Level 1 — Quoted prices in active markets for identical assets or liabilities.

Level 2 — Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the tax benefitfull term of the year-to-date pre-tax loss would not be realized during fiscal year 2008,assets or liabilities.

Level 3 — Unobservable inputs that are supported by little or no market activity and therefore, inthat are significant to the thirteen weeks ended September 27, 2008, the $1,237,000 tax benefit recorded in the first half of 2008 was reversed.

In accordance with FASB Interpretation Number 48, “Accounting for Uncertainty in Income Taxes,” we recorded a discrete item of $104,000 in the third quarter 2007 due to a change in judgment that resulted in a change in measurement of a tax position taken in a prior annual period. No income tax benefit was recognized in the thirteen weeks and thirty-nine weeks ended September 29, 2007 because it was uncertain whether the tax benefitfair value of the year-to-date pre-tax loss would be realized during fiscal year 2007.assets or liabilities.

Salaries and benefits expense decreased $1,757,000, or 18.8%, to $7,603,000 in the first quarter 2009 from $9,360,000 in the first quarter 2008. This decrease is related to a $720,000 decrease in salary and contract labor expenses and a $215,000 decrease in health care benefits and payroll taxes that are primarily attributable to the reduction in work force implemented in January 2009. In addition, the decrease is related to a $472,000 decrease in commission and bonus expenses, which is primarily attributable to the decrease in net sales and increased expenses described below.

•

Other expense decreased $777,000, or 23.4%, to $2,542,000 in the first quarter 2009 compared to $3,319,000 in the first quarter 2008. The decrease is primarily due to a $348,000 decrease in merchant fees, a $256,000 decrease in supplies and the cost of distributing merchandise to our warehouse sales events, studios, and new DWR:Tools for Living stores, a $182,000 decrease in travel-related expense, a $114,000 decrease in bad debt expense, and a $104,000 decrease in telephone and telecommunication expense. This decrease was partially offset by an increase of $181,000 in software and website-related expenses and charges of $73,000 for impairment of leasehold improvements due to closing of our Southlake, Texas studio in the second quarter 2009. We also closed our Tigard, Oregon studio during the second quarter 2009. We incurred impairment charges related to the leasehold improvements for the Tigard, Oregon studio in 2008. In accordance with Financial Accounting Standards Board Statement No. 146,Accounting for Costs Associated with Exit or Disposal Activities(“FAS 146”), a liability for costs that will continue to be incurred under the lease agreement for the remaining term without economic benefit to the Company must be recognized and measured at the lease’s fair value at the cease-use date. We will record additional charges in the second quarter 2009 for future lease payments at the cease-use date in accordance with FAS 146. Excluding any impairment charges, we plan to reduce overall spending in other SG&A expenses in the remainder of 2009 from the prior comparable period in 2008 by approximately $3,000,000 based on our initiative to lower our expenses including reduced travel-related expense, information technology expenses and costs of distributing merchandise to our warehouse sales events, studios, and DWR:Tools for Living stores.

Interest Income.and Other Income and ExpensesInterest

We had no significant interest income decreased $50,000 to $40,000 in the thirdfirst quarter 2009 compared to interest income of $57,000 in the first quarter 2008 compared to $90,000 in the third quarter 2007, primarily due to significantly less invested capital and lower interest rates and less invested capital.

Interest Expense.Interest expense decreased $202,000rates. In the first quarter 2009, excess cash balances were used to $84,000 in the third quarter 2008 compared to $286,000 in the third quarter 2007, primarily due to decreasedpay down borrowings under our loan agreement and lowercompared to being swept into an interest rates.

Other Income, Net. Other income decreased $1,862,000 to $159,000bearing investment account in the thirdfirst quarter 2008. Interest expense increased $66,000 to $114,000 in the first quarter 2009 compared to $48,000 in the first quarter 2008 comparedprimarily due to $2,021,000increased borrowings under our loan agreement. We had no significant other income (expense) in the thirdfirst quarter 2007.2009. Other incomeexpense of $144,000 in the thirdfirst quarter 2008 primarily consists of foreign currency exchange gainslosses related to currency fluctuations. Other income in the third quarter 2007 consists of a net gain of approximately $2,200,000 after related expenses as a result of the early termination of a studio lease per an agreement between the Company and the landlord, partially offset, by foreign currency exchange losses of $187,000. We have certain liabilities from merchandise purchases denominated principally in Euros that result in gains or losses to other income or expense when the value of the dollar changes. Such gains or losses are not offset against designated hedge contracts in which corresponding gains or losses are recognized in other comprehensive income (loss).decreasing approximately 7% relative to the Euro.

Income Taxes.

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

In accordance with FASB Interpretation Number 48, “Accounting for Uncertainty in Income Taxes,” we recorded a discrete item of $104,000 in the third quarter 2007 due to a change in judgment that resulted in a change in measurement of a tax position taken in a prior annual period. No income tax benefit was recognized in the third quarter 20072009 because it was uncertain whether the tax benefit of the year-to-date pre-tax loss would be realized during fiscal year 2007.

