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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549



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FORM 10-Q



(Mark One)

|x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ---------------------------------------------------------------------------------------



For the quarterly period ended April 2, 2005



OR



| ̈ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ----------------------------------------------------------------------------------------



For the transition period from
 to



Commission File Number: 000-50807



DESIGN WITHIN REACH, INC.

(Exact
name of registrant as specified in its charter)



|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|Delaware                                                       |  | 94-3314374                          
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification No.)



|                                              |  |           
|--------------------------------------------- |  | ----------
|225 Bush Street, 20thFloor, San Francisco,
CA |  | 94104     
|(Address of principal executive offices)      |  | (Zip Code)



(415) 676-6500

(Registrants telephone number, including area code)



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



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



The number of outstanding shares of the registrants common stock, par value $0.001 per share, as of April 29, 2005 was 13,751,411.



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##### Table of Contents



DESIGN WITHIN REACH, INC.



FORM 10-Q  QUARTERLY REPORT

FOR THE QUARTERLY PERIOD ENDED APRIL 2, 2005



TABLE OF CONTENTS



|                               |  |                                                                                                                     |  |   
|------------------------------ |  | ------------------------------------------------------------------------------------------------------------------- |  | --
|                               |  | Page No                                                                                                            
|PART I  FINANCIAL INFORMATION |  |                                                                                                                    
|                               |  |                                                                                                                    
|Item 1                         |  | Financial Statements                                                                                                |  | 3 
|                               |  |                                                                                                                    
|                               |  | Condensed Balance Sheets as of April 2, 2005 (unaudited), January 1, 2005 and March 27, 2004 (unaudited)            |  | 3 
|                               |  |                                                                                                                    
|                               |  | Condensed Statements of Earnings (unaudited) for the thirteen week periods ended April 2, 2005 and March 27, 2004   |  | 4 
|                               |  |                                                                                                                    
|                               |  | Condensed Statements of Stockholders Equity (unaudited) for the thirteen weeks ended April 2, 2005                 |  | 5 
|                               |  |                                                                                                                    
|                               |  | Condensed Statements of Cash Flows (unaudited) for the thirteen week periods ended April 2, 2005 and March 27, 2004 |  | 6 
|                               |  |                                                                                                                    
|                               |  | Notes to Unaudited Condensed Financial Statements                                                                   |  | 7 
|                               |  |                                                                                                                    
|Item 2                         |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                               |  | 11
|                               |  |                                                                                                                    
|Item 3                         |  | Quantitative and Qualitative Disclosure about Market Risk                                                           |  | 16
|                               |  |                                                                                                                    
|Item 4                         |  | Controls and Procedures                                                                                             |  | 17
|                               | 
|PART II  OTHER INFORMATION    |  |                                                                                                                    
|                               |  |                                                                                                                    
|Item 2                         |  | Changes in Securities and Use of Proceeds                                                                           |  | 19
|                               |  |                                                                                                                    
|Item 6                         |  | Exhibits                                                                                                            |  | 19
|                               | 
|SIGNATURES                     |  | 21                                                                                                                 



2



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##### Table of Contents



PART I  FINANCIAL
INFORMATION



|Item 1. | Financial Statements
|------- | --------------------



Design Within Reach, Inc.

Condensed Balance Sheets



(amounts in thousands, except per share data)



