As filed with the Securities and Exchange Commission on February ~~17,~~25, 2005

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

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If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. ¨

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ¨

If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. ¨

The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the registration statement shall become effective on such date as the SEC, acting pursuant to Section 8(a), may determine.

The information contained in this prospectus is not complete and may be changed. These securities may not be sold until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.

Design Within Reach, Inc. is offering 100,000 shares and the selling stockholders identified in this prospectus are offering 1,550,000 shares of our common stock. We will not receive any of the proceeds from the sale of shares of common stock by the selling stockholders.

Our common stock is listed on the Nasdaq National Market under the symbol “DWRI.” On February ~~16,~~24, 2005, the last reported sale price of our common stock was ~~$15.76~~$14.68 per share.

Investing in the common stock involves risks. See “Risk Factors” beginning on page 6.

The selling stockholders have granted an over-allotment option to the underwriters. Under this option, the underwriters may elect to purchase a maximum of 247,500 additional shares from the selling stockholders within 30 days following the date of this prospectus to cover over-allotments.

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

You should rely only on the information contained in this prospectus. We and the selling stockholders have not authorized anyone to provide you with information different from that contained in this prospectus. We and the selling stockholders are offering to sell shares of common stock and seeking offers to buy shares of common stock only in jurisdictions where offers and sales are permitted. The information contained in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or of any sale of the common stock.

“Design Within Reach” is a registered trademark of Design Within Reach, Inc. All rights are reserved. All other trademarks, service marks or trade names referred to in this prospectus are the property of their respective owners.

This summary highlights information contained elsewhere in this prospectus. Because this is only a summary, it does not contain all the information that you should consider before buying shares in this offering. You should read the entire prospectus carefully, especially “Risk Factors” and our financial statements and related notes included elsewhere in this prospectus, before deciding to invest in shares of our common stock.

We believe that we have created a differentiated business model based on multiple, integrated sales channels and a single common inventory. Our business model improves customer convenience, reinforces brand awareness, enhances customer knowledge of our products, and produces operational benefits that drive market penetration and higher returns on capital. Seamless channel integration, meaning that all of our products are available, and order processing, customer service assistance and product returns can be handled, through any of our four sales channels, is crucial to our success because a substantial portion of both our residential and commercial customers purchase our products after having had contact with two, three or sometimes all four of our sales channels. For example, customers may research products online and make purchases in our studios or through our catalog. We ship substantially all customer orders, regardless of the sales channel in which they are placed, from our centralized Hebron, Kentucky fulfillment center. Our studios carry inventory solely for customers to view and evaluate, but not for carry-out upon purchase. Our policy of having products “in stock and ready to ship” is a departure from the approach taken by many other modern design furnishings retailers, which we believe typically requires customers to wait weeks or months to receive their products. We ship substantially all in stock product by the next business day after an order has been processed. Our common inventory and shared information systems provide a level of scalability to facilitate future growth. This integration further improves customer service by speeding delivery times and providing real-time inventory information across all sales channels.

The modern design furnishings market is a sub-sector of the residential and commercial furnishings market. Modern design is a twentieth century movement dating back to the 1920s, the purpose of which is to utilize current technologies and production methods to create more useful products for a broad audience. We believe that the philosophy of modern design may be summarized as “form follows function.” Characteristics of modern design furnishings are simplicity, originality, intelligent use of materials, quality, longevity and the avoidance of superfluous ornamentation or period styling. Importantly, we operate in the upscale segment of the modern furnishings industry, which typically has large average order values that, in turn, help improve the economics of this segment. For the fiscal year ended January 1, 2005, we had an average order value of $1,014. We believe that the upscale furnishings segment will continue to benefit from several long-term trends, including an increasing interest in design among both individuals and businesses and middle-market consumers’ willingness to trade up for premium products. Consumers’ expanding focus on design and the increasing popularity of home-related design products have been featured in several television programs, such as Bravo Network’sQueer Eye for the Straight Guy, which has featured some of our products, and The Learning Channel’sTrading Spaces.

We believe our business strengths position us to be a leading provider of modern design furnishings in the United States. These strengths create the foundation of our distinct business model and we believe they have enabled us to grow profitably, through focusing on gross margins, inventory turns and returns on capital, and to better serve the fragmented modern design furnishings marketplace. We believe our business strengths include: strong brand authority; multiple, integrated sales channels; distinctive merchandising; strategic designer, manufacturer and distributor relationships; superior customer service; and an experienced management team.

Our business is subject to numerous risks, which are highlighted in the section entitled “Risk Factors” immediately following this prospectus summary. In particular, our limited operating history makes it difficult for us to accurately forecast net sales and earnings. Furthermore, we primarily purchase our inventory in advance of sale to the customer and, as such, certain products may not achieve continued consumer acceptance requiring us to take significant inventory markdowns. In addition, we do not maintain vendor contracts and therefore may not have access to products we currently offer for sale in the future.

On July 6, 2004 we completed the initial public offering of 4,715,000 shares of our common stock, 3,000,000 of which were sold by us and 1,715,000 of which were sold by some of our stockholders. We received proceeds from our sale of the 3,000,000 newly issued shares of common stock of approximately $31.8 million after deducting underwriting fees, discounts and commissions. The selling stockholders in our initial public offering received proceeds of approximately $19.1 million from the sale of shares of our common stock in that offering after deducting underwriting fees, discounts and commissions.

We were incorporated in California in November 1998, and we reincorporated in Delaware in March 2004. In April 1999, we received funding from a group of investors led by JH Partners, LLC, a San Francisco-based private equity investment firm formerly known as Jesse.Hansen&Co. Our principal executive offices are located at 225 Bush Street, 20^th Floor, San Francisco, California 94104, and our telephone number is (415) 676-6500. Our website address iswww.dwr.com. Information contained in, or accessible through, our website, and information contained in our catalogs, does not constitute part of this prospectus.

The number of shares of common stock to be outstanding after this offering is based upon ~~12,890,778~~12,942,592 shares outstanding as of February ~~16,~~24, 2005 plus ~~428,420~~476,587 shares issuable upon exercise of certain stock options. These options will be exercised by some of the selling stockholders and the shares purchased through these exercises will be sold in this offering. The number of shares that will be outstanding after the offering excludes the following:

Unless otherwise stated, information in this prospectus assumes no exercise of the underwriters’ over-allotment option.

The following tables provide our statements of earnings data and additional operating data for each of the fiscal years in the three year period ended January 1, 2005 and balance sheet data as of January 1, 2005. The adjusted balance sheet data reflects the balance sheet data at January 1, 2005 adjusted (1) for the sale of 100,000 shares of our common stock by us in this offering at an assumed offering price to the public of ~~$15.76~~$14.68 (which was the last reported sale price of our common stock on February ~~16,~~24, 2005), after deducting ~~$536,680~~$530,740 in underwriting discounts and commissions and estimated offering expenses payable by us and (2) the expected issuance of ~~428,420~~476,587 shares of common stock resulting from the exercise of certain stock options by some of the selling stockholders in connection with this offering. This summary information should be read in conjunction with, and is qualified in its entirety by reference to, “Selected Financial Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our financial statements and related notes included elsewhere in this prospectus.


	As of January 1, 2005				As of January 1, 2005
	Actual		As Adjusted		Actual		As Adjusted
	(in thousands)				(in thousands)
Balance Sheet Data:
Cash and cash equivalents	$	21,141	$	22,336	$	21,141	$	22,263
Working capital		28,882		30,077		28,882		30,004
Total assets		74,620		75,815		74,620		75,742
Total indebtedness		1,305		1,305		1,305		1,305
Total stockholders’ equity		48,002		49,197		48,002		49,125

Any investment in shares of our common stock involves a high degree of risk. You should consider carefully the following information about these risks, together with the other information contained in this prospectus, before you decide to buy our common stock. If any of the following risks actually occurs, our business, financial condition, results of operations and future growth prospects would likely be materially and adversely affected. In these circumstances, the market price of our common stock could decline, and you may lose all or part of the money you paid to buy our common stock.

We were originally incorporated in November 1998 and began selling products in July 1999. As an early stage company with limited operating history, we face risks and difficulties, such as challenges in accurate financial planning and forecasting as a result of limited historical data and the uncertainties resulting from having had a relatively limited time period in which to implement and evaluate our business strategies as compared to older companies with longer operating histories. These difficulties are particularly evident with respect to the evaluation and prediction of the operating results and expenses of our studios, as we opened our first studio in November 2000 and have expanded from one studio at the end of 2001 to 3337 studios as of ~~January 1,~~February 24, 2005. Further, our limited operating history will make it difficult for investors and securities analysts who may choose to follow our common stock, if any, to evaluate our business, strategy and prospects. Our failure to address these risks and difficulties successfully would seriously harm our business.

If we fail to offer merchandise that our customers find attractive, the demand for our products may be limited.

In order for our business to be successful, our product offerings must be distinctive in design, useful to the customer, well made, affordable and generally not widely available from other retailers. We may not be successful in offering products that meet these requirements in the future. If our products become less popular with our customers, if other retailers, especially department stores or discount retailers, offer the same products or products similar to those we sell, or if demand generally for design products such as ours decreases or fails to grow, our sales may decline or we may be required to offer our products at lower prices. If customers buy fewer of our products or if we have to reduce our prices, our net sales will decline and our operating results would be affected adversely.

We believe that our future growth will be substantially dependent on the continued increase in sales growth of existing core products, such as the Aeron^® Chair and the Eames^® Lounge Chair and Ottoman manufactured by Herman Miller, Inc. and other design classics and new products, while at the same time maintaining or increasing our current gross margin rates. We may not be able to increase the growth of existing core and new products or successfully introduce new products or maintain or increase our gross margin rate in future periods. Failure to do so may adversely affect our business.

Moreover, in order to meet our strategic goals, we must successfully identify, obtain supplies of, and offer to our customers new, innovative and high quality design products on a continuous basis. These products must appeal to a wide range of residential and commercial customers whose preferences may change in the future. If we misjudge either the market for our products or our customers’ purchasing habits, we may be faced with significant excess inventories for some products and missed opportunities for products we chose not to stock. In addition, our sales may decline or we may be required to sell our products at lower prices. This would have a negative effect on our business.

We do not have long-term vendor contracts and as a result we may not have continued or exclusive access to products that we sell.

All of the products that we offer are manufactured by third-party suppliers. We do not typically enter into formal exclusive supply agreements for our products and, therefore, have no contractual rights to exclusively market and sell them. Since we do not have arrangements with any vendor or distributor that would guarantee the availability or exclusivity of our products from year to year, we do not have a predictable or guaranteed supply of these products in the future. If we are unable to provide our customers with continued access to popular products, our net sales will decline and our operating results would be harmed.

Our business depends, in part, on factors affecting consumer spending that are not within our control.

Our business depends on consumer demand for our products and, consequently, is sensitive to a number of factors that influence consumer spending, including general economic conditions, disposable consumer income, recession and fears of recession, stock market volatility, war and fears of war, acts of terrorism, inclement weather, consumer debt, interest rates, sales tax rates and rate increases, inflation, consumer confidence in future economic conditions and political conditions, and consumer perceptions of personal well-being and security generally. Adverse changes in factors affecting discretionary consumer spending could reduce consumer demand for our products, thus reducing our net sales and adversely affecting our operating results.

Our business will be harmed if we are unable to implement our growth strategy successfully.

Any failure on our part to implement any or all of our growth strategies successfully would likely have a material adverse effect on our financial condition.

The expansion of our studio operations could result in increased expenses with no guarantee of increased earnings.

We plan to open between 18 to 20 new studios in each of 2005 and 2006. We anticipate the costs associated with opening these new studios will be between approximately $11 million and $12 million in each of 2005 and 2006. However, we may not be able to attain our target number of new studio openings, and any of the new studios that we open may not be profitable, either of which could have an adverse impact on our financial results. Our ability to expand by opening new studios will depend in part on the following factors:

Even though we plan to continue to expand the number of geographic areas in which our studios are located, we expect that our studio operations will remain concentrated in limited geographic areas. Please see “Business—Sales Channels—Studios” for a list of the geographic areas where we currently have studios. This concentration could increase our exposure to fluctuating customer demand, adverse weather conditions, competition, distribution problems and poor economic conditions in these regions. In addition, our catalog sales, online sales or existing studio sales in a specific region may decrease as a result of new studio openings in that region.

In order to continue our expansion of studios, we will need to hire additional management and staff for our corporate offices and employees for each new studio. We must also expand our management information systems and distribution systems to serve these new studios. If we are unable to hire necessary personnel or grow our existing systems, our expansion efforts may not succeed and our operating results may suffer.

Some of our expenses will increase with the opening of new studios, such as headcount and lease occupancy expenses. Moreover, as we increase inventory levels to provide studios with product samples and support the incremental sales generated from additional studios, our inventory expenses will increase. We may not be able to manage this increased inventory without decreasing our earnings. If studio sales are inadequate to support these new costs, our earnings will decrease. In addition, if we were to close any studio, whether because a studio is unprofitable or otherwise, we likely would be unable to recover our investment in leasehold improvements and equipment at that studio and would be liable for remaining lease obligations.

We rely on our catalog operations, which could have significant cost increases and could have unpredictable results.

Our success depends in part on our ability to market, advertise and sell our products effectively through the Design Within Reach catalog. In fiscal year 2004, phone sales totaled $25.5 million, representing 21.1% of our total net sales during such period. We believe that the success of our catalog operations depends on the following factors:

Catalog production and mailings entail substantial paper, postage, merchandise acquisition and human resource costs, including costs associated with catalog development and increased inventories. We incur nearly all of these costs prior to the mailing of each catalog. As a result, we are not able to adjust the costs incurred in connection with a particular mailing to reflect the actual performance of the catalog. Increases in costs of mailing, paper or printing would increase our costs and would adversely impact our earnings as we would be unable to pass such increases directly on to our customers or offset such increases by raising prices. If we were to experience a significant shortfall in anticipated sales from a particular mailing, and thereby not recover the costs associated with that mailing, our future results would be adversely affected. In addition, response rates to our mailings and, as a result, sales generated by each mailing, are affected by factors such as consumer preferences, economic conditions, the timing of catalog mailings, the product mix in a particular catalog, the timely delivery by the postal system of our catalog mailings and changes in our merchandise mix, several of which may be outside our control. Furthermore, we have historically experienced fluctuations in the response rates to our catalog mailings. Customer response to our catalogs is dependent on merchandise assortment, merchandise availability and creative presentation, as well as the size and timing of delivery of the catalogs. If we are unable to achieve adequate response rates, we could experience lower sales, significant markdowns or write-offs of inventory and lower margins, which would adversely affect our future operating results.

We must manage our online business successfully or our business will be adversely affected.

Our success depends in part on our ability to market, advertise and sell our products through our website. In fiscal year 2004, online sales totaled $25.1 million, representing 20.8% of our total net sales. The success of our online business depends, in part, on factors over which we have limited control. In addition to changing consumer preferences and buying trends relating to Internet usage, we are vulnerable to additional risks and uncertainties associated with the Internet. These risks include changes in required technology interfaces, website downtime or slowdowns and other technical failures or human errors, changes in applicable federal and state

regulation, security breaches, and consumer privacy concerns. Our failure to respond successfully to these risks and uncertainties might adversely affect the sales through our online business, as well as damage our reputation and increase our selling, general and administrative expenses.

If we do not manage our inventory levels successfully, our operating results will be adversely affected.

We must maintain sufficient inventory levels to operate our business successfully. However, we also must guard against the risk of accumulating excess inventory as we seek to fulfill our “in stock and ready to ship” philosophy. Our success depends upon our ability to anticipate and respond to changing merchandise trends and customer demands in a timely manner. If we misjudge market trends, we may overstock unpopular products and be forced to take significant inventory markdowns, which would have a negative impact on our operating results. Conversely, shortages of popular items could result in loss of sales and have a material adverse effect on our operating results.

Consumer preferences may change between the time we order a product and the time it is available for sale. We base our product selection on our projections of consumer preferences in a future period, and our projections may not be accurate. As a result, we are vulnerable to consumer demands and trends, to misjudgments in the selection and timing of our merchandise purchases and fluctuations in the U.S. economy. Additionally, much of our inventory is sourced from vendors located outside the United States that often require lengthy advance notice of our requirements in order to be able to produce products in the quantities we request. This usually requires us to order merchandise, and enter into purchase order contracts for the purchase and manufacture of such merchandise, well in advance of the time such products will be offered for sale, which makes us vulnerable to changes in consumer demands and trends. If we do not accurately predict our customers’ preferences and acceptance levels of our products, our inventory levels will not be appropriate and our operating results may be negatively impacted.

We source many of our products from manufacturers and suppliers located in Europe, many of which close for vacation during the month of August each year. Accordingly, during September and in many cases for several weeks thereafter as manufacturing resumes and products are shipped to the United States, we are often unable to receive product shipments from these suppliers. As a result, we are required to make projections regarding customer demand for these products for the third and fourth quarters of each year and order sufficient product quantities for delivery in advance of the August shutdown. If we misjudge demand for any of these items, our inventory levels may be too high or low. If we have a shortage of a particular item affected by the August shutdown, we may not be able to procure additional quantities for some weeks or months, which could result in loss of sales and have a material adverse effect on our operating results.

We depend on domestic and foreign vendors, some of which are our competitors, for timely and effective sourcing of our merchandise.

Our performance depends on our ability to purchase our merchandise in sufficient quantities at competitive prices. We purchase our merchandise from over 200 foreign and domestic designers, manufacturers and distributors. We have no long-term purchase contracts with any of our suppliers and, therefore, have no contractual assurances of continued supply, pricing or access to products, and any vendor could discontinue selling to us at any time. In fiscal year 2004, products supplied by our five largest vendors represented approximately 30.1% of net sales.

Additionally, some of our suppliers, including Herman Miller, Inc., Vitra Inc. and Kartell US Inc., compete directly with us in both residential and commercial markets and may in the future choose not to supply products to us. In fiscal year 2004, products supplied by Herman Miller, Inc., Vitra Inc. and Kartell US Inc. represented approximately 12.5% of our net sales. Additionally, some of our smaller vendors have limited resources, production capacities and operating histories, which means that they may not be able to timely produce sufficient quantities of certain products demanded by our customers. We may not be able to acquire desired merchandise in sufficient quantities on terms acceptable to us in the future. 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 because we would be missing products from our merchandise mix unless and until alternative supply arrangements are made. Moreover, we may not be able to develop relationships with new vendors and products from alternative sources, if any, may be of a lesser quality or more expensive than those we currently purchase.

Intellectual property claims against us could be costly and could impair our business.

Third parties may assert claims against us alleging infringement, misappropriation or other violations of patent, trademark, trade dress, or other proprietary rights held by them, whether or not such claims have merit. Some of the products we offer, including some of our best selling items, are reproductions of designs that some of our competitors believe they have exclusive rights to manufacture and sell, and who may take action to seek to prevent us from selling those reproductions. Alternatively, such persons may seek to require us to enter into distribution relationships with them, thereby requiring us to sell their version of such products, at a significantly higher price than the reproduction that we offer, which may have a significant adverse impact on our sales volume, net sales and gross margin. In addition, when marketing or selling our products we may refer to or use product designations that are or may be trademarks of other people, who may allege that we have no right to use such marks or product designations and bring actions against us to prevent us from using them. If we are forced to defend against third-party infringement claims, whether they are with or without merit or are determined in our favor, we could face expensive and time-consuming litigation, which could divert management personnel, or result in product shipment delays. If an infringement claim is determined against us, we may be required to pay monetary damages or ongoing royalties, or to cease selling the infringing product, which may have a significant adverse impact on our sales volume and gross margins, especially if we are required to stop selling any of our best-selling items as a result of, or in connection with, such claim. Further, as a result of infringement claims either against us or against those who license rights to us, we may be required to enter into costly royalty, licensing or product distribution agreements. Such royalty, licensing or product distribution agreements may be unavailable on terms that are acceptable to us, or at all. If a third party successfully asserts an infringement claim against us and we are required to pay monetary damages or royalties or we are unable to obtain suitable non-infringing alternatives or license the infringed or similar intellectual property on reasonable terms on a timely basis, it could significantly harm our business. Moreover, any such litigation regarding infringement claims may result in adverse publicity which may harm our reputation.

We are subject to various risks and uncertainties that might affect our ability to procure quality merchandise.

Our performance depends on our ability to procure quality merchandise from our vendors. Our vendors are subject to certain risks, including availability of raw materials, labor disputes, union organizing activity, inclement weather, natural disasters, and general economic and political conditions, that might limit their ability to provide us with quality merchandise on a timely basis. For these or other reasons, one or more of our vendors might not adhere to our quality control standards, and we might not identify the deficiency before merchandise ships to us or our customers. Our vendors’ failure to manufacture or import quality merchandise could reduce our net sales, damage our reputation and have an adverse effect on our financial condition.

A substantial portion of our sales during any given period of time may be generated by a particular product or line of products obtained from a small number of vendors, and if sales of those products or line of products decrease, our common stock price may be adversely affected.

In fiscal year 2004, our sales of products supplied by Herman Miller, Inc., the manufacturer of, among other items, the Aeron Chair, the Eames Lounge Chair and Ottoman, the Eames^® Aluminum Management Chair and the Noguchi Table, constituted approximately 9.1% of our total net sales. Sales of products supplied by our top five vendors constituted approximately 30.1% of our total net sales in fiscal year 2004. Although we have no formal supply agreements with any of these vendors, we believe that sales of products we obtain from these vendors will continue to constitute a substantial portion of our sales in the future. However, sales of products from these vendors may not continue to increase or may not continue at this level in the future. If sales of

products from these vendors decrease, our net sales will decrease and the price of our common stock may be adversely affected.

Declines in the value of the U.S. dollar relative to foreign currencies could adversely affect our operating results.

We procure supplies of our products from manufacturers in thirteen countries outside the United States. In fiscal year 2004, approximately 57.5% of our merchandise purchases were sourced from outside the United States, primarily from Europe. Our dependence on foreign vendors means, in part, that we may be affected by declines in the relative value of the U.S. dollar to other foreign currencies, particularly the euro. Specifically, as the value of the U.S. dollar declines relative to other currencies, such as the euro, our effective cost of supplies of product increases. As a result, continued declines in the value of the U.S. dollar relative to the euro and other foreign currencies would increase our cost of goods sold and decrease our gross margin.

We currently source a substantial portion of our products from foreign manufacturers located in Canada, the Czech Republic, Denmark, France, Germany, Israel, Italy and in other countries. As such, we are subject to other risks and uncertainties associated with changing economic and political conditions in foreign countries. These risks and uncertainties include import duties and quotas, work stoppages, economic uncertainties including inflation, foreign government regulations, wars and fears of war, acts of terrorism, political unrest and trade restrictions. Additionally, countries in which our products are currently manufactured or may be manufactured in the future may become subject to trade restrictions imposed by the United States or foreign governments. Any event causing a disruption or delay of imports from foreign vendors, including the imposition of additional import restrictions, restrictions on the transfer of funds or increased tariffs or quotas, or both could increase the cost or reduce the supply of merchandise available to us and adversely affect our operating results.

There is also a risk that one or more of our foreign vendors will not adhere to fair labor standards and may engage in child labor practices. If this happens, we could lose customer goodwill and favorable brand recognition, which could negatively affect our business.

If we fail to timely and effectively obtain shipments of product from our vendors and deliver merchandise to our customers, our operating results will be adversely affected.

We cannot control all of the various factors that might affect our timely and effective procurement of supplies of product from our vendors and delivery of merchandise to our customers. All products that we purchase, domestically or overseas, must be shipped to our fulfillment center in Hebron, Kentucky by third-party freight carriers, except for those products that are shipped directly to our customers from the manufacturer. Our dependence on foreign imports also makes us vulnerable to risks associated with products manufactured abroad, including, among other things, risks of damage, destruction or confiscation of products while in transit to our fulfillment center, work stoppages including as a result of events such as longshoremen strikes, transportation and other delays in shipments including as a result of heightened security screening and inspection processes or other port-of-entry limitations or restrictions in the United States, lack of freight availability and freight cost increases. In addition, if we experience a shortage of a popular item, we may be required to arrange for additional quantities of the item, if available, to be delivered to us through airfreight, which is significantly more expensive than standard shipping by sea. As a result, we may not be able to obtain sufficient freight capacity on a timely basis or at favorable shipping rates and, therefore, we may not be able to timely receive merchandise from our vendors or deliver our products to our customers.

We rely upon land-based carriers for merchandise shipments from U.S. ports to our facility in Hebron, Kentucky and from this facility to our customers. Accordingly, we are subject to the risks, including labor disputes, union organizing activity, inclement weather and increased fuel costs, associated with such carriers’ ability to provide delivery services to meet our inbound and outbound shipping needs. For example, recent increases in oil prices resulted in increases in

our shipping expenses and we have not passed all of this increase on to our customers, which has adversely affected our shipping margins. Failure to procure and deliver merchandise either to us or to our customers in a timely, effective and economically viable manner could damage our reputation and adversely affect our business. In addition, any increase in fulfillment costs and expenses could adversely affect our future financial performance.

All of our fulfillment operations are located in our facility in Hebron, Kentucky, and any significant disruption of this center’s operations would hurt our ability to make timely delivery of our products.

We conduct all of our fulfillment operations from our facility in Hebron, Kentucky. Our fulfillment center houses all of our product inventory and is the location from which all of our products are shipped to customers, except for those products that are shipped directly to our customers from the manufacturer. A natural disaster or other catastrophic event, such as an earthquake, fire, flood, severe storm, break-in, terrorist attack or other comparable event would cause interruptions or delays in our business and loss of inventory and could render us unable to accept or fulfill customer orders in a timely manner, or at all. Further, we have no formal disaster recovery plan and our business interruption insurance may not adequately compensate us for losses that may occur. In the event that a fire, natural disaster or other catastrophic event were to destroy a significant part of our Hebron, Kentucky facility or interrupt our operations for any extended period of time, or if harsh weather conditions prevent us from delivering products in a timely manner, our net sales would be reduced and our operating results would be harmed.

Our computer and communications hardware and software systems are vulnerable to damage and interruption, which could harm our business.

Our ability to receive and fulfill orders successfully is critical to our success and largely depends upon the efficient and uninterrupted operation of our computer and communications hardware and software systems. Our primary computer systems and operations are located at our corporate headquarters in San Francisco, California and distribution center in Hebron, Kentucky and are vulnerable to damage or interruption from power outages, computer and telecommunications failures, computer viruses, security breaches, catastrophic events, and errors in usage by our employees and customers. Further, our website servers are located at the facilities of, and hosted by, a third-party service provider in Santa Clara, California. In the event that this service provider experiences any interruption in its operations or ceases operations for any reason or if we are unable to agree on satisfactory terms for a continued hosting relationship, we would be forced to enter into a relationship with another service provider or take over hosting responsibilities ourselves. In the event it became necessary to switch hosting facilities in the future, we may not be successful in finding an alternative service provider on acceptable terms or in hosting our website servers ourselves. Any significant interruption in the availability or functionality of our website or our sales processing, distribution or communications systems, for any reason, could seriously harm our business.

We are planning certain systems changes that might disrupt our supply chain operations.

Our success depends on our ability to source merchandise efficiently through appropriate systems and procedures. We are in the process of substantially modifying our information technology systems supporting our product sourcing, merchandise planning, forecasting, inventory management, product distribution and transportation and price management. Modifications will involve updating or replacing legacy systems with successor systems during the course of fiscal year 2005. There are inherent risks associated with replacing our core systems, including supply chain disruptions that affect our ability to deliver products to our customers. We may not be able to successfully launch these new systems or launch them without supply chain disruptions in the future. Any resulting supply chain disruptions could have a material adverse effect on our operating results.

If we are unable to provide satisfactory customer service, we could lose customers and our reputation could be harmed.

Our ability to provide satisfactory levels of customer service depends, to a large degree, on the efficient and uninterrupted operation of our customer call center. Any material disruption or slowdown in our order processing

systems resulting from labor disputes, telephone or Internet failures, power or service outages, natural disasters or other events could make it difficult or impossible to provide adequate customer service and support. Further, we may be unable to attract and retain adequate numbers of competent customer service representatives, who are essential in creating a favorable, interactive customer experience. In addition, e-mail and telephone call volumes in the future may exceed our present system’s capacities. If this occurs, we could experience delays in taking orders, responding to customer inquiries and addressing customer concerns, which would have an adverse effect on customer satisfaction and our reputation.

We also are dependent on third-party shipping companies for delivery of products to customers. If these companies do not deliver goods in a timely manner or damage products in transit, our customers may be unsatisfied. Because our success depends in large part on keeping our customers satisfied, any failure to provide high levels of customer service would likely impair our reputation and have an adverse effect on our future financial performance.

We face intense competition and if we are unable to compete effectively, we may not be able to maintain profitability.

The specialty retail furnishings market is highly fragmented but highly competitive. We compete with other companies that market lines of merchandise similar to ours, such as large retailers with a national or multinational presence, regional operators with niche assortments and catalog and Internet companies. Many of our competitors are larger companies with greater financial resources than us. We expect that as demand for high quality design products grows, many new competitors will enter the market and competition from established companies will increase.

Moreover, increased competition may result in potential or actual litigation between us and our competitors relating to such activities as competitive sales practices, relationships with key suppliers and manufacturers and other matters. As a result, increased competition may adversely affect our future financial performance.

The U.S. retail industry, the specialty retail industry in particular, and the e-commerce sector are constantly evolving and have undergone significant changes over the past several years. Our ability to anticipate and successfully respond to continuing challenges is critical to our long-term growth, and we may not be successful in anticipating and responding to changes in the retail industry and e-commerce sector.

In light of the many competitive challenges facing us, we may not be able to compete successfully. Increased competition could adversely affect our future net sales.

We maintain a liberal merchandise return policy, which allows customers to return most merchandise and, as a result, excessive merchandise returns could harm our business.

We maintain a liberal merchandise return policy that allows customers to return most merchandise received from us if they are dissatisfied with those items. We make allowances for returns in our financial statements based on historical return rates. Actual merchandise returns may exceed our allowances for returns. In addition, because our allowances are based on historical return rates, the introduction of new products, the opening of new studios, the introduction of new catalogs, increased sales online, changes in our merchandise mix or other factors may

cause actual returns to exceed return allowances. Any significant increase in merchandise returns that exceed our allowances could have a material adverse effect on our future operating results.

The loss of key personnel could have an adverse effect on our ability to execute our business strategy and on our business results.

Our success depends to a significant extent upon the efforts and abilities of our current senior management to execute our business plan. In particular, we are dependent on the services of Wayne Badovinus, our President and Chief Executive Officer, and Robert Forbes, Jr., our founder. We do not have long-term employment agreements with any of our key personnel. The loss of the services of Mr. Badovinus, Mr. Forbes or any of the other members of our senior management team or of other key employees could have a material adverse effect on our ability to implement our business strategy and on our business results. Changes in our senior management and any future departures of key employees or other members of senior management may be disruptive to our business and may adversely affect our operations. Additionally, our future performance will depend upon our ability to attract and retain qualified management, merchandising and sales personnel. If members of our existing management team are not able to manage our company or our growth, or if we are unable to attract and hire additional qualified personnel as needed in the future, our business results will be negatively impacted.

On ~~January 24,~~February 18, 2005, ~~we announced the resignation of~~ David Barnard, our former Chief Financial Officer, ~~which will take effect as of February 18, 2005.~~resigned from his position with us. While we are currently searching for a successor candidate to serve as our Chief Financial Officer, it may take us longer than anticipated to find a suitable successor or to integrate any such successor fully into our operations, either of which may adversely affect our ability to execute our business strategy and our business results. In addition, if we are not able to find a successor Chief Financial Officer in the near future, we may not be able to file our upcoming periodic reports with the Securities and Exchange Commission, or SEC, in a timely manner, which may have a negative impact on the market price of our common stock.

Our independent auditors have indicated to us that they believe there were material weaknesses in our internal controls for the fiscal year ended January 1, 2005. Our failure to implement and maintain effective internal controls in our business could have a material adverse effect on our business, financial condition and stock price.

In connection with the completion of its audit of, and the issuance of an unqualified report on, our financial statements for the fiscal year ended January 1, 2005, our independent auditors, Grant Thornton LLP, delivered a management letter identifying deficiencies involving our internal controls that it considers to be material weaknesses pursuant to standards established by the Public Company Accounting Oversight Board. The deficiencies noted by Grant Thornton LLP are that (1) we had not correctly recorded inventory in transit from our European vendors in our inventory, when the terms were FOB shipping point, and (2) they identified numerous informal or undocumented internal control procedures, instances of inadequate segregation of duties, and a number of closing and adjusting entries during the course of their audit. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Controls and Procedures.”

We intend to take steps to strengthen our internal control processes to address the matters identified by Grant Thornton LLP. These measures may not, however, completely eliminate the material weaknesses identified by our independent auditors, and we may have additional material weaknesses or significant deficiencies in our internal controls that neither they nor our management has yet identified, and which we may be unable to correct in time to meet the deadline imposed by Section 404 of the Sarbanes-Oxley Act. The existence of one or more material weaknesses or significant deficiencies could result in errors in our financial statements, and substantial costs and resources may be required to rectify any internal control deficiencies. If we fail to achieve and maintain the adequacy of our internal controls in accordance with applicable standards, we may be unable to conclude on an ongoing basis that we have effective internal controls over financial reporting, in accordance with Section 404. If we cannot produce reliable financial reports, our business and financial condition could be

harmed, investors could lose confidence in our reported financial information, the market price of our stock could decline significantly and we may be unable to obtain additional financing to operate and expand our business.

We have grown quickly and if we fail to manage our growth, our business will suffer.

We have rapidly and significantly expanded our operations, and anticipate that further significant expansion will be required to address potential growth in our customer base and market opportunities. This expansion has placed, and is expected to continue to place, a significant strain on our management and operational resources. Additionally, we need to properly implement and maintain our financial and managerial controls, reporting systems and procedures, including disclosure controls and procedures and internal controls over financial reporting. Moreover, if we are presented with appropriate opportunities, we may in the future make investments in, or possibly acquire, assets or businesses that we believe are complementary to ours. Any such investment or acquisition may further strain our financial and managerial controls and reporting systems and procedures. These difficulties could disrupt our business, distract our management and employees and increase our costs. If we are unable to manage growth effectively or successfully integrate any assets or businesses that we may acquire, our future financial performance would be adversely affected.

If the protection of our trademarks and proprietary rights is inadequate, our brand and reputation could be impaired and we could lose customers.