Comparison of the thirty-nine weeks ended September 27, 2008 to the thirty-nine weeks ended September 29, 2007

Net Sales.

Net sales decreased $5,452,000, or 3.8%, to $136,490,000 in the thirty-nine weeks ended September 27, 2008 from $141,942,000 in the thirty-nine weeks ended September 29, 2007. The decrease in the combined net sales of our three sales points (studio, online and phone) is related, in part, to a decrease in the number of units of merchandise shipped, partially offset, by a higher average per unit retail sales price. Studio sales increased $245,000, or 0.3%, in the thirty-nine weeks ended September 27, 2008 compared to the thirty-nine weeks ended September 29, 2007. This increase was primarily attributable to the increase in sales inrealized. In the first quarter 2008, compared towe recorded a tax benefit of $696,000 calculated at the first quarter 2007, partially offset, by decreases in sales inprojected annual effective tax rate of 52.8%. The difference between the secondstatutory rate of 39.5% and third quarters of 2008 from the prior comparable period. Incremental sales of approximately $3,970,000 were generated from two new studios opened in fiscal year 2007 which did not operate during the entire first thirty-nine weeks of 2007, two new studios opened in the first quarter 2008 and one new DWR:Tools for Living store opened in the third quarter 2008. Online sales decreased $3,997,000, or 18.3%, and phone sales decreased $1,756,000, or 12.9%, in thirty-nine weeks ended September 27, 2008 compared to the thirty-nine weeks ended September 29, 2007.

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

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

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

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

SG&A increased by $2,125,000, or 3.2%, to $67,908,000 in the thirty-nine weeks ended September 27, 2008 from $65,783,000 in the thirty-nine weeks ended September 29, 2007. As a percentage of net sales, SG&A increased to 49.8% in the thirty-nine weeks ended September 27, 2008 from 46.3% in the thirty-nine weeks ended September 29, 2007, primarily attributable to the decrease in net sales and increased expenses described below.

Interest Income.Interest income decreased $148,000 to $137,000 in the thirty-nine weeks ended September 27, 2008 compared to $285,000 in the thirty-nine weeks ended September 29, 2007, primarily due to lower interest rates and less invested capital.

Interest Expense.Interest expense decreased $279,000 to $202,000 in the thirty-nine weeks ended September 27, 2008 compared to $481,000 in the thirty-nine weeks ended September 29, 2007 primarily due to decreased borrowings under our loan agreement and lower interest rates.

Other Income, Net. Other income decreased $1,944,000 to $116,000 in the thirty-nine weeks ended September 27, 2008 compared to $2,060,000 in the thirty-nine weeks ended September 29, 2007. Other income in the thirty-nine weeks ended September 27, 2008 primarily consists of foreign currency exchange gains related to currency fluctuations. Other income in the thirty-nine weeks ended September 29, 2007 consists of a net gain of approximately $2,200,000 after related expenses as a result of the early termination of a studio lease per an agreement between the Company and the landlord, partially offset, by foreign currency exchange losses of $222,000. We have certain liabilities from merchandise purchases denominated principally in Euros that result in gains or losses to other income or expense when the value of the dollar changes. Such gains or losses are not offset against designated hedge contracts in which corresponding gains or losses are recognized in other comprehensive income.

Income Taxes. No income tax benefit was recognized in the thirty-nine weeks ended September 27, 2008 because recent general economic events have indicated that more likely than not the tax benefit of the year-to-date pre-tax loss would not be realized during fiscal year 2008.purposes.

In accordance with FASB Interpretation Number 48, “Accounting for Uncertainty in Income Taxes,” we recorded a discrete item of $104,000 in the third quarter 2007 due to a change in judgment that resulted in a change in measurement of a tax position taken in a prior annual period. No income tax benefit was recognized in the thirty-nine weeks ended September 29, 2007 because it was uncertain whether the tax benefit of the year-to-date pre-tax loss would be realized during fiscal year 2007.

Liquidity and Capital Resources

As of September 27, 2008,Cash and cash equivalents

Cash and cash equivalents were $5,147,000. $3,099,000 and $6,496,000 as of April 4, 2009 and March 29, 2008, respectively.

Working capital

Working capital was $17,138,000$4,910,000 and $20,923,000$24,743,000 as of September 27,April 4, 2009 and March 29, 2008, respectively. The decrease in working capital is primarily the result of significant operating losses incurred in the second quarter 2008 through the fourth quarter 2008 and September 29, 2007, respectively.the first quarter 2009. Specific component changes in working capital were increased borrowings of $7,149,000 under the loan agreement and decreased inventory of $11,132,000.

Cash Flows.flows

Net cash provided by (used in):

Net Cash UsedProvided by (Used in) Operating Activities

Net cash provided by operating activities of $1,350,000 in Operating Activities.the first quarter 2009 was primarily attributable to a reduction of inventory of $6,511,000 that was offset by the loss from operations of $5,984,000. Net cash used in operating activities was $2,622,000of $401,000 in the thirty-nine weeks ended September 27,first quarter 2008 compared to $7,626,000 in the thirty-nine weeks ended September 29, 2007. The improvement in cash flow was primarily attributable to a lower amount of inventory purchases. We have lowered the amount of inventory by improving our merchandise purchasing process and increasingnet loss from operations in the use of shipments directly from our vendors to our customers.first quarter 2008.