|                                                                                                                                 |  |               |        |   |                |   |        |                           |  |   |        |  
|-------------------------------------------------------------------------------------------------------------------------------- |  | ------------- | ------ | - | -------------- | - | ------ | ------------------------- |  | - | ------ | -
|                                                                                                                                 |  | April 2, 2005 |        |   | January 1,2005 |   |        | March 27, 2004 (restated) | 
|                                                                                                                                 |  | (unaudited)   |        |   |                |   |        | (unaudited)               | 
|ASSETS                                                                                                                           |  |               |        |   |                |   |        |                           |  |   |        |  
|Current assets                                                                                                                   |  |               |        |   |                |   |        |                           |  |   |        |  
|Cash and cash equivalents                                                                                                        |  | $             | 12,147 |   |                | $ | 21,141 |                           |  | $ | 162    |  
|Investments                                                                                                                      |  |               | 6,990  |   |                |   | 3,544  |                           |  |   |       |  
|Accounts receivable (less allowance for doubtful accounts of $23, $36 and $36)                                                   |  |               | 1,863  |   |                |   | 1,344  |                           |  |   | 1,226  |  
|Inventory on hand                                                                                                                |  |               | 20,306 |   |                |   | 13,815 |                           |  |   | 10,826 |  
|Inventory in transit                                                                                                             |  |               | 5,465  |   |                |   | 7,049  |                           |  |   | 3,305  |  
|Prepaid catalog costs                                                                                                            |  |               | 2,053  |   |                |   | 1,862  |                           |  |   | 1,156  |  
|Deferred income taxes, net of valuation allowance                                                                                |  |               | 5,814  |   |                |   | 1,512  |                           |  |   | 1,094  |  
|Other current assets                                                                                                             |  |               | 2,797  |   |                |   | 2,352  |                           |  |   | 1,015  |  
|                                                                                                                                 |  |               |        |   |                |   |        |                           |  |   |        |  
|Total current assets                                                                                                             |  |               | 57,435 |   |                |   | 52,619 |                           |  |   | 18,784 |  
|                                                                                                                                 |  |               |        |   |                |   |        |                           |  |   |        |  
|Property and equipment, net                                                                                                      |  |               | 22,243 |   |                |   | 18,572 |                           |  |   | 11,993 |  
|Non-current investments                                                                                                          |  |               |       |   |                |   | 2,016  |                           |  |   |       |  
|Deferred income taxes, net of valuation allowance                                                                                |  |               | 1,201  |   |                |   | 887    |                           |  |   | 559    |  
|Other non-current assets                                                                                                         |  |               | 579    |   |                |   | 526    |                           |  |   | 339    |  
|                                                                                                                                 |  |               |        |   |                |   |        |                           |  |   |        |  
|Total assets                                                                                                                     |  | $             | 81,458 |   |                | $ | 74,620 |                           |  | $ | 31,675 |  
|                                                                                                                                 |  |               |        |   |                |   |        |                           |  |   |        |  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                             |  |               |        |   |                |   |        |                           |  |   |        |  
|Current liabilities                                                                                                              |  |               |        |   |                |   |        |                           |  |   |        |  
|Accounts payable                                                                                                                 |  | $             | 13,672 |   |                | $ | 14,317 |                           |  | $ | 8,684  |  
|Accrued expenses                                                                                                                 |  |               | 4,842  |   |                |   | 4,668  |                           |  |   | 3,525  |  
|Deferred revenue                                                                                                                 |  |               | 2,024  |   |                |   | 2,014  |                           |  |   | 1,906  |  
|Customer deposits and other liabilities                                                                                          |  |               | 2,208  |   |                |   | 1,573  |                           |  |   | 1,129  |  
|Bank credit facility                                                                                                             |  |               | 1,280  |   |                |   | 1,053  |                           |  |   | 4,061  |  
|Capital lease obligation, current portion                                                                                        |  |               | 112    |   |                |   | 112    |                           |  |   | 90     |  
|                                                                                                                                 |  |               |        |   |                |   |        |                           |  |   |        |  
|Total current liabilities                                                                                                        |  |               | 24,138 |   |                |   | 23,737 |                           |  |   | 19,395 |  
|                                                                                                                                 |  |               |        |   |                |   |        |                           |  |   |        |  
|Deferred rent and lease incentives                                                                                               |  |               | 2,543  |   |                |   | 1,874  |                           |  |   | 917    |  
|Capital lease obligation                                                                                                         |  |               | 112    |   |                |   | 140    |                           |  |   | 260    |  
|Deferred income tax liabilities                                                                                                  |  |               | 1,042  |   |                |   | 867    |                           |  |   | 620    |  
|                                                                                                                                 |  |               |        |   |                |   |        |                           |  |   |        |  
|Total liabilities                                                                                                                |  |               | 27,835 |   |                |   | 26,618 |                           |  |   | 21,192 |  
|                                                                                                                                 |  |               |        |   |                |   |        |                           |  |   |        |  
|Stockholders equity                                                                                                             |  |               |        |   |                |   |        |                           |  |   |        |  
|Preferred stock Series A  $1.00 par value; authorized 2,040 shares; issued and outstanding, none, none and 2,040,
respectively  |  |               |       |   |                |   |       |                           |  |   | 2,040  |  
|Preferred stock Series B  $1.00 par value; authorized 6,000 shares; issued and outstanding, none, none, and 3,359,
respectively |  |               |       |   |                |   |       |                           |  |   | 10,044 |  
|Preferred stock  $0.001 par value; authorized 10,000 shares; issued and outstanding, none                                       |  |               |       |   |                |   |       |                           |  |   |       |  
|Common stock  $0.001 par value; authorized 30,000 shares; issued and outstanding, 13,739, 12,869 and 3,428                      |  |               | 14     |   |                |   | 13     |                           |  |   | 3      |  
|Additional paid-in capital                                                                                                       |  |               | 53,243 |   |                |   | 47,823 |                           |  |   | 2,429  |  
|Deferred compensation                                                                                                            |  |               | (1,345 | ) |                |   | (1,574 | )                         |  |   | (2,049 | )
|Accumulated other comprehensive income (loss)                                                                                    |  |               | (431   | ) |                |   | 482    |                           |  |   |       |  
|Accumulated earnings (deficit)                                                                                                   |  |               | 2,142  |   |                |   | 1,258  |                           |  |   | (1,984 | )
|                                                                                                                                 |  |               |        |   |                |   |        |                           |  |   |        |  
|Total stockholders equity                                                                                                       |  |               | 53,623 |   |                |   | 48,002 |                           |  |   | 10,483 |  
|                                                                                                                                 |  |               |        |   |                |   |        |                           |  |   |        |  
|Total liabilities and stockholders equity                                                                                       |  | $             | 81,458 |   |                | $ | 74,620 |                           |  | $ | 31,675 |  
|                                                                                                                                 |  |               |        |   |                |   |        |                           |  |   |        |  



The accompanying notes
are an integral part of these financial statements.



3



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Design Within Reach, Inc.

Condensed Statements of Earnings

(Unaudited)



(amounts in thousands, except per share data)



|                                                                       |  |                      |        |   |                |   |        |  
|---------------------------------------------------------------------- |  | -------------------- | ------ | - | -------------- | - | ------ | -
|                                                                       |  | Thirteen weeks ended |       
|                                                                       |  | April 2,2005         |        |   | March 27, 2004 |  
|Net sales                                                              |  | $                    | 35,465 |   |                | $ | 22,513 |  
|Cost of sales                                                          |  |                      | 19,927 |   |                |   | 12,096 |  
|                                                                       |  |                      |        |   |                |   |        |  
|Gross margin                                                           |  |                      | 15,538 |   |                |   | 10,417 |  
|Selling, general and administrative expenses                           |  |                      | 12,983 |   |                |   | 8,721  |  
|Stock-based compensation                                               |  |                      | 155    |   |                |   | 76     |  
|Depreciation and amortization                                          |  |                      | 1,067  |   |                |   | 575    |  
|Facility relocation costs                                              |  |                      |       |   |                |   | 198    |  
|                                                                       |  |                      |        |   |                |   |        |  
|Earnings from operations                                               |  |                      | 1,333  |   |                |   | 847    |  
|Interest income (expense)                                              |  |                      |        |   |                |   |        |  
|Interest income                                                        |  |                      | 115    |   |                |   |       |  
|Interest expense                                                       |  |                      | (10    | ) |                |   | (32    | )
|                                                                       |  |                      |        |   |                |   |        |  
|Earnings before income taxes                                           |  |                      | 1,438  |   |                |   | 815    |  
|Income tax expense                                                     |  |                      | 554    |   |                |   | 313    |  
|                                                                       |  |                      |        |   |                |   |        |  
|Net earnings                                                           |  | $                    | 884    |   |                | $ | 502    |  
|                                                                       |  |                      |        |   |                |   |        |  
|Net earnings per share:                                                |  |                      |        |   |                |   |        |  
|Basic                                                                  |  | $                    | 0.07   |   |                | $ | 0.15   |  
|Diluted                                                                |  | $                    | 0.06   |   |                | $ | 0.04   |  
|Weighted average shares used in calculation of net earnings per share: |  |                      |        |   |                |   |        |  
|Basic                                                                  |  |                      | 13,131 |   |                |   | 3,361  |  
|Diluted                                                                |  |                      | 14,706 |   |                |   | 11,428 |  



The accompanying notes
are an integral part of these financial statements.



