ~~future~~trends ~~capital~~in ~~needs~~the ~~are~~general ~~uncertain~~economy, including trends resulting from actual or threatened military action by the U.S. and wethreats ~~may~~of ~~need~~terrorist toattacks on ~~raise~~the ~~additional~~U.S. ~~funds~~and abroad, could cause a decrease in ~~the~~consumer ~~future~~spending on flowers, premium meat, seafood, fresh fruit and ~~such~~ ~~funds~~perishable products in general. Also, any reduction in consumer confidence or disposable income in general may affect the demand for our products. If general economic conditions do not beimprove ~~available~~or deteriorate further and our customers have less disposable income, consumers may spend less on ~~acceptable~~our ~~terms~~products orand atour ~~all~~quarterly operating results may suffer.

~~Our capital~~We ~~requirements~~may ~~will~~not ~~depend~~successfully onaddress ~~many~~problems ~~factors,~~encountered ~~including:~~in connection with any future acquisitions.

•In ~~changes~~December 1999, we purchased Flower Farm Direct, Inc. Subsequently, we amortized and wrote off approximately $9.0 million of goodwill related to the acquisition. We expect to continue to consider opportunities to acquire or make investments in other technologies, products and businesses that could enhance our ~~operating~~technical ~~plan;~~capabilities, complement our current products and services or expand the breadth of our markets or customer base. We have limited experience in acquiring other businesses and technologies. Potential and completed acquisitions and strategic investments involve numerous risks, including:

• ~~lower~~problems ~~than~~assimilating ~~anticipated~~the ~~net~~purchased ~~sales~~technologies, products or business operations;

• ~~increased~~problems ~~expenses~~maintaining inuniform ~~new~~standards, ~~technology~~procedures, ~~and~~controls ~~research~~ and ~~development projects~~policies;

• ~~the~~unanticipated ~~number~~costs ~~and~~associated ~~timing~~with ofthe ~~acquisitions~~acquisition, ~~and~~including ~~other~~accounting ~~strategic~~charges ~~transactions;~~ and transaction expenses;

• ~~the~~diversion ~~costs~~of ~~associated~~management’s ~~with~~attention from our ~~expansion,~~core ~~if any.~~business;

~~Our~~• ~~existing~~adverse ~~sources~~effects ~~of cash and cash flows, may not be sufficient to fund our activities. As a result, we may need to raise additional funds, and such funds may not be available~~ on ~~favorable terms, or at all. Furthermore, if we issue equity or debt securities to raise additional funds, our~~ existing stockholders may experience dilution, and the new equity or debt securities may have rights, preferences and privileges senior to those of our existing stockholders. If we cannot raise funds on acceptable terms, we may not be able to develop or enhance our products and execute our business ~~plan,~~relationships ~~take~~with ~~advantage~~suppliers ~~of future opportunities, or respond to competitive pressures or unanticipated customer requirements. This may materially harm our business, results of operations~~ and ~~financial condition.~~ customers;

~~Anti-takeover~~• ~~provisions~~risks ~~under~~associated ~~our~~with ~~charter~~entering ~~documents~~markets ~~and~~in ~~Delaware~~which ~~law~~we ~~could~~have ~~delay~~no or ~~prevent~~limited aprior ~~change~~experience; ~~of control~~ and ~~could also limit the market price of our stock.~~

~~Our~~• ~~amended~~potential ~~and~~loss ~~restated certificate~~ of ~~incorporation~~ ~~and~~key ~~restated~~employees ~~bylaws contain provisions that could delay or prevent a change~~ of ~~control~~acquired ~~of our company or changes in our board of directors that our stockholders might consider favorable~~organizations. ~~Some of these provisions:~~

•If ~~authorize~~we ~~the~~fail ~~issuance~~to ofproperly ~~preferred~~evaluate ~~stock~~and ~~which~~execute ~~can~~acquisitions and strategic investments, our management team may be ~~created~~distracted ~~and~~from ~~issued~~our byday-to-day ~~the~~operations, our ~~board~~business ofmay ~~directors~~be ~~without~~disrupted, ~~prior~~and ~~stockholder~~our ~~approval~~operating results may suffer. In addition, ~~with~~if ~~rights~~we ~~senior~~finance toacquisitions ~~those~~by ofissuing equity or convertible debt securities, our ~~common~~existing ~~stock;~~stockholders would be diluted.

•We ~~prohibit~~may ~~stockholders~~have ~~from~~difficulty ~~removing~~managing ~~directors~~any ~~without~~growth ~~cause,~~that ~~calling~~we ~~special~~might ~~stockholder meetings or taking action by written consent;~~experience.