Net Cash Used in Investing Activities.Activities

Cash used in investing activities was primarily for the purchase of property and equipment related to our new outlet and studios, and information technology systems of $4,514,000 in the thirty-nine weeks ended September 27, 2008 compared to $4,381,000amounts of $720,000 and $1,196,000 in the thirty-nine weeks ended September 29, 2007.first quarter 2009 and 2008, respectively. We opened two new studios, one replacement studio and one new DWR:Tools for Living storeoutlet in the thirty-nine weeks ended September 27, 2008first quarter 2009 and two new studios and one replacement studio duringin the thirty-nine weeks ended September 29, 2007. We launched our website on a new platform on April 1, 2008, we installed a new warehousing and distribution system at our fulfillment center on May 12, 2008, and we installed a new point of sales system at our outlet on July 27, 2008 that was also installed at our new DWR:Tools for Living stores.first quarter 2008.

For the remainder of fiscal year 2008,2009, we anticipate that our investment in property and equipment will be between approximately $2,500,000 and $3,500,000$500,000, primarily to implement new information technology systems, leasehold improvements and furniture and fixtures for two DWR:Tools for Living stores and remodel selected studios. Although most ofrelocate one studio in the capital costs of the DWR:Tools for Living stores opened on September 19, 2008 and October 2, 2008 are included in property and equipment at September 27, 2008, certain of those costs are included in accounts payable and accrued liabilities and will be fully reflected in net cash used in investing activities by the fourthsecond quarter 2008.2009. We plan to finance these investments in fiscal year 2008this investment from our existing cash balances and borrowings under our revolving line of credit facility.

Net Cash Provided by (Used in) Financing Activities.Activities

Net cash used in financing activities in the first quarter 2009 was primarily comprised of repayment of borrowings under our loan agreement of $4,266,000, the restriction of $2,000,000 of cash related to our loan agreement and repayment of long-term obligations of $207,000. Net cash provided by financing activities was $6,632,000 in the thirty-nine weeks ended September 27,first quarter 2008 compared to $10,770,000 in the thirty-nine weeks ended September 29, 2007. Cash provided by financing activities was primarily comprised primarily of borrowings onof $2,534,000 under our bank credit facility of $6,879,000loan agreement.

Cash Availability and $11,200,000 in the thirty-nine weeks ended September 27, 2008 and September 29, 2007, respectively. Cash used in financing activities was for the repayment of long-term obligations of $280,000 and $462,000 in the thirty-nine weeks ended September 27, 2008 and September 29, 2007, respectively.Liquidity

As of September 27, 2008,April 4, 2009, we had available approximately $16,638,000$6,935,000 in working capital resources for our future cash needs as follows:

Our cashIn response to lower sales following the economic downturn and cash equivalents are heldresulting losses from operations in accounts managed by third party financial institutions2008, we undertook several initiatives to lower our expenses to better match the forecasted reduction in revenues and consist of invested cash and cash in our operating accounts. To date, we have experienced no loss or lack of access to our cash or cash equivalents; however, there can be no assurance that access to our cash and cash equivalents will not be impacted by adverse conditionsimprove liquidity in the financial markets.fourth quarter 2008 and the first quarter 2009. We have restructured certain real estate lease contracts, reduced marketing and catalog expenses primarily by reducing the number of planned catalog mailings and the number of pages per catalog, delayed implementation of a new ERP system, renegotiated certain support contracts related to software maintenance and telecommunications, and lowered outside contractor fees as well as headcount in all areas of the Company. We reduced expenses by approximately $3 million in the first quarter 2009 and expect reduced expenses of approximately $15 million in the remainder of 2009 from the prior comparable periods in 2008. We also reduced inventory levels significantly from year-end 2008 levels to generate additional liquidity. However, if we fail to generate sales and margins at levels currently forecasted or do not obtain additional debt or equity financing, it is unlikely that we will be able to maintain sufficient liquidity to continue as a going concern.

As a result of the challenging market and economic conditions, the cost and availability of credit has been and may continue to be adversely affected by illiquid credit markets and wider credit spreads. Concernconcern about the stability of the markets generally and the strength of counterparties specifically has led many lenders and institutional investors to reduce, and in some cases, cease to provide funding to borrowers. In addition, many vendors in our industry have begun to provide less favorable payment terms. Continued turbulence in the U.S.United States and international markets and economies may adversely affect the liquidity and financial condition of our lenders, and vendors and our access to credit from our lenders and vendors. If these market conditions continue, they may limit our ability, and the ability of our lenders and vendors to timely replace maturing liabilities, and access the capital markets to meet liquidity needs, resulting in an adverse effecteffects on our liquidity, financial condition and results of operations.

Our cash from customers is primarily received throughIn the United States, recent market and economic conditions have been unprecedented and challenging with tighter credit card processing companies. To date, weconditions, and more frequent and lower reappraisals of inventories on which advance rates under our credit line are determined. In addition, large financial institutions have experienced no delaysdeclared bankruptcy or lack of access to credit card cash receipts; however, thereare under government conservatorship. There can be no assurance that access to our cash receiptsworking capital line of credit will not be impacted by adverse conditions in the financial markets.