4



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Design Within Reach, Inc.

Condensed Statements of Stockholders Equity

(Unaudited)



(amounts in thousands)



|                                                                           |  |              |  |                            |    |  |                       |        |   |                            |   |        |                      |  |       |      |   |  |   |       |  |   |        |  
|-------------------------------------------------------------------------- |  | ------------ |  | -------------------------- | -- |  | --------------------- | ------ | - | -------------------------- | - | ------ | -------------------- |  | ----- | ---- | - |  | - | ----- |  | - | ------ | -
|                                                                           |  | Common Stock |  | Additional Paid-in Capital |    |  | Deferred Compensation |        |   | Other Comprehensive Income |   |        | Accumulated Earnings |  | Total |     
|                                                                           |  | Shares       |  | Amount                     |    |  |                       |        |  
|Balance  January 1, 2005                                                  |  | 12,869       |  | $                          | 13 |  | $                     | 47,823 |   |                            | $ | (1,574 | )                    |  | $     | 482  |   |  | $ | 1,258 |  | $ | 48,002 |  
|                                                                           |  |              |  |                            |    |  |                      
|Issuance of common stock pursuant to employee stock option plans           |  | 770          |  |                            | 1  |  |                       | 414    |   |                            |   |       |                      |  |       |     |   |  |   |      |  |   | 415    |  
|                                                                           |  |              |  |                            |    |  |                      
|Issuance of common stock, net of offering expenses                         |  | 100          |  |                            |   |  |                       | 907    |   |                            |   |       |                      |  |       |     |   |  |   |      |  |   | 907    |  
|                                                                           |  |              |  |                            |    |  |                      
|Amortization of deferred compensation                                      |  |             |  |                            |   |  |                       |       |   |                            |   | 155    |                      |  |       |     |   |  |   |      |  |   | 155    |  
|                                                                           |  |              |  |                            |    |  |                      
|Reversal of deferred compensation for forfeitures of stock options         |  |             |  |                            |   |  |                       | (74    | ) |                            |   | 74     |                      |  |       |     |   |  |   |      |  |   |       |  
|                                                                           |  |              |  |                            |    |  |                      
|Tax benefit from disqualifying dispositions of stock                       |  |             |  |                            |   |  |                       | 4,173  |   |                            |   |       |                      |  |       |     |   |  |   |      |  |   | 4,173  |  
|                                                                           |  |              |  |                            |    |  |                      
|Unrealized gains/(losses) on derivatives and available-for-sale securities |  |             |  |                            |   |  |                       |       |   |                            |   |       |                      |  |       | (913 | ) |  |   |      |  |   | (913   | )
|                                                                           |  |              |  |                            |    |  |                      
|Net earnings                                                               |  |             |  |                            |   |  |                       |       |   |                            |   |       |                      |  |       |     |   |  |   | 884   |  |   | 884    |  
|                                                                           |  |              |  |                            |    |  |                       |        |   |                            |   |        |                      |  |       |      |   |  |   |       |  |   |        |  
|Balance - April 2, 2005                                                    |  | 13,739       |  | $                          | 14 |  | $                     | 53,243 |   |                            | $ | (1,345 | )                    |  | $     | (431 | ) |  | $ | 2,142 |  | $ | 53,623 |  



The accompanying notes
are an integral part of this financial statement.



5



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Design Within Reach, Inc.

Condensed Statements of Cash Flows

(Unaudited)



(amounts in thousands)



