Caution on Forward-Looking Statements

Any statements in this report and the information incorporated herein by reference about our expectations, beliefs, plans, objectives, assumptions or future events or performance are not historical facts and are forward-looking statements. You can identify these forward-looking statements by the use of words or phrases such as "believe," "may," "could," "will," "estimate," "continue," "anticipate," "intend," "seek," "plan," "expect," "should" or "would." We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our financial condition, results of operations, business strategy and financial needs. These forward-looking statements are subject to a number of risks, uncertainties and assumptions described in our Annual Report on Form 10-K for the year ended December 29, 2007.

Although we believe that the expectations reflected in our forward-looking statements are reasonable, we cannot guarantee future results, events, levels of activity, performance or achievement. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, unless required by law.

The following discussion contains forward-looking statements, which involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth under the caption "Risk Factors" in our Annual Report on Form 10-K for the year ended December 29, 2007. The interim financial statements and this Management's Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the financial statements and notes thereto for the fiscal year ended December 29, 2007 and the related Management's Discussion and Analysis of Financial Condition and Results of Operations, both of which are contained in our Annual Report on Form 10-K for the fiscal year ended December 29, 2007 filed with the Securities and Exchange Commission on March 12, 2008.

Overview

We are a retailer of distinctive modern design products to both residential and commercial customers. Our clients purchase through three integrated sales points. We have developed a national presence in modern design furnishings and a brand recognized for design excellence among our customers and the design community. In the process we have created a business model that enables us to provide products to our customers in a more convenient, efficient and economical manner than was previously available to them. Our policy of maintaining core products in stock represents a departure from the approach taken by many other modern design furnishings retailers.

In fiscal year 2007, we introduced an extended lead-time program, allowing our clients to personalize their product to meet their unique needs. In addition, we launched an expanded offering in accessories in the fourth quarter 2007, which we call "Tools for Living." We believe this new product line will increase our presence in providing modern design solutions for our customers. We plan to feature in this category approximately 700 products, ranging in price from under $20 to over $2,000. The products all share good design and functionality.

Each Tools for Living product is unique in how it solves a problem or makes something more comfortable or easier to use. We view this as an opportunity to offer our existing customers a solution to their everyday problems, as well as providing an introduction to DWR for new clients. If Tools for Living achieves a sufficient level of market acceptance, we will continue to grow the product line and explore other design-driven opportunities. Our relationships with both internationally recognized and emerging designers continue to grow and allow us to offer our customers an array of innovative and often hard-to-find merchandise.

Our business strategy is based upon the premise that integrated sales points improve customer convenience, reinforce brand awareness, enhance customer knowledge of our products and produce operational benefits that ultimately improve market penetration and returns on capital. We believe most traditional retailers initially established their presence with one sales point and subsequently added additional sales points, thereby making integration across sales points more difficult.

We have experienced significant growth in customers and sales since our founding in 1998. We began selling products through the phone and online in the second half of 1999, and we opened our first studio in November 2000. We base our decisions on where to open new studios by categorizing markets into "tiers" based on household population statistics and supporting sales data collected from our other sales points. Our experience indicates that studio openings significantly improve our overall market penetration rates in the markets in which they are located. In addition, we have seen our online sales increase in markets where we have studios compared to markets where we do not have studios.

In recent years, we have continued to increase sales as our studio base grows. Studios have increased in number from one at the end of 2000 to 68 studios and one outlet operating in 25 states, the District of Columbia and Canada as of June 28, 2008. During the first quarter 2008, we opened two new studios. We plan to open two Tools for Living stores in the third quarter 2008.