•We ~~limit~~expect ~~stockholders~~to ~~from~~continue ~~filling~~to ~~board~~experience ~~vacancies;~~growth in the scope of our operations and the number of our employees. If this growth continues, it will place a significant strain on our management team and on our operational and financial systems, procedures and controls. Our future success will depend in part on the ability of our management team to manage any growth effectively. This will require our management to:

• ~~require~~maintain ~~advance~~our ~~written~~cost ~~notice~~structure ofat ~~stockholder~~an ~~proposals~~appropriate ~~and~~level ~~director~~based ~~nominations.~~on the net sales we generate;

In• ~~addition,~~manage ~~we are governed by the provisions of Section 203 of the Delaware General Corporate Law~~multiple, ~~which~~concurrent ~~may~~development prohibit certain business combinations with stockholders owning 15% or more of our outstanding voting stock. These and other provisions in our amended and restated certificate of incorporation, restated bylaws and Delaware law could make it more difficult for stockholders or potential acquirers to obtain control of our board of directors or initiate actions that are opposed by the then-current board of directors, including to delay or impede a merger, tender offer, or proxy contest involving our company. Any delay or prevention of a change of control transaction or changes in our board of directors could cause the market price of our common stock to decline. projects;

~~ITEM~~• 3.hire ~~QUANTITATIVE~~and ~~AND~~train ~~QUALITATIVE~~additional ~~DISCLOSURES ABOUT MARKET RISK~~ personnel;

~~Market~~34 risk represents the risk of loss arising from adverse changes in market rates and foreign exchange rates. At December 31, 2004, we did not have any balances outstanding under our bank line of credit arrangement (which we terminated in October 2003); however, the amount of outstanding debt at any time may fluctuate and we may from time to time be subject to refinancing risk. We do not believe that a change of 100 basis points in interest rates would have a material effect on our results of operations or financial condition. We derive substantially all of our net sales from sales within the U.S. We have business relationships with foreign growers and other vendors. Approximately $70,000 or 49.3% of total payments to these foreign growers and vendors for the six months ended December 31, 2004 was made in U.S. dollars. Although transactions in foreign currencies represent approximately 50.7% of total payments to foreign vendors, the amount is less than 1% of total payments to all vendors and suppliers. Since transactions in foreign currencies are immaterial to us as a whole, we do not consider it necessary to hedge against currency risk at this time.

32Table of Contents

~~ITEM~~• 4.implement ~~CONTROLS~~and ~~AND~~improve ~~PROCEDURES~~our operational and financial systems, procedures and controls; and

We• ~~maintain disclosure~~manage ~~controls~~operations ~~and procedures that are designed to ensure that information required to be disclosed~~ in ~~our~~multiple ~~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 principal financial officer, as appropriate, to allow for timely decisions regarding required disclosurezones. 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 management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

AsAny ~~required~~failure byto ~~SEC~~successfully ~~Rule~~manage ~~13a-15(b),~~our wegrowth ~~carried~~could ~~out~~distract ~~an evaluation, under the supervision and with the participation of our~~ management,’s ~~including our chief executive officer and principal financial officer~~attention, ~~of the effectiveness of the design~~ and ~~operation~~result of our disclosure controls and procedures as of the end of the quarter covered by this report. Based on their evaluation, our chief executive officer and principal financial officer concluded that our disclosure controls and procedures were (as defined in ~~Rules 13a-15(e) and 15d-15(e) under the Exchange Act) effective at the reasonable assurance level to ensure that information required to be disclosed in~~ our ~~Exchange~~ ~~Act~~failure ~~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~~execute ~~management, including~~ our ~~chief~~business ~~executive officer and principal financial officer, as appropriate, to allow for timely decisions regarding required disclosure~~plan.

~~There~~If ~~have~~we ~~been~~are norequired ~~changes~~to incollect ~~our~~sales ~~internal controls over financial reporting (as defined in Rules 13a-15(f)~~ and ~~15d-15(f)~~use ~~under~~taxes on the ~~Exchange~~products ~~Act) during our most recent~~we ~~fiscal~~sell ~~quarter~~in ~~that~~additional ~~has materially affected~~jurisdictions, orwe ismay ~~reasonably~~be ~~likely~~subject to ~~materially~~liability ~~affect,~~for ~~our~~past ~~internal~~sales ~~controls~~and ~~over~~our ~~financial~~future ~~reporting~~sales may decrease.

33In accordance with current industry practice and our interpretation of current law, as of September 30, 2005, we collected sales and use taxes or other such taxes with respect to shipments of goods into the 16 states in which we have sufficient operations to require us to collect and pay taxes. The operation of our distribution facilities, the operations of any future distribution facilities and other aspects of our evolving business may, however, result in increased sales and use tax obligations. Some states have imposed, sought or are now seeking to impose taxes on Internet access, and multiple or discriminatory taxes on electronic commerce. The imposition of these various taxes may increase the tax collection obligations on companies that engage in electronic commerce as we do.

