DESIGN WITHIN REACHANNUAL REPORT 2010

2009 DESIGN WITHIN REACH ANNUAL 2010

There's a

sort of a parable I'd like to . . . In India . . . I guess it's a

parable: In India, sort of the lowest, the poorest, the, those, those without and the

lowest in caste, eat very often--particularly in southern India--they eat off of a banana leaf. And

those a little bit up the scale, eat off of a sort of a un . . . a low-fired ceramic dish. And a little bit

higher, why, they have a glaze on--a thing they call a "tali"--they use a banana leaf and then the ceramic

as a tali upon which they put all the food. And there get to be some fairly elegant glazed talis, but it

graduates to--if you're up the scale a little bit more--why, a brass tali, and a bell-bronze tali is

absolutely marvelous, it has a sort of a ring to it.And then things get to be a little

questionable. There are things like silver-plated taliand there are solid silver talis and I

suppose some nut has had a gold tali that he's eaten off of, but I've never seen one. But you

can go beyond t hat and the guys that have not only means, but a certain a mount of

knowledge and understanding, go the next step and they eat off of a b anana leaf.And I

think that in these times when we fall back and regroup, that somehow or other,

the banana leaf p arable sort of got to get working there, b ecause I'm not

prepared to say that the banana leaf that one eats off of is the same as the other eats off of, but it's

that process that has happened within the man that changes the banana leaf.And as we attack

these problems--and I hope and I expect that the total amount of energy used in this

world is going to go from high to medium to a little bit lower--the banana

leaf idea might have a great part in it. - Charles Eames,

4introduction

9 our values

15financials

contents

fronting a new eraA WORD FROM A FRESH FACE

JOHN EDELMAN, CEO

Welcome back to the DWR world. I have been on the job since January, and I’m so excited about our beautiful

company. For the past 11 years, I have been a fan of DWR just like you. I have purchased Bubble lamps,

lounge chairs, a fire pit, a bottle opener...you get the idea.

Let’s take a step back. About 15 years ago I met a 6’2” beauty named Bonnie. We both lived in New

York City and my older brother Sam set us up on a blind date. She was in fashion and I worked for my

brother at Sam & Libby, where John McPhee worked as well. On one of my first dates with Bonnie,

we went to the 26th Street flea market. Neither one of us knew what mid-century modern was, but

we fell in love with it. We also fell in love with each other. As passion seems to work, we got married

and started collecting. Bonnie has restraint, I don’t.

We became experts. We bought, sold and bartered. We did the same In France, Uruguay, Italy,

Mexico and any other place that we found ourselves. Back to passion. I did not expect that this

perfect storm of a life would lead me to become the CEO of one of the coolest companies around.

My closest friend, John McPhee is the COO and makes sure that we don’t make big mistakes, and

my wife makes sure that I stay true to a curated aesthetic.

The first thing McPhee and I did was meet our team at DWR. Not an easy task. In a nutshell, we

were blown away. This is an educated, devoted and passionate group—and they love DWR. They

have taught and motivated us. We could not have dreamed of a better team.

In the next few months, you will see refreshed Studios, new product and even art. Catalogs will be

bigger and our website will be more fun to shop. Some of our lost old friends are embracing us again, and

we welcome Flos, Modernica, Heller and Cherner back into our assortment. We are also working with new

designers to bring them Within Reach, and our mantra is “authentic, enduring and heirloom quality” as the

assortment of DWR exclusive items is curated and built.

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THE KEY THING IS SEEING EVERYTHING GROW,

SETTING OUT WITH A SMALL SKETCH AND

SEEING THE WHOLE AND THE DETAILS SPRING

TO LIFE. IT MAY SOUND AFFECTED, BUT IT IS

THE ACT OF CREATION ITSELF, AND IT IS EQUALLY

EXHILARATING WHETHER ONE IS WORKING ON A

TEASPOON OR A NATIONAL BANK

ARNE JACOBSON

framing our futureA PLAN OF GRAND DESIGN

DWR bringing design that was only available to designers—that

was a great idea. But we’ve done that. Now we’re going to

develop new products from top designers—we’d like to work

with people like Marc Newson, David Rockwell, Peter Marino.