We regard our copyrights, service marks, trademarks, trade dress, trade secrets and similar intellectual property as critical to our success. Our principal intellectual property rights include a registered trademark on our name, “Design Within Reach,” copyrights in our catalogs, rights to our domain name,www.dwr.com, and our databases and information management systems. As such, we rely on trademark and copyright law, trade secret protection and confidentiality agreements with our employees, consultants, suppliers, and others to protect our proprietary rights. Nevertheless, the steps we take to protect our proprietary rights may be inadequate. In addition, the relationship between regulations governing domain names and laws protecting trademarks and similar proprietary rights is unclear. Therefore, we may be unable to prevent third parties from acquiring domain names that are similar to, infringe upon or otherwise decrease the value of our trademarks and other proprietary rights. If we are unable to protect or preserve the value of our trademarks, copyrights, trade secrets or other proprietary rights for any reason, our brand and reputation could be impaired and we could lose customers.

We may face product liability claims or product recalls that are costly and create adverse publicity.

The products we sell may from time to time contain defects which could subject us to product liability claims and product recalls. Any such product liability claim or product recall may result in adverse publicity regarding us and the products we sell, which may harm our reputation. If we are found liable under product liability claims, we could be required to pay substantial monetary damages. Further, even if we successfully defend ourselves against this type of claim, we could be forced to spend a substantial amount of money in litigation expenses, our management could be required to spend valuable time in the defense against these claims and our reputation could suffer, any of which could harm our business. In addition, although we maintain limited product liability insurance, if any successful product liability claim or product recall is not covered by or exceeds our insurance coverage, our financial condition would be harmed.

The security risks of online commerce, including credit card fraud, may discourage customers from purchasing products from us online.

For our online sales channel to continue to succeed, we and our customers must be able to transmit confidential information, including credit card information, securely over public networks. Third parties may have the technology or know-how to breach the security of customer transaction data. Any breach could cause customers to lose confidence in the security of our website and choose not to purchase from us. Although we take the security of our systems very seriously, our security measures may not effectively prohibit others from obtaining improper access to our information. If a person is able to circumvent our security measures, he or she could destroy or steal valuable information or disrupt our operations. Any security breach could expose us to risks of data loss, litigation and liability and could seriously disrupt our operations and harm our reputation.

We do not carry insurance against the risk of credit card fraud, so the failure to prevent fraudulent credit card transactions could adversely affect our operating results. In addition, we may in the future suffer losses as a result of orders placed with fraudulent credit card data even though the associated financial institution approved payment of the orders. Under current credit card practices, we may be liable for fraudulent credit card transactions because we do not obtain a cardholder’s signature when we sell our products by telephone or online. If we are unable to detect or control credit card fraud, our liability for these transactions could harm our financial condition.

We are subject to the same federal, state and local laws as other companies conducting business online, including consumer protection laws, user privacy laws and regulations prohibiting unfair and deceptive trade practices. In particular, under federal and state financial privacy laws and regulations, we must provide notice to our customers of our policies on sharing non-public information with third parties, must provide advance notice of any changes to our privacy policies and, with limited exceptions, must give consumers the right to prevent sharing of their non-public personal information with unaffiliated third parties. Further, the growth of online commerce could result in more stringent consumer protection laws that impose additional compliance burdens on us. Today there are an increasing number of laws specifically directed at the conduct of business on the Internet. Moreover, due to the increasing use of the Internet, many additional laws and regulations relating to the Internet are being debated at the state and federal levels. These laws and regulations could cover issues such as freedom of expression, pricing, user privacy, fraud, quality of products and services, taxation, advertising, intellectual property rights and information security. Applicability of existing laws to the Internet relating to issues such as property ownership, copyrights and other intellectual property issues, taxation, libel, obscenity and personal privacy could also harm our business. For example, U.S. and international laws regulate our ability to use customer information and to develop, buy and sell mailing lists. Many of these laws were adopted prior to the advent of the Internet, and do not contemplate or address the unique issues raised by the Internet. The applicability and reach of those laws that do reference the Internet, such as the Digital Millennium Copyright Act, are uncertain. The restrictions imposed by, and costs of complying with, current and possible future laws and regulations related to our business could harm our future operating results.

Tax authorities in a number of states, as well as a Congressional advisory commission, are currently reviewing the appropriate tax treatment of companies engaged in online commerce, and new state tax regulations may subject us to additional state sales and income taxes, which could have an adverse effect on our cash flows and results of operations. Further, there is a possibility that we may be subject to significant fines or other payments for any past failures to comply with these requirements.

The State of California recently enacted a law that requires any company that does business in California and possesses computerized data, in unencrypted form, containing certain personal information about California residents to provide prompt notice to such residents if that personal information was, or is reasonably believed to have been, obtained by an unauthorized person such as a computer hacker. The law defines personal information as an individual’s name together with one or more of that individual’s social security number, driver’s license number, California identification card number, credit card number, debit card number, or bank account information, including any necessary passwords or access codes. As our customers, including California residents, generally provide information to us that is covered by this definition of personal information in connection with their purchases via our website, our business will be affected by this new law. As a result, we will need to ensure that all computerized data containing the previously-described personal information is sufficiently encrypted or that we have implemented appropriate measures to detect unauthorized access to our data. These measures may not be sufficient to prevent unauthorized access to the previously described personal information. In the event of an unauthorized access, we are required to notify our California customers of any such access to the extent it involves their personal information. Such measures will likely increase the costs of doing business and, if we fail to detect and provide prompt notice of unauthorized access as required by the new law, we could be subject to potential claims for damages and other remedies available to California residents whose information was improperly accessed or, under certain circumstances, the State of California could seek to

enjoin our online operations until appropriate corrective actions have been taken. While we intend to comply fully with this new law, we may not be successful in avoiding all potential liability or disruption of business resulting from this law. If we were required to pay any significant amount of money in satisfaction of claims under this new law, or any similar law enacted by another jurisdiction, or if we were forced to cease our business operations for any length of time as a result of our inability to comply fully with any such law, our operating results could be adversely affected. Further, complying with the applicable notice requirements in the event of a security breach could result in significant costs.

In addition, because our website is accessible over the Internet in multiple states and other countries, we may be subject to their laws and regulations or may be required to qualify to do business in those locations. Our failure to qualify in a state or country where we are required to do so could subject us to taxes and penalties and we could be subject to legal actions and liability in those jurisdictions. The restrictions or penalties imposed by, and costs of complying with, these laws and regulations could harm our business, operating results and financial condition. Our ability to enforce contracts and other obligations in states and countries in which we are not qualified to do business could be hampered, which could have a material adverse effect on our business.

Laws or regulations relating to privacy and data protection may adversely affect the growth of our online business or our marketing efforts.

We are subject to increasing regulation relating to privacy and the use of personal user information. For example, we are subject to various telemarketing laws that regulate the manner in which we may solicit future customers. Such regulations, along with increased governmental or private enforcement, may increase the cost of growing our business. In addition, several states have proposed legislation that would limit the uses of personal, user information gathered online or require online services to establish privacy policies. The Federal Trade Commission has adopted regulations regarding the collection and use of personal identifying information obtained from children under 13 years of age. Bills proposed in Congress would extend online privacy protections to adults. Moreover, proposed legislation in the United States and existing laws in other countries require companies to establish procedures to notify users of privacy and security policies, obtain consent from users for collection and use of personal information, and/or provide users with the ability to access, correct and delete personal information stored by companies. These data protection regulations and enforcement efforts may restrict our ability to collect demographic and personal information from users, which could be costly or harm our marketing efforts. Further, any violation of privacy or data protection laws and regulations may subject us to fines, penalties and damages and may otherwise have material adverse effect on our financial condition.

As a publisher of catalogs and online content, we face potential liability for intellectual property infringement and other claims based on the information and other content contained in our catalogs and website. In the past, parties have brought these types of claims and sometimes successfully litigated them against online services. If we incur liability for our catalog or online content, our financial condition could be affected adversely.

We may need additional financing and may not be able to obtain additional financing on favorable terms or at all, which could increase our costs, limit our ability to grow and dilute the ownership interests of existing stockholders.

We may need to raise additional capital in the future to open additional studios, to facilitate long-term expansion, to respond to competitive pressures or to respond to unanticipated financial requirements. We may not be able to obtain additional financing on commercially reasonable terms or at all. A failure to obtain additional financing or an inability to obtain financing on acceptable terms could require us to incur indebtedness that has high rates of interest or substantial restrictive covenants, issue equity securities that will dilute the ownership interests of existing stockholders, or scale back, or fail to address opportunities for expansion or enhancement of, our operations.

Our inability to obtain commercial insurance at acceptable prices might have a negative impact on our business.

During fiscal year 2003, we experienced a substantial increase in the costs of insurance. We believe that extensive commercial insurance coverage is prudent for risk management and anticipate that our insurance costs may continue to increase substantially. However, for certain types or levels of risk (e.g., risks associated with earthquakes or terrorist attacks), we might determine that we cannot obtain commercial insurance at acceptable prices. Therefore, we might choose to forego or limit our purchase of relevant commercial insurance, choosing instead to self-insure one or more types or levels of risks. If we suffer a substantial loss that is not covered by commercial insurance, the loss and attendant expenses could have a material adverse effect on our operating results.

Anti-takeover provisions in our organizational documents and Delaware law make any change in control more difficult. This could affect our stock price adversely.

Our amended and restated certificate of incorporation and bylaws contain provisions that may delay or prevent a change in control, discourage bids at a premium over the market price of our common stock and affect adversely the market price of our common stock and the voting and other rights of the holders of our common stock. These provisions include:

We are also subject to provisions of the Delaware corporation law that, in general, prohibit any business combination with a beneficial owner of 15% or more of our common stock for five years unless the holder’s acquisition of our common stock was approved in advance by our board of directors.

Our costs have increased and may continue to increase as a result of being a public company, and complying with regulations applicable to public companies may adversely affect our business.

As a public company, we have incurred and will continue to incur significant legal, accounting and other expenses that we did not incur as a private company. In addition, the Sarbanes-Oxley Act of 2002, as well as new rules subsequently implemented by the SEC and the Nasdaq National Market, have required changes in corporate governance practices of public companies. We expect these new rules and regulations to significantly increase our legal and financial compliance costs and to make some activities more time-consuming and costly. For example, in connection with becoming a public company, we created additional board committees and adopted policies regarding internal controls and disclosure controls and procedures. In addition, we are in the process of evaluating our internal control structure in relation to Section 404 of the Sarbanes-Oxley Act and, pursuant to this section, we will be required to include management and auditor reports on internal controls as part of our annual report for the year, ending December 31, 2005. We will incur additional costs in, and dedicate significant resources toward, complying with these requirements, which may divert management’s attention from, and which may in turn adversely affect, our business. We also expect these new laws, rules and regulations to make it more difficult and more expensive for us to obtain director and officer liability insurance and we may be required to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. As a result, it may be more difficult for us to attract and retain qualified persons to serve on our board of directors or as executive officers. We are currently evaluating and monitoring developments with respect to these new laws, rules and regulations, and we cannot predict or estimate the amount of additional costs we may incur or the timing of such costs. The costs of compliance or our failure to comply with these laws, rules and

regulations could adversely affect our reputation, financial condition, results of operation and the price of our common stock.

Our stock price may be volatile and you may lose all or a part of your investment.

The market price of our common stock may be subject to significant fluctuations after this offering. It is possible that in some future periods our results of operations may be below the expectations of securities analysts who may choose to follow our common stock, if any, and investors. If this occurs, our stock price may decline. Factors that could affect our stock price include the following:

In addition, the stock markets have experienced significant price and trading volume fluctuations, and the market prices of retail companies in particular have been extremely volatile and have recently experienced sharp share price and trading volume changes. These broad market fluctuations may adversely affect the trading price of our common stock.

As a new investor, you will incur dilution as a result of this offering and future equity issuances, and as a result, our stock price could decline.

The public offering price of this offering will be higher than the net tangible book value per share of our outstanding common stock, assuming an offering price of ~~$15.76~~$14.68 per share, which was the last reported sale price of our common stock on February ~~16,~~24, 2005. As a result, investors purchasing common stock in this offering will incur immediate dilution of ~~$11.98~~$10.91 per share in net tangible book value (excluding the effect of any exercises of options and sales of shares by the selling stockholders in this offering). This dilution is due in large part to earlier investors in our company having paid substantially less than the public offering price of this offering when they purchased their shares, and also reflects the deduction of the expected ~~$536,680~~$530,740 in underwriting discounts and commissions and estimated offering expenses payable by us. The exercise of outstanding options and future equity issuances, including any additional shares issued in connection with acquisitions, will result in further dilution to investors.

Securities analysts may not cover our common stock or may issue negative reports, and this may have a negative impact on our common stock’s market price.

If securities analysts do not cover our common stock, the lack of research coverage may adversely affect our common stock’s market price. The trading market for our common stock relies, in part, on the research and

reports that industry or financial analysts publish about us or our business. If one or more of the analysts who cover us downgrades our common stock, our common stock price would likely decline rapidly. If one or more of these analysts ceases coverage of our company, we could lose visibility in the market, which in turn could cause

our common stock price to decline. In addition, recently-adopted rules mandated by the Sarbanes-Oxley Act, and a global settlement reached between the SEC, other regulatory analysts and a number of investment banks in April 2003 has led to a number of fundamental changes in how analysts are reviewed and compensated. In particular, many investment banking firms are now required to contract with independent financial analysts for their stock research. It may be difficult for companies with smaller market capitalizations, such as our company, to attract independent financial analysts that will cover our common stock, which could have a negative effect on the market price of our common stock.

Our directors and executive officers will continue to hold a substantial portion of our common stock after this offering, which may lead to conflicts with other stockholders over corporate transactions and other corporate matters.

Following the completion of this offering, our directors and executive officers will beneficially own approximately ~~26.5%~~22.9% of our outstanding common stock, including options to purchase shares of our common stock that are exercisable within 60 days after February ~~16,~~24, 2005. These stockholders, acting together, may be able to influence all matters requiring stockholder approval, including the election of directors and significant corporate transactions such as mergers or other business combinations. This control may delay, deter or prevent a third party from acquiring or merging with us, which could adversely affect the market price of our common stock.

There may be sales of substantial amounts of our common stock after this offering, which could cause our stock price to fall.

Our current stockholders hold a substantial number of shares, which they will be able to sell in the public market in the near future. Upon ~~the closing~~completion of this offering, ~~13,419,198~~13,519,179 shares of our common stock will be outstanding, based on the assumptions described in “Prospectus Summary—The Offering.” In addition, as of February ~~16,~~24, 2005, ~~1,933,524~~1,908,543 shares of our common stock were ~~subject~~issuable upon exercise of vested options (excluding options to ~~outstanding~~purchase 476,587 shares of common stock, ~~options (which options are not expected to~~which will be exercised in connection with this offering). ~~All~~Of the outstanding shares after completion of the offering, all of the 1,650,000 shares sold in ~~this~~the offering, ~~as well as~~all of the 4,715,000 shares issued and sold in our initial public offering and substantially all of our other currently outstanding shares held by our current and former employees and consultants will be freely ~~tradable. Shares~~tradable without further registration under the Securities Act, except that any shares held by ~~holders who are~~our “affiliates,” as that term is defined under Rule 144 of the Securities Act, may be sold only in compliance with the limitations under Rule 144. In addition, 4,201,781 shares subject to lock-up agreements ~~with the underwriters represented by CIBC World Markets Corp.~~ entered into in connection with this offering ~~or by any~~will be eligible for sale at various times beginning 90 days after the date of ~~our “affiliates,” as that term is defined in~~this prospectus pursuant to Rule 144, ~~promulgated under the Securities Act of 1933, as amended, or the Securities Act, which generally includes officers, directors and 10% or greater stockholders will be restricted shares.~~including 144(k). The lock-up agreements restrict holders’ ability to transfer their stock for 90 days after the date of this prospectus. Of the outstanding restricted shares, will be available for sale in the public market on the date of this offering and will be available for sale in the public market 90 days after the date of this prospectus. CIBC World Markets Corp., as representative of the underwriters may, however, waive the lock-up period at any time for any stockholder who is party to a lock-up agreement. Certain of our officers have advised us that they intend to enter into so-called “Rule 10b5-1 trading plans” pursuant to which they may sell shares of our common stock following expiration of the lock-up agreement. Sales of a substantial number of shares of our common stock within a short period of time after this offering, or after the expiration of applicable lock-up periods, could cause our stock price to fall. In addition, the sale of these shares could impair our ability to raise capital through the sale of additional stock.

We have never declared or paid any cash dividends on our common stock and do not intend to pay dividends on our common stock for the foreseeable future. We intend to invest our future earnings, if any, to fund our growth. Therefore, you are not likely to receive any dividends from us on our common stock for the foreseeable future.

We have made forward-looking statements in this prospectus, including in the sections entitled “Prospectus Summary,” “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business.” All statements other than statements of historical facts contained in this prospectus, including statements regarding our future financial position, business strategy and plans and objectives of management for future operations, are forward-looking statements. The words “believe,” “may,” “could,” “estimate,” “continue,” “anticipate,” “intend,” “expect” and similar expressions, as they relate to us, are intended to identify forward-looking statements. 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 the section entitled “Risk Factors” and elsewhere in this prospectus.

Because forward-looking statements are inherently subject to risks and uncertainties, some of which cannot be predicted or quantified, you should not rely upon forward-looking statements as predictions of future events. The events and circumstances reflected in the forward-looking statements may not be achieved or occur and actual results could differ materially from those projected in the forward-looking statements. Except as required by applicable law, including the securities laws of the United States, and the rules and regulations of the SEC, we do not plan to publicly update or revise any forward-looking statements after we distribute this prospectus, whether as a result of any new information, future events or otherwise.

The net proceeds to us from the sale of 100,000 shares of common stock that we are offering will be approximately ~~$1,039,320,~~$937,260 assuming an offering price of ~~$15.76~~$14.68 per share (which was the last reported sale price of our common stock on February ~~16,~~24, 2005) and after deducting underwriting discounts and commissions and estimated offering expenses payable by us. We will not receive any of the proceeds from the sale of shares of common stock offered by the selling stockholders.

We intend to use the estimated net proceeds from this offering for general corporate purposes, including paying expenses in connection with this offering and working capital. Pending application of the net proceeds, we will invest the net proceeds in short-term, investment-grade, interest-bearing securities.

Since June 30, 2004, our common stock has been listed on the Nasdaq National Market under the symbol “DWRI.” The following table sets forth, for the periods indicated, the high and low closing sale prices of our common stock as reported by the Nasdaq, without retail mark-up, mark-down or commissions and may not necessarily represent actual transactions. As of February ~~11,~~24, 2005, we had ~~275~~163 record holders of our common stock. This figure does not reflect persons or entities who hold their stock in nominee or “street” name through various brokerage firms.


	Price Range of Common Stock				Price Range of Common Stock
Fiscal Year Ending December 31, 2005	High		Low		High		Low
First Quarter (through February 16, 2005)	$	16.81	$	13.26
First Quarter (through February 24, 2005)					$	16.81	$	13.26

Fiscal Year Ended January 1, 2005
Third Quarter (from June 30, 2004 through September 25, 2004)	$	18.55	$	15.25	$	18.55	$	15.25
Fourth Quarter	$	18.13	$	13.86	$	18.13	$	13.86

On February ~~16,~~24, 2005, the closing price per share of our common stock was ~~$15.76,~~$14.68, as reported by Nasdaq.

We have not declared or paid any dividends on our common stock since our inception and do not intend to pay any dividends on our common stock in the foreseeable future. We currently intend to retain our future earnings, if any, to finance our business and for general corporate purposes. Our board of directors has the authority to declare and pay dividends on our common stock, in its discretion, as long as there are funds legally available to do so.

The following table sets forth our cash and cash equivalents and our capitalization as of January 1, 2005:


	As of January 1, 2005						As of January 1, 2005
	Actual			As Adjusted			Actual			As Adjusted
	(in thousands, except share and per share amounts)						(in thousands, except share and per share amounts)
Cash and cash equivalents	$	21,141		$	22,336		$	21,141		$	22,263
Capital lease obligation (including current portion)		252			252			252			252

Stockholders’ equity:
Common stock; $0.001 par value, 30,000,000 shares authorized and 12,869,054 shares issued and outstanding actual; 30,000,000 shares authorized and 13,397,474 shares issued and outstanding as adjusted		13			14
Common stock; $0.001 par value, 30,000,000 shares authorized and 12,869,054 shares issued and outstanding actual; 30,000,000 shares authorized and 13,445,641 shares issued and outstanding as adjusted								13			14
Preferred stock; $0.001 par value, 10,000,000 shares authorized and no shares issued and outstanding, actual and as adjusted		—			—			—			—
Additional paid-in capital		47,823			49,018			47,823			48,945
Deferred compensation		(1,574	)		(1,574	)		(1,574	)		(1,574	)
Accumulated other comprehensive income		482			482			482			482
Accumulated earnings		1,258			1,258			1,258			1,258

Total stockholders’ equity		48,002			49,197			48,002			49,125

Total capitalization	$	48,254		$	49,449		$	48,254		$	49,377

Please read the above information in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our financial statements and related notes contained elsewhere in this prospectus.

Our net tangible book value on January 1, 2005 was $48.0 million, or $3.73 per share of common stock. “Net tangible book value” is total assets minus the sum of liabilities and intangible assets. “Net tangible book value per share of common stock” is net tangible book value divided by the total number of shares of common stock outstanding.

After giving effect to our sale of the 100,000 shares offered by us in this offering at an assumed public offering price of ~~$15.76~~$14.68 per share, the last reported sale price of our common stock on February ~~16,~~24, 2005, and after deducting estimated underwriting discounts and commissions and our estimated offering expenses, our adjusted net tangible book value as of January 1, 2005 would have been approximately ~~$49.0~~$48.9 million, or approximately ~~$3.78~~$3.77 per share of common stock. This represents an immediate increase in net tangible book value of ~~$0.05~~$0.04 per share to existing stockholders and an immediate dilution in net tangible book value of ~~$11.98~~$10.91 per share to new investors. The following table illustrates this per share dilution:


Assumed public offering price per share of common stock			$	15.76			$	14.68
Net tangible book value per share of common stock as of January 1, 2005	$	3.73			$	3.73
Increase in net tangible book value per share of common stock attributable to this offering(1)		0.05				0.04

Net tangible book value per share of common stock as of January 1, 2005 after giving effect to this offering (1)				3.78				3.77

Dilution per share of common stock to new investors in this offering			$	11.98			$	10.91

The following table summarizes, as of January 1, 2005, the differences between our existing stockholders and investors in this offering with respect to the total number of shares of common stock purchased from us, the total consideration paid to us, and the average price per share paid by our existing stockholders and the price per share paid by investors in this offering based on an assumed public offering price of ~~$15.76~~$14.68 per share, the last reported sale price of our common stock on February ~~16,~~24, 2005, before deducting estimated underwriting discounts and commissions and our estimated offering expenses:


	Shares Purchased			Total Consideration				Average Price Per Share		Shares Purchased			Total Consideration				Average Price Per Share
	Number	Percent		Amount		Percent		Average Price Per Share		Number	Percent		Amount		Percent		Average Price Per Share
Existing stockholders	12,869,054	99.2	%	$	49,857,630	96.9	%	$	3.87	12,869,054	99.2	%	$	49,857,630	97.1	%	$	3.87
New investors	100,000	0.8			1,576,000	3.1		$	15.76	100,000	0.8			1,468,000	2.9		$	14.68

Total	12,969,054	100.0	%	$	51,433,630	100.0	%			12,969,054	100.0	%	$	51,325,630	100.0	%

As of January 1, 2005, there was an aggregate of 2,377,544 shares of our common stock subject to outstanding options at a weighted average exercise price of $3.70 per share. The following table adjusts the information set forth in the table above to reflect the assumed exercise of options outstanding as of January 1, 2005, that are described in the preceding sentence:


	Shares Purchased			Total Consideration				Average Price Per Share		Shares Purchased			Total Consideration				Average Price Per Share
	Number	Percent		Amount		Percent		Average Price Per Share		Number	Percent		Amount		Percent		Average Price Per Share
Existing stockholders (1)	12,869,054	83.9	%	$	49,857,630	82.8	%	$	3.87	12,869,054	83.9	%	$	49,857,630	83.0	%	$	3.87
Option holders (1)	2,377,544	15.5			8,796,913	14.6		$	3.70	2,377,544	15.5			8,796,913	14.6		$	3.70
New investors	100,000	0.7			1,576,000	2.6		$	15.76	100,000	0.7			1,468,000	2.4		$	14.68

Total	15,346,598	100.0	%	$	60,230,543	100.0	%			15,346,598	100.0	%	$	60,122,543	100.0	%

Assuming the exercise of the foregoing outstanding options, dilution to new investors in net tangible book value per share would be ~~$11.99.~~$10.92.

The statements of operations data for the five fiscal years in the period ended January 1, 2005 and the balance sheet data as of December 27, 2003 and January 1, 2005 have been derived from our audited financial statements, which have been audited by Grant Thornton LLP, our independent auditors, and included elsewhere in this prospectus. The statements of operations data for the two years ended December 30, 2000 and December 29, 2001 and the balance sheet data as of December 30, 2000, December 29, 2001 and December 28, 2002 have been derived from our audited financial statements not included in this prospectus. The following selected financial data should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our financial statements and related notes included elsewhere in this prospectus. The selected financial data in this section is not intended to replace our financial statements.


	As of
	December 30, 2000			December 29, 2001			December 28, 2002			December 27, 2003			January 1, 2005
	(in thousands)
Balance Sheet Data:
Cash and cash equivalents	$	5,687		$	4,720		$	4,587		$	44		$	21,141
Working capital		5,250			5,805			5,111			1,646			28,882
Total assets (6)		12,833			12,270			18,378			25,522			74,620
Total indebtedness		—			—			—			3,675			1,305
Convertible preferred stock (7)		12,232			12,232			12,232			12,084			—
Accumulated earnings (deficit)		(6,180	)		(5,884	)		(3,681	)		(2,486	)		1,258
Total stockholders’ equity		6,110			6,436			8,752			9,838			48,002

You should read the following discussion of our financial condition and results of operations in conjunction with the financial statements and the notes to those statements included elsewhere in this prospectus. This discussion may contain forward-looking statements that involve risks and uncertainties. As a result of many factors, such as those set forth under “Risk Factors” and elsewhere in this prospectus, our actual results may differ materially from those anticipated in these forward-looking statements.

Design Within Reach is an integrated multi-channel provider of distinctive modern design furnishings and accessories. We market and sell our products to both residential and commercial customers through four integrated sales channels, consisting of our catalog, studios, website and direct sales force. We offer over 500 products in numerous categories, including chairs, tables, workspace and outdoor furniture, lighting, floor coverings, beds and related accessories, bathroom fixtures, fans and other home and office accessories. Our policy of having products “in stock and ready to ship” is a departure from the approach taken by many other modern design furnishings retailers, which we believe typically requires customers to wait weeks or months to receive their products.

We have experienced significant growth in customers and net sales since our founding in 1998. We began selling products through our catalog and online in the second half of 1999, and we opened our first studio in November 2000. We generated a profit in each fiscal quarter from the second quarter of fiscal year 2001 through the fourth quarter of fiscal year 2004. In recent years, we have continued to increase our total net sales with particular growth in sales through our studios and our website. Our studios have increased in number from one at the end of 2001 to 3337 studios operating in 1416 states ~~at the end~~as of ~~2004.~~February 24, 2005. We expect to open 18 to 20 new studios in each of 2005 and 2006. In 2005, we anticipate opening the majority of our projected new studios for the year during the first half of 2005. As of ~~January 1,~~February 24, 2005, we had signed leases for ~~seven~~ten additional studios that have not yet opened. We closed our Oakland, California studio during third quarter 2004, as our lease on the property was ending and we acquired an alternative location within the same market. This is the only studio we have closed.

As one measure of the performance of our business, we analyze our total market penetration rates across all of our sales channels in the top 50 metropolitan areas in the United States by household population as identified by the U.S. Census Bureau. We calculate our market penetration rates in a particular metropolitan market area based on net sales per capita in that area. We base our decisions on where to open new studios by categorizing markets into five “tiers” based on household population statistics and supporting sales data collected from our other sales channels. We plan to open the majority of our new studios in markets in our top two tiers during 2005 and 2006. Although most of our studios have been open less than two full years, our experience indicates that studio openings significantly improve our overall market penetration rates in the markets in which they are located even though the opening of a studio may initially have an adverse effect on sales growth in our other sales channels in the same market.

In January 2004, we moved our fulfillment operations from Union City, California to Hebron, Kentucky. The new facility, at approximately 217,000 square feet, is nearly 100,000 square feet larger than our previous Union City facility. We have a right of first refusal on an adjacent 100,000 square feet in the new facility, and we expect

this facility to support our distribution capacity needs for at least the next three years. We support all of our sales channels through the new fulfillment center, and the vast majority of our inventory is received and distributed

through it. A small portion of our merchandise is shipped directly by the manufacturers to our customers. In February 2004, we moved our corporate headquarters from an approximately 23,000 square foot facility in Oakland, California to an approximately 59,000 square foot facility in downtown San Francisco, California. We expect that this headquarters facility will provide us with adequate space for growth for at least the next four years. In fiscal year 2003, we incurred $559,000 in costs and $170,000 in accelerated depreciation expense on abandoned assets associated with the relocation of our fulfillment center operations. In fiscal year 2004, we incurred approximately $172,000 in costs associated with the relocation of our fulfillment center operations and approximately $26,000 in costs associated with the relocation of our headquarters. No further relocation costs are expected with respect to these matters.

On July 6, 2004, we completed our initial public offering of 4,715,000 shares of common stock at $12.00 per share. Of the shares offered, 3,000,000 were sold by us and 1,715,000 were sold by selling stockholders. We raised net proceeds of $31.8 million in our initial public offering, net of underwriting discounts and offering expenses. Prior to the completion of our initial public offering, we had funded our capital expenditures and working capital needs primarily through cash flows from operations, private sales of equity securities and borrowings under our bank credit facility, which included a $9.0 million operating line of credit and a $2.5 million equipment line of credit.

As a public company, we have incurred and will continue to incur significant legal, accounting and other expenses that we did not incur as a private company. In addition, the Sarbanes-Oxley Act of 2002, as well as new rules subsequently implemented by the SEC and the Nasdaq National Market, have required changes in corporate governance practices of public companies. We expect these new rules and regulations to significantly increase our legal and financial compliance costs and to make some activities more time-consuming and costly. We are also in the process of evaluating our internal control structure in relation to Section 404 of the Sarbanes-Oxley Act and, pursuant to this section, we will be required to include management and auditor reports on internal controls as part of our annual report for the year ending December 31, 2005. We will incur additional costs in, and dedicate significant resources toward, complying with these requirements, which may divert management’s attention from, and which may in turn adversely affect, our business. We also expect these new laws, rules and regulations to make it more difficult and more expensive for us to obtain director and officer liability insurance and we may be required to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. We are currently evaluating and monitoring developments with respect to these new laws, rules and regulations, and we cannot predict or estimate the amount of additional costs we may incur or the timing of such costs.

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports pursuant to the Securities Exchange Act of 1934 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 timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, our management recognized 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 necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

In connection with the completion of its audit of, and the issuance of an unqualified report on, our financial statements for the year ended January 1, 2005, our independent auditors, Grant Thornton LLP, identified deficiencies in the design or operation of our internal controls that it considers to be material weaknesses in the effectiveness of our internal controls pursuant to standards established by the Public Company Accounting Oversight Board. A “material weakness” is a significant deficiency, or combination of significant deficiencies,

that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected.

In its letter to the Audit Committee, Grant Thornton LLP identified the following two material weaknesses:

Grant Thornton LLP recommended that we take the following actions to address these items:

Grant Thornton LLP stated in their letter that they understood the formalization and documentation of our internal controls over financial reporting will be undertaken in the fiscal year ending December 31, 2005 as part of our Sarbanes-Oxley Section 404 certification process.

Grant Thornton LLP has discussed the areas of weakness described above with the Audit Committee. The Audit Committee is taking an active role in responding to the deficiencies identified by Grant Thornton LLP, including overseeing management’s implementation of the remedial measures described below.

We intend to address the matters identified by Grant Thornton LLP, as a general matter, by undertaking to formalize and document internal control procedures as appropriate, hire additional accounting staff, and have our financial and accounting personnel obtain additional training in public company reporting matters. Our response to the specific matters identified by Grant Thornton LLP is as follows. With respect to the balance sheet restatement, once the matter was identified by Grant Thornton LLP the restatement was effected, and in-transit inventory is now accurately reflected in our financial statements.

With respect to documentation of our internal control procedures, we are developing a plan defining the scope of work necessary to appropriately document our internal control procedures as part of our Sarbanes-Oxley Section 404 certification process. We then plan to have the documentation in place by June 2005, with testing of our procedures to begin with respect to the fiscal quarter ending July 2, 2005. As a non-accelerated filer, we are required to be Section 404 compliant by December 31, 2005.

With respect to inadequate segregation of duties, we have reviewed with Grant Thornton LLP their principal areas of concern. In November 2004, we hired a financial reporting analyst, whose responsibilities include reviewing monthly financial statements with senior management. We plan to continue to address this matter by hiring additional employees with finance, accounting or tax expertise, which will allow us to reassign responsibilities among other accounting personnel. Specifically, we intend to hire a new tax compliance employee during the first half of fiscal year 2005.

With respect to the closing and adjusting journal entries, we presented our financial statements for the year ended January 1, 2005 to Grant Thornton LLP prior to our having completed all appropriate closing journal entries. As

such, these entries were made in conjunction with the audit process. We intend to address this matter through additional personnel and training in public reporting matters.

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 Chief Financial Officer, of the effectiveness of the design and operations of our disclosure controls and procedures as of January 1, 2005. Based on the foregoing and the advice of Grant Thornton LLP, our independent registered accounting firm, our Chief Executive Officer and Chief Financial Officer determined that the deficiencies identified by Grant Thornton LLP could cause our disclosure controls and procedures to be not fully effective at a reasonable assurance level.

Our Chief Executive Officer and Chief Financial Officer did not note any other material weakness or significant deficiencies in our disclosure controls and procedures during their evaluation. We continue to improve and refine our internal controls. This process is ongoing, and will continue during the fiscal year ending December 31, 2005 as part of our Section 404 certification process.

There were no changes in our internal controls over financial reporting during the fourth quarter of fiscal year ended January 1, 2005 that materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting. However, we believe the measures we currently are implementing to improve our internal controls are reasonably likely to have a material impact on our internal controls over financial reporting in future periods.

Net sales consist of studio sales, phone sales, online sales, other sales and shipping and handling fees, net of returns by customers. Studio sales consist of sales of merchandise to customers at our studios, phone sales consist of sales of merchandise through the toll-free numbers associated with our printed catalogs, online sales consist of sales of merchandise from orders placed through our website, and other sales consist of sales made by our business development executives to commercial customers and warehouse sales. Warehouse sales consist of periodic clearance sales at our fulfillment center of product samples and products that customers have returned. Shipping and handling fees consist of amounts we charge customers for the delivery of merchandise. Cost of sales consists of the cost of the products we sell and inbound and outbound freight costs. Handling costs, including our fulfillment center expenses, are included in selling, general and administrative expenses.

