10-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

(Mark One):

x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

          For the fiscal year ended February 1, 2009.

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 001-14077

WILLIAMS-SONOMA, INC.

(Exact name of registrant as specified in its charter)

California	94-2203880
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
3250 Van Ness Avenue, San Francisco, CA	94109
(Address of principal executive offices)	(Zip Code)

Registrant’s telephone number, including area code: (415) 421-7900

Securities registered pursuant to Section 12(b) of the Act:

Common Stock, $.01 par value	New York Stock Exchange, Inc.
(Title of class)	(Name of each exchange on which registered)

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes  x    No  ¨

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.   Yes  ¨    No  x

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.   Yes  x    No  ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  x

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer  x    Accelerated filer  ¨    Non-accelerated filer  ¨    (Do not check if a smaller reporting company) Smaller Reporting Company  ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes  ¨    No  x

As of August 3, 2008, the approximate aggregate market value of the registrant’s common stock held by non-affiliates was $1,701,990,000. It is assumed for purposes of this computation that an affiliate includes all persons as of August 3, 2008 listed as executive officers and directors with the Securities and Exchange Commission. This aggregate market value includes all shares held in the registrant’s Williams-Sonoma, Inc. Stock Fund.

As of March 27, 2009, 105,684,660 shares of the registrant’s common stock were outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of our definitive Proxy Statement for the 2009 Annual Meeting of Shareholders, also referred to in this Annual Report on Form 10-K as our Proxy Statement, which will be filed with the Securities and Exchange Commission, or SEC, have been incorporated in Part III hereof, and portions of our 2008 Annual Report to shareholders have been incorporated in Part II hereof.

FORWARD-LOOKING STATEMENTS

This Annual Report on Form 10-K and the letter to shareholders contained in this Annual Report contain forward-looking statements within the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995 that involve risks and uncertainties, as well as assumptions that, if they do not fully materialize or prove incorrect, could cause our business and operating results to differ materially from those expressed or implied by such forward-looking statements. Such forward-looking statements include, without limitation: any projections of earnings, revenues or financial items, including future comparable store sales, projected capital expenditures, the impact of new accounting pronouncements, and our quarterly and fiscal 2009 tax rates; statements related to enhancing shareholder value; statements related to the long-term growth potential of the PBteen brand; statements related to the plans, strategies, and objectives of management for future operations, including our key initiatives in fiscal 2009; statements related to optimizing our brand positioning, including evolving our merchandise assortment, placing a greater emphasis on price points and the value proposition, and making superior customer service our top priority; statements related to optimizing our marketing strategies, including continuing our catalog optimization strategy, shifting advertising dollars from catalog to e-commerce, and continuing to identify new opportunities to build brand awareness and customer engagement; statements relating to improving profitability, including our $75,000,000 cost reduction program, our plan to realize increased productivity from our catalog circulation optimization strategy, and an increase in our selling gross margin; statements related to strengthening our balance sheet, including optimizing cash flow through aggressive inventory management and lower capital spending; statements related to our plans regarding retail leased square footage, including the opening of new retail stores, the expansion or remodeling of additional stores, and the potential closing of stores; statements related to our use of available cash, including statements related to the payment of dividends; statements related to our compliance with our bank covenants; statements related to indemnifications under our agreements; statements related to legal proceedings; and statements of belief and statements of assumptions underlying any of the foregoing. You can identify these and other forward-looking statements by the use of words such as “will,” “may,” “should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “intends,” “potential,” “continue,” or the negative of such terms, or other comparable terminology.

The risks, uncertainties and assumptions referred to above that could cause our results to differ materially from the results expressed or implied by such forward-looking statements include, but are not limited to, those discussed under the heading “Risk Factors” in Item 1A hereto and the risks, uncertainties and assumptions discussed from time to time in our other public filings and public announcements. All forward-looking statements included in this document are based on information available to us as of the date hereof, and we assume no obligation to update these forward-looking statements.

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WILLIAMS-SONOMA, INC.

ANNUAL REPORT ON FORM 10-K

FISCAL YEAR ENDED FEBRUARY 1, 2009

TABLE OF CONTENTS

		PAGE
	PART I
Item 1.	Business	3
Item 1A.	Risk Factors	6
Item 1B.	Unresolved Staff Comments	17
Item 2.	Properties	17
Item 3.	Legal Proceedings	19
Item 4.	Submission of Matters to a Vote of Security Holders	19
	PART II
Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	20
Item 6.	Selected Financial Data	23
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	24
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	42
Item 8.	Financial Statements and Supplementary Data	43
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	69
Item 9A.	Controls and Procedures	69
Item 9B.	Other Information	70
	PART III
Item 10.	Directors, Executive Officers and Corporate Governance	71
Item 11.	Executive Compensation	71
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	71
Item 13.	Certain Relationships and Related Transactions and Director Independence	71
Item 14.	Principal Accountant Fees and Services	71
	PART IV
Item 15.	Exhibits and Financial Statement Schedules	72

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PART I

ITEM 1.  BUSINESS

OVERVIEW

We are a specialty retailer of products for the home. The retail segment of our business sells our products through our five retail store concepts (Williams-Sonoma, Pottery Barn, Pottery Barn Kids, West Elm and Williams-Sonoma Home). The direct-to-customer segment of our business sells similar products through our seven direct-mail catalogs (Williams-Sonoma, Pottery Barn, Pottery Barn Kids, Pottery Barn Bed and Bath, PBteen, West Elm and Williams-Sonoma Home) and six e-commerce websites (williams-sonoma.com, potterybarn.com, potterybarnkids.com, pbteen.com, westelm.com and wshome.com). The catalogs reach customers throughout the U.S., while the five retail concepts, as of February 1, 2009, operated 627 stores in 44 states, Washington, D.C., Canada and Puerto Rico.

Based on net revenues in fiscal 2008, retail net revenues accounted for 58.4% of our business and direct-to-customer net revenues accounted for 41.6% of our business. Based on their contribution to our net revenues in fiscal 2008, the core brands in both the retail and direct-to-customer channels are: Pottery Barn, which sells casual home furnishings; Williams-Sonoma, which sells cooking and entertaining essentials; and Pottery Barn Kids, which sells stylish children’s furnishings.

Williams-Sonoma

We were founded in 1956 by Charles E. Williams, currently a Director Emeritus, with the opening of our first store in Sonoma, California. Today, our Williams-Sonoma stores offer a wide selection of culinary and serving equipment, including cookware, cookbooks, cutlery, informal dinnerware, glassware, table linens, specialty foods and cooking ingredients. Our direct-to-customer business began in 1972 when we introduced our flagship catalog, “A Catalog for Cooks,” which marketed the Williams-Sonoma brand. The stores continued to grow throughout the years and in 1999, we launched both our Williams-Sonoma e-commerce website and our Williams-Sonoma bridal and gift registry.

Pottery Barn

In 1986, we acquired Pottery Barn, a retailer of casual home furnishings and, in 1987, we launched the first Pottery Barn catalog. Pottery Barn features a large assortment of home furnishings and furniture that we design internally and source from around the world to create a classic american look in the home. In 2000, we introduced our Pottery Barn e-commerce website and created Pottery Barn Bed and Bath, a catalog dedicated to bed and bath products. Additionally, in 2001 we launched our Pottery Barn gift and bridal registry.

Pottery Barn Kids

In 1999, Pottery Barn Kids, a premier retailer offering children’s furnishings and accessories, began with the introduction of the Pottery Barn Kids catalog. In 2000, we opened our first Pottery Barn Kids stores across the U.S. and in 2001 we launched our Pottery Barn Kids e-commerce website and gift registry.

West Elm

In 2002, the West Elm brand was launched with the mailing of our first West Elm catalog. This brand targets design conscious consumers looking for a modern aesthetic to furnish and accessorize their living spaces with quality products at accessible price points. West Elm offers a broad range of home furnishing categories including furniture, textiles, decorative accessories, lighting and tabletop items. In 2003, we launched our West Elm e-commerce website and opened our first West Elm retail store in Brooklyn, New York.

PBteen

The PBteen brand began with the introduction of the PBteen catalog in 2003. PBteen offers exclusive collections of home furnishings and decorative accessories that are specifically designed to reflect the personalities of the teenage market. In late 2003, we launched our PBteen e-commerce website.

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Williams-Sonoma Home

In 2004, the Williams-Sonoma Home brand was started with the introduction of the Williams-Sonoma Home catalog. This premium brand, offering classic home furnishings and decorative accessories, extends the Williams-Sonoma lifestyle beyond the kitchen into every room of the home. In 2005, we opened our first three Williams-Sonoma Home stores and, in 2006, we launched our Williams-Sonoma Home e-commerce website.

Canada and Puerto Rico

In 2001, we expanded the geographic impact of our brands by opening five new retail stores in Toronto, Canada and as of February 1, 2009, now operate 16 stores across Canada representing all of our brands except Williams-Sonoma Home. In fiscal 2008, we further increased our presence by opening two new retail stores in Puerto Rico, one Pottery Barn and one West Elm store, and the response thus far has been positive.

RETAIL STORES

The retail segment has five merchandising concepts (Williams-Sonoma, Pottery Barn, Pottery Barn Kids, West Elm and Williams-Sonoma Home). As of February 1, 2009, we operated 627 retail stores, located in 44 states, Washington, D.C., Canada and Puerto Rico. This represents 264 Williams-Sonoma, 204 Pottery Barn, 95 Pottery Barn Kids, 36 West Elm, 10 Williams-Sonoma Home and 18 Outlet stores, which carry merchandise from all merchandising concepts.

In fiscal 2009, we expect to increase retail leased square footage by approximately 1% through the addition of 15 new stores, including 8 new stores (4 West Elm, 1 Pottery Barn, 1 Williams-Sonoma, 1 Pottery Barn Kids and 1 Williams-Sonoma Home) and 7 remodeled or expanded stores (4 Pottery Barn, 2 Williams-Sonoma and 1 Pottery Barn Kids), partially offset by the permanent closure of 7 stores (3 Pottery Barn, 2 Williams-Sonoma and 2 Pottery Barn Kids) and the temporary closure of 7 stores (4 Pottery Barn, 2 Williams-Sonoma and 1 Pottery Barn Kids). The average leased square footage for new and expanded stores in fiscal 2009 will be approximately 17,300 leased square feet for West Elm, 16,900 leased square feet for Pottery Barn, 13,000 leased square feet for Williams-Sonoma Home, 6,500 leased square feet for Pottery Barn Kids and 5,400 leased square feet for Williams-Sonoma. Although we expect to increase our retail leased squared footage in fiscal 2009, we will continue to evaluate opportunities to close any underperforming retail stores.

The retail business complements the direct-to-customer business by building brand awareness. Our retail stores serve as billboards for our brands, which we believe inspires confidence in our customers to shop via our direct-to-customer channels.

Detailed financial information about the retail segment is found in Note O to our Consolidated Financial Statements.

DIRECT-TO-CUSTOMER OPERATIONS

The direct-to-customer segment has six merchandising concepts (Williams-Sonoma, Pottery Barn, Pottery Barn Kids, PBteen, West Elm and Williams-Sonoma Home) and sells products through our seven direct-mail catalogs (Williams-Sonoma, Pottery Barn, Pottery Barn Kids, Pottery Barn Bed and Bath, PBteen, West Elm and Williams-Sonoma Home) and six e-commerce websites (williams-sonoma.com, potterybarn.com, potterybarnkids.com, pbteen.com, westelm.com and wshome.com). Of these six merchandising concepts, the Pottery Barn brand and its extensions continue to be the major source of revenue in the direct-to-customer segment.

The direct-to-customer channel over the past several years has been strengthened by the introduction of e-commerce websites in all of our core brands and the launching of our newest brands: West Elm, PBteen and Williams-Sonoma Home. Although the amount of e-commerce revenues that are incremental to our direct-to-customer channel cannot be identified precisely, we estimate that approximately 40% of our company-wide non-gift registry Internet revenues are incremental to the direct-to-customer channel and approximately 60% are driven by customers who recently received a catalog. We do, however, expect to see this percentage begin to decrease as we continue to reduce our catalog advertising costs and increase our investment in other internet marketing vehicles, in conjunction with our catalog circulation optimization strategy.

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Consistent with our published privacy policies, we send our catalogs to addresses from our proprietary customer list, as well as to addresses from lists of other mail order merchandisers, magazines and companies with whom we establish a business relationship. In accordance with prevailing industry practice and our privacy policies, we primarily rent our list to select merchandisers. Our customer mailings are continually updated to include new prospects and to eliminate non-responders.

The direct-to-customer business complements the retail business by building brand awareness and acting as an effective advertising vehicle. In addition, we believe that our direct-mail catalogs and the Internet act as a cost-efficient means of testing market acceptance of new products and new brands.

Detailed financial information about the direct-to-customer segment is found in Note O to our Consolidated Financial Statements.

SUPPLIERS

We purchase our merchandise from numerous foreign and domestic manufacturers and importers, the largest of which accounted for approximately 4.7% of our purchases during fiscal 2008. Approximately 59% of our merchandise purchases in fiscal 2008 were foreign-sourced from vendors in 42 countries, predominantly from Asia, of which approximately 95% were negotiated and paid for in U.S. dollars.

COMPETITION AND SEASONALITY

The specialty retail business is highly competitive. Our specialty retail stores, mail order catalogs and e-commerce websites compete with other retail stores, including large department stores, discount retailers, other specialty retailers offering home-centered assortments, other mail order catalogs and other e-commerce websites. The substantial sales growth in the direct-to-customer industry within the last decade has encouraged the entry of many new competitors and an increase in competition from established companies. In addition, the recent decline in the economic environment has generated increased competition from discount retailers which, in the past, may not have competed with us or to this degree. We compete on the basis of our brand authority, the quality of our merchandise, service to our customers and our proprietary customer list, as well as the location and appearance of our stores. We believe that we compare favorably with many of our current competitors with respect to some or all of these factors.

Our business is subject to substantial seasonal variations in demand. Historically, a significant portion of our net revenues and net earnings have been realized during the period from October through December, and levels of net revenues and net earnings have generally been lower during the period from January through September. We believe this is the general pattern associated with the direct-to-customer and retail industries. In anticipation of our peak season, we hire a substantial number of additional temporary employees in our retail stores, care centers and distribution centers, and incur significant fixed catalog production and mailing costs.

PATENTS, TRADEMARKS, COPYRIGHTS AND DOMAIN NAMES

We own and/or have applied to register over 50 separate trademarks and service marks. We own and/or have applied to register all of our marks in the U.S. and we have registered or applied to register our core marks in Canada and approximately 30 additional jurisdictions. Exclusive rights to the trademarks and service marks are held by Williams-Sonoma, Inc. and are used by our subsidiaries under license. These marks include the core brand names or house marks for our subsidiaries, as well as brand names for selected products and services. The house marks in particular, including “Williams-Sonoma,” the Williams-Sonoma Grande Cuisine logo, “Pottery Barn,” “pottery barn kids,” “PBteen,” “west elm” and “Williams-Sonoma Home” are of material importance to us. Trademarks are generally valid as long as they are in use and/or their registrations are properly maintained, and they have not been found to have become generic. Trademark registrations can generally be renewed indefinitely so long as the marks are in use. We own numerous copyrights and trade dress rights for our products, product packaging, catalogs, books, house publications, website designs and store designs, among other things, which are also used by our subsidiaries under license. We hold patents on certain product functions and product designs. Patents are generally valid for 20 years as long as their registrations are properly maintained. In addition,

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we have registered and maintain numerous Internet domain names, including “williams-sonoma.com,” “potterybarn.com,” “potterybarnkids.com,” “pbteen.com,” “westelm.com,” “wshome.com,” and “williams-sonomainc.com.” Collectively, the trademarks, copyrights, trade dress rights and domain names that we hold are of material importance to us.

EMPLOYEES

As of February 1, 2009, we had approximately 30,000 employees of whom, approximately 6,300 were full-time. During the fiscal 2008 peak season (defined as the period from October through December), we hired approximately 9,200 temporary employees in our retail stores, care centers and distribution centers. Our full-time headcount as of year-end has decreased in fiscal 2008 compared to fiscal 2007 by approximately 2,000 employees primarily due to an 18% reduction in company-wide full-time headcount (approximately 1,400 positions) during the fourth quarter associated with our infrastructure cost reduction initiative. See Note N to our Consolidated Financial Statements.

AVAILABLE INFORMATION

We file annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy and information statements and amendments to reports filed or furnished pursuant to Sections 13(a), 14 and 15(d) of the Securities Exchange Act of 1934, as amended. The public may read and copy these materials at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC also maintains a website at www.sec.gov that contains reports, proxy and information statements and other information regarding Williams-Sonoma, Inc. and other companies that file materials with the SEC electronically. You may also obtain copies of our annual reports, Forms 10-K, Forms 10-Q, Forms 8-K and proxy and information statements, free of charge, on our website at www.williams-sonomainc.com.

ITEM 1A.  RISK FACTORS

A description of the risks and uncertainties associated with our business is set forth below. You should carefully consider such risks and uncertainties, together with the other information contained in this report and in our other public filings. If any of such risks and uncertainties actually occurs, our business, financial condition or operating results could differ materially from the plans, projections and other forward-looking statements included in the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere in this report and in our other public filings. In addition, if any of the following risks and uncertainties, or if any other risks and uncertainties, actually occurs, our business, financial condition or operating results could be harmed substantially, which could cause the market price of our stock to decline, perhaps significantly.

The recent changes in general economic conditions, and the resulting impact on consumer confidence and consumer spending, could adversely impact our results of operations.

Our financial performance is subject to changes in general economic conditions and the impact of such economic conditions on levels of consumer confidence and consumer spending. Recently, consumer confidence and consumer spending have deteriorated significantly, and could remain depressed for an extended period of time. Consumer purchases of discretionary items, including our merchandise, generally decline during periods where disposable income is adversely affected, unemployment rates increase or there is economic uncertainty. The current economic environment could cause our vendors to go out of business or our banks to discontinue lending us money or it could cause us to undergo additional restructurings, any of which would adversely impact our business and operating results.

We are unable to control many of the factors affecting consumer spending, and declines in consumer spending on home furnishings in general could reduce demand for our products.

Our business depends on consumer demand for our products and, consequently, is sensitive to a number of factors that influence consumer spending, including general economic conditions, disposable consumer income,

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fuel prices, recession and fears of recession, unemployment, war and fears of war, inclement weather, availability of consumer credit, consumer debt levels, conditions in the housing market, interest rates, sales tax rates and rate increases, inflation, consumer confidence in future economic conditions and political conditions, and consumer perceptions of personal well-being and security. In particular, an economic downturn, such as the one we are in, has led to decreased discretionary spending, which has adversely impacted our business. In addition, a decrease in home purchases has led and may continue to lead to significantly decreased consumer spending on home products. These factors have affected our various brands and channels differently. Adverse changes in factors affecting discretionary consumer spending have reduced and may continue to further reduce consumer demand for our products, thus reducing our sales and harming our business and operating results.

If we are unable to identify and analyze factors affecting our business, anticipate changing consumer preferences and buying trends, and manage our inventory commensurate with customer demand, our sales levels and profit margin may decline.

Our success depends, in large part, upon our ability to identify and analyze factors affecting our business and to anticipate and respond in a timely manner to changing merchandise trends and customer demands. For example, in the specialty home products business, style and color trends are constantly evolving. Consumer preferences cannot be predicted with certainty and may change between selling seasons. Changes in customer preferences and buying trends may also affect our brands differently. We must be able to stay current with preferences and trends in our brands and address the customer tastes for each of our target customer demographics. We must also be able to identify and adjust the customer offerings in our brands to cater to customer demands. For example, a change in customer preferences for children’s room furnishings may not correlate to a similar change in buying trends for other home furnishings. If we misjudge either the market for our merchandise or our customers’ purchasing habits, our sales may decline significantly, and we may be required to mark down certain products to sell the resulting excess inventory or to sell such inventory through our outlet stores or other liquidation channels at prices which are significantly lower than our retail prices, either of which would negatively impact our business and operating results.

In addition, we must manage our inventory effectively and commensurate with customer demand. Much of our inventory is sourced from vendors located outside the United States. Thus, we usually must order merchandise, and enter into contracts for the purchase and manufacture of such merchandise, up to twelve months in advance of the applicable selling season and frequently before trends are known. The extended lead times for many of our purchases may make it difficult for us to respond rapidly to new or changing trends. Our vendors also may not have the capacity to handle our demands, or may go out of business in times of economic crisis. In addition, the seasonal nature of the specialty home products business requires us to carry a significant amount of inventory prior to peak selling season. As a result, we are vulnerable to demand and pricing shifts and to misjudgments in the selection and timing of merchandise purchases. If we do not accurately predict our customers’ preferences and acceptance levels of our products, our inventory levels will not be appropriate, and our business and operating results may be negatively impacted.

Our sales may be negatively impacted by increasing competition from companies with brands or products similar to ours.

The specialty retail and direct-to-customer business is highly competitive. Our specialty retail stores, direct mail catalogs and e-commerce websites compete with other retail stores, other direct mail catalogs and other e- commerce websites that market lines of merchandise similar to ours. We compete with national, regional and local businesses utilizing a similar retail store strategy, as well as traditional furniture stores, department stores and specialty stores. The substantial sales growth in the direct-to-customer industry within the last decade has encouraged the entry of many new competitors and an increase in competition from established companies. In addition, the decline in the global economic environment has led to increased competition from discount retailers selling similar products at reduced prices. The competitive challenges facing us include:

• anticipating and quickly responding to changing consumer demands or preferences better than our competitors;

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• maintaining favorable brand recognition and achieving customer perception of value;

• effectively marketing and competitively pricing our products to consumers in several diverse market segments;

• developing innovative, high-quality products in colors and styles that appeal to consumers of varying age groups and tastes, and in ways that favorably distinguish us from our competitors; and

• effectively managing our supply chain and distribution strategies in order to provide our products to our consumers on a timely basis and minimize returns, replacements, and damaged products.

In light of the many competitive challenges facing us, we may not be able to compete successfully. Increased competition could reduce our sales and harm our operating results and business.

We depend on key domestic and foreign agents and vendors for timely and effective sourcing of our merchandise, and we may not be able to acquire products in sufficient quantities and at acceptable prices to meet our needs which would impact our operations and financial results.

Our performance depends, in part, on our ability to purchase our merchandise in sufficient quantities at competitive prices. We purchase our merchandise from numerous foreign and domestic manufacturers and importers. We have no contractual assurances of continued supply, pricing or access to new products, and any vendor could change the terms upon which they sell to us, discontinue selling to us, or go out of business at any time. We may not be able to acquire desired merchandise in sufficient quantities on terms acceptable to us in the future. Better than expected sales demand may also lead to customer backorders and lower in-stock positions of our merchandise.

Any inability to acquire suitable merchandise on acceptable terms or the loss of one or more of our key agents or vendors could have a negative effect on our business and operating results because we would be missing products that we felt were important to our assortment, unless and until alternative supply arrangements are secured. We may not be able to develop relationships with new agents or vendors, and products from alternative sources, if any, may be of a lesser quality and/or more expensive than those we currently purchase.

In addition, we are subject to certain risks, including availability of raw materials, labor disputes, union organizing activities, vendor financial liquidity, inclement weather, natural disasters, and general economic and political conditions that could limit our vendors’ ability to provide us with quality merchandise on a timely basis and at a price that is commercially acceptable. For these or other reasons, one or more of our vendors might not adhere to our quality control standards, and we might not identify the deficiency before merchandise ships to our stores or customers. In addition, our vendors may have difficulty adjusting to our changing demands and growing business. Our vendors’ failure to manufacture or import quality merchandise in a timely and effective manner could damage our reputation and brands, and could lead to an increase in customer litigation against us and an attendant increase in our routine litigation costs. Further, any merchandise that does not meet our quality standards could become subject to a recall, which would damage our reputation and brands, and harm our business.

Our dependence on foreign vendors and our increased overseas operations subject us to a variety of risks and uncertainties that could impact our operations and financial results.

In fiscal 2008, we sourced our products from vendors in 42 countries outside of the United States. Approximately 59% of our merchandise purchases were foreign-sourced, predominantly from Asia. Our dependence on foreign vendors means that we may be affected by changes in the relative value of the U.S. dollar to other foreign currencies, as well as increases in the cost of living in the vendor’s local countries due to the economic slowdown. For example, any upward valuation in the Chinese yuan, the euro, or any other foreign currency against the U.S. dollar may result in higher costs to us for those goods. In addition, an increase in the cost of living in the foreign countries may result in an increase in our costs or in our vendors going out of business. Although approximately 95% of our foreign purchases of merchandise are negotiated and paid for in U.S. dollars, declines in foreign currencies and currency exchange rates might negatively affect the profitability and business prospects of one or more of our foreign vendors. This, in turn, might cause such foreign vendors to demand higher prices for merchandise in their effort to offset any lost profits associated with any currency devaluation,

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delay merchandise shipments to us, or discontinue selling to us, any of which could ultimately reduce our sales or increase our costs.

We are also subject to other risks and uncertainties associated with changing economic and political conditions in foreign countries. These risks and uncertainties include import duties and quotas, concerns over anti-dumping, work stoppages, economic uncertainties and adverse economic conditions (including inflation and recession), foreign government regulations, employment matters, wars and fears of war, political unrest, natural disasters and other trade restrictions. We cannot predict whether any of the countries in which our products are currently manufactured or may be manufactured in the future will be subject to trade restrictions imposed by the U.S. or foreign governments or the likelihood, type or effect of any such restrictions. Any event causing a disruption or delay of imports from foreign vendors, including the imposition of additional import restrictions, restrictions on the transfer of funds and/or increased tariffs or quotas, or both, could increase the cost or reduce the supply of merchandise available to us and adversely affect our business, financial condition and operating results. Furthermore, some or all of our foreign vendors’ operations may be adversely affected by political and financial instability resulting in the disruption of trade from exporting countries, restrictions on the transfer of funds and/or other trade disruptions. In addition, an economic downturn in or failure of foreign markets may result in financial instabilities for our foreign vendors, which may cause our foreign vendors to decrease production, discontinue selling to us, or to cease operations altogether. Our overseas operations in Europe and Asia could also be affected by changing economic and political conditions in foreign countries, any of which could have a negative effect on our business, financial condition and operating results.

In addition, although we continue to improve our global compliance program, there remains a risk that one or more of our foreign vendors will not adhere to our global compliance standards such as fair labor standards and the prohibition on child labor. Non-governmental organizations might attempt to create an unfavorable impression of our sourcing practices or the practices of some of our vendors that could harm our image. If either of these occurs, we could lose customer goodwill and favorable brand recognition, which could negatively affect our business and operating results.

Our overseas operations are subject to certain U.S. laws applicable to us, including the Foreign Corrupt Practices Act. We must ensure that the employees in our overseas operations comply with these laws. If any of our overseas operations, or our employees or agents, violates such U.S. laws, we could become subject to sanctions, which could negatively affect our business and operating results.

A number of factors that affect our ability to successfully open new stores or close existing stores are beyond our control, and these factors may harm our ability to expand or retract our retail operations and harm our ability to increase our sales and profits.

In each of the past three fiscal years, the majority of our net revenues have been generated by our retail stores. Our ability to open additional stores or close existing stores successfully will depend upon a number of factors, including:

• general economic conditions;

• our identification and availability of suitable store locations;

• our success in negotiating new leases or terminating existing leases on acceptable terms;

• the success of other retail stores in and around our retail locations;

• our ability to secure required governmental permits and approvals;

• our hiring and training of skilled store operating personnel, especially management; and

• the availability of financing on acceptable terms, if at all.

Many of these factors are beyond our control. For example, for the purpose of identifying suitable store locations, we rely, in part, on demographic surveys regarding location of consumers in our target market segments. While we believe that the surveys and other relevant information are helpful indicators of suitable store locations, we recognize that the information sources cannot predict future consumer preferences and buying trends with complete accuracy. In addition, changes in demographics, in the types of merchandise that we sell and in the pricing of our products may reduce the number of suitable store locations. Further, time frames for lease negotiations and store development vary from location to location and can be subject to unforeseen delays.

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Construction and other delays in store openings could have a negative impact on our business and operating results. We may not be able to open new stores or, if opened, operate those stores profitably. Additionally, in these economic times, we may not be able to renegotiate the terms of our current leases or close our underperforming stores, both of which could negatively impact our operating results.

Our business and operating results may be harmed if we are unable to timely and effectively deliver merchandise to our stores and customers.

The success of our business depends on our ability to timely and effectively deliver merchandise to our stores and customers. We cannot control all of the various factors that might affect our fulfillment rates in direct-to-customer sales and timely and effective merchandise delivery to our stores. We rely upon third party carriers for our merchandise shipments and reliable data regarding the timing of those shipments, including shipments to our customers and to and from all of our stores. In addition, we are heavily dependent upon two carriers for the delivery of our merchandise to our customers. Accordingly, we are subject to the risks, including labor disputes, union organizing activity, inclement weather, natural disasters, the closure of their offices or a reduction in operational hours due to an economic slowdown and possible acts of terrorism associated with such carriers’ ability to provide delivery services to meet our shipping needs. Failure to deliver merchandise in a timely and effective manner could damage our reputation and brands. In addition, fuel costs have been volatile and airline and other transportation companies struggle to operate profitably, which could lead to increased fulfillment expenses. Any fulfillment costs could negatively affect our business and operating results by increasing our transportation costs and decreasing the efficiency of our shipments.

Our failure to successfully manage our order-taking and fulfillment operations could have a negative impact on our business and operating results.

Our direct-to-customer business depends on our ability to maintain efficient and uninterrupted order-taking and fulfillment operations in our call centers and on our e-commerce websites. Disruptions or slowdowns in these areas could result from disruptions in telephone service or power outages, inadequate system capacity, system issues, computer viruses, security breaches, human error, changes in programming, union organizing activity, disruptions in our third party labor contracts, natural disasters or adverse weather conditions. Industries that are particularly seasonal, such as the home products business, face a higher risk of harm from operational disruptions during peak sales seasons. These problems could result in a reduction in sales as well as increased selling, general and administrative expenses.

In addition, we face the risk that we cannot hire enough qualified employees, or that there will be a disruption in the labor we hire from our third party providers, especially during our peak season, to support our direct-to-customer operations, due to circumstances that reduce the relevant workforce. The need to operate with fewer employees could negatively impact our customer service levels and our operations.

Our facilities and systems, as well as those of our vendors, are vulnerable to natural disasters and other unexpected events, any of which could result in an interruption in our business and harm our operating results.

Our retail stores, corporate offices, distribution centers, infrastructure projects and direct-to-customer operations, as well as the operations of vendors from which we receive goods and services, are vulnerable to damage from earthquakes, tornadoes, hurricanes, fires, floods, power losses, telecommunications failures, hardware and software failures, computer viruses and similar events. If any of these events result in damage to our facilities or systems, or those of our vendors, we may experience interruptions in our business until the damage is repaired, resulting in the potential loss of customers and revenues. In addition, we may incur costs in repairing any damage beyond our applicable insurance coverage.

Declines in our comparable store sales may harm our operating results and cause a decline in the market price of our common stock.

Various factors affect comparable store sales, including the number, size and location of stores we open, close, remodel or expand in any period, the overall economic and general retail sales environment, consumer preferences and buying trends, changes in sales mix among distribution channels, our ability to efficiently source

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and distribute products, changes in our merchandise mix, competition (including competitive promotional activity and discount retailers), current local and global economic conditions, the timing of our releases of new merchandise and promotional events, the success of marketing programs, the cannibalization of existing store sales by our new stores, changes in catalog circulation, continued strength in our Internet business and fluctuation in foreign exchange rates. Among other things, weather conditions can affect comparable store sales because inclement weather can alter consumer behavior or require us to close certain stores temporarily and thus reduce store traffic. Even if stores are not closed, many customers may decide to avoid going to stores in bad weather. These factors have caused and may continue to cause our comparable store sales results to differ materially from prior periods and from earnings guidance we have provided.

Our comparable store sales have fluctuated significantly in the past on an annual, quarterly and monthly basis, and we expect that comparable store sales will continue to fluctuate in the future. Past comparable store sales are no indication of future results. Comparable store sales have decreased in the past and are expected to continue to decrease in fiscal 2009. Our ability to maintain and improve our comparable store sales results depends, in large part, on maintaining and improving our forecasting of customer demand and buying trends, selecting effective marketing techniques, providing an appropriate mix of merchandise for our broad and diverse customer base and using effective pricing strategies. Any failure to meet the comparable store sales expectations of investors and securities analysts in one or more future periods could significantly reduce the market price of our common stock.

Our failure to successfully manage the costs and performance of our catalog mailings might have a negative impact on our business.

Catalog mailings are an important component of our business. Postal rate increases, paper costs, printing costs and other catalog distribution costs affect the cost of our catalog mailings. We rely on discounts from the basic postal rate structure, which could be changed or discontinued at any time. Our cost of paper has fluctuated significantly during the past three fiscal years, and our paper costs may continue to fluctuate in the future. Future increases in postal rates, paper costs or printing costs would have a negative impact on our operating results to the extent that we are unable to offset such increases by raising prices or by implementing more efficient printing, mailing, delivery and order fulfillment systems. In addition, if the performance of our catalogs declines or we misjudge the correlation between our catalog circulation and net sales, or if our catalog circulation optimization strategy overall is not successful, our results of operations could be negatively impacted.

We have historically experienced fluctuations in customer response to our catalogs. Customer response to our catalogs is substantially dependent on merchandise assortment, merchandise availability and creative presentation, as well as the selection of customers to whom the catalogs are mailed, changes in mailing strategies, the sizing and timing of delivery of the catalogs as well as the general retail sales environment and current domestic and global economic conditions. In addition, environmental organizations and other consumer advocacy groups may attempt to create an unfavorable impression of our paper use in catalogs and our distribution of catalogs generally, which may have a negative effect on our sales and our reputation. In addition, we depend upon external vendors to print our catalogs. The failure to effectively produce or distribute our catalogs could affect the timing of catalog delivery. The timing of catalog delivery has been and can be affected by postal service delays. Any delays in the timing of catalog delivery could cause customers to forego or defer purchases.

If we are unable to effectively manage our Internet business, our reputation and operating results may be harmed.

Our Internet business has been our fastest growing channel over the last several years and continues to be a significant part of our sales success. The success of our Internet business depends, in part, on factors over which we have limited control. We must successfully respond to changing consumer preferences and buying trends relating to Internet usage. We are also vulnerable to certain additional risks and uncertainties associated with the Internet, including changes in required technology interfaces, website downtime and other technical failures, costs and technical issues as we upgrade our website software, computer viruses, changes in applicable federal and state regulation, security breaches and consumer privacy concerns. In addition, we must keep up to date with

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competitive technology trends, including the use of improved technology, creative user interfaces and other Internet marketing tools, which may increase costs and which may not succeed in increasing sales or attracting customers. Our failure to successfully respond to these risks and uncertainties might adversely affect the sales in our Internet business, as well as damage our reputation and brands.

Our failure to successfully anticipate merchandise returns might have a negative impact on our business.

We record a reserve for merchandise returns based on historical return trends together with current product sales performance in each reporting period. If actual returns are greater than those projected by management, additional sales returns might be recorded in the future. Actual merchandise returns may exceed our reserves. In addition, to the extent that returned merchandise is damaged, we often do not receive full retail value from the resale or liquidation of the merchandise. Further, the introduction of new merchandise, changes in merchandise mix, changes in consumer confidence, or other competitive and general economic conditions may cause actual returns to exceed merchandise return reserves. In particular, the current adverse economic conditions may result in increased merchandise returns. Any significant increase in merchandise returns that exceeds our reserves could harm our business and operating results.