Without exclusivity, you can’t make money. What DWR did in the

past, without aspiring for exclusivity, was they knocked off. But

there are ways to do things and have exclusivity that are profitable

and honorable. There are some forms from the 1950s and 1960s

that don’t have authorship—we can have fun with that. Charles

and Ray Eames got their big break at the Museum of Modern Art

in a design contest [the 1948 International Competition for Low-

Cost Furniture] and then started working with George Nelson and

Herman Miller.

I’ve reached out to some designers I adore, and they’re going to

do some work for us. It’s not going to happen as quickly as I would

like, but we might have some things available in May—that’s turbo

rocket-fueling your engines in this business.

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holding on to qualityFURNISHING A HERITAGE OF EXCELLENCE

Design Within Reach is your source for the best in modern design, from iconic mid-

century works to innovative items designed today. We sell clean and simple furniture

and accessories, representing designers, materials and processes that span

categories and countries. Many of the items in our assortment are contract quality,

and are used in restaurants, hotels and schools around the world.

Our business started when founder Rob Forbes tried to furnish his apartment

with the clean, simple classics he’d come to appreciate while living in London. He

discovered that the work of designers like Saarinen, Eames and Bertoia were “out

of reach” of anyone who did not know the secret handshake or have the patience to

wait months for delivery.

There had to be a better way, so in 1999 we bought 20 containers of product,

mailed out a catalog and waited for the phone to ring. (It didn’t for 24 hours, until

we realized the nighttime answering machine had been accidentally left on.) The

rest, as they say, is history. By giving customers access to these items, which are

brilliantly conceived, simply executed and consistent with the enduring principles of

modernism, we made design within reach.

Authenticity is something we’re proud to offer; elitism however is not. Visit any

of our Studios and you’ll never see a “do not touch” sign. We invite you to linger,

bring your dog or kids and join us for design events. Continue the experience here,

at dwr.com, where you’ll find everything we carry, plus additional finishes and styles

not shown in our catalogs or Studios. And, of course, you can always call or Chat

Live with our Connecticut-based office.

Whether you experience DWR by Studio, phone or online, you’ll receive

knowledgeable assistance from people who come from design backgrounds. At

DWR, we’re passionate about design. Welcome to Design Within Reach.

At DWR, we really believe that the direction the world seems to be headed in

is a good one. Owning things that are not disposable, having a real appreciation for

quality and functionality, and maintaining a respect for value — as we all gain a greater

understanding of how our planet works, these ideals come to be even more critical.

Here at DWR we are working every day to do our part. Our product offering is

reviewed constantly to see if it is truly functional, timeless and made at a quality level

that will provide several lifetimes of enjoyment. In addition, we are looking for better ways

to manufacture, sourcing materials and processes that do not harm the environment,

and choosing resources closer to home to reduce the amount of fossil fuel used to move

a sofa from factory to you.

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USING A SIMPLE MATERIAL AND TRANSFORMING IT INTO SOMETHING

THAT NEVER NEEDS TO BE DISCARDED, A TIRELESS AND UNBREAKABLE

PIECE TO ENJOY FOR A LIFETIME. IT’S AN OBJECT YOU NEVER OWN,

YOU JUST USE IT FOR A WHILE UNTIL IT’S THE NEXT PERSON’S TURN.

PHILLIP STARK

passing on our valuesSHARING IN A WEALTH OF TASTE

shaping our design community EXTENDING OUR AESTHETIC REACH

You see, we sell furniture that is made to last and was designed along this

same “ethos.” DWR is based upon the tenets of modernism, not modern and

definitely not moderne (don’t even get me started). That means we believe in

simple, well-designed objects that enrich your life and last a lifetime, the stuff

that was in the house I grew up in, much of which is still in use in my home

today. This got me thinking about the real value of these things and I began

to research vintage pieces of some of our core products.

Today almost 90% of our upholstery products are made in America.

We will continue to move manufacturing to North America over the next few

years, and believe that we may be able to have over 90% of everything we

offer resourced here. We hope all of you are doing the same in your everyday

lives. Shopping closer to home, reusing bags, riding a bike instead of driving

everywhere and buying things you need that will offer you years of enjoyment,

not disposable products that will wind up in the dump. We have all had too

much of that. Please be sure to let us know what you think and share any

ideas you have on how we can all live more responsibly.