We are currently in compliance with all of our debt covenants. Our ability to stay in compliance with all of our debt covenants and to fund our operations and anticipated capital expenditures inIf Wells Fargo increases reserves or reduces the future will dependadvance rate due on our future operations, performancecredit line by a material amount and cash flows, and is subjectwe are unable to prevailing economic conditions and financial, business and other factors, somereduce outstanding borrowings to the reduced level of which are beyondavailability, or an event of default occurs, there can be no assurance that Wells Fargo will not demand repayment of the line of credit or take assets secured by our control.borrowing.

Commitments and Contractual Obligations

On February 2, 2007, we entered into a Loan, Guaranty and Security Agreement, or the Loan Agreement, with Wells Fargo Retail Finance, LLC, or the Loan Agreement, which replaced the previous loan with Wells Fargo HSBC Trade Bank, N.A.Fargo. The Loan Agreement expires on February 2, 2012 and provides for an initial overall credit line up to $20,000,000 which may be increased to $25,000,000 at our option, provided we are not in default on the Loan Agreement. The Loan Agreement consists of a revolving credit line and letters of credit up to $5,000,000. The amount we may borrow at any time under the Loan Agreement is based upon a percentage of eligible inventory and accounts receivable less certain reserves. Advance rates under the credit line are, in part, determined by third party appraisals of the net liquidation value of our inventories. Borrowings are secured by the right, title and interest to all of our personal property, including cash, accounts receivable, inventory, equipment, fixtures, general intangibles and intellectual property and inventory.property. The Loan Agreement contains various restrictive covenants, including minimum availability, which is the amount we may borrow under the Loan Agreement, less certain outstanding obligations, plus certain cash and cash equivalents,restrictions on payment of dividends, limitations on indebtedness, limitations on subordinated indebtedness and limitations on the amount of capital expenditures we may incur in any fiscal year. We are currently in compliance with all of these restrictive covenants.

In the fourth quarter 2008 and the first quarter 2009, bank-commissioned appraisals determined that the net liquidation value of our inventories had declined due to general market conditions and, as a result, Wells Fargo reduced our advance rates, which constricted the availability of borrowings under the line of credit. The availability of borrowings would decrease if subsequent appraisals determine that the net liquidation value of our inventories has decreased.

Wells Fargo increased discretionary reserves by $1,500,000 in the first quarter 2009. On March 18, 2009, we entered into a first amendment to the Loan Agreement and a securities account availability agreement with Wells Fargo in which Wells Fargo increased the amount of advances otherwise available to us by $1,000,000 in exchange for our granting Wells Fargo collateral rights on a deposit account with a balance of approximately $4,678,000. Wells Fargo will permit us to withdraw amounts from this account in excess of $2,000,000 so long as no default or event of default has occurred. Accordingly, we classified $2,000,000 of cash to restricted cash. In addition, Wells Fargo rescinded its decision to require additional discretionary reserves of $1,500,000. On April 14, 2009, we withdrew $1,000,000 from this account for working capital purposes. If Wells Fargo increases reserves or reduces the advance rate due on our credit line by a material amount and we are unable to reduce outstanding borrowings to the reduced level of availability, or an event of default occurs, there can be no assurance that Wells Fargo will not demand repayment of the line of credit or take assets secured by our borrowing.

Interest on borrowings will be either at Wells Fargo’s prime rate, or LIBOR plus 1.25% to 1.75% based upon average availability. We are charged anavailability, and the unused credit line fee of 0.25%is 0.3%. In the event of default, our interest rates would increaseare increased by two percentage points. The interest rate on outstanding borrowings at September 27, 2008 was 5.00%. As of September 27, 2008,April 4, 2009, we had outstanding borrowings of $6,879,000$9,683,000 under the revolving credit line and $1,630,000$1,318,000 in outstanding letters of credit. Advances of $11,491,000 wereApproximately $3,836,000 was available for advances under the revolving credit line as of September 27, 2008.

We have various other notes payable, which consist primarily of unsecured equipment financing loans. In June 2006,January 2009, we financed the second and third years of a portionthree year software license fee of our new information technology projectapproximately $253,000 per year with a three-year promissory note of approximately $1,000,000 with an interest rate of approximately 2.0%. In accordance with APB Opinion No. 21 “Interest on Receivables and Payables,” or APB 21, we discounted this note to its fair value. The discounted portion of approximately $58,000 is being amortized as interest expense over the life of the note using the effective interest method.note. As of September 27, 2008,April 4, 2009, outstanding borrowings under thesethis and other notes were $289,000$261,000 with interest rates ranging from 2% to 6.75%. These notes mature11% maturing in 2009.

We entered into equipment leases during fiscal yearyears 2008 and 2007 with remaining capitalized lease obligation payments of $124,000$287,000 including interest and principal as of September 27, 2008.April 4, 2009.

