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 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 "DWR:Tools for Living." We believe this new product line will increase our presence in providing modern design solutions for our customers. We feature in this category approximately 700 products, ranging in price from under $10 to over $2,000. The products all share good design and functionality.

Each DWR: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 DWR: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.

Studios have increased in number from one at the end of 2000 to 68 studios, one DWR:Tools for Living store and one outlet operating in 25 states, the District of Columbia and Canada as of September 27, 2008. During the first quarter 2008, we opened two new studios. On September 19, 2008 and October 2, 2008, we opened our first DWR:Tools for Living stores. On October 10, 2008, we closed one studio.

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 thirty-nine weeks ended September 27, 2008, we purchased approximately 37% of our product inventories from manufacturers in foreign countries, with 26% 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. 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.

In the U.S., recent market and economic conditions have been unprecedented and challenging with tighter credit conditions and slower growth through the third quarter 2008. For the thirty-nine weeks ended September 27, 2008, continued concerns about the systemic impact of inflation, energy costs, geopolitical issues, the availability and cost of credit, the U.S. mortgage market and a declining real estate market in the U.S. have contributed to increased market volatility and diminished expectations for the U.S. economy. In the third quarter 2008, added concerns fueled by the federal government conservatorship of the Federal Home Loan Mortgage Corporation and the Federal National Mortgage Association, the declared bankruptcy of large U.S. financial institutions, the U.S. government loan provided to a major insurance company and other federal government interventions in the U.S. credit markets led to increased market uncertainty and instability in both U.S. and international capital and credit markets. These conditions, combined with volatile oil prices, declining business and consumer confidence and increased unemployment have in recent weeks, subsequent to the end of the quarter, contributed to volatility of unprecedented levels. The purchase of our products by customers is discretionary, and therefore highly dependent upon the level of consumer spending, particularly among affluent customers. Accordingly, sales of our products have been and may continue to be adversely affected by the recent market and economic conditions. As a result, we may be required to take significant additional markdowns in response to the lower levels of demand for our products.

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 September 27, 2008 (Third Quarter 2008) to the thirteen weeks ended September 29, 2007 (Third 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 and floor sales at our DWR:Tools for Living store. 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. Other sales consist of warehouse sales and outlet sales. Warehouse sales consist of periodic clearance sales at our fulfillment center and other locations 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
(amounts in thousands,         September 27,     % of Net       September 29,     % of Net                      %
except percentages)                2008           Sales             2007           Sales         Change       Change
Studio sales                  $        28,812        68.1 %    $        32,094        65.5 %    $ (3,282 )     (10.2 )%
Online sales                            5,205        12.3 %              7,429        15.2 %      (2,224 )     (29.9 )%
Phone sales                             3,462         8.2 %              4,418         9.0 %        (956 )     (21.6 )%
Other sales                             2,399         5.6 %              1,828         3.7 %         571        31.2 %
Shipping and handling fees              2,438         5.8 %              3,257         6.6 %        (819 )     (25.1 )%

Net sales                     $        42,316       100.0 %    $        49,026       100.0 %    $ (6,710 )     (13.7 )%

Net sales decreased $6,710,000, or 13.7%, to $42,316,000 in the third quarter 2008 from $49,026,000 in the third 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. Studio sales decreased $3,282,000, or 10.2%, in the third quarter 2008 compared to the third quarter 2007. Incremental sales of approximately $1,614,000 were generated from one new studio opened in the fourth quarter 2007, two new studios opened in the first quarter 2008 and one new DWR:Tools for Living store opened in the third quarter 2008. We had 68 studios, one DWR:Tools for Living store and one outlet open at the end of the third quarter 2008 compared to 65 studios and one outlet open at the end of the third quarter 2007. Online sales decreased $2,224,000, or 29.9%, and phone sales decreased $956,000, or 21.6%, in the third quarter 2008 compared to the third quarter 2007.

Other sales increased $571,000, or 31.2%, in the third quarter 2008 compared to the third quarter 2007. This increase is primarily related to an increase in warehouse sales of approximately $535,000, related to a large warehouse sales event in the third quarter 2008 without a comparable event in the third quarter 2007. Shipping and handling fees for delivery of merchandise decreased $819,000, or 25.1%, in the third quarter 2008 compared to the third quarter 2007, primarily attributable to the decrease in product sales and an increase in the amount of free shipping.

The purchase of our products by customers is discretionary, and therefore highly dependent upon the level of consumer spending, particularly among affluent customers. Accordingly, sales of our products have been and may continue to be adversely affected by the recent market and economic conditions.

Cost of Sales. Cost of sales decreased by $2,232,000, or 8.2%, to $24,989,000 in the third quarter 2008 from $27,221,000 in the third quarter 2007. The decrease in cost of sales is attributable to the decrease in net sales, partially offset, by a decrease in product-related margins. Cost of sales as a percentage of net sales increased 3.6 percentage points to 59.1% in the third quarter 2008 from 55.5% in the third quarter 2007, primarily attributable to the warehouse sale event margins, which are lower than our margins for sales through our integrated sales points. We held a large warehouse sale in the third quarter 2008, without a comparable event in the third quarter 2007, for damaged and overstock inventory that included discounted prices and disposal of certain unsold inventory. Shipping margins were negative in the third quarter 2008, in part, due to rate increases we pay for shipping as a result of fuel surcharges.