All of our sales points utilize a single common inventory held at our Hebron, Kentucky fulfillment center. Because we don't offer a "cash and carry" option in our studios, we are able to more fully utilize selling space and avoid the operational issues that often arise with stock balancing and store replenishment. We currently source our products primarily in the U.S. and Europe. In the twenty-six weeks ended June 28, 2008, we purchased approximately 35% of our product inventories from manufacturers in foreign countries, with 25% of our product inventory purchases being paid for in Euros. To mitigate our foreign currency exchange risk, we purchased foreign currency contracts to pay for merchandise purchases. As fiscal year 2008 progresses, we expect to have an increasing amount of products being sourced from factories outside of Europe. We plan to increase our efforts to develop products internally and include more exclusive items in our mix, and in doing so, source products from other parts of the world including Latin America and Asia where product costs are generally lower. Our product development team has worked diligently to find qualified factories in North America, Asia and elsewhere that can provide us with the quality our clients expect but free us from the impact of fluctuations in the price of the Euro. By the end of 2009, we believe we can achieve product margin improvements from these efforts. We believe that within five years we may have less than 20% of our product coming from European factories.

Basis of Presentation

We operate on a 52- or 53-week fiscal year, which ends on the Saturday closest to December 31. Each fiscal year consists of four 13-week quarters, with an extra week added onto the fourth quarter every four to six years. Our 2007 fiscal year ended on December 29, 2007 and the 2008 fiscal year will end on January 3, 2009. Fiscal year 2007 consisted of 52 weeks and fiscal year 2008 consists of 53 weeks.

Results of Operations

Comparison of the thirteen weeks ended June 28, 2008 (Second Quarter 2008) to the thirteen weeks ended June 30, 2007 (Second Quarter 2007)

Net Sales. Net sales consist of studio sales, online sales, phone sales, other sales and shipping and handling fees, net of actual and estimated returns by customers. Studio sales consist of sales of merchandise to customers from orders placed at our studios, online sales consist of sales of merchandise from orders placed through our website, phone sales consist of sales of merchandise through the toll-free numbers, and other sales consist of warehouse sales and outlet sales. Warehouse sales consist of periodic clearance sales at our fulfillment center of product samples and products that customers have returned. Outlet sales consist of sales at our outlet of product samples, returned products from our customers and, to a lesser degree, full price products. Shipping and handling fees consist of amounts we charge customers for the delivery of merchandise.

                                                                Thirteen weeks ended
                                        June 28,    % of Net     June 30,    % of Net                    %
(amounts in thousands)                    2008       Sales         2007       Sales        Change      Change
Studio sales                            $  32,617       69.0 %   $  31,917       65.0 %   $    700        2.2  %
Online sales                                6,276       13.3 %       7,584       15.5 %     (1,308 )    (17.2 )%
Phone sales                                 4,128        8.7 %       5,029       10.2 %       (901 )    (17.9 )%
Other sales                                 1,782        3.8 %       1,903        3.9 %       (121 )     (6.4 )%
Shipping and handling fees                  2,457        5.2 %       2,635        5.4 %       (178 )     (6.8 )%

Net sales                               $  47,260      100.0 %   $  49,068      100.0 %   $ (1,808 )     (3.7 )%

Net sales decreased $1,808,000, or 3.7%, to $47,260,000 in the second quarter 2008 from $49,068,000 in the second quarter 2007. The decrease in the combined net sales of our three sales points (studio, online and phone) is, related in part, to a decrease in the number of units of merchandise shipped, partially offset by a higher average per unit retail sales price. Studio sales increased $700,000, or 2.2%, in the second quarter 2008 compared to the second quarter 2007. This increase is attributable to the incremental sales of approximately $1,713,000 generated from two new studios opened in fiscal year 2007 which did not operate during the entire second quarter 2007 and two new studios opened in the first quarter 2008. We had 68 studios and one outlet open at the end of the second quarter 2008 compared to 65 studios and one outlet open at the end of the second quarter 2007. Online sales decreased $1,308,000, or 17.2%, and phone sales decreased $901,000, or 17.9%, in the second quarter 2008 compared to the second quarter 2007.

Other sales decreased $121,000, or 6.4%, in the second quarter 2008 compared to the second quarter 2007. This decrease is primarily related to a decrease in warehouse sales of approximately $287,000, partially offset by an increase in our outlet sales of approximately $148,000. Shipping and handling fees for delivery of merchandise decreased $178,000, or 6.8%, in the second quarter 2008 compared to the second quarter 2007, primarily attributable to the decrease in product sales, a reduction in rates we charged for shipping to our customers and more free shipping days in the second quarter 2008.