As of September 27, 2008,April 4, 2009, inventory purchase obligations related to open purchase orders were approximately $23,745,000,$7,920,000, commitments for furniture, fixtures, and leasehold improvements related to studios were approximately $283,000,$387,000, and commitments to maintainfor software licenses, software maintenance, hosting, and enhancedevelopment services for various information technology systems and website were approximately $2,153,000.$1,316,000.

Critical Accounting Estimates

Our financial statements have been prepared in accordance with accounting principles generally accepted in the United States, or U.S.US GAAP. 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 and estimates are set forth below and in ourSee the Annual Report on Form 10-K for the fiscal year ended December 29, 2007,January 3, 2009, in the Notes to Financial Statements and Critical Accounting Policies and Estimates section.section for critical accounting estimates except as modified below.

Revenue Recognition

We recognize revenue on the date on which we estimate that the product has been received by the customer. Wecustomer and retain title to items and bear the risk of loss of shipments until delivery fromto our warehouse.customers. We recognize shipping and handling fees charged to customers in net sales at the time products are estimated to have been received by customers. We take title to items drop shipped by vendors at the time of shipment and bear the risk of loss until delivery to customers. We use third-party freight carrier information to estimate standard delivery times to various locations throughout the United States and Canada. We record as deferred revenue the dollar amount of all shipments for a particular day, if based upon our estimated delivery time, such shipments, on average, are expected to be delivered after the end of the reporting period. As of September 27,April 4, 2009, January 3, 2009 and March 29, 2008, December 29, 2007 and September 29, 2007, deferred revenue was $1,905,000, $325,000$1,637,000, $1,162,000 and $3,171,000,$1,980,000, respectively, and related deferred cost of sales was $986,000, $173,000$890,000, $572,000 and $1,617,000,$1,024,000, respectively.

Sales are recorded net of expected product 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 products when evaluating the adequacy of the sales returns and other allowances in any accounting period. The returns allowance is recorded as a reduction to net sales for the estimated retail value of the projected product returns and as a reduction in cost of sales for the corresponding cost amount, less any reserve for estimated scrap. The reserves for estimated product returns were $538,000, $654,000$532,000, $573,000 and $655,000$674,000 as of September 27,April 4, 2009, January 3, 2009 and March 29, 2008, December 29, 2007 and September 29, 2007, respectively.

Item 3.

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

Foreign Currency Exchange Risk

In the thirty-nine weeks ended September 27, 2008,first quarter 2009, we generated approximatelymore than 98% of our net sales in U.S. dollars, but we purchased approximately 37%36% of our product inventories from manufacturers in foreign countries with 26%20% of our product inventory purchases being paid for in Euros. Increases and decreases in the U.S. dollar relative to the Euro result in fluctuations in 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. Specifically, as the value of the U.S. dollar declines relative to the Euro, the effective cost for our product increases. As a result, declines in the value of the U.S. dollar relative to the Euro and other foreign currencies would increase our cost of sales and decrease our gross margin. Although

In the first quarter 2009, the value of the dollar increased approximately 4% relative to the Euro. We purchased foreign currency forward contracts to hedge our hedging strategy described below may mitigate thisforeign currency risk in the short term, currency fluctuations infirst quarter 2008 through the long term will not be mitigated by hedging because we do not hedge our currency risks beyond a year.

third quarter 2008. In the thirty-nine weeks ended September 27, 2008, the value of the dollar increased approximately 1%5% relative to the Euro.Euro resulting in losses on some of those contracts and, as a result, we discontinued purchasing hedge contracts at the end of 2008. We implemented a new hedging strategy in the first quarter 2007 to mitigate the impact ofdo not hold any foreign currency fluctuations on inventory purchases. Foreign currencyforward contracts entered into from January 2007 toas of April 2007 were not designated as cash flow hedge contracts. We accounted for non-hedge foreign currency contracts on a monthly basis by recognizing the net cash settlement gain or loss in other income, net and adjusting the carrying amount of open contracts to fair value by recognizing any corresponding gain or loss in other income, net. In the second quarter 2007, we developed policies and procedures that met the criteria for cash flow hedge accounting. Foreign currency contracts entered into from May 2007 through September 2008 were designated as cash flow hedge contracts and were accounted for on a monthly basis by adjusting the carrying amount of open designated contracts to fair value by recognizing any corresponding gain or loss in other comprehensive income (loss) and recognizing the net cash settlement gain or loss in other comprehensive income (loss). Subsequently, these net cash settlement gains or losses are being recognized in cost of sales as the underlying hedged inventory is sold in each reporting period. In the condensed statements of cash flows, net cash settlement gain or loss is included in operating cash flows as changes in other assets, and as customer deposits and other liabilities. Our derivative positions were used only to manage identified exposures. If our hedging strategy does not help reduce fluctuations in our cost of goods and mitigate the impact of the strengthening of the Euro relative to the U.S. dollar, we will continue to have difficulties in accurately predicting our costs of sales and our cost of sales may increase, adversely impacting our gross margin.4, 2009. A hypothetical 1% increase or decrease in the Euro exchange rate with the dollar on December 30, 2007January 4, 2009 would have resultedresult in a $104,000 change to cost of sales in the thirty-nine weeks ended September 27, 2008 and $158,000 change to cost of salesapproximately $68,000 on an annualized basis.basis if our product inventory purchases being paid for in Euros remained constant throughout 2009.