THE PELICAN CHAIR, BY FINN JUHL

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AMOUNTS IN MILLIONS

2006 2007 2009

287

267

290

242

235

230

236

222

215

203

245

230

345

2005 2008 DWR financials

EARNINGS JANUARY 2005 THROUGH DECEMBER 2009

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 retailer of distinctive modern

design products. The Company markets and sells its products to both

residential and commercial customers through three integrated sales

points consisting of studios, website and phone. The Company sells its

products directly to customers principally throughout the United States.

The Company opened its first international studio in Canada in the first

quarter 2008.

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 four to six years. The Company’s 2008, 2007 and 2006 fiscal years

ended on January 3, 2009, December 29, 2007 and December 30, 2006,

respectively. Fiscal year 2008 consisted of 53 weeks, and each of fiscal

years 2007 and 2006 consisted of 52 weeks.

BASIS OF PRESENTATION

These financial statements are prepared in conformity with accounting

principles generally accepted in the United States of America, which

contemplate continuation of the Company as a going concern. However,

the Company has sustained substantial losses from operations in recent

years and has used cash in operations during 2008. During the latter part

of 2008, the economic downturn impacted the Company’s operations,

resulting in lower sales and higher losses than expected.

In view of the matters described in the preceding paragraph,

the going concern of the Company is dependent upon generating

sales at forecasted levels. The financial statements do not include any

adjustments relating to the recoverability and classification of recorded

asset amounts and classification of liabilities that might be necessary

should the Company be unable to continue in existence.

In response to lower sales following the economic downturn and

subsequent loss from operations in 2008, the Company in January 2009

undertook several initiatives to lower its expenses to better match the

forecasted reduction in revenues and improve liquidity. Management

has taken the following steps, which it believes are sufficient to provide

the Company with the ability to continue in existence. The Company

restructured certain real estate lease contracts, reduced marketing and

catalog expenses mainly with fewer planned catalog mailings and fewer

pages, delayed implementation of a new ERP system, renegotiated

certain support contracts and lowered outside contractor fees as well

as headcount in all areas of the company. The total annualized reduction

in expenses is expected to be approximately $18 million (unaudited)

compared to 2008 levels. The Company also plans to reduce inventory

levels significantly from year-end 2008 levels to generate additional

liquidity. Although not anticipated, the Company will, as needed, further

reduce its anticipated level of expenditures to enable the Company to

meet its projected operating and capital requirements through December

2009.

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.

selected financial data FISCAL YEAR 2009-2010

statement of operations data

net sales

cost of sales

gross margin

selling, general and administrative expenses

income (loss) from operations

other income (expense), net

income (loss) before income taxes

income tax espense (benefit)

net income (loss) available to common stockholders

net income (loss) per share (3) basic

diluted

weighted average shares used to compute net income basic

diluted

balance sheet data

cash and cash equivalents

investments

working capital

total assets

income indebtedness

accumulated earnings (deficit)

total stockholders’ equity

2008 2007 2006 2005 2004

178,903

100,798

78,105

92,435

(14,330)

(238)

(14,568)

9,417

(23,985)

(1.66)

(1.66)

14,465

14,465

178,903

100,798

78,105

92,435

(14,330)

(238)

(14,568)

193,93

107,014

86,922

87,651

(729)

1,778

1,049

726

323

0.02

0.02

14,430

14,544

193,93

107,014

86,922

87,651

(729)

1,778

1,049

178,142

103,681

74,461

87,555

(13,094)

212

(12,882)

(4,593)

(8,289)

(0.58)

(0.58)

14,342

14,342

178,142

103,681

74,461

87,555

(13,094)

212

(12,882)

158,236

90,400

67,836

71,422

(3,586)

568

(3,018)

(949)

(2,069)

(0.15)

(0.15)

13,729

13,729

158,236

90,400

67,836

71,422

(3,586)

568

(3,018)

120,598

65,077

55,521

49,507

5,816

242

6,058

2,314

3,744

0.46

0.29

8,177

13,128

120,598

65,077

55,521

49,507

5,816

242

6,058

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The preparation of financial statements in conformity with U.S. GAAP 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. Actual results could differ from those estimates and such differences could affect the results of operations reported in future periods.