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.

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 five to six years. Our 2002 fiscal year ended on December 28, 2002, our 2003 fiscal year ended on December 27, 2003, our 2004 fiscal year ended on January 1, 2005, and our 2005 fiscal year will end on December 31, 2005. Each of fiscal years 2002 and 2003 consisted of 52 weeks and fiscal year 2004 consisted of 53 weeks.

Net Sales and Other Data. The following table sets forth information for fiscal years 2002, 2003 and 2004 about our net sales by sales channel, total net sales, gross margin, operating expenses, earnings from operations, net interest income, income taxes and net earnings both in dollars and as a percentage of net sales.

The following table provides information for fiscal years 2002, 2003 and 2004 about the number of studios open at the end of each fiscal period, the number of catalogs circulated during each fiscal period, the number of online sessions during each fiscal period and the average order value during each fiscal period.

Net Sales. During fiscal year 2004, net sales increased $39.5 million, or 48.6%, to $120.6 million from $81.1 million in fiscal year 2003. Approximately $28.2 million of this increase was due to increased studio sales, which resulted primarily from our opening 18 new studios during fiscal year 2004 and the results of a full year of operations from the nine studios opened during fiscal year 2003, as well as increased demand for our products in all categories, particularly upholstery and bedroom items, driven by increased marketing efforts in other sales channels. Approximately $6.5 million of the increase in net sales was due to increased online sales, resulting primarily from the circulation of 16.6% more catalogs in fiscal year 2004 compared to fiscal year 2003 and additional marketing efforts through our website. Average order value increased 10.6% to $1,014 in fiscal year

2004 from $917 in fiscal year 2003. The balance of the increase in net sales was primarily due to increased sales generated by increased shipping and handling fees. The increase in average order value resulted primarily from the increase in studio sales as a percentage of net sales.

Cost of Sales. Cost of sales increased $21.8 million, or 50.3%, to $65.1 million in fiscal year 2004 from $43.3 million in fiscal year 2003. As a percentage of net sales, cost of sales increased to 54.0% in fiscal year 2004 from 53.4% in fiscal year 2003. The slight increase in cost of sales as a percentage of net sales in fiscal year 2004 compared to fiscal year 2003 was primarily a result of the strengthening of the euro relative to the U.S. dollar, partially offset by lower product costs due to increased volumes of merchandise that we purchased and increased sales of higher margin products. In fiscal year 2004, we generated all of our net sales in U.S. dollars, but we purchased approximately 50.9% of our product inventories from manufacturers in Europe and paid for substantially all of these products in euros. During fiscal year 2004, the value of the U.S. dollar declined approximately 8% relative to the euro, which effectively increased the cost to us of merchandise sourced from Europe. To date, we have been able to negotiate reduced prices from some of our European vendors to partially offset the impact of the decline of the U.S. dollar relative to the euro, and we have increased our prices on certain items we source from Europe. However, a continued decline in the value of the U.S. dollar relative to the euro would further increase our cost of goods sold and decrease our gross margin. The dollar increase in cost of sales in fiscal year 2004 was primarily attributable to the 48.6% increase in net sales during the same period.

Selling, General and Administrative Expenses. Selling, general and administrative expenses increased $12.5 million, or 37.6%, to $45.5 million in fiscal year 2004 from $33.0 million in fiscal year 2003. As a percentage of net sales, selling, general and administrative expenses decreased to 37.7% in fiscal year 2004 from 40.7% in fiscal year 2003. The decrease in these expenses as a percentage of net sales resulted from spreading catalog costs, fixed fulfillment center costs and corporate overhead expenses over increased net sales across all of our sales channels, partially offset by increases in costs associated with our studios as the number of studios has increased. The dollar increase in these expenses resulted primarily from the expenses associated with opening and operating new studios and mailing additional catalogs, as well as increased handling costs as our total volume of sales increased. We opened 18 new studios during fiscal year 2004, compared to nine new studios in fiscal year 2003, and mailed 16.6% more catalogs in fiscal year 2004 than in fiscal year 2003.

Depreciation and Amortization Expenses. Depreciation and amortization expenses increased to $3.3 million in fiscal year 2004 from $2.1 million in fiscal year 2003. As a percentage of net sales, depreciation and amortization expenses increased to 2.8% of net sales in fiscal year 2004 from 2.6% of net sales in fiscal year 2003. These expenses increased as a result of significant increases in spending on capital assets associated with our new studio openings and improvements in our management information systems.

Stock-Based Compensation. In fiscal year 2004 we recorded approximately $551,000 in non-cash expenses associated with the issuance of (1) options to purchase 120,000 common shares with an exercise price of $4.50 per share and an estimated fair market value of $10.00 per share granted in the first quarter 2004 and (2) options to purchase 366,250 common shares with an exercise price of $7.00 per share and an estimated fair market value of $11.00 per share granted in first quarter 2004. Stock-based compensation was zero in fiscal year 2003.

Facility Relocation Costs. In fiscal year 2004, we incurred $198,000 in costs associated with the relocation of our fulfillment operations from Union City, California to Hebron, Kentucky and our corporate headquarters from Oakland, California to San Francisco, California compared to $559,000 associated with the relocation of our fulfillment operations in fiscal year 2003.

Interest Income. Interest income was $178,000 and $13,000 in fiscal years 2004 and 2003, respectively. Our interest income in fiscal years 2003 and 2004 was generated by interest paid on our cash and cash equivalents and investments.

Interest Expense. We incurred $97,000 of interest expense in fiscal year 2004 compared to $42,000 in fiscal year 2003 related to short-term borrowings under our bank credit facility for working capital purposes.

Income Taxes. In fiscal year 2004, we recorded a net income tax expense of $2.3 million. As of December 27, 2003, we had $29,000 of net operating loss carryforwards for federal income tax purposes and $4.3 million of net operating loss carryforwards for California state income tax purposes. We also had approximately $131,000 of California enterprise zone tax credits which may be impaired or limited in certain circumstances. We used all of our net operating loss carryforwards for federal and state income tax purposes during fiscal year 2004. To the extent not used, our tax credits will begin to expire in 2007. In addition, in fiscal year 2004, because of the uncertainty regarding their realizability in future periods, we recorded a partial valuation allowance on our deferred tax assets, consisting of net enterprise zone credit carryforwards associated with our Oakland headquarters facility.

Net Earnings. As a result of the foregoing factors, net earnings increased to $3.7 million, or 3.1% of net sales, in fiscal year 2004 from $3.0 million, or 3.6% of net sales, in fiscal year 2003. Net earnings for fiscal year 2004 included $198,000 in costs associated with the relocation of our fulfillment center and corporate headquarters and tax expense of $2.3 million. Net earnings for fiscal year 2003 included $559,000 in costs and $170,000 in accelerated depreciation expense on abandoned assets associated with the relocation of our fulfillment center and a tax benefit of $852,000 associated with the reversal of valuation allowances on certain deferred tax assets.

Net Sales. During fiscal year 2003, net sales increased $23.9 million, or 41.7%, to $81.1 million from $57.3 million in fiscal year 2002. Approximately $19.9 million of this increase was due to increased studio sales, which resulted primarily from our opening nine new studios during fiscal year 2003 and the results of a full year of operations from the six studios opened during fiscal year 2002, as well as increased demand for our products in all categories, particularly upholstery and bedroom items, driven by increased marketing efforts in other sales channels. Approximately $1.9 million of the increase in net sales was due to increased phone and online sales, resulting primarily from the circulation of 23.0% more catalogs in fiscal year 2003 compared to fiscal year 2002 and additional marketing efforts through our website. Average order value increased 20.3% to $917 in fiscal year 2003 from $762 in fiscal year 2002. The balance of the increase in net sales was primarily due to increased sales generated by our direct sales force and increased shipping and handling fees. The increase in average order value resulted primarily from the increase in studio sales as a percentage of net sales.

Cost of Sales. Cost of sales increased $13.1 million, or 43.2%, to $43.3 million in fiscal year 2003 from $30.2 million in fiscal year 2002. As a percentage of net sales, cost of sales increased to 53.4% in fiscal year 2003 from 52.8% in fiscal year 2002. The slight increase in cost of sales as a percentage of net sales in fiscal year 2003 compared to fiscal year 2002 was primarily a result of a promotion in which we offered free shipping on products purchased during the period from March 1, 2003 to March 17, 2003, and the negative impact of the strengthening of the euro relative to the U.S. dollar, partially offset by lower product costs due to increased volumes of merchandise that we purchased and increased sales of higher margin products. In fiscal year 2003, we generated all of our net sales in U.S. dollars, but we purchased approximately 52.0% of our product inventories from manufacturers in Europe and paid for substantially all of these products in euros. During fiscal year 2003, the value of the U.S. dollar declined approximately 18.7% relative to the euro, which effectively increased the cost to us of merchandise sourced from Europe. To date, we have been able to negotiate reduced prices from some of our European vendors to partially offset the impact of the decline of the U.S. dollar relative to the euro, and we have increased our prices on certain items we source from Europe. However, a continued decline in the value of the U.S. dollar relative to the euro would further increase our cost of goods sold and decrease our gross margin. The dollar increase in cost of sales in fiscal year 2003 was primarily attributable to the 41.7% increase in net sales during the same period.

Selling, General and Administrative Expenses. Selling, general and administrative expenses increased $9.0 million, or 37.5%, to $33.0 million in fiscal year 2003 from $24.0 million in fiscal year 2002. As a percentage of net sales, selling, general and administrative expenses decreased to 40.7% in fiscal year 2003 from 42.0% in fiscal year 2002. The decrease in these expenses as a percentage of net sales resulted from spreading catalog

costs, fixed fulfillment center costs and corporate overhead expenses over increased net sales across all of our sales channels, partially offset by increases in costs associated with our studios as the number of studios has increased. The dollar increase in these expenses resulted primarily from the expenses associated with opening and operating new studios and mailing additional catalogs, as well as increased handling costs as our total volume of sales increased. We opened nine new studios during fiscal year 2003, compared to six new studios in fiscal year 2002, and mailed 23.0% more catalogs in fiscal year 2003 than in fiscal year 2002.

Depreciation and Amortization Expenses. Depreciation and amortization expenses increased to $2.1 million in fiscal year 2003 from $855,000 in fiscal year 2002. As a percentage of net sales, depreciation and amortization expenses increased to 2.6% of net sales in fiscal year 2003 from 1.5% of net sales in fiscal year 2002. These expenses increased as a result of significant increases in spending on capital assets associated with our new studio openings and improvements in our management information systems and $170,000 in accelerated depreciation expense on abandoned assets associated with the relocation of our fulfillment center operations from Union City, California to Hebron, Kentucky.

Facility Relocation Costs. In fiscal year 2003, we incurred $559,000 in costs associated with the relocation of our fulfillment operations from Union City, California to Hebron, Kentucky. We did not incur any relocation costs in fiscal year 2002.

Interest Income. Interest income was $13,000 and $74,000 in fiscal years 2003 and 2002, respectively. Our interest income in each of fiscal years 2002 and 2003 was generated by interest paid on our cash and cash equivalents.

Interest Expense. We incurred $42,000 of interest expense in fiscal year 2003 related to short-term borrowings under our bank credit facility for working capital purposes and for capital expenditures associated with new studios. We did not have any interest expense in fiscal year 2002.

Income Taxes. In fiscal year 2003, we recorded a net income tax benefit of $852,000 principally as a result of the reversal of a valuation allowance on our California state and federal net operating loss carryforwards. As of December 27, 2003, we had $29,000 of net operating loss carryforwards for federal income tax purposes and $4.3 million of net operating loss carryforwards for California state income tax purposes. We also had approximately $131,000 of California enterprise zone tax credits which may be impaired or limited in certain circumstances. We used all of our net operating loss carryforwards for federal income tax purposes during the first quarter of fiscal year 2004. We used all of our net operating loss carryforwards for California state income tax purposes by the end of fiscal year 2004. To the extent not used, our tax credits will begin to expire in 2007. In addition, in fiscal year 2003, because of the uncertainty regarding their realizability in future periods, we recorded a partial valuation allowance on our deferred tax assets, consisting of net enterprise zone credit carryforwards associated with our Oakland headquarters facility.

Net Earnings. As a result of the foregoing factors, net earnings increased to $3.0 million, or 3.6% of net sales, in fiscal year 2003 from $2.2 million, or 3.8% of net sales, in fiscal year 2002. Net earnings for fiscal year 2003 included $559,000 in costs and $170,000 in accelerated depreciation expense on abandoned assets associated with the relocation of our fulfillment center and a tax benefit of $852,000 associated with the reversal of valuation allowances on certain deferred tax assets.

The following table sets forth our unaudited quarterly results of operations for fiscal years 2003 and 2004. Each quarterly period presented below consisted of 13 weeks, except for the fiscal quarter ended January 1, 2005, which consisted of 14 weeks. The information for each of these periods has been prepared on the same basis as the audited financial statements included elsewhere in this prospectus. This information includes all adjustments, which consist only of normal and recurring adjustments, management considers necessary for the fair presentation of such data. This data should be read in conjunction with the audited financial statements included elsewhere in this prospectus. The results of operations for historical periods are not necessarily indicative of

results for any future period. We expect quarterly results of operations to fluctuate depending on the timing and amount of net sales contributed by new studios, changes in catalog circulation and other marketing initiatives. Historically, we have undertaken marketing initiatives in the fourth quarter of each fiscal year, which have increased our net sales during such periods. Also, we generally have mailed fewer catalogs in the third quarter of each fiscal year due to our belief that many customers are on summer vacations during this period. Accordingly, we have usually experienced lower demand for our products in the third quarter of each fiscal year.


	Quarter Ended																							Quarter Ended
	Mar. 29, 2003		June 28, 2003			Sept. 27, 2003			Dec. 27, 2003			Mar. 27, 2004			June 26, 2004			Sept. 25, 2004			Jan. 1, 2005			Mar. 29, 2003		June 28, 2003			Sept. 27, 2003			Dec. 27, 2003			Mar. 27, 2004			June 26, 2004			Sept. 25, 2004			Jan. 1, 2005
	(in thousands, except per share amounts and additional operating data)																							(in thousands, except per share amounts and additional operating data)
Statement of Earnings Data
Net sales:
Studio sales	$	3,122	$	5,845		$	6,628		$	9,031		$	8,094		$	12,054		$	13,422		$	19,290		$	3,122	$	5,845		$	6,628		$	9,031		$	8,094		$	12,054		$	13,422		$	19,290
Phone sales		6,188		6,663			6,023			6,586			5,487			6,672			6,340			6,967			6,188		6,663			6,023			6,586			5,487			6,672			6,340			6,967
Online sales		4,198		4,377			4,053			6,052			5,093			6,085			5,766			8,193			4,198		4,377			4,053			6,052			5,093			6,085			5,766			8,193
Other sales		1,259		705			1,916			738			1,613			475			1,526			1,353			1,259		705			1,916			738			1,613			475			1,526			1,353
Shipping and handling fees		1,374		1,768			2,027			2,585			2,226			2,937			3,092			3,913			1,374		1,768			2,027			2,585			2,226			2,937			3,092			3,913

Total net sales		16,141		19,358			20,647			24,992			22,513			28,223			30,146			39,716			16,141		19,358			20,647			24,992			22,513			28,223			30,146			39,716
Cost of sales		8,856		10,210			10,852			13,380			12,096			15,103			16,096			21,782			8,856		10,210			10,852			13,380			12,096			15,103			16,096			21,782

Gross margin		7,285		9,148			9,795			11,612			10,417			13,120			14,050			17,934			7,285		9,148			9,795			11,612			10,417			13,120			14,050			17,934
Selling, general and administrative expenses		6,714		8,102			8,532			9,698			8,721			10,896			11,703			14,135			6,714		8,102			8,532			9,698			8,721			10,896			11,703			14,135
Stock-based compensation		—		—			—			—			76			149			149			177			—		—			—			—			76			149			149			177
Depreciation and amortization		310		440			475			873			575			710			775			1,280			310		440			475			873			575			710			775			1,280
Facility relocation costs		8		1			28			522			198			—			—			—			8		1			28			522			198			—			—			—

Earnings from operations		253		605			760			519			847			1,365			1,423			2,342			253		605			760			519			847			1,365			1,423			2,342
Interest income		12		—			—			1			—			—			58			120			12		—			—			1			—			—			58			120
Interest expense		—		—			(21	)		(21	)		(32	)		(51	)		(9	)		(5	)		—		—			(21	)		(21	)		(32	)		(51	)		(9	)		(5	)

Earnings before income taxes		265		605			739			499			815			1,314			1,472			2,457			265		605			739			499			815			1,314			1,472			2,457
Income tax expense (benefit)		—		—			—			(852	)		313			508			566			927			—		—			—			(852	)		313			508			566			927

Net earnings		265		605			739			1,351			502			806			906			1,530			265		605			739			1,351			502			806			906			1,530

Deemed preferred stock dividends		—		(1,765	)		—			—			—			—			—			—			—		(1,765	)		—			—			—			—			—			—

Net earnings (loss) available to common stockholders	$	265	$	(1,160	)	$	739		$	1,351		$	502		$	806		$	906		$	1,530		$	265	$	(1,160	)	$	739		$	1,351		$	502		$	806		$	906		$	1,530

Net earnings (loss) per share:
Basic	$	0.08	$	(0.36	)	$	0.23		$	0.41		$	0.15		$	0.09		$	0.07		$	0.12		$	0.08	$	(0.36	)	$	0.23		$	0.41		$	0.15		$	0.23		$	0.07		$	0.12
Diluted	$	0.02	$	(0.36	)	$	0.07		$	0.12		$	0.04		$	0.07		$	0.06		$	0.10		$	0.02	$	(0.36	)	$	0.07		$	0.12		$	0.04		$	0.07		$	0.06		$	0.10
Weighted average shares used to compute net earnings (loss) per share:
Basic		3,230		3,246			3,254			3,315			3,361			9,136			12,643			12,866			3,230		3,246			3,254			3,315			3,361			3,476			12,643			12,866
Diluted		11,612		3,246			11,078			11,107			11,362			11,671			14,636			14,661			11,612		3,246			11,078			11,107			11,362			11,671			14,636			14,661

Additional Operating Data
Number of studios open at the end of the quarter		10		12			14			16			18			26			29			33			10		12			14			16			18			26			29			33
Number of catalogs circulated		2,335,479		3,387,763			1,792,980			2,245,102			2,644,219			3,557,875			2,266,068			2,913,459			2,335,479		3,387,763			1,792,980			2,245,102			2,644,219			3,557,875			2,266,068			2,913,459
Number of online sessions		577,319		568,719			621,262			803,294			930,913			794,193			781,890			925,857			577,319		568,719			621,262			803,294			930,913			794,193			781,890			925,857
Average order value	$	833	$	1,003		$	1,043		$	832		$	942		$	1,036		$	1,027		$	993		$	833	$	1,003		$	1,043		$	832		$	942		$	1,056		$	1,040		$	993

On July 6, 2004, we completed our initial public offering of 4,715,000 shares of common stock at $12.00 per share. Of these shares 3,000,000 were sold by us and 1,715,000 were sold by selling stockholders. We raised net proceeds of $31.8 million in our initial public offering, net of underwriting discounts and offering expenses. Prior to completion of the initial public offering, we had funded our operations primarily through cash flows from

operations, private placements of equity securities and short-term borrowings under our bank credit facility. The $1.1 million outstanding under our bank credit facility as of January 1, 2005 represents outstanding checks in excess of the cash balances in our bank accounts with Wells Fargo HSBC Trade Bank, N.A.

In fiscal year 2004, cash and cash equivalents increased by approximately $21.1 million to approximately $21.1 million from approximately $44,000 at December 27, 2003. The primary contributors to the increase in cash and cash equivalents during this period were our initial public offering in July 2004, in which we raised net proceeds of $31.8 million, and an increase in cash provided by operating activities of $8.6 million, primarily due to growth in earnings achieved by our business, offset by $18.5 million net cash used in investing activities principally related to our opening 18 studios and the purchase of $5.6 million in investments in available-for-sale securities during fiscal year 2004. For the fiscal year ended December 27, 2003, cash and cash equivalents decreased by $4.5 million to $44,000 at the end of fiscal year 2003 from $4.6 million at the end of fiscal year 2002. The primary contributors to the decrease in cash and cash equivalents during fiscal year 2003 were the use of $7.4 million of cash for purchases of property and equipment and the use of $1.9 million of cash to repurchase a portion of the outstanding shares of our Series B preferred stock, net of the issuance of additional shares of our Series B preferred stock, offset by $1.4 million of cash provided by operating activities.

Net cash provided by operating activities was $8.6 million for fiscal year 2004, compared to $1.4 million for fiscal year 2003. Net cash provided by operating activities increased during fiscal year 2004, compared to fiscal year 2003 primarily because of the growth in earnings achieved by our business and because we invested less cash in working capital in fiscal year 2004 compared to fiscal year 2003. Net cash provided by operating activities was $1.4 million for fiscal year 2003 and $3.2 million for fiscal year 2002. Net cash provided by operating activities decreased in fiscal year 2003 compared to fiscal year 2002 primarily because of expenditures associated with opening nine new studios, including the maintenance of increased inventory levels to support additional sales from the new studios, partially offset by growth in net sales and gross margin.

Net cash used in investing activities was $18.5 million for fiscal year 2004, compared to $7.4 million for fiscal year 2003. Net cash used in investing activities increased during fiscal year 2004 compared to fiscal year 2003 primarily because we opened 18 studios during fiscal year 2004 and we opened nine studios during fiscal year 2003. We also made $5.6 million in investments in available-for-sale securities during fiscal year 2004. Net cash used in investing activities was $7.4 million for fiscal year 2003 and $3.4 million for fiscal year 2002. Net cash used in investing activities for fiscal years 2003 and 2002 was primarily attributable to expenditures for property and equipment for our studios and the implementation of new information technology systems.

In fiscal years 2005 and 2006, we anticipate that our investment in property and equipment will increase to between approximately $14 million and $15 million in each year, from $12.9 million in fiscal year 2004 and $7.4 million in fiscal year 2003. This increase is a result of our planned opening of 18 to 20 new studios in each of fiscal years 2005 and 2006, the cost of which we expect to be between approximately $11 million and $12 million in each such fiscal year. Investment in property and equipment for fiscal year 2004 was $12.9 million, driven by $8.5 million related to the opening of 18 new studios, as well as our investment of approximately $4.1 million in additional information systems and technology. We plan to finance these investments in fiscal years 2005 and 2006 from cash flows from operations and the proceeds from our initial public offering.

Net cash provided by financing activities was $31.0 million for fiscal year 2004, compared to $1.5 million for fiscal year 2003. This increase was due primarily to our initial public offering that closed on July 6, 2004. The net cash provided by financing activities during fiscal year 2003 represents increases in borrowing on our line of credit, partially offset by cash used to repurchase and retire approximately 554,000 shares of Series B Preferred Stock. Net cash provided by financing activities was $1.5 million for fiscal year 2003 and $113,000 for fiscal year 2002. Net cash provided by financing activities during fiscal year 2002 resulted primarily from cash provided from exercises of employee stock options.

Until required for other purposes, our cash and cash equivalents are maintained in deposit accounts or highly liquid investments with maturities of 90 days or less at the time of purchase.

Liquidity Sources, Requirements and Contractual Cash Requirements and Commitments

Our principal sources of liquidity as of January 1, 2005 consisted of: (1) $21.1 million in cash and cash equivalents; (2) $5.6 million in investments; (3) our bank credit facility, consisting of a $9.0 million operating line of credit, of which nothing had been drawn down and $759,000 had been used for outstanding letters of credit as of January 1, 2005; and (4) cash we expect to generate from operations during this fiscal year. The amount available for borrowings under the bank facility as of January 1, 2005 was $6.8 million.

Historically, our principal liquidity requirements have been to meet our working capital and capital expenditure needs.

We believe that our sources of cash will be sufficient to fund our operations and anticipated capital expenditures for at least the next twelve months. Our ability to fund these requirements and comply with the financial covenants under our bank credit agreement will depend on our future operations, performance and cash flow and is subject to prevailing economic conditions and financial, business and other factors, some of which are beyond our control. In addition, as part of our strategy, we intend to continue to expand our studio sales channel. Such expansion will require additional capital. We cannot assure you that additional funds from available sources will be available on terms acceptable to us, or at all.

The following table summarizes our future contractual obligations as of January 1, 2005:

In addition, our credit agreement with Wells Fargo HSBC Trade Bank, N.A., which we amended in June 2004, provides for a $9.0 million operating line of credit. The $9.0 million operating line of credit is subject to availability guidelines that specify the amount that can be borrowed under the facility at any given time to provide working capital and expires on July 31, 2005. Amounts borrowed under this line of credit bear interest at an annual rate equal to the lender’s prime lending rate plus 0.25%. Amounts borrowed under our credit agreement are secured by our accounts receivable, inventory and equipment. The credit agreement also sets forth a number of affirmative and negative covenants to which we must adhere, including financial covenants that require us to achieve positive net earnings in each quarter and limitations on capital expenditures. We are currently in compliance with all financial covenants under our credit agreement. We have borrowed funds under these lines of credit from time to time and periodically have repaid such borrowings with available cash. As of January 1, 2005, no borrowings were outstanding under this facility.

All of our sales and a portion of our expenses are denominated in U.S. dollars, and our assets and liabilities together with our cash holdings are predominantly denominated in U.S. dollars. However, in fiscal year 2004 we obtained approximately 50.9% of our product inventories from manufacturers in Europe, and these transactions typically were denominated in currencies other than the U.S. dollar, principally the euro. During fiscal year 2004, the value of the U.S. dollar declined approximately 8% relative to the euro, which effectively increased the cost to us of merchandise sourced from Europe. As a result of such currency fluctuations, we have experienced and may continue to experience fluctuations in our operating results on an annual and a quarterly basis going forward. To mitigate our exchange rate risk relating to the euro, we typically purchase foreign currency forward contracts with maturities of less than 12 months relating to invoices for supplies of merchandise after the payable amount and due date of the invoice are known. We account for these contracts by adjusting the carrying amount of the contract to market and recognizing any corresponding gain or loss in selling, general and administrative expenses in each reporting period. Based on our euro-denominated purchases during fiscal year 2004, a hypothetical additional 10% weakening in the value of the dollar relative to the euro would have increased our cost of sales in fiscal year 2004 by approximately ~~$1.9~~$2.4 million, and would have decreased both our net earnings and cash flows for that year by a corresponding amount. Future hedging transactions may not successfully mitigate losses caused by currency fluctuations. In addition to the direct effect of changes in exchange rates on cost of goods, changes in exchange rates also affect the volume of purchases or the foreign currency purchase price as vendors’ prices become more or less attractive. We expect to continue to experience the effect of exchange rate fluctuations on an annual and quarterly basis, and currency fluctuations could have a material adverse impact on our results of operations.

Starting in the third quarter of fiscal year 2004, we adopted a program to hedge the potential foreign currency risk relating to the amount of our forecasted monthly euro purchases, on a rolling twelve-month basis. The objective of our foreign exchange risk management program is to manage the financial and operational exposure arising from these risks by offsetting gains and losses on the underlying exposures with gains and losses on derivatives used to hedge them. We have comprehensive hedge documentation that defines the hedging objectives, practices, procedures, and accounting treatment. Our hedging program and our derivative positions and strategy are reviewed on a regular basis by our management. In addition, we have entered into agreements that allow us to settle positive and negative positions with the same counterparty on a net basis. Derivative positions are used only to manage identified exposures.

We typically do not attempt to reduce or eliminate our market exposures on our investment securities because the majority of our investments are short-term. The fair value of our investment portfolio or related income would not be significantly impacted by either a 100 basis point increase or decrease in interest rates due mainly to the short-term nature of our investment portfolio.

Our financial statements have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, sales and expenses. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the 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 under different assumptions or conditions. Our critical accounting policies are set forth below.

Revenue Recognition. We recognize revenue on the date on which we estimate that the product has been received by the customer, and we record any payments received prior to the estimated date of receipt of the goods by the customer as deferred revenue until the estimated date of receipt. We use our third-party freight carrier information to estimate when delivery has occurred. Sales are recorded net of returns by customers. Significant management judgments and estimates must be made and used in connection with determining net sales recognized in any accounting period. Our management must make estimates of potential future product

returns related to current period revenue. We analyze historical returns, current economic trends and changes in customer demand and acceptance of our products when evaluating the adequacy of the sales returns and other allowances in any accounting period. Although our actual returns historically have not differed materially from estimated returns, in the future, actual returns may differ materially from our reserves. As a result, our operating results and financial condition could be affected adversely. The reserve for returns was $558,000, $442,000 and $560,000 as of January 1, 2005, December 27, 2003 and December 28, 2002, respectively. We recognize net sales revenue for shipping and handling fees charged to customers at the time products are estimated to have been received by customers.

Shipping and Handling Costs. Shipping costs, which include inbound and outbound freight costs, are included in cost of sales. We record costs of shipping products to customers in our cost of sales at the time products are estimated to have been received by customers. Handling costs, which include fulfillment center expenses, call center expenses, and credit card fees, are included in selling, general and administrative expenses. Handling costs were $6.9 million, $5.1 million and $4.3 million for fiscal years 2004, 2003 and 2002, respectively. Our gross margin calculation may not be comparable to that of other entities, which may allocate all shipping and handling costs to cost of sales, resulting in lower gross margin, or to operating expenses, resulting in higher gross margin.

Inventory. Our inventory is valued at the lower of cost or market. Cost has been determined using the first in, first out method. We write down inventory for estimated damage equal to the difference between the cost of inventory and the estimated market value based upon assumptions about future demand and market conditions. If actual market conditions or demand for our products are less favorable than projected by management, additional inventory write-downs may be required. Although our actual inventory write-downs historically have not differed materially from estimated inventory write downs, in the future, actual inventory write downs may differ materially from our reserves. As a result, our operating results and financial condition could be affected adversely. As of January 1, 2005, December 27, 2003 and December 28, 2002, inventory write-downs amounted to approximately $677,000, $754,000 and $531,000, respectively.

Stock-Based Compensation. We account for stock options granted to employees using the intrinsic value method in accordance with Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees.” As of December 27, 2003, we had not recognized any compensation expense for stock options in our financial statements, as all options granted up to that date have an exercise price equal to the estimated fair value of the underlying common stock on the date of grant. During fiscal year 2004, we recognized approximately $551,000 in stock-based compensation expense, and we also recorded $2.1 million in deferred compensation. However, Statement of Financial Accounting Standard (“SFAS”) No. 123, “Accounting for Stock-Based Compensation,” requires the disclosure of pro forma net earnings and earnings per share as if we had adopted the fair value method. Under SFAS No. 123, the fair value of stock-based awards to employees is calculated through the use of option pricing models. These models require subjective assumptions, including future stock price volatility and expected time to exercise, which affect the calculated values. Our calculations are based on a single option valuation approach and forfeitures are recognized as they occur. With effect from the quarter commencing on July 2, 2005, we will be required to follow the fair value approach using an option-pricing model, such as the Black-Scholes option valuation model, to value the stock options we grant. See “—Effect of Recent Accounting Pronouncements” below.

Accounting for Income Taxes. We record an estimated valuation allowance on our deferred tax assets if it is more likely than not that they will not be realized. Significant management judgment is required in determining our deferred tax assets and liabilities and any valuation allowance recorded against our net deferred tax assets, including judgments regarding whether or not we will generate sufficient taxable income to realize our deferred tax assets.

Amortization of Prepaid Catalog Costs. Prepaid catalog costs consist of third-party costs, including paper, printing, postage, name acquisition and mailing costs, for all of our direct response catalogs. Such costs are capitalized as prepaid catalog costs and are amortized over their expected period of future benefit. Such amortization is based upon the ratio of actual sales to the total of actual and estimated future sales on an individual catalog basis. The period of expected future benefit is calculated based on our projections of when

approximately 90% of sales generated by the catalog will be made. Based on data we have collected, we historically have estimated that catalogs have a period of expected future benefit of two to four months. The period of expected future benefit of our catalogs would decrease if we were to publish new catalogs more frequently in each year, or increase if we published them less frequently. Prepaid catalog costs are evaluated for realizability at the end of each reporting period by comparing the carrying amount associated with each catalog to the estimated probable remaining future net benefit associated with that catalog. If the carrying amount is in excess of the estimated probable remaining future net benefit of the catalog, the excess is expensed in the reporting period. We account for consideration received from our vendors for co-operative advertising as a reduction of selling, general and administrative expense. Co-operative advertising amounts received from such vendors were $489,000, $273,000 and $371,000 in fiscal years 2004, 2003 and 2002, respectively.

Derivative and Hedging Activities. Our operations are exposed to global market risks, including the effect of changes in foreign currency exchange rates. The objective of our foreign exchange risk management program is to manage the financial and operational exposure arising from these risks by offsetting gains and losses on the underlying exposures with gains and losses on derivatives used to hedge them. We use forwards and options contracts, which qualify as cash flow hedges to manage these risks. We have comprehensive hedge documentation that defines our hedging objectives, practices, procedures, and accounting treatment of such instruments. Our hedging program and derivative positions and strategy are reviewed on a regular basis by our management. In addition, we have entered into agreements that allow us to settle positive and negative positions under derivative agreements, with the same counterparty, on a net basis. Derivative positions are used only to manage identified exposures. Hedges that receive designated hedge accounting treatment are evaluated for effectiveness at the time they are designated, as well as throughout the hedge period. The effective portion of changes in the fair value of cash flow hedges is recorded in other comprehensive income (OCI) and is recognized in cost of sales when the hedged item affects earnings. Cash flow hedges are discontinued when it is probable that the original forecasted transaction will not occur. We have not experienced or recorded any impact to earnings associated with hedge ineffectiveness from cash flow hedges. Derivatives used to manage financial exposures for foreign exchange risks generally mature within one year or less.

Valuation of Long-Lived Assets. Long-lived assets held and used by us are reviewed for impairment whenever events or changes in circumstances indicate the net book value may not be recoverable. An impairment loss is recognized if the sum of the expected future cash flows from use of the asset is less than the net book value of the asset. The amount of the impairment loss will generally be measured as the difference between net book values of the assets and their estimated fair values. We did not record any impairment charges in fiscal years 2004, 2003 or 2002.