Interest Rate Risk

We have interest payable on our revolving line of credit. Amounts borrowed under this line of credit bear interest at an annual rate equal to the lender’s prime lending rate or LIBOR plus 1.25% to 1.75% based upon average availability. The extent of this risk is not quantifiable or predictable because of the variability of future interest rates and the future financing requirements. As of September 27, 2008,April 4, 2009, we had $6,879,000$9,683,000 of outstanding borrowings under the revolving credit line at an interest rate of 5.00%3.25%. A hypothetical increase or decrease in interest rates by one percentage point on December 30, 2007January 3, 2009 would have resultedresult in a $30,000 changechanges to our interest expenseexpenses of approximately $28,000 in the thirty-nine weeks ended September 27, 2008first quarter 2009 and $40,000approximately $101,000 on an annualized basis.if our outstanding loan balance remained constant throughout 2009.

Item 4.

Controls and Procedures

Management, including our Chief Executive Officer, or CEO, and Chief Financial Officer, or CFO, evaluated the effectiveness of our disclosure controls and procedures, as of the end of the period covered by this report, in accordance with Rules 13a-15(b) and 15d-15(b) of the Exchange Act. Based on that evaluation, our CEO and CFO concluded that control deficiencies which constituted material weaknesses at December 29, 2007the end of fiscal year 2008, as discussed in subsection (b) below, continued to exist in our internal control over financial reporting as of the end of the period covered by this report. As a result of these material weaknesses, our CEO and CFO concluded that our disclosure controls and procedures were not effective as of the end of the period covered by this report at the reasonable assurance level. In light of the material weaknesses described below, we performed additional analyses and other post-closing procedures to determine that our financial statements included in this report were prepared in accordance with U.S.US GAAP. Accordingly, management believes that the financial statements included in this report fairly present in all material respects our financial condition, results of operations and cash flows for the periods presented.

The certifications of our principal executive officer and principal financial officer required in accordance with Section 302 of the Sarbanes-Oxley Act of 2002 are attached as exhibits to this Quarterly Report on Form 10-Q. The disclosures set forth in this Item 4 contain information concerning the evaluation of our disclosure controls and procedures, internal control over financial reporting and changes in internal control over financial reporting referred to in those certifications. Those certifications should be read in conjunction with this Item 4 for a more complete understanding of the matters covered by the certifications.

Internal Control over Financial Reporting

Management is responsible for establishing and maintaining adequate internal control over our financial reporting. Internal control over financial reporting refers to the process designed by, or under the supervision of, our CEO and CFO, and effected by our board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S.US GAAP, and includes those policies and procedures that:

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Management assessed the effectiveness of our internal control over financial reporting as of the end of the period covered by this report. In making this assessment, management used the framework set forth in the report entitled Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission, or COSO. The COSO framework summarizes each of the components of a company’s internal control system, including (i) the control environment, (ii) risk assessment, (iii) control activities, (iv) information and communication, and (v) monitoring.

Material Weaknesses and Remediation Initiatives

A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis. Management identifiedOur management has discussed the following material weaknesses during itsand other deficiencies with our Audit Committee and performed significant additional substantive review as described below where it identified material weaknesses to gain assurance that the financial statements as included herein are fairly stated in all material respects. During our assessment of our internal control over financial reporting as of the end of fiscal year 2007 and determined that such weaknesses continued to exist as of the end of the period covered by this report.report, management identified the following material weaknesses:

Control Activities

We had an entity level material weakness related to ineffective controls over the initiation, authorization, review, documentation and recording of the financial impact of material contracts. Specifically, we do not have a contract tracking system for material contracts entered into other than for purchase orders related to inventory commitments. This material weakness could impact selling, general and administrative expenses and capital expenditures.

As remediation initiative we have developed a process to review material contracts for appropriate financial statement treatment and disclosure and are in the process of implementing it. Specifically, in the first quarter 2009 we have reviewed material contracts related to new real estate leases, real estate lease amendments, and website and information systems to adequately account for their financial impact.

Monitoring

We had an entity level material weakness related to insufficient oversight procedures performed by management of our internal controls. We did not maintain processes to verify that internal controls over financial reporting and regulatory filings were performed correctly or in a timely and consistent basis.

As remediation initiative in the first quarter 2009, we continued self testing and evaluation by process owners that was initiated in 2008. When a result of this conclusion, management performed significant additional substantive review of those areas described above where it identified material weaknesses to gain assurance thatdeficiency was discovered, we followed up with the financial statements as included herein are fairly stated in all material respects.parties involved and monitored corrective action and confirmed the control has been corrected and updated.

We continue to evaluate the deficiencies that were identified in 2007. We continue to remediate the remaining deficiencies.

To facilitate some of the improvements in the internal control environment, we continue to implement a new ERP system. This new ERP system should replace the majority of our existing legacy systems. We expect the new system to allow us to leverage more automated controls which will help remediate some of the deficiencies.