Cost of Sales. Cost of sales decreased by $2,025,000, or 7.4%, to $25,325,000 in the second quarter 2008 from $27,350,000 in the second quarter 2007. The decrease in cost of sales is attributable to the decrease in net sales and product-related margin improvements. Cost of sales as a percentage of net sales decreased 2.1 percentage points to 53.6% in the second quarter 2008 from 55.7% in the second quarter 2007, primarily attributable to product-related margin improvements. Shipping margins were negative in the second quarter 2008 and second quarter 2007 partially attributable to free shipping events in both periods. In addition, in the second quarter 2008 we reduced our rates we charged for shipping to our customers and incurred rate increases we pay for shipping as a result of fuel surcharges. These factors negatively impacted our shipping margins in the second quarter of 2008.

Selling, General and Administrative Expenses ("SG&A"). Selling, general and administrative expenses consist of studio costs, including salaries and studio occupancy costs, costs associated with publishing our catalogs and maintaining our website, and corporate and fulfillment center costs, including salaries and occupancy costs, among others. Our gross margins may not be comparable to those of other companies because some other companies include all of the costs related to their distribution network in cost of sales, while other companies, including us, may exclude a portion of those costs from gross margin, including them instead in other line items, such as selling, general and administrative expenses.

                                                                  Thirteen weeks ended
                                          June 28,    % of Net     June 30,    % of Net                    %
(amounts in thousands)                      2008       Sales         2007       Sales        Change      Change
Salaries and benefits                     $   8,869       18.8 %   $   9,154       18.7 %   $   (285 )     (3.1 )%
Occupancy and related expense                 6,616       14.0 %       5,882       12.0 %        734       12.5  %
Catalog, advertising and promotion            3,408        7.2 %       2,655        5.4 %        753       28.4  %
Other expense                                 3,466        7.3 %       3,154        6.4 %        312        9.9  %
Professional, accounting, legal and SOX         347        0.7 %       1,393        2.8 %     (1,046 )    (75.1 )%

Total SG&A                                $  22,706       48.0 %   $  22,238       45.3 %   $    468        2.1  %

SG&A expenses increased by $468,000, or 2.1%, to $22,706,000 in the second quarter 2008 from $22,238,000 in the second quarter 2007. As a percentage of net sales, SG&A expenses increased to 48.0% in the second quarter 2008 from 45.3% in the second quarter 2007, primarily attributable to the decrease in net sales and increased expenses described below. The increases in SG&A are primarily due to the following:

• Salaries and benefits expense decreased $285,000, or 3.1%, to $8,869,000 in the second quarter 2008 from $9,154,000 in the second quarter 2007. This decrease is primarily related to a $202,000 decrease in stock-based compensation expense, a $107,000 decrease in commission and bonus expenses, related in part, to the decrease in net sales, and a $67,000 decrease in recruiting, relocation and severance expenses. This decrease was partially offset by a $136,000 increase in salary and contract labor expenses. Incremental salaries and benefits expense related to two new studios opened in fiscal year 2007 which did not operate during the entire second quarter 2007 and two new studios opened in the first quarter 2008 was approximately $199,000. We may increase or decrease headcount depending on operating requirements and cost considerations that would affect salaries and benefits expense.

• Catalog, advertising and promotion expense increased approximately $753,000, or 28.4%, to $3,408,000 in the second quarter 2008 from $2,655,000 in the second quarter 2007. This increase is primarily due to a $511,000 increase in catalog expense and a $221,000 increase in media advertising expense. Direct response catalog costs are capitalized as prepaid catalog costs and are amortized over their expected period of future benefit of approximately four months. The increase in catalog amortization expense is attributable to increased paper, printing and distribution costs for our 2008 catalog as compared to our 2007 catalogs. We expect higher catalog expense throughout 2008 compared to 2007.

• Other expense increased $312,000, or 9.9%, to $3,466,000 in the second quarter 2008 compared to $3,154,000 in the second quarter 2007. The increase is partially due to a $72,000 increase in travel-related expense, and a $51,000 increase in telecommunication expense.