In December 2004, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards No. 123R,Share-based Payment (“SFAS 123R”). SFAS 123R revises SFAS 123 and supersedes APB 25. SFAS 123R applies to transactions in which an entity exchanges its equity instruments for goods or services and also applies to liabilities an entity may incur for goods or services that are based on the fair value of those equity instruments. Under SFAS 123R, which becomes effective for all fiscal quarters beginning after June 15, 2005, we will be required to follow a fair value approach using an option-pricing model, such as the Black-Scholes option valuation model, to value stock options at the date of a stock option grant. The deferred compensation calculated under the fair value method would then be amortized over the respective vesting period of the stock option. We will adopt the provisions of SFAS 123R during our 2005 fiscal year. The adoption of SFAS 123R is expected to have a material impact on our results of operations.

In December 2004, the FASB issued Statement of Financial Accounting Standards No. 151,Inventory Costs (“SFAS 151”). SFAS 151 requires abnormal amounts of inventory costs related to idle facility, freight handling and wasted material expenses to be recognized as current period charges. The standard is effective for fiscal years beginning after June 15, 2005. We believe the adoption of SFAS 151 will not have a material impact on our financial statements.

We are an integrated multi-channel provider of distinctive modern design furnishings and accessories. We market and sell our products to both residential and commercial customers through four integrated sales channels, consisting of our catalog, studios, website and direct sales force. We believe we have developed a national presence in modern design furnishings and a brand recognized for design excellence among our customers and the design community. We believe that we have created a differentiated business model that enables us to provide products to our customers in a more convenient, efficient and economical manner. We strive to broaden the base of modern design consumers, who we believe have been underserved in the United States. This belief has been driven by direct consumer feedback gathered over the last five years and our rapid sales growth, which was over 100% from 2002 through 2004. Our policy of having products “in stock and ready to ship” is a departure from the approach taken by many other modern design furnishings retailers, which we believe typically requires customers to wait weeks or months to receive their products. We have relationships with both internationally recognized and emerging designers, which allow us to offer our customers an array of innovative and often hard-to-find merchandise. Our differentiated business model, along with a dedicated management team, have enabled us to generate significant growth in customers and net sales over the last five years.

We established our business strategy on the premise that multiple, integrated sales channels 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 furnishings retailers initially established their presence with one sales channel and subsequently added additional channels, thereby making integration across sales channels more difficult. Seamless channel integration, meaning all of our products are available, and order processing, customer service assistance and product returns can be handled, through any of our four sales channels, is crucial to our success because a substantial portion of our customers purchase our products after having had contact with two, three or sometimes all four of our sales channels. All of our sales channels utilize a common inventory held at our centralized Hebron, Kentucky fulfillment center and share information technology systems, which together provide a level of scalability to facilitate future growth. This integration further improves customer service by speeding delivery times and providing real-time inventory information across all sales channels.

Our merchandise offering is comprised of products that we believe share an aesthetic appeal and feature distinctive modern design elements, superior quality and authenticity. We offer over 500 products in numerous categories, including chairs, tables, workspace and outdoor furniture, lighting, floor coverings, beds and related accessories, bathroom fixtures, fans and other home and office accessories. Across each of our sales channels, we display merchandise in an educational context by providing detailed information regarding the designer and key design and functional elements about each product. We obtain our merchandise from select designers and manufacturers in Europe and North America that meet our stringent requirements for design, quality, packaging, and consistency of production and flow. We believe that our unique assortment of innovative and often hard-to-find products serves as a competitive advantage and provides our customers with a distinctive shopping experience.

We believe our success requires the development and maintenance of a broad base of residential and commercial customers. Our customers include design professionals, consumers with an interest in modern design and commercial clients. We target educated consumers focused on quality of life and interested in self-enrichment. Historically, our residential customers have been almost as likely to be male as female, have spanned a wide range of ages and typically have had household incomes greater than $75,000. In fiscal year 2004, our net sales were approximately 65% to residential customers and 35% to commercial customers. We sell to the following commercial customers, who we believe are representative of our commercial customer base in a number of different industries, including: architects and designers such as Art Design and SHW Group, Inc.; restaurants such as Chicago Pizza & Brewery, Inc. and Krispy Kreme Doughnuts, Inc.; institutions of higher education such

as New York University and Rhode Island School of Design; retailers such as The Gap, Inc. and The Limited Brands, Inc.; and service firms such as Fitch, Inc. and iSTAR Financial Inc. A significant percentage of our commercial sales is to small businesses with an interest in, or focus on, design, such as restaurants, salons and boutiques.

We also seek to establish close, lasting relationships with notable and emerging designers and manufacturers. While modern design products have been widely popular in Europe for decades, we believe distribution channels in the United States have historically been limited principally to local boutiques and interior designers. This has restricted product availability and exposure in the United States, reducing opportunities for both designers and manufacturers. We believe we are providing European and American designers with broader, more efficient access to the U.S. modern design furnishings market. In that role, we have developed relationships with leading and emerging designers and manufacturers of design products, many of whom have sought us out as a platform for further exposure and distribution of their products.

We were founded and incorporated in 1998, and in April 1999 we received funding from a group of investors led by JH Partners, LLC, a San Francisco-based private equity investment firm formerly known as Jesse.Hansen&Co. We began selling products through our catalog and online in the second half of 1999. We opened our first studio in November 2000 and first generated a profit in the second quarter of 2001. During the last three years, we have continued to increase sales across all distribution channels with particular growth in studio sales. We have increased the number of our studios from one at the end of 2001 to 3337 as of ~~January 1,~~February 24, 2005. We expect to open 18 to 20 new studios during each of 2005 and 2006, and as of ~~January 1,~~February 24, 2005, we had signed leases for ~~seven~~ten additional studios.

Modern design is a twentieth century movement, the purpose of which is to utilize current technologies and production methods to create more useful products for a broad audience. The movement was driven by many important designers and architects, including Ludwig Mies van der Rohe, Charles and Ray Eames and Le Corbusier, among others, and has its origins within the German Bauhaus school in the 1920s and the post-World War II mid-century modernists. Modern design is concerned more with functionality than with appearance. As such, modern design is not a decorative style, but rather a discipline where a product’s form follows its function. A product achieves its value through utility and performance, and a well-designed product is one that performs its task especially well and elegantly. Characteristics of modern design furnishings are simplicity, originality, intelligent use of materials, quality, longevity and the avoidance of superfluous ornamentation or period styling. We offer products created by the classic authors of modern design, as well as products created by emerging designers, and strive in all aspects of our business to enhance appreciation of modern design.

The residential and commercial furnishings market encompasses a variety of goods, including furniture, floor coverings, lighting and accessories. Sales in the U.S. home furnishings market were estimated at approximately $68.3 billion in 2003 and are projected to grow 4.2% to $71.1 billion in 2005, according to Datamonitor plc, a business information company specializing in industry analysis and forecasts. Sales in the U.S. office furnishings market were approximately $10.1 billion in 2003 and are projected to grow approximately 14.6% to $11.5 billion in 2005, according to BIFMA International, a not-for-profit trade association of furniture manufacturers and suppliers whose strategic area of focus includes, among other things, statistical data generation.

The modern design furnishings market is a sub-sector of the residential and commercial furnishings market. We believe that the upscale segment of this market, in which we operate, will continue to benefit from several long-term trends, including an increasing interest in modern design, middle-market consumers’ willingness to trade up for premium products and favorable demographic trends.

We believe the increased focus on design covers a wide range of products both within and beyond the traditional furnishings market, from home computers to kitchen appliances. Consumers’ expanding focus on design has

been featured in several television programs, such as Bravo Network’sQueer Eye for the Straight Guy, which has featured some of our products, and The Learning Channel’sTrading Spaces, as well as in books and other publications, including Michael Silverstein’s book,Trading Up: The New American Luxury. According to the U.S. Department of Commerce, the disposable income of consumers has increased from 2000 through 2004. These consumers are driving increased sales of premium goods and services, which deliver higher quality, technical advantages and superior performance relative to conventional products. These premium products typically command higher prices and gross margins than traditional products. We believe that the household “cocooning” trend among consumers has also had a significant impact on our market. As more consumers retreat to their homes to spend time with family and friends, we believe that quality, home-related design products have become increasingly popular. We believe many consumers are interested in modern design products, but are not familiar with, or are hesitant to engage, the more traditional sales channels, such as interior designers or expensive boutiques.

Businesses have also begun to place more emphasis on modern design. We believe that many manufacturers are turning to design as an important differentiator of their products. A November 2003 article inFortune magazine highlighted organizational initiatives at several major corporations, which have created new positions for design professionals and promoted other design professionals, reflecting the growing importance of design in selling their products. We believe small businesses, which account for a significant portion of our commercial sales, historically have also had difficulties gaining access to modern design furnishings. We believe that the modern design furnishings industry has generally marketed and sold modern design products in a manner that effectively excludes small businesses as buyers. Factors that contribute to the exclusion of small businesses from the market for modern design products include: the imposition of minimum order requirements that often exceed such buyers’ requirements; limited physical presence of product sellers in smaller markets; and lack of interest from product distributors to sell to smaller buyers, among others. According to the U.S. Census Bureau, small businesses, defined as employers with less than 100 employees, comprised 98.2% of all employers in 2001. We believe this large segment of the commercial market has traditionally been underserved and will continue to be particularly receptive to our product offerings.

We believe our business model makes design-oriented products available for convenient purchase to a broad array of residential and commercial consumers and provides enhanced consumer education and product information to our customers, helping us further expand and penetrate the market for modern design products.

We believe our business strategy and strengths position us to be a leading provider of modern design furnishings in the United States. We believe that our business model is differentiated in several key respects from those of traditional retailers and serves as a competitive strength. We intend to increase market penetration through our strong brand authority, multiple and integrated sales channels, distinctive merchandising, strategic designer and manufacturer relationships, superior customer service and the efforts of our experienced management team.

Since our founding, an integral part of our strategy has been to build the Design Within Reach brand both within the design community and among residential and commercial consumers. To build our brand, we have cultivated relationships with leading designers, highlighted designers and classic design products throughout our sales channels, and carefully sourced products that embody the principles of enduring design, performance and authenticity. Our publications have broad consumer reach. In fiscal year 2004, we circulated on average over 948,000 catalogs each month, and more than 330,000 people currently receive our weekly electronic newsletter, “Design Notes.” We have also sponsored design conferences and other design education activities, such as studio events and design contests, which further increase public awareness of our brand. Through these activities, we believe that the Design Within Reach brand provides our products with authenticity among our customers and has become associated with design excellence both in the design community and with residential and commercial consumers with an interest in modern design.

We market and sell our products to both residential and commercial customers through four integrated sales channels, consisting of our catalog, studios, website and direct sales force. We believe our multi-channel strategy enhances our ability to access and serve our customers while improving operational efficiency.

This strategy allows us to better serve customers who may prefer shopping for products in different formats, facilitates rapid and direct feedback as to customer needs and satisfaction, and provides broader exposure and reinforcement of the Design Within Reach brand. Customer service is further enhanced by providing superior convenience, by cost effectively communicating educational information about our products and design in general and by permitting customers to view our complete product selection. In fiscal year 2004, approximately 60.7% of online buyers had previously been mailed a catalog but chose to purchase atwww.dwr.com, sometimes after visiting a studio or speaking with a customer service representative over the phone. Our studios enable us to provide the touch and feel of our merchandise to customers and provide a local presence for enhancing market penetration. Our website serves as an information source for both our studio and catalog customers, as well as for our own business development executives. We maintain consistent pricing across all of our sales channels for all of our customers.

Our strategy also improves operational efficiency through the utilization of a common inventory and centralized information systems. Operating from a common inventory allows us to maintain a high proportion of our products in stock at all times and facilitates more efficient inventory turns. In fiscal year 2004, we had an initial fulfillment rate, meaning the product was in stock and ready to ship at the time of order, of approximately 86.2%, and we achieved 6.6 turns of our pickable inventory (defined as annual product cost of goods sold divided by average product inventory in our fulfillment center and available for sale to our customers, over the preceding thirteen months). In addition, our integrated channel strategy and common inventory enable us to centralize our management information systems, providing a highly scalable platform capable of supporting additional growth. A centralized system also permits us to utilize experience and information from each channel to benefit the others. For example, we deploy customer data from our catalog and online channels to identify promising markets and to increase the effectiveness of our studio site selection process.

We seek to be a leader in identifying and selling products that are innovative and not widely available from other retailers. In fiscal year 2004, 34.5% of our net sales were derived from products for which we believe we were the sole supplier in the United States. While we do not have exclusivity agreements with our manufacturers, we believe we are the sole supplier of many products we carry, based on manufacturers’ oral representations that they are only manufacturing certain products for us and our not being aware of such products being sold by other retailers.

We take a selective approach to product sourcing, and new products must meet our stringent standards for design, quality and authenticity before they are selected for inclusion in our product assortment. We ensure that the price, look and feel of our products is consistent across all sales channels, creating a sense of harmony for our customers. A crucial element of our merchandising is the belief that each well-designed product should be presented as a stand-alone item, rather than as part of a prepackaged set. Therefore, we present and describe our products in a clear, concise and specific manner, including by providing line drawings for each product with its measurements. We complement our merchandise mix with authoritative educational content regarding the designers of our products and other design topics. We believe that our merchandising approach delivers large average order values, along with attractive gross margins and returns on capital.

We purchase merchandise from select designers, manufacturers and distributors in Europe and North America that meet our stringent requirements for design, quality, packaging, and consistency of production and flow. We currently source products from over 200 vendors, many of which are small, family-owned businesses. Although

we do not have any formal written agreements with designers, manufacturers and distributors, we believe that we have developed strong, albeit not formal, business relationships with such entities. These relationships have developed over time principally because these designers, manufacturers and distributors have prospered along with our growth, which has fostered loyalty towards us by these entities. For example, we purchase products from our vendors frequently and in large volumes, and in many cases we are a vendor’s largest customer. As a result, we are able to develop long-lasting relationships with most of our vendors and often become the de facto sole provider of their products in the United States. In addition, we seek to strengthen our relationships with designers by highlighting the design community in our publications and on our website, as well as through our educational efforts across all sales channels. Our credibility and reputation with residential and commercial consumers for high quality, innovative modern design products is further enhanced by our relationships with larger, more prominent vendors from around the world, such as Herman Miller, Inc., Vitra Inc. and Kartell US Inc. Developing and maintaining our relationships with these designers and manufacturers is a critical component of our strategy.

Since inception, we have focused on providing what we believe to be superior customer service in each of our sales channels. Our policy of having products “in stock and ready to ship” is a departure from the approach taken by many other modern design furnishings retailers, which we believe typically requires customers to wait weeks or months to receive their products. In fiscal year 2004, we had an initial fulfillment rate, meaning the product was in stock and ready to ship at the time of order, of approximately 86.2%, and we shipped substantially all in stock product by the next business day after receiving the order. With the opening of our new fulfillment center in Hebron, Kentucky, approximately 70% of the U.S. population is located within a two-day drive time for delivery, which has enhanced our level of customer service. Other key elements of our customer service include: well-designed and attractive catalogs; knowledgeable sales personnel; our easy-to-use website for around-the-clock purchases; a liberal product return policy; extensive product information; and insightful design-oriented commentary. Our sales personnel work in a coordinated fashion across all of our sales channels with the goal of providing a satisfying and educational experience to all customers. We typically hire our sales personnel from the design community, and we believe that their passion and knowledge enables them to interact effectively with design professionals and residential and commercial consumers in all channels. The turnover rate among our sales personnel has historically been low, which we believe results from our sales personnel seeing their position with us as a career opportunity.

We were founded in 1998 by Robert Forbes, Jr., who continues to be our leading influence in modern design and our principal contact with the design community. Since May 2000, our senior management team has been led by our Chief Executive Officer Wayne Badovinus. Mr. Badovinus was formerly the President of Williams-Sonoma, Inc. and Chief Executive Officer of Eddie Bauer, Inc. Mr. Badovinus has assembled what we believe to be a first-class management team, who have on average approximately 20 years of experience with leading companies in the retail and consumer products industries. We believe that our team has successfully managed the business as evidenced by a demonstrated track record of profitable growth. We intend to continue to leverage our management team’s experience and acumen to execute our strategy effectively.

Our goal is to strengthen our position as a leading provider of modern design furnishings and accessories. We believe that as a truly integrated multi-channel business, we must measure ourselves by total market penetration, or sales across all of our channels. Accordingly, we focus on increasing the overall penetration of our target markets, rather than on increasing sales in a particular channel. This helps us avoid conflicts among channels, which often occurs in traditional retail models. We select our target markets based upon population statistics and our current sales in those markets. We intend to increase our market penetration nationwide and within selected markets by opening additional studios, expanding and refining our product offerings, increasing marketing within and across our sales channels and expanding market awareness and appreciation for design products.

Our studios have become an integral part of our multi-channel strategy by providing customers with the ability to touch and feel our products and by bringing our philosophy and products to life. We believe that our studio concept has broad appeal, offers attractive financial returns and can be implemented successfully in many additional markets across the United States. We opened our first studio in November 2000 and have expanded from one studio at the end of 2001 to 3337 studios as of ~~January 1,~~February 24, 2005. We intend to expand our studio presence by opening 18 to 20 new studios in each of 2005 and 2006, in both new and existing markets. As of ~~January 1,~~February 24, 2005, we had signed leases for ~~seven~~ten additional studios. We generally seek to occupy street-front locations in moderate rent areas, which allows us to become visible and integrated in a neighborhood while obtaining attractive rental payments. We believe our studios have compelling unit-level economics. In fiscal year 2004, studios open the entire twelve months had an average annual sales volume of $2.7 million and an average annual studio operating margin of 26.5%. These studios had an average ten-month payback on an average initial investment of approximately $464,000, including net buildout and pre-opening expenses and the cost of product floor samples. We intend to use the additional studios to gain market share and to secure a strong competitive position in each market where our studios are located, with support from our other sales channels.

We believe there are substantial opportunities in the near-term to utilize our brand attributes of enduring design, quality and authenticity to expand our product offerings within existing categories and enter into new, complementary categories. We regularly evaluate and edit our merchandise assortment based upon product performance, compatibility and margin. In recent years, we introduced several new product categories, such as bedroom furnishings and mattresses, floor coverings and lighting. Products introduced since January 1, 2002 accounted for 29.6% of our net sales for fiscal year 2004. Bedroom furnishings, which we introduced in September 2001, is currently our fastest growing product segment, and we are currently considering the launch of children’s furniture products. We also intend to focus on and expand the number of product offerings for which we believe we are the sole supplier in the United States. We believe that any product that meets our standards for design attributes and quality is a candidate to be added to our product assortment, and in the future we may seek out opportunities to market products beyond residential and commercial furnishings and accessories.

We believe that opportunities exist to expand net sales with marketing initiatives focused within and across each of our sales channels. We have expanded the number of catalogs in circulation by introducing new, targeted catalogs that vary in size, merchandise selection and frequency of delivery. For example, in March 2004 we began to mail smaller catalogs containing our most popular products, as well as new items, to prospective customers in markets where we have studios and in other select markets. We believe that this has enabled us to more cost-effectively reach new customers, improve our response rates and order sizes and lower our per customer acquisition costs across all of our sales channels. We believe that we can enhance marketing efficiency by promoting our studio locations and openings in our catalogs and on our website and by utilizing customer data obtained from our catalog and online channels to target future studio openings. Our studios contain computers for online access towww.dwr.com, and we encourage in-studio sales personnel to promote online usage and to distribute our catalogs. To enhance online sales, we intend to develop additional website functionality and to implement additional third-party marketing agreements, such as our existing agreements with selected search engines. We also intend to add new business development executives who, working in conjunction with our studio proprietors, will target new commercial customers and work to expand sales to existing commercial customers.

We intend to expand our addressable market by continuing to use each of our sales channels to promote innovative design products and to educate consumers on the principles of modern design. We seek to educate consumers through our weekly electronic newsletter, catalogs and other special publications, such as our

republication of the classic design bookHow to See, by George Nelson, and through periodic design seminars, conferences, studio events and design contests. For example, we recently commenced our second annual online contest asking customers to create chairs made from the corks and wire cages of champagne bottles. In our second annual contest, we received over 500 entries and, following the contest, we conducted traveling exhibitions of over 100 of the leading entries for display in our studios. We often host events featuring industry speakers and promote studios by hosting in-studio activities such as wine tastings for consumers and neighboring galleries. We believe that these activities enhance consumers’ appreciation of modern design and expand the market for our products.

Our merchandising strategy is to offer well-designed products that are versatile and can be comfortably integrated with other furnishings. As such, we are selective in the products we offer and present our products as stand-alone items, rather than as part of a prepackaged set. The principles that guide our merchandising decisions are authorship, attention to detail, simplicity, quality of materials and authenticity. Our product offering includes a refined assortment of chairs and tables, workspace and outdoor furniture, lighting, floor coverings, bedroom furnishings and related accessories, bathroom fixtures, fans and other home and office accessories.

Noguchi Table – Designed in 1944 by Isamu Noguchi for Herman Miller, Inc., this is a practical glass-top table for commercial or residential use in which two simple, smoothly shaped solid wood pieces interlock to form a tripod that supports a three-quarter inch slab of transparent glass.

Arco Floor Lamp – Designed in 1962 by Achille Castiglioni and Pier Giacomo Castiglioni, this is a classic modern lighting design characterized by the dramatic arc of its stainless steel stem and the counterpoint provided by the substantial Carrara marble base. The lamp is designed to provide overhead lighting without ceiling suspension, and its light intensity makes it useful for reading, working or dining.

Globus Chair – Designed in 1993 by Jesus Gasca, this is a sophisticated and practical dining chair designed for both commercial and residential use. The chair has a stainless steel frame and wood lacquer back and stacks up to five chairs high.

Sussex Credenza – Designed in 2000 by Terence Woodgate and inspired by the shingled, angled roof of a Sussex cottage, this credenza features four louvered doors with dominant horizontal lines that mimic the credenza’s rectangular shape, oak veneer applied to all sides, compartments with adjustable shelves and a steel base that lends further aesthetic appeal and acts as a stable foundation.

brand further strengthens the appeal of these products as intelligent answers for residential and commercial customers’ furniture needs. We believe that commercial customers find many of these products particularly attractive because of their problem-solving attributes. Products designated as design solutions generally remain in our merchandise assortment until another product offering a better solution becomes available. Examples of design solutions that we offer include:

Coco Armchair – Designed in 2001 by Fratelli Tominaga, this is a lightweight and sturdy dining chair that is built for easy maneuvering. The chair is constructed from durable beechwood and features a continuous barrel backrest which doubles as an armrest and can be hung on a tabletop or stacked to open floor space for cleaning or storage. The chair’s seat is subtly contoured for comfort and a single piece of wood acts as the back leg and forms a portion of the backrest for maximum strength.

Sliding Sofa – Designed in 2000 by Pietro Arosio for Tacchini, this is a sofa with clean lines and modern proportions that easily transforms into a two-person bed by sliding the base of the sofa out from the backrest. Its seat cushions and backrest provide the platform for both sitting and sleeping, and it also comes with two large feather-filled pillows. The upholstery is fully removable for cleaning, and the aluminum frame is fitted with two casters for easy mobility.

Cubitec Shelving – Designed in 1998 by Doron Lachish, this is a modular shelving system consisting of lightweight polypropylene panels, which may be easily assembled into multiple configurations of cubes. Each kit contains eighteen panels to create six cubes, which can be attached vertically or horizontally. The shelving comes in a variety of colors and can be used in a wide-range of residential and commercial environments.

Kyoto Chair – A clean-looking chair constructed with beechwood, with an unusual broad back. The Kyoto Chair is so named because it is a popular café chair in Japan.

Nelson Ball Clock – Designed in the 1950’s by George Nelson, this is a thirteen-inch diameter circular clock, the circumference of which is comprised of twelve small balls each connected by a rod to the clock’s center.

PH5 Pendant Lamp – Designed in the 1950’s by Poul Henningsen, this is a hanging ceiling lamp that has been widely used in Europe for decades. The lamp’s shade is comprised of layers of varying sizes and shapes that direct light both horizontally and vertically. The lamp is compact enough to allow multiple lamps to be hung in the same setting and can be used in both residential and commercial applications.

We believe there are many product lines that can be developed in addition to residential and commercial furnishings and accessories, and we are constantly looking for ways to further leverage our brand recognition for design and quality. Our merchant and inventory planning teams meet weekly to review selling rates and make decisions regarding our merchandise assortment based on product performance. We manage over 500 active products and regularly review the bottom third of our assortment and discontinue unproductive items. This process allows us to introduce new items each year while maintaining our focus on product management and

inventory turnover. For example, in fiscal year 2004, our top 25 products represented 41.5% of our net sales. We introduced four of these top 25 products since the beginning of 2004. When we discontinue an item, the remaining inventory of that item is offered as a clearance item through our website.

Our full-color catalog is mailed every month and serves as our primary brand building and marketing tool. By mailing our catalogs in large quantities in selected markets, we are able to reach a substantial audience, reduce the need for large expenditures on traditional advertising and marketing and generate additional sales across all of our channels. In fiscal year 2004, we circulated over 11.4 million catalogs to existing and prospective customers, representing an increase of 16.6% from fiscal year 2003. In fiscal year 2004, phone sales totaled $25.5 million, remaining relatively flat compared to fiscal year 2003.

Our catalog reflects the values of the modern design community, with clean and simple graphic layouts and low-density and easily-readable typeface. Copy is simple, direct and informative. Line drawings and measurements complete the straightforward presentation of each product. The catalog also addresses product functionality, such as the ability to stack chairs, the durability of fabrics and ergonomic features. Additionally, our catalogs provide historical information about our products, many of which have rich design legacies, and generally feature the designers pictured with their products. This approach signals to the customer our respect for the design community, and we believe that it has been one of the most appreciated aspects of our catalog.

Our catalog generally ranges from between 80 and 100 pages and contains between 350 and 400 products. Catalog circulation is focused on:

We have introduced smaller catalogs as part of our circulation strategy. These smaller catalogs contain our most popular products as well as new items and are mailed to prospective customers in markets where we have studios and in other select markets. We believe this has enabled us to more cost-effectively reach new customers, improve our response rates and order sizes and lower our per customer acquisition costs across all of our sales channels. These smaller catalogs generally range from between 50 and 60 pages and contain between 200 and 240 products.

The role of our studios is to bring modern design to customers’ neighborhoods and allow them to experience our products first hand. In fiscal year 2004, studio sales totaled $52.9 million, representing a 114.6% increase from fiscal year 2003. We opened our first studio in San Francisco in November 2000 and operated a total of 3337 studios as of ~~January 1,~~February 24, 2005. Like our catalog and website, our studios are designed to reinforce our multi-channel strategy. For example, in fiscal year 2004, approximately 48.4% of buyers in our studios had been mailed a catalog prior to making a purchase.

The design of our studios is understated and reflects the clean, simple aesthetics established by the catalog. This allows us to highlight the design elements of our merchandise. Studio sizes range from approximately 1,900 to

11,000 square feet. We are targeting our future studios to be approximately 3,300 square feet on average. Most studios are located in buildings with architectural elements such as brick walls, hardwood floors, high ceilings or exposed beams, which we believe provide the appropriate atmosphere for our products. Since studios are often located in architecturally distinctive buildings, sometimes not originally intended for retail use, our floor plans may vary. However, all of our studios feature designer-oriented graphics and include our “chair-wall,” which showcases a variety of the chairs we offer on clean white display risers. Each studio’s selection of tables, lounges, lighting, shelving and other items are displayed throughout the remainder of the studio. Signage is understated but informative and is meant to reflect our design community approach. Since our studios only contain product samples and do not stock inventory for purchase, we are able to devote substantially all of our studio space to showcasing and selling products while also reducing product shrinkage, in-studio costs and the number of studio personnel. Customers are encouraged to touch the products and treat the studio as their own design hub, allowing them to learn about our products in a friendly and informal atmosphere. Computers with direct connections towww.dwr.com are available in our studios, and salespeople are trained to take customers to our website and instruct them in its use.

The following table provides information about our existing studios as of ~~January 1,~~February 24, 2005.


Market / Location	Opened	Square Footage
Boston Area
Cambridge, Massachusetts	September 2003	2,521
Boston, Massachusetts	August 2004	2,970


~~Market / Location~~	~~Opened~~	~~Square Footage~~
Denver
Denver, Colorado	July 2004	4,098
Dallas
Dallas, Texas	February 2003	6,080
Houston
Houston, Texas	May 2004	4,100
Miami / Fort Lauderdale Area
South Beach, Florida	May 2003	5,315
Coral Gables, Florida	March 2004	1,900
Philadelphia
Philadelphia, Pennsylvania	September 2004	3,500
Portland
Portland, Oregon	December 2002	11,037
West Palm Beach
West Palm Beach, Florida	July 2003	6,619
Detroit
Birmingham, Michigan	February 2005	6,000
Providence
Providence, Rhode Island	January 2005	3,190

We generally staff our studios with one manager, whom we refer to as a proprietor, and two to three sales associates. We select proprietors from the design community who bring a passion for, and knowledge base about, design. The studio proprietors are responsible for creating traffic in the studios through in-house design events, hiring and training sales associates, and ultimately leading the sales effort for their studio. Because our studios contain only product samples and do not stock inventory for purchase, we are able to staff our studios leanly and our studio personnel are able to focus on delivering a superior level of service and information to our customers. Both studio proprietors and sales associates work on an incentive-based compensation structure that includes salary, commission and bonus. We believe that our studio employees have the opportunity to earn higher compensation than traditional home furnishings retail employees.

Target markets for studio openings are identified based partly on household population statistics, but also on supporting sales data collected from our other channels. Studios are located typically in moderate rent areas and usually occupy street-front space. In fiscal year 2004, studios open the entire twelve months had an average annual sales volume of $2.7 million and an average annual studio operating margin of 26.5%. Our average initial investment per studio opened during fiscal year 2004 was approximately $563,000, including net build-out and pre-opening expenses and the cost of product floor samples.

We created our website,www.dwr.com, to be a readily available resource for modern design furnishings and to support sales and customer service activities 24 hours a day. In fiscal year 2004, our online sales totaled $25.1 million, representing a 34.6% increase from fiscal year 2003. Our website is designed to be consistent with our catalog, with clean and simple layouts. We believe that other features such as zoom, product color changes, and downloadable product specifications, increase functionality and differentiate our website from those of our competitors.

Online sales are an essential component of our multi-channel strategy. In fiscal year 2004, approximately 60.7% of online buyers had previously been mailed a catalog but chose to purchase atwww.dwr.com, often after visiting a studio or speaking with a customer service representative over the phone. In addition to driving traffic to our

website through our other sales channels, we have entered into marketing agreements with selected search engines that provide us with key word rights in order to increase the number of visits to our website.

One additional feature that has developed into a central part of our strategy is a weekly outgoing e-mail called “Design Notes.” This newsletter currently has a circulation of more than 330,000 and covers a wide range of design topics. The newsletter provides information about our products and also features general industry discussions on topics such as urban design, automobile design, mass transit systems and profiles of specific

designers. With an average opt-out rate, meaning the number of requests from newsletter recipients that we discontinue sending them our newsletter as a percentage of total newsletters sent out, of 0.2% in fiscal year 2004, the newsletter is an important tool allowing us to make valuable contacts with design enthusiasts and potential customers. We have also used our website and “Design Notes” as testing grounds for new products, as they have proven to be effective media for receiving prompt customer feedback.

The role of our business development executives is to market and sell our products to commercial buyers, including restaurants, museums, universities, real estate developers and retailers, among others. Although our business development executives are responsible for establishing and maintaining relationships with our commercial customers, a substantial portion of our commercial sales are transacted in our other channels. In fiscal year 2004, net sales generated by our business development executives were $2.5 million, representing a 25.5% decrease from fiscal year 2003. Business development executives generate average order values substantially higher than those in our other channels. In fiscal year 2004, the average order value generated by business development executives was approximately $1,985. Commercial sales through our business development executives tend to be for individual office spaces and to local or regional retailers. We currently do not focus our commercial business on larger, corporate wide furnishing programs.

Like our studio proprietors, our business development executives are hired from the design community and have a similar passion for, and knowledge of, design and our products. Business development executives generally work out of the studios and work closely with the studio proprietors. This cooperation is crucial to the success of both channels. While this channel is in the early development stage, we believe that the opportunity to add business development executives and increase our commercial business is substantial, and we expect to focus on this opportunity in our largest strategic markets over the next few years.

We continually seek to identify and introduce new products that meet our stringent design and quality standards. We provide designers and manufacturers with a forum through which they can significantly enhance the exposure and distribution of their products. We cultivate vendor relationships and host a biennial conference where we communicate openly with our vendor base regarding our expansion strategy and product requirements.

We employ a specialized merchandising team that actively participates with manufacturers and designers in the design process for many new products. Our founder and our merchandising team travel regularly to European and domestic markets visiting trade shows, designers and manufacturers in search of innovative new product offerings. Once a product has been approved for inclusion in our product assortment, we negotiate with the product’s vendor to secure product supply. In an effort to ensure consistent product flow from our manufacturers, our inventory planning team supplies select vendors with a six-month rolling forecast of projected purchases.

When determining which products to introduce, we estimate the potential sales, gross margin and returns on capital. We also assess whether a product has the potential to be available through mass merchant channels, which would dilute the uniqueness of the product. In fiscal year 2004, approximately 34.5% of our net sales were derived from products for which we believe we were the sole supplier in the United States. Going forward, we will seek to increase this percentage.

We depend on select designers, manufacturers and distributors to develop and manufacture products for us. We do not have any contractual relationships with these suppliers. However, we represent the largest share of business for many of them. We currently conduct business with over 200 designers, manufacturers and distributors, over half of which are located outside the United States. In fiscal year 2004, our largest vendor, Herman Miller, Inc., supplied us with products representing 9.1% of our net sales, and products supplied by our five largest vendors represented approximately 30.1% of net sales.

We are committed to providing our customers with courteous, knowledgeable and prompt service across all our channels. We have customer service representatives located at our corporate headquarters in San Francisco, California as well as our distribution center in Hebron, Kentucky. Our agents are available to take calls from 8:00 a.m. to 9:00 p.m. Eastern time, Monday through Friday, and 10:00 a.m. to 6:30 p.m. Eastern time on Saturday. Our customer service centers are staffed with DWR representatives who are passionate about design and knowledgeable about our products. Our customer service representatives handled, on average, approximately 20,342 customer contacts each month in fiscal year 2004. Our representatives provide personal attention to customers who call toll free or send e-mails to request a catalog subscription, place an order or inquire about a product. Our customer service group also is responsible for resolving customer complaints. We seek to provide a superior customer experience. Therefore, if a customer is not satisfied with one of our products, he or she can return it for repair, replacement or refund.