|                                                                                    |  |                      |        |   |                           |   |        |  
|----------------------------------------------------------------------------------- |  | -------------------- | ------ | - | ------------------------- | - | ------ | -
|                                                                                    |  | Thirteen weeks ended |       
|                                                                                    |  | April 2,2005         |        |   | March 27, 2004 (restated) |  
|Cash flows from operating activities                                                |  |                      |        |   |                           |   |        |  
|Net earnings                                                                        |  | $                    | 884    |   |                           | $ | 502    |  
|Adjustments to reconcile net earnings to net cash provided by operating activities: |  |                      |        |   |                           |   |        |  
|Depreciation and amortization                                                       |  |                      | 1,067  |   |                           |   | 575    |  
|Amortization of deferred compensation                                               |  |                      | 155    |   |                           |   | 76     |  
|Change in assets and liabilities:                                                   |  |                      |        |   |                           |   |        |  
|Accounts receivable                                                                 |  |                      | (520   | ) |                           |   | (606   | )
|Inventory on hand                                                                   |  |                      | (6,491 | ) |                           |   | 207    |  
|Inventory in transit                                                                |  |                      | 1,584  |   |                           |   | (1,233 | )
|Prepaid catalog costs                                                               |  |                      | (191   | ) |                           |   | (542   | )
|Deferred income taxes, net of valuation allowance                                   |  |                      | (534   | ) |                           |   | (72    | )
|Other current assets                                                                |  |                      | (1,252 | ) |                           |   | (335   | )
|Other non-current assets                                                            |  |                      | (52    | ) |                           |   | (478   | )
|Accounts payable                                                                    |  |                      | (324   | ) |                           |   | 2,152  |  
|Accrued expenses                                                                    |  |                      | 174    |   |                           |   | 811    |  
|Deferred revenue                                                                    |  |                      | 10     |   |                           |   | 1,219  |  
|Customer deposits and other liabilities                                             |  |                      | 10     |   |                           |   | 38     |  
|Deferred rent and lease incentives                                                  |  |                      | 669    |   |                           |   | 330    |  
|Deferred income tax liabilities                                                     |  |                      | 485    |   |                           |   | 221    |  
|                                                                                    |  |                      |        |   |                           |   |        |  
|Net cash provided by (used in) operating activities                                 |  |                      | (4,326 | ) |                           |   | 2,865  |  
|Cash flows from investing activities                                                |  |                      |        |   |                           |   |        |  
|Purchases of property and equipment                                                 |  |                      | (4,738 | ) |                           |   | (3,550 | )
|Purchases of investments                                                            |  |                      | (1,451 | ) |                           |   |       |  
|                                                                                    |  |                      |        |   |                           |   |        |  
|Net cash used in investing activities                                               |  |                      | (6,189 | ) |                           |   | (3,550 | )
|Cash flows from financing activities                                                |  |                      |        |   |                           |   |        |  
|Proceeds from issuance of common stock pursuant to employee stock option plan       |  |                      | 415    |   |                           |   | 67     |  
|Proceeds from common stock offering, net of expenses                                |  |                      | 907    |   |                           |   |       |  
|Net borrowing on bank credit facility                                               |  |                      | 227    |   |                           |   | 736    |  
|Repayments of long term obligations                                                 |  |                      | (28    | ) |                           |   |       |  
|                                                                                    |  |                      |        |   |                           |   |        |  
|Net cash provided by financing activities                                           |  |                      | 1,521  |   |                           |   | 803    |  
|                                                                                    |  |                      |        |   |                           |   |        |  
|Net increase (decrease) in cash and cash equivalents                                |  |                      | (8,993 | ) |                           |   | 118    |  
|Cash and cash equivalents at beginning of period                                    |  |                      | 21,141 |   |                           |   | 44     |  
|                                                                                    |  |                      |        |   |                           |   |        |  
|Cash and cash equivalents at end of period                                          |  | $                    | 12,147 |   |                           | $ | 162    |  
|                                                                                    |  |                      |        |   |                           |   |        |  
|Supplemental disclosure of cash flow information Cash paid during the period for:   |  |                      |        |   |                           |   |        |  
|Income taxes                                                                        |  | $                    | 1,497  |   |                           | $ | 133    |  
|Interest                                                                            |  | $                    | 10     |   |                           | $ | 26     |  



The accompanying notes
are an integral part of these financial statements.



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##### Table of Contents

Design Within Reach, Inc.

Notes to the Condensed Financial Statements

(Unaudited)



(amounts in thousands, except per share data)



Note 1  Summary of Significant Accounting Policies



Design Within Reach, Inc. (the Company) was incorporated in California in November 1998 and reincorporated in Delaware in March 2004. 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 2003 fiscal
year ended on December 27, 2003, its 2004 fiscal year ended on January 1, 2005 and its 2005 fiscal year will end on December 31, 2005. Fiscal year 2003 consisted of 52 weeks, fiscal year 2004 consisted of 53 weeks and fiscal year 2005 consists of 52
weeks.



Inventory in transit



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 March 27, 2004 has been restated to reflect an increase of $3,305 in inventory in transit and the related payable. The restatement had no
impact on previously reported net sales, earnings, earnings per share, stockholders equity, or cash flows.



Quarterly information (unaudited)



The accompanying unaudited condensed interim financial statements as of and for the fiscal quarters ended April 2, 2005 and March 27, 2004 have been prepared by the
Company pursuant to the rules and regulations of the Securities and Exchange Commission regarding interim financial reporting. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted
in the United States of America for complete financial statements and should be read in conjunction with the audited financial statements and related notes thereto included in the Companys annual report on Form 10-K for the year ended January
1, 2005. The accompanying unaudited interim financial statements reflect all adjustments that are, in the opinion of management, necessary for a fair statement of results for the interim periods presented. The results of operations for the fiscal
quarter ended April 2, 2005 are not necessarily indicative of the results to be expected for any future period or the full fiscal year.



Segment Reporting



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.



Stock-Based Compensation



In the first quarter 2005, the Company recorded approximately $155 in expenses associated with the amortization resulting from the issuance of (1) 120 options to purchase
common stock with an exercise price of $4.50 per share and an estimated fair market value of $10.00 per share granted in first quarter 2004 and (2) 366 options to purchase common stock 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 $155 in first quarter 2005 and $76 in the first quarter of 2004.



The Company accounts for stock-based employee 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. 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 employee compensation.



7



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|                                                                                                                        |  |                      |      |   |                |   |      |  
|----------------------------------------------------------------------------------------------------------------------- |  | -------------------- | ---- | - | -------------- | - | ---- | -
|                                                                                                                        |  | Thirteen weeks ended |     
|                                                                                                                        |  | April 2, 2005        |      |   | March 27, 2004 |  
|                                                                                                                        |  | (unaudited)          |     
|Net earnings  as reported                                                                                              |  | $                    | 884  |   |                | $ | 502  |  
|Add: Total stock-based employee compensation expense included in reported net earnings, net of taxes                    |  |                      | 95   |   |                |   | 47   |  
|Deduct: Total stock-based employee compensation expense determined under fair value method for all awards, net of taxes |  |                      | (264 | ) |                |   | (85  | )
|                                                                                                                        |  |                      |      |   |                |   |      |  
|Pro forma net earnings                                                                                                  |  | $                    | 715  |   |                | $ | 464  |  
|                                                                                                                        |  |                      |      |   |                |   |      |  
|Basic earnings per share  as reported                                                                                  |  | $                    | 0.07 |   |                | $ | 0.15 |  
|Diluted earnings per share  as reported                                                                                |  | $                    | 0.06 |   |                | $ | 0.04 |  
|Basic earnings per share  pro forma                                                                                    |  | $                    | 0.05 |   |                | $ | 0.14 |  
|Diluted earnings per share  pro forma                                                                                  |  | $                    | 0.05 |   |                | $ | 0.04 |  



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



|                         |  |                      |   |  |                |  
|------------------------ |  | -------------------- | - |  | -------------- | -
|                         |  | Thirteen weeks ended |  
|                         |  | April 2, 2005        |   |  | March 27, 2004 |  
|                         |  | (unaudited)          |  
|Risk-free interest rate  |  | 4.25                 | % |  | 4.00           | %
|Expected volatility      |  | 37                   | % |  | 60             | %
|Expected life (in years) |  | 5                    |   |  | 5              |  
|Dividend yield           |  |                     |   |  |               |  



Earnings per Share



Basic earnings per share is calculated by dividing the Companys net
earnings available to the Companys common stockholders for the period by the number of weighted average common shares outstanding for the period. 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.