If we are unable to manage successfully the complexities associated with a multi-channel and multi-brand business, we may suffer declines in our existing business and our ability to attract new business.

During the past few years, with the launch and expansion of our Internet business, new brands and brand extensions, our overall business has become substantially more complex. The changes in our business have forced us to develop new expertise and face new challenges, risks and uncertainties. For example, we face the risk that our Internet business might cannibalize a significant portion of our retail and catalog businesses, and we face the risk of increased catalog circulation cannibalizing our retail sales. While we recognize that our Internet sales cannot be entirely incremental to sales through our retail and catalog channels, we seek to attract as many new customers as possible to our e-commerce websites. We continually analyze the business results of our three channels and the relationships among the channels, in an effort to find opportunities to build incremental sales.

If we are unable to introduce new brands and brand extensions successfully, or to reposition existing brands, we may not be able to grow our business.

We have in the past and may in the future introduce new brands and brand extensions, or reposition existing brands. Our newest brands – West Elm, PBteen and Williams-Sonoma Home – and any other new brands, however, may not be successful growth vehicles. Further, if we devote time and resources to new brands, brand extensions or brand repositioning, and those businesses are not as successful as we planned, then we risk damaging our overall business results. Alternatively, if our new brands, brand extensions or repositioned brands prove to be very successful, we risk hurting our other existing brands through the potential migration of existing brand customers to the new businesses. In addition, we may not be able to introduce new brands and brand extensions, or to reposition brands, in a manner that improves our overall business and operating results.

Our inability to obtain commercial insurance at acceptable prices or our failure to adequately reserve for self-insured exposures might increase our expenses and have a negative impact on our business.

We believe that commercial insurance coverage is prudent in certain areas for risk management. Insurance costs may increase substantially in the future and may be affected by natural catastrophes, fear of terrorism, financial irregularities and other fraud at publicly-traded companies, intervention by the government and a decrease in the number of insurance carriers. In addition, the carriers with which we hold our policies, including AIG, may go out of business, or may be otherwise unable to fulfill their contractual obligations. In addition, for certain types or levels of risk, such as risks associated with earthquakes, hurricanes or terrorist attacks, we may determine that we cannot obtain commercial insurance at acceptable prices, if at all. Therefore, we may choose to forego or limit our purchase of relevant commercial insurance, choosing instead to self-insure one or more types or levels of risks. We are primarily self-insured for workers’ compensation, employee health benefits and product and

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general liability claims. If we suffer a substantial loss that is not covered by commercial insurance or our self- insurance reserves, the loss and attendant expenses could harm our business and operating results. In addition, exposures exist for which no insurance may be available and for which we have not reserved.

Our inability or failure to protect our intellectual property would have a negative impact on our brands, goodwill and operating results.

Our trademarks, service marks, copyrights, patents, trade dress rights, trade secrets, domain names and other intellectual property are valuable assets that are critical to our success. The unauthorized reproduction or other misappropriation of our intellectual property could diminish the value of our brands or goodwill and cause a decline in our sales. In industries in which many competitors market and sell similar products, protection of intellectual property and maintenance of distinct branding are particularly important. We may not be able to adequately protect our intellectual property. In addition, the costs of defending our intellectual property may adversely affect our operating results.

We may be subject to legal proceedings that could be time consuming, result in costly litigation, require significant amounts of management time and result in the diversion of significant operational resources.

We are involved in lawsuits, claims and proceedings incident to the ordinary course of our business. Litigation is inherently unpredictable. Any claims against us, whether meritorious or not, could be time consuming, result in costly litigation, require significant amounts of management time and result in the diversion of significant operational resources. There are an increasing number of cases being filed against companies generally, including a growing number of business method patent infringement lawsuits. The plaintiff in each case claims to hold a patent that covers certain technology or methodologies, which are allegedly infringed by the operation of the defendants’ business. We are currently a defendant in such patent infringement cases and may be named in others in the future, as part of an industry-wide trend. There has also been a rise in lawsuits against companies like us that collect personal information from customers. The cost of defending such claims or the ultimate resolution of such claims may harm our business and operating results. In addition, the significant deterioration in the global financial markets can create a more litigious environment and therefore subjects us to increased exposure to shareholder lawsuits.

Our operating results may be harmed by unsuccessful management of our employment, occupancy and other operating costs, and the operation and growth of our business may be harmed if we are unable to attract qualified personnel.

To be successful, we need to manage our operating costs and continue to look for opportunities to reduce costs. We recognize that we may need to increase the number of our employees, especially during peak sales seasons, and incur other expenses to support new brands and brand extensions, as well as the opening of new stores and direct-to-customer growth of our existing brands. Alternatively, if we are unable to make substantial adjustments to our cost structure during times of uncertainty, such as this current economic environment, we may incur unnecessary expenses, may have too few resources to properly run our business, or our business and operating results may be negatively impacted. From time to time, we may also experience union organizing activity in currently non-union facilities. Union organizing activity may result in work slowdowns or stoppages and higher labor costs. In addition, there appears to be a growing number of wage-and-hour lawsuits against retail companies, especially in California.

We contract with various agencies to provide us with qualified personnel for our workforce. Any negative publicity regarding these agencies, such as in connection with immigration issues or employment practices, could damage our reputation, disrupt our ability to obtain needed labor or result in financial harm to our business, including the potential loss of business-related financial incentives in the jurisdictions where we operate.

Although we strive to secure long-term contracts with our service providers and other vendors and to otherwise limit our financial commitment to them, we may not be able to avoid unexpected operating cost increases in the future. Further, we incur substantial costs to warehouse and distribute our inventory. Significant increases in our inventory levels may result in increased warehousing and distribution costs in addition to potential increases in

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costs associated with inventory that is lost, damaged or aged. Higher than expected costs, particularly if coupled with lower than expected sales, would negatively impact our business and operating results.

We are undertaking certain systems changes that might disrupt our business operations.

Our success depends, in part, on our ability to source and distribute merchandise efficiently through appropriate systems and procedures. We are in the process of substantially modifying our information technology systems which involve updating or replacing legacy systems with successor systems during the course of several years. There are inherent risks associated with replacing our core systems, including supply chain and merchandising systems disruptions that affect our ability to get the correct products into the appropriate stores and delivered to customers. We may not successfully launch these new systems, or the launch of such systems may result in disruptions to our business operations. In addition, changes to any of our software implementation strategies could result in the impairment of software-related assets. We are also subject to the risks associated with the ability of our vendors to provide information technology solutions to meet our needs. Any disruptions could negatively impact our business and operating results.

We outsource certain aspects of our business to third party vendors and are in the process of insourcing certain business functions from third party vendors, both of which subject us to risks, including disruptions in our business and increased costs.

We outsource certain aspects of our business to third party vendors that subject us to risks of disruptions in our business as well as increased costs. For example, we utilize outside vendors for such things as payroll processing and various information technology and distribution center services. Accordingly, we are subject to the risks associated with their ability to successfully provide the necessary services to meet our needs. If our vendors are unable to adequately protect our data and information is lost, our ability to deliver our services is interrupted, or our vendors’ fees are more than expected, then our business and operating results may be negatively impacted.

In addition, we are in the process of insourcing certain aspects of our business, including the management of certain infrastructure technology, furniture manufacturing, furniture delivery to our customers and the management of our international vendors, each of which were previously outsourced to third party providers. This may cause disruptions in our business and result in increased cost to us. In addition, if we are unable to perform these functions better than, or at least as well as, our third party providers, our business may be harmed.

If our operating and financial performance in any given period do not meet the extensive guidance that we have provided to the public, our stock price may decline.

We provide extensive public guidance on our expected operating and financial results for future periods. Although we believe that this guidance provides investors and analysts with a better understanding of management’s expectations for the future and is useful to our shareholders and potential shareholders, such guidance is comprised of forward-looking statements subject to the risks and uncertainties described in this report and in our other public filings and public statements. Our actual results may not always be in line with or exceed the guidance we have provided, especially in times of great economic uncertainty. In the past, when we have reduced our previously provided guidance, the market price of our common stock has declined. If, in the future, our operating or financial results for a particular period do not meet our guidance or the expectations of investment analysts or if we reduce our guidance for future periods, the market price of our common stock may decline as well.

A variety of factors, including seasonality and economic downturn, may cause our quarterly operating results to fluctuate, leading to volatility in our stock price.

Our quarterly results have fluctuated in the past and may fluctuate in the future, depending upon a variety of factors, including shifts in the timing of holiday selling seasons, including Valentine’s Day, Easter, Halloween, Thanksgiving and Christmas. A significant portion of our revenues and net earnings has been realized during the

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period from October through December each year. In anticipation of increased holiday sales activity, we incur certain significant incremental expenses prior to and during peak selling seasons, particularly October through December, including fixed catalog production and mailing costs and the costs associated with hiring a substantial number of temporary employees to supplement our existing workforce. For example, we realized significantly lower-than-expected revenues and net earnings during the October through December selling season of fiscal 2008 due to the economic downturn, which affected our business and operating results.

We may require external funding sources for operating funds, which may cost more than we expect, or not be available at the levels we require and, as a consequence, our expenses and operating results could be negatively affected.

We regularly review and evaluate our liquidity and capital needs. We currently believe that our available cash, cash equivalents, cash flow from operations and cash available under our existing credit facilities will be sufficient to finance our operations and expected capital requirements for at least the next 12 months. However, we might experience periods during which we encounter additional cash needs during the course of our fiscal year, and we might need additional external funding to support our operations. Although we were able to amend our line of credit facility during fiscal 2008 on acceptable terms, in the event we require additional liquidity from our lenders, such funds may not be available to us or may not be available to us on acceptable terms. For example, in the event we were to breach any of our financial covenants, our banks would not be required to provide us with additional funding, or they may require us to renegotiate our existing credit facility on less acceptable terms. In addition, we may not be able to renew our letters of credit that we use to help pay our suppliers on terms that are acceptable to us, or at all, as the availability of letter of credit facilities may continue to be limited. Further, the providers of such credit may reallocate the available credit to other borrowers. If we are unable to access credit at the levels we require, or the cost of credit is greater than expected, it could adversely affect our operating results.

Disruptions in the financial markets may adversely affect our liquidity and capital resources and our business.

Disruptions in global financial markets and banking systems have made credit and capital markets more difficult for companies to access, even for some companies with established revolving or other credit facilities. We have access to capital through our revolving line of credit facility. Each financial institution which is part of the syndicate for our revolving line of credit facility is responsible for providing a portion of the loans to be made under the facility. If any participant or group of participants with a significant portion of the commitments in our revolving line of credit facility fail to satisfy its or their respective obligations to extend credit under the facility and we are unable to find a replacement for such participant or participants on a timely basis (if at all), our liquidity may be adversely affected and our business could be materially adversely affected.

If we are unable to pay quarterly dividends at intended levels, our reputation and stock price may be harmed.

Our current quarterly cash dividend is $0.12 per common share. The dividend program requires the use of a significant portion of our cash earnings. As a result, we may not retain a sufficient amount of cash to fund our operations or finance future growth opportunities, new product development initiatives and unanticipated capital expenditures. Our Board of Directors may, at its discretion, decrease the intended level of dividends or entirely discontinue the payment of dividends at any time. Our ability to pay dividends will depend on our ability to generate sufficient cash flows from operations in the future. This ability may be subject to certain economic, financial, competitive and other factors that are beyond our control. Any failure to pay dividends after we have announced our intention to do so may negatively impact our reputation and investor confidence in us and negatively impact our stock price.

If we fail to maintain proper and effective internal controls, our ability to produce accurate and timely financial statements could be impaired and investors’ views of us could be harmed.

We have evaluated and tested our internal controls in order to allow management to report on, and our registered independent public accounting firm to attest to, our internal controls, as required by Section 404 of the Sarbanes-

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Oxley Act of 2002. We have incurred, and expect to continue to incur, significant expenses and a diversion of management’s time to meet the requirements of Section 404. If we are not able to continue to meet the requirements of Section 404 in a timely manner or with adequate compliance, we would be required to disclose material weaknesses if they develop or are uncovered and we may be subject to sanctions or investigation by regulatory authorities, such as the Securities and Exchange Commission or the New York Stock Exchange. Any such action could negatively impact the perception of us in the financial market and our business. In addition, our internal controls may not prevent or detect all errors and fraud. A control system, no matter how well designed and operated, is based upon certain assumptions and can provide only reasonable assurance that the objectives of the control system will be met.

Changes to accounting rules or regulations may adversely affect our operating results.

Changes to existing accounting rules or regulations may impact our future operating results. A change in accounting rules or regulations may even affect our reporting of transactions completed before the change is effective. Other new accounting rules or regulations and varying interpretations of existing accounting rules or regulations have occurred and may occur in the future. Future changes to accounting rules or regulations or the questioning of current accounting practices may adversely affect our operating results.

Changes to estimates related to our property and equipment, including information technology systems, or operating results that are lower than our current estimates at certain store locations, may cause us to incur impairment charges.

We make certain estimates and projections in connection with impairment analyses for certain of our store locations and other property and equipment, including information technology systems, in accordance with “Statement of Financial Accounting Standards (“SFAS”) No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets.” These impairment analyses require that we review for impairment all stores for which current or projected cash flows from operations are either negative or nominal, or the construction costs are significantly in excess of the amount originally expected. An impairment charge is required when the carrying value of the asset exceeds the undiscounted future cash flows over the remaining life of the lease. These calculations require us to make a number of estimates and projections of future results, often up to 20 years into the future. If these estimates or projections change or prove incorrect, we may be, and have been, required to record impairment charges on certain store locations and other property and equipment, including information technology systems. These impairment charges have been significant in the past and may be in the future and, as a result of these charges, our operating results have been and may be adversely affected. For example, during fiscal 2008, we recorded impairment charges of $33,995,000 related to underperforming retail stores.

If we do not properly account for our unredeemed gift certificates, gift cards and merchandise credits, our operating results will be harmed.

We maintain a liability for unredeemed gift cards, gift certificates and merchandise credits until the earlier of redemption, escheatment or four years. After four years, the remaining unredeemed gift cards, gift certificate or merchandise credit liability is relieved and recorded within selling, general and administrative expenses. In the event that our historical redemption patterns change in the future, we might change the minimum time period for maintaining a liability for unredeemed gift certificates on our balance sheets, which would affect our financial position or operating results. Further, in the event that a state or states were to require that the unredeemed amounts should have been escheated to that state or states, our business and operating results would be harmed.

Fluctuations in our tax obligations and effective tax rate may result in volatility of our operating results and stock price.

We are subject to income taxes in many U.S. and certain foreign jurisdictions. We record tax expense based on our estimates of future payments, which include reserves for estimates of probable settlements of foreign and domestic tax audits. At any one time, many tax years are subject to audit by various taxing jurisdictions. The results of these audits and negotiations with taxing authorities may affect the ultimate settlement of these issues.

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As a result, we expect that throughout the year there could be on-going variability in our quarterly tax rates as taxable events occur and exposures are evaluated. Further, our effective tax rate in a given financial statement period may be materially impacted by changes in the mix and level of earnings or by changes to existing accounting rules or regulations.

If we fail to attract and retain key personnel, our business and operating results may be harmed.

Our future success depends to a significant degree on the skills, experience and efforts of key personnel in our senior management, whose vision for our company, knowledge of our business and expertise would be difficult to replace. If any of our key employees leaves, is seriously injured or is unable to work, and we are unable to find a qualified replacement, we may be unable to execute our business strategy.

In addition, our main offices are located in the San Francisco Bay Area, where competition for personnel with retail and technology skills can be intense. If we fail to identify, attract, retain and motivate these skilled personnel, especially in this challenging economic environment, our business may be harmed. Further, in the event we need to hire additional personnel, we may experience difficulties in attracting and successfully hiring such individuals due to competition for highly skilled personnel in our market.

We may be exposed to risks and costs associated with credit card fraud and identity theft that could cause us to incur unexpected expenditures and loss of revenue.

A significant portion of our customer orders are placed through our website or through our customer care centers. In addition, a significant portion of sales made through our retail channel require the collection of certain customer data, such as credit card information. In order for our sales channel to function and develop successfully, we and other parties involved in processing customer transactions must be able to transmit confidential information, including credit card information, securely over public networks. Third parties may have the technology or knowledge to breach the security of customer transaction data. Although we take the security of our systems and the privacy of our customers’ confidential information seriously, we cannot guarantee that our security measures will effectively prevent others from obtaining unauthorized access to our information and our customers’ information. Any person who circumvents our security measures could destroy or steal valuable information or disrupt our operations. Any security breach could cause consumers to lose confidence in the security of our website or stores and choose not to purchase from us. Any security breach could also expose us to risks of data loss, litigation and liability and could seriously disrupt our operations and harm our reputation, any of which could harm our business.

In addition, states and the federal government are increasingly enacting laws and regulations to protect consumers against identity theft. We collect personal information from consumers in the course of doing business. These laws will likely increase the costs of doing business and, if we fail to implement appropriate safeguards or to detect and provide prompt notice of unauthorized access as required by some of these new laws, we could be subject to potential claims for damages and other remedies, which could harm our business.

ITEM 1B.  UNRESOLVED STAFF COMMENTS

None.

ITEM 2.  PROPERTIES

Our gross leased store space, as of February 1, 2009, totaled approximately 6,148,000 square feet for 627 stores compared to approximately 5,739,000 square feet for 600 stores, as of February 3, 2008. All of the existing stores are leased by us with original terms ranging generally from 5 to 22 years. Certain leases contain renewal options for periods of up to 20 years. The rental payment requirements in our store leases are typically structured as either minimum rent, minimum rent plus additional rent based on a percentage of store sales if a specified store sales threshold is exceeded, or rent based on a percentage of store sales if a specified store sales threshold or contractual obligations of the landlord has not been met. Contingent rental payments, including rental payments

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that are based on a percentage of sales, cannot be predicted with certainty at the onset of the lease term. Accordingly, any contingent rental payments are recorded as incurred each period when the sales threshold is probable and are excluded from our calculation of deferred rent liability.

Distribution Centers

We lease distribution facility space in the following locations:

Location	Square Footage (Approximate)
Olive Branch, Mississippi	3,275,000
Memphis, Tennessee	1,023,000
City of Industry, California	1,180,000
Cranbury, New Jersey	781,000
South Brunswick, New Jersey	418,000
Hickory, North Carolina	199,000
Lakeland and Pompano Beach, Florida	72,000

Two of our distribution facilities in Memphis, Tennessee are leased from two partnerships whose partners include W. Howard Lester, our Chairman of the Board of Directors and Chief Executive Officer, and James A. McMahan, a Director Emeritus and a significant shareholder. Both partnerships are consolidated by us. See Note F to our Consolidated Financial Statements for more information.

During fiscal 2008, we entered into lease agreements in Florida and North Carolina for storage space associated with the additional insourcing of our furniture delivery hubs within the region and for the purpose of a small manufacturing facility.

In January 2009, in connection with our infrastructure cost reduction program, we closed one of our offsite distribution facilities located in Memphis, Tennessee. The facility, containing approximately 500,000 square feet of space was fully vacated by us as of February 1, 2009 and therefore not included in the table above. We do, however, continue to be liable for future rental payments under our lease agreement through the end of the lease term in August 2010. Therefore, we have recorded a liability for all contractual future obligations within our Consolidated Balance Sheet as of February 1, 2009.

In addition to the above long-term contracts, we enter into other agreements for such things as our offsite storage needs for both our distribution centers and our retail store locations. As of February 1, 2009, we had approximately 194,000 square feet of leased space relating to these agreements that is not included in the table above. This compares to approximately 676,000 square feet of leased space as of February 3, 2008.

Care Centers

We lease care center space in the following locations:

Location	Square Footage (Approximate)
Las Vegas, Nevada	36,000
Oklahoma City, Oklahoma	36,000

As of February 1, 2009, in connection with our infrastructure cost reduction program, we terminated the lease agreement on our 38,000 square foot care center facility in Camp Hill, Pennsylvania and vacated the facility. The square footage associated with this care center facility has therefore been excluded from the table above.

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Corporate Facilities

We also lease office, design studio, photo studio, warehouse and data center space in the following locations:

Location	Square Footage (Approximate)
Brisbane, California	194,000
San Francisco, California	173,000
New York City, New York	52,000
Rocklin, California	25,000

In addition to the above leased facilities, we own buildings in San Francisco, California comprising approximately 326,000 square feet that we use for our corporate headquarters and a 13,000 square foot data center located in Memphis, Tennessee.

We believe that our facilities are adequate for our current needs and that suitable additional or substitute space will be available in the future to replace our existing facilities, if necessary, or to accommodate the expansion of our operations.

ITEM 3.  LEGAL PROCEEDINGS

We are involved in lawsuits, claims and proceedings incident to the ordinary course of our business. These disputes, which are not currently material, are increasing in number as our business expands and our company grows larger. Litigation is inherently unpredictable. Any claims against us, whether meritorious or not, could be time consuming, result in costly litigation, require significant amounts of management time and result in the diversion of significant operational resources. The results of these lawsuits, claims and proceedings cannot be predicted with certainty. However, we believe that the ultimate resolution of these current matters will not have a material adverse effect on our consolidated financial statements taken as a whole.

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

There were no matters submitted to a vote of security holders during the fourth quarter of fiscal 2008.

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PART II

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

MARKET INFORMATION

Our common stock is traded on the New York Stock Exchange, or the NYSE, under the symbol WSM. The following table sets forth the high and low closing prices of our common stock on the NYSE for the periods indicated:

Fiscal 2008 (52 Weeks)	High		Low
1st Quarter	$	27.72	$	22.00
2nd Quarter	$	27.67	$	17.44
3rd Quarter	$	19.44	$	8.01
4th Quarter	$	9.57	$	4.72
Fiscal 2007 (53 Weeks)	High		Low
1st Quarter	$	36.52	$	32.55
2nd Quarter	$	35.91	$	30.73
3rd Quarter	$	34.28	$	29.00
4th Quarter	$	31.44	$	20.01

The closing price of our common stock on the NYSE on March 27, 2009 was $10.70. See Quarterly Financial Information on page 69 of this Annual Report on Form 10-K for the quarter-end closing price of our common stock for each quarter listed above.

SHAREHOLDERS

The number of shareholders of record of our common stock as of March 27, 2009 was 475. This number excludes shareholders whose stock is held in nominee or street name by brokers.

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PERFORMANCE GRAPH

This graph compares the cumulative total shareholder return for our common stock with those for The NYSE Composite Index and The NASDAQ Retail Trade Index, our peer group index. In addition, we have included the S&P Retailing Index, a new index that we will be using as our peer group index going forward. We have determined that the companies included in the S&P Retailing Index more closely match our company characteristics than the companies included in the NASDAQ Retail Trade Index, as the S&P Retailing Index limits its scope to companies that include several high end retailers, retailers in specialty industries including home improvement and furnishings, and retailers with similar size and market capitalization.

The cumulative total return listed below assumed an initial investment of $100 and reinvestment of dividends. The graph shows historical stock price performance, including reinvestment of dividends, and is not necessarily indicative of future performance.

Comparison of Five-Year Cumulative Total Return

of Williams-Sonoma, Inc., the NYSE Composite Index,

the NASDAQ Retail Trade Index and the S&P Retailing Index

¨ Williams-Sonoma, Inc.

* S&P Retailing Index

D NYSE Composite Index

O NASDAQ Retail Trade Index

	1/30/04	1/28/05	1/27/06	1/26/07	2/1/08	1/30/09
Williams-Sonoma, Inc.	100.00	107.54	126.50	107.84	87.99	26.30
NYSE Composite Index	100.00	110.51	129.20	150.77	151.90	98.36
NASDAQ Retail Trade Index	100.00	108.60	140.08	137.03	148.66	85.31
S&P Retailing Index	100.00	116.95	126.91	144.26	123.01	77.15

Notes:

A. The lines represent monthly index levels derived from compounded daily returns that include all dividends.

B. The indices are re-weighted daily, using the market capitalization on the previous trading day.

C. If the monthly interval, based on the fiscal year-end, is not a trading day, the preceding trading day is used.

D. The index level for all Series was set to $100.00 on 1/30/04.

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DIVIDEND POLICY

During fiscal 2008 and fiscal 2007, total cash dividends declared were approximately $51,189,000 and $50,000,000, respectively, or $0.12 per common share per quarter. Subsequent to year-end, on March 24, 2009, our Board of Directors declared a quarterly cash dividend of $0.12 per common share, payable on May 26, 2009 to shareholders of record as of the close of business on April 27, 2009. Our quarterly cash dividend may be limited or terminated at any time.

Additional information required by Item 5 is contained in Notes H and I to the Consolidated Financial Statements in this Annual Report on Form 10-K.

STOCK REPURCHASE PROGRAM

We did not repurchase any shares of our common stock during fiscal 2008 under our previously authorized $150,000,000 share repurchase program. On December 2, 2008, our Board of Directors terminated this share repurchase program in response to current economic conditions and our belief that in these times it is strategically important to maintain a strong financial position and greater cash reserves.

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ITEM 6.  SELECTED FINANCIAL DATA

Five-Year Selected Financial Data

Dollars and amounts in thousands, except percentages, per share amounts and retail stores data	Feb. 1, 2009 (52 Weeks)			Feb. 3, 2008 (53 Weeks)		Jan. 28, 2007 (52 Weeks)			Jan. 29, 2006 (52 Weeks)		Jan. 30, 2005 (52 Weeks)
Results of Operations
Net revenues	$	3,361,472		$	3,944,934	$	3,727,513		$	3,538,947	$	3,136,931
Net revenue growth (decline)		(14.8%	)		5.8%		5.3%			12.8%		13.9%
Gross margin	$	1,135,172		$	1,535,971	$	1,487,287		$	1,435,482	$	1,271,145
Earnings before income taxes	$	41,953		$	316,340	$	337,186		$	348,798	$	310,205
Net earnings	$	30,024		$	195,757	$	208,868		$	214,866	$	191,234
Basic net earnings per share	$	0.28		$	1.79	$	1.83		$	1.86	$	1.65
Diluted net earnings per share	$	0.28		$	1.76	$	1.79		$	1.81	$	1.60
Gross margin as a percent of net revenues		33.8%			38.9%		39.9%			40.6%		40.5%
Pre-tax operating margin as a percent of net revenues1		1.2%			8.0%		9.0%			9.9%		9.9%
Financial Position
Working capital	$	479,936		$	438,241	$	473,229		$	492,772	$	351,608
Total assets	$	1,935,464		$	2,093,854	$	2,048,331		$	1,981,620	$	1,745,545
Return on assets		1.5%			9.4%		10.1%			11.4%		11.9%
Long-term debt and other long-term obligations	$	62,071		$	68,761	$	32,562		$	29,201	$	32,476
Shareholders’ equity	$	1,147,984		$	1,165,723	$	1,151,431		$	1,125,318	$	957,662
Shareholders’ equity per share (book value)	$	10.86		$	11.07	$	10.48		$	9.80	$	8.30
Return on equity		2.6%			16.9%		18.3%			20.6%		21.7%
Debt-to-equity ratio		2.2%			2.2%		2.5%			3.0%		4.4%
Annual dividends declared per share	$	0.48		$	0.46	$	0.40			—		—
Retail Revenues
Retail revenue growth (decline)		(14.0%	)		5.9%		6.0%			12.3%		11.6%
Retail revenues as a percent of net revenues		58.4%			57.8%		57.8%			57.4%		57.7%
Comparable store sales growth (decline)2		(17.2%	)		0.3%		0.3%			4.9%		3.5%
Store count
Williams-Sonoma		264			256		254			254		254
Pottery Barn		204			198		197			188		183
Pottery Barn Kids		95			94		92			89		87
West Elm		36			27		22			12		4
Williams-Sonoma Home		10			9		7			3		—
Outlets		18			16		16			16		15
Hold Everything		—			—		—			8		9
Number of stores at year-end		627			600		588			570		552
Store selling area at fiscal year-end (sq. ft.)		3,828,000			3,575,000		3,389,000			3,140,000		2,911,000
Store leased area at fiscal year-end (sq. ft.)		6,148,000			5,739,000		5,451,000			5,035,000		4,637,000
Direct-to-Customer Revenues
Direct-to-customer revenue growth (decline)		(15.9%	)		5.7%		4.5%			13.6%		17.1%
Direct-to-customer revenues as a percent of net revenues		41.6%			42.2%		42.2%			42.6%		42.3%
Catalogs circulated during the year		313,740			393,160		379,011			385,158		368,210
Percent increase (decrease) in number of catalogs circulated		(20.2%	)		3.7%		(1.6%	)		4.6%		12.1%
Percent increase (decrease) in number of pages circulated		(30.3%	)		7.9%		3.2%			9.7%		19.5%

¹ Pre-tax operating margin is defined as earnings before income taxes.

² Fiscal 2008 was calculated on a 52-week to 52-week basis. Fiscal 2007 was calculated on a 53-week to 53-week basis.

The information set forth above is not necessarily indicative of future operations and should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the Consolidated Financial Statements and notes thereto in this Annual Report on Form 10-K.

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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

OVERVIEW

Fiscal 2008 Financial Results

In fiscal 2008, a 52-week year, our net revenues decreased 14.8% to $3,361,472,000 from $3,944,934,000 in fiscal 2007, a 53-week year, and our diluted earnings per share decreased by 84.1% to $0.28 in fiscal 2008 from $1.76 in fiscal 2007. Although we are not satisfied with these results, we believe the fact that we were still able to deliver positive earnings of $0.28 for fiscal 2008 demonstrates the flexibility of our multi-channel business model and our ability to drive rapid change in a down-trending economy.

From a cash flow perspective, we generated $230,163,000 in cash flow from operating activities and increased our cash balance by $29,872,000 to $148,822,000 despite significantly reduced sales and earnings during the back half of fiscal 2008.

Retail net revenues in fiscal 2008 decreased by $318,720,000, or 14.0%, over fiscal 2007. This decrease was primarily due to the downturn in the economic environment during fiscal 2008 resulting in a comparable store sales decrease of 17.2%, the impact of the extra week of net revenues in fiscal 2007 (a 53-week year) of approximately $30,000,000 and the temporary and permanent closure of 21 stores and 4 stores, respectively. This decrease was partially offset by an increase in our store leased square footage of 7.1% (including 29 new store openings and the remodeling or expansion of an additional 23 stores). Net revenue decreases were led by the Pottery Barn, Williams-Sonoma and Pottery Barn Kids brands, partially offset by net revenue increases in the West Elm brand.

In our direct-to-customer channel, net revenues in fiscal 2008 decreased by $264,742,000, or 15.9%, over fiscal 2007. This decrease was primarily driven by the downturn in the overall economic environment during fiscal 2008, the impact of the extra week of net revenues in fiscal 2007 (a 53-week year) of approximately $40,000,000 and a decrease in catalog and page circulation of 20.2% and 30.3%, respectively. Declining net revenues in the Pottery Barn and Pottery Barn Kids brands were the primary contributors to the year-over-year net revenue decrease. All brands except PBteen had declining net revenues during fiscal 2008.

In our core brands, net revenues decreased by 16.9% over fiscal 2007 driven by net revenue decreases in the Pottery Barn and Pottery Barn Kids brands primarily due to the downturn in the economic environment in the back half of fiscal 2008, the impact of our catalog circulation optimization strategy and the impact of the extra week of net revenues in fiscal 2007 (a 53-week year). Comparable store sales decreases were 21.8% and 17.8% for the Pottery Barn and Pottery Barn Kids brands, respectively. Although net revenues decreased in the Williams-Sonoma brand, it proved to be more resilient than our other core brands, ending the year with a comparable store decrease of only 11.4%.

Similar to our core brands, our emerging brands (including West Elm, PBteen and Williams-Sonoma Home) were also impacted by the downturn in the economic environment, where net revenues decreased 0.3% from fiscal 2007 primarily due to a decrease in the Williams-Sonoma Home brand in both the retail and direct-to-customer channels. This net revenue decrease was partially offset by increases in both the PBteen and West Elm brands.

PBteen was our best performing brand during the year with net revenue growth of 2.7%. New product innovation and superior execution drove this year-over-year increase. Although overall net revenues increased year-over-year, we did begin to see net revenue decreases in the back half of the year. We do, however, continue to be excited about the long-term growth potential of the brand as it solidifies its positioning in the Pottery Barn portfolio of brands.

Although West Elm continued to be more resilient than our other home furnishings brands with increased net revenues in fiscal 2008, we saw net revenue decreases in the back half of fiscal 2008 due to lower transactions and conversion rates. Despite these declines, we continued to expand the reach of the brand by opening nine new stores during the year, including our first West Elm stores in Puerto Rico and Canada, and are planning to open four additional stores in fiscal 2009.

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In the Williams-Sonoma Home brand, we believe the customer has been particularly impacted by the macro-economic environment and that these trends are likely to continue for the foreseeable future. Given the brands performance to-date and the fixed cost pressure from underperforming retail stores, we are working with our landlords on potential store closings and we will continue to assess the brand’s overall market potential in this economic environment as we progress throughout the year.

Fiscal 2008 Operational Results

During fiscal 2008, though we faced a difficult economic environment, we were able to make significant progress against several key initiatives, including successfully amending our unsecured credit facilities and ending the year with significant cushions in the financial covenants on these facilities; reducing our year-end inventory levels by $120,762,000, or 17.4%; initiating and implementing a $75,000,000 infrastructure cost reduction program; and optimizing profitability through aggressive expense management and highly controlled promotional activity.

In our supply chain, we continued to make significant progress on our key initiatives, including restructuring our Asian furniture sourcing network to establish in-country expertise and improved vendor performance; expanding our U.S. upholstered furniture operations to provide shorter lead times, better quality, and lower cost; and in-sourcing six of our largest local furniture delivery hubs to improve customer service and reduce returns, replacements, and damages expense. We also reduced distribution capacity due to substantial improvements in inventory management.

In information technology, we continued the rollout of our direct-to-customer order management system. This is a phased implementation that is improving efficiency and functionality in an area that we believe still has significant cost and inventory planning opportunities. In the customer insights area, we implemented new functionality that is allowing us to significantly improve the relevancy of our marketing contacts and optimize our catalog response rates.

In e-commerce, we completed the migration of all of our websites to our next generation platform, with the exception of West Elm, which will be transitioned in fiscal 2009. We also began testing new functionality in the areas of click-to-call, product reviews, and search. Infrastructure was also a key area of investment this year, including the replacement of our company-wide point-of-sale hardware and the rollout of electronic signature and pin debit functionality in our stores.

In direct-marketing, we reduced catalog advertising costs by an estimated $45,000,000 based on the success of our catalog circulation optimization strategy. At the same time, we continued to aggressively explore additional traffic drivers through paid and natural search, target-driven direct response and affiliate programs. While we are still in the early phases of these rollouts, all of these initiatives have driven increased transactions and incremental sales to the brands.

Fiscal 2009

As we enter fiscal 2009, though we do expect a continued net revenue decline of 12% to 17%, due to the continuing effects of the economic downturn, we are focused on the aspects of the business that we can control, including the following three key initiatives:

• optimizing our brand positioning and marketing strategies in a “reset” economy;

• improving profitability; and

• strengthening our balance sheet.

To optimize our brand positioning, we plan to continue evolving our merchandise assortment and placing a greater emphasis on opening price points and the value proposition. We also plan to continue making superior customer service our top priority.

To optimize our marketing strategies, we plan to continue our catalog circulation optimization strategy and to shift advertising dollars from catalog to e-commerce, our most profitable channel. We also plan to continue to identify new opportunities to build brand awareness and customer engagement through search, e-mail modeling, affiliate programs, and enhanced functionality.