Federal legislation limits the imposition of U.S. state and local taxes on Internet-related sales. In 1998, Congress passed the Internet Tax Freedom Act, ~~PART~~which IIplaced a moratorium on state and local taxes on Internet access, unless such tax was already imposed prior to October 1, 1998, and on multiple or discriminatory taxes on electronic commerce. ~~OTHER~~The ~~INFORMATION~~original moratorium expired in November 2003 while Congress debated several proposals to retain the moratorium. On December 3, 2004, Congress passed the Internet Tax Nondiscrimination Act, which retroactively extended the moratorium on these taxes from November 1, 2003 until November 1, 2007 and also requires state and local governments that are currently imposing such taxes to eliminate them by specified dates.

~~ITEM~~When the moratorium expires on November 1, 2007, state and local governments may be free once again to impose new taxes on Internet-related sales. ~~Legal~~If Congress ~~Proceedings~~does not extend the law as they currently have done, or chooses to lift the moratorium prematurely, we may be required to collect and pay any new taxes imposed.

~~None~~We are dependent on our management team and key employees, and the loss of any of them could harm our business.

~~ITEM~~Our 2.success ~~Unregistered~~depends, ~~Sales~~in part, upon the continued availability and contributions of ~~Equity~~our ~~Securities~~senior management team, particularly William Strauss, our chief executive officer, and ~~Use~~Abraham Wynperle, our president and chief operating officer. Important factors that could cause the loss of ~~Proceeds~~key personnel include:

~~(a)~~• ~~During~~members ~~the quarter ended December 31, 2004, we issued the following securities to certain holders~~ of ~~the~~our ~~previously~~management ~~issued~~team ~~warrants~~may toterminate ~~purchase shares~~their ofemployment ~~our~~with ~~common~~us ~~stock:~~at any time;

On• ~~October 5, 2004,~~ we ~~issued~~do ~~105 shares~~not ofmaintain ~~our~~key-man ~~common~~life ~~stock~~insurance ~~upon~~on ~~the~~any ~~cashless exercise~~ of ~~a previously issued warrant to purchase shares of~~ our ~~common stock.~~ employees;

On• ~~October~~significant 7,portions ~~2004, we issued 1,062 shares~~ of ~~our~~the ~~common~~ stock ~~upon~~options ~~the~~held ~~cashless~~by ~~exercise~~the members of aour ~~previously~~management ~~issued~~team ~~warrant~~are tovested; ~~purchase shares of our common stock.~~ and

On• ~~October~~many ~~14,~~of ~~2004,~~the westock ~~issued~~options ~~106~~held ~~shares~~by of our ~~common stock~~executive ~~upon~~officers ~~the~~provide ~~cashless~~for ~~exercise~~accelerated vesting in the event of a ~~previously~~sale ~~issued~~or ~~warrant~~change toof ~~purchase~~control ~~shares~~ of our ~~common stock~~company.

OnThe ~~December~~loss ~~18,~~of ~~2004,~~key wepersonnel ~~issued~~or ~~156,643~~an ~~shares~~inability ofto ~~our~~attract ~~common~~qualified ~~stock~~personnel ~~upon~~in ~~the~~a timely ~~cashless~~manner ~~exercise~~could ofslow aour ~~previously~~technology ~~issued~~and ~~warrant~~product todevelopment ~~purchase~~and ~~shares~~harm ofour ability to execute our ~~common~~ ~~stock~~business plan.

OnOur ~~December~~accounting ~~22,~~and ~~2004,~~financial wesystem ~~issued~~is ~~10,124~~not ~~shares~~integrated ~~of our~~with ~~common stock upon the cash exercise of a previously issued warrant to purchase shares of~~ our ~~common~~transaction ~~stock~~processing system.

~~These~~We ~~transactions~~use ~~did~~an ~~not~~internally ~~involve~~developed asystem ~~public~~for ~~offering.~~substantially ~~Appropriate~~all ~~legends~~aspects ~~were~~of ~~affixed~~transaction toprocessing, ~~the~~including ~~stock~~order ~~certificates~~management, credit ascard ~~applicable~~processing inand ~~such transactions~~shipping. ~~The shares~~Our ofaccounting ~~our~~and ~~common~~financial ~~stock~~system ~~identified~~is ~~above~~purchased ~~were~~from ~~issued under~~ a ~~claim~~third-party. ofBecause ~~exemption~~our ~~under~~current ~~Regulation~~transaction Dprocessing ~~promulgated~~system, bywhich ~~the~~provides ~~SEC,~~frequent ~~or,~~operational ~~alternatively~~reports, ~~under~~is ~~Section~~not ~~4(2)~~integrated ofwith ~~the~~our ~~Securities~~accounting ~~Act.~~and financial Wesystem, ~~believe~~we ~~each~~must ~~transferee~~manually ~~had~~input ~~adequate~~data ~~access~~in order to prepare information ~~about~~ usfor toaccounting ~~make~~and anfinancial ~~informed~~reporting. ~~investment~~This ~~and~~manual ~~each~~input ~~transferee~~of isdata anmay ~~accredited~~make ~~investor~~it ~~within~~more ~~the~~difficult ~~meaning~~for ofmanagement ~~Rule~~to ~~501~~obtain ofaccurate ~~Regulation~~financial Dstatements and reporting information on a timely basis. We intend to