Our performance depends on our ability to purchase our merchandise from foreign and domestic designers, manufacturers and distributors. Merchandise vendors could cease their operations, discontinue extending credit terms to us or stop selling to us at any time. Any inability to acquire suitable merchandise or the loss of one or more key vendors could have a negative effect on our business and operating results.

Selling, General and Administrative Expenses ("SG&A"). Selling, general and administrative expenses consist of studio, marketing, corporate and fulfillment center costs. Studio costs include salaries and studio occupancy costs. Marketing costs include consumer and online advertising expenses, and costs associated with publishing our catalogs. Corporate costs include salaries, occupancy costs, computer systems and web-site related costs, and professional fees, among others. Fulfillment center costs include salaries, occupancy costs and charges for shipping merchandise from our fulfillment center to studios, DWR:Tools for Living stores, our outlet and warehouse sales events. 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
(amounts in thousands         September 27,      % of Net        September 29,      % of Net                       %
except percentages)               2008            Sales              2007            Sales         Change        Change
Salaries and benefits        $         8,197         19.4 %     $         9,056         18.5 %     $  (859 )       (9.5 )%
Occupancy and related
expense                                6,877         16.3 %               6,614         13.5 %         263          4.0 %
Catalog, advertising and
promotion                              2,734          6.5 %               2,316          4.7 %         418         18.0 %
Other expense                          3,681          8.7 %               2,824          5.8 %         857         30.3 %
Professional,
accounting, legal and
SOX                                      354          0.8 %                 491          1.0 %        (137 )      (27.9 )%

Total SG&A                   $        21,843         51.6 %     $        21,301         43.4 %     $   542          2.5 %

SG&A increased by $542,000, or 2.5%, to $21,843,000 in the third quarter 2008 from $21,301,000 in the third quarter 2007. As a percentage of net sales, SG&A increased to 51.6% in the third quarter 2008 from 43.4% in the third quarter 2007, primarily attributable to the decrease in net sales and increased expenses described below.

• Salaries and benefits expense decreased $859,000, or 9.5%, to $8,197,000 in the third quarter 2008 from $9,056,000 in the third quarter 2007. This decrease is primarily related to a $338,000 decrease in commission and bonus expenses, related in part, to the decrease in net sales, a $324,000 decrease in stock-based compensation expense and a $104,000 decrease in salary and contract labor expenses. Incremental salaries and benefits expense related to one new studio opened in the fourth quarter 2007, two new studios opened in the first quarter 2008 and two new DWR:Tools for Living stores opened on September 19, 2008 and October 2, 2008, including pre-opening expenses, was approximately $285,000. We may decrease headcount depending on operating requirements and cost considerations, which would affect salaries and benefits expense.

• Occupancy and related expense increased $263,000, or 4.0%, to $6,877,000 in the third quarter 2008 compared to $6,614,000 in the third quarter 2007. This increase is primarily due to a $582,000 increase in rent and related operating expenses, of which $501,000 is associated with one new studio opened in the fourth quarter 2007, two new studios opened in the first quarter 2008, one relocated studio with increased occupancy expenses and two new DWR:Tools for Living stores opened on September 19, 2008 and October 2, 2008, including pre-opening expenses. This increase was partially offset by a $319,000 decrease in depreciation expense, primarily attributable to a change in the estimated useful life of assets related to the early termination of a studio lease in the third quarter 2007. Occupancy and related expense is expected to increase in the fourth quarter 2008 from the prior comparable period as the result of recently opened studios and DWR:Tools for Living stores.

• Other expense increased $857,000, or 30.3%, to $3,681,000 in the third quarter 2008 compared to $2,824,000 in the third quarter 2007. The increase is partially due to a $374,000 increase in the cost of distributing merchandise to our warehouse sales event, studios, and new DWR:Tools for Living stores, a $141,000 increase in travel-related expense and a $119,000 increase in software and website-related expenses.

• Professional, accounting, legal and SOX expense decreased $137,000, or 27.9%, to $354,000 in the third quarter 2008 compared to $491,000 in the third quarter 2007. The decrease is primarily due to a $147,000 decrease in accounting and consulting fees directly related to SEC reporting and SOX compliance.

Interest Income. Interest income decreased $50,000 to $40,000 in the third quarter 2008 compared to $90,000 in the third quarter 2007, primarily due to lower interest rates and less invested capital.

Interest Expense. Interest expense decreased $202,000 to $84,000 in the third quarter 2008 compared to $286,000 in the third quarter 2007, primarily due to decreased borrowings under our loan agreement and lower interest rates.