We seek to hire and retain qualified sales and customer service representatives in both our customer service center and studio operations. As of ~~January 1,~~February 24, 2005, approximately half of our studio personnel either had a degree in design or prior work experience as a design professional. Each new studio proprietor undergoes a thorough training program during which he or she is trained in all aspects of our business. Studio sales personnel are trained extensively prior to a new studio opening. This training focuses primarily on giving them a working knowledge of our products, augmenting their knowledge regarding featured designers and ensuring that they understand our high customer service standards. We have also developed ongoing programs conducted at each studio that are designed to keep each salesperson up-to-date on each new product offered.

During January 2004, we launched a private label credit card program, which is administered by World Financial Network National Bank. We bear no credit risk in connection with this program. As of January 1, 2005, approximately 4,061 cards had been issued, and we have experienced an average order value of $1,716 per card transaction.

In January 2004, we moved our fulfillment operations from Union City, California to Hebron, Kentucky. All product orders from each of our sales channels are fulfilled from this facility, except in limited cases where the product is shipped directly to the customer from the manufacturer. The new facility, at approximately 217,000 square feet, is nearly 100,000 square feet larger than our previous Union City facility. We have a right of first refusal on an adjacent 100,000 square feet in the new facility, and we expect this facility to support our distribution capacity needs for at least the next three years. We believe this facility has enhanced our level of customer service and order fulfillment, as approximately 70% of the U.S. population is now within a two day drive time for delivery. Shipment of products from our fulfillment center to our customers are through third-party carriers. Our goal is to ship the majority of customer orders within 24 to 48 hours after the order is received. In fiscal year 2004, we had an initial fulfillment rate, meaning the product was in stock and ready to ship at the time of order, of approximately 86.2%, and we shipped substantially all in stock product by the next business day after receiving the order.

We have invested significant resources to create a fast, reliable and secure network that facilitates companywide access to our operational systems and information. These systems, including our supply chain, order processing,

distribution, financial and communication systems are located in our headquarters or warehouse data centers. Sales associates in all channels have high-speed access to real-time inventory data and customer order status 24 hours a day, seven days a week through their computers and the DWR order-entry system, eliminating the requirement for a point-of-sale system.

We have designed our customer, order and merchandise databases to collect and summarize detailed sales data at the market, studio, vendor, customer and product level. Maintaining sufficient inventory levels is crucial to our

business, and real-time sales and inventory information is available to our merchandising staff and senior management for review. This allows us to focus on maximizing sales while minimizing our inventory investment. Each of our sales channels is fully integrated with the main computer system at our corporate headquarters, allowing us to transmit sales, inventory and customer data as well as receive data from headquarters on a real-time basis. This data integration enables corporate personnel to monitor current sales, inventory and merchandise information, providing the information necessary for inventory allocations and replenishment and customer database management.

Our website is located at a third-party hosting facility in Santa Clara, California. The hardware configuration includes firewalls, scalable servers, and other network enhancing features. This configuration allowed us to maintain 99.6% availability and a 1.6 second average response time over broadband during fiscal years 2003 and 2004.

The market for residential and commercial furnishings is fragmented with no single company holding a dominant market position. The market includes numerous smaller specialty retailers, as well as department stores, larger mass merchandisers and home furnishings stores, with department stores commanding a decreasing percentage of the furnishings industry compared to specialty retailers. In recent years, the industry has been characterized by consolidation, the withdrawal of certain retailers from the marketplace and a de-emphasis by traditional department stores on upscale merchandise, leaving fewer large competitors focused exclusively on this segment of the furnishings market.

Many of our competitors are larger than us and have substantially greater financial, marketing and other resources than we do. However, many smaller specialty retailers may lack the financial resources, infrastructure and national brand identity necessary to compete effectively with us.

The U.S. retail industry, along with the catalog and online commerce sectors are highly competitive, dynamic in nature and have undergone significant change over the past several years. Our ability to anticipate and respond successfully to these changes is critical to our long-term growth. If we are unable to maintain or increase our market share or compete effectively in the furnishings market, our business, financial condition and operating results would be adversely affected.

We believe that the ability to compete successfully is determined by a variety of factors, including quality of product selection, effective product presentation, customer service and pricing. We believe that we compete favorably on the basis of these factors.

We believe that our trademarks, including our registered trademark, “Design Within Reach,” and the brand name recognition that we have developed are of significant value. We strive to preserve the quality of our brand name

and protect all of our intellectual property rights, which include the copyrights in our catalogs, rights to our domain name,www.dwr.com, databases and information management systems, and licenses for software for our desktop computers, to ensure that the value of our proprietary rights is maintained. We rely on various intellectual property laws and contractual restrictions to protect our proprietary rights. These include trademark, copyright and trade secret laws and confidentiality, invention assignment and nondisclosure agreements with our employees, contractors and suppliers.

We currently lease an approximately 59,000 square foot facility in downtown San Francisco, California for our corporate headquarters. The lease for our corporate headquarters expires on March 10, 2010. We believe that this facility will provide us with adequate space for growth for at least the next four years.

We lease approximately 217,000 square feet of warehouse space in Hebron, Kentucky for use as our warehouse and fulfillment center. We have a right of first refusal on an adjacent 100,000 square feet, and we expect this facility to support our distribution capacity needs for at least the next three years. The lease expires on November 30, 2008.

As of ~~January 1,~~February 24, 2005, we leased approximately ~~146,000~~164,000 gross square feet for our 3337 studios that are currently open and an aggregate of approximately ~~24,000~~39,000 square feet for ~~seven~~ten planned studios for which we have signed leases. For a listing of our studios, see “Sales Channels—Studios.” Most of the studio leases have lease terms ranging from two to twelve years and provide for a minimum rent plus a percentage rent based upon sales after certain minimum thresholds are achieved. These leases generally require that we pay insurance, utilities, real estate taxes and repair and maintenance expenses.

At ~~January 1,~~February 24, 2005, we had ~~269~~287 employees, of whom ~~214~~237 were engaged in selling and administrative functions, and 5550 were involved in sourcing or fulfillment functions. We have never experienced a work stoppage, and none of our employees are represented by a labor union. We believe that our relations with our employees are good.

From time to time, we may be involved in legal proceedings and litigation incidental to the normal conduct of our business. We are not currently involved in any material legal proceedings or litigation.

The following table sets forth information with respect to our executive officers, senior management and directors as of February ~~16,~~24, 2005:

Wayne Badovinus. Mr. Badovinus has served as our president and chief executive officer since May 2000 and as a member of our board of directors since November ~~1998.~~1998, and has served as our acting chief financial officer since February 18, 2005. Mr. Badovinus has also served as a senior operating partner for JH Partners, LLC, a San Francisco-based private equity firm since April 2004. From September 1998 to May 2000, Mr. Badovinus served on the faculty of Green Mountain College. Mr. Badovinus is currently a member of the board of directors of NapaStyle, Inc., a multi-channel retailer of food and lifestyle products. Mr. Badovinus holds a B.A. from the University of Washington.

Robert Forbes, Jr. Mr. Forbes is our founder and has served as a member of our board of directors since November 1998. From July 1999 to May 2000, Mr. Forbes served as our chief executive officer. From November 1995 to January 1998, Mr. Forbes served as Vice President Business Development of Smith Hawken Ltd., a retailer of outdoor furniture, gardening tools, work wear, plants and accessories. Mr. Forbes is currently a member of the board of directors of the San Francisco Jazz Festival, a non-profit organization, and the International Design Conference at Aspen, a non-profit organization. Mr. Forbes holds a B.A. in Aesthetic Studies from the University of California Santa Cruz, an M.F.A. in Design from the State University of New York and an M.B.A. from Stanford University.

~~David Barnard.~~ Mr. Barnard has served as our secretary and chief financial officer since September 1999. From February 1999 to July 1999, Mr. Barnard served as chief financial officer of Tavolo, Inc., an Internet retailer of cooking and gourmet food items. From August 1997 to January 1999, Mr. Barnard served as chief financial officer of Reel.com, Inc., an Internet retailer of videos and DVDs. Mr. Barnard is currently a member of

the board of directors of Pinnacle Rock Associates, a privately held company dedicated to improving business processes and implementing information systems. Mr. Barnard holds a B.A. in accountancy from Miami University. Mr. Barnard has previously announced his intention to resign from his position with us, effective as of February 18, 2005.

Vincent Barriero. Mr. Barriero has served as our chief information officer since July 2000. From May 1999 to May 2000, Mr. Barriero served as chief information officer of Tavolo, Inc., an Internet retailer of cooking and gourmet food items. From August 1997 through April 1999, Mr. Barriero served as vice president of information systems of Kendall-Jackson Wine Estates Ltd., a producer of premium wines. Mr. Barriero holds a B.A. from St. Mary’s College and an M.B.A. from Pepperdine University.

Ray Brunner. Mr. Brunner has served as our vice president of real estate and construction since November 2004 and prior to that served as our vice president of studios since April 2002. From June 1993 to April 2002, Mr. Brunner served as president of RGB & Associates, a strategic consulting company. Mr. Brunner holds a B.A. in business administration from Western Connecticut State University.

Wanda Gierhart. Ms. Gierhart has served as our chief marketing officer since April 2004. Before joining us, from December 1995 to March 2004, Ms. Gierhart served at a number of companies in roles of increasing responsibility from director of direct marketing, director of marketing, vice president of brand and creative group to, most recently, executive vice president of brand and creative group for The Limited, Inc., a specialty retailer of women’s apparel. Ms. Gierhart holds a B.S. in business administration—finance from the University of Nebraska-Lincoln.

Carmela Krantz. Ms. Krantz has served as our vice president of human resources since April 2002. From September 2000 through January 2002, Ms. Krantz served as vice president of human resources/administration for Reactivity, Inc., a software start-up company. From April 2000 through August 2000, Ms. Krantz served as vice president of human resources for Linuxcare, Inc., a company that provides system management products. From April 1998 through April 2000, Ms. Krantz served as vice president of human resources/corporate administration for Sydran Services, a restaurant franchisee. Ms. Krantz holds a B.A. in speech communication and a B.S. in political science from the University of Nevada at Reno.

Tara Poseley. Ms. Poseley has served as our vice president of merchandising since August 2004. From December 1989 to July 2004, Ms. Poseley served in various merchandising, product development, planning, production, distribution and strategy positions for The Gap, Inc. and most recently was senior vice president of merchandising for GapKids and babyGap. Ms. Poseley holds a B.S. in retailing from the University of Wisconsin-Madison.

Laura Sites-Reynolds. Ms. Sites-Reynolds has served as our vice president of inventory management since May 2000. From February 2000 to May 2000, Ms. Sites-Reynolds served as a consultant to, and from September 1998 to February 2000, as vice president of planning of, HomeChef Inc., a cooking school and retailer of kitchen supplies and equipment. Ms. Sites-Reynolds holds a B.S. in marketing from San Jose State University.

Elizabeth Rivera. Ms. Rivera has served as our Vice President of Studios since November 2004. From August 1999 until November 2004, Ms. Rivera served as the Vice President of Stores for Pottery Barn Kids (a division of Williams-Sonoma, Inc.) where she was responsible for opening and operating 83 stores, including staffing, merchandising and financial planning for the stores. Ms. Rivera holds a B.A. from the University of San Francisco.

John Hansen. Mr. Hansen has served as the chairman of our board of directors since November 2003 and as a member of our board of directors since November 1998. Since March 1998, Mr. Hansen has served as president of JH Partners, LLC, a private equity firm formerly known as Jesse.Hansen&Co. Mr. Hansen is currently a member of the boards of directors of Sagus International, Inc., a manufacturer and supplier of educational furnishings; NapaStyle, Inc., a multi-channel retailer of food and lifestyle products; MD Beauty, Inc., a retailer of cosmetic and skin care products; and Six Degrees Records, Ltd., an independent music label, each of which is

privately held. Mr. Hansen holds an A.B. from Harvard College, an M.B.A. from Harvard Business School and a J.D. from University of California, Berkeley.

Hilary Billings. Ms. Billings has served as a member of our board of directors since November 2003. Since April 2003, Ms. Billings has served as brand strategist of RedEnvelope, Inc., an Internet retailer of upscale gifts. From February 2000 to April 2003, Ms. Billings served as chief marketing officer and chairman of the board of RedEnvelope, Inc. From June 1999 to February 2000, Ms. Billings served as chief executive officer of RedEnvelope, Inc. From May 1999 to June 1999, Ms. Billings served as chief merchandising officer of RedEnvelope, Inc. From July 1997 to May 1999, Ms. Billings served as senior vice president of brand design for Starwood Hotels & Resorts Worldwide, Inc., a hotel and leisure company. Ms. Billings is currently a member of the boards of directors of Peet’s Coffee and Tea, Inc., a publicly held coffee and tea retailer, and Hanna Andersson, Inc., a privately held multi-channel specialty apparel company. Ms. Billings holds a B.A. from Brown University.

Edward Friedrichs. Mr. Friedrichs has served as a member of our board of directors since July 2000. From October 2000 to September 2003, Mr. Friedrichs served as president and chief executive officer of Gensler…Architecture, Design & Planning Worldwide, a global architectural, design and strategic consulting firm. From October 1995 to October 2000, Mr. Friedrichs served as president of Gensler…Architecture, Design & Planning Worldwide. Mr. Friedrichs is currently a member of the board of overseers of the University of Pennsylvania School of Design and a member of the executive boards of the San Francisco Council and the Boy Scouts of America, a non-profit organization. Mr. Friedrichs holds a B.A. from Stanford University and an M.A. in Architecture from the University of Pennsylvania.

Terry Lee. Mr. Lee has served as a member of our board of directors since November 2003. Mr. Lee is currently co-chairman of Bell Sports Corp., a private company that sells bicycle helmets and accessories, since April 2001; executive chairman of Bay Travelgear, Inc., a private company that sells Arctic Zone coolers and lunch kits, luggage and sport bags, since August 2001; and chief executive officer of Bell Automotive Products, Inc., a private company that sells automotive accessories, since February 2000. From January 2001 to May 2001, Mr. Lee served as chief executive officer of Bell Sports Corp. From August 2000 to January 2001, Mr. Lee served as a member of the board of directors of Bell Sports Corp. From August 1998 to August 2000, Mr. Lee served as chairman of the board of directors of Bell Sports Corp. Mr. Lee is also currently a member of the board of directors of Tailwind Sports Marketing, Inc., a company that owns the U.S. Postal Pro Bicycle Team, The Boys and Girls Club of Metropolitan Phoenix, a non profit organization, and USA Cycling, the national governing body for the sport of bicycling. Mr. Lee attended The University of Utah and Weber State College on a non-matriculated basis.

William McDonagh. Mr. McDonagh has served as a member of our board of directors since March 2004. Mr. McDonagh is currently a partner of WaldenVC, a venture capital firm, since September 2000, and has been a management consultant since January 1999. From April 1994 to March 1998, Mr. McDonagh served as president and chief operating officer of Broderbund Software, Inc., a company that develops and markets computer software. Mr. McDonagh is currently a member of the board of directors of Carlston Family Foundation, a charitable organization supporting education and teachers in California. Mr. McDonagh holds a B.B.A. in accounting from the University of Notre Dame and an M.B.A. from Golden Gate University.

Lawrence Wilkinson. Mr. Wilkinson has served as a member of our board of directors since May 2000. Mr. Wilkinson is currently the chairman of Heminge & Condell, a provider of corporate strategic counsel and venture design services, since November 1997, and co-founder of and counsel to Global Business Network, a strategic consulting organization, since November 1987. Mr. Wilkinson co-founded Oxygen Media, Inc. in June 1998, and served as its vice-chairman until January 2002. Mr. Wilkinson serves on the boards of Oxygen Media, Inc. and Ealing Studios, Ltd. He is a director of Public Radio International, a non-profit organization, and a member of the Board of Visitors of Davidson College. Mr. Wilkinson holds a B.A. from Davidson College, an M.B.A. from Harvard Business School and a B.Phil. from Oxford University.

Our board of directors currently consists of eight members. Our board of directors has determined that five of its members, Hilary Billings, Edward Friedrichs, Terry Lee, William McDonagh and Lawrence Wilkinson, are “independent directors” as defined under the rules of the Nasdaq Stock Market, Inc., or the Nasdaq Rules. All directors hold office until their successors have been elected and qualified or until their earlier death, resignation, disqualification or removal. Our board of directors is divided into three classes that serve staggered three-year terms:

Class I consists of John Hansen and Hilary Billings, Class II consists of Robert Forbes, Jr., Edward Friedrichs and Terry Lee, and Class III consists of Wayne Badovinus, William McDonagh and Lawrence Wilkinson. At

each annual meeting of stockholders, the successors to directors whose terms will then expire serve from the time of election and qualification until the third annual meeting following election and until their successors are duly elected and qualified. In addition, a resolution of the board of directors or affirmative vote of the holders of at least two-thirds of our outstanding voting stock may change the authorized number of directors. Any additional directorships resulting from an increase in the number of directors will be distributed among the three classes so that, as nearly as possible, each class will consist of one third of the directors. This classification of the board of directors may have the effect of delaying or preventing changes in control or management of our company.

Our board of directors has an audit committee, compensation committee and nominating and corporate governance committee.

Audit Committee. The audit committee of our board of directors is responsible for reviewing and monitoring our financial statements and internal accounting procedures, recommending the selection of independent auditors by our board, evaluating the scope of the annual audit, reviewing audit results, consulting with management and our independent auditor prior to presentation of financial statements to stockholders and, as appropriate, initiating inquiries into aspects of our internal accounting controls and financial affairs. The audit committee is comprised of William McDonagh, who serves as its chairman, Terry Lee and Lawrence Wilkinson. Each of these directors is “independent” as defined under and required by the federal securities laws, including Rule 10A-3(b)(i) under the Securities Exchange Act of 1934 and the Nasdaq Rules. In addition, our board of directors has determined that William McDonagh qualifies as an “audit committee financial expert” under the federal securities laws.

Compensation Committee. The compensation committee of our board of directors reviews and recommends to the board the compensation and benefits of all of our executive officers, administers our stock option plans and establishes and reviews general policies relating to compensation and benefits of our employees. The compensation committee is comprised of Edward Friedrichs, who serves as its chairman, and Hilary Billings, each of whom is an independent director for the purposes of the federal securities laws and the Nasdaq Rules.

Nominating and Corporate Governance Committee. The nominating and corporate governance committee of our board of directors identifies prospective board candidates, recommends nominees for election to our board of directors, develops and recommends board member selection criteria, considers committee member qualification, recommends corporate governance principles to the board of directors, and provides oversight in the evaluation of the board of directors and each committee. The nominating and corporate governance committee is comprised of Lawrence Wilkinson, serves as its chairman, Edward Friedrichs and Hilary Billings, each of whom is an independent director for the purposes of the federal securities laws and the Nasdaq Rules.

Our board of directors has adopted a written charter for each of these committees, a copy of which is available on our website.

Our board of directors did not have a compensation committee during fiscal year 2003. In fiscal year 2003, the compensation of our executive officers was determined by our board of directors based on performance and market data. No member of our compensation committee serves as a member of the board of directors or compensation committee of any entity that has one or more executive officers serving as a member of our board of directors or compensation committee.

Our board of directors has adopted a code of business conduct and ethics applicable to our directors, officers and employees, in accordance with applicable federal securities laws and the Nasdaq Rules, and which is available on our website.

During fiscal year 2003, we did not compensate our non-employee directors for their service on our board of directors. In January 2004, we granted each of our independent directors, Ms. Billings, Mr. Friedrichs, Mr. Lee and Mr. Wilkinson, an option to purchase 30,000 shares of our common stock under our 1999 Stock Plan. Such option grants have an exercise price equal to $4.50 and will vest in three equal annual installments commencing on the first anniversary of the date of grant. In March 2004, we granted Mr. McDonagh, upon joining our board of directors, an option to purchase 30,000 shares of our common stock under our 1999 Stock Plan. Such option grant has an exercise price equal to $7.00 and will vest in three equal installments commencing on the first anniversary of the date of the grant. We did not otherwise compensate our non-employee directors during fiscal year 2004.

Starting in fiscal year 2005, we intend to compensate non-employee directors for their service on our board of directors with an annual grant of an option to purchase 10,000 shares of our common stock under our 2004 Equity Incentive Award Plan, which will vest in full on the first anniversary of the date of grant. We will compensate new non-employee directors for their service on our board of directors with an initial grant of an option to purchase 30,000 shares of our common stock under our 2004 Equity Incentive Award Plan, which will vest in three equal annual installments commencing on the first anniversary of the date of grant. Options granted to non-employee directors will have an exercise price equal to the fair market value of our common stock on the date of grant. We also reimburse our non-employee directors for their reasonable expenses incurred in attending board meetings. Directors who are also employees of our company do not receive any additional compensation for board service.

In February 2005, we granted John Hansen, our Chairman of the Board of Directors, two stock options to purchase an aggregate of 75,000 shares of our common stock pursuant to our 2004 Equity Incentive Award Plan. Both options have an exercise price of $14.68, and have ten-year terms. One option to purchase 30,000 shares of common stock was immediately vested as to one-third of the shares covered by the option, with the balance to vest in equal installments on the first and second anniversaries of the grant date. The other option covers 45,000 shares of common stock and will vest in three equal annual installments commencing on the first anniversary of the grant date.

The following table shows compensation earned during the fiscal years ended January 1, 2005 and December 27, 2003 by our Chief Executive Officer and our four most highly compensated executive officers for 2004, other than the Chief Executive Officer. We refer to these executives as the named executive officers in this prospectus. The information in the table includes salaries, bonuses, stock options granted and other miscellaneous compensation.

The following table sets forth information regarding grants of stock options to each of the named executive officers during the fiscal year ended January 1, 2005. During the fiscal year ended January 1, 2005, we granted stock options to purchase 783,250 shares of common stock, all of which were granted to employees. All options were granted at the fair market value of our common stock, as determined by our board of directors, on the date of grant.

Aggregated Option Exercises in Fiscal Year 2004 and Option Values at January 1, 2005

The following table sets forth the number of shares of common stock subject to exercisable and unexercisable stock options held as of January 1, 2005 by each of the named executive officers. The value realized and the value of unexercised in-the-money options at January 1, 2005, is calculated based on $14.55, the fair market value of the underlying shares of our common stock on December 31, 2004 (the last trading day of fiscal year 2004), less the per share exercise price multiplied by the number of shares issued upon exercise of the options.

We are a party to an offer of employment letter dated February 22, 2000 with Wayne Badovinus. The letter provides that upon a change of control of us, if Mr. Badovinus is terminated or if he is not offered a new position with the acquiring company that is substantially similar to his current position as our Chief Executive Officer, fifty percent of his unvested stock options shall become immediately vested and exerciseable and Mr. Badovinus would be paid twelve months base salary either as a lump sum or as salary continuance. The letter also provides that if we terminate the employment of Mr. Badovinus for any reason other than for cause, fifty percent of his unvested stock options shall become immediately vested and exercisable and Mr. Badovinus would be paid twelve months base salary either in a lump sum or as salary continuance.

We are a party to an offer of employment letter dated February 22, 2000 with David Barnard. The agreement provides that upon a change of control of us, if Mr. Barnard is terminated or if he is not offered a new position with the acquiring company that is substantially similar to his current position as our Chief Financial Officer, twenty-five percent of his unvested stock options shall become immediately vested and exerciseable and Mr. Barnard would be paid twelve months base salary either in a lump sum or as salary continuance. The letter also provides that if we terminate the employment of Mr. Barnard for any reason other than for cause, twenty-five percent of his unvested stock options shall become immediately vested and exerciseable and Mr. Barnard would be paid twelve months base salary either in a lump sum or as salary continuance.

~~We are a party to an offer of employment letter dated~~ June 1, 2004 with Tara Poseley. The agreement provides that upon a change of control of us, if Ms. Poseley is terminated or if she is not offered a new position with the acquiring company that is substantially similar to her current position as Vice President of Merchandising, all of her unvested options shall become immediately vested and exercisable and Ms. Poseley would be paid six months base salary as a salary continuance. The letter also provides that if we terminate the employment of Ms. Poseley for any reason other than for cause, she would be paid six months base salary as a salary continuance.

In January 1999, we adopted our 1999 Stock Plan, which was approved by our stockholders in January 1999. The plan allows us to issue incentive and nonstatutory stock options and make restricted stock awards. Our employees, outside directors and consultants are eligible to receive awards under the plan, but only employees may receive incentive stock options. We reserved a total of 3,100,000 shares of our common stock for issuance under the plan. As of February ~~16,~~24, 2005, there were ~~477,685~~477,235 shares of our common stock available for issuance under the plan. The plan is administered by our board of directors, or a committee of our board appointed by the board to administer the plan. The board of directors or the committee administering the plan selects the participants who will receive awards and determines the terms and conditions of such awards. Our incentive and nonstatutory stock options and our restricted stock are generally subject to special forfeiture conditions, rights of repurchase, rights of first refusal and other transfer restrictions as the board of directors may determine.

In the event of certain corporate transactions, such as a merger or consolidation, the plan provides for: (1) the continuation of the outstanding options by us if we are the surviving corporation; (2) the assumption of the 1999 Stock Plan and the outstanding options by the surviving corporation or its parent; (3) the substitution by the surviving corporation or its parent of options with substantially the same terms; or (4) the cancellation of the outstanding options without payment of any consideration. In the event of a change in control, the plan provides that: (a) each outstanding award will vest if the repurchase right is not assigned to the entity that employs the optionee immediately after the change in control or its parent or subsidiary; and (b) each outstanding option will become exercisable in full if such options do not remain outstanding, are not assumed by the surviving corporation or its parent and the surviving corporation or its parent does not substitute options with substantially the same terms for such options. A change in control means: (i) the consummation of our merger or consolidation with or into another entity or any other corporate reorganization, if persons who were not our stockholders immediately prior to such merger, consolidation or other reorganization own immediately after such merger, consolidation or other reorganization 50% or more of the voting power of the outstanding securities of each of (A) the continuing or surviving entity and (B) any direct or indirect parent corporation of such continuing or surviving entity; or (ii) the sale, transfer or other disposition of all or substantially all of our assets.

In March 2004, our board of directors adopted our 2004 Equity Incentive Award Plan and it was approved by our stockholders in April 2004. The plan allows us to issue awards of incentive or nonqualified stock options,

restricted stock or stock appreciation rights. Our employees, consultants and directors are eligible to receive awards under the plan, but only employees may receive incentive stock options. We have initially reserved a total of 500,000 shares of our common stock for issuance under the plan. The reserve will automatically increase on each December 31 during the term of the plan by an amount equal to the lesser of (1) 200,000 shares or (2) a lesser amount determined by the board of directors. As of February ~~16,~~24, 2005, there were ~~188,000~~113,000 shares of common stock available for issuance under the plan. The plan is administered by our board of directors, or a committee of our board appointed by the board to administer the plan. The board of directors or the committee administering the plan selects the participants who will receive awards and determines the terms and conditions of such awards. Restricted stock is generally subject to forfeiture upon termination of the employee or consultant’s relationship with us for any reason, with exceptions for certain terminations for cause.

In the event of certain corporate transactions, such as a merger or consolidation or sale of all or substantially all of the assets of our company, the plan provides that each outstanding award may, and in some cases will, be assumed or replaced with a comparable award by our successor company or its parent. If the successor company or its parent does not assume or replace the awards, outstanding options will become 100% vested and exercisable immediately before the corporate transaction. To the extent that options accelerate due to a corporate transaction, the restrictions on restricted stock awards will also lapse. In the event of such a corporate transaction or a change in capitalization, the board of directors or the committee administering the plan also has the discretion to make adjustments, where appropriate, with respect to the number and types of shares that may be issued under the plan, the terms and conditions of outstanding awards and the grant or exercise price per share for outstanding awards in order to prevent dilution or enlargement of the benefits or potential benefits we intend to provide under the plan.

In March 2004, our board of directors adopted our Employee Stock Purchase Plan and it was approved by our stockholders in April 2004. The plan is designed to allow our eligible employees to purchase shares of common stock, at semi-annual intervals, with their accumulated payroll deductions.

We have initially reserved a total of 300,000 shares of our common stock for issuance under the plan. The reserve will automatically increase on each December 31 during the term of the plan by an amount equal to the lesser of (1) 100,000 shares or (2) a lesser amount determined by the board of directors.

The plan generally will have a series of successive 12-month offering periods. The first offering period commenced on July 6, 2004 and will end on May 1, 2005.

Individuals whose customary employment is for more than 20 hours per week and who have been continuously employed by us for at least six months may join an offering period on the first day of the offering period or the beginning of any semi-annual purchase period within that period. Individuals who become eligible employees after the start of an offering period may join the plan at the beginning of any subsequent semi-annual purchase period.

Participants may contribute up to 15% of their cash earnings through payroll deductions, and the accumulated deductions will be applied to the purchase shares on each semi-annual purchase date. The purchase price per share will be equal to 85.0% of the fair market value per share on the participant’s entry date into the offering period or, if lower, 85.0% of the fair market value per share on the semi-annual purchase date.

If the fair market value per share of our common stock on any purchase date is less than the fair market value per share on the start date of the 12-month offering period, then that offering period will automatically terminate, and a new 12-month offering period will begin on the next business day. All participants in the terminated offering will be transferred to the new offering period.

In the event of a proposed sale of all or substantially all of our assets, or our merger with or into another company, the outstanding rights under the plan will be assumed or an equivalent right substituted by the

successor company or its parent. If the successor company or its parent refuses to assume the outstanding rights or substitute an equivalent right, then all outstanding purchase rights will automatically be exercised prior to the effective date of the transaction. The purchase price will be equal to 85.0% of the market value per share on the participant’s entry date into the offering period in which an acquisition occurs or, if lower, 85.0% of the fair market value per share on the date the purchase rights are exercised.

The plan will terminate no later than the tenth anniversary of the plan’s initial adoption by the board of directors.

Effective in 2000, we adopted the Design Within Reach 401(k) plan covering our employees. The 401(k) plan is intended to qualify under Section 401(k) of the Internal Revenue Code of 1986, as amended, so that the contributions to the 401(k) plan by employees, and the investment earning thereon, are not taxable to employees until withdrawn from the 401(k) plan, and so that contributions by us, if any, will be deductible by us for federal income tax purposes when made. Under the 401(k) plan, employees may elect to reduce their current compensation by up to the statutorily prescribed annual limit and to have the amount of such reduction contributed to the 401(k) plan. The 401(k) plan permits, but does not require additional matching contributions to the 401(k) plan by us on behalf of all participants in the 401(k) plan. During fiscal year 2003, we made no contributions to the 401(k) plan.

As permitted by the Delaware General Corporation Law, we have adopted provisions in our certificate of incorporation and bylaws that limit or eliminate the personal liability of our directors for a breach of their fiduciary duty of care as a director. The duty of care generally requires that, when acting on behalf of the corporation, directors exercise an informed business judgment based on all material information reasonably available to them. Consequently, a director will not be personally liable to us or our stockholders for monetary damages or breach of fiduciary duty as a director, except for liability for:

These limitations of liability do not affect the availability of equitable remedies such as injunctive relief or rescission. Our certificate of incorporation also authorizes us to indemnify our officers, directors and other agents to the full extent permitted under Delaware law.

We have entered into separate indemnification agreements with each of our directors and officers. See “Related Party Transactions—Indemnification Agreements” for more information.

At present, there is no pending litigation or proceeding involving any of our directors, officers, employees or agents in which indemnification by us is sought, nor are we aware of any threatened litigation or proceeding that may result in a claim for indemnification.

In October 1998, we engaged JH Partners, LLC, formerly known as Jesse.Hansen&Co., a San Francisco-based private equity investment firm affiliated with John Hansen, the Chairman of our board of directors, to act as our financial advisor. The financial and strategic advisory services we received from JH Partners, LLC consisted primarily of business plan development and strategic consulting, budget planning, assistance with fundraising, arrangement of bank debt, and recruitment of our chief executive officer. In connection with this engagement, and as partial consideration for such financial advisory services, we issued to JH Partners, LLC, a warrant to purchase 700,000 shares of our common stock at an exercise price of $1.50 per share. In 1998, JH Partners, LLC sold this warrant to JH Capital Partners, L.P., an entity affiliated with JH Partners, LLC and Mr. Hansen. This warrant was exercised in full immediately prior to the closing of our initial public offering in July 2004.

In November 1998, we sold 2,600,000 shares of our common stock at a price of $0.0001 per share to Robert Forbes, Jr., our founder and member of our board of directors.

From November 1998 to February ~~16,~~24, 2005, we granted options to purchase an aggregate of ~~2,004,500~~1,747,500 shares of our common stock to our current directors and executive officers, ~~including the executive officers named in the Summary Compensation Table,~~ with exercise prices ranging from $0.25 to $16.50 per share. In October 2002, Wayne Badovinus, our President, Chief Executive Officer and a member of our board of directors, exercised options for 200,000 shares of our common stock at an exercise price of $0.25 per share. In October 2002, David Barnard, our Secretary and Chief Financial Officer, exercised options for 50,000 shares of our common stock at an exercise price of $0.25 per share, and in September 2003, Mr. Barnard exercised options for an additional 50,000 shares of our common stock at an exercise price of $0.25 per share. In July 2001, Vincent Barriero, our Chief Information Officer, exercised options for 25,000 shares of our common stock at an exercise price of $0.60 per share, and in August 2002, Mr. Barriero exercised options for an additional 25,000 shares of our common stock at an exercise price of $0.60 per share.

In April 1999, we issued and sold to investors an aggregate of 1,500,000 shares of our Series A preferred stock at a price of $1.00 per share for aggregate consideration of $1.5 million, which included 850,000 shares sold to JH Capital Partners, L.P., 50,000 shares sold to Mr. Badovinus and 25,000 shares sold to Mr. Forbes. In July 1999, we issued and sold to investors an aggregate of 500,000 shares of our Series A preferred stock at a price of $1.00 per share for aggregate consideration of $500,000, which included 240,000 shares sold to JH Capital Partners, L.P. The Series A preferred stock issued in these transactions ranked on a parity with our Series B preferred stock and was senior to our common stock, was entitled to receive non-cumulative dividends when and as declared by our board of directors at a rate of $0.08 per share per annum, voted equally with our common stock and Series B preferred stock and not as a separate class (except as otherwise provided in our certificate of incorporation or as required by law) and was convertible into shares of our common stock at a rate of one to one. The Series A preferred stock converted automatically into shares of our common stock upon the closing of our initial public offering in July 2004.

In December 1999, we obtained bridge loans from some of our investors, including a bridge loan from Mr. Barnard in the principal amount of $50,000 and bridge loans from JH Capital Partners, L.P. in an aggregate principal amount of $1,505,000. These bridge loans accrued interest at the rate of 8.0% per annum, were convertible into shares of, and became due and payable upon the issuance in June 2000 of, our Series B preferred stock. These bridge loans were repaid by us in full or converted into shares of Series B preferred stock in June 2000. In connection with these bridge loans, we issued warrants to purchase an aggregate of 261,172 shares of our Series B preferred stock at an exercise price of $2.55 per share. Of these warrants, warrants to purchase 5,882 and 177,057 shares of our Series B preferred stock were issued to Mr. Barnard and JH Capital Partners, L.P., respectively. These warrants were exercised in full immediately prior to the closing of our initial public offering in July 2004.