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



|                                                 |  |                      |  |               
|------------------------------------------------ |  | -------------------- |  | --------------
|                                                 |  | Thirteen weeks ended
|                                                 |  | April 2, 2005        |  | March 27, 2004
|                                                 |  | (unaudited)         
|Shares used to compute basic earnings per share  |  | 13,131               |  | 3,361         
|Add: Effect of dilutive securities               |  |                      |  |               
|Preferred stock Series A                         |  |                     |  | 2,040         
|Preferred stock Series B                         |  |                     |  | 3,359         
|Effect of dilutive options outstanding           |  | 1,575                |  | 1,707         
|Warrants outstanding                             |  |                     |  | 961           
|                                                 |  |                      |  |               
|Shares used to compute diluted earning per share |  | 14,706               |  | 11,428        
|                                                 |  |                      |  |               



Use of Estimates



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 employee 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.



New Accounting Pronouncements



In
December 2004, FASB issued SFAS No. 123R (revised 2004), Share-Based Payment(SFAS 123R). This Statement is a revision of SFAS 123 and amends SFAS No. 95, Statement of Cash Flows. This Statement supersedes APB
Opinion No. 25, Accounting for Stock Issued to Employees, and its related implementation guidance. SFAS 123R covers a wide range of share-based compensation arrangements including stock options, restricted share plans,
performance-based awards, share appreciation rights, and employee share purchase plans. The new standard is effective as of the beginning of the first interim or annual reporting period that begins after December 15, 2005. Based on the
aforementioned effective date, the Company will begin expensing stock options granted to its employees in its Statement of Earnings using a fair-value based method effective the period beginning January 01, 2006. Adoption of the expensing
requirements will increase the Companys operating expenses.



Note 2
 Income Taxes



The Companys effective tax rate was 38.5% for
the thirteen weeks ended April 2, 2005 and March 27, 2004, respectively. The Company expects its effective tax rate to remain approximately the same for fiscal year 2005.



Note 3  Related Party Transactions



The Company rents studio space from an affiliate of a significant stockholder of the Company and of the Companys Chairman of the Board of Directors pursuant to a
lease dated February 9, 2004. Rent expense related to this space for the thirteen weeks ended April 2, 2005 and March 27, 2004 was $25 and $25, respectively. The Company received consulting services from the same affiliate on a monthly basis.
Consulting expense related to these services for the thirteen weeks ended April 2, 2005 and March 27, 2004 was $0 and $15, respectively.



In fiscal 2004, the Company combined its print buying with NapaStyle, Inc., in order to obtain beneficial pricing with the printer of the Companys catalog. In order
to obtain the best pricing, the Company guaranteed NapaStyle, Inc.s payments to the printer. As of June 26, 2004, NapaStyle Inc. owed the Company approximately $121 which was repaid to the Company in full on July 9, 2004. The Company no longer
guarantees NapaStyle Inc.s payments to the printer. The Companys Chairman and its 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.



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



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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.



Note 4  Secondary Public
Offering



On March 9, 2005, the Companys secondary registration
statement on Form S-1 was declared effective for the Companys secondary public offering, pursuant to which the Company sold 100 shares and selling stockholders sold 1,970 shares of common stock at $15.80 per share. The Companys secondary
public offering closed on March 15, 2005, and net offering proceeds of approximately $1,493 (after underwriters discounts of $87) were received by the Company and approximately $29,414 (after underwriters discounts of $1,712) were
received by selling stockholders the same day. The net proceeds available to the Company were $907 after it incurred additional related offering expenses of approximately $586 through March 2005.



Note 5 - Commitments



Operating lease obligations consist of office, studio and fulfillment center lease obligations. Capital lease obligation consists of an
obligation for the lease of certain equipment. Between January 1, 2005 and April 2, 2005, the Company has entered into additional operating leases with additional minimum lease obligations of $14.9 million.



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##### Table of Contents

|Item 2. | Managements Discussion and Analysis of Financial Condition and Results of Operations
|------- | -------------------------------------------------------------------------------------



The following discussion contains forward-looking statements, which involve risks and uncertainties. Our actual results could differ
materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth below under the caption Risk Factors. The interim financial statements and this Managements Discussion
and Analysis of Financial Condition and Results of Operations should be read in conjunction with the financial statements and notes thereto for the fiscal year ended January 1, 2005 and the related Managements Discussion and Analysis of
Financial Condition and Results of Operations, both of which are contained in our Annual Report on Form 10-K for the fiscal year ended January 1, 2005 with the Securities and Exchange Commission on February 17, 2005.



Overview



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 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. All of our sales channels utilize a single common inventory held at our Hebron, Kentucky fulfillment center and share
centralized information technology systems, which together provide a level of scalability to facilitate our future growth. This integration further improves customer service, speeds delivery times and provides real-time data availability.



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 first quarter of fiscal year 2005. In recent years, we have continued to increase sales across all distribution channels with particular growth in sales through our studios, which have increased in number from one at the end of 2001 to 33
studios operating in seventeen states at the end of 2004. We expect to open 18 to 20 new studios in each of fiscal years 2005 and 2006, and as of April 2, 2005, we had opened five of these new studios and had signed leases for 12 additional studios.
We closed our Oakland, California studio during third quarter 2004, as the lease was ending and we acquired a superior location within the same market.