• Professional, accounting, legal and SOX expense decreased $1,046,000, or 75.1%, to $347,000 in the second quarter 2008 compared to $1,393,000 in the second quarter 2007. The decrease is primarily due to a $1,077,000 decrease in accounting and consulting fees directly related to SEC reporting and SOX compliance, partially offset by a $46,000 increase in legal expense.

Interest Income. Interest income decreased $45,000 to $40,000 in the second quarter 2008 compared to $85,000 in the second quarter 2007, primarily due to lower interest rates and a lower amount of invested capital in the second quarter 2008 compared to the second quarter 2007.

Interest Expense. Interest expense decreased $87,000 to $70,000 in the second quarter 2008 compared to $157,000 in the second quarter 2007, primarily due to a lower amount of borrowings under our loan agreement and lower interest rates in the second quarter 2008 compared to the second quarter 2007.

Other Income (Expense), Net. Other income of $101,000 in the second quarter 2008 primarily consists of foreign currency exchange gains related to currency fluctuations. We have certain liabilities from merchandise purchases denominated principally in Euros that result in gains or losses to other income or expense when the value of the dollar changes. Such gains or losses are not offset against gains from designated hedge contracts in which corresponding gains or losses are recognized in other comprehensive income.

Income Taxes. We recorded a tax benefit of approximately $541,000 in the second quarter 2008. No income tax benefit was recognized in the second quarter 2007 because it was uncertain whether the tax benefit of the year-to-date pre-tax loss would be realized during fiscal year 2007.

Comparison of the twenty-six weeks ended June 28, 2008 to the twenty-six weeks ended June 30, 2007

Net Sales.



                                                               Twenty-six weeks ended
                                        June 28,    % of Net     June 30,    % of Net                    %
(amounts in thousands)                    2008       Sales         2007       Sales        Change      Change
Studio sales                            $  63,931       67.9 %   $  60,405       65.0 %   $  3,526        5.8  %
Online sales                               12,603       13.4 %      14,376       15.5 %     (1,773 )    (12.3 )%
Phone sales                                 8,427        8.9 %       9,226        9.9 %       (799 )     (8.7 )%
Other sales                                 3,201        3.4 %       3,111        3.4 %         90        2.9  %
Shipping and handling fees                  6,012        6.4 %       5,798        6.2 %        214        3.7  %

Net sales                               $  94,174      100.0 %   $  92,916      100.0 %   $  1,258        1.4  %

Net sales increased $1,258,000, or 1.4%, to $94,174,000 in the twenty-six weeks ended June 28, 2008 from $92,916,000 in the twenty-six weeks ended June 30, 2007. The increase in the combined net sales of our three sales points (studio, online and phone) is related, in part, to a higher average per unit retail sales price, partially offset by a decrease in the number of units of merchandise shipped. Studio sales increased $3,526,000, or 5.8%, in the twenty-six weeks ended June 28, 2008 compared to the twenty-six weeks ended June 30, 2007. This increase is attributable to the incremental sales of approximately $2,448,000 generated from two new studios opened in fiscal year 2007 which did not operate during the entire first half of 2007 and two new studios opened in the first quarter 2008. Online sales decreased $1,773,000, or 12.3%, and phone sales decreased $799,000, or 8.7%, in twenty-six weeks ended June 28, 2008 compared to the twenty-six weeks ended June 30, 2007.

Other sales increased $90,000 or 2.9%, in the twenty-six weeks ended June 28, 2008 compared to the twenty-six weeks ended June 30, 2007. This increase is primarily related to an increase of approximately $537,000 in sales generated from our outlet, partially offset by a decrease in warehouse sales of approximately $476,000. Shipping and handling fees for delivery of merchandise increased $214,000, or 3.7%, in the twenty-six weeks ended June 28, 2008 compared to the twenty-six weeks ended June 30, 2007, partially attributable to the increased product sales.