In June 2000, we issued and sold to investors an aggregate of 1,952,154 shares of our Series B preferred stock at a price of $2.55 per share for aggregate consideration of $5.0 million, which included 1,056,863 shares sold to Jesse.Hansen Co-Investment Vehicle, L.P., 609,917 shares sold to JH Capital Partners, L.P. and 39,216 shares sold to Mr. Badovinus. The Series B preferred stock ranked on a parity with our Series A preferred stock and was senior to our common stock, was entitled to receive non-cumulative dividends when and as declared by our board of directors at a rate of $0.204 per share per annum, voted equally with our common stock and Series A preferred stock and not as a separate class (except as otherwise provided in our certificate of incorporation or as required by law) and was convertible into shares of our common stock at a rate of one to one. The Series B preferred stock converted automatically into shares of our common stock upon the closing of our initial public offering in July 2004.

In May 2003, we sold 1,406,506 shares of our Series B preferred stock at a price of $3.45 per share, which included 28,985 shares sold to Edward Friedrichs, a member of our board of directors, 364,332 shares sold to JH Capital Partners II, L.P., 10,000 shares sold to Lawrence Wilkinson, a member of our board of directors, and 870,000 shares sold to SPI DWR Investments L.P., an entity which now owns more than 5% of our capital stock. We used the proceeds from these issuances, together with other available funds, to repurchase 1,960,784 shares of our Series B preferred stock at a price of $3.45 per share from Reed Business Information, a division of Reed Elsevier, Inc., a company that at such time owned more than 5% of our capital stock, for aggregate consideration of $6.8 million. These repurchased shares were originally issued and sold by us to Reed Business Information in May 2000 at a price of $2.55 per share.

In connection with the sale of shares of our Series B preferred stock in May and June 2000, we entered into an Investors’ Rights Agreement, dated as of May 12, 2000, with Jesse.Hansen Co-Investment Vehicle, LP, JH Capital Partners, L.P., Mr. Badovinus and the other investors party thereto, which, among other things, granted registration rights to holders of Series A preferred stock and Series B preferred stock with respect to the shares of common stock issuable upon conversion of the preferred stock. Under that agreement, following this offering, these holders will hold approximately 930,000 shares of our common stock and will have the right to require us to register their shares of common stock with the SEC so that they may be publicly resold or to include their shares in any registration statement we file.

Demand Registration Rights. At any time after July 6, 2004, subject to certain exceptions, including the expiration of lock-up agreements entered into by certain of our stockholders in connection with our initial public offering, the holders of at least 30% of the shares having registration rights have the right to demand that we file up to two registration statements. If the holders intend to distribute their shares by means of an underwritten offering, the underwriters will have the right to limit the number of shares having registration rights to be included in the registration statement, but not below 50% of the total number of shares included in the registration statement. If we are eligible to file a registration statement on Form S-3, holders of shares having registration rights have the right to demand that we file a registration statement on Form S-3 so long as the aggregate amount of securities to be sold under the registration statement on Form S-3 equals or exceeds $1.0 million.

Piggyback Registration Rights. If we register any securities for public sale, subject to certain exceptions, stockholders with registration rights will have the right to include their shares in the registration statement. The underwriters of any underwritten offering will have the right to limit the number of shares having registration rights to be included in the registration statement, but not below 35% of the total number of shares included in the registration statement. We anticipate that these piggyback registration rights applicable to this offering will be effectively waived by the holders having these rights prior to the closing of this offering.

Expenses of Registration. We will pay all expenses relating to any demand or piggyback registration other than underwriting discounts and commissions. However, we will not pay for the expenses of any demand registration if the request is subsequently withdrawn by the holders of a majority of the shares having registration rights.

Expiration of Registration Rights. The registration rights described above will terminate for a particular stockholder at the time that such holder can resell all of its securities in a three-month period under Rule 144 of the Securities Act.

JH Partners, LLC Transactions. From October 1998 until July 2004, we retained JH Partners, LLC, formerly known as Jesse.Hansen&Co., to serve as our financial advisor. In each of fiscal years 2002 and 2003 and during the first seven months of fiscal year 2004, we paid JH Partners, LLC a retainer fees of $7,500 per month. Our financial advisory arrangement with JH Partners, LLC terminated upon the closing of our initial public offering in July 2004.

Since November 2000, we have also leased space on a month-to-month basis for our San Francisco studio facility from JH Partners, LLC. We paid $100,800 in aggregate rental payments under this lease for each of fiscal years 2002 and 2003 and 2004.

Mr. Badovinus, our chief executive officer, serves as a senior operating partner for JH Partners, LLC. As a senior operating partner, Mr. Badovinus participates in deal origination, the due diligence process and as a director of some of JH Partners portfolio companies.

NapaStyle, Inc. Loan. In May 2003, we made a $100,000 loan to NapaStyle, Inc., which was repaid to us in full by the end of fiscal year 2003. In connection with this loan, NapaStyle, Inc. issued us a warrant to purchase 67,210 shares of NapaStyle, Inc. Series B preferred stock at an exercise price of $0.01 per share. The warrant expires on May 21, 2008. Mr. Hansen and Mr. Badovinus are members of the board of directors of NapaStyle, Inc. During 2004, we guaranteed certain payments for NapaStyle, Inc. in order to obtain attractive print pricing for our catalogs. No obligations were outstanding at the end of 2004 and we no longer guarantee payments for NapaStyle, Inc.

Indemnification Agreements. We have entered into separate indemnification agreements with each of our directors and officers, which may be broader than the specific indemnification provisions contained in the Delaware General Corporation Law. These indemnification agreements may require us, among other things, to indemnify our officers and directors against liabilities that may arise by reason of their status or service as directors or officers, other than liabilities arising from willful misconduct. These indemnification agreements also may require us to advance any expenses incurred by the directors or officers as a result of any proceeding against them as to which they could be indemnified.

We believe that we have executed all of the transactions set forth above on terms no less favorable to us than terms we could have obtained from unaffiliated third parties.

Set forth below is information relating to the beneficial ownership of our common stock as of February ~~16,~~24, 2005, and as adjusted to reflect the sale of 100,000 shares of common stock in this offering by Design Within Reach and the sale of 1,550,000 shares of common stock in this offering by selling stockholders, by:

We have agreed to bear the expenses (other than underwriting discounts and commissions) of the selling stockholders in connection with this offering and to indemnify them against certain liabilities, including liabilities under the Securities Act of 1933.

The number of shares beneficially owned by each stockholder and each stockholder’s percentage ownership in the following table is based on ~~12,890,778~~12,942,592 shares of common stock outstanding as of February ~~16,~~24, 2005. Beneficial ownership is determined in accordance with the rules of the SEC and generally includes any shares over which a person exercises sole or shared voting or investment power and shares of which a person has the right to acquire ownership within 60 days after February ~~16,~~24, 2005, if any. Except as otherwise indicated, and subject to applicable community property laws, the persons named in the table have sole voting and investment power with respect to all shares of common stock held by them. Unless otherwise indicated, the address of each executive officer, director and 5% stockholder listed below is c/o Design Within Reach, Inc., 225 Bush Street, 20^th Floor, San Francisco, California 94104.


Name of Beneficial Owner	Number of Shares Beneficially Owned Prior to Offering (1)	Number of Shares Being Offered (2)		Number of Shares Beneficially Owned After Offering		Percentage of Shares Beneficially Owned					Number of Shares Beneficially Owned Prior to Offering (1)	Number of Shares Being Offered (2)		Number of Shares Beneficially Owned After Offering	Percentage of Shares Beneficially Owned
Name of Beneficial Owner	Number of Shares Beneficially Owned Prior to Offering (1)			Number of Shares Beneficially Owned After Offering	Before Offering			After Offering				Number of Shares Being Offered (2)	Before Offering	Number of Shares Beneficially Owned After Offering		After Offering

5% Stockholders:
Credit Suisse Asset Management, LLC (3)	919,300	Number of Shares Being Offered (2)	—		919,300		7.1			6.9	Number of Shares Beneficially Owned Prior to Offering (1)	868,300		—	868,300		6.7	%	6.4	%
Gildner, Gagnon, Howe & Corporation LLC (4)	894,571	—		894,571		6.9	%		6.7	%	894,571	—		894,571	6.9			6.6

Directors and Named Executive Officers:
Wayne Badovinus	739,216	150,000		589,216		5.7			4.4		739,216	150,000		589,216	5.5			4.2
Robert Forbes, Jr.	1,700,500	350,000		1,350,500		13.2			10.1		1,694,500	350,000		1,344,500	13.1			9.9
Vincent Barriero	135,500	44,520		90,980		1.1			*		135,500	46,066		89,434	1.0			*
John Ball (5)	122,000	32,940		89,060		*			*		122,000	32,940		89,060	*			*
Ray Brunner	117,000	28,080		88,920		*			*		117,000	29,055		87,945	*			*
David Barnard (6)	268,000	185,000		83,000		*			*		243,000	185,000		58,000	1.9			*
John Hansen (7)	548,380	—		548,380		4.3			4.1		623,380	100,439		522,941	4.8			3.8
Hilary Billings	35,000	—		35,000		*			*		35,000	—		35,000	*			*
Edward Friedrichs	73,985	—		73,985		*			*		73,985	—		73,985	*			*
Terry Lee	30,000	—		30,000		*			*		48,571	—		48,571	*			*
William McDonagh	30,000	—		30,000		*			*		30,000	—		30,000	*			*
Lawrence Wilkinson	55,000	—		55,000		*			*		55,000	—		55,000	*			*
All executive officers and directors as a group (16 persons) (8)	4,206,072	790,540		3,415,532		32.6			26.5
All executive officers and directors as a group (15 persons) (8)											4,037,152	708,996		3,328,156	28.0			22.9


Name of Beneficial Owner	Number of Shares Beneficially Owned Prior to Offering (1)	Number of Shares Being Offered (2)		Number of Shares Beneficially Owned After Offering		Percentage of Shares Beneficially Owned				Number of Shares Beneficially Owned Prior to Offering (1)	Number of Shares Being Offered (2)		Number of Shares Beneficially Owned After Offering	Percentage of Shares Beneficially Owned
Name of Beneficial Owner	Number of Shares Beneficially Owned Prior to Offering (1)			Number of Shares Beneficially Owned After Offering	Before Offering		After Offering				Number of Shares Being Offered (2)	Before Offering	Number of Shares Beneficially Owned After Offering	After Offering

Other Selling Stockholders:
Elizabeth Arnold	25,000	Number of Shares Being Offered (2)	10,000		15,000		*		*	Number of Shares Beneficially Owned Prior to Offering (1)	25,000		10,000	15,000	*	*
Baldwin Family Trust										8,667	3,667		5,000	*	*
Bates Living Trust										8,667	1,500		7,167	*	*
Clayton Bentley	8,667	3,000		5,667		*		*		8,667	3,000		5,667	*	*
Dean L. & Rosemarie Buntrock Foundation	17,334	5,200		12,134		*		*		17,334	5,200		12,134	*	*
Charles Daggs III Directed IRA	8,667	7,667		1,000		*		*		8,667	8,667		—	*	—
Charles Daggs	25,000	1,000		24,000		*		*
Charles & Jacqueline Davis	1,733	1,733		—		*		—		1,733	1,733		—	*	—
Benjamin Dixon										43,000	11,610		31,390	*	*
Dennis Family Living Trust U/A/D 3/94	34,725	8,667		26,058		*		*		34,725	8,667		26,058	*	*
Ruth & Paul Flowers 2003 Trust	8,667	5,000		3,667		*		*
Paul W. Flowers	14,493	5,000		9,493		*		*		14,493	10,000		4,493	*	*
Frank Family Trust	46,319	6,319		40,000		*		*		46,319	6,319		40,000	*	*
Dennis Gama										36,500	9,855		26,645	*	*
Kenneth Hagen	10,000	9,000		1,000		*		*		10,000	9,000		1,000	*	*
Houston Hall	34,669	10,000		24,669		*		*		34,669	10,000		24,669	*	*
Steven Hamerslag	8,667	8,677		—		*		—		8,667	8,667		—	*	—
James Herbert	8,667	8,667		—		*		—		8,667	8,667		—	*	—
Doug Herst	50,000	12,500		37,500		*		*		50,000	12,500		37,500	*	*
John Holey	1,179	400		779		*		*		1,179	400		779	*	*
H. William Jesse	330,790	261,842		68,948		*		*		531,842	271,290		260,552	4.1	1.9
JH Partners, LLC										35,745	35,745		—	*	—
John Family Limited Partnership										219,625	27,716		191,909	1.7	1.4
Thomas Klein	67,334	17,334		50,000		*		*		67,334	17,334		50,000	*	*
Carmela Krantz										62,000	15,397		46,603	*	*
Jerry Machado	13,001	1,040		11,961		*		*		3,466	1,040		2,426	*	*
Michael M. & Kathleen McNickle	4,767	4,250		517		*		*
Michael McNickle	26,145	4,250		21,895		*		*		26,145	8,500		17,645	*	*
O. Lynn & Susan M. McShane Living Trust	17,334	5,770		11,564		*		*		17,334	5,770		11,564	*	*
Monte Savello, L.P.										140,018	17,670		122,348	1.1	*
Cynthia Peowski	13,868	3,467		10,401		*		*		13,868	3,467		10,401	*	*
John Porter										100,000	15,000		85,000	*	*
David Joseph Mees Jr. Living Trust	17,334	4,333		13,001		*		*		17,334	4,333		13,001	*	*
Mees Family Living Trust	8,667	2,667		6,000		*		*		8,667	2,667		6,000	*	*
Osterwiess Trust	10,000	3,000		7,000		*		*		10,000	3,000		7,000	*	*
Quinn Family Trust	8,667	338		8,329		*		*		8,667	338		8,329	*	*
Christine A. Reid	13,608	8,608		5,000		*		*		13,608	8,608		5,000	*	*
William Riffle	7,000	2,000		5,000		*		*		7,000	2,000		5,000	*	*
Susan Sachs										7,714	2,500		5,214	*	*
Siberia Investment Company, LLC										372,617	47,024		325,593	2.9	2.4
John Sidgmore										17,334	459		16,875	*	*
Charles & Carol Smith Family Trust										8,667	2,000		6,667	*	*
Gus B. Spanos Fund III, L.P.										44,239	22,719		21,520	*	*
D.R. Stephens Industrial Partners, LLC										8,667	8,667		—	*	—
Laura Sites-Reynolds										73,000	18,129		54,871	*	*
Joseph P. Urso	1,733	733		1,000		*		*		1,733	733		1,000	*	*
William White	4,334	1,300		3,034		*		*		4,334	1,300		3,034	*	*
James G. Williamson	14,000	3,500		10,500		*		*		14,000	3,500		10,500	*	*
Prism Capital 4, LP	190,241	47,560		142,681		1.5		1.1		190,241	47,560		142,681	1.5	1.1
Dennis Wong	91,597	22,899		68,698		*		*		91,597	22,899		68,698	*	*
Charles Zeches	33,740	10,122		23,618		*		*		33,740	10,122		23,618	*	*
Carmella Krantz	62,000	14,880		47,120		*		*
Laura Sites-Reynolds	73,000	17,520		55,480		*		*
Benjamin Dixon	43,000	11,610		31,390		*		*
Dennis Gama	36,500	9,855		26,645		*		*
[To be completed by amendment]

(1)	The following table indicates the number of shares subject to options exercisable within sixty (60) days of February ~~16,~~24, 2005, held by individuals listed in the table above:


Selling Stockholders	Shares Subject to Over-Allotment Option	Shares Beneficially Owned After the Offering if Over-Allotment Option is Exercised			Shares Subject to Over-Allotment Option	Shares Beneficially Owned After the Offering if Over-Allotment Option is Exercised
Selling Stockholders	Shares Subject to Over-Allotment Option	Number	Percent		Shares Subject to Over-Allotment Option	Number	Percent
Wayne Badovinus	71,766	517,450	3.9	%	71,766	517,450	3.7	%
Robert Forbes, Jr.	150,000	1,200,500	8.9		150,000	1,194,500	8.8
Vincent Barriero	8,348	82,398	*		8,348	81,086	*
John Ball	3,660	85,400	*		3,660	85,400	*
Ray Brunner	5,265	83,507	*		5,265	82,680	*
Carmella Krantz	2,791	44,252	*
Laura Sites-Reynolds	3,285	52,103	*
Benjamin Dixon	1,290	30,100	*		1,290	30,100	*
Dennis Gama	1,095	25,550	*		1,095	25,550	*
Carmela Krantz					2,791	43,812	*
Laura Sites-Reynolds					3,285	51,586	*

Our authorized capital stock consists of 30,000,000 shares of common stock, $0.001 par value per share, and 10,000,000 shares of preferred stock, $0.001 par value per share. As of February ~~16,~~24, 2005, there were ~~12,890,778~~12,942,592 shares of common stock outstanding. As of the same date, there were options outstanding to purchase ~~2,361,944~~2,385,130 shares of common stock. ~~This figure does not reflect persons or entities who hold their stock in nominee or “street” name through various brokerage firms.~~

The following is a summary of the rights of our common stock and preferred stock. For more detailed information, please see our amended and restated certificate of incorporation and bylaws, which are incorporated by reference as exhibits to the registration statement of which this prospectus is a part.

Dividend Rights. Subject to preferences that may apply to shares of preferred stock outstanding at the time, the holders of outstanding shares of common stock are entitled to receive dividends out of assets legally available at the times and in the amounts as our board of directors may from time to time determine.

Voting Rights. Each common stockholder is entitled to one vote for each share of common stock held on all matters submitted to a vote of stockholders. Cumulative voting for the election of directors is not provided for in our certificate of incorporation, which means that the holders of a majority of the shares voted can elect all of the directors then standing for election.

No Preemptive or Similar Rights. No holder of our common stock is entitled to preemptive rights to subscribe for any shares of capital stock and our common stock is not subject to conversion or redemption.

Right to Receive Liquidation Distributions. Upon our liquidation, dissolution or winding-up, the assets legally available for distribution to our stockholders are distributable ratably among the holders of our common stock and any participating preferred stock outstanding at that time, after payment of liquidation preferences, if any, on any outstanding preferred stock and payment of other claims of creditors. Each outstanding share of common stock is, and all shares of common stock to be outstanding upon completion of this offering will be, fully paid and nonassessable.

No shares of, and no securities convertible into, our preferred stock are outstanding.

Under our certificate of incorporation our board of directors is authorized, subject to the limits imposed by the Delaware General Corporation Law, but without further action by our stockholders to issue shares of preferred stock in one or more series, to establish from time to time the number of shares to be included in each series, to fix the rights, preferences and privileges of the shares of each wholly unissued series and any of its qualifications, limitations and restrictions. Our board of directors can also increase or decrease the number of shares of any series, but not below the number of shares of that series then outstanding, without any further vote or action by our stockholders.

Our board of directors may authorize the issuance of preferred stock with voting or conversion rights that adversely affect the voting power or other rights of our common stockholders. The issuance of preferred stock, while providing flexibility in connection with possible acquisitions, financings and other corporate purposes, could have the effect of delaying, deferring or preventing our change in control and may cause the market price of our common stock to decline or impair the voting and other rights of the holders of our common stock. We have no current plans to issue any shares of preferred stock.

Antitakeover Effects of Delaware Law and Provisions of Our Certificate of Incorporation and Bylaws

Delaware Takeover Statute. We are subject to Section 203 of the Delaware General Corporation Law. This statute regulating corporate takeovers prohibits a publicly held Delaware corporation from engaging in any business combination with any interested stockholder for three years following the date that the stockholder became an interested stockholder, unless:

In general, Section 203 defines an interested stockholder as any entity or person beneficially owning 15% or more of the outstanding voting stock of the corporation and any entity or person affiliated with or controlling or controlled by the entity or person.

Certificate of Incorporation and Bylaw Provisions. Provisions of our amended and restated certificate of incorporation and bylaws may have the effect of making it more difficult for a third party to acquire, or of discouraging a third party from attempting to acquire, control of our company. Some of these provisions allow us to issue preferred stock without any vote or further action by the stockholders, have allowed us to eliminate the right of stockholders to act by written consent without a meeting, eliminate cumulative voting in the election of directors, and have allowed us to divide our board into three classes that will serve staggered three-year terms. These provisions may make it more difficult for stockholders to take specific corporate actions and could have the effect of delaying or preventing a change in our control. The amendment of any of these provisions would require approval by holders of at least two-thirds of the outstanding common stock.

The transfer agent and registrar for our common stock is American Stock Transfer & Trust Company.

Our common stock is listed on the Nasdaq National Market under the symbol “DWRI.”

Future sales of substantial amounts of our common stock in the public market could adversely affect prevailing market prices. Furthermore, since certain shares will not be available for sale shortly after the offering because of contractual and legal restrictions on resale described below, sales of substantial amounts of common stock in the public market after the restrictions lapse could adversely affect the prevailing market price and our ability to raise equity capital in the future.

Upon completion of this offering, ~~13,419,198~~13,519,179 shares of our common stock will be outstanding, based on the assumptions described in “Prospectus Summary—The Offering.” Of these shares, the 4,715,000 shares sold in our initial public offering, the 1,657,790 shares sold in this offering and any additional shares sold upon exercise of the underwriters’ over-allotment option, will be freely transferable without restriction under the Securities Act, unless they are held by our “affiliates” as that term is used under the Securities Act and the rules and regulations promulgated thereunder. Of the remaining 7,046,408 shares of common stock outstanding after this offering, are freely tradeable without restriction or further registration, unless held by our affiliates, and the remaining shares of common stock are restricted shares. Restricted shares may be sold in the public market only if registered or if they qualify for an exemption from registration under Rules 144 or 701 promulgated under the Securities Act, which rules are summarized below.

In addition, as of February ~~16,~~24, 2005, ~~1,933,524~~1,908,543 shares of our common stock were issuable upon exercise of vested options (excluding options to purchase ~~428,420~~476,587 shares of common stock, which will be exercised in connection with this offering). ~~If any~~Of the outstanding shares after completion of ~~these options are exercised,~~ the offering, all of the 1,650,000 shares sold in the offering, all of the 4,715,000 shares issued ~~upon exercise will also be restricted, but may be~~and sold ~~under Rule 144 after the~~in our initial public offering and substantially all of our other currently outstanding shares ~~have been~~ held ~~for one year. Sales under Rule 144 may be subject to volume limitations~~by our current and ~~other conditions.~~

~~As a result of lock-up agreements~~former employees and ~~the provisions of Rules 144 and 701, additional shares~~consultants immediately will be ~~available for sale in the public market, subject to certain volume and other restrictions, as follows:~~

~~Beginning on December 26, 2004, the holders of shares of common stock have the right in specified circumstances to require us to register their shares~~freely tradable without further registration under the Securities Act, for resale to the public. If those holders, by exercising their demand registration rights, cause a large number of shares to be registered and sold in the public market, such sales could have an adverse effect on the market price for the common stock. If we were required to include in a registrationexcept that ~~we initiated~~any shares held by ~~such holders upon~~our “affiliates,” as that term is defined under Rule 144 of the ~~exercise of their piggyback registration rights, such sales~~Securities Act, may ~~have an adverse effect on our ability to raise needed capital.~~be sold only in compliance with the limitations under Rule 144 as described below. In addition, ~~we have filed a registration statement on Form S-8 registering~~4,201,781 shares ~~of common stock~~ subject to outstanding stock options or reserved for issuance under our stock option and employee stock purchase plans. Shares registered under this registration statement are, subject to Rule 144 volume limitations applicable to affiliates, available for sale in the open market, unless such shares are subject to vesting restrictions with us or the lock-up agreements described ~~above.~~below will be eligible for sale at various times beginning 90 days after the date of this prospectus pursuant to Rule 144, including 144(k).

In general, under Rule 144 as currently in effect, ~~on the date of this prospectus, our affiliates, or a~~any person (or persons whose shares ~~are~~must be aggregated), including an affiliate of ours, who has beneficially owned restricted shares ~~(as defined under Rule 144)~~of our common stock for at least one year ~~are~~is entitled to sell ~~within~~in any three-month period a number of shares that does not exceed the greater of ~~one percent of~~ the ~~then outstanding~~following:

Sales under Rule 144 also must be sold only through “brokers’ transactions” or ~~the average weekly trading volume of the common stock on the Nasdaq National Market during the four calendar weeks immediately preceding the date on which notice of the sale is filed~~in transactions directly with ~~the SEC. Sales~~a “market maker,” as those terms are defined in Rule 144. In addition, sales under Rule 144 are subject to notice requirements ~~relating to the manner of sale, notice~~ and the availability of current public information ~~about us.~~ concerning us for at least 90 days after completion of the offering.

A person (or persons whose shares ~~are~~must be aggregated) who ~~was~~is not ~~our~~deemed to have been an affiliate of ours at any time during the 90 days ~~immediately~~ preceding ~~the~~a sale and who has beneficially owned ~~restricted~~the shares proposed to be sold for at least two years iswould be entitled to sell ~~such~~those shares under Rule 144(k) without regard to the ~~limitations~~volume, manner of sale, notice or public information requirements of Rule 144 described above.

~~Our employees, officers, directors or consultants who purchased or were awarded shares or options to purchase shares under~~

On July 7, 2004, we filed a ~~written compensatory plan or contract are entitled to rely~~registration statement on ~~the resale provisions of Rule 701~~Form S-8 under the Securities Act ~~which permits affiliates~~of 1933 to register shares of common stock issuable under our 1999 stock plan, 2004 stock incentive plan and ~~non-affiliates~~employee stock purchase plan. As a result, shares issued pursuant to ~~sell their Rule 701 shares~~our 1999 stock plan, 2004 stock incentive plan and employee stock purchase plan, including upon the exercise of stock options, are eligible for resale in the public market without ~~having~~

restriction, subject to ~~comply with the~~ Rule 144 ~~holding period restrictions. In addition, non-affiliates may sell Rule 701 shares without complying with~~limitations applicable to affiliates described above and the ~~public information, volume~~lock-up and ~~notice provisions of Rule 144.~~other agreements described below.

We, our officers, directors and stockholders and optionholders selling shares of common stock in this offering have agreed to a 90-day “lock up” with respect to ~~5,558,652~~4,201,781 shares of common stock and other of our securities that they beneficially own, including securities that are convertible into shares of common stock and securities that are exchangeable or exercisable for shares of common stock. This means that, for a period of 90 days following the date of this prospectus, subject to specified exceptions, we and such persons may not, directly or indirectly, offer, sell, pledge or otherwise dispose of these securities without the prior written consent of CIBC World Markets Corp. These restrictions will not prevent such persons from transferring their shares or other securities as gifts, to members of their immediate family or to a trust for the benefit of themselves of member of their family or by will or intestacy, provided, in each case, that the transferee of such shares of other securities agrees to be locked-up to the same extent as the person from whom they received the shares. In addition, stockholders that are a corporation, partnership or other business entity may transfer their shares or other securities to their affiliates or as part of a plan of distribution to their equityholders, provided, in each case, that the recipient of such shares agrees to be locked-up to the extent as the entity from which they received such shares or other securities.

Following this offering, under specified circumstances and subject to customary conditions, some holders of shares of our outstanding common stock will hold demand registration rights with respect to their shares of common stock, subject to the 90-day lock-up arrangement described above, to require us to register their shares of common stock under the Securities Act, and rights to participate in any future registrations of securities. If the holders of these registrable securities request that we register their shares, and if the registration is effected, these shares will become freely tradable without restriction under the Securities Act. Any sales of securities by these stockholders could have a material adverse effect on the trading price of our common stock.

We and the selling stockholders have entered into an underwriting agreement with the underwriters named below. CIBC World Markets Corp., William Blair & Company, L.L.C., SG Cowen & Co., LLC and Thomas Weisel Partners LLC are acting as representatives of the underwriters.

The underwriting agreement provides for the purchase of a specific number of shares of common stock by each of the underwriters. The underwriters’ obligations are several, which means that each underwriter is required to purchase a specified number of shares, but is not responsible for the commitment of any other underwriter to purchase shares. Subject to the terms and conditions of the underwriting agreement, each underwriter has severally agreed to purchase the number of shares of common stock set forth opposite its name below:

The underwriters have agreed to purchase all of the shares offered by this prospectus (other than those covered by the over-allotment option described below) if any are purchased. Under the underwriting agreement, if an underwriter defaults in its commitment to purchase shares, the commitments of non-defaulting underwriters may be increased or the underwriting agreement may be terminated, depending on the circumstances.

The shares should be ready for delivery on or about , 2005 against payment in immediately available funds. The underwriters are offering the shares subject to various conditions and may reject all or part of any order. The representatives have advised us and the selling stockholders that the underwriters propose to offer the shares directly to the public at the public offering price that appears on the cover page of this prospectus. In addition, the representatives may offer some of the shares to other securities dealers at such price less a concession of $ per share. The underwriters may also allow, and such dealers may reallow, a concession not in excess of $ per share to other dealers. After the shares are released for sale to the public, the representatives may change the offering price and other selling terms at various times.

The selling stockholders have granted the underwriters an over-allotment option. This option, which is exercisable for up to 30 days after the date of this prospectus, permits the underwriters to purchase a maximum of 247,500 additional shares from the selling stockholders to cover over-allotments. If the underwriters exercise all or part of this option, they will purchase shares covered by the option at the public offering price that appears on the cover page of this prospectus, less the underwriting discount. If this option is exercised in full, the total price to the public will be $ , the total proceeds to us will be $ and the total proceeds to the selling stockholders will be $ . The underwriters have severally agreed that, to the extent the over-allotment option is exercised, they will each purchase a number of additional shares proportionate to the underwriter’s initial amount reflected in the foregoing table.

The following table provides information regarding the amount of the discount to be paid to the underwriters by us and the selling stockholders:

We estimate that our total expenses of the offering, excluding the underwriting discount, will be approximately $450,000.

We and the selling stockholders have agreed to indemnify the underwriters against certain liabilities, including liabilities under the Securities Act of 1933.

We, our officers and directors and the selling stockholders have agreed to a 90-day “lock up” with respect to shares of common stock and other of our securities that they beneficially own, including securities that are convertible into shares of common stock and securities that are exchangeable or exercisable for shares of common stock. This means that, subject to certain exceptions, for a period of 90 days following the date of this prospectus, we and such persons may not offer, sell, pledge or otherwise dispose of these securities without the prior written consent of CIBC World Markets Corp. These restrictions will not prevent such persons from transferring their shares or other securities as gifts, to members of their immediate family or to a trust for the benefit of themselves of member of their family or by will or intestacy, provided, in each case, that the transferee of such shares of other securities agrees to be locked-up to the same extent as the person from whom they received the shares. In addition, stockholders that are a corporation, partnership or other business entity may transfer their shares or other securities to their affiliates or as part of a plan of distribution to their equityholders, provided, in each case, that the recipient of such shares agrees to be locked-up to the extent as the entity from which they received such shares or other securities.

The representatives have informed us that they do not expect discretionary sales by the underwriters to exceed five percent of the shares offered by this prospectus.

Rules of the SEC may limit the ability of the underwriters to bid for or purchase shares before the distribution of the shares is completed. However, the underwriters may engage in the following activities in accordance with the rules:

pricing, there may be downward pressure on the price of the shares that could adversely affect investors who purchase shares in this offering.

Similar to other purchase transactions, the underwriters’ purchases to cover the syndicate short sales or to stabilize the market price of our common stock may have the effect of raising or maintaining the market price of our common stock or preventing or mitigating a decline in the market price of our common stock. As a result, the price of the shares of our common stock may be higher than the price that might otherwise exist in the open market. The imposition of a penalty bid might also have an effect on the price of the shares if it discourages resales of the shares.

Neither we nor the underwriters makes any representation or prediction as to the effect that the transactions described above may have on the price of the shares. These transactions may occur on the Nasdaq National Market or otherwise. If such transactions are commenced, they may be discontinued without notice at any time.

Based on the number of shares outstanding on February ~~16,~~24, 2005, certain employees of CIBC World Markets Corp., William Blair & Company, L.L.C. and Thomas Weisel Partners LLC own approximately 1.1%, in the aggregate, of our outstanding capital stock.

In the future, certain of the underwriters or their affiliates, may provide us, from time to time, with other financial advisory or commercial or investment banking services, for which we expect they will receive customary fees and commissions.

The validity of the common stock offered hereby will be passed upon for us by Latham & Watkins LLP, San Diego, California. The validity of the common stock offered hereby will be passed upon for the underwriters by Simpson Thacher & Bartlett LLP, Palo Alto, California.

Grant Thornton LLP, independent auditors, have audited our financial statements at December 27, 2003 and January 1, 2005, and for each of the three years in the period ended January 1, 2005, as set forth in their report. We have included our financial statements in the prospectus and elsewhere in the registration statement in reliance on the report of Grant Thornton LLP, given on their authority as experts in accounting and auditing.

We have filed with the SEC a registration statement on Form S-1 under the Securities Act to register the shares of common stock offered hereby. The term registration statement means the original registration statement and any and all amendments thereto, including the schedules and exhibits to the original registration statement and any amendments. This prospectus, which constitutes a part of the registration statement, does not contain all of the information set forth in the registration statement or the exhibits and schedules filed therewith. For further information with respect to Design Within Reach, Inc. and the common stock offered hereby, reference is made to the registration statement and the exhibits and schedules filed therewith. With respect to each document filed with the SEC as an exhibit to the registration statement, reference is made to the exhibit for a more complete description of the matter involved. A copy of the registration statement the exhibits and schedules filed therewith may be inspected without charge at the public reference room maintained by the SEC, located at 450 Fifth Street, N.W., Room 1200, Washington, DC 20549, and copies of all or any part of the registration statement may be obtained from such offices upon the payment of the fees prescribed by the SEC. Please call the SEC at 1-800-SEC-0330 for further information about the public reference room. The SEC also maintains an Internet website that contains reports, proxy and information statements and other information regarding registrants that file electronically with the SEC. The address of the site iswww.sec.gov.

We file periodic reports, proxy statements and other information with the SEC. Such periodic reports, proxy statements and other information are available for inspection and copying at the public reference room and website of the SEC referred to above. We maintain a website atwww.dwr.com. You may access our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act with the SEC free or charge at our website as soon as reasonably practicable after such material is electronically filed with, or furnished to, the SEC. The reference to our web address does not constitute incorporation by reference of the information contained at or accessible through this site.

We intend to furnish our stockholders with annual reports containing consolidated financial statements audited by our independent auditors and to make available to our stockholders quarterly reports for the first three quarters of each fiscal year containing unaudited interim condensed consolidated financial statements.