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To improve profitability, our most significant initiative is the $75,000,000 infrastructure cost reduction program we implemented in January. We also plan to realize increased productivity from our catalog circulation optimization strategy, which we expect will drive additional advertising cost reductions. In addition, we expect to realize an increase in our selling gross margin due to fewer markdowns and lower inventory levels, as well as additional savings from our furniture returns, replacements, and damages initiatives.

Further, to strengthen our balance sheet, we plan to optimize cash flow through aggressive inventory management and lower capital spending, where we expect to reduce merchandise inventories by 11% to 16% over fiscal 2008 and decrease gross capital spending from $191,789,000 in fiscal 2008 to an estimated $90,000,000 to $100,000,000 in fiscal 2009.

From a leased square footage perspective, we are only proceeding with new and remodeled stores that we are already committed to. Therefore, net of store closings, retail leased square footage is only expected to increase approximately 1% and, to the extent possible, we will reduce this number further as we work with landlords to close underperforming stores.

Finally, in fiscal 2009, we expect to continue to return excess capital to our shareholders as reflected by the approval of a quarterly cash dividend of $0.12 per common share by our Board of Directors in March 2009.

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Results of Operations

NET REVENUES

Net revenues consist of retail sales, direct-to-customer sales and shipping fees. Retail sales include sales of merchandise to customers at our retail stores. Direct-to-customer sales include sales of merchandise to customers through our catalogs and the Internet. Shipping fees consist of revenue received from customers for delivery of merchandise. Revenues are presented net of sales returns and other discounts.

The following table summarizes our net revenues for the 52 weeks ended February 1, 2009 (“fiscal 2008”), the 53 weeks ended February 3, 2008 (“fiscal 2007”) and the 52 weeks ended January 28, 2007 (“fiscal 2006”):

Dollars in thousands	Fiscal 2008 (52 Weeks)		% Total	Fiscal 2007 (53 Weeks)		% Total	Fiscal 2006 (52 Weeks)		% Total
Retail revenues	$	1,962,498	58.4%	$	2,281,218	57.8%	$	2,153,978	57.8%
Direct-to-customer revenues		1,398,974	41.6%		1,663,716	42.2%		1,573,535	42.2%
Net revenues	$	3,361,472	100.0%	$	3,944,934	100.0%	$	3,727,513	100.0%

Net revenues for fiscal 2008 decreased by $583,462,000, or 14.8%, over fiscal 2007. This decrease was primarily due to the downturn in the economic environment during fiscal 2008 resulting in a comparable store sales decrease of 17.2%, the impact of the extra week of net revenues in fiscal 2007 (a 53-week year) of approximately $70,000,000, the temporary and permanent closure of 21 stores and 4 stores, respectively and a decrease in catalog and page circulation of 20.2% and 30.3%, respectively. This decrease was partially offset by an increase in store leased square footage of 7.1% (including 29 new store openings and the remodeling or expansion of an additional 23 stores).

Net revenues for fiscal 2007 increased by $217,421,000, or 5.8%, over fiscal 2006. This increase was primarily due to an increase in store leased square footage of 5.3%, including 23 new store openings and the remodeling or expansion of an additional 26 stores, the impact of the extra week of net revenues in fiscal 2007 (a 53-week year) of approximately $70,000,000 and comparable store sales growth of 0.3% in fiscal 2007. This increase was further driven by an overall increase in catalog and page circulation of 3.7% and 7.9%, respectively, and continued strength in our Internet business, primarily resulting from our catalog advertising, expanded efforts associated with our electronic direct marketing initiatives and strategic e-commerce partnerships. This increase was partially offset by lost revenues in the Hold Everything brand, the temporary closure of 28 stores and the permanent closure of 9 stores in fiscal 2007.

RETAIL REVENUES AND OTHER DATA

Dollars in thousands	Fiscal 2008 (52 Weeks)			Fiscal 2007 (53 Weeks)			Fiscal 2006 (52 Weeks)
Retail revenues	$	1,962,498		$	2,281,218		$	2,153,978
Percent growth (decline) in retail revenues		(14.0%	)		5.9%			6.0%
Percent increase (decrease) in comparable store sales		(17.2%	)		0.3%			0.3%
Number of stores – beginning of year		600			588			570
Number of new stores		29			23			28
Number of new stores due to remodeling1		23			26			28
Number of closed stores due to remodeling1		(21	)		(28	)		(24	)
Number of permanently closed stores		(4	)		(9	)		(14	)
Number of stores – end of year		627			600			588
Store selling square footage at year-end		3,828,000			3,575,000			3,389,000
Store leased square footage (“LSF”) at year-end		6,148,000			5,739,000			5,451,000

¹ Remodeled stores are defined as those stores temporarily closed and subsequently reopened during the year due to square footage expansion, store modification or relocation.

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	Fiscal 2008		Fiscal 2007		Fiscal 2006
	Store Count	Avg. LSF Per Store	Store Count	Avg. LSF Per Store	Store Count	Avg. LSF Per Store
Williams-Sonoma	264	6,300	256	6,100	254	5,900
Pottery Barn	204	12,900	198	12,500	197	12,200
Pottery Barn Kids	95	7,900	94	7,900	92	7,900
West Elm	36	17,100	27	18,200	22	17,400
Williams-Sonoma Home	10	13,300	9	14,300	7	14,500
Outlets	18	20,300	16	20,500	16	20,200
Total	627	9,800	600	9,600	588	9,300

Retail net revenues in fiscal 2008 decreased by $318,720,000, or 14.0%, over fiscal 2007. This decrease was primarily due to the downturn in the economic environment during fiscal 2008 resulting in a comparable store sales decrease of 17.2%, the impact of the extra week of net revenues in fiscal 2007 (a 53-week year) of approximately $30,000,000 and the temporary and permanent closure of 21 stores and 4 stores, respectively. This decrease was partially offset by an increase in store leased square footage of 7.1%, including 29 new store openings and the remodeling or expansion of an additional 23 stores. Net revenue decreases were led by the Pottery Barn, Williams-Sonoma and Pottery Barn Kids brands, partially offset by net revenue increases in the West Elm brand.

Retail net revenues in fiscal 2007 increased by $127,240,000, or 5.9%, over fiscal 2006. This increase was primarily due to an increase in store leased square footage of 5.3%, including 23 new store openings and the remodeling or expansion of an additional 26 stores, the impact of the extra week of net revenues in fiscal 2007 (a 53-week year) of approximately $30,000,000, and comparable store sales growth of 0.3% in fiscal 2007. This increase was partially offset by the temporary closure of 28 stores and the permanent closure of 9 stores during fiscal 2007. Net revenues generated in the West Elm, Pottery Barn, Williams-Sonoma and Williams-Sonoma Home brands were the primary contributors to this year-over-year revenue increase.

Comparable Store Sales

Comparable stores are defined as those stores in which gross square footage did not change by more than 20% in the previous 12 months and which have been open for at least 12 consecutive months without closure for seven or more consecutive days. By measuring the year-over-year sales of merchandise in the stores that have a history of being open for a full comparable 12 months or more, we can better gauge how the core store base is performing since it excludes new store openings, store remodelings and expansions. Comparable stores exclude new retail concepts until such time as we believe that comparable store results in those concepts are meaningful to evaluating the performance of the retail strategy. For fiscal 2008, 2007 and 2006, our total comparable store sales exclude the West Elm and Williams-Sonoma Home concepts.

Percentages represent changes in comparable store sales versus the same period in the prior year.

Percent increase (decrease) in comparable store sales	Fiscal 2008 (52 Weeks)		Fiscal 2007 (53 Weeks)		Fiscal 2006 (52 Weeks)
Williams-Sonoma	(11.4%	)	0.7%		3.0%
Pottery Barn	(21.8%	)	(0.3%	)	(2.1%	)
Pottery Barn Kids	(17.8%	)	(1.5%	)	3.3%
Outlets	(17.1%	)	5.8%		(4.3%	)
Total	(17.2%	)	0.3%		0.3%

Various factors affect comparable store sales, including the number, size and location of stores we open, close, remodel or expand in any period, the overall economic and general retail sales environment, consumer preferences and buying trends, changes in sales mix between distribution channels, our ability to efficiently source and distribute products, changes in our merchandise mix, competition (including competitive promotional

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activity and discount retailers), current local and global economic conditions, the timing of our releases of new merchandise and promotional events, the success of marketing programs, the cannibalization of existing store sales by our new stores, changes in catalog circulation, continued strength in our Internet business and fluctuations in foreign exchange rates. Among other things, weather conditions can affect comparable store sales because inclement weather can alter consumer behavior or require us to close certain stores temporarily and thus reduce store traffic. Even if stores are not closed, many customers may decide to avoid going to stores in bad weather. These factors have caused our comparable store sales to fluctuate significantly in the past on an annual, quarterly and monthly basis and, as a result, we expect that comparable store sales will continue to fluctuate in the future.

DIRECT-TO-CUSTOMER REVENUES

Dollars in thousands	Fiscal 2008 (52 Weeks)			Fiscal 2007 (53 Weeks)		Fiscal 2006 (52 Weeks)
Catalog revenues1	$	365,574		$	559,966	$	645,975
Internet revenues1	$	1,033,400			1,103,750		927,560
Total direct-to-customer revenues1	$	1,398,974		$	1,663,716	$	1,573,535
Percent growth (decline) in direct-to-customer revenues		(15.9%	)		5.7%		4.5%
Percent increase (decrease) in number of catalogs circulated		(20.2%	)		3.7%		(1.6%	)
Percent increase (decrease) in number of pages circulated		(30.3%	)		7.9%		3.2%

¹ We estimate that approximately 60% of our company-wide non-gift registry Internet revenues are driven by customers who recently received a catalog and approximately 40% are incremental to the direct-to-customer channel. We do, however, expect to see this percentage begin to decrease as we continue to reduce our catalog advertising costs, and increase our investment in other internet marketing vehicles, in conjunction with our catalog circulation optimization strategy.

In our direct-to-customer channel, net revenues in fiscal 2008 decreased by $264,742,000, or 15.9%, over fiscal 2007. This decrease was primarily driven by the downturn in the overall economic environment during fiscal 2008, the impact of the extra week of net revenues in fiscal 2007 (a 53-week year) of approximately $40,000,000 and a decrease in catalog and page circulation of 20.2% and 30.3%, respectively. Declining net revenues in the Pottery Barn and Pottery Barn Kids brands were the primary contributors to the year-over-year net revenue decrease. All brands except PBteen had declining net revenues during fiscal 2008.

In our direct-to-customer channel, net revenues in fiscal 2007 increased by $90,181,000, or 5.7%, over fiscal 2006. This increase was primarily driven by net revenues generated in the PBteen, West Elm, Pottery Barn and Williams-Sonoma brands due to the impact of the extra week of net revenues in fiscal 2007 (a 53-week year) of approximately $40,000,000, an overall increase in catalog and page circulation of 3.7% and 7.9%, respectively, and continued strength in our Internet business, which continued to be our fastest growing shopping channel, with revenues increasing 19.0% to $1,103,750,000. This increase was partially offset by lost revenues in the Hold Everything brand due to its transition during the second quarter of fiscal 2006.

COST OF GOODS SOLD

Dollars in thousands	Fiscal 2008 (52 Weeks)		% Net Revenues	Fiscal 2007 (53 Weeks)		% Net Revenues	Fiscal 2006 (52 Weeks)		% Net Revenues
Total cost of goods sold	$	2,226,300	66.2%	$	2,408,963	61.1%	$	2,240,226	60.1%

Cost of goods sold includes cost of goods, occupancy expenses and shipping costs. Cost of goods consists of cost of merchandise, inbound freight expenses, freight-to-store expenses and other inventory related costs such as shrinkage, damages and replacements. Occupancy expenses consist of rent, depreciation and other occupancy costs, including common area maintenance and utilities. Shipping costs consist of third party delivery services and shipping materials.

Our classification of expenses in cost of goods sold may not be comparable to other public companies, as we do not include non-occupancy related costs associated with our distribution network in cost of goods sold. These

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costs, which include distribution network employment, third party warehouse management and other distribution-related administrative expenses, are recorded in selling, general and administrative expenses.

Within our reportable segments, the direct-to-customer channel does not incur freight-to-store or store occupancy expenses, and typically operates with lower markdowns and inventory shrinkage than the retail channel. However, the direct-to-customer channel incurs higher customer shipping and damage and replacement costs than the retail channel.

Fiscal 2008 vs. Fiscal 2007

Cost of goods sold decreased by $182,663,000, or 7.6%, in fiscal 2008 compared to fiscal 2007. Including expense of approximately $2,390,000 from lease termination related costs associated with our infrastructure cost reduction program, cost of goods sold as a percentage of net revenues increased to 66.2% in fiscal 2008 from 61.1% in fiscal 2007. This increase as a percentage of net revenues was driven by the deleverage of fixed occupancy expenses primarily due to declining sales, an increase in cost of merchandise (including the impact of greater markdowns) and an increase in inventory related reserves of approximately $11,172,000 partially offset by favorable replacement and damages expense.

In the retail channel, cost of goods sold as a percentage of retail net revenues increased 670 basis points during fiscal 2008 compared to fiscal 2007. This increase as a percentage of net revenues was primarily driven by the deleverage of fixed occupancy expenses due to declining sales, an increase in cost of merchandise (including the impact of greater markdowns) and an increase in inventory related reserves, partially offset by favorable replacement and damages expense.

In the direct-to-customer channel, cost of goods sold as a percentage of direct-to-customer net revenues increased by 180 basis points during fiscal 2008 compared to fiscal 2007. This increase as a percentage of net revenues was primarily driven by an increase in cost of merchandise (including the impact of greater markdowns), an increase in inventory related reserves and the deleverage of fixed occupancy expenses due to declining sales, partially offset by favorable replacement and damages expense.

Fiscal 2007 vs. Fiscal 2006

Cost of goods sold increased by $168,737,000, or 7.5%, in fiscal 2007 over fiscal 2006. Cost of goods sold as a percentage of net revenues increased to 61.1% in fiscal 2007 from 60.1% in fiscal 2006. This 100 basis point increase as a percentage of net revenues was primarily driven by increased markdowns, higher cost of merchandise sold due to increased raw material costs and higher inventory-related costs, including costs associated with the start-up of a new returns processing operation, partially offset by fixed occupancy expense leverage generated by incremental net revenues during the additional week in fiscal 2007 and the elimination of cost of goods sold associated with the Hold Everything brand, including expense associated with the Hold Everything transition.

In the retail channel, cost of goods sold as a percentage of retail net revenues increased 140 basis points during fiscal 2007 compared to fiscal 2006. This was primarily driven by increased markdowns, higher cost of merchandise sold due to increasing raw material costs and higher inventory-related costs. This increase was further driven by increased occupancy costs primarily resulting from the retail rollout of our emerging brands. This was partially offset by the elimination of cost of goods sold associated with the Hold Everything brand, including expense associated with the Hold Everything transition, and the leverage on fixed occupancy expenses provided by the incremental net revenues generated during the additional week in fiscal 2007.

In the direct-to-customer channel, cost of goods sold as a percentage of direct-to-customer net revenues increased by 30 basis points during fiscal 2007 compared to fiscal 2006. This was primarily driven by increased markdowns, higher cost of merchandise sold due to increasing raw material costs and higher inventory-related costs, including costs associated with the start-up of a new returns processing operation. This was partially offset by the elimination of cost of goods sold associated with the Hold Everything brand.

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SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

Dollars in thousands	Fiscal 2008 (52 Weeks)		% Net Revenues	Fiscal 2007 (53 Weeks)		% Net Revenues	Fiscal 2006 (52 Weeks)		% Net Revenues
Selling, general and administrative expenses	$	1,093,019	32.5%	$	1,222,573	31.0%	$	1,159,786	31.1%

Selling, general and administrative expenses consist of non-occupancy related costs associated with our retail stores, distribution centers, customer care centers, supply chain operations (buying, receiving and inspection), and corporate administrative functions. These costs include employment, advertising, third party credit card processing and other general expenses.

Due to their distinct distribution and marketing strategies, we experience differing employment and advertising costs as a percentage of net revenues within the retail and direct-to-customer channels. Store employment costs represent a greater percentage of retail net revenues than employment costs as a percentage of net revenues within the direct-to-customer channel. However, catalog advertising expenses are greater within the direct-to-customer channel than the retail channel.

Fiscal 2008 vs. Fiscal 2007

Selling, general and administrative expenses decreased by $129,554,000, or 10.6%, compared to fiscal 2007, however, as a percentage of net revenues, selling, general and administrative expenses increased to 32.5% in fiscal 2008 from 31.0% in fiscal 2007. This increase as a percentage of net revenues was primarily driven by the deleverage of our employment costs due to declining sales, asset impairment charges of approximately $33,995,000 related to our underperforming retail stores, and severance related costs of approximately $10,344,000 associated with our infrastructure cost reduction program. This increase was partially offset by an approximate $16,000,000 benefit related to a gain on the sale of our corporate aircraft, a net benefit of $11,023,000 associated with the reversal of performance-based stock compensation expense, a $9,350,000 incentive payment received from a landlord to compensate us for terminating a store lease prior to its original expiration and reductions in other general expenses. Although total advertising costs as a percentage of net revenues increased due to declining sales, during fiscal 2008 compared to fiscal 2007 we saw a reduction in catalog advertising expenditures due to our catalog circulation optimization strategy.

In the retail channel, selling, general and administrative expenses as a percentage of retail net revenues increased approximately 230 basis points in fiscal 2008 compared to fiscal 2007. This increase as a percentage of net revenues was primarily driven by impairment charges of $33,995,000 associated with our underperforming retail stores and the deleverage of our employment costs due to declining sales, partially offset by a $9,350,000 incentive payment received from a landlord to compensate us for terminating a store lease prior to its original expiration.

In the direct-to-customer channel, selling, general and administrative expenses as a percentage of direct-to-customer net revenues increased by approximately 120 basis points in fiscal 2008 compared to fiscal 2007. This increase as a percentage of net revenues was primarily driven by the deleverage of our employment and advertising costs due to declining sales, partially offset by reductions in other general expenses. Although total advertising costs as a percentage of net revenues increased due to declining sales during fiscal 2008 compared to fiscal 2007, we saw a reduction in catalog advertising expenditures due to our catalog circulation optimization strategy.

Fiscal 2007 vs. Fiscal 2006

Selling, general and administrative expenses increased by $62,787,000, or 5.4%, over fiscal 2006. Selling, general and administrative expenses as a percentage of net revenues decreased to 31.0% in fiscal 2007 from 31.1% in fiscal 2006. This 10 basis point decrease as a percentage of net revenues was primarily driven by certain asset disposal and asset impairment costs incurred in fiscal 2006 that did not recur in fiscal 2007 and lower advertising costs due to a higher percentage of direct-to-customer revenues being generated in the Internet channel, which operates at a lower advertising cost than the catalog. Partially offsetting this favorability, however, were increased employment costs, primarily driven by higher incentive compensation, as well as an

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$8,600,000 net benefit recorded in fiscal 2006 that did not recur in fiscal 2007, from “Unusual Business Events” (unredeemed gift certificate income due to a change in estimate and the Visa/MasterCard litigation settlement income, partially offset by the expense associated with the departure of our Chief Executive Officer and the expense associated with the Hold Everything transition).

In the retail channel, selling, general and administrative expenses as a percentage of retail net revenues decreased approximately 30 basis points in fiscal 2007 versus fiscal 2006. This decrease as a percentage of net revenues was primarily driven by retail asset impairment charges recorded in fiscal 2006 that did not recur in fiscal 2007 and increased income from unredeemed gift certificates and gift cards, partially offset by increased employment costs primarily associated with the growth of the emerging brands.

In the direct-to-customer channel, selling, general and administrative expenses as a percentage of direct-to-customer net revenues decreased by approximately 60 basis points in fiscal 2007 compared to fiscal 2006. This was primarily driven by lower advertising costs due to a higher percentage of direct-to-customer revenues being generated in the Internet channel, which operates at a lower advertising cost than the catalog, a reduction in other general expenses and increased income from unredeemed gift certificates.

INTEREST INCOME AND EXPENSE

Interest income was $1,280,000, $5,041,000 and $11,810,000 in fiscal 2008, fiscal 2007 and fiscal 2006, respectively, comprised primarily of income from short-term investments classified as cash and cash equivalents. The decrease in interest income resulted from a decrease in our average investment balances and lower average interest rates during fiscal 2008 compared to fiscal 2007. The decrease in interest income during fiscal 2007 resulted from a decrease in our average cash balances during fiscal 2007 compared to fiscal 2006.

Interest expense was $1,480,000 (net of capitalized interest of $1,163,000), $2,099,000 (net of capitalized interest of $1,389,000) and $2,125,000 (net of capitalized interest of $699,000) for fiscal 2008, fiscal 2007 and fiscal 2006, respectively. Interest expense, net of capitalized interest, decreased in fiscal 2008 compared to fiscal 2007 due to lower average borrowings on our credit facility during fiscal 2008 and lower average interest rates. Capitalized interest increased in fiscal 2007 from fiscal 2006 due to an increase in interest expense in fiscal 2007 compared to fiscal 2006 resulting from borrowings under our credit facility in fiscal 2007, which did not occur in fiscal 2006.

INCOME TAXES

The effective income tax rate was 28.4% for fiscal 2008 and 38.1% for fiscal 2007 and fiscal 2006. The decrease in the effective income tax rate was primarily driven by certain favorable income tax resolutions during fiscal 2008.

We currently expect our fiscal 2009 effective tax rate to be in the range of 35% to 41%. Throughout the year, we expect that there could be on-going variability in our quarterly tax rates as lower levels of earnings or losses can increase the volatility of our tax rate. Additionally, our quarterly tax rate may continue to experience ongoing variability as taxable events occur and exposures are re-evaluated.

LIQUIDITY AND CAPITAL RESOURCES

As of February 1, 2009, we held $148,822,000 in cash and cash equivalent funds. Consistent with our industry, our cash balances are seasonal in nature, with the fourth quarter representing a significantly higher level of cash than other periods.

Throughout the fiscal year, we utilize our cash balances to build our inventory levels in preparation for our fourth quarter holiday sales. In fiscal 2008, our cash resources were used to fund our inventory and inventory related purchases, catalog advertising and marketing initiatives, purchases of property and equipment and dividend payments. In addition to the current cash balances on hand, we have a $300,000,000 credit facility available as of February 1, 2009 that may be used for loans or letters of credit. Prior to April 4, 2011, we may, upon notice to the lenders, request an increase in the credit facility of up to $200,000,000 to provide for a total of $500,000,000 of

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unsecured revolving credit. During fiscal 2008 and fiscal 2007, we had cumulative borrowings under the credit facility of $195,800,000 and 189,000,000, respectively, of which the maximum amount of borrowings outstanding at any one time were $78,000,000 and $98,000,000 during fiscal 2008 and fiscal 2007, respectively. No amounts were outstanding under the credit facility as of February 1, 2009 or February 3, 2008. Additionally, as of February 1, 2009, $39,559,000 in issued but undrawn standby letters of credit was outstanding under the credit facility. We believe our cash on-hand, in addition to our available credit facilities, will provide adequate liquidity for our business operations over the next 12-month period. Further, based on our current projections, we believe we will be in compliance with all of our bank covenants throughout fiscal 2009.

In fiscal 2008, net cash provided by operating activities was $230,163,000 compared to net cash provided by operating activities of $245,539,000 in fiscal 2007. Cash provided by operating activities in fiscal 2008 was primarily attributable to a decrease in merchandise inventories due to our inventory reduction initiatives throughout fiscal 2008, an increase in deferred rent and lease incentives due to the opening of new stores and a decrease in our prepaid catalog costs due to our catalog circulation optimization strategy. This was partially offset by a decrease in income taxes payable due to the payment of our fiscal 2007 income taxes and a significantly reduced income tax obligation due to reduced earnings in the back half of fiscal 2008.

In fiscal 2007, net cash provided by operating activities was $245,539,000 compared to net cash provided by operating activities of $309,114,000 in fiscal 2006. Cash provided by operating activities in fiscal 2007 was primarily attributable to net earnings, an increase in deferred rent and lease incentives due to new store openings and an increase in customer deposits due to growth in unredeemed gift cards. This was partially offset by an increase in merchandise inventories due to inventories growing at a faster rate than sales, in addition to the purchase of new inventory to support the increase in sales in our core and emerging brands and an increase in our leased square footage of 5.3%.

Net cash used in investing activities was $144,039,000 for fiscal 2008 compared to $197,250,000 in fiscal 2007. Fiscal 2008 purchases of property and equipment were $191,789,000, comprised of $131,792,000 for 29 new and 23 remodeled or expanded stores, $45,847,000 for systems development projects (including e-commerce websites) and $14,150,000 for distribution, facility infrastructure and other projects. Net cash used in investing activities was partially offset by proceeds from the sale of a corporate aircraft of $46,787,000.

Net cash used in investing activities was $197,250,000 for fiscal 2007 compared to $189,287,000 in fiscal 2006. Fiscal 2007 purchases of property and equipment were $212,024,000, comprised of $120,325,000 for 23 new and 26 remodeled or expanded stores, $69,286,000 for systems development projects (including e-commerce websites) and $22,413,000 for distribution, facility infrastructure and other projects. Net cash used in investing activities was partially offset by a $14,770,000 reimbursement from a software developer.

In fiscal 2009, we anticipate investing $90,000,000 to $100,000,000 in the purchase of property and equipment, primarily for the construction of 8 new stores and 7 remodeled or expanded stores, systems development projects (including e-commerce websites), and distribution, facility infrastructure and other projects.

For fiscal 2008, net cash used in financing activities was $52,160,000 compared to $208,482,000 in fiscal 2007, comprised primarily of $50,518,000 for the payment of dividends.

For fiscal 2007, net cash used in financing activities was $208,482,000 compared to $206,027,000 in fiscal 2006, comprised primarily of $190,378,000 for the repurchase of our common stock and $48,863,000 for the payment of dividends, partially offset by $28,362,000 in net proceeds from the exercise of stock options.

Stock Repurchase Program

We did not repurchase any shares of our common stock during fiscal 2008 under our previously authorized $150,000,000 share repurchase program. On December 2, 2008, our Board of Directors terminated this share repurchase program in response to current economic conditions and our belief that in these times it is strategically important to maintain a strong financial position and greater cash reserves.

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Contractual Obligations

The following table provides summary information concerning our future contractual obligations as of February 1, 2009:

	Payments Due by Period 1
Dollars in thousands	Fiscal 2009		Fiscal 2010 to Fiscal 2012		Fiscal 2013 to Fiscal 2014		Thereafter		Total
Mississippi industrial development bonds	$	13,150	$	—	$	—	$	—	$	13,150
Memphis-based distribution facilities obligation		1,438		4,410		3,422		1,968		11,238
Capital leases		114		371		88		—		573
Interest 2		1,293		2,923		1,069		281		5,566
Operating leases 3,4		233,240		605,030		315,673		614,378		1,768,321
Purchase obligations 5		339,302		4,875		—		—		344,177
Total	$	588,537	$	617,609	$	320,252	$	616,627	$	2,143,025

¹ This table excludes $22.8 million of liabilities for unrecognized tax benefits under FIN 48, as we are not able to reasonably estimate when cash payments for these liabilities will occur. This amount, however, has been recorded as a liability in the accompanying Consolidated Balance Sheet as of February 1, 2009.

² Represents interest expected to be paid on our long-term debt, Mississippi industrial development bonds and our capital leases.

³ See discussion on operating leases in the “Off Balance Sheet Arrangements” section and Note E to our Consolidated Financial Statements.

⁴ Projected payments include only those amounts that are fixed and determinable as of the reporting date.

⁵ Represents estimated commitments at year-end to purchase inventory and other goods and services in the normal course of business to meet operational requirements.

Mississippi Industrial Development Bonds

In June 2004, in an effort to utilize tax incentives offered to us by the state of Mississippi, we entered into an agreement whereby the Mississippi Business Finance Corporation issued $15,000,000 in long-term variable rate industrial development bonds, the proceeds, net of debt issuance costs, of which were loaned to us to finance the acquisition and installation of leasehold improvements and equipment located in our Olive Branch, Mississippi distribution center. The bonds are marketed through a remarketing agent and are secured by a letter of credit issued under our $300,000,000 line of credit facility. The bonds mature on June 1, 2024. The bond rate resets each week based upon current market rates. The rate in effect at February 1, 2009 was 1.4%.

The bond agreement allows for each bondholder to tender their bonds to the trustee for repurchase, on demand, with seven days advance notice. In the event the remarketing agent fails to remarket the bonds, the trustee will draw upon the letter of credit to fund the purchase of the bonds. As of February 1, 2009, $13,150,000 remained outstanding on these bonds and was classified as current debt. The bond proceeds were restricted for use in the acquisition and installation of leasehold improvements and equipment located in our Olive Branch, Mississippi distribution center.

Memphis-Based Distribution Facilities Obligation

As of February 1, 2009, total debt of $11,238,000 consisted entirely of bond-related debt pertaining to the consolidation of our Memphis-based distribution facilities in accordance with FIN 46R, “Consolidation of Variable Interest Entities.” See discussion of the consolidation of our Memphis-based distribution facilities at Note F to our Consolidated Financial Statements.

Capital Leases

As of February 1, 2009, capital lease obligations of $573,000 consist primarily of leases for distribution center equipment. As of February 3, 2008, we did not have any outstanding capital lease obligations.

Other Contractual Obligations

We have other liabilities reflected in our Consolidated Balance Sheets. The payment obligations associated with these liabilities are not reflected in the table above due to the absence of scheduled maturities. The timing of

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these payments cannot be determined, except for amounts estimated to be payable in fiscal 2009 which are included in our current liabilities as of February 1, 2009.

Commercial Commitments

The following table provides summary information concerning our outstanding commercial commitments as of February 1, 2009:

	Amount of Outstanding Commitment Expiration By Period
Dollars in thousands	Fiscal 2009		Fiscal 2010 to Fiscal 2012	Fiscal 2013 to Fiscal 2014	Thereafter	Total
Credit facility	$	—	—	—	—	$	—
Letter of credit facilities		28,518	—	—	—		28,518
Standby letters of credit		39,559	—	—	—		39,559
Total	$	68,077	—	—	—	$	68,077

Credit Facility

As of February 1, 2009, we have an amended credit facility that provides for a $300,000,000 unsecured revolving line of credit that may be used for loans or letters of credit. Prior to April 4, 2011, we may, upon notice to the lenders, request an increase in the credit facility of up to $200,000,000, to provide for a total of $500,000,000 of unsecured revolving credit. The amended revolving line of credit facility contains certain financial covenants, including a maximum leverage ratio (funded debt adjusted for lease and rent expense to Earnings Before Interest, Income Tax, Depreciation, Amortization and Rent Expense, or “EBITDAR”), a minimum fixed charge coverage ratio (calculated as EBITDAR to total fixed charges), and covenants limiting our ability to repurchase shares of stock or increase our dividend, in addition to covenants limiting our ability to dispose of assets, make acquisitions, be acquired (if a default would result from the acquisition), incur indebtedness, grant liens and make investments. The credit facility contains events of default that include, among others, non-payment of principal, interest or fees, violation of covenants, inaccuracy of representations and warranties, bankruptcy and insolvency events, material judgments, cross defaults to material indebtedness and events constituting a change of control. The occurrence of an event of default will increase the applicable rate of interest by 2.0% and could result in the acceleration of our obligations under the credit facility and an obligation of any or all of our subsidiaries that have guaranteed our credit facility to pay the full amount of our obligations under the credit facility. The amended credit facility matures on October 4, 2011, at which time all outstanding borrowings must be repaid and all outstanding letters of credit must be cash collateralized.

We may elect interest rates calculated at (i) Bank of America’s prime rate (or, if greater, the average rate on overnight federal funds plus one-half of one percent, or a rate based on LIBOR plus one percent) plus a margin based on our leverage ratio, or (ii) LIBOR plus a margin based on our leverage ratio. During fiscal 2008 and fiscal 2007, we had cumulative borrowings under the credit facility of $195,800,000 and $189,000,000, respectively, of which the maximum amount of borrowings outstanding at any one time were $78,000,000 and $98,000,000 during fiscal 2008 and fiscal 2007, respectively. No amounts were outstanding under the credit facility as of February 1, 2009 or February 3, 2008. As of February 1, 2009, $39,559,000 in issued but undrawn standby letters of credit was outstanding under the credit facility. The standby letters of credit were issued to secure the liabilities associated with workers’ compensation, other insurance programs and certain debt transactions. As of February 1, 2009, we were in compliance with our financial covenants under the credit facility and, based on our current projections, expect to be in compliance throughout 2009.

Letter of Credit Facilities

We have five unsecured commercial letter of credit reimbursement facilities, each of which expires on September 4, 2009. The aggregate credit available under all letter of credit facilities is $165,000,000. The letter of credit facilities contain substantially similar covenants and provide for substantially similar events of default as the credit facility. Interest on amounts outstanding under the letter of credit facilities accrues at the lender’s

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prime rate (or, if greater, the average rate on overnight federal funds plus one-half of one percent) plus 2.0%. As of February 1, 2009, an aggregate of $28,518,000 was outstanding under the letter of credit facilities. Such letters of credit represent only a future commitment to fund inventory purchases to which we had not taken legal title as of February 1, 2009. The latest expiration possible for any future letters of credit issued under the facilities is February 1, 2010.

OFF BALANCE SHEET ARRANGEMENTS

Operating Leases

We lease store locations, warehouses, corporate facilities, care centers and certain equipment for original terms ranging generally from 2 to 22 years. Certain leases contain renewal options for periods up to 20 years. The rental payment requirements in our store leases are typically structured as either minimum rent, minimum rent plus additional rent based on a percentage of store sales if a specified store sales threshold is exceeded, or rent based on a percentage of store sales if a specified store sales threshold or contractual obligations of the landlord has not been met. Contingent rental payments, including rental payments that are based on a percentage of sales, cannot be predicted with certainty at the onset of the lease term. Accordingly, any contingent rental payments are recorded as incurred each period when the sales threshold is probable and are excluded from our calculation of deferred rent liability. See Notes A and E to our Consolidated Financial Statements.

The following represent our distribution facility operating lease agreements:

• We have an operating lease for a 1,002,000 square foot retail distribution facility located in Olive Branch, Mississippi. The lease has an initial term of 22.5 years, expiring January 2022, with two optional five-year renewals.

• We have an operating lease for an additional 1,103,000 square foot retail distribution facility located in Olive Branch, Mississippi. The lease has an initial term of 22.5 years, expiring January 2023, with two optional five-year renewals.

• We have an operating lease for an additional 1,170,000 square feet of a distribution facility located in Olive Branch, Mississippi. The lease has an initial term of six years, expiring January 2011, with two optional two-year renewals.

• In February 2004, we entered into an agreement to lease 781,000 square feet of a distribution center located in Cranbury, New Jersey. The lease has an initial term of seven years, with three optional five-year renewals. The agreement allows us to lease an additional 219,000 square feet of the facility in the event the current tenant vacates the premises.

• In August 2004, we entered into an agreement to lease a 500,000 square foot distribution facility located in Memphis, Tennessee. In August 2008, we renewed this lease for an additional two year period and the lease now expires in August 2010. In January 2009, in connection with our infrastructure cost reduction program, we closed this distribution facility and vacated the property as of February 1, 2009. We do, however, continue to be liable for future rental payments under our lease agreement through the end of the lease term in August 2010. Therefore, we have recorded a liability for all contractual future obligations within our Consolidated Balance Sheet as of February 1, 2009.

• In May 2006, we entered into an agreement to lease a 418,000 square foot distribution facility located in South Brunswick, New Jersey. The lease has an initial term of two years, with two optional two-year renewals. In May 2008, we exercised our option under the lease agreement to renew the agreement for an additional two year period. The lease now expires in June 2010.