~~(b)~~35 Our initial public offering of common stock, $0.001 par value, was effected through a Registration Statement on Form S-1 (File No. 333-109009) that was declared effective by the Securities and Exchange Commission on December 16, 2003. The net offering proceeds to us, after deducting underwriting discounts and commissions and estimated offering expenses, were approximately $34.8 million. As of December 31, 2004, we have not used any of the net proceeds from the offering. We intend to use the net proceeds from the offering for: (i) sales and marketing activities; (ii) promotion of existing and future product categories; and (iii) general corporate purposes. In addition, we may use a portion of the net proceeds to acquire or invest in complementary businesses or products or to obtain the right to use complementary technologies. We have no commitments with respect to any acquisition or investment.

TheTable amounts actually expended for each of the purposes listed above and the timing of our actual expenditures will depend on numerous factors, including the status of our efforts to increase our number of relationships with other retailers to use our market platform, sales and marketing activities, technological advances, amount of cash generated or used by our operations and competition. We have not determined the amount or timing of expenditures in the areas listed above and will retain broad discretion in the allocation and use of the net proceeds. Pending the uses described above, we have invested the net proceeds in short-term, interest-bearing, investment-grade securities. Contents

~~ITEM~~increase 3the integration between our transaction processing and accounting systems. ~~Defaults~~We ~~Upon~~cannot ~~Senior~~guarantee ~~Securities~~that we will complete this increased integration in a fast and effective manner. Any inability to do so may have a material adverse effect on our business, financial condition and results of operations.

~~None~~If third parties acquire rights to use similar domain names or phone numbers or if we lose the right to use our domain names or phone numbers, our brands may be damaged and we may lose sales.

34Our Internet domain names are an important aspect of our brand recognition. We cannot practically acquire rights to all domain names similar to www.providecommerce.com, www.proflowers.com, www.uptownprime.com, www.flowerfarm.com or www.cherrymoonfarms.com. If third parties obtain rights to similar domain names, these third parties may confuse our customers and cause our customers to inadvertently place orders with these third parties, which would result in lost sales for us and could damage our brand.

The phone number that spells 1-888-FRESHEST is also important ~~ITEM~~to 4our brand and business. ~~Submission~~While ofwe ~~Matters~~have obtained the right to use the phone numbers 1-888-FRESHEST, 1-800-FRESHEST and 1-800-PROFLOW, as well as common toll-free “FRESHEST” and “PROFLOW” misdials, we may not be able to obtain rights to use the FRESHEST and PROFLOW phone numbers as new toll-free prefixes are issued, or the rights to all similar and potentially confusing numbers. If third parties obtain the phone number which spells “FRESHEST” or “PROFLOW” with a ~~Vote~~different prefix, these parties may also confuse our customers and impede our customer service efforts, causing lost sales and potential damage to our brands. In addition, under applicable Federal Communication Commission, or FCC, rules, ownership rights to phone numbers cannot be acquired. Accordingly, the FCC may rescind our right to use any of ~~Security~~its ~~Holders~~phone numbers, including 1-888-FRESHEST and 1-800-PROFLOW.

~~Our~~If ~~2004~~our ~~Annual~~third-party ~~Meeting~~technology ofproviders ~~Stockholders~~do ~~was~~not ~~held~~adequately onmaintain ~~November~~our 18telephone service, ~~2004.~~we ~~The~~may ~~following~~experience ~~matters~~system ~~were~~failures ~~voted upon at the meeting~~ and ~~were~~our ~~adopted~~business bymay ~~the margins~~suffer. ~~indicated:~~

1.We ~~The~~are ~~stockholders~~largely ~~elected~~dependent ~~nine~~on ~~directors~~ AT&T and SBC Pacific Bell to ~~hold~~provide ~~office~~telephone ~~until~~service ~~the~~to ~~2005~~our ~~Annual~~customer ~~Meeting~~service ofcenters. ~~Stockholders~~If ~~and~~AT&T ~~until~~or ~~their~~SBC ~~successors~~Pacific ~~are~~Bell ~~elected~~experience ~~and~~system ~~have~~failures ~~been~~or ~~qualified~~fail to adequately maintain our systems, we would experience interruptions and our customers might not continue to utilize our services. Frequent or ~~until~~long ~~their~~system ~~earlier~~failures ~~death,~~or ~~resignation~~interruptions in our service or ~~removal~~disruptions during a peak holiday season could materially harm our business and results of operations.