CASH AND CASH EQUIVALENTS

The Company considers all highly liquid investments with an original maturity of three months or less when purchased to be cash

equivalents. Cash and cash equivalents primarily consists of cash and money market funds stated at cost, which approximates

fair value (Note 2).

ACCOUNTS RECEIVABLE

Accounts receivable consists of amounts due from major credit card companies that are generally collected within one to five days

after the customer’s credit card is charged and receivables due from commercial customers due within 30 days of the invoice date.

Amounts due from customers net of allowance for doubtful accounts were $1,457,000 and $543,000 as of January 3, 2009 and

December 29, 2007, respectively. Accounts receivable also includes other receivables primarily due from vendors. The Company

estimates its allowance for doubtful accounts by considering a number of factors, including the length of time accounts receivable

are past due and the Company’s previous loss history. The following table presents activities in the allowance for doubtful accounts:

CONCENTRATIONS OF CREDIT RISK

Financial instruments that potentially subject the Company to a

concentration of credit risk consist of cash, cash equivalents and

accounts receivable. Cash and cash equivalents are deposited with

financial institutions. The Company’s cash balances at financial

institutions of $8,684,000 as of January 3, 2009 are not insured except

for approximately $250,000 that is insured by the Federal Deposit

Insurance Corporation. The Company has not experienced any losses in

such accounts and believes it is not exposed to any significant credit risk

on cash and cash equivalents. Cash includes amounts held in Canadian

currency of US$514,000 as of January 3, 2009 that is subject to the risk

of exchange rate fluctuations.

INVENTORY

Inventory consists of finished goods purchased from third-party

manufacturers and estimated inbound freight costs. Inventory on hand

is carried at the lower of cost or market. Cost is determined using the

average cost method. The Company writes down inventory below cost

to the estimated market value when necessary, based upon assumptions

about future demand and market conditions.

Total inventory includes inventory-in-transit that consists primarily

of finished goods purchased from third-party manufacturers that

are in-transit from the vendor to the Company when terms are FOB

shipping point and estimated inbound freight costs. Inventory-in-transit

also includes those goods that are in-transit from the Company to its

customers. Inventory-in-transit is carried at cost.

VENDOR CONCENTRATION

During 2008, 2007 and 2006, product inventories supplied by one vendor

constituted approximately 16.5%, 13.4% and 16.8% of total purchases,

respectively, while product inventories supplied by the Company’s top

five vendors constituted approximately 43.1%, 35.6% and 33.8% of total

purchases, respectively. In 2008, the Company purchased approximately

25% of its product inventories in Euro-denominated transactions that

were subject to the risk of exchange rate fluctuations.

PROPERTY AND EQUIPMENT

Property and equipment are stated at cost and depreciated using

the straight-line method over the assets’ estimated useful lives.

Construction-in-progress, consisting primarily of computer software and

leasehold improvements, is not depreciated until it is placed in service.

Construction-in-progress as of January 3, 2009 consisted primarily of

computer software related to new information technology systems of

approximately $2,540,000. In January 2009 the Company deferred

the implementation of new information technology systems because of

the recession, but believes that the implementation is probable within

a reasonable timeframe. The Company currently plans to resume

implementation when sales increase and cash flow becomes available.

Should the Company ultimately not resume implementation within

a reasonable timeframe, these assets may be subject to impairment.

Costs of maintenance and repairs are charged to expense as incurred.

Significant renewals and betterments are capitalized. Estimated useful

lives are as follows:

COMPUTER EQUIPMENT AND SOFTWARE

18 months - 5 years

FURNITURE AND EQUIPMENT

5 years

CAPITALIZED EQUIPMENT LEASES

Life of lease

LEASEHOLD IMPROVEMENTS

10 years or remaining life of lease, whichever is shorter

The Company receives construction allowances from landlords

for tenant improvements under many of its lease agreements. Each

construction allowance is deferred and amortized on a straight-line basis

over the life of the lease as a reduction of rent expense.

DEFERRED RENT AND LEASE INCENTIVES

The Company’s operating leases typically contain free rent periods,

reimbursements for the cost of leasehold improvement construction and

predetermined fixed increases of minimum rental rates during the lease

term. For these leases, the Company recognizes rental expense on a

straight-line basis over the minimum lease term and records the difference

2008 264 56 164

384 (120) 264

253 131 384

2007

2006

FISCAL YEAR (amount in thousands)

BEGINNING BALANCE CHARGED/ (CREDITED)

TOOPERATIONS

RESERVE REDUCTION DUE TO

WRITE-OFFS

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between the amounts charged to expense and the rent paid as deferred

rent and lease incentives.