• In September 2007, we entered into a 10-year agreement to lease 1,180,000 square feet of distribution facility space in City of Industry, California. As of February 3, 2008, we were occupying 950,000 square feet of this facility and, in February 2008, we began occupying the remaining 230,000 square feet.

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• During fiscal 2008, we entered into lease agreements in Florida and North Carolina for storage space associated with the additional insourcing of our furniture delivery hubs within the region and for the purpose of a small manufacturing facility.

We are party to a variety of contractual agreements under which we may be obligated to indemnify the other party for certain matters. These contracts primarily relate to our commercial contracts, operating leases, trademarks, intellectual property, financial agreements and various other agreements. Under these contracts, we may provide certain routine indemnifications relating to representations and warranties or personal injury matters. The terms of these indemnifications range in duration and may not be explicitly defined. Historically, we have not made significant payments for these indemnifications. We believe that if we were to incur a loss in any of these matters, the loss would not have a material effect on our financial condition or results of operations.

CONSOLIDATION OF MEMPHIS-BASED DISTRIBUTION FACILITIES

Our Memphis-based distribution facilities include an operating lease entered into in July 1983 for a distribution facility in Memphis, Tennessee. The lessor is a general partnership (“Partnership 1”) comprised of W. Howard Lester, our Chairman of the Board of Directors and Chief Executive Officer and James A. McMahan, a Director Emeritus and a significant shareholder. Partnership 1 does not have operations separate from the leasing of this distribution facility and does not have lease agreements with any unrelated third parties.

Partnership 1 financed the construction of this distribution facility through the sale of a total of $9,200,000 of industrial development bonds in 1983 and 1985. Annual principal payments and monthly interest payments are required through maturity in December 2010. The Partnership 1 industrial development bonds are collateralized by the distribution facility and the individual partners guarantee the bond repayments. As of February 1, 2009, $425,000 was outstanding under the Partnership 1 industrial development bonds.

We made annual rental payments in fiscal 2008, fiscal 2007 and fiscal 2006 of approximately $618,000, plus interest on the bonds calculated at a variable rate determined monthly (approximately 3.0% as of February 1, 2009), applicable taxes, insurance and maintenance expenses. Although the current term of the lease expires in August 2009, we are obligated to renew the operating lease on an annual basis until these bonds are fully repaid.

Our other Memphis-based distribution facility includes an operating lease entered into in August 1990 for another distribution facility that is adjoined to the Partnership 1 facility in Memphis, Tennessee. The lessor is a general partnership (“Partnership 2”) comprised of W. Howard Lester, James A. McMahan and two unrelated parties. Partnership 2 does not have operations separate from the leasing of this distribution facility and does not have lease agreements with any unrelated third parties.

Partnership 2 financed the construction of this distribution facility and related addition through the sale of a total of $24,000,000 of industrial development bonds in 1990 and 1994. Quarterly interest and annual principal payments are required through maturity in August 2015. The Partnership 2 industrial development bonds are collateralized by the distribution facility and require us to maintain certain financial covenants. As of February 1, 2009, $10,813,000 was outstanding under the Partnership 2 industrial development bonds.

We made annual rental payments of approximately $2,577,000, $2,591,000 and $2,585,000 plus applicable taxes, insurance and maintenance expenses in fiscal 2008, fiscal 2007 and fiscal 2006, respectively. Although the current term of the lease expires in August 2009, we are obligated to renew the operating lease on an annual basis until these bonds are fully repaid.

The two partnerships described above qualify as variable interest entities under FIN 46R due to their related party relationship to us and our obligation to renew the leases until the bonds are fully repaid. Accordingly, the two related party variable interest entity partnerships, from which we lease our Memphis-based distribution facilities, are consolidated by us. As of February 1, 2009, our consolidated balance sheet includes $16,372,000 in assets (primarily buildings), $11,238,000 in debt and $5,134,000 in other long-term liabilities.

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IMPACT OF INFLATION

The impact of inflation on our results of operations for the past three fiscal years has not been significant. In light of the current economic environment, however, we cannot be certain of the effect inflation or deflation may have on our results of our operations in the future.

CRITICAL ACCOUNTING POLICIES

Management’s Discussion and Analysis of Financial Condition and Results of Operations is based on our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosures of contingent assets and liabilities. These estimates and assumptions are evaluated on an ongoing basis and are based on historical experience and various other factors that we believe to be reasonable under the circumstances. Actual results could differ from these estimates.

We believe the following critical accounting policies affect the significant estimates and assumptions used in the preparation of our consolidated financial statements.

Merchandise Inventories

Merchandise inventories, net of an allowance for excess quantities and obsolescence, are stated at the lower of cost (weighted average method) or market. To determine if the value of our inventory should be marked down below cost, we consider current and anticipated demand, customer preferences, age of the merchandise and fashion trends. Our inventory value is adjusted periodically to reflect current market conditions, which requires management judgments that may significantly affect the ending inventory valuation, as well as gross margin. The significant estimates used in inventory valuation are obsolescence (including excess and slow-moving inventory and lower of cost or market reserves) and estimates of inventory shrinkage. We reserve for obsolescence based on historical trends, aging reports, specific identification and our estimates of future retail sales prices.

Reserves for shrinkage are estimated, at the concept and channel level, as a percentage of net sales based on historical shrinkage results, expectations of future shrinkage and current inventory levels. Actual shrinkage is recorded at year-end based on the results of our physical inventory count and can vary from our estimates due to such factors as changes in operations within our distribution centers, the mix of our inventory (which ranges from large furniture to small tabletop items) and execution against loss prevention initiatives in our stores, off-site storage locations, and our third-party transportation providers.

Due to these factors, our obsolescence and shrinkage reserves contain uncertainties. Both estimates have calculations that require management to make assumptions and to apply judgment regarding a number of factors, including market conditions, the selling environment, historical results and current inventory trends. If actual obsolescence or shrinkage estimates change from our original estimate, we will adjust our reserves accordingly. Management does not believe that changes in the assumptions used in these estimates would have a significant effect on our inventory balances. We have made no material changes to our assumptions included in the calculations of the obsolescence and shrinkage reserves. In addition, we do not believe a 10% change in our inventory reserves would have a material effect on net earnings. As of February 1, 2009 and February 3, 2008, our inventory reserves were $20,647,000 and $9,475,000, respectively.

Advertising and Prepaid Catalog Expenses

Advertising expenses consist of media and production costs related to catalog mailings, e-commerce advertising and other direct marketing activities. All advertising costs are expensed as incurred, or upon the release of the initial advertisement, with the exception of prepaid catalog expenses. Prepaid catalog expenses consist primarily of third party incremental direct costs, including creative design, paper, printing, postage and mailing costs for all of our direct response catalogs. Such costs are capitalized as prepaid catalog expenses and are amortized over their expected period of future benefit. Such amortization is based upon the ratio of actual revenues to the total of actual and estimated future revenues on an individual catalog basis. Estimated future revenues are based upon

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various factors such as the total number of catalogs and pages circulated, the probability and magnitude of consumer response and the assortment of merchandise offered. Each catalog is generally fully amortized over a six to nine month period, with the majority of the amortization occurring within the first four to five months. Prepaid catalog expenses are evaluated for realizability on a monthly basis by comparing the carrying amount associated with each catalog to the estimated probable remaining future profitability (remaining net revenues less merchandise cost of goods sold, selling expenses and catalog related-costs) associated with that catalog. If the catalog is not expected to be profitable, the carrying amount of the catalog is impaired accordingly.

Property and Equipment

Property and equipment is stated at cost. Depreciation is computed using the straight-line method over the estimated useful lives of the assets.

We review the carrying value of all long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. We review for impairment all stores for which current or projected cash flows from operations are either negative or nominal, or the construction costs are significantly in excess of the amount originally expected. Impairment results when the carrying value of the assets exceeds the undiscounted future cash flows over the remaining life of the lease. Our estimate of undiscounted future cash flows over the lease term (typically 5 to 22 years) is based upon our experience, historical operations of the stores and estimates of future store profitability and economic conditions. The future estimates of store profitability and economic conditions require estimating such factors as sales growth, gross margin, employment rates, lease escalations, inflation on operating expenses and the overall economics of the retail industry for up to 20 years in the future, and are therefore subject to variability and difficult to predict. If a long-lived asset is found to be impaired, the amount recognized for impairment is equal to the difference between the net carrying value and the asset’s fair value. The fair value is estimated based upon future cash flows (discounted at a rate that is commensurate with the risk and approximates our weighted average cost of capital). We recorded impairment charges related to our underperforming retail stores of $33,995,000, $1,082,000 and $5,629,000 in selling, general and administrative expenses in fiscal 2008, fiscal 2007 and fiscal 2006, respectively. See Note A to the Consolidated Financial Statements for additional information regarding Property and Equipment.

Self-Insured Liabilities

We are primarily self-insured for workers’ compensation, employee health benefits and product and general liability claims. We record self-insurance liabilities based on claims filed, including the development of those claims, and an estimate of claims incurred but not yet reported. Factors affecting this estimate include future inflation rates, changes in severity, benefit level changes, medical costs and claim settlement patterns. Should a different amount of claims occur compared to what was estimated, or costs of the claims increase or decrease beyond what was anticipated, reserves may need to be adjusted accordingly. We determine our workers’ compensation liability and product and general liability claims reserves based on an actuarial analysis of historical claims data. Self-insurance reserves for employee health benefits, workers’ compensation and product and general liability claims were $21,006,000 and $21,512,000 as of February 1, 2009 and February 3, 2008, respectively, and are recorded within accrued salaries, benefits and other on our Consolidated Balance Sheets.

Customer Deposits

Customer deposits are primarily comprised of unredeemed gift cards, gift certificates, and merchandise credits and deferred revenue related to undelivered merchandise. We maintain a liability for unredeemed gift cards, gift certificates, and merchandise credits until the earlier of redemption, escheatment or four years as we have concluded that the likelihood of our gift cards and gift certificates being redeemed beyond four years from the date of issuance is remote.

Revenue Recognition

We recognize revenues and the related cost of goods sold (including shipping costs) at the time the products are delivered to our customers. Revenue is recognized for retail sales (excluding home-delivered merchandise) at the

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point of sale in the store and for home-delivered merchandise and direct-to-customer sales when the merchandise is delivered to the customers. Discounts provided to customers are accounted for as a reduction of sales. We record a reserve for estimated product returns in each reporting period. Shipping and handling fees charged to the customer are recognized as revenue at the time the products are delivered to the customer. Revenues are presented net of any taxes collected from customers and remitted to governmental authorities.

Sales Return Reserve

Our customers may return purchased items for an exchange or refund. We record a reserve for estimated product returns, net of cost of goods sold, based on historical return trends together with current product sales performance. As of February 1, 2009 and February 3, 2008, our reserve for sales returns was $10,142,000 and $17,259,000, respectively.

Stock-Based Compensation

We measure and record compensation expense in our consolidated financial statements for all stock-based compensation awards using a fair value method. For stock options and stock-settled stock appreciation rights (“option awards”), fair value is determined using the Black-Scholes valuation model, while restricted stock units are valued using the closing price of our stock on the date prior to the date of issuance. Significant factors affecting the fair value of option awards include the estimated future volatility of our stock price and the estimated expected term until the option award is exercised or cancelled. The fair value of the award is amortized over the requisite service period. Total stock-based compensation expense was $12,131,000, $26,812,000 and $26,759,000, in fiscal 2008, fiscal 2007 and fiscal 2006, respectively, and is recorded as a component of selling, general and administrative expenses.

Fiscal 2008 stock-compensation expense was impacted by the reversal of approximately $11,023,000 of expense previously recognized relating to previously issued stock awards that would have vested based on the achievement of certain performance criteria. We had recognized compensation expense related to these awards as we believed that it was probable that the performance criteria would be achieved. During the third quarter of fiscal 2008, due to the decline in our operating performance, we concluded that it was no longer probable that these criteria would be achieved and therefore reversed approximately $11,023,000 of compensation expense previously recognized.

Subsequently, our Board of Directors decided to remove or modify the performance conditions but retain the service provisions of the awards. As a result, these awards are now considered probable of vesting. Accordingly, we measured the fair value of all such awards as of the date of the modification and will recognize the fair value over the remaining service period of the awards.

Income Taxes

Income taxes are accounted for using the asset and liability method. Under this method, deferred income taxes arise from temporary differences between the tax basis of assets and liabilities and their reported amounts in the consolidated financial statements. We record reserves for estimates of probable settlements of foreign and domestic tax audits. At any one time, many tax years are subject to audit by various taxing jurisdictions. The results of these audits and negotiations with taxing authorities may affect the ultimate settlement of these issues. Additionally, our effective tax rate in a given financial statement period may be materially impacted by changes in the mix and level of earnings.

We adopted the provisions of FASB Interpretation (“FIN”) No. 48, Accounting for Uncertainty in Income Taxes – An Interpretation of FASB Statement No. 109 on January 29, 2007, which clarifies the accounting for uncertain tax positions. FIN 48 prescribes a process for the recognition and measurement of a tax position taken or expected to be taken in a tax return and requires us to make estimates of the likelihood that certain tax positions will be realized upon ultimate settlement. It is reasonably possible that current income tax examinations involving uncertain tax positions could be resolved within the next 12 months through administrative adjudicative procedures or settlement.

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NEW ACCOUNTING PRONOUNCEMENTS

On February 4, 2008, we adopted Statement of Financial Accounting Standards (“SFAS”) No. 157, Fair Value Measurements, for all financial assets and liabilities. SFAS No. 157 establishes a standard definition for fair value, provides a framework under generally accepted accounting principles for measuring fair value and expands disclosure requirements for fair value measurements. In December 2007, the Financial Accounting Standards Board (“FASB”) issued FASB Staff Position (“FSP”) No. 157-b, Effective Date of FASB No. 157, which delayed the effective date of SFAS No. 157 for all nonfinancial assets and liabilities (except those recognized or disclosed at fair value in the financial statements on a recurring basis) to annual reporting periods beginning after November 15, 2008. We do not have significant financial assets and liabilities or nonfinancial assets and liabilities recognized or disclosed at fair value on a recurring basis and, as such, the adoption of SFAS No. 157 did not have a material impact on our consolidated financial position, results of operations or cash flows. Further, we do not expect the adoption of FSP No. 157-b to have a material impact on our consolidated financial position, results of operations or cash flows. Additional disclosures will be provided in our Form 10-Q for our first fiscal quarter ending May 3, 2009.

On February 4, 2008, we adopted the provisions of SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities – Including an Amendment of FASB Statement No. 115. SFAS No. 159 permits entities to choose to measure eligible items at fair value at specified election dates and report unrealized gains and losses on items for which the fair value option has been elected in earnings at each subsequent reporting date. The adoption of SFAS No. 159 did not have a material impact on our consolidated financial position, results of operations or cash flows.

In December 2007, the FASB issued SFAS No. 141 (Revised 2007), Business Combinations (“SFAS 141(R)”). SFAS 141(R) will change the accounting for business combinations. Under SFAS 141(R), an acquiring entity will be required to recognize all the assets acquired and liabilities assumed in a transaction at the acquisition date fair value with limited exceptions. SFAS 141(R) will change the accounting treatment for certain specific acquisition-related items, including expensing acquisition-related costs as incurred, valuing non-controlling interests (minority interests) at fair value at the acquisition date, and expensing restructuring costs associated with an acquired business. SFAS 141(R) applies prospectively, with limited exceptions, to business combinations for which the acquisition date is on or after the first fiscal period beginning on or after December 15, 2008. Early adoption is not permitted. Generally, the effect of SFAS 141(R) will depend on future acquisitions and, as such, we do not currently expect the adoption of this Statement to have a material impact on our consolidated financial position, results of operations or cash flows.

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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to market risks, which include significant deterioration of the U.S. and foreign markets, changes in U.S. interest rates, foreign currency exchange rates, including the devaluation of the U.S. dollar, and the effects of uncertain economic forces which may affect the prices we pay our vendors in the foreign countries in which we do business. We do not engage in financial transactions for trading or speculative purposes.

Interest Rate Risk

As of February 1, 2009, we have three debt instruments with variable interest rates which subject us to risks associated with changes in interest rates (the interest payable on our credit facility, Mississippi industrial development bond and bond-related debt associated with our Memphis-based distribution facilities). As of February 1, 2009, the total outstanding principal balance on these instruments was $13,575,000 (weighted average interest rate of approximately 2.0% as of February 1, 2009). Although we had no borrowings outstanding under our line of credit facility as of year-end, had we borrowed under our line of credit on February 1, 2009, the interest rate in effect would have been approximately 2.8%. If interest rates on these existing variable rate debt instruments rose 20 basis points (an approximate 10% increase in the associated variable rates as of February 1, 2009), our results from operations and cash flows would not be materially affected.

In addition, we have fixed and variable income investments consisting of short-term investments classified as cash and cash equivalents, which are also affected by changes in market interest rates. As of February 1, 2009, our investments, made solely in U.S Treasury bills and money market funds, are stated at cost and approximate their fair values. An increase in interest rates of 10% would have an immaterial effect on the value of these investments. Declines in interest rates, however, have and would in the future decrease the income derived from these investments.

Foreign Currency Risks

We purchase a significant amount of inventory from vendors outside of the U.S. in transactions that are denominated in U.S. dollars, however, approximately 5% of our international purchase transactions are in currencies other than the U.S. dollar, primarily the euro. Any currency risks related to these international purchase transactions were not significant to us during fiscal 2008 and fiscal 2007. Since we pay for the majority of our international purchases in U.S. dollars, however, a decline in the U.S. dollar relative to other foreign currencies would subject us to risks associated with increased purchasing costs from our vendors in their effort to offset any lost profits associated with any currency devaluation. We can not predict with certainty the effect these increased costs may have on our financial statements or results of operations.

In addition, as of February 1, 2009, we have 16 retail stores in Canada and limited operations in both Europe and Asia, each of which expose us to market risk associated with foreign currency exchange rate fluctuations. Although these exchange rate fluctuations have not been material to us in the past, we may enter into foreign currency contracts in the future to minimize any currency remeasurement risk associated with the intercompany assets and liabilities of our subsidiaries. We did not enter into any foreign currency contracts during fiscal 2008 or fiscal 2007.

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Williams-Sonoma, Inc.

Consolidated Statements of Earnings

	Fiscal Year Ended
Dollars and shares in thousands, except per share amounts	Feb. 1, 2009 (52 Weeks)			Feb. 3, 2008 (53 Weeks)			Jan. 28, 2007 (52 Weeks)
Net revenues	$	3,361,472		$	3,944,934		$	3,727,513
Cost of goods sold		2,226,300			2,408,963			2,240,226
Gross margin		1,135,172			1,535,971			1,487,287
Selling, general and administrative expenses		1,093,019			1,222,573			1,159,786
Interest income		(1,280	)		(5,041	)		(11,810	)
Interest expense		1,480			2,099			2,125
Earnings before income taxes		41,953			316,340			337,186
Income taxes		11,929			120,583			128,318
Net earnings	$	30,024		$	195,757		$	208,868
Basic earnings per share	$	0.28		$	1.79		$	1.83
Diluted earnings per share	$	0.28		$	1.76		$	1.79
Shares used in calculation of earnings per share:
Basic		105,530			109,273			114,020
Diluted		106,880			111,447			116,773

See Notes to Consolidated Financial Statements.

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Williams-Sonoma, Inc.

Consolidated Balance Sheets

Dollars and shares in thousands, except per share amounts	Feb. 1, 2009		Feb. 3, 2008
ASSETS
Current assets
Cash and cash equivalents	$	148,822	$	118,950
Accounts receivable – net		37,405		48,052
Merchandise inventories – net		572,899		693,661
Prepaid catalog expenses		36,424		54,907
Prepaid expenses		45,354		32,276
Deferred income taxes		90,349		91,843
Other assets		9,420		10,086
Total current assets		940,673		1,049,775
Property and equipment – net		942,219		981,075
Non-current deferred income taxes		36,555		44,997
Other assets, net		16,017		18,007
Total assets	$	1,935,464	$	2,093,854
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities
Accounts payable	$	162,362	$	197,561
Accrued salaries, benefits and other		75,732		95,383
Customer deposits		192,209		201,743
Income taxes payable		112		83,984
Current portion of long-term debt		14,702		14,734
Other liabilities		15,620		18,129
Total current liabilities		460,737		611,534
Deferred rent and lease incentives		264,672		247,836
Long-term debt		10,259		11,238
Other long-term obligations		51,812		57,523
Total liabilities		787,480		928,131
Commitments and contingencies – See Note L
Shareholders’ equity
Preferred stock, $.01 par value, 7,500 shares authorized, none issued		—		—
Common stock, $.01 par value, 253,125 shares authorized,
105,664 shares issued and outstanding at February 1, 2009; 105,349 shares issued and outstanding at February 3, 2008		1,057		1,054
Additional paid-in capital		416,366		403,217
Retained earnings		725,052		746,201
Accumulated other comprehensive income		5,509		15,251
Total shareholders’ equity		1,147,984		1,165,723
Total liabilities and shareholders’ equity	$	1,935,464	$	2,093,854

See Notes to Consolidated Financial Statements.

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Williams-Sonoma, Inc.

Consolidated Statements of Shareholders’ Equity

	Common Stock					Additional Paid-in Capital			Retained Earnings			Accumulated Other Comprehensive Income			Total Shareholders’ Equity			Comprehensive Income
Dollars and shares in thousands	Shares		Amount
Balance at January 29, 2006	114,779		$	1,148		$	325,146		$	791,329		$	7,695		$	1,125,318
Net earnings	—			—			—			208,868			—			208,868		$	208,868
Foreign currency translation adjustment	—			—			—			—			76			76			76
Unrealized gain on investment	—			—			—			—			13			13			13
Exercise of stock options and related tax effect	913			9			21,349			—			—			21,358
Repurchase and retirement of common stock	(5,824	)		(58	)		(15,031	)		(170,419	)		—			(185,508	)
Stock-based compensation expense	—			—			26,759			54			—			26,813
Dividends declared	—			—			—			(45,507	)		—			(45,507	)
Comprehensive income																		$	208,957
Balance at January 28, 2007	109,868		$	1,099		$	358,223		$	784,325		$	7,784		$	1,151,431
Net earnings	—			—			—			195,757			—			195,757			195,757
Foreign currency translation adjustment	—			—			—			—			7,482			7,482			7,482
Unrealized loss on investment	—			—			—			—			(15	)		(15	)		(15	)
Exercise of stock options and related tax effect	1,677			16			36,337			—			—			36,353
Repurchase and retirement of common stock	(6,196	)		(61	)		(18,060	)		(172,257	)		—			(190,378	)
Stock-based compensation expense							26,717			60			—			26,777
Dividends declared	—			—			—			(50,000	)		—			(50,000	)
Adoption of FIN 48	—			—			—			(11,684	)		—			(11,684	)
Comprehensive income																		$	203,224
Balance at February 3, 2008	105,349		$	1,054		$	403,217		$	746,201		$	15,251		$	1,165,723
Net earnings	—			—			—			30,024			—			30,024			30,024
Foreign currency translation adjustment	—			—			—			—			(9,742	)		(9,742	)		(9,742	)
Exercise of stock options and related tax effect	299			3			1,034			—			—			1,037
Release of restricted stock units	16			—			—			—			—			—
Stock-based compensation expense	—			—			12,115			16			—			12,131
Dividends declared	—			—			—			(51,189	)		—			(51,189	)
Comprehensive income																		$	20,282
Balance at February 1, 2009	105,664		$	1,057		$	416,366		$	725,052		$	5,509		$	1,147,984

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Williams-Sonoma, Inc.

Consolidated Statements of Cash Flows

	Fiscal Year Ended
Dollars in thousands	Feb. 1, 2009 (52 Weeks)			Feb. 3, 2008 (53 Weeks)			Jan. 28, 2007 (52 Weeks)
Cash flows from operating activities:
Net earnings	$	30,024		$	195,757		$	208,868
Adjustments to reconcile net earnings to net cash provided by (used in) operating activities:
Depreciation and amortization		148,083			140,701			135,031
Loss on disposal/impairment of assets		39,317			4,700			17,113
Gain on sale of asset		(16,115	)		—			—
Amortization of deferred lease incentives		(31,266	)		(29,400	)		(28,683	)
Deferred income taxes		5,107			(31,951	)		(50,751	)
Tax benefit from exercise of stock-based compensation		1,059			3,922			2,545
Stock-based compensation expense		12,131			26,812			26,813
Other		(416	)		—			—
Changes in:
Accounts receivable		9,579			2,091			1,070
Merchandise inventories		118,679			(81,469	)		(90,598	)
Prepaid catalog expenses		18,483			4,702			(5,684	)
Prepaid expenses and other assets		(8,578	)		(8,161	)		5,398
Accounts payable		(27,532	)		(30,068	)		11,981
Accrued salaries, benefits and other current and long term liabilities1		(24,361	)		5,945			(6,141	)
Customer deposits		(8,644	)		13,458			14,958
Deferred rent and lease incentives		49,619			37,675			49,079
Income taxes payable		(85,006	)		(9,175	)		18,115
Net cash provided by operating activities		230,163			245,539			309,114
Cash flows from investing activities:
Purchases of property and equipment		(191,789	)		(212,024	)		(190,980	)
Proceeds from sale of assets and investments		47,257			285			589
Proceeds from software developer reimbursement		—			14,770			—
Proceeds from insurance reimbursement		632			—			1,104
Other		(139	)		(281	)		—
Net cash used in investing activities		(144,039	)		(197,250	)		(189,287	)
Cash flows from financing activities:
Borrowings under line of credit		195,800			189,000			—
Repayments of borrowings under line of credit		(195,800	)		(189,000	)		—
Repayments of long-term obligations		(1,617	)		(2,703	)		(4,679	)
Net proceeds from exercise of stock options		461			28,362			13,935
Excess tax benefit from exercise of stock-based compensation		1,034			5,100			4,878
Payment of dividends		(50,518	)		(48,863	)		(34,435	)
Credit facility costs		(1,520	)		—			(218	)
Repurchases of common stock		—			(190,378	)		(185,508	)
Net cash used in financing activities		(52,160	)		(208,482	)		(206,027	)
Effect of exchange rates on cash and cash equivalents		(4,092	)		3,714			647
Net increase (decrease) in cash and cash equivalents		29,872			(156,479	)		(85,553	)
Cash and cash equivalents at beginning of year		118,950			275,429			360,982
Cash and cash equivalents at end of year	$	148,822		$	118,950		$	275,429
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest 2	$	2,550		$	3,484		$	2,815
Income taxes3		118,356			154,948			155,041

¹ Includes the impact from the implementation of FIN 48. See Note A.

² Interest paid, net of capitalized interest, was $1.4 million, $2.1 million and $2.1 million in fiscal 2008, fiscal 2007 and fiscal 2006, respectively.

³ Income taxes paid is presented net of refunds of $1.4 million, $1.5 million and $1.7 million in fiscal 2008, fiscal 2007, and fiscal 2006, respectively.

See Notes to Consolidated Financial Statements.

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Williams-Sonoma, Inc.

Notes to Consolidated Financial Statements

Note A: Summary of Significant Accounting Policies

We are a specialty retailer of products for the home. The retail segment of our business sells our products through our five retail store concepts (Williams-Sonoma, Pottery Barn, Pottery Barn Kids, West Elm and Williams-Sonoma Home). The direct-to-customer segment of our business sells similar products through our seven direct-mail catalogs (Williams-Sonoma, Pottery Barn, Pottery Barn Kids, Pottery Barn Bed and Bath, PBteen, West Elm and Williams-Sonoma Home) and six e-commerce websites (williams-sonoma.com, potterybarn.com, potterybarnkids.com, pbteen.com, westelm.com and wshome.com). The catalogs reach customers throughout the U.S., while the five retail concepts, as of February 1, 2009, operated 627 stores in 44 states, Washington, D.C., Canada and Puerto Rico.

Significant intercompany transactions and accounts have been eliminated.

Fiscal Year

Our fiscal year ends on the Sunday closest to January 31, based on a 52/53-week year. Fiscal 2008, a 52-week year, ended on February 1, 2009; fiscal 2007, a 53-week year, ended on February 3, 2008; and fiscal 2006, a 52-week year, ended on January 28, 2007.

Use of Estimates

The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosures of contingent assets and liabilities. These estimates and assumptions are evaluated on an on-going basis and are based on historical experience and various other factors that we believe to be reasonable under the circumstances. Actual results could differ from these estimates.

Cash Equivalents

Cash equivalents include highly liquid investments with an original maturity of three months or less. Our policy is to invest in high-quality, short-term instruments to achieve maximum yield while maintaining a level of liquidity consistent with our needs. As of February 1, 2009, we were primarily invested in U.S. Treasury bills and money market funds. Book cash overdrafts issued, but not yet presented to the bank for payment, are reclassified to accounts payable.

Accounts Receivable and Allowance for Doubtful Accounts

Accounts receivable are stated at their carrying values, net of an allowance for doubtful accounts. Accounts receivable consist primarily of credit card and landlord receivables for which collectibility is reasonably assured. Other miscellaneous receivables are evaluated for collectibility on a regular basis and an allowance for doubtful accounts is recorded as deemed necessary. Our allowance for doubtful accounts was not material to our financial statements as of February 1, 2009 and February 3, 2008.

Merchandise Inventories

Merchandise inventories, net of an allowance for excess quantities and obsolescence, are stated at the lower of cost (weighted average method) or market. To determine if the value of our inventory should be marked down below cost, we consider current and anticipated demand, customer preferences, age of the merchandise and fashion trends. Our inventory value is adjusted periodically to reflect current market conditions, which requires management judgments that may significantly affect the ending inventory valuation, as well as gross margin. The significant estimates used in inventory valuation are obsolescence (including excess and slow-moving inventory and lower of cost or market reserves) and estimates of inventory shrinkage. We reserve for obsolescence based on historical trends, aging reports, specific identification and our estimates of future retail sales prices.

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Reserves for shrinkage are estimated, at the concept and channel level, as a percentage of net sales based on historical shrinkage results, expectations of future shrinkage and current inventory levels. Actual shrinkage is recorded at year-end based on the results of our physical inventory count and can vary from our estimates due to such factors as changes in operations within our distribution centers, the mix of our inventory (which ranges from large furniture to small tabletop items) and execution against loss prevention initiatives in our stores, off-site storage locations, and our third party transportation providers.

Due to these factors, our obsolescence and shrinkage reserves contain uncertainties. Both estimates have calculations that require management to make assumptions and to apply judgment regarding a number of factors, including market conditions, the selling environment, historical results and current inventory trends. If actual obsolescence or shrinkage estimates change from our original estimate, we will adjust our reserves accordingly. Management does not believe that changes in the assumptions used in these estimates would have a significant effect on our inventory balances. We have made no material changes to our assumptions included in the calculations of the obsolescence and shrinkage reserves. In addition, we do not believe a 10% change in our inventory reserves would have a material effect on net earnings. As of February 1, 2009 and February 3, 2008, our inventory reserves were $20,647,000 and $9,475,000, respectively.

Advertising and Prepaid Catalog Expenses

Advertising expenses consist of media and production costs related to catalog mailings, e-commerce advertising and other direct marketing activities. All advertising costs are expensed as incurred, or upon the release of the initial advertisement, with the exception of prepaid catalog expenses. Prepaid catalog expenses consist primarily of third party incremental direct costs, including creative design, paper, printing, postage and mailing costs for all of our direct response catalogs. Such costs are capitalized as prepaid catalog expenses and are amortized over their expected period of future benefit. Such amortization is based upon the ratio of actual revenues to the total of actual and estimated future revenues on an individual catalog basis. Estimated future revenues are based upon various factors such as the total number of catalogs and pages circulated, the probability and magnitude of consumer response and the assortment of merchandise offered. Each catalog is generally fully amortized over a six to nine month period, with the majority of the amortization occurring within the first four to five months. Prepaid catalog expenses are evaluated for realizability on a monthly basis by comparing the carrying amount associated with each catalog to the estimated probable remaining future profitability (remaining net revenues less merchandise cost of goods sold, selling expenses and catalog related-costs) associated with that catalog. If the catalog is not expected to be profitable, the carrying amount of the catalog is impaired accordingly.

Total advertising expenses (including catalog advertising, e-commerce advertising and all other advertising costs) were approximately $328,019,000, $379,468,000 and $365,829,000 in fiscal 2008, fiscal 2007 and fiscal 2006, respectively.

Property and Equipment

Property and equipment is stated at cost. Depreciation is computed using the straight-line method over the estimated useful lives of the assets below.

Leasehold improvements	Shorter of estimated useful life or lease term (generally 2 – 22 years)
Fixtures and equipment	2 – 20 years
Buildings and building improvements	10 – 40 years
Capitalized software	2 – 10 years
Corporate aircraft	20 years (20% salvage value)

Internally developed software costs are capitalized in accordance with the American Institute of Certified Public Accountants Statement of Position (“SOP”) 98-1, “Accounting for the Costs of Computer Software Developed or Obtained for Internal Use.”

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Interest costs related to assets under construction, including software projects, are capitalized during the construction or development period. We capitalized interest costs of $1,163,000, $1,389,000 and $699,000 in fiscal 2008, fiscal 2007 and fiscal 2006, respectively.

For any facility closures where a lease obligation still exists, we record the estimated future liability associated with the rental obligation on the date the store is closed, however, most store closures occur upon the lease expiration.

We review the carrying value of all long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. We review for impairment all stores for which current or projected cash flows from operations are either negative or nominal, or the construction costs are significantly in excess of the amount originally expected. Impairment results when the carrying value of the assets exceeds the undiscounted future cash flows over the remaining life of the lease. Our estimate of undiscounted future cash flows over the lease term (typically 5 to 22 years) is based upon our experience, historical operations of the stores and estimates of future store profitability and economic conditions. The future estimates of store profitability and economic conditions require estimating such factors as sales growth, gross margin, employment rates, lease escalations, inflation on operating expenses and the overall economics of the retail industry for up to 20 years in the future, and are therefore subject to variability and difficult to predict. If a long-lived asset is found to be impaired, the amount recognized for impairment is equal to the difference between the net carrying value and the asset’s fair value. The fair value is estimated based upon future cash flows (discounted at a rate that is commensurate with the risk and approximates our weighted average cost of capital). We recorded impairment charges related to our underperforming retail stores of $33,995,000, $1,082,000 and $5,629,000 in selling, general and administrative expenses in fiscal 2008, fiscal 2007 and fiscal 2006, respectively.

Lease Rights and Other Intangible Assets

Lease rights, representing costs incurred to acquire the lease of a specific commercial property, are recorded at cost in other assets and are amortized over the lives of the respective leases. Other intangible assets primarily include fees associated with the acquisition of our credit facility and are recorded at cost in other assets and amortized over the life of the facility.

Self-Insured Liabilities

We are primarily self-insured for workers’ compensation, employee health benefits and product and general liability claims. We record self-insurance liabilities based on claims filed, including the development of those claims, and an estimate of claims incurred but not yet reported. Factors affecting this estimate include future inflation rates, changes in severity, benefit level changes, medical costs and claim settlement patterns. Should a different amount of claims occur compared to what was estimated, or costs of the claims increase or decrease beyond what was anticipated, reserves may need to be adjusted accordingly. We determine our workers’ compensation liability and product and general liability claims reserves based on an actuarial analysis of historical claims data. Self-insurance reserves for employee health benefits, workers’ compensation and product and general liability claims were $21,006,000 and $21,512,000 as of February 1, 2009 and February 3, 2008, respectively, and are recorded within accrued salaries, benefits and other on our Consolidated Balance Sheets.