Other Income, Net. Other income decreased $1,862,000 to $159,000 in the third quarter 2008 compared to $2,021,000 in the third quarter 2007. Other income in the third quarter 2008 primarily consists of foreign currency exchange gains related to currency fluctuations. Other income in the third quarter 2007 consists of a net gain of approximately $2,200,000 after related expenses as a result of the early termination of a studio lease per an agreement between the Company and the landlord, partially offset, by foreign currency exchange losses of $187,000. 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 designated hedge contracts in which corresponding gains or losses are recognized in other comprehensive income (loss).

Income Taxes. No income tax benefit was recognized in the thirty-nine weeks ended September 27, 2008 because recent general economic events have indicated that more likely than not the tax benefit of the year-to-date pre-tax loss would not be realized during fiscal year 2008, and therefore, in the thirteen weeks ended September 27, 2008, the $1,237,000 tax benefit recorded in the first half of 2008 was reversed.

In accordance with FASB Interpretation Number 48, "Accounting for Uncertainty in Income Taxes," we recorded a discrete item of $104,000 in the third quarter 2007 due to a change in judgment that resulted in a change in measurement of a tax position taken in a prior annual period. No income tax benefit was recognized in the third 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.

Net Sales.



                                                             Thirty-nine weeks ended
(amounts in thousands,         September 27,     % of Net       September 29,     % of Net                      %
except percentages)                2008           Sales             2007           Sales         Change       Change
Studio sales                  $        92,743        67.9 %    $        92,498        65.2 %    $    245         0.3 %
Online sales                           17,808        13.0 %             21,805        15.4 %      (3,997 )     (18.3 )%
Phone sales                            11,888         8.7 %             13,644         9.6 %      (1,756 )     (12.9 )%
Other sales                             5,601         4.2 %              4,940         3.4 %         661        13.4 %
Shipping and handling fees              8,450         6.2 %              9,055         6.4 %        (605 )      (6.7 )%

Net sales                     $       136,490       100.0 %    $       141,942       100.0 %    $ (5,452 )      (3.8 )%

Net sales decreased $5,452,000, or 3.8%, to $136,490,000 in the thirty-nine weeks ended September 27, 2008 from $141,942,000 in the thirty-nine weeks ended September 29, 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 $245,000, or 0.3%, in the thirty-nine weeks ended September 27, 2008 compared to the thirty-nine weeks ended September 29, 2007. This increase was primarily attributable to the increase in sales in the first quarter 2008 compared to the first quarter 2007, partially offset, by decreases in sales in the second and third quarters of 2008 from the prior comparable period. Incremental sales of approximately $3,970,000 were generated from two new studios opened in fiscal year 2007 which did not operate during the entire first thirty-nine weeks of 2007, two new studios opened in the first quarter 2008 and one new DWR:Tools for Living store opened in the third quarter 2008. Online sales decreased $3,997,000, or 18.3%, and phone sales decreased $1,756,000, or 12.9%, in thirty-nine weeks ended September 27, 2008 compared to the thirty-nine weeks ended September 29, 2007.

Other sales increased $661,000 or 13.4%, in the thirty-nine weeks ended September 27, 2008 compared to the thirty-nine weeks ended September 29, 2007. This increase is primarily related to an increase in sales of approximately $542,000 from our outlet and an increase in sales of approximately $59,000 from warehouse sales events. Shipping and handling fees for delivery of merchandise decreased $605,000, or 6.7%, in the thirty-nine weeks ended September 27, 2008 compared to the thirty-nine weeks ended September 29, 2007. This decrease is partially attributable to the decreased product sales.

The purchase of our products by customers is discretionary, and therefore highly dependent upon the level of consumer spending, particularly among affluent customers. Accordingly, sales of our products have been and may continue to be adversely affected by the recent market and economic conditions.

Cost of Sales. Cost of sales decreased by $5,022,000, or 6.3%, to $75,052,000 in the thirty-nine weeks ended September 27, 2008 from $80,074,000 in the thirty-nine weeks ended September 29, 2007. Cost of sales as a percentage of net sales decreased 1.4 percentage points to 55.0% in the thirty-nine weeks ended September 27, 2008 from 56.4% in the thirty-nine weeks ended September 29, 2007, primarily attributable to product-related margin improvements. Shipping margins were negative in the thirty-nine weeks ended September 27, 2008, in part, due to rate increases we pay for shipping as a result of fuel surcharges.

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

                                                              Thirty-nine weeks ended
(amounts in thousands,          September 27,     % of Net       September 29,     % of Net                      %
except percentages)                 2008           Sales             2007           Sales         Change       Change
Salaries and benefits          $        26,426        19.4 %    $        27,443        19.3 %    $ (1,017 )      (3.7 )%
Occupancy and related
expense                                 19,857        14.5 %             18,982        13.4 %         875         4.6 %
Catalog, advertising and
promotion                                9,424         6.9 %              6,827         4.8 %       2,597        38.0 %
Other expense                           10,466         7.7 %              8,740         6.2 %       1,726        19.7 %
Professional, accounting,
legal and SOX                            1,735         1.3 %              3,791         2.7 %      (2,056 )     (54.2 )%
. . .