Our management has discussed the material weaknesses described above and other deficiencies with our Audit Committee. In an effort to remediate the identified material weaknesses and other deficiencies, we have initiated and/or taken action to remediate material weaknesses related to the following areas:

Control Activities

We are continuing to develop a process to emphasize the importance of internal controls and verify that all process owners are involved with performance of internal controls. We continue to provide training to all process owners on the appropriate requirements to document and perform internal control procedures.

We are continuing to develop a process whereby, on a periodic basis, process owners will perform self-assessment testing and report results to management. Periodic independent testing also will be performed to evaluate the adequacy of design and effectiveness of internal control procedures.

We have developed a process to review material contracts for appropriate financial statement treatment and disclosure and are in the process of implementing it.

Monitoring

We are implementing formal policies and procedures over performance of internal controls, including monitoring functions. We are performing a top-down risk-based approach to identify those accounts, financial statement assertions, business processes and locations which have a higher likelihood of resulting in a material misstatement to our financial statements and to accordingly adjust the nature, timing and extent of control monitoring efforts.

We have tasked an internal resource to monitor compliance with internal control requirements, including the performance of self-testing by process owners. During this quarter, we began monitoring compliance with internal control requirements, which included self-testing.

We installed a new point of sales system at our outlet on July 27, 2008 that was also installed at our new DWR:Tools for Living stores. Other than these implementations, the improvements in our control environment overduring the last thirteen weeksfirst quarter 2009 and the internal control implementation currently underway as discussed above, there have been no changes in our internal control over financial reporting during our fiscalthe first quarter ended September 27, 20082009 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II –- OTHER INFORMATION

None.

In addition to the other information set forth in this report, you should carefully consider the factors described below, as well as those discussed in Part I, Item 1A, “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 29, 2007,January 3, 2009, which could materially affect our business, financial condition or future results. The risks described in our Annual Report on Form 10-K are not the only risks and uncertainties facing us. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.

Our business depends, in part, on factors affecting consumer spending that are not within our control.control and if current sales and margin trends are below our forecast, we may not be able to generate enough liquidity to sustain significant ongoing operating losses and continue operating as a going concern.

Our business depends on consumer demand for our products and, consequently, is sensitive to a number of factors that influence consumer spending, including general economic conditions, turmoil in the credit markets, disposable consumer income, levels of employment, salaries and wage rates, consumer confidence, recession and fears of recession, stock market volatility, war and fears of war, acts of terrorism, inclement weather, consumer debt, interest rates, sales tax rates and rate increases, inflation, and consumer perceptions of personal well-being and security generally. The purchase of our products by customers is discretionary, and therefore highly dependent upon the level of consumer spending, particularly among affluent customers. Adverse changes in factors affecting discretionary consumer spending could reduce consumer demand for our products, thus reducing our net sales and adversely affecting our operating results.spending. The recent downturn in the housing market, increases in energy prices, the turmoil in the credit markets, the decrease in consumer confidence and uncertainties in general economic conditions including the possibility of acurrent recession, mayhave adversely affectaffected our sales. In addition, fewer customers may shopare shopping at our studios, our website or through the catalog. AnyNet sales decreased $12,838,000, or 27.4%, in the first quarter 2009 from the first quarter 2008. The decrease in the combined net sales of our three sales points (studio, online and phone) is related to a decrease in the number of units of merchandise shipped by 5%, a decrease in prices due to an increase in promotional discounts and a change in product mix to a relative higher volume of lower priced DWR:Tools for Living merchandise. The average revenue per unit of product sold decreased by 23%. All of these factors would likely cause usare attributed to delay or slowthe impact of the unfavorable economy.

In response to lower sales following the economic downturn and resulting losses from operations in 2008, we undertook several initiatives to lower our expansion plans, resultexpenses to better match the forecasted reduction in lower net salesrevenues and hamper our ability to raise prices in line with costs and also could result in excess inventories, which could, in turn, lead to increased merchandise markdowns, promotional expenses and impairment charges, adversely affecting our profitability. In addition, promotional and/or prolonged periods of deep discount pricing by our competitors could have a material adverse effect on our business.

Recent turmoilimprove liquidity in the credit marketsfourth quarter 2008 and the financial services industry may negatively impact our business, resultsfirst quarter 2009. We have restructured certain real estate lease contracts, reduced marketing and catalog expenses primarily by reducing the number of operations, financial condition, liquidity or market price of our common stock.

Recently, general worldwide economic conditions have experienced a downturn due to the sequential effects of the subprime lending crisis, general credit market crisis, collateral effects on the finance and banking industries, volatile energy costs, concerns about inflation, slower economic activity, decreased consumer confidence, reduced corporate profits and capital spending. We cannot predict the timing or duration of any economic slowdown or the timing or strength of a subsequent economic recovery, worldwide or in the retail industry, specifically. While the ultimate outcome of these events cannot be predicted, they may have a material adverse effect on our liquidity and financial condition if our ability to borrow money to finance our operations from our existing lenders under our loan agreements or obtain credit under our revolving line of credit were to be impaired. The recent economic crisis could adversely impact our customers’ discretionary spending. Because consumer purchases of discretionary items, such as our products, tend to decline during recessionary periods, when disposable income is lower, our sales have been and will continue to be adversely affected by the downturn in economic conditions. Additionally, our stock price could decrease if investors have concerns that our business, financial condition and results of operations will be negatively impacted by a worldwide macroeconomic downturn.