Cost of Sales. Cost of sales decreased by $2,790,000, or 5.3%, to $50,063,000 in the twenty-six weeks ended June 28, 2008 from $52,853,000 in the twenty-six weeks ended June 30, 2007. Cost of sales as a percentage of net sales decreased 3.7 percentage points to 53.2% in the twenty-six weeks ended June 28, 2008 from 56.9% in the twenty-six weeks ended June 30, 2007. Of the 3.7 percentage points decrease in cost of sales as a percentage of net sales, 3.4 percentage points were attributable to product-related margin improvements and 0.3 percentage points were attributable to shipping margin improvements. Shipping margins were negative in the twenty-six weeks ended June 28, 2008 and June 30, 2007, partially attributable to free shipping events in both periods. In addition, in the second quarter 2008 we reduced our rates we charged for shipping to our customers and in the twenty-six weeks ended June 28, 2008, incurred rate increases we pay for shipping as a result of fuel surcharges. These factors negatively impacted our shipping margins in the twenty-six weeks ended June 28, 2008.

Selling, General and Administrative Expenses ("SG&A").

                                                                 Twenty-six weeks ended
                                          June 28,    % of Net     June 30,    % of Net                    %
(amounts in thousands)                      2008       Sales         2007       Sales        Change      Change
Salaries and benefits                     $  18,229       19.4 %   $  18,387       19.8 %   $   (158 )     (0.9 )%
Occupancy and related expense                12,979       13.8 %      12,368       13.3 %        611        4.9  %
Catalog, advertising and promotion            6,691        7.1 %       4,511        4.9 %      2,180       48.3  %
Other expense                                 6,785        7.2 %       5,917        6.4 %        868       14.7  %
Professional, accounting, legal and SOX       1,381        1.5 %       3,299        3.6 %     (1,918 )    (58.1 )%

Total SG&A                                $  46,065       48.9 %   $  44,482       47.9 %   $  1,583        3.6  %

SG&A expenses increased by $1,583,000, or 3.6%, to $46,065,000 in the twenty-six weeks ended June 28, 2008 from $44,482,000 in the twenty-six weeks ended June 30, 2007. As a percentage of net sales, SG&A expenses increased to 48.9% in the twenty-six weeks ended June 28, 2008 from 47.9% in the twenty-six weeks ended June 30, 2007, attributable to the increased expenses described below. The increases in SG&A are primarily due to the following:

• Salaries and benefits expense decreased $158,000, or 0.9%, to $18,229,000 in the twenty-six weeks ended June 28, 2008 from $18,387,000 in the twenty-six weeks ended June 30, 2007. This decrease is primarily related to a $337,000 decrease in stock-based compensation expense and a $111,000 decrease in recruiting, relocation and severance expenses. This decrease was partially offset by a $279,000 increase in salary and contract labor expenses and a $47,000 increase in commission and bonus expenses, related in part, to the increase in net sales. Incremental salaries and benefits expense related to two new studios opened in fiscal year 2007 which did not operate during the entire first half of 2007 and two new studios opened in the first quarter 2008 was approximately $353,000. Salaries and benefits expense is expected to increase due to benefit cost increases, increased commissions related to planned sales increases, if any, and headcount increases from new studios not operating in the prior comparable period.

• Occupancy and related expense increased $611,000, or 4.9%, to $12,979,000 in the twenty-six weeks ended June 28, 2008 compared to $12,368,000 in the twenty-six weeks ended June 30, 2007. This increase is primarily due to a $1,201,000 increase in rent and related operating expenses of which $434,000 is associated with two new studios opened in fiscal year 2007 which did not operate during the entire first half of 2007 and two new studios opened in the first quarter 2008, and the incremental expense of $400,000 to relocate a studio and convert the existing location into a Tools for Living store. This increase was partially offset by a $587,000 decrease in depreciation expense, of which $450,000 was related to our information technology system, which was fully depreciated in the first quarter 2007.

• Other expense increased $868,000, or 14.7%, to $6,785,000 in the twenty-six weeks ended June 28, 2008 compared to $5,917,000 in the twenty-six weeks ended June 30, 2007. The increase is primarily due to a $174,000 increase in uncollectible credit card billings, a $167,000 increase in travel-related expense, a $162,000 increase in the cost of distributing sample merchandise to our studios, a $149,000 increase in sales-related merchant fees and a $130,000 increase in telecommunication expense.

• Professional, accounting, legal and SOX expense decreased $1,918,000, or 58.1%, to $1,381,000 in the twenty-six weeks ended June 28, 2008 compared . . .