Customer Deposits

Customer deposits are primarily comprised of unredeemed gift cards, gift certificates, and merchandise credits and deferred revenue related to undelivered merchandise. We maintain a liability for unredeemed gift cards, gift certificates, and merchandise credits until the earlier of redemption, escheatment or four years as we have concluded that the likelihood of our gift cards and gift certificates being redeemed beyond four years from the date of issuance is remote.

Deferred Rent and Lease Incentives

For leases that contain fixed escalations of the minimum annual lease payment during the original term of the lease, we recognize rental expense on a straight-line basis over the lease term, including the construction period,

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and record the difference between rent expense and the amount currently payable as deferred rent. In accordance with Financial Accounting Standards Board (“FASB”) Staff Position (“FSP”) 13-1, “Accounting for Rental Costs Incurred During a Construction Period,” we record rental expense during the construction period. Deferred lease incentives include construction allowances received from landlords, which are amortized on a straight-line basis over the lease term, including the construction period.

Contingent Liabilities

Contingent liabilities are recorded when it is determined that the outcome of an event is expected to result in a loss that is considered probable and reasonably estimable.

Fair Value of Financial Instruments

The carrying values of cash and cash equivalents, accounts receivable, investments, accounts payable and debt approximate their estimated fair values.

Revenue Recognition

We recognize revenues and the related cost of goods sold (including shipping costs) at the time the products are delivered to our customers in accordance with the provisions of Staff Accounting Bulletin (“SAB”) No. 101, “Revenue Recognition in Financial Statements” as amended by SAB No. 104, “Revenue Recognition.” Revenue is recognized for retail sales (excluding home-delivered merchandise) at the point of sale in the store and for home-delivered merchandise and direct-to-customer sales when the merchandise is delivered to the customers. Discounts provided to customers are accounted for as a reduction of sales. We record a reserve for estimated product returns in each reporting period. Shipping and handling fees charged to the customer are recognized as revenue at the time the products are delivered to the customer. Revenues are presented net of any taxes collected from customers and remitted to governmental authorities.

Sales Returns Reserve

Our customers may return purchased items for an exchange or refund. We record a reserve for estimated product returns, net of cost of goods sold, based on historical return trends together with current product sales performance. A summary of activity in the sales returns reserve is as follows:

Dollars in thousands	Fiscal 20081 (52 Weeks)			Fiscal 20071 (53 Weeks)			Fiscal 20061 (52 Weeks)
Balance at beginning of year	$	17,259		$	15,467		$	13,682
Provision for sales returns		206,288			277,281			264,630
Actual sales returns		(213,405	)		(275,489	)		(262,845	)
Balance at end of year	$	10,142		$	17,259		$	15,467

¹ Amounts are shown net of cost of goods sold.

Vendor Allowances

We receive allowances or credits from certain vendors for volume rebates. We treat such volume rebates as an offset to the cost of the product or services provided at the time the expense is recorded. These allowances and credits received are recorded in both cost of goods sold and in selling, general and administrative expenses.

Cost of Goods Sold

Cost of goods sold includes cost of goods, occupancy expenses and shipping costs. Cost of goods consists of cost of merchandise, inbound freight expenses, freight-to-store expenses and other inventory related costs such as shrinkage, damages and replacements. Occupancy expenses consist of rent, depreciation and other occupancy costs, including common area maintenance and utilities. Shipping costs consist of third party delivery services and shipping materials.

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Selling, General and Administrative Expenses

Selling, general and administrative expenses consist of non-occupancy related costs associated with our retail stores, distribution warehouses, customer care centers, supply chain operations (buying, receiving and inspection), and corporate administrative functions. These costs include employment, advertising, third party credit card processing and other general expenses.

Stock-Based Compensation

We account for stock-based compensation arrangements in accordance with Statements of Financial Accounting Standards (“SFAS”) No. 123R, “Share-Based Payment,” by measuring and recording compensation expense in our consolidated financial statements for all stock-based compensation awards using a fair value method. For stock options and stock-settled stock appreciation rights (“option awards”), fair value is determined using the Black-Scholes valuation model, while restricted stock units are valued using the closing price of our stock on the date prior to the date of issuance. Significant factors affecting the fair value of option awards include the estimated future volatility of our stock price and the estimated expected term until the option award is exercised or cancelled. The fair value of the award is amortized over the requisite service period. Total stock-based compensation expense was $12,131,000, $26,812,000 and $26,759,000 in fiscal 2008, fiscal 2007 and fiscal 2006, respectively, and is recorded as a component of selling, general and administrative expenses.

Financial Instruments

As of February 1, 2009, we have 16 retail stores in Canada and limited operations in both Europe and Asia, each of which expose us to market risk associated with foreign currency exchange rate fluctuations. Although these exchange rate fluctuations have not been material to us in the past, we may enter into foreign currency contracts in the future to minimize any currency remeasurement risk associated with the intercompany assets and liabilities of our subsidiaries. We did not enter into any foreign currency contracts during fiscal 2008, fiscal 2007 or fiscal 2006.

Foreign Currency Translation

We have subsidiaries which have foreign operations and a functional currency different than the U.S. dollar, such as in Canada (functional currency of the CAD), in Europe (functional currency of the Euro), in the United Kingdom (functional currency of GBP), and in Singapore (functional currency of the Singapore Dollar). Assets and liabilities are translated into U.S. dollars using the current exchange rates in effect at the balance sheet date, while revenues and expenses are translated at the average exchange rates during the period. The resulting translation adjustments are recorded as other comprehensive income within shareholders’ equity. Gains and losses in fiscal 2008 and fiscal 2007 resulting from foreign currency transactions have not been significant and are included in selling, general and administrative expenses.

Earnings Per Share

Basic earnings per share is computed as net earnings divided by the weighted average number of common shares outstanding for the period. Diluted earnings per share is computed as net earnings divided by the weighted average number of common shares outstanding for the period plus common stock equivalents consisting of shares subject to stock-based awards with exercise prices less than or equal to the average market price of our common stock for the period, to the extent their inclusion would be dilutive.

Income Taxes

Income taxes are accounted for using the asset and liability method. Under this method, deferred income taxes arise from temporary differences between the tax basis of assets and liabilities and their reported amounts in the consolidated financial statements. We record reserves for estimates of probable settlements of foreign and domestic tax audits. At any one time, many tax years are subject to audit by various taxing jurisdictions. The results of these audits and negotiations with taxing authorities may affect the ultimate settlement of these issues. Additionally, our effective tax rate in a given financial statement period may be materially impacted by changes in the mix and level of earnings.

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On January 29, 2007, we adopted the provisions of FASB Interpretation (“FIN”) No. 48, Accounting for Uncertainty in Income Taxes – An Interpretation of FASB Statement No. 109, which clarifies the accounting for uncertain tax positions. As a result of the implementation of FIN 48, we recognized an $11,684,000 increase in unrecognized tax benefits, which was accounted for as a reduction to the January 29, 2007 balance of retained earnings.

New Accounting Pronouncements

On February 4, 2008, we adopted SFAS No. 157, Fair Value Measurements, for all financial assets and liabilities. SFAS No. 157 establishes a standard definition for fair value, provides a framework under generally accepted accounting principles for measuring fair value and expands disclosure requirements for fair value measurements. In December 2007, the FASB issued FSP No. 157-b, Effective Date of FASB No. 157, which delayed the effective date of SFAS No. 157 for all nonfinancial assets and liabilities (except those recognized or disclosed at fair value in the financial statements on a recurring basis) to annual reporting periods beginning after November 15, 2008. We do not have significant financial assets and liabilities or nonfinancial assets and liabilities recognized or disclosed at fair value on a recurring basis and, as such, the adoption of SFAS No. 157 did not have a material impact on our consolidated financial position, results of operations or cash flows. Further, we do not expect the adoption of FSP No. 157-b to have a material impact on our consolidated financial position, results of operations or cash flows. Additional disclosures will be provided in our Form 10-Q for our first fiscal quarter ending May 3, 2009.

On February 4, 2008, we adopted the provisions of SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities – Including an Amendment of FASB Statement No. 115. SFAS No. 159 permits entities to choose to measure eligible items at fair value at specified election dates and report unrealized gains and losses on items for which the fair value option has been elected in earnings at each subsequent reporting date. The adoption of SFAS No. 159 did not have a material impact on our consolidated financial position, results of operations or cash flows.

In December 2007, the FASB issued SFAS No. 141 (Revised 2007), Business Combinations (“SFAS 141(R)”). SFAS 141(R) will change the accounting for business combinations. Under SFAS 141(R), an acquiring entity will be required to recognize all the assets acquired and liabilities assumed in a transaction at the acquisition date fair value with limited exceptions. SFAS 141(R) will change the accounting treatment for certain specific acquisition-related items, including expensing acquisition-related costs as incurred, valuing non-controlling interests (minority interests) at fair value at the acquisition date, and expensing restructuring costs associated with an acquired business. SFAS 141(R) applies prospectively, with limited exceptions, to business combinations for which the acquisition date is on or after the first fiscal period beginning on or after December 15, 2008. Early adoption is not permitted. Generally, the effect of SFAS 141(R) will depend on future acquisitions and, as such, we do not currently expect the adoption of this Statement to have a material impact on our consolidated financial position, results of operations or cash flows.

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Note B: Property and Equipment

Property and equipment consists of the following:

Dollars in thousands	Feb. 1, 2009			Feb. 3, 2008
Leasehold improvements	$	828,414		$	800,658
Fixtures and equipment		578,259			544,152
Capitalized software		247,613			196,311
Land and buildings		133,406			133,435
Corporate systems projects in progress 1		66,469			96,493
Construction in progress 2		25,866			23,384
Corporate aircraft		11,503			48,668
Total		1,891,530			1,843,101
Accumulated depreciation and amortization		(949,311	)		(862,026	)
Property and equipment – net	$	942,219		$	981,075

¹ Corporate systems projects in progress is primarily comprised of a new merchandising, inventory management and order management system currently under development.

² Construction in progress is primarily comprised of leasehold improvements and furniture and fixtures related to new, expanded or remodeled retail stores where construction had not been completed as of year-end.

Note C: Borrowing Arrangements

Long-term debt consists of the following:

Dollars in thousands	Feb. 1, 2009		Feb. 3, 2008
Obligations under capital leases	$	573	$	–
Memphis-based distribution facilities obligation		11,238		12,822
Mississippi industrial development bonds		13,150		13,150
Total debt		24,961		25,972
Less current maturities		14,702		14,734
Total long-term debt	$	10,259	$	11,238

Capital Leases

As of February 1, 2009, capital lease obligations of $573,000 consist primarily of leases for distribution center equipment. As of February 3, 2008, we did not have any outstanding capital lease obligations.

Memphis-Based Distribution Facilities Obligation

See Note F for a discussion on our bond-related debt pertaining to our Memphis-based distribution facilities.

Mississippi Industrial Development Bonds

In June 2004, in an effort to utilize tax incentives offered to us by the state of Mississippi, we entered into an agreement whereby the Mississippi Business Finance Corporation issued $15,000,000 in long-term variable rate industrial development bonds, the proceeds, net of debt issuance costs, of which were loaned to us to finance the acquisition and installation of leasehold improvements and equipment located in our Olive Branch, Mississippi, distribution center. The bonds are marketed through a remarketing agent and are secured by a letter of credit issued under our $300,000,000 line of credit facility. The bonds mature on June 1, 2024. The bond rate resets each week based upon current market rates. The rate in effect at February 1, 2009 was 1.4%.

The bond agreement allows for each bondholder to tender their bonds to the trustee for repurchase, on demand, with seven days advance notice. In the event the remarketing agent fails to remarket the bonds, the trustee will draw upon the letter of credit to fund the purchase of the bonds. As of February 1, 2009, $13,150,000 remained outstanding on these bonds and was classified as current debt. The bond proceeds were restricted for use in the

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acquisition and installation of leasehold improvements and equipment located in our Olive Branch, Mississippi distribution center.

The aggregate maturities of long-term debt at February 1, 2009 were as follows:

Dollars in thousands
Fiscal 2009	$	14,702
Fiscal 2010		1,587
Fiscal 2011		1,542
Fiscal 2012		1,652
Fiscal 2013		1,724
Thereafter		3,754
Total	$	24,961

Credit Facility

As of February 1, 2009, we have an amended credit facility that provides for a $300,000,000 unsecured revolving line of credit that may be used for loans or letters of credit. Prior to April 4, 2011, we may, upon notice to the lenders, request an increase in the credit facility of up to $200,000,000, to provide for a total of $500,000,000 of unsecured revolving credit. The amended revolving line of credit facility contains certain financial covenants, including a maximum leverage ratio (funded debt adjusted for lease and rent expense to Earnings Before Interest, Income Tax, Depreciation, Amortization and Rent Expense, or “EBITDAR”), a minimum fixed charge coverage ratio (calculated as EBITDAR to total fixed charges), and covenants limiting our ability to repurchase shares of stock or increase our dividend, in addition to covenants limiting our ability to dispose of assets, make acquisitions, be acquired (if a default would result from the acquisition), incur indebtedness, grant liens and make investments. The credit facility contains events of default that include, among others, non-payment of principal, interest or fees, violation of covenants, inaccuracy of representations and warranties, bankruptcy and insolvency events, material judgments, cross defaults to material indebtedness and events constituting a change of control. The occurrence of an event of default will increase the applicable rate of interest by 2.0% and could result in the acceleration of our obligations under the credit facility and an obligation of any or all of our subsidiaries that have guaranteed our credit facility to pay the full amount of our obligations under the credit facility. The amended credit facility matures on October 4, 2011, at which time all outstanding borrowings must be repaid and all outstanding letters of credit must be cash collateralized.

We may elect interest rates calculated at (i) Bank of America’s prime rate (or, if greater, the average rate on overnight federal funds plus one-half of one percent, or a rate based on LIBOR plus one percent) plus a margin based on our leverage ratio, or (ii) LIBOR plus a margin based on our leverage ratio. During fiscal 2008 and fiscal 2007, we had cumulative borrowings under the credit facility of $195,800,000 and $189,000,000, respectively, of which the maximum amount of borrowings outstanding at any one time were $78,000,000 and $98,000,000 during fiscal 2008 and fiscal 2007, respectively. No amounts were outstanding under the credit facility as of February 1, 2009 or February 3, 2008. As of February 1, 2009, $39,559,000 in issued but undrawn standby letters of credit was outstanding under the credit facility. The standby letters of credit were issued to secure the liabilities associated with workers’ compensation, other insurance programs and certain debt transactions. As of February 1, 2009, we were in compliance with our financial covenants under the credit facility and, based on our current projections, expect to be in compliance throughout 2009.

Letter of Credit Facilities

We have five unsecured commercial letter of credit reimbursement facilities, each of which expires on September 4, 2009. The aggregate credit available under all letter of credit facilities is $165,000,000. The letter of credit facilities contain substantially similar covenants and provide for substantially similar events of default as the credit facility. Interest on amounts outstanding under the letter of credit facilities accrues at the lender’s prime rate (or, if greater, the average rate on overnight federal funds plus one-half of one percent) plus 2.0%. As of February 1, 2009, an aggregate of $28,518,000 was outstanding under the letter of credit facilities. Such letters

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of credit represent only a future commitment to fund inventory purchases to which we had not taken legal title as of February 1, 2009. The latest expiration possible for any future letters of credit issued under the facilities is February 1, 2010.

Interest Expense

Interest expense was $1,480,000 (net of capitalized interest of $1,163,000), $2,099,000 (net of capitalized interest of $1,389,000) and $2,125,000 (net of capitalized interest of $699,000) for fiscal 2008, fiscal 2007 and fiscal 2006, respectively.

Note D: Income Taxes

The components of earnings before income taxes, by tax jurisdiction, are as follows:

	Fiscal Year Ended
Dollars in thousands	Feb. 1, 2009 (52 Weeks)		Feb. 3, 2008 (53 Weeks)		Jan. 28, 2007 (52 Weeks)
United States	$	33,376	$	299,235	$	319,732
Foreign		8,577		17,105		17,454
Total earnings before income taxes	$	41,953	$	316,340	$	337,186

The provision for income taxes consists of the following:

	Fiscal Year Ended
Dollars in thousands	Feb. 1, 2009 (52 Weeks)			Feb. 3, 2008 (53 Weeks)			Jan. 28, 2007 (52 Weeks)
Current
Federal	$	5,143		$	126,219		$	148,125
State		(1,096	)		19,254			24,645
Foreign		2,775			7,061			6,299
Total current		6,822			152,534			179,069
Deferred
Federal		4,817			(26,494	)		(44,573	)
State		(83	)		(4,796	)		(5,802	)
Foreign		373			(661	)		(376	)
Total deferred		5,107			(31,951	)		(50,751	)
Total provision	$	11,929		$	120,583		$	128,318

Except where required by U.S. tax law, we have historically elected not to provide for U.S. income taxes with respect to the undistributed earnings of our foreign subsidiaries as we have intended to utilize those earnings in our foreign operations for an indefinite period of time. In the fourth quarter of fiscal 2008, based on the current economic environment, we assessed our anticipated future cash needs and the overall financial position of our Canadian subsidiary and concluded that the remaining undistributed earnings were in excess of our future cash requirements for the on-going operations of our Canadian subsidiary. Accordingly, our Canadian subsidiary repatriated $13,900,000 to our U.S. operations in the fourth quarter of fiscal 2008. These repatriated earnings were offset by foreign tax credits that reduced the financial tax liability associated with this foreign dividend to zero. The accumulated undistributed earnings of all of our foreign subsidiaries were approximately $500,000 as of February 1, 2009 and are sufficient to support our anticipated future cash needs for our foreign operations. We currently intend to utilize the remainder of these undistributed earnings for an indefinite period of time and will only repatriate such earnings when it is tax effective to do so. It is currently not practical to estimate the tax liability that might be payable if these foreign earnings were to be repatriated.

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A reconciliation of income taxes at the federal statutory corporate rate to the effective rate is as follows:

	Fiscal Year Ended
	Feb. 1, 2009 (52 Weeks)		Feb. 3, 2008 (53 Weeks)		Jan. 28, 2007 (52 Weeks)
Federal income taxes at the statutory rate	35.0%		35.0%		35.0%
State income tax rate	(8.2%	)	3.5%		4.0%
Other	1.6%		(0.4%	)	(0.9%	)
Total	28.4%	1	38.1%		38.1%

¹ The decrease in the fiscal 2008 effective income tax rate was primarily driven by certain favorable income tax resolutions during fiscal 2008.

Significant components of our deferred tax accounts are as follows:

Dollars in thousands	Feb. 1, 2009 (52 Weeks)			Feb. 3, 2008 (53 Weeks)
Current:
Compensation	$	12,436		$	11,392
Inventory		19,538			22,117
Accrued liabilities		11,868			17,585
Customer deposits		58,197			61,215
Deferred catalog costs		(14,589	)		(21,184	)
Other		2,899			718
Total current		90,349			91,843
Non-current:
Depreciation		13,392			14,616
Deferred rent		15,672			12,390
Stock-based compensation		20,828			17,757
Deferred lease incentives		(27,548	)		(23,046	)
Executive deferral plan		4,527			6,214
State taxes		8,260			15,985
Other		1,424			1,081
Total non-current		36,555			44,997
Total deferred tax assets, net	$	126,904		$	136,840

As of February 1, 2009, we had $16,243,000 of gross unrecognized tax benefits, of which $10,558,000 would, if recognized, affect the effective tax rate. The gross unrecognized tax benefits as of February 3, 2008 were $35,211,000, of which $22,634,000 would, if recognized, affect the effective tax rate.

The following table summarizes the activity related to our gross unrecognized tax benefits:

Dollars in thousands	Feb. 1, 2009 (52 Weeks)			Feb. 3, 2008 (53 Weeks)
Balance at beginning of year	$	35,211		$	30,981
Increases related to current year tax positions		2,018			7,076
Increases for tax positions for prior years		178			712
Decreases for tax positions for prior years		(1,628	)		(1,010	)
Settlements		(18,469	)		(1,979	)
Lapse in statute of limitations		(1,067	)		(569	)
Balance at end of year	$	16,243		$	35,211

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We accrue interest and penalties related to unrecognized tax benefits in the provision for income taxes. As of February 1, 2009 and February 3, 2008, our accruals, primarily for the payment of interest, totaled $6,450,000, and $9,006,000, respectively.

Due to the potential resolution of state issues, it is reasonably possible that the balance of our gross unrecognized tax benefits balance could decrease within the next twelve months by a range of zero to $3,500,000.

We file income tax returns in the U.S. federal jurisdiction, and various states and foreign jurisdictions. The Internal Revenue Service (IRS) has concluded its examination of our U.S. federal income tax returns for years prior to 2004 without any significant adjustments. Substantially all material state, local and foreign income tax examinations have been concluded for years through 1999.

Note E: Accounting for Leases

Operating Leases

We lease store locations, warehouses, corporate facilities, care centers and certain equipment for original terms ranging generally from 2 to 22 years. Certain leases contain renewal options for periods up to 20 years. The rental payment requirements in our store leases are typically structured as either minimum rent, minimum rent plus additional rent based on a percentage of store sales if a specified store sales threshold is exceeded, or rent based on a percentage of store sales if a specified store sales threshold or contractual obligations of the landlord has not been met. Contingent rental payments, including rental payments that are based on a percentage of sales, cannot be predicted with certainty at the onset of the lease term. Accordingly, any contingent rental payments are recorded as incurred each period when the sales threshold is probable and are excluded from our calculation of deferred rent liability.

Total rental expense for all operating leases was as follows:

	Fiscal Year Ended
Dollars in thousands	Feb. 1, 2009 (52 Weeks)			Feb. 3, 2008 (53 Weeks)			Jan. 28, 2007 (52 Weeks)
Rent expense,1	$	161,254		$	146,226		$	130,870
Contingent rent expense		32,268			35,731			35,020
Less: sublease rental income		(175	)		(46	)		(39	)
Total rent expense	$	193,347		$	181,911		$	165,851

¹ Excludes expense of approximately $2.0 million recorded in fiscal 2008 related to future minimum lease commitments on the distribution facility that was closed during the fourth quarter of fiscal 2008 associated with our infrastructure cost reduction program (See Note N).

The aggregate minimum annual cash rental payments under non-cancelable operating leases (excluding the Memphis-based distribution facilities) in effect at February 1, 2009 were as follows:

Dollars in thousands	Lease Commitments1,2
Fiscal 2009	$	233,240
Fiscal 2010		222,131
Fiscal 2011		200,670
Fiscal 2012		182,229
Fiscal 2013		167,964
Thereafter		762,087
Total	$	1,768,321

¹ Represents future projected cash payments and therefore, is not necessarily representative of future expected rental expense.

^2. Projected cash payments include only those amounts that are fixed and determinable as of the reporting date. We currently pay rent for certain store locations based on a percentage of store sales if a specified store sales threshold is or is not met or if contractual obligations of the landlord have not been met. Projected payments for these locations are based on minimum rent, which is generally higher as future store sales cannot be predicted with certainty. In addition, these projected payments do not include any benefit from deferred lease incentive income, which is reflected within “Rent expense” above.

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Note F: Consolidation of Memphis-Based Distribution Facilities

Our Memphis-based distribution facilities include an operating lease entered into in July 1983 for a distribution facility in Memphis, Tennessee. The lessor is a general partnership (“Partnership 1”) comprised of W. Howard Lester, our Chairman of the Board of Directors and Chief Executive Officer and James A. McMahan, a Director Emeritus and a significant shareholder. Partnership 1 does not have operations separate from the leasing of this distribution facility and does not have lease agreements with any unrelated third parties.

Partnership 1 financed the construction of this distribution facility through the sale of a total of $9,200,000 of industrial development bonds in 1983 and 1985. Annual principal payments and monthly interest payments are required through maturity in December 2010. The Partnership 1 industrial development bonds are collateralized by the distribution facility and the individual partners guarantee the bond repayments. As of February 1, 2009, $425,000 was outstanding under the Partnership 1 industrial development bonds.

We made annual rental payments in fiscal 2008, fiscal 2007 and fiscal 2006 of approximately $618,000, plus interest on the bonds calculated at a variable rate determined monthly (approximately 3.0% on February 1, 2009), applicable taxes, insurance and maintenance expenses. Although the current term of the lease expires in August 2009, we are obligated to renew the operating lease on an annual basis until these bonds are fully repaid.

Our other Memphis-based distribution facility includes an operating lease entered into in August 1990 for another distribution facility that is adjoined to the Partnership 1 facility in Memphis, Tennessee. The lessor is a general partnership (“Partnership 2”) comprised of W. Howard Lester, James A. McMahan and two unrelated parties. Partnership 2 does not have operations separate from the leasing of this distribution facility and does not have lease agreements with any unrelated third parties.

Partnership 2 financed the construction of this distribution facility and related addition through the sale of a total of $24,000,000 of industrial development bonds in 1990 and 1994. Quarterly interest and annual principal payments are required through maturity in August 2015. The Partnership 2 industrial development bonds are collateralized by the distribution facility and require us to maintain certain financial covenants. As of February 1, 2009, $10,813,000 was outstanding under the Partnership 2 industrial development bonds.

We made annual rental payments of approximately $2,577,000, $2,591,000 and $2,585,000 plus applicable taxes, insurance and maintenance expenses in fiscal 2008, fiscal 2007 and fiscal 2006, respectively. Although the current term of the lease expires in August 2009, we are obligated to renew the operating lease on an annual basis until these bonds are fully repaid.

The two partnerships described above qualify as variable interest entities under FIN 46R due to their related party relationship and our obligation to renew the leases until the bonds are fully repaid. Accordingly, the two related party variable interest entity partnerships, from which we lease our Memphis-based distribution facilities, are consolidated by us. As of February 1, 2009, our consolidated balance sheet includes $16,372,000 in assets (primarily buildings), $11,238,000 in debt and $5,134,000 in other long-term liabilities.

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Note G: Earnings Per Share

The following is a reconciliation of net earnings and the number of shares used in the basic and diluted earnings per share computations:

Dollars and amounts in thousands, except per share amounts	Net Earnings		Weighted Average Shares	Per-Share Amount
2008 (52 Weeks)
Basic	$	30,024	105,530	$	0.28
Effect of dilutive stock-based awards			1,350
Diluted	$	30,024	106,880	$	0.28
2007 (53 Weeks)
Basic	$	195,757	109,273	$	1.79
Effect of dilutive stock-based awards			2,174
Diluted	$	195,757	111,447	$	1.76
2006 (52 Weeks)
Basic	$	208,868	114,020	$	1.83
Effect of dilutive stock-based awards			2,753
Diluted	$	208,868	116,773	$	1.79

Stock-based awards of 6,428,000, 5,612,000 and 4,181,000 in fiscal 2008, fiscal 2007 and fiscal 2006 respectively, were not included in the computation of diluted earnings per share, as their inclusion would be anti-dilutive.

Note H: Common Stock

Authorized preferred stock consists of 7,500,000 shares at $0.01 par value of which none was outstanding during fiscal 2008 or fiscal 2007. Authorized common stock consists of 253,125,000 shares at $0.01 par value. Common stock outstanding as of February 1, 2009 and February 3, 2008 was 105,664,000 and 105,349,000 shares, respectively. Our Board of Directors is authorized to issue equity awards for up to the total number of shares authorized and remaining available for grant under our 2001 Amended and Restated Long-Term Incentive Plan.

We did not repurchase any shares of our common stock during fiscal 2008 under our previously authorized $150,000,000 share repurchase program. On December 2, 2008, our Board of Directors terminated this share repurchase program in response to current economic conditions and our belief that in these times it is strategically important to maintain a strong financial position and greater cash reserves.

During fiscal 2008 and fiscal 2007, total cash dividends declared were approximately $51,189,000 and $50,000,000, respectively, or $0.12 per common share per quarter. Subsequent to year-end, on March 24, 2009, our Board of Directors declared a quarterly cash dividend of $0.12 per common share payable on May 26, 2009 to shareholders of record as of the close of business on April 27, 2009. Our quarterly cash dividend may be limited or terminated at any time.

Note I: Stock-Based Compensation

Our Amended and Restated 2001 Long-Term Incentive Plan (the “2001 Plan”) provides for grants of incentive stock options, nonqualified stock options, stock-settled stock appreciation rights (collectively, “option awards”), restricted stock awards, restricted stock units, deferred stock awards (collectively, “stock awards”) and dividend equivalents up to an aggregate of 15,959,903 shares. As of February 1, 2009, there were approximately 1,076,714 shares available for future grant. Awards may be granted under the 2001 Plan to officers, employees and non-employee Board members of the company or any parent or subsidiary. Annual grants are limited to 1,000,000 shares covered by option awards and 400,000 shares covered by stock awards on a per person basis. All grants of option awards made under the 2001 Plan have a maximum term of ten years, except incentive stock

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options that may be issued to 10% shareholders, which have a maximum term of five years. The exercise price of these option awards is not less than 100% of the closing price of our stock on the date prior to the grant date or not less than 110% of such closing price for an incentive stock option granted to a 10% shareholder. Option awards granted to employees generally vest over four to five years. Stock awards granted to employees generally vest over a period of three to five years for service based awards, and four to five years for performance based awards. Certain option and stock awards contain vesting acceleration clauses in the event of a merger or similar corporate event. Option and stock awards granted to non-employee Board members generally vest in approximately one year. Non-employee Board members automatically receive stock awards on the date of their initial election to the Board and annually thereafter on the date of the annual meeting of shareholders (as long as they continue to serve as a non-employee Board member). Shares issued as a result of option award exercises will be funded with the issuance of new shares.

We account for stock-based compensation arrangements in accordance with SFAS No. 123R, “Share-Based Payment,” which requires us to measure and record compensation expense in our consolidated financial statements for all employee stock-based awards using a fair value method.

Total Stock-Based Compensation Expense

During fiscal 2008, fiscal 2007 and fiscal 2006, we recognized total stock-based compensation expense, as a component of selling, general and administrative expenses, of $12,131,000 (which includes the $11,023,000 reversal of compensation expense related to performance-based stock awards), $26,812,000, and $26,759,000, respectively. As of February 1, 2009, there was a remaining unamortized expense balance of $50,145,000 (net of estimated forfeitures), which we expect to be recognized on a straight-line basis over an average remaining service period of approximately three years.

Fiscal 2008 stock-compensation expense was impacted by the reversal of approximately $11,023,000 of expense previously recognized relating to previously issued stock awards that would have vested based on the achievement of certain performance criteria. We had recognized compensation expense related to these awards as we believed that it was probable that the performance criteria would be achieved. During the third quarter of fiscal 2008, due to the decline in our operating performance, we concluded that it was no longer probable that these criteria would be achieved and therefore reversed approximately $11,023,000 of compensation expense previously recognized.

Subsequently, our Board of Directors decided to remove or modify the performance conditions but retain the service provisions of the awards. As a result, these awards are now considered probable of vesting. Accordingly, we measured the fair value of all such awards as of the date of the modification and will recognize the fair value over the remaining service period of the awards.

Compensation expense is recorded for the following awards:

• Stock Options – Compensation expense related to the remaining unvested portion of all stock options granted prior to the adoption of SFAS No. 123R is based on the grant date fair value (using the market value of our stock on the date prior to the grant date), estimated in accordance with the provisions of SFAS No. 123, as amended by SFAS No. 148. Compensation expense related to all stock options granted subsequent to the SFAS No. 123R adoption date is based on the grant date fair value estimated in accordance with the provisions of SFAS No. 123R.

• Stock-Settled Stock Appreciation Rights – Compensation expense is based on the grant date fair value estimated in accordance with the provisions of SFAS No. 123R.

• Restricted Stock Units – For performance-based restricted stock units, compensation expense is based on the grant date fair value (or modification date fair values, if applicable) and the probability that the performance metrics will be achieved. For non-performance-based restricted stock units, compensation expense is based on the grant date fair value.

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Stock Options

The following table summarizes our stock option activity during fiscal 2008 and fiscal 2007:

	Shares		Weighted Average Exercise Price		Weighted Average Contractual Term Remaining (Years)	Intrinsic Value1
Balance at January 28, 2007	9,026,289		$	23.04
Granted2	—			—
Exercised	(1,979,641	)		19.45		$	28,470,000
Canceled	(415,499	)		36.60
Balance at February 3, 2008	6,631,149		$	23.26
Granted2	—			—
Exercised	(571,782	)		10.96		$	6,219,000
Canceled	(432,824	)		35.29
Balance at February 1, 2009	5,626,543		$	23.58	3.48	$	0
Vested at February 1, 2009	5,109,153			22.22	3.22	$	0
Vested plus expected to vest at February 1, 2009	5,581,057			23.46	3.46	$	0

¹ Intrinsic value for outstanding and vested options is defined as the excess of the market value on the last business day of the fiscal year (or $7.92) over the exercise price, if any. For exercises, intrinsic value is defined as the difference between the grant date exercise price and the market value on the date of exercise.

² In fiscal 2006, we began issuing stock-settled stock appreciation rights in lieu of stock option grants. Therefore, no stock options were granted during fiscal 2008 or fiscal 2007. See the stock-settled stock appreciation rights table below.

The following table summarizes information about stock options outstanding at February 1, 2009:

	Stock Options Outstanding				Stock Options Exercisable
Range of Exercise Prices	Number Outstanding	Weighted Average Contractual Term Remaining (Years)	Weighted Average Exercise Price		Number Exercisable	Weighted Average Exercise Price
$   8.31   –  $ 13.66	1,163,578	1.61	$	11.03	1,163,578	$	11.03
$ 13.85   –  $ 16.34	1,139,652	1.14		14.65	1,139,652		14.65
$ 16.53   –  $ 28.25	1,183,268	3.47		22.61	1,183,268		22.61
$ 28.45   –  $ 38.34	1,135,215	5.13		32.61	970,105		32.57
$ 38.84   –  $ 43.85	1,004,830	6.44		39.20	652,550		39.26
$   8.31   –  $ 43.85	5,626,543	3.48	$	23.58	5,109,153	$	22.22

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Stock-Settled Stock Appreciation Rights

A stock-settled stock appreciation right is an award that allows the recipient to receive common stock equal to the appreciation in the fair market value of our common stock between the date the award was granted and the conversion date for the number of shares vested.

The following table summarizes our stock-settled stock appreciation right activity during fiscal 2008 and fiscal 2007:

	Shares		Weighted Average Conversion Price1		Weighted Average Contractual Term Remaining (Years)	Intrinsic Value2
Balance at January 28, 2007	1,978,850		$	36.01
Granted (weighted average fair value of $11.56)	1,539,200			34.42
Converted	—			—			—
Canceled	(231,580	)		36.07
Balance at February 3, 2008	3,286,470			35.27
Granted (weighted average fair value of $3.16)	4,794,300			8.61
Converted	—			—			—
Canceled	(469,256	)		32.17
Balance at February 1, 2009	7,611,514		$	18.67	9.02	$	0
Vested at February 1, 2009	1,209,628		$	35.19	7.76	$	0
Vested plus expected to vest at February 1, 2009	6,108,126		$	19.86	8.93	$	0

¹ Conversion price is defined as the price from which stock-settled stock appreciation rights are measured and is equal to the market value on the date of issuance.

² Intrinsic value for activities other than conversions is defined as the excess of the grant price over the current market value on the last business day of the fiscal year (or $7.92), if any. For conversions, intrinsic value is defined as the difference between the grant date price and the market value on the date of the conversion.