Name of Director Elected:	Number of Shares For:	Number of Shares Withheld:
Joel T. Citron	11,242,033	147,150
David E. R. Dangoor	11,144,715	244,468
Joseph P. Kennedy	11,285,933	103,250
Arthur B. Laffer	11,228,033	161,150
Peter J. McLaughlin	11,144,615	244,568
James M. Myers	11,284,521	104,662
Jordanna Schutz	11,240,412	148,771
Marilyn R. Seymann	11,246,121	143,062
William Strauss	11,242,033	147,150

If we lose our telephone service, we will be unable to operate a significant portion of our customer service. Our future success depends upon these third-party relationships because we do not have the resources to maintain telephone services without these or other third parties. Failure to maintain these relationships or replace them on financially attractive terms may disrupt our operations or require us to incur significant unanticipated costs.

2.Product ~~The~~liability ~~stockholders ratified~~claims ~~the~~may ~~appointment~~subject ofus ~~Ernst~~to &increased ~~Young LLP as our independent registered public accounting firm for the fiscal year ending June 30, 2005~~costs.

For:		11,337,833
Against:		51,350
Abstain:		0

Several of the products we sell and intend to sell, including perishable food products, may expose us to product liability claims in the event that the use or consumption of these products results in personal injury. We may incur significant costs in defense of product liability claims. Product liability claims often create negative publicity, which could materially damage our reputation and our brands. Although we maintain insurance against product liability claims, our coverage may be inadequate to cover any liabilities we may incur.

Health concerns relating to the consumption of beef, fruit or other food products could have a negative impact on our premium meat, ~~ITEM~~seafood 5.fruit ~~Other~~and ~~Information~~related product offerings and could negatively impact our results of operations.

~~None~~The success of our premium meat and seafood website and other planned perishable product offerings could be affected by health concerns related to the consumption of beef, certain seafood, or fruit or negative publicity concerning food quality, illness and injury generally, such as negative publicity concerning e-coli, “mad cow” or “foot-and-mouth” disease. This negative publicity may adversely affect demand for our premium meat, seafood, or fruit products which could materially harm our business and results of operations.

~~ITEM~~36 ~~6. Exhibits~~

Exhibit 3.1	(1)	Amended and Restated Certificate of Incorporation of the Company (Filed as Exhibit 3.4).
Exhibit 3.2	(1)	Bylaws of the Company, as amended (Filed as Exhibit 3.6).
Exhibit 4.1	(1)	Specimen stock certificate for shares of Common Stock of the Company (Filed as Exhibit 4.2).
Exhibit 4.2	(1)	Investors’ Rights Agreement, dated December 29, 1999 by and among us and the parties named therein (Filed as Exhibit 10.3).
Exhibit 4.3	(1)	Amendment Number One to the Investors’ Rights Agreement, dated March 31, 2000, by and among us and parties named therein (Filed as Exhibit 10.5).
Exhibit 4.4	(1)	Amendment No. 1 to the Investors’ Rights Agreement, dated May 18, 2000 by and among us and parties named therein (Filed as Exhibit 10.6).
Exhibit 4.5	(1)	Amended and Restated Stockholders Agreement, dated December 29, 1999, by and among us and parties named therein (Filed as Exhibit 10.4).
Exhibit 4.6	(1)	Amendment Number One to the Amended and Restated Stockholders Agreement, dated March 31, 2000, by and among us and parties named therein (Filed as Exhibit 10.7).
Exhibit 4.7	(1)	Amendment Number Two to the Amended and Restated Stockholders Agreement, dated August 11, 2000, by and among us and parties named therein (Filed as Exhibit 10.8).
Exhibit 4.8	(1)	Amendment Number Three to the Amended and Restated Stockholders Agreement, dated June 25, 2000, by and among us and parties named therein (Filed as Exhibit 10.8).

35Risks Related to the Securities Markets

Exhibit 10.45†		FedEx Pricing Agreement Amendment, dated November 11, 2004, between us and Federal Express Corporation and FedEx Ground Package System, Inc.
Exhibit 10.46†		Carrier Agreement, dated December 10, 2004, between us and United Parcel Service Inc.
Exhibit 31.1		Certification of Chief Executive Officer pursuant to Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Exhibit 31.2		Certification of Chief Financial Officer pursuant to Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Exhibit 32*		Certifications of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

We expect that the price of our common stock will fluctuate substantially.