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 nearly all of our studios have been open less than three 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, was nearly
100,000 square feet larger than our previous Union City facility. We exercised our right of first refusal on an adjacent 100,000 square feet in the new facility in first quarter 2005, and we expect this facility to support our distribution capacity
needs for at least the next four 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 five 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.



Until the end of the second quarter 2004, 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 includes a $9.0 million operating line of credit and a $2.5 million equipment line of credit. In addition, on July 6, 2004, we completed an initial public



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offering of 4,715,000 shares of common stock at $12.00 per share. Of the shares offered, 3,000,000 were offered by us and 1,715,000 were offered by selling
stockholders. We raised net proceeds of $31.8 million in our initial public offering, net of underwriting discounts and offering expenses. On March 15, 2005, we completed a public offering of 2,070,000 shares of common stock at $15.80 per share. Of
the shares offered, 100,000 were offered by us and 1,970,000 were offered by selling stockholders. We raised net proceeds of $907,000 in this public offering, net of underwriting discounts and offering expenses.



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.



Basis of Presentation



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 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 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 2003 and 2005 consist
of 52 weeks and fiscal year 2004 consisted of 53 weeks.



Results of
Operations



Comparison of the thirteen weeks ended April 2, 2005 (First
Quarter 2005) to March 27, 2004 (First Quarter 2004)



Net sales.During First Quarter 2005, net sales increased $13.0 million, or 57.5%, to $35.5 million from $22.5 million in First Quarter 2004. Approximately $10.1 million of this increase was due to increased studio sales, which resulted primarily from our
opening 20 net new studios since the end of First Quarter 2004. First Quarter 2005 phone sales were comparable to First Quarter 2004 phone sales due to a general shift away from phone purchases and towards online sales. Online sales for First
Quarter 2005 increased 48.8% from First Quarter 2004 to $7.6 million, primarily due to increased online marketing initiatives. Other sales decreased $1.2 million, or 72.9%, to $0.4 million in First Quarter 2005 from $1.6 million in First Quarter
2004 due to not having a warehouse sale in First Quarter 2005 as we did in First Quarter 2004. The balance of the increase in net sales was primarily due to increased shipping and handling fees.



Cost of Sales. Cost of sales increased $7.8 million, or 64.7%, to $19.9 million in
First Quarter 2005 from $12.1 million in First Quarter 2004. As a percentage of net sales, cost of sales increased to 56.2% in First Quarter 2005 from 53.7% in First Quarter 2004. The increase in cost of sales as a percentage of net sales in First
Quarter 2005 compared to First Quarter 2004 was primarily a result of the strengthening of the Euro in relationship to the US Dollar in addition to increasing fuel prices, offset by increased sales of higher margin products. The dollar increase in
cost of sales in First Quarter 2005 was primarily attributable to the 57.5% increase in net sales during the same period.



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Selling, General and Administrative Expenses. Selling, general and administrative expenses increased $4.3 million,
or 48.9%, to $13.0 million in First Quarter 2005 from $8.7 million in First Quarter 2004. As a percentage of net sales, selling, general and administrative expenses decreased to 36.6% in First Quarter 2005 from 38.7% in First Quarter 2004. The
decrease in these expenses as a percentage of net sales resulted primarily from leveraging catalog costs, fixed fulfillment center costs and corporate overhead expenses over increased net sales, partially offset by increases in costs associated with
our studios, as the number of studios we have open 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
variable handling costs as our total volume of sales increased. We opened five new studios during First Quarter 2005, compared to two new studios in First Quarter 2004, and mailed 46.9% more catalogs in First Quarter 2005 than in First Quarter 2004.



Stock-based compensation. In First Quarter 2005, we recorded
approximately $155,000 in non-cash expenses associated with the amortization of deferred compensation that resulted from the issuance of (1) 120,000 options to purchase common stock with an exercise price of $4.50 per share and an estimated fair
market value of $10.00 per share granted in first quarter 2004 and (2) 366,250 options to purchase common stock 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 $76,000 in First Quarter 2004 on the same options.



Depreciation and Amortization Expenses. Depreciation and amortization expenses increased to $1.1 million in First Quarter 2005 from approximately $575,000 in First Quarter 2004. As a percentage of net sales, depreciation and
amortization expenses increased to 3.0% of net sales in First Quarter 2005 from 2.6% of net sales in First Quarter 2004. These expenses increased as a result of significant increases in spending on capital assets associated with our new studio
openings and improvements in our network infrastructure, such as investments in servers, desktop computers and related software licenses.



Facility Relocation Costs. In First Quarter 2005, we incurred no costs associated with the relocation of our fulfillment operations from Union City, California to
Hebron, Kentucky, compared to approximately $198,000 in such costs incurred in First Quarter 2004.



Interest Income. Interest income was approximately $115,000 in First Quarter 2005 as we invested a portion of the proceeds from our public offering in available for sale securities. Interest income was zero in
First Quarter 2004.



Interest Expense. We incurred approximately $10,000
of interest expense in First Quarter 2005 and $32,000 in First Quarter 2004 related to short-term borrowings under our bank credit facility for working capital purposes and for capital expenditures associated with new studios.



Income Taxes. We recorded a net income tax expense of approximately $554,000 in First
Quarter 2005 and $313,000 in First Quarter 2004. Our effective tax rate was 38.5% in First Quarter 2005 and First Quarter 2004.



Net Earnings. As a result of the foregoing factors, net earnings increased to approximately $884,000, or 2.5% of net sales, in First Quarter 2005 from
approximately $502,000, or 2.2% of net sales, in First Quarter 2004. Net earnings for First Quarter 2005 included no costs associated with the relocation of our fulfillment center and corporate headquarters, compared to approximately $198,000 in
such costs incurred in First Quarter 2004.



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Liquidity and Capital Resources



Through the end of Second Quarter 2004, 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. In addition, on July 6, 2004, we completed an initial public offering of 4,715,000 shares of common stock at $12.00 per share. Of the shares offered, 3,000,000 were offered
by us and 1,715,000 were offered by selling stockholders. We raised net proceeds of $31.8 million in our initial public offering, net of underwriting discounts and offering expenses. On March 15, 2005, we completed a public offering of 2,070,000
shares of common stock at $15.80 per share. Of the shares offered, 100,000 were offered by us and 1,970,000 were offered by selling stockholders. We raised net proceeds of $907,000 in our second public offering, net of underwriting discounts and
offering expenses.