We are subject to various risks and uncertainties that might affect our ability to procure quality merchandise from our vendors or receive favorable payment terms from our vendors.

Our performance depends on our ability to procure quality merchandise from our vendors. Our vendors are subject to certain risks, including availability of raw materials, labor disputes, union organizing activity, inclement weather, natural disasters, and general economic and political conditions that might limit their ability to provide us with quality merchandise on a timely basis. For these or other reasons, one or more of our vendors might not adhere to our quality control standards, and we might not identify the deficiency before merchandise is shipped to us or our customers. Our vendors’ failure to manufacture or import quality merchandise could reduce our net sales, damage our reputation and have an adverse effect on our financial condition. In addition, the global credit crisis may affect the liquidity and viability of our vendors and may cause them to provide less favorable payment terms. Any such changes could require us to seek different vendors from which to purchase products and could require us to borrow additional funds under our revolving credit line to finance the purchase of our products.

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

On February 2, 2007, we entered into a Loan, Guaranty and Security Agreement with Wells Fargo Retail Finance, LLC (the “Loan Agreement”) which replaced the loan with Wells Fargo HSBC Trade Bank, N.A. The Loan Agreement expires on February 2, 2012 and provides for an initial overall credit line up to $20.0 million, which may be increased to $25.0 million at our option, provided we are not in default on the Loan Agreement. The Loan Agreement consists of a revolving credit line and letters of credit up to $5.0 million. The amount we may borrow at any time under the Loan Agreement is based upon a percentage of eligible inventory and accounts receivable less certain reserves. Borrowings are secured by the right, title and interest to all of our personal property, including equipment, fixtures, general intangibles, intellectual property and inventory. The Loan Agreement contains various restrictive covenants, including minimum availability, which is the amount we may borrow under the Loan Agreement, less certain outstanding obligations, plus certain cash and cash equivalents, limitations on indebtedness, limitations on subordinated indebtedness and limitations on the amount of capital expenditures we may incur in any fiscal year. The current disruptions in the capital markets have caused banks and other credit providers to restrict availability of new credit facilities and require more collateral and higher pricing upon renewal or increase of existing credit facilities, if such facilities are renewed at all.

Other than the Loan Agreement, we do not have any significant available credit, bank financing or other external sources of liquidity. We may need to raise additional capital in the future to fund our working capital requirements, open additional studios, to facilitate long-term expansion, to respond to competitive pressures or to respond to unanticipated financial requirements. The amount of financing that we will require for these efforts will vary depending on our financial results, our ability to generate cash from internal operations,planned catalog mailings and the number of pages per catalog, delayed implementation of a new ERP system, renegotiated certain support contracts related to software maintenance and speedtelecommunications, and lowered outside contractor fees as well as headcount in all areas of the Company. We reduced expenses by approximately $3 million in the first quarter 2009 and expect reduced expenses of approximately $15 million in the remainder of 2009 from the prior comparable periods in 2008. We also reduced inventory levels significantly from year-end 2008 levels to generate additional liquidity. However, if we fail to generate sales and margins at which we openlevels currently forecasted or do not obtain additional studios. Theredebt or equity financing, it is no assuranceunlikely that we will be able to raisemaintain sufficient liquidity to continue as a going concern.

Wells Fargo may demand repayment of the additional capital required to meet our objectives. Our access to additional financing will depend on a variety of factors such as market conditions, the general availabilityline of credit or take assets secured by our borrowing.

We are currently in compliance with all of our debt covenants. If Wells Fargo increases reserves or reduces the volumeadvance rate due on our credit line by a material amount and we are unable to reduce outstanding borrowings to the reduced level of trading activities,availability, or an event of default occurs, there can be no assurance that Wells Fargo will not demand repayment of the overall availabilityline of credit toor take assets secured by our industry, our credit ratings and credit capacity, as well as the possibility that customers or lenders could develop a negative perception of our long- or short-term financial prospects. Our financial circumstances at the time of any future financing transaction may make the terms, conditions and cost of any available capital relatively unfavorable. If additional debt or equity capital is not readily available, we will be forced to scale back, or fail to address opportunities for expansion or enhancement of, our operations.borrowing.

Our process of exploring strategic alternatives may not be successful.

In February 2009, we announced the engagement of Thomas Weisel Partners LLC, an investment banking firm, to assist in the review of strategic alternatives, including advice related to an unsolicited offer we recently received. In the review process, an independent committee of the board has been and will continue to consider a full range of possible alternatives, including, among other things, a possible sale, merger, strategic partnership or refinancing. We currently have no commitments or agreements with respect to any particular transaction, and there can be no assurance that our review of strategic alternatives will result in any transaction.

None.

None.

None.

None.

Item 6.

Exhibits

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.

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