REVENUE RECOGNITION

Significant management judgments and estimates must be made

and used in connection with determining net sales recognized in any

accounting period. The Company recognizes revenue on the date on

which it estimates that the product has been received by the customer

and retains title to items and bears the risk of loss of shipments until

delivery to its customers. The Company recognizes shipping and handling

fees charged to customers in net sales at the time products are estimated

to have been received by customers. The Company recognizes revenue

gross in accordance with Emerging Issues Task Force (“EITF”) 99-19,

Reporting Revenue Gross as a Principal versus Net as an Agent because

it bears the risk of loss until delivery to customers. The Company uses

third-party freight carrier information to estimate standard delivery times

to various locations throughout the United States and Canada. The

Company records as deferred revenue the dollar amount of all shipments

for a particular day, if based upon the Company’s estimated delivery

time, such shipments, on average, are expected to be delivered after the

end of the reporting period. As of January 3, 2009 and December 29,

2007, deferred revenue was $1,162,000 and $325,000, respectively, and

related deferred cost of sales was $572,000 and $173,000, respectively.

Sales are recorded net of expected product returns by customers.

The Company analyzes historical returns, current economic trends,

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.

Various governmental authorities directly impose taxes on sales

including sales, use, value added and some excise taxes. The Company

excludes such taxes from net sales. The Company accounts for gift cards

by recognizing a liability at the time a gift card is sold, and recognizing

revenue at the time the gift card is redeemed for merchandise. Promotion

gift cards, issued as part of a sales transaction, are recorded as a

reduction in sales for the value of the gift card.

SHIPPING AND HANDLING COSTS

Shipping costs, which include inbound and outbound freight costs,

are included in cost of sales. The Company records costs of shipping

products to customers in 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 approximately $9,006,000, $9,200,000 and $9,813,000 in 2008,

2007, and 2006, respectively.

STUDIO PRE-OPENING COSTS

Studio pre-opening costs are expensed as they are incurred.

STOCK-BASED COMPENSATION

The Company accounts for stock-based compensation under Statement

of Financial Accounting Standards (“FAS”) No. 123R, Share-Based

Payment (“FAS 123R”). Stock-based compensation expense was

$1,458,000, $2,272,000 and $1,926,000 in 2008, 2007 and 2006,

respectively. No income tax benefit was recognized in 2008 for stock-

based compensation arrangements because of the valuation allowance.

Total income tax benefit recognized in the statements of operations for

stock-based compensation arrangements was approximately $508,000

and $400,000 in 2007 and 2006, respectively. The Company accounts

for equity instruments issued to non-employees in accordance with the

provisions of FAS 123R and related EITF 96-18.

In 2008, the Company used its historical volatility rate since going

public in July 2004, as management believes this is a sufficient period

to calculate historical volatility. In 2006 and 2007, the Company used a

blended volatility rate using a combination of historical stock prices of the

Company and volatility data from four publicly traded retail industry peers

due to the relatively short period since the Company’s initial public offering.

The risk-free interest rate assumption is based upon the closing rates on

the grant date for U.S. treasury notes that have a life that approximates

the expected life of the option. The dividend yield assumption is based

on the Company’s history and expectation of dividend payouts. The

07193,936

06 178,142

04

05

158,236

120,598

08178,903

net sales (2004-2008)IN THOUSANDS

90,400 05

cost of sales (2004-2008)IN THOUSANDS

07107,014

06103,681

08100,798

04 65,077

NET SALES PERCENTAGES

The following table represents our sales throughout the last

year. These financial statements are prepared in conformity with

accounting principles generally accepted in the United States of

America, which contemplate continuation of the Company as a

going concern.

However, the Company has sustained substantial losses from

operations in recent years and has used cash in operations during

2008. During the latter part of 2008, the economic downturn

impacted the Company’s operations, resulting in lower sales and

higher losses than expected.