Discussion of Cash Flows



For the thirteen weeks ended April 2, 2005, cash and cash equivalents decreased by
approximately $9.0 million to approximately $12.1 million from approximately $21.1 million at January 1, 2005.



Net cash provided by (used in) operating activities was ($4.3 million) for the thirteen weeks ended April 2, 2005, compared to $2.9 million for the thirteen weeks ended March 27, 2004. Net cash used in operating
activities increased during the thirteen weeks ended April 2, 2005 compared to the thirteen weeks ended March 27, 2004 primarily because of increases in capital expenditures for new studio development and inventory in support of the studio growth.



Net cash used in investing activities was $6.2 million for the thirteen weeks
ended April 2, 2005, compared to $3.6 million for the thirteen weeks ended March 27, 2004. Net cash used in investing activities increased during the thirteen weeks ended April 2, 2005 compared to the thirteen weeks ended March 27, 2004 primarily
because we opened five studios during the thirteen weeks ended April 2, 2005 while we opened two studios during the thirteen weeks ended March 27, 2004. We also invested $1.5 million in investments during the thirteen weeks ended April 2, 2005.



Net cash provided by financing activities was $1.5 million for the thirteen
weeks ended April 2, 2005, compared to approximately $803,000 for the thirteen weeks ended March 27, 2004. Net cash provided by financing activities increased during the thirteen weeks ended April 2, 2005 compared to the thirteen weeks ended March
27, 2004 primarily because of our secondary public offering that closed on March 15, 2005. The net cash provided by financing activities during the thirteen weeks ended March 27, 2004 represents increases in borrowing on our line of credit and cash
received upon exercise of employee stock options.



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



Liquidity Sources, Requirements and Contractual Cash Requirements and Commitments



Our principal sources of liquidity as of April 2, 2005 consisted of: (1) $12.1 million in
cash and cash equivalents; (2) $7.0 million in short-term investments; (3) our bank credit facility, consisting of a $9.0 million operating line of credit, of which nothing had been drawn down and $726,000 had been used for outstanding letters of
credit as of April 2, 2005; and (4) cash we expect to generate from operations during this fiscal year. The amount available from the bank facility as of April 2, 2005 is $8.2 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.



In fiscal years 2005 and 2006, we anticipate that our investment in property and equipment will increase to between approximately $14.0 million and $15.0 million in each
year, from $12.9 million in fiscal year 2004. 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, as well as our planned investment of approximately $4.1 million in additional information systems and technology. We expect our investment in property and equipment in subsequent years to increase due to the continued expansion of
our studio channel. We plan to finance these investments in fiscal years 2005 and 2006 from cash flows from operations and our available cash resources.



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



|                            |  |                       |        |                 |   |           |  |           |        |                  |   |        |  |   |       
|--------------------------- |  | --------------------- | ------ | --------------- | - | --------- |  | --------- | ------ | ---------------- | - | ------ |  | - | ------
|                            |  | Payment due by period
|Contractual Obligations (1) |  | Total                 |        | Less than1 year |   | 1-3 years |  | 3-5 years |        | More than5 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
|                            |  |                       |        |                 |   |           |  |           |        |                  |   |        |  |   |       

---

|(1) | Operating lease obligations consist of office, studio and fulfillment center lease obligations. Capital lease obligation consists of an obligation for the lease of certain
equipment. Between January 2, 2005 and April 2, 2005, the Company has entered into additional operating leases with additional minimum lease obligations of $14.9 million.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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 and a $2.5 million equipment 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. The Company is currently in discussions with Wells Fargo HSBC Trade Bank, N.A. regarding a new facility. Amounts borrowed under this line of credit bear interest at an annual rate equal to the
lenders prime lending rate plus 0.25%. The $2.5 million equipment line of credit was repaid in full in July 2004. 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.



Critical Accounting Policies



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 approximately $585,000 as of April 2, 2005. 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 $1.8 million for First Quarter 2005. 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



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differ materially from our reserves. As a result, our operating results and financial condition could be affected adversely. As of April 2, 2005, estimated
inventory write-downs amounted to approximately $1.2 million.



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
the First Quarter of 2004, we recognized approximately $76,000 in stock-based compensation expense, and we also recorded $2.1 million in deferred compensation. During First Quarter 2005, we recognized approximately $155,000 in stock-based
compensation expense. 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.



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 approximately $203,000 for First Quarter 2005. The balance of prepaid catalog at April 2, 2005 was $2.1 million.



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 the First Quarter 2005.



Caution on Forward-Looking Statements



Any statements in this report about our expectations, beliefs, plans, objectives, assumptions or future events or performance are not historical facts and are
forward-looking statements. You can identify these forward-looking statements by the use of words or phrases such as believe, may, could, will, estimate, continue,
anticipate, intend, seek, plan, expect, should, or would. Among the factors that could cause actual results to differ materially from those indicated in the
forward-looking statements are risks and uncertainties inherent in our business including, without limitation, the discussions set forth below under the caption Risk Factors and other factors detailed in our Annual Report on Form 10-K
for the fiscal year ended January 1, 2005 filed with the Securities and Exchange Commission on February 17, 2005.



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



|Item 3. | Quantitative and Qualitative Disclosures About Market Risk
|------- | ----------------------------------------------------------



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



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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 $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.



|Item 4. | Controls and Procedures
|------- | -----------------------



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, as amended, 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, 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:



(1) During the course of its audit, Grant Thornton LLP
identified that we had not correctly recorded inventory in transit from our European vendors, when the terms were FOB shipping point. As a consequence, we restated our balance sheet for the fiscal year ended December 31, 2003 to reflect an increase
in inventories and a corresponding liability in the amount of $1.7 million. Grant Thornton LLP noted that in accordance with professional standards this restatement indicates the existence of a material weakness in our internal controls over
financial reporting.