~~(1)~~The ~~Incorporated~~market byprice ~~reference~~of toour ~~the~~common ~~numbered~~stock ~~exhibit~~has ~~filed~~been, ~~with~~and ~~the~~is ~~Company’s~~likely ~~Registration~~to ~~Statement~~continue onto be, ~~Form~~highly ~~S-1 (No~~volatile. ~~333-109009)~~The ~~filed~~market onprice ~~September~~may ~~22,~~fluctuate ~~2003,~~substantially asdue ~~amended~~to ~~thereafter.~~many factors, including:

~~(2)~~• ~~Incorporated~~actual byor ~~reference~~anticipated tofluctuations ~~the~~in ~~Annual~~our ~~Report~~results onof ~~Form 10-K for the fiscal year ended June 30, 2004.~~operations;

#• ~~Indicates~~changes ~~management~~in ~~contract~~securities analysts’ expectations or ~~compensatory~~our ~~plan.~~failure to meet those expectations;

†• ~~Certain~~announcements ~~confidential portions~~ of ~~this~~significant ~~exhibit~~contracts ~~were omitted~~ by ~~means~~us ofor ~~redacting~~our a portion of the text (the “Mark”). This Exhibit has been filed separately with the Secretary of the Commission without the Mark pursuant to the Registrant’s Application Requesting Confidential Treatment under Rule 406 under the Securities Act.competitors;

*• ~~These~~changes ~~certifications~~in ~~are~~our ~~being~~pricing ~~furnished~~policies solely to accompany this quarterly report pursuant to 18 U.S.C. Section 1350, and are not being filed for purposes of Section 18 of the Securities Exchange Act of 1934 and are not to be incorporated by reference into any filing of Provide Commerce, Inc., whether made before or ~~after~~ the ~~date~~pricing ~~hereof,~~policies ~~regardless~~ of ~~any~~our ~~general incorporate language in such filing.~~competitors;

36• inability to maintain our current relationship with our delivery carriers, FedEx and UPS;

~~SIGNATURE~~• developments with respect to intellectual property rights;

~~Pursuant~~• to the ~~requirements~~introduction of ~~the Securities~~new ~~Exchange~~products ~~Act~~or ofproduct ~~1934,~~enhancements ~~the registrant has duly caused this report to be signed on its behalf~~ by ~~the~~us ~~undersigned~~or ~~thereunto~~our ~~duly authorized.~~ competitors;

~~Date:~~• ~~February~~the 2,commencement ~~2005~~of or our involvement in litigation;

~~Provide~~• ~~Commerce,~~our ~~Inc.~~sale ~~By:~~of ~~/s/~~common ~~Rex~~stock E.or ~~Bosen~~other ~~Rex~~securities E.in ~~Bosen~~the ~~Vice President, Finance and Accounting and Principal Financial Officer~~future;

37• conditions and trends in the e-commerce industry;

•

changes in market valuation or earnings of our competitors;

•

the trading volume of our common stock;

•

changes in the estimation of the future size and growth rate of our markets; and

•

general economic conditions.

In addition, the stock market in general, and the Nasdaq National Market and the market for technology companies in particular, have experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of those companies. Further, the market prices of securities of e-commerce companies have been particularly volatile, including our stock price since our initial public offering in December 2003. These broad market and industry factors may materially harm the market price of our common stock, regardless of our operating performance. In the past, following periods of volatility in the market price of a company’s securities, securities class-action litigation has often been instituted against that company. Such litigation, if instituted against us, could result in substantial costs and a diversion of management’s attention and resources.

In May 2005, our board of directors authorized a stock repurchase program of up to $25 million of our common stock in open market and negotiated purchases over a period of one year. Through September 30, 2005, we had repurchased 498,200 shares of our common stock in open market transactions at varying market prices. Our prior repurchases and any repurchases we may make in the future may not prove to be at optimal market prices and our use of cash for the stock repurchase program may not prove to be the best use of our cash resources.

Because of the significant stock ownership of our largest stockholder, our largest stockholder will be able to exert significant influence over us and our significant corporate decisions.

As of September 30, 2005, our largest stockholder and persons affiliated with our largest stockholder beneficially owned 33.7% of our outstanding common stock. In addition, as of the same date, our executive officers, directors and other stockholders holding more than 5% of our outstanding capital stock and their affiliates, in the aggregate, beneficially owned approximately 60.8% of our outstanding common stock. These persons, acting together, may have the ability to control our management and affairs. Our majority stockholder and persons affiliated with our majority stockholder will have the ability to exert significant influence over the

outcome of all matters submitted to our stockholders for approval, including the election and removal of directors and any merger, consolidation or sale of all or substantially all of our assets. This concentration of ownership may harm the market price of our common stock by, among other things:

•

delaying, deferring or preventing a change in control of our company;

•

impeding a merger, consolidation, takeover or other business combination involving our company;

•

causing us to enter into transactions or agreements that are not in the best interests of all stockholders; or

•

discouraging a potential acquirer from making a tender offer or otherwise attempting to obtain control of our company.

Future sales of our common stock may depress our stock price.