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In the first nine months of 2008 and all of 2007, prepaid catalog costs were amortized over

their expected period of future benefit of approximately four months in accordance with

SOP 93-7, based upon weighted-average historical revenues attributed to previously issued

catalogs. In the fourth quarter 2008, prepaid catalog costs were expensed upon publication

since the Company no longer adequately tracked the required information required by SOP

93-7, resulting in approximately $1,140,000 of increased catalog expense in 2008 and

$1,140,000 reduction of prepaid catalog costs at January 3, 2009.

Prepaid catalog costs of $708,000 as of January 3, 2009 were for the costs of catalogs to be

distributed in 2009. Prepaid catalog costs of $2,101,000 as of December 29, 2007 included

direct response catalog costs distributed in 2007 and amortized in 2008 of $1,040,000,

and the costs of catalogs to be distributed in 2008 of $1,061,000. Prepaid catalog costs

are evaluated for realizability at the end of each reporting period. If the carrying amount

associated with each catalog is in excess of the estimated probable remaining future net

benefit associated with that catalog, the excess is expensed in the current reporting period.

The Company donated merchandise to third parties for advertising purposes. These

donations were $56,000, $30,000 and $92,000 in 2008, 2007 and 2006, respectively. The

Company accounts for consideration received from its vendors for co-operative advertising

as a reduction of selling, general and administrative expense. Co-operative advertising

amounts earned by the Company were $835,000, $666,000 and $514,000 in 2008, 2007

and 2006, respectively. Advertising and promotion expenses, including catalog expense, net

of co-operative advertising, were $13,972,000, $9,892,000 and $10,623,000 in 2008, 2007

and 2006, respectively.

Apart from amounts received from vendors for cooperative advertising, the Company

does not typically receive allowances or credits from vendors. In the case of a few select

vendors, the Company receives a small discount of approximately 2% for prompt payment

of invoices. These discounts were recorded as a reduction of costs of sales and totaled

$230,000, $184,000 and $128,000 in 2008, 2007 and 2006, respectively.

IMPAIRMENT OF LONG-LIVED ASSETS

The Company evaluates the recoverability of its long-lived assets in accordance with

FAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (“FAS 144”).

Long-lived assets are reviewed for possible impairment whenever events

or circumstances indicate that the carrying amount of such assets may

not be recoverable. If such review indicates that the carrying amount of

long-lived assets is not recoverable, the carrying amount of such assets is

reduced to fair value. Management considers the following circumstances

and events to assess the recoverability of carrying amounts: 1) a significant

adverse change in the extent or manner in which long-lived assets are

being used or in their physical condition, 2) an accumulation of costs

significantly in excess of the amount originally expected for the acquisition

or construction of a long-lived asset, 3) a current-period operating or cash

flow loss combined with a history of operating or cash flow losses or

a projection or forecast that demonstrates continuing losses associated

with the use of a long-lived asset, and 4) a current expectation that, more

likely than not, the long-lived asset will be sold or otherwise disposed of

significantly before the end of its previously estimated useful life. If the

undiscounted future cash flows from the long-lived assets are less than

the carrying value, a loss is recognized equal to the difference between

the carrying value and the fair value of the assets.

Decisions to close a studio or facility also can result in accelerated

depreciation over the revised useful life. When the Company closes a

location that is under a long-term lease, the Company records a charge

for the fair value of the liability associated with that lease at the cease-use

date. The fair value of such liability is calculated based on the remaining

lease rental payments due under the lease, reduced by estimated

rental payments that could be reasonably obtained by the Company for

subleasing the property to a third party. The estimate of future cash flows

is based on the Company’s experience, knowledge and typically third-

party advice or market data. However, these estimates can be affected

by factors such as future studio profitability, real estate demand and

economic conditions that can be difficult to predict.

On October 10, 2008, the Company closed its Las Vegas studio.

The related leasehold improvements with a net cost of $94,000 were

deemed impaired. An impairment charge of $94,000 was recorded in

selling, general and administrative expenses.

75

15NET SALES PERCENTAGES

The following table represents our sales

throughout the last year. These financial

statements are prepared in conformity with

accounting principles generally accepted in the

United States of America, which contemplate

continuation of the Company as a going concern.

However, the Company has sustained substantial

losses from operations in recent years and has

used cash in operations during 2008.

During the latter part of 2008, the economic

downturn impacted the Company’s operations,

resulting in lower sales and higher losses than

expected.

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