(2) During the course of
its audit, Grant Thornton identified numerous informal or undocumented internal control procedures, as well as instances of inadequate segregation of duties. We also recorded a number of closing and adjusting journal entries during the course of the
audit. Grant Thornton LLP stated that the volume of these findings and adjustments constitutes significant deficiencies that aggregate to form a material weakness over financial reporting.



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



(A) Consider allocating additional resources to our
accounting and finance department to strengthen our SEC reporting and accounting.



(B) Use cross-training to delegate certain responsibilities to other individuals already employed by our company, and to help further
delegate responsibilities to lower-level accounting staff-members.



(C) Have the individuals involved in financial reporting obtain additional training in connection with their duties so that they can keep current with U.S. generally accepted accounting principles and the new
regulatory reporting standards and requirements.



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 documentation in place by June 2005, with testing of our procedures to begin with respect to the fiscal quarter ending July 2, 2005. 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 April 2, 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 quarter ended April 2, 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.



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PART II - OTHER
INFORMATION



|Item 2. | Changes in Securities and Use of Proceeds
|------- | -----------------------------------------



Our initial public offering of common stock was effected through a Registration Statement on Form S-1 (File No. 333-113903) that was declared effective by the Securities
and Exchange Commission on June 29, 2004. On July 6, 2004, 3,000,000 shares of our common stock were sold on our behalf at an initial public offering price of $12.00 per share, for an aggregate offering price of $36.0 million, and 1,715,000 shares
of our common stock were sold on behalf of certain selling stockholders at an initial public offering price of $12.00 per share, for an aggregate offering price of $20.6 million. The initial public offering was managed by CIBC World Markets Corp.,
William Blair & Co., L.L.C. and SG Cowen & Co., LLC.



We paid to the
underwriters underwriting discounts and commissions totaling approximately $2.5 million in connection with the offering. In addition, we incurred additional expenses of $1.6 million in connection with the offering, which when added to the
underwriting discounts and commissions paid by us, amounts to total expenses of $4.1 million. Thus, the net offering proceeds to us, after deducting underwriting discounts and commissions and offering expenses, were $31.8 million. No offering
expenses were paid directly or indirectly to any of our directors or officers (or their associates) or persons owning ten percent or more of any class of our equity securities or to any other affiliates.



We intend to use the net proceeds from this offering as follows:



| |  |  | between approximately $15 million and $18 million to finance the opening of additional studios;
| | - |  | -----------------------------------------------------------------------------------------------



| |  |  | to pay all of the indebtedness outstanding under our bank credit facility, approximately $3.6 million; and
| | - |  | ----------------------------------------------------------------------------------------------------------



| |  |  | the remaining net proceeds for other general corporate purposes, including working capital.
| | - |  | -------------------------------------------------------------------------------------------



We also may use a portion of the net proceeds for the acquisition of complementary businesses or products in the event that an attractive
opportunity presents itself in the future. We have no current agreements or commitments with respect to any acquisition. Pending application of the net proceeds, we will invest the net proceeds in short-term, investment-grade, interest-bearing
securities.



|Item 6. | Exhibits
|------- | --------



|              |  |                                                                                                                                    
|------------- |  | -----------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Exhibit Title                                                                                                                      
|3.01(1)       |  | Amended and Restated Certificate of Incorporation                                                                                  
|              | 
|3.02(3)       |  | Amended and Restated Bylaws                                                                                                        
|              | 
|4.01(2)       |  | Form of Specimen Common Stock Certificate                                                                                          
|              | 
|4.03(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
|              | 
|10.01(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.       
|              | 
|10.03(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                                                          

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|              |  |                                                                                                                                                                               
|------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Exhibit Title                                                                                                                                                                 
|10.05(2)      |  | Design Within Reach, Inc. 2004 Equity Incentive Award Plan                                                                                                                    
|              | 
|10.06(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.                                                   
|              | 
|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.                                
|              | 
|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.                           
|              | 
|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.                       
|              | 
|10.11(1)      |  | Offer of Employment Letter dated February 22, 2000 between Design Within Reach, Inc. and Wayne Badovinus                                                                      
|              | 
|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.                                   
|              | 
|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.                                 
|              | 
|10.15(5)      |  | Offer of Employment Letter dated June 1, 2004 between Design Within Reach, Inc. and Tara Poseley                                                                              
|              | 
|10.16(5)      |  | Form of Option Agreement under Design Within Reach, Inc. 2004 Equity Incentive Award Plan                                                                                     
|              | 
|31.01         |  | Certification of Chief Executive Officer pursuant to Rules 13a-14 and 15d-14 promulgated under the Securities Exchange Act of 1934                                            
|              | 
|31.02         |  | Certification of Chief Financial Officer pursuant to Rules 13a-14 and 15d-14 promulgated under the Securities Exchange Act of 1934                                            
|              | 
|32*           |  | Certifications of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

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|(1) | Incorporated by reference to the same-numbered exhibit (except where otherwise noted) to the Registration Statement on Form S-1 (No. 333-113903) filed on March 24, 2004, as amended.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(2) | Incorporated by reference to the same-numbered exhibit (except where otherwise noted) to Amendment No. 1 to Registration Statement on Form S-1 (No. 333-113903) filed on May 17,
2004, as amended.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(3) | Incorporated by reference to the same-numbered exhibit (except where otherwise noted) to Amendment No. 2 to Registration Statement on Form S-1 (No. 333-113903) filed on June 1,
2004, as amended.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(4) | Incorporated by reference to the same-numbered exhibit (except where otherwise noted) to Amendment No. 3 to Registration Statement on Form S-1 (No. 333-113903) filed on June 10,
2004, as amended.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(5) | Incorporated by reference to the same-numbered exhibit to the Companys Annual Report on Form 10-K for the fiscal year ended January 1, 2005 filed on February 17, 2005.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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

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SIGNATURES



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



Dated: May 5, 2005



/s/ WAYNE BADOVINUSWayne Badovinus President and Chief Executive
Officer (Duly authorized Officer and Principal Executive
Officer)




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