The following table summarizes information about stock-settled stock appreciation rights outstanding at February 1, 2009:

	Stock-Settled Stock Appreciation Rights Outstanding				Stock-Settled Stock Appreciation Rights Vested
Range of Conversion Prices	Number Outstanding	Weighted Average Contractual Term Remaining (Years)	Weighted Average Conversion Price		Number Vested	Weighted Average Conversion Price
$   8.01 – $   8.31	70,600	9.89	$	8.08	—		—
$   8.56 – $   8.56	4,643,800	9.76		8.56	—		—
$ 24.25 – $ 34.89	2,215,854	8.01		33.51	924,140	$	33.59
$ 36.70 – $ 41.70	676,260	7.13		40.36	283,488		40.36
$ 42.13 – $ 42.13	5,000	7.24		42.13	2,000		42.13
$   8.01 – $ 42.13	7,611,514	9.02	$	18.67	1,209,628	$	35.19

The fair value for both stock options and stock-settled stock appreciation rights is estimated on the date of the grant using the Black-Scholes option pricing model with the following weighted-average assumptions:

• Expected term – The expected term of the option awards represents the period of time between the grant date of the option awards and the date the option awards are either exercised or canceled, including an estimate for those option awards still outstanding.

• Expected volatility – The expected volatility is based on an average of the historical volatility of our stock price, for a period approximating our expected term, and the implied volatility of externally traded options of our stock that were entered into during the period.

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• Risk-free interest rate – The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant and with a maturity that approximates our expected term.

• Dividend yield – The dividend yield is based on our quarterly cash dividend and the anticipated dividend payout over our expected term of the option award.

The weighted average assumptions used for fiscal 2008 and fiscal 2007 are as follows:

	Fiscal Year Ended
	Feb. 1, 2009 (52 Weeks)	Feb. 3, 2008 (53 Weeks)
Expected term (years)	5.2	5.0
Expected volatility	49.4%	33.6%
Risk-free interest rate	2.5%	4.4%
Dividend yield	2.7%	1.0%

Restricted Stock Units

The following table summarizes our restricted stock unit activity during fiscal 2008 and fiscal 2007:

	Weighted Average
	Shares		Grant Date Fair Value		Intrinsic Value1
Balance at January 28, 2007	850,000
Granted	51,800		$	32.71
Released	—			—		—
Canceled	(70,000	)
Balance at February 3, 2008	831,800
Granted	506,964		$	24.17
Released	(15,900	)	$	26.61	$	423,000
Canceled	(76,531	)
Balance at February 1, 2009	1,246,333		$	20.50	$	9,871,000
Expected to Vest at February 1, 2009	1,176,562		$	20.50	$	9,318,000

¹ Intrinsic value for restricted stock units is defined as the market value on the last business day of the fiscal year (or $7.92).

Tax Effect

We present tax benefits resulting from the exercise of stock-based awards as operating cash flows, and tax deductions in excess of the cumulative compensation cost recognized for stock-based compensation awards exercised as financing cash flows in the Consolidated Statements of Cash Flows. During fiscal 2008, fiscal 2007 and fiscal 2006, net proceeds from the exercise of stock options was $461,000, $28,362,000 and $13,935,000, respectively, and the tax benefit (shortfall) associated with such exercises totaled ($1,660,000), $10,821,000 and $7,696,000, respectively.

Equity Award Exchange Program

In response to the significant decline in our stock price, on June 11, 2008, our shareholders approved an offer for our eligible employees to exchange certain outstanding option awards and stock-settled stock appreciation rights for restricted stock units. This offer commenced on March 16, 2009 and is expected to close on April 10, 2009. As of March 16, 2009, approximately 3,156,600 of our outstanding option awards and stock-settled stock appreciation rights were eligible to be exchanged in the program. The exchange program is designed such that participants may exchange their eligible option awards and stock-settled stock appreciation rights for restricted stock units of an approximate equal fair value. Therefore, we do not expect the exchange program to have a material impact on our results of operations.

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Note J: Williams-Sonoma, Inc. 401(k) Plan and Other Employee Benefits

We have a defined contribution retirement plan, the “Williams-Sonoma, Inc. 401(k) Plan” (the “Plan”), which is intended to be qualified under Internal Revenue Code Sections 401(a), 401(k), 401(m) and 4975(e)(7). Prior to January 1, 2009, the Plan permitted eligible employees to make salary deferral contributions up to 15% of their eligible compensation each pay period (5% for certain higher paid individuals). As of January 1, 2009, the Plan now permits eligible employees to make salary deferral contributions up to 75% of their eligible compensation each pay period (5% for certain higher paid individuals). Employees designate the funds in which their contributions are invested. Each participant may choose to have his or her salary deferral contributions and earnings thereon invested in one or more investment funds, including our company stock fund.

Prior to January 1, 2009, our matching contribution was equal to 50% of each participant’s salary deferral contribution each pay period, taking into account only those contributions that do not exceed 6% of the participant’s eligible pay for the pay period (5% for certain higher paid individuals). As of January 1, 2009, each participant’s matching contribution will be earned on a semi-annual basis with respect to eligible salary deferrals for those employees that are employed with the company on June 30th or December 31st of the year in which the deferrals are made. Further, as of January 1, 2009, eligible associates must complete one year of eligibility service prior to receiving company matching contributions. For the first five years of the participant’s employment, all matching contributions vest at the rate of 20% per year of service, measuring service from the participant’s hire date. Thereafter, all matching contributions vest immediately.

The Plan consists of two parts: a profit sharing plan portion and, effective April 21, 2006, a stock bonus plan/employee stock ownership plan (the “ESOP”). The ESOP portion is the portion that is invested in the company internal revenue stock fund at any time. The profit sharing and ESOP components of the Plan are considered a single plan under Code section 414(l). Our contributions to the plan were $5,168,000, $5,336,000 and $3,467,000 in fiscal 2008, fiscal 2007 and fiscal 2006, respectively.

We have a nonqualified executive deferred compensation plan that provides supplemental retirement income benefits for a select group of management and other certain highly compensated employees. This plan permits eligible employees to make salary and bonus deferrals that are 100% vested. We have an unsecured obligation to pay in the future the value of the deferred compensation adjusted to reflect the performance, whether positive or negative, of selected investment measurement options, chosen by each participant, during the deferral period. As of February 1, 2009 and February 3, 2008, $11,789,000 and $16,105,000, respectively, was included in other long-term obligations. Additionally, we have purchased life insurance policies on certain participants to potentially offset these unsecured obligations. The cash surrender value of these policies was $9,413,000 and $12,758,000 as of February 1, 2009 and February 3, 2008, respectively, and was included in other assets.

Note K: Financial Guarantees

We are party to a variety of contractual agreements under which we may be obligated to indemnify the other party for certain matters. These contracts primarily relate to our commercial contracts, operating leases, trademarks, intellectual property, financial agreements and various other agreements. Under these contracts, we may provide certain routine indemnifications relating to representations and warranties or personal injury matters. The terms of these indemnifications range in duration and may not be explicitly defined. Historically, we have not made significant payments for these indemnifications. We believe that if we were to incur a loss in any of these matters, the loss would not have a material effect on our financial condition or results of operations.

Note L: Commitments and Contingencies

We are involved in lawsuits, claims and proceedings incident to the ordinary course of our business. These disputes, which are not currently material, are increasing in number as our business expands and our company grows larger. Litigation is inherently unpredictable. Any claims against us, whether meritorious or not, could be time consuming, result in costly litigation, require significant amounts of management time and result in the diversion of significant operational resources. The results of these lawsuits, claims and proceedings cannot be predicted with certainty. However, we believe that the ultimate resolution of these current matters will not have a material adverse effect on our consolidated financial statements taken as a whole.

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Note M: Related Party Transaction

On May 16, 2008, we completed two transactions relating to our corporate aircraft. First, we sold our Bombardier Global Express airplane for approximately $46,787,000 in cash (a net after-tax cash benefit of approximately $29,000,000) to an unrelated third party. This resulted in a gain on sale of asset of approximately $16,000,000 in the second quarter of fiscal 2008. Second, we entered into an Aircraft Lease Agreement (the “Lease Agreement”) with a limited liability company (the “LLC”) owned by W. Howard Lester, our Chief Executive Officer and Chairman of the Board of Directors, for use of a Bombardier Global 5000 owned by the LLC. These transactions were approved by our Board of Directors.

Under the terms of the Lease Agreement, in exchange for use of the aircraft, we will pay the LLC $375,000 for each of the thirty-six months of the lease term through May 15, 2011. We are also responsible for all use-related costs associated with the aircraft, including fixed costs such as crew salaries and benefits, insurance and hangar costs, and all direct operating costs. Closing costs associated with the Lease Agreement were divided evenly between us and the LLC, and each party paid its own attorney and advisor fees. The Lease Agreement is subject to early termination by either party, with 90 days prior written notice, if Mr. Lester retires or otherwise withdraws from active management of the company. During fiscal 2008, we paid a total of $3,185,000 to the LLC and as of February 1, 2009, $375,000, equal to one month’s rent, was owed to the LLC, all of which was paid subsequent to year-end.

Note N: Infrastructure Cost Reduction Program

On January 21, 2009, we announced a series of actions completed during the fourth quarter of fiscal 2008 to reduce our fiscal 2009 fixed and semi-fixed overhead costs by approximately $75,000,000. These actions included an approximate 18% reduction in company-wide full time headcount (approximately 1,400 positions), the closure of our Camp Hill, Pennsylvania care center and the closure of a 500,000 square foot distribution facility in Memphis, Tennessee. In connection with this cost reduction program, we incurred approximately $12,734,000 in severance and lease termination related expenses in the fourth quarter of fiscal 2008. Approximately $2,390,000 of these expenses are recorded within cost of goods sold and $10,344,000 is recorded within selling, general and administrative expenses.

Note O: Segment Reporting

We have two reportable segments, retail and direct-to-customer. The retail segment has five merchandising concepts which sell products for the home (Williams-Sonoma, Pottery Barn, Pottery Barn Kids, West Elm and Williams-Sonoma Home). The five retail merchandising concepts are operating segments, which have been aggregated into one reportable segment, retail. The direct-to-customer segment has six merchandising concepts (Williams-Sonoma, Pottery Barn, Pottery Barn Kids, PBteen, West Elm and Williams-Sonoma Home) and sells similar products through our seven direct mail catalogs (Williams-Sonoma, Pottery Barn, Pottery Barn Kids, Pottery Barn Bed and Bath, PBteen, West Elm and Williams-Sonoma Home) and six e-commerce websites (williams-sonoma.com, potterybarn.com, potterybarnkids.com, pbteen.com, westelm.com and wshome.com). Management’s expectation is that the overall economics of each of our major concepts within each reportable segment will be similar over time.

These reportable segments are strategic business units that offer similar home-centered products. They are managed separately because the business units utilize two distinct distribution and marketing strategies. Our operating segments are aggregated at the channel level for reporting purposes due to the fact that our brands are interdependent for economies of scale and we do not maintain fully allocated income statements at the brand level. As a result, material financial decisions related to the brands are made at the channel level. Furthermore, it is not practicable for us to report revenue by product group.

We use earnings before unallocated corporate overhead, interest and taxes to evaluate segment profitability. Unallocated costs before income taxes include corporate employee-related costs, occupancy expenses (including depreciation expense), third-party service costs and administrative costs, primarily in our corporate systems, corporate facilities and other administrative departments. Unallocated assets include the net book value of corporate facilities and related information systems, deferred income taxes, other corporate long-lived assets and corporate cash and cash equivalents.

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Income tax information by segment has not been included as taxes are calculated at a company-wide level and are not allocated to each segment.

Segment Information

Dollars in thousands	Retail1		Direct-to- Customer		Unallocated			Total
2008 (52 Weeks)
Net revenues	$	1,962,498	$	1,398,974	$	—		$	3,361,472
Depreciation and amortization expense		99,065		21,142		27,876			148,083
Earnings (loss) before income taxes2, 3		41,293		183,237		(182,577	)		41,953
Assets 4		1,047,448		295,022		592,994			1,935,464
Capital expenditures		145,456		17,283		29,050			191,789
2007 (53 Weeks)
Net revenues	$	2,281,218	$	1,663,716	$	—		$	3,944,934
Depreciation and amortization expense		96,129		19,328		25,244			140,701
Earnings (loss) before income taxes		253,834		267,470		(204,964	)		316,340
Assets 4		1,143,910		378,520		571,424			2,093,854
Capital expenditures		134,158		24,393		53,473			212,024
2006 (52 Weeks)
Net revenues	$	2,153,978	$	1,573,535	$	—		$	3,727,513
Depreciation and amortization expense		92,372		19,650		23,009			135,031
Earnings (loss) before income taxes3		264,574		248,793		(176,181	)		337,186
Assets 4,5		1,062,362		349,419		636,550			2,048,331
Capital expenditures		125,333		25,686		39,961			190,980

¹ Net revenues include $79.9 million, $87.3 million and $78.1 million in fiscal 2008, fiscal 2007 and fiscal 2006, respectively, related to our foreign operations.

² In the retail channel, includes asset impairment charges of $34.0 million related to our underperforming retail stores and a $9.4 million benefit related to an incentive payment received from a landlord to compensate us for terminating a store lease prior to its original expiration.

³ Unallocated costs before income taxes in fiscal 2008 includes an approximate $16.0 million benefit related to a gain on sale of our corporate aircraft, an $11.0 million benefit related to the reversal of expense associated with certain performance-based stock awards and $12.7 million in severance related costs associated with our infrastructure cost reduction program. Approximately $2.4 million of these severance related costs are recorded within cost of goods sold and approximately $10.3 million are recorded within selling, general and administrative expenses (See Note N).

⁴ Includes $28.3 million, $30.7 million and $23.1 million of long-term assets in fiscal 2008, fiscal 2007 and fiscal 2006, respectively, related to our foreign operations.

⁵ Includes $2.4 million, $1.6 million and $0.3 million in the retail, direct-to-customer and corporate unallocated segments, respectively, related to the transitioning of the merchandising strategies of our Hold Everything brand into our other existing brands.

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Report of Independent Registered Public Accounting Firm

To the Board of Directors and Shareholders of

Williams-Sonoma, Inc.

We have audited the accompanying consolidated balance sheets of Williams-Sonoma, Inc. and subsidiaries (the “Company”) as of February 1, 2009 and February 3, 2008, and the related consolidated statements of income, shareholders’ equity, and cash flows for each of the three years in the period ended February 1, 2009. We also have audited the Company’s internal control over financial reporting as of February 1, 2009, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on these financial statements and an opinion on the Company’s internal control over financial reporting based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audit of financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

A company’s internal control over financial reporting is a process designed by, or under the supervision of, the company’s principal executive and principal financial officers, or persons performing similar functions, and effected by the company’s 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 generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Williams-Sonoma, Inc. and subsidiaries as of February 1, 2009 and February 3, 2008, and the results of their operations and their cash flows for each of the three years in the period ended February 1, 2009, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of February 1, 2009, based on the criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.

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As discussed in Note A to the consolidated financial statements, the Company adopted the provisions of Financial Accounting Standards Board (“FASB”) Interpretation No. 48, Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109, on January 29, 2007.

/s/ DELOITTE & TOUCHE LLP

San Francisco, California

April 2, 2009

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Quarterly Financial Information

(Unaudited)

Dollars in thousands, except per share amounts
Fiscal 2008 (52 Weeks)	First Quarter	1		Second Quarter	2		Third Quarter	3		Fourth Quarter	4		Full Year
Net revenues	$781,784		$	819,621		$	752,052		$	1,008,015		$	3,361,472
Gross margin	276,219			278,847			240,480			339,626			1,135,172
Earnings before income taxes5	17,062			25,233			(19,536	)		19,194			41,953
Net earnings7	10,447			18,384			(10,998	)		12,191			30,024
Basic earnings per share6	$      0.10		$	0.17		$	(0.10	)	$	0.12		$	0.28
Diluted earnings per share6	$      0.10		$	0.17		$	(0.10	)	$	0.12		$	0.28
Stock price (as of quarter-end) 7	$    26.10		$	17.47		$	8.28		$	7.92		$	7.92
Fiscal 2007 (53 Weeks)	First Quarter			Second Quarter			Third Quarter			Fourth Quarter			Full Year
Net revenues	$816,051		$	859,396		$	895,132		$	1,374,355		$	3,944,934
Gross margin	301,970			320,095			342,081			571,825			1,535,971
Earnings before income taxes	30,381			43,394			44,679			197,886			316,340
Net earnings	18,150			25,966			27,077			124,564			195,757
Basic earnings per share6	$      0.16		$	0.24		$	0.25		$	1.17		$	1.79
Diluted earnings per share6	$      0.16		$	0.23		$	0.25		$	1.15		$	1.76
Stock price (as of quarter-end)7	$    35.67		$	30.73		$	30.61		$	27.52		$	27.52

¹ Includes a net pre-tax benefit of $9,350,000 in selling, general and administrative expense related to an incentive payment from a landlord to compensate us for terminating a store lease prior to its expiration.

² Includes a pre-tax benefit of approximately $16,000,000 in selling, general and administrative expense related to the sale of our corporate aircraft.

³ Includes a pre-tax benefit of $11,023,000 in selling, general and administrative expense associated with the reversal of performance-based stock compensation expense.

⁴ Includes a pre-tax expense of $2,390,000 in cost of goods sold and $10,344,000 in selling, general and administrative expense related to our infrastructure cost reduction program.

⁵ Includes pre-tax impairment charges of $596,000 in the first quarter, $1,474,000 in the second quarter, $12,280,000 in the third quarter and $19,645,000 in the fourth quarter related to our underperforming retail stores.

⁶ The sum of the quarterly net earnings per share amounts will not necessarily equal the annual net earnings per share as each quarter is calculated independently.

⁷ Stock price represents our common stock price at the close of business on the Friday before our fiscal quarter-end.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

ITEM 9A. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

As of February 1, 2009, an evaluation was performed by management, with the participation of our Chief Executive Officer (“CEO”) and our Executive Vice President, Chief Operating and Chief Financial Officer (“CFO”), of the effectiveness of our disclosure controls and procedures. Based on that evaluation, our management, including our CEO and CFO, concluded that our disclosure controls and procedures are effective to ensure that information we are required to disclose in reports that we file or submit under the Securities Exchange Act of 1934 is accumulated and communicated to our management, including our CEO and CFO, as appropriate, to allow timely discussions regarding required disclosures, and that such information is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC.

69

Changes in Internal Control Over Financial Reporting

There was no change in our internal control over financial reporting that occurred during our most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Management’s Report on Internal Control Over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over the company’s financial reporting. There are inherent limitations in the effectiveness of any internal control, including the possibility of human error and the circumvention or overriding of controls. Accordingly, even any effective internal control can provide only reasonable assurance with respect to financial statement preparation. Further, because of changes in conditions, the effectiveness of any internal control may vary over time.

Our management assessed the effectiveness of the company’s internal control over financial reporting as of February 1, 2009. In making this assessment, we used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework. Based on our assessment using those criteria, our management concluded that, as of February 1, 2009, our internal control over financial reporting is effective.

Our independent registered public accounting firm audited the financial statements included in this Annual Report on Form 10-K and has issued an attention report on the Company’s internal control over financial reporting. Their report appears on pages 67 through 68 of this Annual Report on Form 10-K.

ITEM 9B. OTHER INFORMATION

None.

70

PART III

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

Information required by this Item is incorporated by reference herein to the information under the headings “Election of Directors,” “Information Concerning Executive Officers,” “Committee Reports–Nominations and Corporate Governance Committee Report,” “Committee Reports–Audit and Finance Committee Report,” “Corporate Governance Guidelines and Corporate Code of Conduct” and “Section 16(a) Beneficial Ownership Reporting Compliance” in our Proxy Statement.

ITEM 11. EXECUTIVE COMPENSATION

Information required by this Item is incorporated by reference herein to information under the headings “Election of Directors,” “Information Concerning Executive Officers,” “Compensation Discussion and Analysis,” and “Committee Reports–Compensation Committee Report” in our Proxy Statement.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

Information required by this Item is incorporated by reference herein to information under the headings “Security Ownership of Principal Shareholders and Management” and “Equity Compensation Plan Information” in our Proxy Statement.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE

Information required by this Item is incorporated by reference herein to information under the heading “Certain Relationships and Related Transactions” in our Proxy Statement.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

Information required by this Item is incorporated by reference herein to information under the headings “Committee Reports–Audit and Finance Committee Report” and “Audit and Related Fees” in our Proxy Statement.

71

PART IV

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a)(1) Financial Statements:

The following consolidated financial statements of Williams-Sonoma, Inc. and subsidiaries and the related notes are filed as part of this report pursuant to Item 8:

Consolidated Statements of Earnings for the fiscal years ended February 1, 2009, February 3, 2008 and January 28, 2007

Consolidated Balance Sheets as of February 1, 2009 and February 3, 2008

Consolidated Statements of Shareholders’ Equity for the fiscal years ended February 1, 2009, February 3, 2008 and January 28, 2007

Consolidated Statements of Cash Flows for the fiscal years ended February 1, 2009, February 3, 2008 and January 28, 2007

Notes to Consolidated Financial Statements

Report of Independent Registered Public Accounting Firm

Quarterly Financial Information

(a)(2) Financial Statement Schedules: Schedules have been omitted because they are not required or because the required information, where material, is included in the financial statements, notes, or supplementary financial information.

(a)(3) Exhibits: See Exhibit Index on pages 74 through 81.

(b) Exhibits: See Exhibit Index on pages 74 through 81.

(c) Financial Statement Schedules: Schedules have been omitted because they are not required or are not applicable.

72

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	WILLIAMS-SONOMA, INC.
Date: April 2, 2009	By	/s/    W. HOWARD LESTER
		Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

Date: April 2, 2009	/s/    W. HOWARD LESTER
	W. Howard Lester
	Chairman of the Board of Directors and Chief Executive Officer
	(principal executive officer)
Date: April 2, 2009	/s/    SHARON L. MCCOLLAM
	Sharon L. McCollam
	Executive Vice President, Chief Operating and Chief Financial Officer
	(principal financial officer and principal accounting officer)
Date: April 2, 2009	/s/    ADRIAN D.P. BELLAMY
	Adrian D.P. Bellamy
	Director
Date: April 2, 2009	/s/    PATRICK J. CONNOLLY
	Patrick J. Connolly
	Director
Date: April 2, 2009	/s/    ADRIAN T. DILLON
	Adrian T. Dillon
	Director
Date: April 2, 2009	/s/    ANTHONY A. GREENER
	Anthony A. Greener
	Director
Date: April 2, 2009	/s/    TED W. HALL
	Ted W. Hall
	Director
Date: April 2, 2009	/s/    MICHAEL R. LYNCH
	Michael R. Lynch
	Director
Date: April 2, 2009	/s/    RICHARD T. ROBERTSON
	Richard T. Robertson
	Director
Date: April 2, 2009	/s/    DAVID B. ZENOFF
	David B. Zenoff
	Director

73

EXHIBIT INDEX TO ANNUAL REPORT ON FORM 10-K

FOR THE

FISCAL YEAR ENDED FEBRUARY 1, 2009

EXHIBIT NUMBER	EXHIBIT DESCRIPTION
ARTICLES OF INCORPORATION AND BYLAWS
3.1	Restated Articles of Incorporation (incorporated by reference to Exhibit 3.1 to the Company’s Quarterly Report on Form 10-Q for the period ended October 29, 1995 as filed with the Commission on December 13, 1995, File No. 000-12704)
3.2	Certificate of Amendment of Restated Articles of Incorporation (incorporated by reference to Exhibit 3.1A to the Company’s Annual Report on Form 10-K for the fiscal year ended January 30, 2000 as filed with the Commission on May 1, 2000, File No. 001-14077)
3.3	Certificate of Amendment of Restated Articles of Incorporation, as Amended, of the Company, dated April 29, 2002 (incorporated by reference to Exhibit 3.3 to the Company’s Quarterly Report on Form 10-Q for the period ended August 1, 2004 as filed with the Commission on September 10, 2004, File No. 001-14077)
3.4	Certificate of Amendment of Restated Articles of Incorporation, as Amended, of the Company, dated as of July 22, 2003 (incorporated by reference to Exhibit 3.1 to the Company’s Quarterly Report on Form 10-Q for the period ended August 3, 2003 as filed with the Commission on September 11, 2003, File No. 001-14077)
3.5	Amended and Restated Bylaws of Registrant (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K as filed with the Commission on May 22, 2007, File No. 001-14077)
FINANCING AGREEMENTS
10.1	Fourth Amended and Restated Credit Agreement, dated October 4, 2006, between the Company and Bank of America, N.A., as administrative agent, L/C Issuer and lender of swing line advances, Banc of America Securities LLC, as sole lead arranger and sole book manager, The Bank of New York and Wells Fargo Bank N.A., as co-syndication agents, JPMorgan Chase Bank, N.A. and Union Bank of California, N.A., as co-documentation agents, and the lenders party thereto (incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the fiscal quarter ended October 29, 2006 as filed with the Commission on December 8, 2006, File No. 001-14077)
10.2	Amendment No. 1 to Fourth Amended and Restated Credit Agreement, dated as of December 3, 2008, by and among Company, Bank of America, N.A., as Administrative Agent, L/C Issuer and lender of swingline advances, each of the lenders party thereto, and each of the subsidiary guarantors party thereto (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K as filed with the Commission on December 4, 2008, File No. 001-14077)
10.3	Reimbursement Agreement between the Company and Bank of America, N.A., dated as of July 1, 2005 (incorporated by reference to Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q for the period ended July 31, 2005 as filed with the Commission on September 9, 2005, File No. 001-14077)

74

EXHIBIT NUMBER	EXHIBIT DESCRIPTION
10.4	First Amendment, dated as of September 9, 2005, to the Reimbursement Agreement between the Company and Bank of America, N.A., dated as of July 1, 2005 (incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the period ended October 30, 2005 as filed with the Commission on December 6, 2005, File No. 001-14077)
10.5	Second Amendment, dated as of September 8, 2006, to the Reimbursement Agreement between the Company and Bank of America, N.A., dated as of July 1, 2005 (incorporated by reference to Exhibit 10.6 to the Company’s Quarterly Report on Form 10-Q for the fiscal quarter ended October 29, 2006 as filed with the Commission on December 8, 2006, File No. 001-14077)
10.6	Third Amendment, dated as of October 25, 2006, to the Reimbursement Agreement between the Company and Bank of America, N.A., dated as of July 1, 2005 (incorporated by reference to Exhibit 10.7 to the Company’s Quarterly Report on Form 10-Q for the fiscal quarter ended October 29, 2006 as filed with the Commission on December 8, 2006, File No. 001-14077)
10.7	Fourth Amendment, dated as of September 8, 2007, to the Reimbursement Agreement between the Company and Bank of America, N.A., dated as of July 1, 2005 (incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the period ended October 28, 2007 as filed with the Commission on December 7, 2007, File No. 001-14077)
10.8	Fifth Amendment, dated as of September 5, 2008, to the Reimbursement Agreement between the Company and Bank of America, N.A., dated as of July 1, 2005 (incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the period ended November 2, 2008 as filed with the Commission on December 12, 2008, File No. 001-14077)
10.9	Reimbursement Agreement between the Company and The Bank of New York dated as of July 1, 2005 (incorporated by reference to Exhibit 10.3 to the Company’s Quarterly Report on Form 10-Q for the period ended July 31, 2005 as filed with the Commission on September 9, 2005, File No. 001-14077)
10.10	First Amendment, dated as of September 9, 2005, to the Reimbursement Agreement between the Company and The Bank of New York, dated as of July 1, 2005 (incorporated by reference to Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q for the period ended October 30, 2005 as filed with the Commission on December 6, 2005, File No. 001-14077)
10.11	Second Amendment, dated as of September 8, 2006, to the Reimbursement Agreement between the Company and The Bank of New York, dated as of July 1, 2005 (incorporated by reference to Exhibit 10.9 to the Company’s Quarterly Report on Form 10-Q for the fiscal quarter ended October 29, 2006 as filed with the Commission on December 8, 2006, File No. 001-14077)
10.12	Third Amendment, dated as of July 23, 2007, to the Reimbursement Agreement between the Company and the Bank of New York, dated as of July 1, 2005 (incorporated by reference to Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q for the period ended October 28, 2007 as filed with the Commission on December 7, 2007, File No. 001-14077)

75

EXHIBIT NUMBER	EXHIBIT DESCRIPTION
10.13	Fourth Amendment, dated as of September 8, 2007, to the Reimbursement Agreement between the Company and The Bank of New York, dated as of July 1, 2005 (incorporated by reference to Exhibit 10.3 to the Company’s Quarterly Report on Form 10-Q for the period ended October 28, 2007 as filed with the Commission on December 7, 2007, File No. 001-14077)
10.14	Fifth Amendment, dated as of September 5, 2008, to the Reimbursement Agreement between the Company and The Bank of New York Mellon, formerly known as The Bank of New York, dated as of July 1, 2005 (incorporated by reference to Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q for the period ended November 2, 2008 as filed with the Commission on December 12, 2008, File No. 001-14077)
10.15	Reimbursement Agreement between the Company and Wells Fargo Bank, N.A., dated as of July 1, 2005 (incorporated by reference to Exhibit 10.4 to the Company’s Quarterly Report on Form 10-Q for the period ended July 31, 2005 as filed with the Commission on September 9, 2005, File No. 001-14077)
10.16	First Amendment, dated as of September 9, 2005, to the Reimbursement Agreement between the Company and Wells Fargo Bank, N.A., dated as of July 1, 2005 (incorporated by reference to Exhibit 10.3 to the Company’s Quarterly Report on Form 10-Q for the period ended October 30, 2005 as filed with the Commission on December 6, 2005, File No. 001-14077)
10.17	Second Amendment, dated as of September 8, 2006, to the Reimbursement Agreement between the Company and Wells Fargo Bank, N.A., dated as of July 1, 2005 (incorporated by reference to Exhibit 10.8 to the Company’s Quarterly Report on Form 10-Q for the fiscal quarter ended October 29, 2006 as filed with the Commission on December 8, 2006, File No. 001-14077)
10.18	Third Amendment, dated as of September 8, 2007, to the Reimbursement Agreement between the Company and Wells Fargo Bank, N.A., dated as of July 1, 2005 (incorporated by reference to Exhibit 10.4 to the Company’s Quarterly Report on Form 10-Q for the period ended October 28, 2007 as filed with the Commission on December 7, 2007, File No. 001-14077)
10.19	Fourth Amendment, dated as of September 5, 2008, to the Reimbursement Agreement between the Company and Wells Fargo Bank, N.A., dated as of July 1, 2005 (incorporated by reference to Exhibit 10.3 to the Company’s Quarterly Report on Form 10-Q for the period ended November 2, 2008 as filed with the Commission on December 12, 2008, File No. 001-14077)
10.20	Reimbursement Agreement between the Company and JPMorgan Chase Bank, N.A., dated as of September 8, 2006 (incorporated by reference to Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q for the fiscal quarter ended October 29, 2006 as filed with the Commission on December 8, 2006, File No. 001-14077)
10.21	First Amendment, dated as of October 25, 2006, to the Reimbursement Agreement between the Company and JPMorgan Chase Bank, N.A., dated as of September 8, 2006 (incorporated by reference to Exhibit 10.3 to the Company’s Quarterly Report on Form 10-Q for the fiscal quarter ended October 29, 2006 as filed with the Commission on December 8, 2006, File No. 001-14077)

76

EXHIBIT NUMBER	EXHIBIT DESCRIPTION
10.22	Second Amendment, dated as of July 20, 2007, to the Reimbursement Agreement between the Company and JPMorgan Chase Bank, N.A., dated as of September 8, 2006 (incorporated by reference to Exhibit 10.5 to the Company’s Quarterly Report on Form 10-Q for the period ended October 28, 2007 as filed with the Commission on December 7, 2007, File No. 001-14077)
10.23	Third Amendment, dated as of September 8, 2007, to the Reimbursement Agreement between the Company and JPMorgan Chase Bank, N.A., dated as of September 8, 2006 (incorporated by reference to Exhibit 10.6 to the Company’s Quarterly Report on Form 10-Q for the period ended October 28, 2007 as filed with the Commission on December 7, 2007, File No. 001-14077)
10.24	Fourth Amendment, dated as of September 5, 2008, to the Reimbursement Agreement between the Company and JPMorgan Chase Bank, N.A., dated as of September 8, 2006 (incorporated by reference to Exhibit 10.4 to the Company’s Quarterly Report on Form 10-Q for the period ended November 2, 2008 as filed with the Commission on December 12, 2008, File No. 001-14077)
10.25	Reimbursement Agreement between the Company and U.S. Bank National Association, dated as of September 8, 2006 (incorporated by reference to Exhibit 10.4 to the Company’s Quarterly Report on Form 10-Q for the fiscal quarter ended October 29, 2006 as filed with the Commission on December 8, 2006, File No. 001-14077)
10.26	First Amendment, dated as of October 25, 2006, to the Reimbursement Agreement between the Company and U.S. Bank National Association, dated as of September 8, 2006 (incorporated by reference to Exhibit 10.5 to the Company’s Quarterly Report on Form 10-Q for the fiscal quarter ended October 29, 2006 as filed with the Commission on December 8, 2006, File No. 001-14077)
10.27	Second Amendment, dated as of September 8, 2007, to the Reimbursement Agreement between the Company and U.S. Bank National Association, dated as of September 8, 2006 (incorporated by reference to Exhibit 10.6 to the Company’s Quarterly Report on Form 10-Q for the period ended October 28, 2007 as filed with the Commission on December 7, 2007, File No. 001-14077)
10.28	Third Amendment, dated as of September 5, 2008, to the Reimbursement Agreement between the Company and U.S. Bank National Association, dated as of September 8, 2006 (incorporated by reference to Exhibit 10.5 to the Company’s Quarterly Report on Form 10-Q for the period ended November 2, 2008 as filed with the Commission on December 12, 2008, File No. 001-14077)
STOCK PLANS
10.29+	Williams-Sonoma, Inc. Amended and Restated 1993 Stock Option Plan (incorporated by reference to Exhibit 10.12 to the Company’s Annual Report on Form 10-K for the fiscal year ended January 29, 2006 as filed with the Commission on April 15, 2005, File No. 001-14077)
10.30+	Williams-Sonoma, Inc. 2000 Nonqualified Stock Option Plan (incorporated by reference to Exhibit 4 to the Company’s Registration Statement on Form S-8 as filed with the Commission on October 27, 2000, File No. 333-48750)