If our common stockholders sell substantial amounts of common stock in the public market, or if the market perceives that these sales may occur, the market price of our common stock may decline. Certain of our directors and executive officers, including our chairman, our chief executive officer and our president and chief operating officer, have in the past established, and may in the future establish, programmed selling plans under Rule 10b5-1 for the purpose of effecting sales of common stock. We have also registered all shares of common stock that we may issue under our employee benefits plans. As a result, these shares can be freely sold in the public market upon issuance, subject to restrictions under the securities laws. In addition, the holders of up to 5,419,302 shares of common stock, based upon shares outstanding as of September 30, 2005 and assuming exercise of such holders’ outstanding options and warrants, have rights, subject to some conditions, to require us to file registration statements covering the resale of their shares or to include their shares in registration statements that we may file for ourselves or other stockholders. These registration rights of our stockholders could impair our ability to raise capital by depressing the price at which we could sell our common stock.

An active trading market for our common stock may not be sufficiently developed.

Prior to our initial public offering in December 2003, there was no public market for our common stock. An active trading market may not be sufficiently developed or sustained. The lack of an active market may impair your ability to sell your shares at the time you wish to sell them or at a price that you consider reasonable. The lack of an active market may also reduce the fair market value of your shares. An inactive market may also impair our ability to raise capital by selling shares of capital stock and may impair our ability to acquire other companies or technologies by using our shares as consideration.

Our future capital needs are uncertain and we may need to raise additional funds in the future, and such funds may not be available on acceptable terms or at all.

Our capital requirements will depend on many factors, including:

•

changes in our operating plan;

•

lower than anticipated net sales;

•

increased expenses in new technology and research and development projects;

•

the number and timing of acquisitions and other strategic transactions; and

•

the costs associated with our expansion, if any.

Our existing sources of cash and cash flows, may not be sufficient to fund our activities. As a result, we may need to raise additional funds, and such funds may not be available on favorable terms, or at all. Furthermore, if we issue equity or debt securities to raise additional funds, our existing stockholders may experience dilution, and the new equity or debt securities may have rights, preferences and privileges senior to those of our existing stockholders. If we cannot raise funds on acceptable terms, we may not be able to develop or enhance our products and execute our business plan, take advantage of future opportunities, or respond to competitive pressures or unanticipated customer requirements. This may materially harm our business, results of operations and financial condition.

Anti-takeover provisions under our charter documents and Delaware law could delay or prevent a change of control and could also limit the market price of our stock.

Our amended and restated certificate of incorporation and restated bylaws contain provisions that could delay or prevent a change of control of our company or changes in our board of directors that our stockholders might consider favorable. Some of these provisions:

•

authorize the issuance of preferred stock which can be created and issued by the board of directors without prior stockholder approval, with rights senior to those of our common stock;

•

prohibit stockholders from removing directors without cause, calling special stockholder meetings or taking action by written consent;

•

limit stockholders from filling board vacancies; and

•

require advance written notice of stockholder proposals and director nominations.

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market risk represents the risk of loss arising from adverse changes in market rates and foreign exchange rates. At September 30, 2005, we did not have any outstanding bank debt; however, the amount of outstanding debt or liabilities related to benefit plans may fluctuate at any time and we may from time to time be subject to market risk. We do not believe that a change of 100 basis points in interest rates would have a material effect on our results of operations or financial condition. We derive substantially all of our net sales from sales within the U.S. We have business relationships with foreign growers and other vendors. Approximately $108,000 or 80.1% of total payments to these foreign growers and vendors for the three months ended September 30, 2005 was made in U.S. dollars. Although transactions in foreign currencies represent approximately 19.9% of total payments to foreign vendors, the amount is less than 1% of total payments to all vendors and suppliers. Since transactions in foreign currencies are immaterial to us as a whole, we do not consider it necessary to hedge against currency risk at this time.

ITEM 4.

CONTROLS AND PROCEDURES

We maintain 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 our management, including our chief executive officer and chief financial officer, as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

As required by SEC Rule 13a-15(b), we carried out an evaluation, under the supervision and with the participation of our management, including our chief executive officer and principal financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the quarter covered by this report. Based on their evaluation, our chief executive officer and principal financial officer concluded that our disclosure controls and procedures were (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) effective at the reasonable assurance level 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 chief financial officer, as appropriate, to allow for timely decisions regarding required disclosure.

There has been no change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during our most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II.

OTHER INFORMATION

ITEM 1.

Legal Proceedings

On August 23, 2005, Florists’ Transworld Delivery, Inc. (FTD) filed a complaint in the United States District Court for the Northern District of Illinois, Eastern Division against us, alleging claims for unfair competition by false advertising, deceptive trade practices and intentional interference with prospective economic advantage. The claims relate to our print and radio advertising. FTD seeks injunctive relief and monetary damages, including punitive damages and attorneys’ fees and costs. On September 13, 2005, we filed our answer and counterclaim. The response to the counterclaim was filed by FTD on October 4, 2005.