We have audited the accompanying balance sheets of Design Within Reach, Inc. as of January 1, 2005 and December 27, 2003, and the related statements of earnings, stockholders’ equity, and cash flows for each of the three years in the period ended January 1, 2005. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Design Within Reach, Inc. as of January 1, 2005 and December 27, 2003, and the results of its operations and its cash flows for each of the three years in the period ended January 1, 2005 in conformity with accounting principles generally accepted in the United States of America.

The financial statements for fiscal 2003 and 2002 have been restated as discussed in Note 1 to the financial statements.

We have also audited the financial statement schedule listed at Item 16 (b) for each of the three years in the period ended January 1, 2005. In our opinion, this schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information therein.


	December 27, 2003			January 1, 2005			December 27, 2003			January 1, 2005
	(Restated)						(Restated)
ASSETS
Current assets
Cash and cash equivalents	$	44		$	21,141		$	44		$	21,141
Investments		—			3,544			—			3,544
Inventory on hand		11,032			13,815			11,032			13,815
Inventory-in-transit		2,072			7,049			2,072			7,049
Accounts receivable (less allowance for doubtful accounts of $96 and $36)		620			1,344			620			1,344
Prepaid catalog costs		614			1,862			614			1,862
Deferred income taxes, net of valuation allowance		1,022			1,512			1,022			1,512
Other current assets		680			2,352			680			2,352

Total current assets		16,084			52,619			16,084			52,619

Property and equipment, net		9,018			18,572			9,018			18,572
Investments, non-current		—			2,016			—			2,016
Deferred income taxes		309			887			309			887
Other non-current assets		111			526			111			526

Total assets	$	25,522		$	74,620		$	25,522		$	74,620

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Accounts payable	$	6,531		$	14,317		$	6,531		$	14,317
Accrued expenses		2,714			4,668			2,714			4,668
Deferred revenue		687			2,014			687			2,014
Customer deposits and other liabilities		1,091			1,573			1,091			1,573
Bank credit facility		3,325			1,053			3,325			1,053
Capital lease obligation, current portion		90			112			90			112

Total current liabilities		14,438			23,737			14,438			23,737

Deferred rent and lease incentives		587			1,874			587			1,874
Capital lease obligation		260			140			260			140
Deferred income tax liabilities		399			867			399			867

Total liabilities		15,684			26,618			15,684			26,618

Stockholders’ equity
Preferred stock Series A – $1.00 par value; authorized 2,040 shares; issued and outstanding, 2,040 shares in 2003		2,040			—			2,040			—
Preferred stock Series B – $1.00 par value; authorized 6,000 shares; issued and outstanding, 3,359 shares in 2003		10,044			—			10,044			—
Preferred stock – $0.001 par value; authorized 10,000 shares; issued and outstanding, no shares in 2004								—			—
Common stock – no par value; authorized 13,000 shares; issued and outstanding, 3,322 shares in 2003		240			—			240			—
Common stock – $0.001 par value; authorized 30,000 shares; issued and outstanding, 12,869 shares in 2004		—			13			—			13
Additional paid-in capital		—			47,823			—			47,823
Deferred compensation		—			(1,574	)		—			(1,574	)
Accumulated other comprehensive income		—			482			—			482
Accumulated earnings (deficit)		(2,486	)		1,258			(2,486	)		1,258

Total stockholders’ equity		9,838			48,002			9,838			48,002

Total liabilities and stockholders’ equity	$	25,522		$	74,620		$	25,522		$	74,620

Design Within Reach, Inc. (the “Company”) was incorporated in California in November 1998. The Company is an integrated multi-channel provider of distinctive modern design furnishings and accessories. The Company markets and sells its products to both residential and commercial customers through four sales channels consisting of its catalog, studios, website and direct sales force. The Company sells its products directly to customers throughout the United States.

The Company operates 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 five to six years. The Company’s 2002 fiscal year ended on December 28, 2002, its 2003 fiscal year ended on December 27, 2003 and its 2004 fiscal year ended on January 1, 2005. Each of fiscal years 2002 and 2003 consisted of 52 weeks and fiscal year 2004 consisted of 53 weeks.

The Company’s business is conducted in a single operating segment. The Company’s chief operating decision maker is the Chief Executive Officer who reviews a single set of financial data that encompasses the Company’s entire operations for purposes of making operating decisions and assessing performance.

During the year ended January 1, 2005, sales of products supplied by one vendor constituted approximately 9.1% of net sales, while sales of products supplied by the Company’s top five vendors constituted approximately 30.1% of net sales.

The Company considers all highly liquid investments with an original maturity of three months or less when purchased to be cash equivalents. Cash and cash equivalents consisted of the following at the end of fiscal years 2003 and 2004:

Short-term securities (generally money market funds deposited with major financial institutions or investment grade auction rate securities) are stated at cost plus accrued interest, which approximates market value.

The Company, from time to time, maintains cash balances at financial institutions that are in excess of the amounts insured by the Federal Deposit Insurance Corporation up to $100. The Company has not experienced any losses in such accounts and believes it is not exposed to any significant credit risk on cash and cash equivalents.

The majority of the Company’s accounts receivable consist of amounts due from major credit card companies that are collected within five days after the customer’s credit card is charged and receivables due from

commercial customers due within 30 days of the invoice date. The Company estimates its allowance for uncollectible receivables by considering a number of factors, including the length of time accounts receivable are past due and the Company’s previous loss history.

Inventory consists primarily of finished goods purchased from third-party manufacturers and is carried at the lower of cost (first-in, first-out) or market. As of December 27, 2003 and January 1, 2005, the Company had inventory of $11,032 and $13,815, respectively, net of write-downs of $754 and $677, respectively.

In 2004, the Company determined that it had not correctly recorded inventory-in-transit from its European vendors in the Company’s inventory in prior periods. To correct this, the balance sheet as of December 27, 2003 has been restated to reflect an increase of $1,679 in inventory-in-transit and the related payable. The quarterly balance sheets as of March 27, 2004, June 26, 2004 and September 25, 2004 have been restated to reflect increases of $2,367, $3,614 and $2,353 in inventory-in-transit and the related payables, respectively. The restatement had no impact on previously reported net sales, earnings, earnings per share, stockholders’ equity, or cash flows.

Inventory-in-transit consists primarily of finished goods purchased from third-party manufacturers and represents those goods that are in-transit from certain vendors, when terms are FOB shipping, to the Company. Inventory-in-transit also includes those goods that are in-transit from the Company to its customers. As of December 27, 2003 and January 1, 2005, the Company had total inventory-in-transit of $2,072 and $7,049, respectively. See footnote 3 for inventory-in-transit detail.

The carrying value of cash and cash equivalents, accounts receivable, accounts payable, and current portion of debt approximates their estimated fair values due to the short maturities of these instruments. The carrying value of long-term debt approximates its fair value based on current rates available to the Company for similar debt.

The Company applies SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” as amended and interpreted, for derivative instruments and requires that all derivatives be recorded at fair value on its balance sheet, including embedded derivatives.

The Company’s operations are exposed to global market risks, including the effect of changes in foreign currency exchange rates. The objective of the Company’s foreign exchange risk management program is to manage the financial and operational exposure arising from these risks by offsetting gains and losses on the underlying exposures with gains and losses on derivatives used to hedge them. The Company uses forwards and options contracts, which qualify as cash flow hedges, to manage its exposure to foreign currency exchange risks. The Company has comprehensive hedge documentation that defines the hedging objectives, practices, procedures, and accounting treatment. The Company’s hedging program and derivative positions and strategy are reviewed on a regular basis by its management. In addition, the Company has entered into agreements that allow us to settle positive and negative positions with the same counterparty on a net basis.

Derivative positions are used only to manage identified exposures. Hedges that receive designated hedge accounting treatment are evaluated for effectiveness at the time they are designated as well as throughout the hedge period. All of the Company’s derivatives qualify for hedge accounting under SFAS No. 133. With respect

to any derivative that is deemed ineffective, the ineffective portion is reported through earnings. The effective portion of changes in the fair value of cash flow hedges is recorded in Other Comprehensive Income (OCI) and is recognized in cost of sales when the hedged item affects earnings. We did not have any ineffectiveness during the periods reported.

Derivatives used to manage financial exposures for foreign exchange risks generally mature within one year or less. Cash flow hedges are discontinued when it is probable that the original forecasted transaction will not occur.

Property and equipment are stated at cost and depreciated using a straight-line method over the assets’ estimated useful lives. Costs of maintenance and repairs are charged to expense as incurred; significant renewals and betterments are capitalized. Estimated useful lives are as follows:

Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. If the undiscounted future cash flows from the long-lived assets are less than the carrying value, a loss is recognized equal to the difference between the carrying value and the fair value of the assets. Decisions to close a studio or facility also can result in accelerated depreciation over the revised useful life. When the Company closes a location that is under a long-term lease, the Company records a charge for the fair value of the liability associated with that lease at the cease-use date. The fair value of such liability is calculated based on the remaining lease rental payments due under the lease, reduced by estimated rental payments that could be reasonably obtained by the Company for subleasing the property to a third party. The estimate of future cash flows is based on the Company’s experience, knowledge and typically third-party advice or market data. However, these estimates can be affected by factors such as future studio profitability, real estate demand and economic conditions that can be difficult to predict.

The Company recognizes sales and the related cost of sales at the time the products are estimated to have been received by customers. The Company’s customers may return ordered items for an exchange or refund. The Company provides an allowance based on projected product returns, taking into consideration historical experience and other factors. The returns allowance is recorded as a reduction to net sales for the estimated retail value of the projected product returns and as a reduction in cost of sales for the corresponding cost amount. Shipping and handling fees charged to the customer are recognized at the time the products are estimated to have been received by the customer and are included in net sales. Costs of shipping products to customers are recognized at the time the products are estimated to have been received by the customers and are included in cost of sales.

Sales of products typically are covered by warranties provided by the manufacturer of the product sold, therefore the Company has not recorded any warranty expense or liability.

Income taxes are computed using the asset and liability method under Statement of Financial Accounting Standards (“SFAS”) No. 109, “Accounting for Income Taxes.” Deferred income tax assets and liabilities are determined based on the differences between the financial reporting and tax bases of assets and liabilities and are measured using the currently enacted tax rates and laws currently in effect. The Company records an estimated valuation allowance on its deferred income tax assets if it is more likely than not that these deferred income tax assets will not be realized.

Prepaid catalog costs consist of third-party costs, including paper, printing, postage, name acquisition and mailing costs, for all of the Company’s direct response catalogs. Such costs are capitalized and are amortized over their expected period of future benefit. Each catalog is generally fully amortized within two to four months of its initial mailing depending on circulation plans. At December 27, 2003 and January 1, 2005, the Company had prepaid catalog costs of $614 and $1,862, respectively. Other advertising costs are expensed as incurred. Prepaid catalog costs are evaluated for realizability at each reporting period by comparing the carrying amount associated with each catalog to the estimated probable remaining future net benefit associated with that catalog. If the carrying amount is in excess of the estimated probable remaining future net benefit of the catalog, the excess is expensed in the reporting period. Advertising expenses, including amortized catalog costs, were $8,583, $10,336 and $10,813 in 2002, 2003 and 2004, respectively. The Company accounts for consideration received from its vendors for co-operative advertising as a reduction of selling, general and administrative expense. Co-operative advertising amounts received by the Company were $371, $273 and $489 in fiscal years 2002, 2003 and 2004, respectively.

Several of the Company’s operating leases contain free rent periods and many contain predetermined fixed increases of the minimum rental rate during the initial lease term. For these leases, the Company recognizes rental expense on a straight-line basis over the minimum lease term and records the difference between the amounts charged to expense and the rent paid as deferred rent.

As part of many of the Company’s lease agreements, the Company receives construction allowances from landlords for tenant improvements. The construction allowances are deferred and amortized on a straight-line basis over the life of the lease as a reduction of rent expense. Construction allowances of $3, $335 and $305 were granted in 2002, 2003 and 2004, respectively, with the unamortized balance included in deferred rent and lease incentives.

The Company accounts for stock based compensation arrangements in accordance with the provisions of Accounting Principles Board (“APB”) Statement No. 25, “Accounting for Stock Issued to Employees,” and complies with the disclosure provisions of SFAS No. 123, “Accounting for Stock-Based Compensation,” as amended by SFAS No. 148, “Accounting for Stock-Based Compensation-Transition and Disclosure,” and related

interpretations. Stock-based compensation costs of $551 are reflected in net earnings for year ended January 1, 2005. No stock-based compensation cost is reflected in net earnings for the two years ending December 27, 2003, as all options granted under the Company’s stock plans had exercise prices equal to the estimated fair value of the underlying common stock on the date of grant. The Company accounts for equity instruments issued to non-employees in accordance with the provisions of SFAS No. 123 and related interpretations. The following table illustrates the effect on net earnings if the Company had applied the fair value recognition provisions of SFAS No. 123 to stock-based compensation.

The fair value of option grants has been determined using the Black-Scholes option pricing model with the following weighted average assumptions:

Basic earnings per share is calculated by dividing the Company’s net earnings available to the Company’s common stockholders for the year by the number of weighted average common shares outstanding for the year. In accordance with Emerging Issues Task Force Topic No. D-53, the net earnings available to the Company’s common stockholders for the year ended December 27, 2003 is stated after recognizing deemed preferred stock dividends of $1,765. The amount of the deemed preferred stock dividends represents the excess of the consideration of $6,765 paid by the Company to Reed Business Information, a division of Reed Elsevier Inc., in connection with its repurchase from Reed Business Information of 1,961 shares of the Company’s Series B Preferred Stock in May 2003, over the carrying value of those shares of $5,000. Diluted earnings per share includes the effects of dilutive instruments, such as stock options, warrants and convertible preferred stock, and uses the average share price for the period in determining the number of incremental shares that are to be added to the weighted average number of shares outstanding.

The following table summarizes the incremental shares from potentially dilutive securities, calculated using the treasury stock method at the end of each fiscal period:

The Company has no anti-dilutive common share equivalents to be excluded from the calculation of diluted earnings per share.

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management of the Company to make estimates and assumptions affecting the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, as well as revenues and expenses during the reporting period. The Company’s significant accounting estimates include estimates of market value used in calculating the value of inventory on a lower of cost or market basis, estimates of market value used in calculating the value of stock-based compensation, estimates of expected future cash flows used in the review for impairment of long-lived assets, estimates of the Company’s ability to realize its deferred tax assets which are also used to establish whether valuation allowances are needed on those assets, and estimates of returns used to calculate sales return reserves. Actual results could differ from those estimates and such differences could affect the results of operations reported in future periods.

Certain items in the fiscal year 2003 and fiscal year 2002 financial statements have been reclassified to conform to the fiscal year 2004 presentation.

Financial instruments that potentially subject the Company to a concentration of credit risk consist of cash, cash equivalents, foreign currency forward contracts and accounts receivable. Cash and cash equivalents are deposited with high credit quality financial institutions. The majority of the Company’s accounts receivable consist of receivables due from major credit card companies that are collected within five days after the customer’s credit card is charged and receivables due from commercial customers due within 30 days of the invoice date.

approach using an option-pricing model, such as the Black-Scholes option valuation model, at the date of a stock option grant. The deferred compensation amount calculated under the fair value method would then be amortized over the respective vesting period of the stock option. The Company will adopt the provisions of SFAS 123R during its 2005 fiscal year. The adoption of SFAS 123R is expected to have a material impact on the Company’s results of operations.

In December 2004, the FASB issued Statement of Financial Accounting Standards No. 151, Inventory Costs (“SFAS 151”). SFAS 151 requires abnormal amounts of inventory costs related to idle facility, freight handling and wasted material expenses to recognized as current period charges. The standard is effective for fiscal years beginning after June 15, 2005. The Company believes the adoption of SFAS 151 will not have a material impact on its financial statements.

The Company considers all highly liquid interest-earning investments with a maturity of three months or less at the date of purchase to be cash equivalents. The Company invests its excess cash in high quality financial instruments. Those with maturities beyond one year may be classified as short-term based on their highly liquid nature and because such marketable securities represent the investment of cash that is available for current operations. All cash and short-term investments are classified as available for sale and are recorded at fair market value using the specific identification method; unrealized gains and losses (excluding other-than-temporary impairments) are reflected in Accumulated Other Comprehensive Income (“OCI”). Realized gains and losses and declines in value judged to be other than temporary, if any, on available for sale securities are included in earnings.

Long term investments include debt instruments with maturities of one to five years. Debt securities are classified as available for sale and are recorded at fair market using the specific identification method. Unrealized gains and losses (excluding other-than-temporary impairments) are reflected in OCI. The following table presents the Company’s available for sale securities as of January 1, 2005:

The Company had no investments as of December 27, 2003. There were no sales or dispositions of available-for-sale securities during fiscal year 2004 and therefore no realized gains or losses.

Inventory-in-transit consists primarily of finished goods purchased from third-party manufacturers and represents those goods that are in-transit from certain vendors to the Company. Inventory-in-transit also includes those goods where title has passed to the Company that are in-transit from the Company to its customers. The following table presents the Company’s inventory-in-transit at the end of each fiscal year.

Construction-in-progress as of January 1, 2005 consists of leasehold improvements of $681 to studios under construction and $2,342 of external development of enterprise solution software. Construction-in-progress as of December 27, 2003 consists of equipment under capital lease of $350 and leasehold improvements of $104 to studios under construction.

The provision for income taxes consists of the following for each of the fiscal years:

A reconciliation of the statutory federal income tax rate with the Company’s effective income tax rate is as follows:

Deferred income taxes reflect the impact of temporary differences between amounts of assets and liabilities for financial reporting purposes and such amounts as measured by tax laws. Temporary differences and carryforwards, which give rise to deferred tax assets and liabilities, are as follows at the end of each fiscal year:

The Company had net operating loss carryforwards of approximately $29 and $4,342 at December 27, 2003 for Federal and California state income taxes, respectively. All of these net operating loss carryforwards were used to reduce taxable income during fiscal year 2004.

During July 2002, the Company entered into an approximately one-year secured revolving line of credit with Wells Fargo HSBC Trade Bank. The Company amended this agreement for the third time on June 3, 2004. This facility provides an overall credit line of $11,500, comprised of a $9,000 operating line of credit for working capital and standby letters of credit and a $2,500 equipment line of credit for capital expenditure needs. Amounts borrowed under the credit agreement are secured by the Company’s accounts receivable, inventory and equipment. The Company’s permitted annual capital expenditures are limited under the credit agreement. The credit agreement also sets forth a number of affirmative and negative covenants to which the Company must adhere, including financial covenants that require us to achieve positive net earnings in each quarter and limitations on capital expenditures. As of January 1, 2005, the Company was in compliance with all covenants.

The Company’s maximum borrowing under the operating line of credit may not exceed the lesser of (a) $9,000 or (b) the total of (i) 75% of the Company’s eligible trade accounts receivable, plus (ii) 50% of the adjusted value of independently appraised acceptable inventory. This line of credit expires in July 2005. The interest rate for the operating line of credit during the term of the facility is based on the lender’s prime rate plus 0.25%. As of January 1, 2005, the interest rate for the operating line of credit was 5.50%. As of January 1, 2005, no borrowings and $759 of stand-by letters of credit were outstanding and approximately $6,758 was available to be drawn. The maximum amount of borrowings outstanding during fiscal year 2003 and 2004 were $3,676 and $3,485, respectively.

The Company’s maximum borrowing under the equipment line of credit may not exceed $2,500. The interest rate for the equipment line of credit during the term of the facility is based on the lender’s prime rate plus 0.50%.

During July 2004, the Company repaid all borrowings under the operating line of credit and the equipment line of credit. Per the amended agreement, the balance of the equipment line as of July 31, 2004 converted to a term loan. The balance of the equipment line on July 31, 2004 was zero, and therefore expired.

Included in the bank credit facility amount outstanding on the balance sheet of $3,325 and $1,053, as of December 27, 2003 and January 1, 2005, is $1,368 and $1,053 representing outstanding checks in excess of the cash balances in the Company’s bank accounts with the Bank.

Total interest expense during fiscal year 2003 and 2004 was $42 and $97, respectively. There were no borrowings during fiscal year 2002 and therefore no interest expense for that year.

On June 29, 2004, the Company’s registration statement on Form S-1 was declared effective for the Company’s initial public offering, pursuant to which the Company sold 3,000 shares of common stock at $12 per share. The Company’s common stock commenced trading on June 30, 2004. The Company’s initial public offering closed on July 6, 2004, and net offering proceeds of approximately $33,480 (after underwriters’ discounts of $2,520) were received the same day. The net proceeds available to the Company amounted to $31,830 after it incurred additional related offering expenses of approximately $1,648 through December 2004.

On June 30, 2004, all of the Company’s outstanding preferred stock was automatically converted into approximately 5,399 shares of common stock. Each share of Series A and B preferred stock outstanding was converted into common stock on a one-for-one exchange ratio of common for preferred.

The Company had two classes of preferred stock as of December 27, 2003: Series A Preferred Stock and Series B Preferred Stock. Each share of preferred stock was converted into one share of common stock during July of 2004.

The Company repurchased 1,961 shares of Series B Preferred Stock from Reed Business Information, a division of Reed Elsevier Inc., during May 2003 at $3.45 per share for total of $6,765. These shares were originally issued during May 2000 at $2.55 per share. The Company simultaneously issued 1,407 shares of Series B Preferred Stock during May 2003 at $3.45 per share for total consideration of $4,852. The balance of 554 shares of Series B Preferred Stock was retired during May 2003. For the purpose of calculating earnings per share, the $1,765 excess of the fair value of the consideration transferred to the holder of the Series B Preferred Stock over the carrying value of $5,000 of that stock has been reported as a deemed preferred stock dividend and subtracted

from the Company’s net earnings of $2,960, to arrive at the Company’s net earnings available to common stockholders of $1,195. The deemed preferred stock dividend reduced the Company’s basic earnings per share by $0.54 to $0.37 and diluted earnings per share by $0.15 to $0.11.

In October 1998, the Company issued warrants to purchase 700 shares of the Company’s common stock exercisable at $1.50 per share in relation to an advising agreement with a major stockholder. The fair value of these warrants at the time of issuance was zero. The fair value of the warrants was determined using the Black-Scholes option pricing model with the following assumptions: underlying common stock price of $0.25, expected life of 10 years, interest rate of 6%, volatility of 0% and no dividend yield. Each warrant contained provisions for the adjustment of its exercise price and the number of shares issuable upon its exercise upon the occurrence of any stock dividend, reorganization, reclassification, consolidation, merger, sale or stock split. These warrants had net exercise provisions under which the holder could, in lieu of payment of the exercise price in cash, surrender the warrant and receive a net amount of shares based on the fair market value of the Company’s common stock at the time of exercise of the warrant after deduction of the aggregate exercise price. These warrants were exercised in full on June 29, 2004 in cash, resulting in the issuance of 700 shares of the Company’s common stock.

In December 1999, the Company issued warrants to purchase an aggregate of 261 shares of the Company’s Series B Preferred Stock exercisable at $2.55 per share in relation to bridge loans made in December 1999. The fair value of these warrants at the time of issuance was $295 and was recognized as interest expense in fiscal year 2000. The fair value of the warrants was determined using the Black-Scholes option pricing model with the following assumptions: underlying Series B Preferred stock price of $2.55, expected life of 10 years, interest rate of 6%, volatility of 0% and no dividend yield. Each warrant contained provisions for the adjustment of its exercise price and the number of shares issuable upon its exercise upon the occurrence of any stock dividend or stock split. These warrants had net exercise provisions under which the holder could, in lieu of payment of the exercise price in cash, surrender the warrant and receive a net amount of shares based on the fair market value of the Company’s common stock at the time of exercise of the warrant after deduction of the aggregate exercise price. A portion of these warrants were exercised on June 29, 2004 in part in cash, resulting in the issuance of 154 shares of the Company’s Series B Preferred Stock, and in part on a net exercise basis resulting in the issuance of 19 shares of the Company’s Series B Preferred Stock. The remaining warrants were automatically exercised pursuant to their cashless exercise provisions immediately prior to the closing of the Company’s initial public offering of common stock, resulting in the issuance of 66 shares of the Company’s Series B Preferred Stock.

The Design Within Reach, Inc. 1999 Stock Plan (the “1999 Plan”) allows for the issuance of incentive stock options and nonstatutory stock options to purchase shares of the Company’s common stock. The Board of Directors most recently amended the 1999 Plan in October 2003, and the Company’s stockholders approved the Plan, as amended, in November 2003. The Company has reserved a total of 3,100 shares for issuance under the 1999 Plan, including 500 shares approved for grant during 2003.

The Design Within Reach, Inc. 2004 Equity Incentive Award Plan (the “2004 Plan” and together with the 1999 Plan, the “Plans”) allows for the issuance of incentive stock options and nonstatutory stock options to purchase shares of the Company’s common stock. The 2004 Plan was registered with the SEC and became effective during July 2004. The Company has reserved a total of 500 shares for issuance under the 2004 Plan.

A total of 671 shares remained available for grant under both Plans at January 1, 2005. Shares subject to cancelled options are returned to their respective Plan and are available to be reissued. Under the Plans, incentive

stock options may be granted only to employees, and nonstatutory stock options may be granted to employees, outside directors and consultants. Options granted under the Plans are for periods not to exceed ten years, and must be issued at prices not less than 100% of the fair market value for incentive stock options and not less than 85% of fair market value for nonstatutory options. Stock options granted to stockholders who own greater than 10% of the outstanding stock must be issued at prices not less than 110% of the fair market value of the stock on the date of grant. Options granted under the Plans generally vest within three to four years. The Plans allow certain options to be exercised prior to the time such options are vested. All unvested shares are subject to repurchase at the exercise price paid for such shares, at the option of the Company.

During the quarter ended March 27, 2004, the Company granted compensatory options to employees and directors. A total of 486 options were granted and the Company recorded deferred compensation of $2,125 and recognized expense during the fiscal year ended January 1, 2005 of $551. The deferred compensation is being amortized over 3 to 4 years from the date of grant, as applicable.

The following table summarizes information about stock options outstanding at January 1, 2005:

The weighted average fair value of options granted during the year ending January 1, 2005 was $12.65.

The Company leases office space, studios and fulfillment center space under operating leases. The Company also has equipment under a capital lease. Future minimum lease payments as of January 1, 2005 are as follows:

Rent expense, consisting of fixed minimum amounts and/or contingent rent based on a percentage of sales exceeding a stipulated amount, was $1,605, $3,215 and $6,233 for 2002, 2003 and 2004, respectively.

The Company accounts for step rent provisions, escalation clauses, capital improvements funding and other lease concessions on a straight-line basis over the minimum term of the lease.

The Company rents studio space from an affiliate of a significant stockholder of the Company and of the Chairman of the Company’s Board of Directors on a monthly basis. Rent expense related to this space for the year ended December 28, 2002, December 27, 2003 and January 1, 2005 was $101 for each of the three years. The Company received consulting services from the same affiliate on a monthly basis. Consulting expense related to these services was $90, $90 and $60 for 2002, 2003 and 2004, respectively.

In May 2003, the Company made a $100 loan to NapaStyle, Inc., which was repaid to the Company in full by the end of fiscal year 2003. In connection with this loan, NapaStyle, Inc. issued the Company a warrant to purchase 67 shares of NapaStyle, Inc. Series B preferred stock at an exercise price of $0.01 per share. The warrant expires on May 21, 2008. The Company has not ascribed a fair market value to these warrants for financial statement purposes. During 2004, the Company guaranteed certain payments for NapaStyle, Inc. in order to obtain attractive print pricing for the Company’s catalogs. No obligations were outstanding at the end of 2004 and the Company no longer guarantees payments for NapaStyle, Inc. The Company’s Chairman and Chief Executive Officer are members of the board of directors of NapaStyle, Inc., and some of the Company’s significant stockholders also are stockholders of NapaStyle, Inc.

The Company has a 401(k) savings plan. Employees may contribute up to 15% of their earnings to the plan. Company contributions to the plan are discretionary. The Company did not contribute to the plan in fiscal years 2002, 2003 or 2004.

During July of 2004, the Company filed a registration statement on Form S-8 with the SEC to register shares related to the Design Within Reach, Inc. Employee Stock Purchase Plan (the “ESPP”). The ESPP allows employees to purchase Company common stock at a 15% discount to market price through payroll deductions. The ESPP operates through a series of concurrent twelve-month offering periods. Except for the first offering period, these offering periods generally start on the first trading day on or after May 1st and November 1st of each year and end, respectively, on the last trading day of the next October and April. The Company registered 500 shares of Common Stock available for future grants under the ESPP.

During fiscal year 2003, the Company incurred $729 in costs associated with the relocation of its fulfillment center operations from Union City, California to Hebron, Kentucky. These costs consisted of freight costs to transport inventory ($182), severance costs for certain fulfillment center employees ($71), relocation costs for certain fulfillment center employees ($42), outside service costs ($110), lease cancellation costs ($110), accelerated depreciation on abandoned assets ($170) and other miscellaneous costs ($44). All costs ($729) except accelerated depreciation ($170) are included in facility relocation costs ($559). The accelerated depreciation is included in depreciation expense. During fiscal year 2004, the Company completed the relocation of its fulfillment center at a cost of $172.

The Company signed a lease during the fourth quarter of 2003 for approximately sixty thousand square feet of office space and relocated its Oakland, California headquarters to San Francisco, California in March of 2004. Rental payments under this lease commenced on June 1, 2004. During fiscal year 2004, the Company incurred approximately $26 in connection with the relocation of its headquarters.

The beginning and ending liability balances related to the facility relocation costs, provisions and payments for fiscal year 2004 are included in the table below.

You should rely only on the information contained in this prospectus. No dealer, salesperson or other person is authorized to give information that is not contained in this prospectus. This prospectus is not an offer to sell nor is it seeking an offer to buy these securities in any jurisdiction where the offer or sale is not permitted. The information contained in this prospectus is correct only as of the date of this prospectus, regardless of the time of the delivery of this prospectus or any sale of these securities.

The following table sets forth all costs and expenses, other than the underwriting discounts and commissions payable by the Registrant in connection with the sale and distribution of the common stock being registered. All amounts shown are estimates except for the Securities and Exchange Commission registration fee, the NASD filing fee and the Nasdaq National Market application fee.

As permitted by Section 102(b)(7) of the Delaware General Corporation Law, we have adopted provisions in our amended and restated certificate of incorporation and bylaws that limit or eliminate the personal liability of our directors for a breach of their fiduciary duty of care as a director. The duty of care generally requires that, when acting on behalf of the corporation, directors exercise an informed business judgment based on all material information reasonable available to them. Consequently, a director will not be personally liable to us or our stockholders for monetary damages or breach of fiduciary duty as a director except for:

These limitations of liability do not affect the availability of equitable remedies such as injunctive relief or rescission. Our amended and restated certificate or incorporation also authorizes us to indemnify our officers, directors and other agents to the fullest extent permitted under Delaware law.

As permitted by Section 145 of the Delaware General Corporation Law, our bylaws provide that:

Our amended and restated certificate of incorporation, Exhibit 3.01 hereto, and our bylaws, Exhibit 3.02 hereto, provide for the indemnification provisions described above and elsewhere herein. In addition, we have entered into separate indemnification agreements, a form of which is Exhibit 10.01 hereto, with our directors and officers which may be broader than the specific indemnification provisions contained in the Delaware General Corporation Law. These indemnification agreements may require us, among other things, to indemnify our officers and directors against liabilities that may arise by reason of their status or service as directors or officers,

other than liabilities arising from willful misconduct. These indemnification agreements also may require us to advance any expenses incurred by the directors or officers as a result of any proceeding against them as to which they could be indemnified. In addition, we have purchased a policy of directors’ and officers’ liability insurance that insures our directors and officers against the cost of defense, settlement or payment of a judgment in some circumstances. These indemnification provisions and the indemnification agreements may be sufficiently broad to permit indemnification of our officers and directors for liabilities, including reimbursement of expenses incurred, arising under the Securities Act.

The form of Underwriting Agreement, Exhibit 1.01 hereto, provides for indemnification by the underwriters of us and our officers and directors for specified liabilities, including matters arising under the Securities Act.

We have a directors’ and officers’ liability insurance policy that insures our directors and officers against the cost of defense, settlement or payment of a judgment in some circumstances.

The following list sets forth information regarding all securities sold by us over the past three years which were not registered under the Securities Act:

The offers, sales, and issuances of the securities described in paragraph (1) were deemed to be exempt from registration under the Securities Act in reliance on Rule 506 of Regulation D in that the issuance of securities to the accredited investors did not involve a public offering. The purchasers of securities in each such transaction represented their intention to acquire the securities for investment only and not with a view to or for sale in connection with any distribution thereof and appropriate legends were affixed to the share certificates issued in such transactions. Each of the recipients of securities in the transactions described in paragraph (1) were accredited investors under Rule 501 of Regulation D.

The offers, sales and issuances of the options and common stock described in paragraph (2) were deemed to be exempt from registration under the Securities Act in reliance on Rule 701 in that the transactions were under compensatory benefit plans and contracts relating to compensation as provided under such rule. The recipients of such options and common stock were our employees, directors or bona fide consultants and received the securities under our stock incentive plan. Appropriate legends were affixed to the share certificates issued in such transactions. Each of these recipients had adequate access, through employment or other relationships, to information about us.

There were no underwriters employed in connection with any of the transactions set forth in this Item 15.


Exhibit Number		Exhibit Title		Exhibit Title
1.01	*	Form of Underwriting Agreement		Form of Underwriting Agreement

3.01	(1)	Amended and Restated Certificate of Incorporation	(1)	Amended and Restated Certificate of Incorporation

3.02	(3)	Amended and Restated Bylaws	(3)	Amended and Restated Bylaws

4.01	(2)	Form of Specimen Common Stock Certificate	(2)	Form of Specimen Common Stock Certificate

4.02	(1)	Warrant, dated October 2, 1998, issued to JH Partners, LLC, formerly known as Jesse.Hansen&Co.	(1)	Warrant, dated October 2, 1998, issued to JH Partners, LLC, formerly known as Jesse.Hansen&Co.

4.03	(1)	Investors’ Rights Agreement, dated May 12, 2000, by and among Design Within Reach, Inc. and the investors named therein	(1)	Investors’ Rights Agreement, dated May 12, 2000, by and among Design Within Reach, Inc. and the investors named therein

4.04	(1)	Amendment to Investors’ Rights Agreement, dated May 8, 2003, by and among Design Within Reach, Inc. and the investors named therein	(1)	Amendment to Investors’ Rights Agreement, dated May 8, 2003, by and among Design Within Reach, Inc. and the investors named therein

5.01	*	Opinion of Latham & Watkins LLP		Opinion of Latham & Watkins LLP

10.01	(1)	Form of Indemnification Agreement entered into by Design Within Reach, Inc. and its directors and executive officers	(1)	Form of Indemnification Agreement entered into by Design Within Reach, Inc. and its directors and executive officers

10.02	(1)	Sublease Agreement, dated October 23, 2003, by and between National Broadcasting Company, Inc. and Design Within Reach, Inc.	(1)	Sublease Agreement, dated October 23, 2003, by and between National Broadcasting Company, Inc. and Design Within Reach, Inc.