77

EXHIBIT NUMBER	EXHIBIT DESCRIPTION
10.31+	Amended and Restated Williams-Sonoma, Inc. 2001 Long-Term Incentive Plan (incorporated by reference to Exhibit 99(D)(1) Schedule TO as filed with the Commission on March 16, 2009, File No. 001-14077)
10.32+	Forms of Notice of Grant and Stock Option Agreement under the Company’s 1993 Stock Option Plan, 2000 Nonqualified Stock Option Plan and 2001 Long-Term Incentive Plan (incorporated by reference to Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q for the period ended October 31, 2004 as filed with the Commission on December 10, 2004, File No. 001-14077)
10.33+	Form of Amended and Restated 2001 Long-Term Incentive Plan Restricted Stock Unit Award Agreement for 2006 Employee Grants (incorporated by reference to Exhibit 10.27 to the Company’s Annual Report on Form 10-K for the fiscal year ended February 3, 2008 as filed with the Commission on April 3, 2008, File No. 001-14077)
10.34+	Form of Williams-Sonoma, Inc. 2001 Long-Term Incentive Plan Restricted Stock Unit Award Term Sheet for Director Grants (incorporated by reference to Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q for the period ended July 29, 2007 as filed with the Commission on September 7, 2007, File No. 001-14077)
10.35+	Form of Williams-Sonoma, Inc. 2001 Long-Term Incentive Plan Restricted Stock Unit Award Agreement for Employee Grants (incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the period ended May 4, 2008 as filed with the Commission on June 11, 2008, File No. 001-14077)
10.36+	Form of Williams-Sonoma, Inc. 2001 Long-Term Incentive Plan Stock-Settled Stock Appreciation Right Award Agreement for Employee Grants (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the Commission on March 20, 2006, File No. 001-14077)
10.37+	Form of Williams-Sonoma, Inc. 2001 Long-Term Incentive Plan Stock-Settled Stock Appreciation Right Award Agreement for Director Grants (incorporated by reference to Exhibit 10.31 to the Company’s Annual Report on Form 10-K for the fiscal year ended February 3, 2008 as filed with the Commission on April 3, 2008, File No. 001-14077)
10.38*+	Williams-Sonoma, Inc. 2001 Long-Term Incentive Plan Stock-Settled Stock Appreciation Right Award Agreement for CEO Grant
OTHER INCENTIVE PLANS
10.39+	2001 Incentive Bonus Plan, as amended and restated (incorporated by reference to Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q filed with the Commission on June 11, 2008, File No. 001-14077)
10.40*+	Williams-Sonoma, Inc. Pre-2005 Executive Deferral Plan
10.41*+	Williams-Sonoma, Inc. Executive Deferred Compensation Plan
10.42+	Williams-Sonoma, Inc. 401(k) Plan, as amended and restated effective January 1, 2002, except as otherwise noted, and including amendments effective through August 1, 2007 (incorporated by reference to Exhibit 10.34 to the Company’s Annual Report on Form 10-K for the fiscal year ended February 3, 2008 as filed with the Commission on April 3, 2008, File No. 001-14077)

78

EXHIBIT NUMBER	EXHIBIT DESCRIPTION
10.43*+	Amendment to the Williams-Sonoma, Inc. 401(k) Plan dated November 6, 2008
10.44*+	January 2009 Amendment to the Williams-Sonoma, Inc. 401(k) Plan dated January 20, 2009
PROPERTIES
10.45	Warehouse – Distribution Facility lease dated July 1, 1983, between the Company as lessee and the Lester-McMahan Partnership as lessor (incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the period ended September 30, 1983 as filed with the Commission on October 14, 1983, File No. 000-12704)
10.46	First Amendment, dated December 1, 1985, to the Warehouse – Distribution Facility lease dated July 1, 1983, between the Company as lessee and the Lester-McMahan Partnership as lessor (incorporated by reference to Exhibit 10.48 to the Company’s Annual Report on Form 10-K for the fiscal year ended February 2, 1986 as filed with the Commission on May 2, 1986, File No. 000-12704)
10.47	Second Amendment, dated December 1, 1993, to the Warehouse – Distribution Facility lease dated July 1, 1983 between the Company as lessee and the Lester-McMahan Partnership as lessor (incorporated by reference to Exhibit 10.27 to the Company’s Annual Report on Form 10-K for the fiscal year ended January 30, 1994 as filed with the Commission on April 29, 1994, File No. 000-12704)
10.48	Sublease for the Distribution Facility at 4600 and 4650 Sonoma Cove, Memphis, Tennessee, dated as of August 1, 1990, by and between Hewson-Memphis Partners and the Company (incorporated by reference to Exhibit 10 to the Company’s Quarterly Report on Form 10-Q for the period ended October 28, 1990 as filed with the Commission on December 12, 1990, File No. 000-12704)
10.49	First Amendment, dated December 22, 1993, to Sublease for the Distribution Facility at 4600 and 4650 Sonoma Cove, Memphis, Tennessee between the Company and Hewson-Memphis Partners, dated as of August 1, 1990 (incorporated by reference to Exhibit 10.7 to the Company’s Annual Report on Form 10-K for the fiscal year ended January 28, 2001 as filed with the Commission on April 26, 2001, File No. 001-14077)
10.50	Second Amendment, dated September 1, 1994, to Sublease for the Distribution Facility at 4600 and 4650 Sonoma Cove, Memphis, Tennessee, dated as of August 1, 1990 between the Company and Hewson-Memphis Partners (incorporated by reference to Exhibit 10.38 to the Company’s Quarterly Report on Form 10-Q for the period ended October 30, 1994 as filed with the Commission on December 13, 1994, File No. 000-12704)
10.51	Third Amendment, dated October 24, 1995, to Sublease for the Distribution Facility at 4600 and 4650 Sonoma Cove, Memphis, Tennessee, dated as of August 1, 1990 between the Company and Hewson-Memphis Partners (incorporated by reference to Exhibit 10.2E to the Company’s Quarterly Report on Form 10-Q for the period ended October 29, 1995 as filed with the Commission on December 13, 1995, File No. 000-12704)
10.52	Fourth Amendment, dated February 1, 1996, to Sublease for the Distribution Facility at 4600 and 4650 Sonoma Cove, Memphis, Tennessee, dated as of August 1, 1990 between the Company and Hewson-Memphis Partners (incorporated by reference to

79

EXHIBIT NUMBER	EXHIBIT DESCRIPTION
	Exhibit 10.16 to the Company’s Annual Report on Form 10-K for the fiscal year ended January 28, 2001 as filed with the Commission on April 26, 2001, File No. 001-14077)
10.53	Fifth Amendment to Sublease, dated March 1, 1999, incorrectly titled Fourth Amendment to Sublease for the Distribution Facility at 4600 and 4650 Sonoma Cove, Memphis, Tennessee, dated as of August 1, 1990 between the Company and Hewson-Memphis Partners (incorporated by reference to Exhibit 10.43 to the Company’s Annual Report on Form 10-K for the fiscal year ended February 3, 2002 as filed with the Commission on April 29, 2002, File No. 001-14077)
10.54	Memorandum of Understanding between the Company and the State of Mississippi, Mississippi Business Finance Corporation, Desoto County, Mississippi, the City of Olive Branch, Mississippi and Hewson Properties, Inc., dated August 24, 1998 (incorporated by reference to Exhibit 10.6 to the Company’s Quarterly Report on Form 10-Q for the period ended August 2, 1998 as filed with the Commission on September 14, 1998, File No. 001-14077)
10.55	Olive Branch Distribution Facility Lease, dated December 1, 1998, between the Company as lessee and WSDC, LLC (the successor-in-interest to Hewson/Desoto Phase I, L.L.C.) as lessor (incorporated by reference to Exhibit 10.3D to the Company’s Annual Report on Form 10-K for the fiscal year ended January 31, 1999 as filed with the Commission on April 30, 1999, File No. 001-14077)
10.56	First Amendment, dated September 1, 1999, to the Olive Branch Distribution Facility Lease between the Company as lessee and WSDC, LLC (the successor-in-interest to Hewson/Desoto Phase I, L.L.C.) as lessor, dated December 1, 1998 (incorporated by reference to Exhibit 10.3B to the Company’s Annual Report on Form 10-K for the fiscal year ended January 30, 2000 as filed with the Commission on May 1, 2000, File No. 001-14077)
10.57	Lease for an additional Company distribution facility located in Olive Branch, Mississippi between Williams-Sonoma Retail Services, Inc. as lessee and SPI WS II, LLC (the successor-in-interest to Hewson/Desoto Partners, L.L.C.) as lessor, dated November 15, 1999 (incorporated by reference to Exhibit 10.14 to the Company’s Annual Report on Form 10-K for the fiscal year ended January 30, 2000 as filed with the Commission on May 1, 2000, File No. 001-14077)
10.58	Lease for an additional Company distribution facility located in Olive Branch, Mississippi, between Pottery Barn, Inc. as lessee and ProLogis-Macquarie MS Investment Trust (the successor-in-interest to Robert Pattillo Properties, Inc.) as lessor, dated December 1, 2003 (incorporated by reference to Exhibit 10.46 to the Company’s Annual Report on Form 10-K for the fiscal year ended February 1, 2004 as filed with the Commission on April 15, 2004, File No. 001-14077)
10.59	First Addendum, dated February 27, 2004, to Lease for an additional Company distribution facility located in Olive Branch, Mississippi, between Pottery Barn, Inc. as lessee, ProLogis-Macquarie MS Investment Trust (the successor-in-interest to Robert Pattillo Properties, Inc.) as lessor, and the Company as guarantor dated December 1, 2003 (incorporated by reference to Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q for the period ended May 2, 2004 as filed with the Commission on June 9, 2004, File No. 001-14077)

80

EXHIBIT NUMBER	EXHIBIT DESCRIPTION
10.60	Second Addendum, dated June 1, 2004, to Lease for an additional Company distribution facility located in Olive Branch, Mississippi, between Pottery Barn, Inc. as lessee, ProLogis-Macquarie MS Investment Trust (the successor-in-interest to Robert Pattillo Properties, Inc.) as lessor, and the Company as guarantor dated December 1, 2003 (incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the period ended August 1, 2004 as filed with the Commission on September 10, 2004, File No. 001-14077)
EMPLOYMENT AGREEMENTS
10.61	Employment Agreement between the Company and Laura Alber, dated March 19, 2001 (incorporated by reference to Exhibit 10.77 to the Company’s Annual Report on Form 10-K for the fiscal year ended February 3, 2002 as filed with the Commission on April 29, 2002, File No. 001-14077)
10.62*	Amendment, dated as of November 11, 2008, to Employment Agreement between the Company and Laura Alber, dated March 19, 2001.
10.63	Employment Agreement between the Company and Sharon McCollam, dated December 28, 2002 (incorporated by reference to Exhibit 10.42 to the Company’s Annual Report on Form 10-K for the fiscal year ended January 29, 2006 as filed with the Commission on April 15, 2005, File No. 001-14077)
10.64*	Amendment, dated as of November 11, 2008, to Employment Agreement between the Company and Sharon McCollam, dated December 28, 2002.
OTHER AGREEMENTS
10.65	Aircraft Lease Agreement between WHL Management LLC and the Company, dated May 16, 2008, (incorporated by reference to Exhibit 10.3 to the Company’s Quarterly Report on Form 10-Q for the quarter ended August 3, 2008 as filed with the Commission on September 12, 2008, File No. 001-14077)
OTHER EXHIBITS
21.1*	Subsidiaries
23.1*	Consent of Independent Registered Public Accounting Firm
CERTIFICATIONS
31.1*	Certification of Chief Financial Officer, pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended
31.2*	Certification of Chief Financial Officer, pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended
32.1*	Certification of Chief Executive Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2*	Certification of Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

* Filed herewith.

+ Indicates a management contract or compensatory plan or arrangement.

81

EX-10.38

Exhibit 10.38

WILLIAMS–SONOMA, INC. 2001 LONG-TERM INCENTIVE PLAN

STOCK-SETTLED STOCK APPRECIATION RIGHT AWARD AGREEMENT

Name:    Howard Lester	Employee ID:    20031
Grant Date:    11/07/2008	Per Share Exercise Price:    $8.56
Number of SSARs:     425,000	Vesting:    25%/Year over 4 years. Vests on each anniversary of the grant date.

1. Award. Williams-Sonoma, Inc. (the “Company”), has awarded you the number of Stock-Settled Stock Appreciation Rights (“SSARs”) indicated above. Each SSAR entitles you to purchase one share of Common Stock of the Company, at the per share exercise price set forth above, subject to the terms and conditions set forth in the Company’s 2001 Long-Term Incentive Plan (the “Plan”) and this Award Agreement. Prior to the distribution of any shares hereunder, this Award represents an unsecured obligation, payable only from the general assets of the Company.

2. Term, Vesting and Exercise of SSAR. The term of this SSAR commences on 11/07/2008 and ends on 11/07/2018, provided that you remain continuously employed by the Company or a Subsidiary. In no event may this SSAR be exercised later than 11/07/2018. This SSAR shall become vested and exercisable in 25% increments on each anniversary of the grant date (11/07/2008), so as to be 100% vested and exercisable on the fourth anniversary of the grant date, subject to your continued service either as an employee or as a Non-employee Director of the Company or a Subsidiary (“Service”) on each vesting date. If your employment with the Company or a Subsidiary terminates, the SSAR may be exercised only as described in paragraph 3 below. While you are alive, the SSAR may be exercised only by you or your legal representative.

To exercise all or part of the SSAR you must deliver a “Notice of Exercise,” in such form as the Company authorizes. You shall not have any rights as a stockholder with respect to the shares of Common Stock subject to the SSAR until you have exercised the SSAR for such shares.

Upon exercise, the number of shares of Stock issued will be net of (i) shares with a Fair Market Value equal to the aggregate exercise price of the exercised shares, and (ii) shares withheld by the Company to satisfy the minimum statutorily required tax withholding obligations. The remaining shares of Stock will be issued to you or, in case of your death, your beneficiary designated in accordance with the procedures specified by the Administrator. If at the time of your death, there is not an effective beneficiary designation on file or you are not survived by your designated beneficiary, the shares will be issued to the legal representative of your estate.

3. Termination and Certain Transactions

If your Service to the Company or a Subsidiary terminates by the Company or a Subsidiary, all then unvested SSARs awarded hereby shall immediately terminate without notice to you and shall be forfeited. In such event, you shall have ninety (90) days following your employment termination (or if less, the original SSAR term) to exercise any vested SSARs, after which date the SSARs shall immediately terminate without notice to you and shall be forfeited. Notwithstanding the foregoing, if you cease to be employed by the Company or its Subsidiaries by reason of your death, or if you die within the thirty (30) day period after the you cease to be employed by the Company or its Subsidiaries, any of your vested SSARs hereunder may be exercised by your estate, personal representative or beneficiary who has acquired the SSARs by will or by the laws of descent and distribution, at any time prior to the earlier of the original SSAR term or one hundred eighty (180) days from the date of your death. Additionally, if you cease to be employed by the Company or the Company’s Subsidiaries by reason of your Disability, you shall have the right to exercise any SSARs hereunder that were vested on your employment termination date at any time prior to the earlier of the original SSAR term or one hundred eighty (180) days from the date your employment terminates.

4. Tax Withholding. The Company will withhold from the number of shares of Common Stock otherwise issuable hereunder a number of shares necessary to satisfy the minimum statutorily required tax withholding obligations. Shares will be valued at their Fair Market Value when the taxable event occurs.

5. Nontransferable. You may not sell, assign, pledge, encumber or otherwise transfer any interest in the SSARs.

6. Other Restrictions. The issuance of Common Stock hereunder is subject to compliance by the Company and you with all applicable legal requirements applicable thereto, including tax withholding obligations, and with all applicable regulations of any stock exchange on which the Common Stock may be listed at the time of issuance. The Company may delay the issuance of shares of Common Stock hereunder to ensure at the time of issuance there is a registration statement for the shares in effect under the Securities Act of 1933.

7. Additional Provisions. This Award is subject to the provisions of the Plan. Capitalized terms not defined in this Award are used as defined in the Plan. If the Plan and this Award are inconsistent, the provisions of the Plan will govern. The Plan and this Award represent the entire agreement of you and the Company with respect to this Award and supersede in their entirety all prior undertakings and agreements of the Company and you with respect to this Award and may not be modified except by means of a written agreement between the Company and you. Interpretations of the Plan and this Award by the Committee are binding on you and the Company.

8. No Employment Agreement. Neither the award to you of the SSAR nor the delivery to you of this Award Agreement or any other document relating to the SSARs will confer on you the right to continued employment with the Company or any Subsidiary.

2

EX-10.40

Exhibit 10.40

WILLIAMS-SONOMA, INC.

PRE-2005 EXECUTIVE DEFERRAL PLAN

Williams-Sonoma, Inc. (the “Company”) hereby adopts the Williams-Sonoma, Inc. Pre-2005 Executive Deferral Plan, with reference to the following facts:

A.    Effective as of July 1, 1995, the Company adopted the Williams-Sonoma, Inc. Executive Deferral Plan (the “Plan”) to provide supplemental retirement income benefits for a select group of management and highly compensated employees.

B.     Effective as of January 1, 1998 and January 1, 1999, the Company amended and restated the Plan in its entirety.

C.    In order to preserve grandfather treatment under Internal Revenue Code Section 409A, the Plan has been frozen to deferrals on and after January 1, 2005.

D.    The Plan has been renamed the Pre-2005 Executive Deferral Plan, and the claims procedures under Article IX have been updated to comply with ERISA, but the Plan otherwise remains unchanged such that it has not been materially modified for purposes of Internal Revenue Code Section 409A. This Plan governs all deferrals made prior to January 1, 2005 and any earinings and losses thereon.

ARTICLE I

TITLE AND DEFINITIONS

1.1    Title. This Plan shall be known as the Williams-Sonoma, Inc. Pre-2005 Executive Deferral Plan.

1.2    Definitions. Whenever the following words and phrases are used in this Plan, with the first letter capitalized, they shall have the meanings specified below.

“Beneficiary” or “Beneficiaries” shall mean the person or persons designated under Article VII.

“Board of Directors” or “Board” shall mean the Board of Directors of the Company.

“Bonus” shall mean any incentive compensation payable to a Participant in addition to the Participant’s Salary.

“Code” shall mean the Internal Revenue Code of 1986, as amended.

“Committee” shall mean the Committee appointed by the Board to administer the Plan in accordance with Article V1I.

“Company” shall mean Williams-Sonoma, Inc., any successor corporation and each corporation which is a member of a controlled group of corporations (within the meaning of Section 414(b) of the Code) of which Williams-Sonoma, Inc. is a member.

“Compensation” shall mean the Salary and Bonus that the Participant receives for services rendered to the Company.

“Deferral Account” shall mean the bookkeeping account maintained by the Committee for each Participant under Article IV, which shall be the sum of the Participant’s Plan Year Subaccounts.

“Disability” shall mean a period of disability during which a Participant qualifies for benefits under the Company’s group long term disability plan or, if a Participant does not participate in such a plan, a period of disability during which the Participant would have qualified for benefits under such a plan had the Participant been a participant in such a plan, as determined in the sole discretion of the Committee. If the Company does not sponsor such a plan, Disability shall be determined by the Committee in its sole discretion.

“Distributable Amount” shall mean the amount credited to a Participant’s Plan Year Subaccount as of the date of distribution or withdrawal under Section 6.5.

“Eligible Employee” shall mean each member of a group of select management or highly compensated employees of the Company who is selected by the Committee to participate in the Plan.

“ERISA” means the Employee Retirement Income Security Act of 1974, as amended.

“Fund” or “Funds” shall mean one or more of the mutual funds or investment vehicles selected by the Committee pursuant to Section 3.2(a).

“Initial Election Period” for an Eligible Employee shall mean the 30-day period following the date on which the Committee notifies an employee that he or she has been selected as an Eligible Employee.

“Participant” shall mean any Eligible Employee who elects to defer Compensation in accordance with Section 3.1.

“Payment Eligibility Date” shall mean (a) for the Plan Year Subaccount for Plan Years before 1999, the date (which shall be the first day of a calendar quarter) specified by the Participant on a form provided by the Committee prior to July 30, 1995 or, if later, within 30 days of the date on which such person became a Participant, and (b) for each Plan Year Subaccount for the 1999 Plan Year and later Plan Years, the date (which shall be the first day of a calendar year at least three years after the first day of the Plan Year for which the Plan Year Subaccount is maintained) specified by the Participant on a form prescribed by the Committee when the Participant makes a valid election to defer Salary for the Plan Year for which the Plan Year Subaccount is maintained. If the Participant specifies no Payment Eligibility Date for a Plan Year Subaccount, the Payment Eligibility Date shall be the first day of the calendar quarter following the Participant’s death, Disability, Retirement, or Termination of Employment.

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“Plan” shall mean the Williams-Sonoma, Inc. Executive Deferral Plan set forth herein.

“Plan Year” shall mean the 12 consecutive month period beginning January 1, and ending December 31, except that the first Plan Year shall be a short year beginning July 1, 1995 and ending December 31, 1995.

“Plan Year Subaccount” shall mean the bookkeeping account maintained by the Committee for each Participant under Article IV to reflect, for each Plan Year, the deferrals of Salary made by such Participant for such Plan Year, the deferrals of Bonuses made by such Participant for the fiscal year of the Company which includes the last day of such Plan Year, deemed earnings credited thereon, and withdrawals and distributions debited thereto. The Committee shall maintain a single Plan Year Subaccount for all Plan Years before 1999.

“Retirement” shall mean a Participant’s Termination of Employment on or after his or her attainment of both age 55 and five Years of Service for any reason other than a leave of absence approved by the Committee, death, or Disability. For purposes of determining whether a Participant has “Retired,” “Years of Service” shall mean the total number of full years in which a Participant has been continuously employed by the Company. For purposes of this definition, a year of employment shall be a 365 day period (or 366 day period in the case of a leap year) that, for the first year of employment, commences an the employee’s date of hire and that, for any subsequent year, commences on an anniversary of that hiring date. The Committee may, in its sole discretion, credit a Participant with any partial year of employment. Periods during which an Eligible Employee is on a paid leave of absence or suffers from a Disability shall be deemed to be periods of continuous employment.

“Retirement Payment Eligibility Date” shall mean the date (which shall be the first day of a calendar year) a number of years after the Participant’s Retirement or Disability, which such number shall be specified by the Participant on a form provided by the Committee within the Initial Election Period, or, if the Participant does not file the form within the Initial Election Period, at least one year before the Participant’s Retirement or Disability. If the Participant does not validly specify a Retirement Payment Eligibility Date, the Retirement Payment Eligibility Date shall be the first day of the calendar quarter following the Participant’s Retirement or Disability.

“Salary” shall mean the Participant’s base pay.

“Termination of Employment” shall mean the ceasing of a Participant’s employment with the Company for any reason other than a leave of absence approved by the Committee, death, or Disability. A Participant shall not be considered to have had a Termination of Employment by virtue of a change in employment from one corporation which is a member of the controlled group of corporations (within the meaning of Section 414(b) of the Code) constituting the Company to another such member. However, if the corporation which employs a Participant ceases to be a member of the controlled group of corporations constituting the Company as a result of a sale or other corporate reorganization, such sale or other corporate reorganization shall be treated as the Participant’s Termination of Employment unless, immediately following such sale or reorganization and without any break in employment, the Participant remains employed by another member of the controlled group of corporations constituting the Company, or the former member of the controlled

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group which employs the Participant assumes liability for the benefits of the Participant under this Plan.

ARTICLE II

PARTICIPATION

2.1    Participation. An Eligible Employee shall become a Participant in the Plan by electing to defer all or a portion of his or her Compensation in accordance with Section 3.1. The Committee, in its discretion, may require an Eligible Employee, as a condition to becoming a Participant, to complete an application for the life insurance benefit described in Section 6.3(a), and to comply with various medical underwriting requirements of the insurance company.

2.2    Continuing Participation. An Eligible Employee who becomes a Participant shall continue to be a Participant until all of his benefits are distributed under this Plan. The Committee may determine at any time, in its sole discretion, that a Participant is no longer an Eligible Employee. Such a Participant shall continue to be a Participant in this Plan until all of his benefits are distributed under this Plan, but, from and after the first day of the first Plan Year beginning after such determination, such Participant shall not be entitled to make any further deferrals of Compensation under Article III.

ARTICLE III

DEFERRAL ELECTIONS

3.1    Elections to Defer Compensation.

(a)    Initial Election Period. Each Eligible Employee may elect to defer Compensation by filing with the Committee an election that conforms to the requirements of this Section 3.1, on a form provided by the Committee, no later than the last day of his or her Initial Election Period.

(b)    General Rule. Subject to the limitations set forth in paragraphs (c) and (d) below, the amount of Compensation which an Eligible Employee may elect to defer is as follows:

(1)    Any whole percentage of Salary up to 100%; and/or

(2)    Any whole percentage or dollar amount of Bonus up to 100%.

(c)    Maximum Deferrals. A Participant shall not be entitled to defer an amount of his Salary or Bonus for any Plan Year to the extent that the amount of the Salary or Bonus remaining undeferred for that Plan Year is less than the amount of payroll taxes which the Company will owe on his Compensation and all other compensation he receives from the Company in that Plan Year. An election to defer Salary or Bonus shall not be effective to the extent it exceeds the maximum amount set forth in this Section 3.1(b).

(d)    Minimum Deferrals. For each Plan Year for which a Participant elects to defer any portion of his Salary, the minimum percentage of Salary which may be deferred under paragraph (b)(1) of this Section 3.1 is 5%. This 5% minimum deferral for any Plan Year shall be

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reduced to a lesser percentage (but not below zero percent) if the Participant deferred any portion of his or her Bonus paid with respect to the fiscal year of the Company which included the last day of the preceding Plan Year (the “Prior Year Bonus”). The amount of such reduction shall be the number of percentage points determined by (1) dividing the amount of the Prior Year Bonus by the amount of the Participant’s annual Salary at the beginning of the Plan Year for which the minimum deferral is being computed, and (2) multiplying by 10. For example, if a Participant receives a Salary of $200,000 for the Plan Year for which the minimum deferral is being computed, and deferred $20,000 of his Prior Year Bonus, the minimum deferral will be reduced by (1) $20,000 divided by $200,000, or .10, multiplied by (2) 10, to arrive at a reduction in the maximum percentage of 1.0%. The maximum deferral percentage will therefore be 5% minus 1%, or 4%.

(e)    Effect of Initial Election. An election to defer compensation made during an Initial Election Period shall be effective with respect to Salary earned during the first pay period beginning after the end of the Initial Election Period and with respect to the Bonus payable for services rendered during the Company’s fiscal year which includes the last day of the Plan Year in which the election is made.

(f)    Duration of Salary Deferral Election. Any Salary deferral election made under paragraph (a) or paragraph (h) of this Section 3.1 shall be irrevocable with respect to the Plan Year for which it is made, and shall remain in effect, notwithstanding any change in the Participant’s Salary, until changed or terminated in accordance with the terms of this paragraph (f); provided, however, that such election shall terminate under Section 2.2 for any Plan Year for which the Participant is not an Eligible Employee, or pursuant to Section 3.1(i). Subject to the maximum deferral requirement of Section 3.1(c) and the minimum deferral requirement of Section 3.1(d), a Participant may increase, decrease or terminate his or her Salary deferral election, effective for Salary earned during pay periods beginning after any January 1, by filing a new election, in accordance with the terms of this Section 3.1, with the Committee during the preceding December.

(g)    Duration of Bonus Deferral Election. Any Bonus deferral election made under paragraph (a) or paragraph (h) of this Section 3.1 shall be irrevocable and shall apply only to the Bonus payable with respect to services performed during the Company’s fiscal year which includes the last day of the Plan Year for which the election is made. For each subsequent fiscal year, an Eligible Employee may make a new election, subject to the limitations set forth in this Section 3.1, to defer a percentage of his or her Bonus payable with respect to services performed during such subsequent fiscal year. Such election shall be on forms provided by the Committee and shall be made during the month of September of the Plan Year which ends within such fiscal year.

(h)    Elections other than Elections during the Initial Election Period. Subject to the limitations of paragraphs (c) and (d) above, any Eligible Employee who fails to elect to defer compensation during his or her Initial Election Period may subsequently become a Participant, and any Eligible Employee who has terminated a prior Salary deferral election may elect to again defer Salary, by filing an election, on a form provided by the Committee, to defer Compensation as described in paragraph (b) above. An election to defer Salary must be filed during the month of December and will be effective for Salary earned during pay periods beginning after the following January 1. An election to defer the Bonus must be filed during the month of September and will be

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effective for the Bonus paid with respect to services performed during the Company’s fiscal year which includes such month of September.

(i)    At any time during a Plan Year, a participant may elect, by written notice to the Committee on a form prescribed by the committee, to suspend deferrals of Salary for the remainder of the Plan Year.

3.2    Investment Elections.

(a)    The Committee shall select the Funds whose performance will measure the amounts to be credited to the Deferral Accounts of Participants under paragraph (c) of Article IV. The selection of funds shall be for bookkeeping purposes only, and the Company shall not be obligated actually to invest any money in the Funds, or to acquire or maintain any actual investment. The Committee may, in its discretion, change its selection of the Funds at any time. If a Participant has elected pursuant to Section 3.2(b) to invest all or a portion of his Plan Year Subaccount in a Fund which the Committee decides to discontinue, his Plan Year Subaccount shall be invested after such discontinuance in the continuing Fund which the Committee determines, in its discretion, most nearly resembles the discontinued Fund.

(b)    The Committee shall provide each Participant with a list of the Funds available for hypothetical investment, and the Participant shall designate, when the Participant makes deferral elections under Section 3.1, on a form provided by the Committee, one or more of such Funds in which each of his or her Plan Year Subaccounts will be deemed to be invested. The Participant may make a separate designation for each of his or her Plan Year Subaccounts. In making the designation pursuant to this Section 3.2(b), the Participant may specify that all or any whole percentage of at least 10% of his or her Plan Year Subaccount balance be deemed to be invested in one or more of Funds.

(c)    On or prior to the twentieth day of any calendar month (or later day prescribed by the Committee, but not later than the last day of the calendar month), a Participant may change the designation of the Funds in which the balances of any of his Plan Year Subaccounts will be deemed to be invested. Such change may be made with respect to any whole percentage of at least 10% of a Plan Year Subaccount balance. Such change shall be made by filing with the Committee an election on a form provided by the Committee. Such change shall be effective as of the first day of the following calendar month.

ARTICLE IV

DEFERRAL ACCOUNT

The committee shall establish and maintain the Plan Year Subaccounts and the Deferral Account (which shall be the sum of all Plan Year Subaccounts) for each Participant under the Plan, which shall be merely bookkeeping accounts and which need not represent any actual assets. Each Plan Year Subaccount of each Participant shall be further divided into separate subaccounts (“Fund Subaccounts”), each of which corresponds to a Fund elected by the Participant pursuant to Section 3.2(b). Each Plan Year Subaccount of each Participant shall be credited as follows:

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(a)    Within five business days after deferred Salary has been withheld from a Participant’s paycheck, the Committee shall credit each of the Participant’s Fund Subaccounts with amounts equal to the deferred Salary in accordance with the Participant’s election under Section 3.2; that is, the portion of the Participant’s deferred Salary that the Participant has elected to be deemed to be invested in a certain Fund shall be credited to the Fund Subaccount corresponding to that Fund.

(b)    Within five business days after the payment of a Bonus, the Committee shall credit the Participant’s Fund Subaccounts with amounts equal to the portion of the Bonus which the Participant has deferred in accordance with the Participant’s election under Section 3.2(b); that is, the portion of the Participant’s deferred Bonus that the Participant has elected to be deemed to be invested in a certain Fund shall be credited to the Fund Subaccount corresponding to that Fund.

(c)    At least once in each calendar month, each Fund Subaccount of a Participant’s Plan Year Subaccount shall be credited with deemed earnings on the Fund corresponding to that Fund Subaccount. The Committee shall determine the exact times and method for crediting such deemed earnings; provided, however, that the exact times for crediting such deemed earnings shall be uniform among all Participants and the exact method for crediting such deemed earnings as of any time shall be uniform among all Participants.

(d)    Any distribution, installment or withdrawal from a Participant’s Plan Year Subaccount shall be charged to the Plan Year Subaccount as soon as practicable after such distribution, installment or withdrawal is made. The amount of a distribution, installment, or withdrawal charged to a Participant’s Plan Year Subaccount shall be charged to the Fund Subaccounts in such Plan Year Subaccount in the proportions of the relative balances of such Fund Subaccounts as of the date such distribution, installment or withdrawal is charged to the Plan Year Subaccount.

ARTICLE V

VESTING

Subject to the provisions of Section 6.1(e), 6.5, 6.7, 11.1, 11.2 and 11.6, a Participant’s Deferral Account shall be 100% vested at all times.

ARTICLE VI

DISTRIBUTIONS

6.1    Distribution on Retirement or Disability.

(a)    Unless a Participant makes a valid election under Section 6.1(b) and except as provided in Section 6.1(c), a Participant who becomes Disabled or who Retires shall receive the balance in his or her Deferral Account in the form of quarterly installments over 15 years beginning on his or her Retirement Payment Eligibility Date.

(b)    Notwithstanding the foregoing, a Participant may elect, pursuant to this Section 6.1(b), to have the balance in his or her Deferral Account paid in one of the following optional forms on his or her Retirement Payment Eligibility Date:

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(1)    a cash lump sum payable on the Participant’s Retirement Payment Eligibility Date, or

(2)    quarterly installments over five, 10 or 20 years beginning on the Participant’s Retirement Payment Eligibility Date.

An election under this Section 6.1(b) shall be valid only if it is made in writing in a form prescribed by the Committee either (i) during the Initial Election Period, or (ii) at least one year before the Participant’s Retirement Payment Eligibility Date.

(c)    Notwithstanding the provisions of Sections 6.1(a) and (b), (i) if the total balance of a Participant’s Deferral Account as of his or her Retirement Payment Eligibility Date is $25,000 or less, such balance in such Deferral Account shall automatically be distributed in the form of a cash lump sum as soon as practicable following the Retirement Payment Eligibility Date.

(d)    If a Participant’s benefits are paid in installments, the Participant’s Deferral Account shall continue to be credited with deemed earnings pursuant to paragraph (c) of Article IV until all amounts credited to his or her Deferral Account have been distributed. Such installments shall be as nearly equal as possible consistent with the requirement of the preceding sentence.

(e)    If a Participant has begun to receive distributions under this Section 6.1 in the form of installments, the Participant may elect to receive installments over a shorter period of time than the period originally in effect under Section 6.1(a) or elected under Section 6.1(b), subject to the following conditions:

(i)    such shorter period of time over which the installments shall be paid shall be five, 10 or 15 years from the Retirement Payment Eligibility Date;

(ii)    the election to receive installments over a shorter period of time shall be made by filing a form prescribed by the Committee with the Committee at least 15 days before an installment would otherwise be payable;

(iii)    ten percent of the balance of the Deferral Account as of the date the Participant makes the election by filing the form referred to in Section 6.1(e)(ii) shall be permanently forfeited and the Company shall have no obligation to the Participant or his Beneficiary with respect to such forfeited amount;

(iv)    the amount distributed in installments over the shorter period elected by the Participant is under this Section 6.1(e) shall be 90% of the balance of the Deferral Account as of the date the Participant makes the election by filing the form referred to in Section 6.1(e)(ii).

6.2    Situations Other Than Retirement, Disability or Death. The balance of the Deferral Account of a Participant whose Termination of Employment occurs for any reason other than Retirement, Disability or death shall be paid to the Participant in the form of a cash lump sum as soon as practicable following the Participant’s Termination of Employment. If a Participant has not had a Termination of Employment as of the Payment Eligibility Date for any Plan Year

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Subaccount, the balance of such Plan Year Subaccount shall be paid to the Participant in the form of a cash lump sum on the Payment Eligibility Date.

6.3    Extension of Payment Eligibility Date and Retirement Payment Eligibility Date. A Participant may elect to extend any Payment Eligibility Date or the Retirement Payment Eligibility Date by filing a written election with the Committee on a form prescribed by the Committee at least one year before such Payment Eligibility Date or Retirement Payment Eligibility Date; provided, however, that such extended Payment Eligibility Date or Retirement Payment Eligibility Date shall be at least two years after the Payment Eligibility Date or Retirement Payment Eligibility Date in effect before such extension. A Payment Eligibility Date or Retirement Payment Eligibility Date which has been so extended may be further extended by filing another election in the manner and at the time specified in this Section 6.3.