On October 4, 2005, an action was filed on Los Angeles County Superior Court, entitled Theodore G. Phelps, individually and on behalf of others similarly situated v. Provide Commerce, Inc., et al., Case No. BC340863. The action alleges causes of action for unfair competition, false advertising and breach of warranty relating to our print and radio advertising. The plaintiff seeks to certify the case as a California and nationwide class consisting of “all persons residing in the U.S. who purchased [the Company’s] products during the four year period prior to the filing of the lawsuit to the date of judgment in this action.” The plaintiff seeks injunctive relief, restitution, money damages and attorneys’ fees.

We believe that each of these lawsuits is without merit and intend to vigorously defend against each of such lawsuits. Due to the uncertainty of the ultimate outcome of these matters, the impact on future financial results is not subject to reasonable estimates.

As of October 31, 2005, we were not a party to any other material legal proceedings that management believes would adversely affect our business. We may, however, become subject to lawsuits in the ordinary course of business.

ITEM 2.

Unregistered Sales of Equity Securities and Use of Proceeds

Use of Proceeds

Our initial public offering of common stock, $0.001 par value, was effected through a Registration Statement on Form S-1 (File No. 333-109009) that was declared effective by the Securities and Exchange Commission on December 16, 2003. The net offering proceeds to us, after deducting underwriting discounts and commissions and estimated offering expenses, were approximately $34.8 million. As of September 30, 2005, we have not used any of the net proceeds from the offering. We intend to use the net proceeds from the offering for: (i) sales and marketing activities; (ii) promotion of existing and future product categories; and (iii) general corporate purposes. In addition, we may use a portion of the net proceeds to acquire or invest in complementary businesses or products or to obtain the right to use complementary technologies. We have no commitments with respect to any acquisition or investment.

The amounts actually expended for each of the purposes listed above and the timing of our actual expenditures will depend on numerous factors, including the status of our efforts to increase our number of relationships with other retailers to use our market platform, sales and marketing activities, technological advances, amount of cash generated or used by our operations and competition. We have not determined the amount or timing of expenditures in the areas listed above and will retain broad discretion in the allocation and use of the net proceeds. Pending the uses described above, we have invested the net proceeds in short-term, interest-bearing, investment-grade securities.

Issuer Purchases of Equity Securities

On May 3, 2005, we announced that our board of directors authorized a stock repurchase program under Rule 10b-18 of the Exchange Act of up to $25 million of shares of our common stock in open market and negotiated purchases over a period of one year. The following table provides information regarding our stock repurchases in the quarter ended September 30, 2005:


Month	Total Number of Shares Purchased During Month(1)	Average Price Paid Per Share(2)		Cumulative Number of Shares Purchased as Part of Publicly Announced Plan	Maximum Dollar Value of Shares That May Yet Be Purchased Under the Plan(3)
July 2005	—		—	408,500	$	16,151,264
August 2005	25,000	$	25.23	433,500	$	15,520,549
September 2005	64,700	$	24.95	498,200	$	14,536,741

Total	89,700

(1)	The purchases were made in open-market transactions.

(2)	Excludes commissions paid, if any, related to the share repurchase transactions.

(3)	Represents the difference between the $25,000,000 of share repurchases authorized by our board of directors and the value of the shares repurchased from May 2005 through the indicated month.

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


Exhibit 3.1(1)		Amended and Restated Certificate of Incorporation .

Exhibit 3.2(1)		Bylaws.

Exhibit 4.1		Reference is made to exhibits 3.1 and 3.2.

Exhibit 4.2(1)		Form of Common Stock Certificate.

Exhibit 10.25(2)		Third Amendment to Employment Agreement, dated December 17, 1999, between us and Abraham Wynperle, dated September 9, 2005.

Exhibit 10.30(2)		Second Amendment to Employment Agreement, dated September 9, 2005, between us and William Strauss.

Exhibit 10.40		Employment Agreement, dated September 12, 2005, between us and W. Eric Carlborg.

Exhibit 31.1		Certification of Chief Executive Officer pursuant to Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

Exhibit 31.2		Certification of Chief Financial Officer pursuant to Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

Exhibit 32*		Certifications of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

(1)	Incorporated by reference to the Registration Statement on Form S-1 (No. 333-109009) filed on September 22, 2003, as amended.

(2)	Incorporated by reference to the Annual Report on Form 10-K for the fiscal year ended June 30, 2005.

These certifications are being furnished solely to accompany this quarterly report pursuant to 18 U.S.C. Section 1350, and are not being filed for purposes of Section 18 of the Securities Exchange Act of 1934 and are not to be incorporated by reference into any filing of Provide Commerce, Inc., whether made before or after the date hereof, regardless of any general incorporate language in such filing.

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Provide Commerce, Inc.

Date: November 9, 2005

By:

/S/ W. ERIC CARLBORG

W. Eric Carlborg

Chief Financial Officer

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