10.03	(1)	Lease Agreement, dated October 2, 2003, by and between Dugan Financing LLC and Design Within Reach, Inc.	(1)	Lease Agreement, dated October 2, 2003, by and between Dugan Financing LLC and Design Within Reach, Inc.

10.04	(1)	Design Within Reach, Inc. 1999 Stock Plan, amended as of October 29, 2003	(1)	Design Within Reach, Inc. 1999 Stock Plan, amended as of October 29, 2003

10.05	(2)	Design Within Reach, Inc. 2004 Equity Incentive Award Plan	(2)	Design Within Reach, Inc. 2004 Equity Incentive Award Plan

10.06	(1)	Design Within Reach, Inc. Employee Stock Purchase Plan	(1)	Design Within Reach, Inc. Employee Stock Purchase Plan

10.07	(1)	Credit Agreement, dated as of July 10, 2002, by and between Design Within Reach, Inc. and Wells Fargo HSBC Trade Bank, N.A.	(1)	Credit Agreement, dated as of July 10, 2002, by and between Design Within Reach, Inc. and Wells Fargo HSBC Trade Bank, N.A.

10.08	(1)	First Amendment to Credit Agreement, dated as of July 30, 2003, by and between Design Within Reach, Inc. and Wells Fargo HSBC Trade Bank, N.A.	(1)	First Amendment to Credit Agreement, dated as of July 30, 2003, by and between Design Within Reach, Inc. and Wells Fargo HSBC Trade Bank, N.A.

10.09	(1)	Second Amendment to Credit Agreement, dated as of November 18, 2003, by and between Design Within Reach, Inc. and Wells Fargo HSBC Trade Bank, N.A.	(1)	Second Amendment to Credit Agreement, dated as of November 18, 2003, by and between Design Within Reach, Inc. and Wells Fargo HSBC Trade Bank, N.A.

10.10	(1)	Private Label Credit Card Program Agreement, dated as of November 13, 2003, between World Financial Network National Bank and Design Within Reach, Inc.	(1)	Private Label Credit Card Program Agreement, dated as of November 13, 2003, between World Financial Network National Bank and Design Within Reach, Inc.

10.11	(1)	Offer of Employment Letter dated February 22, 2000 between Design Within Reach, Inc. and Wayne Badovinus	(1)	Offer of Employment Letter dated February 22, 2000 between Design Within Reach, Inc. and Wayne Badovinus

10.12	(1)	Offer of Employment Letter dated February 22, 2000 between Design Within Reach, Inc. and David Barnard

10.13	(2)	Letter Agreement, dated February 9, 2004, by and between Design Within Reach, Inc. and JH Partners, LLC, formerly known as Jesse.Hansen&Co.	(2)	Letter Agreement, dated February 9, 2004, by and between Design Within Reach, Inc. and JH Partners, LLC, formerly known as Jesse.Hansen&Co.

10.14	(4)	Third Amendment to Credit Agreement, dated as of June 3, 2004, by and between Design Within Reach, Inc. and Wells Fargo HSBC Trade Bank, N.A.	(4)	Third Amendment to Credit Agreement, dated as of June 3, 2004, by and between Design Within Reach, Inc. and Wells Fargo HSBC Trade Bank, N.A.

10.15	(5)	Offer of Employment Letter dated June 1, 2004 between Design Within Reach, Inc. and Tara Poseley	(5)	Offer of Employment Letter dated June 1, 2004 between Design Within Reach, Inc. and Tara Poseley

23.01	*	Consent of Latham & Watkins LLP (included in Exhibit 5.01)		Consent of Latham & Watkins LLP (included in Exhibit 5.01)

23.02		Consent of Grant Thornton LLP, Independent Registered Public Accounting Firm		Consent of Grant Thornton LLP, Independent Registered Public Accounting Firm

24.01		Powers of Attorney (see p. II-5).		Powers of Attorney (previously filed).

The following schedule required to be filed by Item 16(b) is contained on page II-6 of this registration statement:

Schedule II – Valuation and Qualifying Accounts for each of the fiscal years 2004, 2003 and 2002.

All other schedules have been omitted because they are either inapplicable or the required information has been given in the financial statements or the notes thereto.

The undersigned registrant hereby undertakes to provide to the underwriters at the closing specified in the Underwriting Agreement, certificates in such denominations and registered in such names as required by the underwriters to permit prompt delivery to each purchaser.

Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the provisions described under Item 14 above, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by us of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue.

(1) For purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective; and

(2) For the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initialbona fide offering thereof.

Pursuant to the requirements of the Securities Act of 1933, the registrant has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the city of San Francisco, State of California, on February ~~17,~~25, 2005.

KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below hereby constitutes and appoints Wayne Badovinus acting individually, as his true and lawful attorney-in-fact and agent, with full power of substitution, for him in any and all capacities, to sign any and all amendments to this Registration Statement, including post-effective amendments or any abbreviated registration statement and any amendments thereto filed pursuant to Rule 462(b) increasing the number of securities for which registration is sought, and to file the same, with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorney-in-fact and agent, with full power of each to act alone, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully for all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorney-in-fact and agent, or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof.

Pursuant to the requirements of the Securities Act of 1933, this registration statement has been signed by the following persons in the capacities and on the dates indicated.


Exhibit Number		Exhibit Title		Exhibit Title
1.01	*	Form of Underwriting Agreement		Form of Underwriting Agreement

3.01	(1)	Amended and Restated Certificate of Incorporation	(1)	Amended and Restated Certificate of Incorporation

3.02	(3)	Amended and Restated Bylaws	(3)	Amended and Restated Bylaws

4.01	(2)	Form of Specimen Common Stock Certificate	(2)	Form of Specimen Common Stock Certificate

4.02	(1)	Warrant, dated October 2, 1998, issued to JH Partners, LLC, formerly known as Jesse.Hansen&Co.	(1)	Warrant, dated October 2, 1998, issued to JH Partners, LLC, formerly known as Jesse.Hansen&Co.

4.03	(1)	Investors’ Rights Agreement, dated May 12, 2000, by and among Design Within Reach, Inc. and the investors named therein	(1)	Investors’ Rights Agreement, dated May 12, 2000, by and among Design Within Reach, Inc. and the investors named therein

4.04	(1)	Amendment to Investors’ Rights Agreement, dated May 8, 2003, by and among Design Within Reach, Inc. and the investors named therein	(1)	Amendment to Investors’ Rights Agreement, dated May 8, 2003, by and among Design Within Reach, Inc. and the investors named therein

5.01	*	Opinion of Latham & Watkins LLP		Opinion of Latham & Watkins LLP

10.01	(1)	Form of Indemnification Agreement entered into by Design Within Reach, Inc. and its directors and executive officers	(1)	Form of Indemnification Agreement entered into by Design Within Reach, Inc. and its directors and executive officers

10.02	(1)	Sublease Agreement, dated October 23, 2003, by and between National Broadcasting Company, Inc. and Design Within Reach, Inc.	(1)	Sublease Agreement, dated October 23, 2003, by and between National Broadcasting Company, Inc. and Design Within Reach, Inc.

10.03	(1)	Lease Agreement, dated October 2, 2003, by and between Dugan Financing LLC and Design Within Reach, Inc.	(1)	Lease Agreement, dated October 2, 2003, by and between Dugan Financing LLC and Design Within Reach, Inc.

10.04	(1)	Design Within Reach, Inc. 1999 Stock Plan, amended as of October 29, 2003	(1)	Design Within Reach, Inc. 1999 Stock Plan, amended as of October 29, 2003

10.05	(2)	Design Within Reach, Inc. 2004 Equity Incentive Award Plan	(2)	Design Within Reach, Inc. 2004 Equity Incentive Award Plan

10.06	(1)	Design Within Reach, Inc. Employee Stock Purchase Plan	(1)	Design Within Reach, Inc. Employee Stock Purchase Plan

10.07	(1)	Credit Agreement, dated as of July 10, 2002, by and between Design Within Reach, Inc. and Wells Fargo HSBC Trade Bank, N.A.	(1)	Credit Agreement, dated as of July 10, 2002, by and between Design Within Reach, Inc. and Wells Fargo HSBC Trade Bank, N.A.

10.08	(1)	First Amendment to Credit Agreement, dated as of July 30, 2003, by and between Design Within Reach, Inc. and Wells Fargo HSBC Trade Bank, N.A.	(1)	First Amendment to Credit Agreement, dated as of July 30, 2003, by and between Design Within Reach, Inc. and Wells Fargo HSBC Trade Bank, N.A.

10.09	(1)	Second Amendment to Credit Agreement, dated as of November 18, 2003, by and between Design Within Reach, Inc. and Wells Fargo HSBC Trade Bank, N.A.	(1)	Second Amendment to Credit Agreement, dated as of November 18, 2003, by and between Design Within Reach, Inc. and Wells Fargo HSBC Trade Bank, N.A.

10.10	(1)	Private Label Credit Card Program Agreement, dated as of November 13, 2003, between World Financial Network National Bank and Design Within Reach, Inc.	(1)	Private Label Credit Card Program Agreement, dated as of November 13, 2003, between World Financial Network National Bank and Design Within Reach, Inc.

10.11	(1)	Offer of Employment Letter dated February 22, 2000 between Design Within Reach, Inc. and Wayne Badovinus	(1)	Offer of Employment Letter dated February 22, 2000 between Design Within Reach, Inc. and Wayne Badovinus

10.12	(1)	Offer of Employment Letter dated February 22, 2000 between Design Within Reach, Inc. and David Barnard

10.13	(2)	Letter Agreement, dated February 9, 2004, by and between Design Within Reach, Inc. and JH Partners, LLC, formerly known as Jesse.Hansen&Co.	(2)	Letter Agreement, dated February 9, 2004, by and between Design Within Reach, Inc. and JH Partners, LLC, formerly known as Jesse.Hansen&Co.

10.14	(4)	Third Amendment to Credit Agreement, dated as of June 3, 2004, by and between Design Within Reach, Inc. and Wells Fargo HSBC Trade Bank, N.A.	(4)	Third Amendment to Credit Agreement, dated as of June 3, 2004, by and between Design Within Reach, Inc. and Wells Fargo HSBC Trade Bank, N.A.

10.15	(5)	Offer of Employment Letter dated June 1, 2004 between Design Within Reach, Inc. and Tara Poseley	(5)	Offer of Employment Letter dated June 1, 2004 between Design Within Reach, Inc. and Tara Poseley

23.01	*	Consent of Latham & Watkins LLP (included in Exhibit 5.01)		Consent of Latham & Watkins LLP (included in Exhibit 5.01)

23.02		Consent of Grant Thornton LLP, Independent Registered Public Accounting Firm		Consent of Grant Thornton LLP, Independent Registered Public Accounting Firm

24.01		Powers of Attorney (see p. II-5).		Powers of Attorney (previously filed).


Common stock offered by Design Within Reach, Inc.		100,000 shares

Common stock offered by the selling stockholders		1,550,000 shares

Common stock to be outstanding after the offering		~~13,419,198~~13,519,179 shares

Use of proceeds		We expect that the net proceeds to us from the sale of shares of common stock that we are offering will be approximately ~~$1,039,320,~~$937,260, assuming an offering price of ~~$15.76~~$14.68 per share (which was the last reported sale price of our common stock on February ~~16,~~24, 2005) and after deducting underwriting discounts and commissions and estimated offering expenses payable by us. We intend to use the net proceeds from this offering of shares of common stock by us for general corporate purposes, including paying the expenses of this offering and working capital. We will not receive any of the proceeds from the sale of shares of common stock offered by the selling stockholders.

Nasdaq National Market symbol		DWRI


	Fiscal Year Ended (1)
	December 28, 2002		December 27, 2003			January 1, 2005
	(in thousands, except per share amounts and additional operating data)
Statements of Earnings Data:
Net sales	$	57,254	$	81,138		$	120,598
Cost of sales		30,241		43,298			65,077

Gross margin		27,013		37,840			55,521
Selling, general and administrative expenses		24,028		33,046			45,455
Depreciation and amortization		855		2,098			3,340
Stock-based compensation		—		—			551
Facility relocation costs (2)		—		559			198

Earnings from operations		2,130		2,137			5,977
Net interest income (expense)		74		(29	)		81
Income tax expense (benefit) (3)		1		(852	)		2,314

Net earnings		2,203		2,960			3,744

Deemed preferred stock dividend (4)		—		(1,765	)		—

Net earnings available to common stockholders	$	2,203	$	1,195		$	3,744

Net earnings per share (5):
Basic	$	0.75	$	0.37		$	0.46
Diluted	$	0.21	$	0.11		$	0.29
Weighted average shares used to compute net earnings per share:
Basic		2,951		3,261			8,177
Diluted		10,663		11,294			13,128

Additional Operating Data:
Number of studios open at end of fiscal period		7		16			33
Number of catalogs circulated		7,934,725		9,761,324			11,381,621
Number of online sessions (6)		1,725,791		2,570,594			3,432,853
Average order value	$	762	$	917		$	1,014


	Fiscal Year Ended (1)
	December 30, 2000			December 29, 2001		December 28, 2002		December 27, 2003			January 1, 2005
	(in thousands, except share and per share data)
Statements of Operations Data:
Net sales	$	23,032		$	40,299	$	57,254	$	81,138		$	120,598
Cost of sales		13,074			22,291		30,241		43,298			65,077

Gross margin		9,958			18,008		27,013		37,840			55,521
Selling, general and administrative expenses		14,190			17,334		24,028		33,046			45,455
Depreciation and amortization		329			540		855		2,098			3,340
Stock-based compensation		—			—		—		—			551
Facility relocation costs (2)		—			—		—		559			198

Earnings (loss) from operations		(4,561	)		134		2,130		2,137			5,977
Net interest income (expense)		(122	)		166		74		(29	)		81

Earnings (loss) before income taxes		(4,683	)		300		2,204		2,108			6,058
Income tax expense (benefit) (3)		1			4		1		(852	)		2,314

Net earnings (loss)		(4,684	)		296		2,203		2,960			3,744

Deemed preferred stock dividend (4)		—			—		—		(1,765	)		—

Net earnings (loss) available to common stockholders	$	(4,684	)	$	296	$	2,203	$	1,195		$	3,744

Net earnings (loss) per share (5):
Basic	$	(1.71	)	$	0.10	$	0.75	$	0.37		$	0.46
Diluted	$	(0.54	)	$	0.03	$	0.21	$	0.11		$	0.29
Weighted average shares used to compute net earnings (loss) per share:
Basic		2,745			2,833		2,951		3,261			8,177
Diluted		8,681			10,029		10,663		11,294			13,128


	Payment due by period
Contractual Obligations (1)	Total		Less than 1 year		1-3 years		3-5 years		More than 5 years
	(in thousands)
Operating lease obligations	$	63,093	$	7,881	$	17,001	$	15,591	$	22,620
Capital lease obligation		273		131		142		—		—

Total	$	63,366	$	8,012	$	17,143	$	15,591	$	22,620


		Page
Prospectus Summary		1
Risk Factors		6
Special Note Regarding Forward-Looking Statements		21
Use of Proceeds		21
Price Range of Our Common Stock		22
Dividend Policy		22
Capitalization		23
Dilution		24
Selected Financial Data		25
Management’s Discussion and Analysis of Financial Condition and Results of Operations		27
Business		41
Management		56
Related Party Transactions		66
Principal and Selling Stockholders		69
Description of Capital Stock		72
Shares Eligible for Future Sale		74
Underwriting		76
Legal Matters		79
Experts		79
Where You Can Find More Information		79
Index to Financial Statements		F-1


	Fiscal Year 2002		% of net sales		Fiscal Year 2003			% of net sales		Fiscal Year 2004			% of net sales
	(dollars in thousands)
Net sales:
Studio sales	$	4,719	8.2	%	$	24,626		30.4	%	$	52,860		43.8	%
Phone sales		23,985	41.9			25,460		31.4			25,466		21.1
Online sales		18,209	31.8			18,680		23.0			25,137		20.8
Other sales		4,143	7.2			4,618		5.7			4,967		4.1
Shipping and handling fees		6,198	10.8			7,754		9.6			12,168		10.1

Total net sales		57,254	100.0			81,138		100.0			120,598		100.0
Cost of sales		30,241	52.8			43,298		53.4			65,077		54.0

Gross margin		27,013	47.2			37,840		46.6			55,521		46.0
Selling, general and administrative expenses		24,028	42.0			33,046		40.7			45,455		37.7
Depreciation and amortization		855	1.5			2,098		2.6			3,340		2.8
Stock-based compensation		—	—			—		—			551		0.5
Facility relocation costs		—	—			559		0.7			198		0.2

Earnings from operations		2,130	3.7			2,137		2.6			5,977		5.0
Interest income		74	0.1			13		0.0			178		0.1
Interest expense		—	—			(42	)	(0.1	)		(97	)	(0.1	)

Earnings before income taxes		2,204	3.8			2,108		2.6			6,058		5.0
Income tax expense (benefit)		1	0.0			(852	)	(1.1	)		2,314		1.9

Net earnings	$	2,203	3.8	%	$	2,960		3.6	%	$	3,744		3.1	%


	Fiscal Year 2002		Fiscal Year 2003		Fiscal Year 2004
Number of studios open at end of fiscal period		7		16		33
Number of catalogs circulated		7,934,725		9,761,324		11,381,621
Number of online sessions		1,725,791		2,570,594		3,432,853
Average order value	$	762	$	917	$	1,014


Name	Age	Position

Wayne Badovinus	61	President, Chief Executive Officer, acting Chief Financial Officer and Director

Robert Forbes, Jr.	54	Founder and Director

~~David Barnard~~	45	~~Chief Financial Officer and Secretary~~

Vincent Barriero	56	Chief Information Officer

Ray Brunner	57	Vice President – Real Estate and Construction

Wanda Gierhart	40	Chief Marketing Officer

Carmela Krantz	42	Vice President – Human Resources

Tara Poseley	39	Vice President – Merchandising

Laura Sites-Reynolds	44	Vice President – Inventory Management

Elizabeth Rivera	45	Vice President – Studios

John Hansen	45	Chairman of the Board

Hilary Billings (1)(2)	41	Director

Edward Friedrichs (1)(2)	60	Director

Terry Lee (3)	55	Director

William McDonagh (3)	48	Director

Lawrence Wilkinson (2)(3)	55	Director


						Long-Term Compensation
	Fiscal Year	Annual Compensation				Securities Underlying Options (#)	All Other Compensation
		Annual Compensation
Name and Principal Position		Salary		Bonus (1)
Wayne Badovinus President and Chief Executive Officer	2004 2003	$ $	400,000 346,500	$ $	— 70,500	50,000 —		— —

Robert Forbes, Jr. Founder	2004 2003	$ $	250,000 204,000	$ $	— 47,000	— —		— —

Vincent Barriero Chief Information Officer	2004 2003	$ $	217,000 205,000	$ $	32,000 38,890	15,000 2,500		— —

John Ball Former Vice President – Merchandising (2)	2004 2003	$ $	215,000 200,000	$ $	— 32,000	15,000 7,000		— —

Ray Brunner Vice President – Studios	2004 2003	$ $	205,000 190,000	$ $	30,000 35,720	15,000 2,000	$	— 8,400	(3)

David Barnard Former Chief Financial Officer (4)	2004 2003	$ $	182,000 ~~170,000~~165,095	$ $	— 31,960	15,000 —		— —


	Individual Grants						Potential Realizable Value at Assumed Annual Rates of Stock Price Appreciation for Option Term (2)
	Number of Shares of Common Stock Underlying Options Granted (1)	Percentage of Total Options Granted to Employees in Fiscal Year		Exercise or Base Price Per Share		Expiration Date

							0%		5%		10%
Wayne Badovinus	50,000	6.38	%	$	7.00	3/3/2014	$	200,000	$	545,892	$	1,076,588
Robert Forbes, Jr.	—	—			—	—		—		—		—
Vincent Barriero	15,000	1.92	%	$	7.00	3/3/2014	$	60,000	$	163,768	$	322,968
John Ball	15,000	1.92	%	$	7.00	3/3/2014	$	60,000	$	163,768	$	322,968
Ray Brunner	15,000	1.92	%	$	7.00	3/3/2014	$	60,000	$	163,768	$	322,968
David Barnard	15,000	1.92	%	$	7.00	3/3/2014	$	60,000	$	163,768	$	322,968


Name	Shares Acquired on Exercise	Value Realized	Number of Securities Underlying Unexercised Options at Fiscal Year-End (1)			Value of Unexercised In-the-Money Options at Fiscal Year-End
Name	Shares Acquired on Exercise	Value Realized	Exercisable		Unexercisable	Exercisable		Unexercisable
Wayne Badovinus	—	—	550,000	(2)	—	$	7,457,500	—
Robert Forbes, Jr.	—	—	—		—		—	—
John Ball	—	—	122,000	(3)	—	$	1,590,850	—
Vincent Barriero	—	—	85,500	(4)	—	$	1,091,350	—
Ray Brunner	—	—	117,000	(5)	—	$	1,531,850	—
David Barnard	—	—	210,000	(6)	—	$	2,882,500	—


Name of Beneficial Owner		Shares Subject to Options Exercisable Within 60 Days

Directors and Named Executive Officers:
Wayne Badovinus		550,000
Robert Forbes, Jr.		—
Vincent Barriero		85,500
John Ball		122,000
~~Vincent Barriero~~		~~85,500~~
Ray Brunner		117,000
David Barnard		~~210,000~~185,000
John Hansen		—75,000
Hilary Billings		35,000
Edward Friedrichs		45,000
Terry Lee		30,000
William McDonagh		30,000
Lawrence Wilkinson		45,000
All executive officers and directors as a group ~~(16~~(15 persons. Does not include shares subject to options held by John Ball and David Barnard, who isare no longer ~~one of~~ our executive officers.)		~~1,682,500~~1,497,500

Other Selling Stockholders:
~~Carmella Krantz~~		~~62,000~~
~~Laura Sites-Reynolds~~		~~73,000~~
Benjamin Dixon		18,000
Dennis Gama		21,500
Carmela Krantz		62,000
Laura Sites-Reynolds		73,000


Underwriter		Number of Shares
CIBC World Markets Corp.
William Blair & Company, L.L.C.
SG Cowen & Co., LLC
Thomas Weisel Partners LLC

Total		1,650,000


	Per Share	Total Without Exercise of Over- Allotment Option	Total With Full Exercise of Over- Allotment Option
Design Within Reach, Inc.	$	$	$
Selling stockholders

Total	$	$


		Page
Report of Independent ~~Registered~~Certified Public ~~Accounting Firm~~Accountants		F-2

Balance Sheets		F-3

Statements of Earnings		F-4

Statement of Stockholders’ Equity		F-5

Statements of Cash Flows		F-6

Notes to Financial Statements		F-7


	Fiscal Year Ended
	December 28, 2002		December 27, 2003			January 1, 2005
Net sales	$	57,254	$	81,138		$	120,598
Cost of sales		30,241		43,298			65,077

Gross margin		27,013		37,840			55,521

Selling, general and administrative expenses		24,028		33,046			45,455
Depreciation and amortization		855		2,098			3,340
Stock-based compensation		—		—			551
Facility relocation costs		—		559			198

Earnings from operations		2,130		2,137			5,977

Interest income (expense)
Interest income		74		13			178
Interest expense		—		(42	)		(97	)

Earnings before income taxes		2,204		2,108			6,058

Income tax expense (benefit)		1		(852	)		2,314

Net earnings		2,203		2,960			3,744

Deemed preferred stock dividends		—		(1,765	)		—

Net earnings available to common stockholders	$	2,203	$	1,195		$	3,744

Net earnings per share
Basic	$	0.75	$	0.37		$	0.46
Diluted	$	0.21	$	0.11		$	0.29
Weighted average shares used in calculation of net earnings per share:
Basic		2,951		3,261			8,177
Diluted		10,663		11,294			13,128


	Preferred Stock Series A					Preferred Stock Series B					Common Stock				Additional Paid-in Capital		Deferred Stock-based Compensation			Accumulated Other Comprehensive Income			Accumulated Earnings (Deficit)			Total
	Shares		Amount			Shares		Amount			Shares	Amount			Additional Paid-in Capital		Deferred Stock-based Compensation			Accumulated Other Comprehensive Income			Accumulated Earnings (Deficit)			Total
Balance – December 29, 2001	2,040		$	2,040		3,913		$	10,192		2,870	$	88		$	—	$	—		$	—		$	(5,884	)	$	6,436
Issuance of common stock pursuant to employee stock option plan	—			—		—			—		349		113			—		—			—			—			113
Net earnings	—			—		—			—		—		—			—		—			—			2,203			2,203

Balance – December 28, 2002	2,040			2,040		3,913			10,192		3,219		201			—		—			—			(3,681	)		8,752
Issuance of common stock pursuant to employee stock option plan	—			—		—			—		103		39			—		—			—			—			39
Repurchase of Series B preferred stock	—			—		(1,961	)		(5,000	)	—		—			—		—			—			(1,765	)		(6,765	)
Issuance of Series B preferred stock	—			—		1,407			4,852		—		—			—		—			—			—			4,852
Net earnings	—			—		—			—		—		—			—		—			—			2,960			2,960

Balance – December 27, 2003	2,040			2,040		3,359			10,044		3,322		240			—		—			—			(2,486	)		9,838
Issuance of common stock pursuant to 1999 employee stock option plan pre reincorporation	—			—		—			—		106		67			—		—			—			—			67
Issuance of common stock, net of offering expenses											3,000		3			31,827											31,830
Issuance of preferred and common stock upon warrant exercise						238			394		700		1			1,050											1,445
Conversion of preferred stock to common stock	(2,040	)		(2,040	)	(3,597	)		(10,438	)	5,637		6			12,472											—
Deferred compensation on issuance of stock options	—			—		—			—		—		—			2,125		(2,125	)		—			—			—
Amortization of deferred compensation	—			—		—			—		—		—			—		551			—			—			551
Reclassification upon reincorporation	—			—		—			—		—		(304	)		304		—			—			—			—
Issuance of common stock pursuant to 1999 employee stock option plan post reincorporation											104		—			45											45
Comprehensive income (loss)
Net earnings																								3,744			3,744
Unrealized gain (loss) on derivatives																					493						493
Unrealized gain (loss) available-for-sale securities																					(11	)					(11	)

Comprehensive income (loss)																											4,225

Balance – January 1, 2005	—		$	—		—		$	—		12,869	$	13		$	47,823	$	(1,574	)	$	482		$	1,258		$	48,002


	Fiscal Year
	2003		2004
Cash and time deposits	$	33	$	1,075
Short-term securities		11		20,066

Total	$	44	$	21,141


Computer equipment and software		3-5 years
Office furniture and equipment		3 years
Leasehold improvements		10 years or life of lease, whichever is shorter


	Fiscal Year
	2002			2003			2004
Net earnings – as reported	$	2,203		$	2,960		$	3,744
Add: Total stock-based employee compensation expense included in reported net earnings (net of tax)		—			—			339
Deduct: Total stock-based employee compensation expense determined under fair value method for all awards (net of tax)		(68	)		(88	)		(686	)

Pro forma net earnings		2,135			2,872			3,397
Deemed preferred stock dividend		—			(1,765	)		—

Pro forma net earnings available to common stockholders	$	2,135		$	1,107		$	3,397

Basic earnings per share – as reported	$	0.75		$	0.37		$	0.46
Diluted earnings per share – as reported	$	0.21		$	0.11		$	0.29
Basic earnings per share – pro forma	$	0.72		$	0.34		$	0.42
Diluted earnings per share – pro forma	$	0.20		$	0.10		$	0.26


	Amortized Cost		Unrealized				Book/Fair Value
	Amortized Cost		Gains		Losses		Book/Fair Value
Tax free auction rate securities	$	2,504	$	—	$	1	$	2,503

Municipal bonds		3,074		—		17		3,057

Total	$	5,578		—	$	18	$	5,560


Statutory federal rate	34.0	%	34.0	%	34.0	%
State income taxes, net of federal income tax benefit	5.8	%	5.8	%	6.2	%
Change in valuation allowance	(20.4	)%	(83.0	)%	(0.7	)%
Enterprise zone credit and other	(19.4	)%	2.8	%	(1.3	)%

Effective tax rate	0.0	%	(40.4	)%	38.2	%


	Options Outstanding		Weighted Average Exercise Price
Balance, December 29, 2001	1,541		$	0.49
Options granted	837		$	0.63
Options exercised	(351	)	$	0.32
Options canceled	(84	)	$	0.56

Balance, December 28, 2002	1,943		$	0.50
Options granted	141		$	2.75
Options exercised	(103	)	$	0.37
Options canceled	(79	)	$	0.60

Balance, December 27, 2003	1,902		$	0.67

Options granted	783		$	9.94
Options exercised	(210	)	$	0.52
Options canceled	(97	)	$	1.52

Balance, January 1, 2005	2,378		$	3.70

Exercisable, December 28, 2002	612		$	0.43
Exercisable, December 27, 2003	1,032		$	0.50
Exercisable, January 1, 2005	1,343		$	0.89


Options Outstanding					Options Exercisable
Exercise Prices	Number of Shares	Weighted Average Remaining Life (in years)	Weighted Average Exercise Price		Number Exercisable at January 1, 2005	Weighted Average Exercise Price
$ 0.25	478	4.9	$	0.25	478	$	0.25
$ 0.60	980	6.9	$	0.60	730	$	0.60
$ 2.00	15	7.9	$	2.00	8	$	2.00
$ 2.75	126	8.5	$	2.75	48	$	2.75
$ 4.50	120	9.0	$	4.50	28	$	4.50
$ 7.00	365	9.2	$	7.00	52	$	7.00
$14.95	143	9.8	$	14.95	—	$	14.95
$16.50	151	9.5	$	16.50	—	$	16.50

$ 0.25 to $16.50	2,378	7.4	$	3.70	1,343	$	0.89


Year Ending December	Capital Lease			Operating Leases
2005	$	131		$	7,881
2006		131			8,460
2007		11			8,541
2008		—			8,269
2009		—			7,322
Thereafter		—			22,620

Minimum lease commitments	$	273		$	63,093

Less: Interest		(21	)

Present value of capital lease obligation	$	252
Less current portion		(112	)

Long-term portion	$	140


	Transportation			Severance			Employee Relocation			Outside Services			Lease Cancellations			Other			Total
Balance at December 28, 2002	$	—		$	—		$	—		$	—		$	—		$	—		$	—
Provisions		182			71			42			110			110			44			559
Payments		(152	)		—			(42	)		(90	)		—			(44	)		(328	)

Balance at December 27, 2003		30			71			—			20			110			—			231
Provisions/(adjustments)		146			(40	)		32			52			—			8			198
Payments		(176	)		(31	)		(32	)		(72	)		(110	)		(8	)		(429	)

Balance at January 1, 2005	$	—		$	—		$	—		$	—		$	—		$	—		$	—


SEC registration fee	$	3,498
NASD filing fee		3,500
Accounting fees and expenses		100,000
Legal fees and expenses		150,000
Printing and engraving expenses		125,000
Blue sky fees and expenses		10,000
Transfer agent and registrar fees and expenses		5,000
Miscellaneous		53,002

Total	$	450,000


DESIGN WITHIN REACH, INC.

By:		/s/ WAYNE BADOVINUS
		Wayne Badovinus *President, ~~and~~ Chief Executive Officer and acting Chief Financial Officer*


NAME	TITLE	DATE
/s/ WAYNE BADOVINUS Wayne Badovinus	President, Chief Executive Officer, Acting Chief Financial Officer and Director (Principal Executive and Financial Officer)	February ~~17,~~25, 2005

/s/ BENJAMIND~~AVID~~ B~~ARNARD~~IXON ~~David Barnard~~Benjamin Dixon	~~Chief Financial Officer~~Controller(Principal~~Financial and~~ Accounting Officer)	February ~~17,~~25, 2005

~~/s/ ROBERT~~ F~~ORBES~~ * Robert Forbes	Director	February ~~17,~~25, 2005

~~/s/ HILARY~~ B~~ILLINGS~~ * Hilary Billings	Director	February ~~17,~~25, 2005

~~/s/ EDWARD~~ F~~RIEDRICHS~~ * Edward Friedrichs	Director	February ~~17,~~25, 2005

~~/s/ JOHN~~ H~~ANSEN~~ * John Hansen	Director	February ~~17,~~25, 2005

~~/s/ TERRY~~ LEE * Terry Lee	Director	February ~~17,~~25, 2005

~~/s/ WILLIAM~~ MCD~~ONAGH~~ * William McDonagh	Director	February ~~17,~~25, 2005

~~/s/ LAWRENCE~~ W~~ILKINSON~~ * Lawrence Wilkinson	Director	February ~~17,~~25, 2005



*By:		/s/ WAYNE BADOVINUS
		Wayne Badovinus *Attorney-in-Fact*


	Balance at Beginning of Period		Additions Charges to Costs & Expenses		Charged to Other Accounts		Deductions			Balance at End of Period
Allowance for Doubtful Accounts
Year Ended December 28, 2002	$	21,249	$	15,000	$	—	$	—		$	36,249
Year Ended December 27, 2003		36,249		—		—		—			36,249
Year Ended January 1, 2005		36,249		59,700		—		—			95,949
Inventory Reserve Against Damaged Merchandise
Year Ended December 28, 2002	$	409,557	$	1,056,674	$	—	$	(934,874	)	$	531,357
Year Ended December 27, 2003		531,357		1,263,853		—		(1,041,665	)		753,545
Year Ended January 1, 2005		753,545		1,232,000		—		(1,308,545	)		677,000
Sales Return Allowance
Year Ended December 28, 2002	$	230,000	$	480,000	$	—	$	(150,000	)	$	560,000
Year Ended December 27, 2003		560,000		475,000		—		(593,039	)		441,961
Year Ended January 1, 2005		441,961		1,434,310		—		(1,318,418	)		557,853
Valuation Allowance for Deferred Tax Asset
Year Ended December 28, 2002	$	2,331,000	$	—	$	—	$	(449,000	)	$	1,882,000
Year Ended December 27, 2003		1,882,000		—		—		(1,751,000	)		131,000
Year Ended January 1, 2005		131,000		—		—		(44,723	)		86,277

Price to the public

Underwriting discount

Proceeds to Design Within Reach, Inc.

Proceeds to the selling stockholders