6.4    Death.

(a)    If a Participant dies while employed by the Company, the following benefits shall be provided: That portion of the death benefit of any life insurance policy purchased by the Company to insure the life of the Participant (the “Policy”) which is equal to two times the Participant’s annual Salary at the time the Participant dies shall be paid to Participant’s beneficiary under the Policy by the insurance company which issued the Policy. Any such Policy shall be subject to the conditions set forth in a “Split-Dollar Life Insurance Agreement” between the Participant and the Company, pursuant to which the Participant may designate a beneficiary with respect to the portion of the Policy proceeds described in the preceding sentence in the event the Participant dies prior to terminating employment with the Company. The Participant shall have the right to designate and change such beneficiary (which need not be his Beneficiary as determined under Article VIII) at any time of a form provided by and filed with the insurance company, and the life insurance proceeds designated in this Section 6.4(a) shall be paid to such beneficiary. The benefit payable pursuant to this Section 6.4(a) shall be paid only if a Policy has been issued on the Participant’s life and is in force at the time of the Participant’s death and any such payment shall be subject to all conditions and exceptions set forth in the Policy. A Participant who is entitled to a death benefit pursuant to this Section 6.4(a) shall not be entitled to any other Company-paid group term life insurance benefits from the Company under this Plan or any other Policy provided by the Company. Notwithstanding any provision of this Plan or any other document to the contrary, the Company shall not have any obligation to pay the Participant or his Beneficiary any amounts described in this Section 6.4(a). Any such amounts shall be payable solely from the proceeds of the Policy, and if no Policy is in force, no payment shall be made. Furthermore, the Company is not obligated to maintain any Policy; and no death benefit shall be payable under this Section 6.4(a) if the Company has been notified by the Committee to discontinue the Policy for the Participant. In addition, no Policy shall be allocated to any Deferral Account.

(b)    If a Participant dies before the beginning of installment payments under Sections 6.1(a) or (b), the balance of his or her Deferral Account shall be paid to the Participant’s Beneficiary in a cash lump sum as soon as practicable after the first day of the calendar quarter following the calendar quarter in which the Participant dies. If a Participant dies after the beginning of installment payments under Sections 6.1(a) or (b) but before receiving all of such installments, his beneficiary shall receive a cash lump sum payment as soon as practicable following the last day of

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the calendar month in which he dies equal to the remaining balance of his Deferral Account as of such last day.

6.5    Withdrawals. A Participant shall be permitted to elect to withdraw amounts from his Deferral Account as soon as practicable after the first day of any calendar quarter, whether before or after his Termination of Employment or Payment Eligibility Date, subject to the following restrictions:

(a)    The election to take a withdrawal shall be made by filing a form provided by and filed with the Committee prior to the end of any calendar month.

(b)    The amount of the withdrawal shall equal 90% of the balance of the Deferral Account as of the end of the calendar month in which the withdrawal election is made.

(c)    The amount described in subsection (b) above shall be paid in a single cash lump sum as soon as practicable after the end of the calendar month in which the withdrawal election is made.

(d)    If a Participant receives a withdrawal, the remaining 10% of the balance (including the withdrawn amount) in his Deferral Account as of the date of the withdrawal shall be permanently forfeited and the Company shall have no obligation to the Participant or his Beneficiary with respect to such forfeited amount.

(e)    If a Participant receives a withdrawal, the following rules apply for the balance of the Plan Year in which the withdrawal election is made and for the following Plan Year: (i) the Participant will be ineligible to Participate in the Plan, and (ii) neither the Participant (nor his Beneficiary or Beneficiaries) shall be entitled to death benefits under Section 6.4.

(f)    A Participant will be limited to a maximum of two withdrawals during all of his periods of Plan Participation.

6.6    Distribution on an Unforeseeable Emergency. The Committee may, pursuant to rules adopted by it and applied in a uniform manner, accelerate the date of distribution of a Participant’s Deferral Account because of an “Unforeseeable Emergency” at any time; provided, however, that any determination to accelerate the distribution of the Deferral Account of any member of the Committee shall be made by the Board. Any acceleration shall be limited to the amount necessary to meet the Unforeseeable Emergency. Subject to the foregoing, payment of any amount with respect to which a Participant has filed a request under this Section 6.6 shall be made as soon as practicable after approval of such request by the Committee. “Unforeseeable Emergency” shall mean an unforeseeable, severe financial condition resulting from (a) a sudden and unexpected illness or accident of the Participant or his dependent (as defined in Section 152(a) of the Code); (b) loss of the Participant’s property due to casualty; or (c) other similar extraordinary and unforeseeable circumstances arising as a result of events beyond the control of the Participant, but which may not be relieved through other available resources of the Participant (including reimbursement or compensation by insurance, liquidation of the Participant’s assets, to the extent the liquidation of the assets would not itself cause severe financial hardship, or by the cessation of

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deferrals under the Plan), as determined by the Committee in accordance with uniform rules adopted by it.

6.7    Inability to Locate Participant. If the Committee is unable to locate a Participant or his or her Beneficiary on any date on which a distribution is to be made from such Participant’s Deferral Account, the Company shall retain the distribution which was to be made on such date until such time as the Committee can locate the Participant or Beneficiary; provided, however, that the Company may deduct from such retained distributions all taxes which are required to be withheld by the Company. No additional earnings shall be credited pursuant to paragraph (c) of Article IV on any distribution retained pursuant to this Section 6.7. If the Committee is unable to locate a Participant or Beneficiary within five years following a date on which a distribution is to be made from such Participant’s Deferral Account, the amount of such distribution shall be forfeited. In seeking to locate a Participant or Beneficiary, the Committee may take any reasonable action, but shall not be required to take any action other than communicating by registered mail to the address or addresses last provided to the Committee by the Participant or Beneficiary.

ARTICLE VII

ADMINISTRATION

7.1    Committee. A Committee, consisting of not less than one person, shall be appointed by and serve at the pleasure of the Board of Directors. The number of members comprising the Committee shall be determined by the Board, which may from time to time vary the number of members. A member of the Committee may resign by delivering a written notice of resignation to the Board. The Board may remove any member by resolution at any time. Vacancies in the membership of the Committee shall be filled by the Board.

7.2    Committee Action. The Committee shall act at meetings by affirmative vote of a majority of the members of the Committee. Any action permitted to be taken at a meeting may be taken without a meeting if, prior or subsequent to such action, a written consent to the action is signed by all members of the Committee, and such written consent is filed with the minutes of the proceedings of the Committee. A member of the Committee shall not vote or act upon any matter which relates solely to himself or herself as a Participant. The Chairman or any other member or members of the Committee designated by the Chairman may execute any certificate or other written direction on behalf of the Committee.

7.3    Powers and Duties of the Committee. The Committee shall enforce the Plan in accordance with its terms, shall be charged with the general administration of the Plan and shall have full discretion, power, and authority necessary to accomplish its purposes, including, but not by way of limitation, the following:

(a)    To construe and interpret the terms and provisions of this Plan;

(b)    To compute and certify to the amount and kind of benefits payable to Participants and their Beneficiaries;

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(c)    To maintain all records that may be necessary for the administration of the Plan;

(d)    To provide for disclosure of all information and the filing or provision of all reports and statements to Participants, Beneficiaries or governmental agencies as shall be required by law;

(e)    To make and publish such rules for the regulation of the Plan and procedures for the administration of the Plan as are not inconsistent with the terms hereof;

(f)    To appoint a plan administrator or any other agent, and to delegate to them such powers and duties in connection with the administration of the Plan as the Committee may from time to time prescribe; and

(g)    To determine who are Eligible Employees, subject to the limitations described in the Plan.

7.4    Construction and Interpretation. The Committee shall have full discretion to construe and interpret the terms and provisions of this Plan, which interpretation or construction shall be final and binding on all parties, including but not limited to the Company and any Participant or Beneficiary. The Committee shall administer such terms and provisions in a uniform and nondiscriminatory manner and in full accordance with any and all laws applicable to the Plan; provided, however, the Committee shall have the discretion to determine whether an otherwise Eligible Employee is selected to participate in the Plan.

7.5    Information. To enable the Committee to perform its functions, the Companies shall supply full and timely information to the Committee on all matters relating to the Compensation of all Participants, their death or other cause of termination, and such other pertinent facts as the Committee may require.

7.6    Compensation and Expenses. The members of the Committee shall serve without compensation for their services hereunder. The Committee is authorized at the expense of Williams-Sonoma, Inc. to employ such legal counsel, accountants, and other advisers as it may deem advisable to assist in the performance of its duties hereunder. Expenses and fees in connection with the administration of the Plan shall be paid by Williams-Sonoma, Inc.

7.7    Indemnity. To the fullest extent permitted by applicable law, Williams-Sonoma, Inc. shall indemnify, hold harmless, and defend the Committee and each member thereof, the Board of Directors, and any delegate of the Committee who is an employee of the Company against any and all expenses, liabilities and claims, including legal fees as they are incurred to defend against such liabilities and claims arising out of their discharge in good faith of responsibilities under or incident to the Plan, other than expenses and liabilities arising out of willful misconduct. This indemnity shall not preclude such further indemnities as may be available under insurance purchased by the Company or provided by the Company under any bylaw, agreement or otherwise.

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7.8    Participant Statements. Under procedures established by the Committee, a Participant shall receive a statement with respect to such Participant’s Deferral Account on a periodic basis at least once with respect to each Plan year.

ARTICLE VIII

BENEFICIARY DESIGNATION

8.1    Beneficiary. Each Participant shall have the right, at any time, to designate his or her Beneficiary(ies) (both primary as well as contingent) to receive any benefits payable under the Plan to a beneficiary upon the death of a Participant. The Beneficiary designated under this Plan may be the same as or different from the Beneficiary designation under any other plan of the Company in which the Participant participates.

8.2    Beneficiary Designation; Change; Spousal Consent. A Participant shall designate his or her Beneficiary by completing and signing the Beneficiary Designation Form, and returning it to the Committee or its designated agent. A Participant shall have the right to change a Beneficiary by completing, signing and otherwise complying with the terms of the Beneficiary Designation Form and the Committee’s rules and procedures, as in effect from time to time. If the Participant names someone other than his or her spouse as a Beneficiary, a spousal consent, in the form designated by the Committee, must be signed by that Participant’s spouse and returned to the Committee. Upon the acceptance by the Committee of a new Beneficiary Designation Form, all Beneficiary designations previously filed shall be cancelled. The Committee shall be entitled to rely on the last Beneficiary Designation Form filed by the Participant and accepted by the Committee prior to his or her death.

8.3    Acknowledgment. No designation or change in designation of a Beneficiary shall be effective until received, accepted and acknowledged in writing by the Committee or its designated agent.

8.4    No Beneficiary Designation. If a Participant fails to designate a Beneficiary as provided in Sections 8.1, 8.2 and 8.3 above or, if all designated Beneficiaries predecease the Participant or die prior to complete distribution of the Participant’s benefits, then the Participant’s spouse shall be the designated Beneficiary. If the Participant has no surviving spouse, the benefits remaining under the Plan shall be paid to the duly appointed and currently acting personal representative of the Participant’s estate (which shall include either the Participant’s probate estate or living trust) shall be the Beneficiary. In any case where there is no such personal representative of the Participant’s estate duly appointed and acting in that capacity within 90 days after the Participant’s death (or such extended period as the Committee determines is reasonably necessary to allow such personal representative to be appointed, but not to exceed 180 days after the Participant’s death), then Beneficiary shall mean the person or persons who can verify by affidavit or court order to the satisfaction of the Committee that they are legally entitled to receive the benefits under this Plan.

8.5    Doubt as to Beneficiary. If the Committee has any doubt as to the proper Beneficiary to receive payments pursuant to this Plan, the Committee shall have the right, exercisable in its discretion, to cause the Company to withhold such payments until this matter is resolved to the Committee’s satisfaction.

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8.6    Discharge of Obligations. The payment of benefits under the Plan to a Beneficiary shall fully and completely discharge the Company and the Committee from all further obligations under this Plan with respect to the Participant, and that Participant’s rights under the Plan shall terminate upon such full payment of benefits.

8.7    Death of Spouse or Dissolution of Marriage. A Participant’s Beneficiary designation shall be deemed automatically revoked if the Participant names a spouse as Beneficiary and the marriage is later dissolved. Without limiting the generality of the preceding sentence, the interest in benefits of a spouse of a Participant who has predeceased the Participant or whose marriage has been dissolved shall automatically pass to the Participant, and shall not be transferable by such spouse in any manner, including but not limited to such spouse’s will, nor shall such interest pass under the laws of intestate succession.

ARTICLE IX

CLAIMS PROCEDURE

9.1    Presentation of Claim. If a Participant or Beneficiary (a “Claimant”) asserts a right to a benefit under the Plan which has not been received, the Claimant must file a written claim for such benefit with the Committee. All other claims must be made in writing and filed with the Committee within one hundred eighty (180) days of the date on which the event that caused the claim to arise occurred. Any claim must state with particularity the determination desired by the Claimant. The claims and review procedure set forth in this Article IX will be administered in accordance with ERISA Section 503. Any written notice that is required to be given to the Claimant may, at the option of the Committee and in accordance with applicable guidance issued under ERISA Section 503, be provided electronically.

9.2    Non-Disability Claims.

(a)    Notification of Decision. The Committee will consider a Claimant’s claim (other than a claim for benefits due to a Disability) (a “Non-Disability Claim”) within a reasonable time, but no later than ninety (90) days after its receipt of the Claim, unless the Committee determines that special circumstances require an extension of time for processing the Claim, in which case written notice of the extension will be furnished to the Claimant before the termination of the initial ninety (90) day period. In no event will such extension exceed a period of ninety (90) days from the end of the initial ninety (90) day period. The extension notice will indicate the special circumstances requiring the extension of time and the date by which the Committee expects to render its decision on the Non-Disability Claim. The Committee will notify the Claimant in writing:

(1)    that the Claimant’s requested determination has been made, and that the Non-Disability Claim has been allowed in full; or

(2)    that the Committee has reached a conclusion contrary, in whole or in part, to the Claimant’s requested determination, which notice will set forth:

(i)    the specific reason(s) for the denial of the Claim;

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(ii)    specific reference(s) to pertinent provisions of the Plan upon which the denial was based;

(iii)    a description of any additional material or information necessary for the Claimant to perfect the Claim, and an explanation of why such material or information is necessary;

(iv)    an explanation of the Plan’s Claims review procedure and the time limits applicable to such procedure; and

(v)    a statement of the Claimant’s right to bring a civil action under ERISA Section 502(a) following an adverse benefit determination on review (as set forth in Article 9.4).

(b)    Review of a Denied Non-Disability Claim. On or before sixty (60) days after receiving a notice from the Committee that the Claimant’s Non-Disability Claim has been denied, in whole or in part, the Claimant (or the Claimant’s duly authorized representative) may file with the Committee a written request for a review of the denial of the Claim. The Claimant (or the Claimant’s duly authorized representative):

(1)    may, upon request and free of charge, have reasonable access to, and copies of, all documents, records and other information relevant (as defined in ERISA) to the Non-Disability Claim;

(2)    may submit written comments or other documents to the Committee; and/or

(3)    may request a hearing, which the Committee, in its sole discretion, may grant.

(c)    Decision on Review of the Non-Disability Claim. The Committee will render its decision on review promptly, but not later than sixty (60) days after the Committee receives the Claimant’s timely written request for a review of the denial of the Non-Disability Claim. If the Committee determines that special circumstances require an extension of time for reviewing the Non-Disability Claim, written notice of the extension will be furnished to the Claimant before the termination of the initial sixty (60) day period. In no event will such extension exceed a period of sixty (60) days from the end of the initial sixty (60) day period. The extension notice will indicate the special circumstances requiring the extension of time and the date by which the Committee expects to render its decision on review. In rendering its decision, the Committee will take into account all comments, documents, records and other information submitted by the Claimant (if any) relating to the Non-Disability Claim, without regard to whether such information was submitted or considered in the initial Claim determination. If the Committee wholly or partly denies the Non-Disability Claim on review, the Committee will provide written notice to the Claimant which will set forth:

(1)    the specific reasons for the denial of the Claim;

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(2)    the specific reference(s) to the pertinent Plan provisions upon which the denial was based;

(3)    a statement that the Claimant is entitled to receive, upon request and free of charge, reasonable access to and copies of, all documents, records and other information relevant (as defined in ERISA) to his or her Claim for benefits; and

(4)    a statement of the Claimant’s right to bring a civil action under ERISA Section 502(a).

9.3    Disability Claims.

(a)    Notification of Decision. The Committee will consider a Claimant’s claim for benefits due to a Disability (a “Disability Claim”) within a reasonable time, but no later than forty-five (45) days after its receipt of the Claim, unless the Committee determines that special circumstances require an extension of time to process the Claim, in which case written notice of the extension will be furnished to the Claimant before the termination of the initial forty-five (45) day period. In no event will such extension exceed a period of thirty (30) days from the end of the initial forty-five (45) day period. However, if the Committee determines that special circumstances require an additional extension of time to process the Disability Claim, the Committee will notify the Claimant in writing before the end of the initial thirty (30) day extension period. In no event will such additional extension exceed a period of thirty (30) days from the end of the initial thirty (30) day extension period. The extension notice will indicate the special circumstances requiring the extension of time and the date by which the Committee expects to render its decision on the Disability Claim. The extension notice also will explain the standards on which the entitlement to a benefit is based, the unresolved issues that prevent a decision on the Disability Claim and the additional information needed to resolve those issues, and notice that the Claimant will be afforded at least forty-five (45) days within which to provide the specified information. The Committee will notify the Claimant in writing:

(1)    that the Claimant’s requested determination has been made, and that the Disability Claim has been allowed in full; or

(2)    that the Committee has reached a conclusion contrary, in whole or in part, to the Claimant’s requested determination, which notice will set forth:

(i)the specific reason(s) for the denial of the Claim;

(ii)specific reference(s) to pertinent provisions of the Plan upon which the denial was based;

(iii)a description of any additional material or information necessary for the Claimant to perfect the Claim, and an explanation of why such material or information is necessary;

(iv)an explanation of the Plan’s Claims review procedure and the time limits applicable to such procedure;

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(v)a copy of any internal rule, guideline, protocol or other similar criteria relied on in denying the Claim or a statement that such rule, guideline, protocol or other similar criteria was relied on in denying the Claim and that a copy of it will be provided without charge upon request; and

(vi)a statement of the Claimant’s right to bring a civil action under ERISA Section 502(a) following an adverse benefit determination on review (as set forth in Article 9.4).

(b)    Review of a Denied Disability Claim. On or before one hundred eighty (180) days after receiving a notice from the Committee that the Claimant’s Disability Claim has been denied, in whole or in part, a Claimant (or the Claimant’s duly authorized representative) may file with the Committee a written request for a review of the denial of the Claim. The Claimant (or the Claimant’s duly authorized representative):

(1)    may, upon request and free of charge, have reasonable access to, and copies of, all documents, records and other information relevant (as defined in ERISA) to the Disability Claim;

(2)    may submit written comments or other documents to the Committee; and/or

(3)    may request a hearing, which the Committee, in its sole discretion, may grant.

(c)    Decision on Review of the Disability Claim. The Committee will render its decision on review promptly, but not later than forty-five (45) days after the Committee receives the Claimant’s timely written request for a review of the denial of the Disability Claim, unless the Committee determines that special circumstances require an extension of time for processing the Claim, in which case written notice of the extension will be furnished to the Claimant before the termination of the initial forty-five (45) day period. In no event will such extension exceed a period of forty-five (45) days from the end of the initial forty-five (45) day period. The extension notice will indicate the special circumstances requiring an extension of time and the date by which the Committee expects to render its decision on the Disability Claim. In rendering its decision, the Committee will take into account all comments, documents, records and other information submitted by the Claimant (if any) relating to the Disability Claim, without regard to whether such information was submitted or considered in the initial Claim determination. The review of the denied Disability Claim will not be conducted by the individual who decided the Claimant’s initial Claim nor the subordinate of such individual. In deciding an appeal of any denied Disability Claim that is based in whole or in part on a medical judgment, the Committee will consult with a health care professional (who will neither be an individual who was consulted in connection with the initial Claim denial nor the subordinate of such individual) who has appropriate training and experience in the field of medicine involved in the medical judgment. Any medical or vocational experts whose advice was obtained on behalf of the Committee in connection with the denial of the Disability Claim will be identified, regardless of whether the advice was relied upon in denying the Claim. If the Committee wholly or partly denies the Disability Claim on review, the Committee will provide written notice to the Claimant which will set forth:

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(1)    the specific reasons for the denial of the Claim;

(2)    specific reference(s) to the pertinent Plan provisions upon which the denial was based;

(3)    a statement that the Claimant is entitled to receive, upon request and free of charge, reasonable access to and copies of, all documents, records and other information relevant (as defined in ERISA) to the Claimant’s Claim for benefits;

(4)    a copy of any internal rule, guideline, protocol or other similar criteria relied on in denying the Claim or a statement that such rule, guideline, protocol or other similar criteria was relied on in denying the Claim and that a copy of it will be provided without charge upon request; and

(5)    a statement of the Claimant’s right to bring a civil action under ERISA Section 502(a).

9.4    Arbitration. A Claimant’s compliance with the foregoing provisions of this Article 9 is a mandatory prerequisite to a Claimant’s right to commence any arbitration proceeding with respect to any claim for benefits under this Plan.

ARTICLE X

ARBITRATION

Arbitration shall be the exclusive remedy for resolving any dispute or controversy between the Company and any employee, Participant or Beneficiary, including, but not limited to, any dispute regarding an employee’s status as a Participant, a Participant’s employment or the termination of a Participant’s employment or any dispute regarding the application, interpretation or validity of this Plan not otherwise resolved through the claims procedure set forth in Article 9. Such arbitration shall be conducted in accordance with the then most applicable rules of the American Arbitration Association. The arbitrator shall be empowered to grant only such relief as would be available in a court of law. In the event of any conflict between this Agreement and the rules of the American Arbitration Association, the provisions of this Agreement shall be determinative. If the parties are unable to agree upon an arbitrator, they shall select a single arbitrator from a list designated by the office of the American Arbitration Association having responsibility for the city in which the Participant or Beneficiary last resided while employed by the Employer of seven arbitrators, all of whom shall be retired judges who are actively involved in hearing private cases or members of the National Academy of Arbitrators. If the parties are unable to agree upon an arbitrator from such list, they shall each strike names alternatively from the list, with the first to strike being determined by lot. After each party has used three strikes, the remaining name on the list shall be the arbitrator. The fees and expenses of the arbitrator shall initially be borne equally by the parties; provided, however, that each party shall initially be responsible for the fees and expenses of its own representatives and witnesses. If the parties cannot agree upon a location for the arbitration, the arbitrator shall determine the location. Judgment may be entered on the award of the arbitrator in any court having jurisdiction. The prevailing party in the arbitration proceeding, as determined by the arbitrator, and in any enforcement or other court proceedings, shall be entitled to the extent

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provided by law to reimbursement from the other party for all of the prevailing party’s costs (including but not limited to the arbitrator’s compensation), expenses and reasonable attorney’s fees.

ARTICLE XI

MISCELLANEOUS

11.1    Unsecured General Creditor. Participants and their Beneficiaries, heirs, successors, and assigns shall have not legal or equitable rights, claims, or interests in any specific property or assets of any Company. No assets of the Company shall be held under any trust, or held in any way as collateral security for the fulfilling of the obligations of the Company under this Plan. This Plan shall not cause the Company’s assets to be pledged or restricted. The Company’s obligation under the Plan shall be merely that of an unfunded and unsecured promise of that Company to pay money in the future, and the rights of the Participants and Beneficiaries shall be no greater than those of unsecured general creditors of the Company. The Company may, but need not, acquire investments corresponding to the Funds, and it is not under any obligation to maintain any investment it may make. Any such investments, if made, shall be in the name of the Company, and shall be its sole property in which no Participant shall have any interest. The Plan is intended to be an unfunded plan for purposes of Title I of ERISA.

11.2    Restriction Against Assignment. The Company shall pay all amounts payable hereunder only to the person or persons designated by the Plan and not to or for any other person. No part of a Participant’s Deferral Account shall be liable for the debts, contracts, or engagements of any Participant, his or her Beneficiary, or successors in interest, nor shall a Participant’s Deferral Account be subject to execution by levy, attachment, or garnishment or by any other legal or equitable proceeding, nor shall any such person have any right to alienate, anticipate, transfer, commute, pledge, encumber, or assign any benefits or payments hereunder in any manner whatsoever, except with regard to debts, contracts and engagements owed to the Company. Any purported alienation, anticipation, transfer, commutation, pledge, encumbrance, or assignment shall be void and of no effect, except with regard to debts, contracts and engagements owed to the Company. If any Participant, Beneficiary or successor in interest is adjudicated bankrupt, and the Participant’s rights to distribution or payment under the Plan are subject to involuntary transfer or assignment in any such proceeding, the Committee may in its discretion cancel such distribution or payment (or any part thereof) to or for the benefit of such Participant, Beneficiary or successor in interest.

11.3    Withholding. There shall be deducted from each payment to a Participant or Beneficiary made under the plan all taxes which are required to be withheld by the Company from such payment. If any taxes, including employment taxes with respect to the Deferral Account, are required to be withheld prior to the time of payment, the Company may withhold such amounts form other compensation paid to the Participant.

11.4    Amendment, Modification, Suspension or Termination. The Board of Directors may amend, modify, suspend or terminate the Plan in whole or in part, except that no amendment, modification, suspension or termination shall have any retroactive effect to reduce any amounts allocated to a Participant’s Deferral Account on the date of such termination. On the termination of this Plan, the Board may cause the Deferral Accounts of Participants to be immediately paid out in

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cash lump sum payments, or to be paid at any other time or in any other manner the Board may determine, but not later than the times such Deferral Accounts would otherwise be paid to Participants or Beneficiaries.

11.5    Governing Law. This Plan shall be construed, governed and administered in accordance with the laws of the State of California, to the extent not preempted by ERISA.

11.6    Receipt and Release. Any payment to a Participant or the Participant’s Beneficiary in accordance with the provisions of the Plan shall, to the extent thereof, be in full satisfaction of all claims against the Committee and the Company. The Committee may require such Participant or Beneficiary, as a condition precedent to such payment, to execute a receipt and release to such effect.

11.7    Payments on Behalf of Persons Under Incapacity. In the event that any amount becomes payable under the Plan to a person who, in the sole judgment of the Committee, is considered by reason of physical or mental condition to be unable to give a valid receipt therefor, the Committee may direct that such payment be made to any person found by the Committee, in its sole judgment, to have assumed the care of such person. Any payment made pursuant to such determination shall constitute a full release and discharge of the Committee and the Company.

11.8    No Employment Rights. Participation in this Plan shall not confer upon any person any right to be employed by the Company nor any other right not expressly provided hereunder.

11.9    Headings Not Part of Agreement. Headings and subheadings in this Plan are inserted for convenience of reference only and are not to be considered in the construction of the provisions hereof.

11.10  ERISA. This Plan constitutes a pension benefit plan within the meaning of Section 3(2) of ERISA, which is unfunded and maintained for the purpose of providing deferred compensation for a select group of management or highly compensation employees. This Plan constitutes the “Summary Plan Description” required under ERISA, as well as the governing document of the Plan. The Committee is the Administrator of the Plan, within the meaning of Section 3(16) of ERISA, and the Named Fiduciary thereof, within the meaning of Section 402 of ERISA, is the Committee.

11.11  Validity. In case any provision of this Plan shall be illegal or invalid for any reason, said illegality or invalidity shall not affect the remaining parts hereof, but his Plan shall be construed and enforced as if such illegal and invalid provision had never been inserted herein.

11.12  Distribution in the Event of Taxation. If, for any reason, all or any portion of a Participant’s benefit under this Plan becomes taxable to the Participant prior to receipt, a Participant may petition the Committee for a distribution of that portion of his or her benefit that has become taxable. Upon the grant of such a petition, which the Committee may grant or refrain from granting in its sole discretion, the Company shall distribute to the Participant immediately available funds in an amount equal to the taxable portion of his or her benefit (which amount shall not exceed the balance in such Participant’s Deferral Account as of the last day of the calendar month before such

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distribution). If the petition is granted, the tax liability distribution shall be made within ninety (90) days of the date when the Participant’s petition is granted.

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EX-10.41

Exhibit 10.41

WILLIAMS-SONOMA, INC.

EXECUTIVE DEFERRED COMPENSATION PLAN

(Effective as of January 1, 2005)

TABLE OF CONTENTS

		Page
SECTION 1 DEFINITIONS		1
1.1	“Bankruptcy Court Approval”	1
1.2	“Beneficiary”	1
1.3	“Board of Directors” or “Board”	1
1.4	“Bonus”	1
1.5	“Change of Control Event”	1
1.6	“Code”	1
1.7	“Committee”	2
1.8	“Company”	2
1.9	“Compensation”	2
1.10	“Corporate Dissolution”	2
1.11	“Deferral Account”	2
1.12	“Disability” or “Disabled”	2
1.13	“Domestic Relations Order”	2
1.14	“Election Form”	2
1.15	“Eligible Employee”	3
1.16	“Employer”	3
1.17	“ERISA”	3
1.18	“401(k) Plan”	3
1.19	“Fund” or “Funds”	3
1.20	“Participant”	3
1.21	“Plan”	3
1.22	“Plan Year”	3
1.23	“Plan Year Subaccount”	3
1.24	“Retirement”	3
1.25	“Salary”	3
1.26	“Separation from Service”	4
1.27	“Specified Employee”	4
1.28	“Unforeseeable Emergency”	4
1.29	“Year of Service”	4
SECTION 2 PARTICIPATION		4
2.1	Participation	4
2.2	Continuing Participation	4
SECTION 3 COMPENSATION DEFERRAL ELECTIONS		5
3.1	Elections to Defer Compensation	5
3.2	Deemed Investment Elections	7
3.3	Cancellation of Compensation Deferrals	8
SECTION 4 ACCOUNTING		9

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TABLE OF CONTENTS

(continued)

		Page
4.1	Deferral Accounts	9
4.2	Accounting Methods	9
4.3	Periodic Reports	10
SECTION 5 VESTING		10
SECTION 6 DISTRIBUTIONS		10
6.1	Distribution on Retirement or Disability	10
6.2	Distribution on Separation from Service Not Due to Retirement, Disability or Death	12
6.3	Distribution on Death	12
6.4	Required Six-Month Delay in Payment for Specified Employees	12
6.5	Acceleration of Payment(s) Permitted Under Certain Circumstances	12
6.6	Unforeseeable Emergency	13
6.7	Inability to Locate Participant or Beneficiary	14
6.8	Domestic Relations Order Distributions.	14
SECTION 7 CHANGE OF CONTROL		14
7.1	No New Participants Following Change of Control	14
7.2	No Deferrals Following a Change of Control	14
7.3	Discretionary Termination and Accelerated Plan Distributions 30 Days Prior to or Within 12 Months Following a Change in Control	14
SECTION 8 TERMINATION DUE TO CORPORATE DISSOLUTION OR PURSUANT TO
BANKRUPTCY COURT APPROVAL		15
8.1	Corporate Dissolution	15
8.2	Bankruptcy Court Approval	15
SECTION 9 BENEFICIARY DESIGNATION		15
9.1	Beneficiary	15
9.2	Beneficiary Designation; Change; Spousal Consent	15
9.3	Acknowledgment	15
9.4	No Beneficiary Designation	16
9.5	Doubt as to Beneficiary	16
9.6	Discharge of Obligations	16
9.7	Death of Spouse or Dissolution of Marriage	16
SECTION 10 ADMINISTRATION OF THE PLAN		16
10.1	Committee	16
10.2	Committee Action	17
10.3	Powers and Duties of the Committee	17
10.4	Decisions of the Committee and its Delegates	18

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TABLE OF CONTENTS

(continued)

		Page
10.5	Eligibility to Participate	18
10.6	Compensation and Expenses	18
10.7	Information	18
10.8	Indemnity	18
SECTION 11 CLAIMS AND REVIEW PROCEDURE		18
11.1	Presentation of Claim	18
11.2	Non-Disability Claims	19
11.3	Disability Claims.	20
11.4	Exhaustion of Claims and Review Procedure and Legal Action.	23
SECTION 12 MODIFICATION OR TERMINATION OF THE PLAN		23
12.1	Companies’ Obligations Limited	23
12.2	Right to Amend or Terminate	23
12.3	Retroactive Amendment Permitted	23
12.4	Effect of Termination	23
SECTION 13 GENERAL		23
13.1	Unsecured General Creditors	23
13.2	Restriction Against Assignment	24
13.3	Governing Law	24
13.4	Receipt and Release	24
13.5	Tax Withholding	24
13.6	Severability	24
13.7	No Guarantees Regarding Tax Treatment	24
13.8	Captions	25
13.9	No Employment Rights	25
13.10	Payments on Behalf of Persons Under Incapacity	25
13.11	Rights and Duties	25
EXECUTION		26

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WILLIAMS-SONOMA, INC.

EXECUTIVE DEFERRED COMPENSATION PLAN

(Effective as of January 1, 2005)

Williams-Sonoma, Inc. (the “Company”) hereby establishes this Williams-Sonoma, Inc. Executive Deferred Compensation Plan (the “Plan”), effective as of January 1, 2005 (the “Effective Date”).

The purpose of the Plan is to provide certain supplemental retirement income benefits to a select group of management or highly compensated employees of the Company and its affiliates who have been selected for participation in the Plan. The Plan is an unfunded deferred compensation plan that is intended to (1) qualify for the exemptions provided in sections 201, 301 and 401 of the Employee Retirement Income Security Act of 1974, as amended, and (2) comply with the requirements of Section 409A of the Internal Revenue Code of 1986, as amended, and applicable guidance issued thereunder (collectively, “Code Section 409A”).

From and after the Effective Date, this Plan replaces the Williams-Sonoma, Inc. Pre-2005 Executive Deferral Plan, as amended, which was frozen to new deferrals effective after December 31, 2004 so as to qualify the amounts deferred on or before December 31, 2004 under such prior plan for “grandfather” treatment under Code Section 409A.

SECTION 1

DEFINITIONS

For purposes of this Plan, the following words and phrases will have the following meanings unless a different meaning is plainly required by the context:

1.1    “Bankruptcy Court Approval” means the approval of a bankruptcy court pursuant to 11 U.S.C. § 503(b)(1)(A).

1.2    “Beneficiary” means the person or persons entitled to receive benefits under the Plan upon the death of a Participant, as provided in Section 9.

1.3    “Board of Directors” or “Board” means the Board of Directors of the Employer.

1.4    “Bonus” means any cash incentive compensation that is payable to an Eligible Employee, in addition to his or her Salary, which the Committee, in its discretion, has designated as being eligible for deferral under the Plan.

1.5    “Change of Control Event” means a change in ownership or effective control of the Company or in the ownership of a substantial portion of the Company’s assets, as defined under Code Section 409A.

1.6    “Code” means the Internal Revenue Code of 1986, as amended. Reference to a specific section of the Code will include such section, any valid regulation or other Treasury

Department or Internal Revenue Service guidance promulgated thereunder, and any comparable provision of any future legislation amending, supplementing or superseding such section.

1.7    “Committee” means the administrative committee charged with responsibility for the general administration of the Plan pursuant to Section 10, as it may be constituted from time to time.

1.8    “Company” means the Employer and each corporation, trade or business that is, together with the Employer, a member of a controlled group of corporations or under common control (within the meaning of Code Sections 414(b) or (c)); provided, however, that in applying Code Sections 1563(a)(1), (2), and (3) for purposes of determining a controlled group of corporations under Code Section 414(b) and in applying Treasury Regulation Section 1.414(c)-2 for purposes of determining trades or businesses that are under common control for purposes of Code Section 414(c), the phrase “at least 50 percent” will be used instead of “at least 80 percent” at each place it appears in such sections.

1.9    “Compensation” means the Salary and Bonus (if any) of an Eligible Employee. An Eligible Employee’s Compensation will not include any other type of remuneration, including any severance pay.

1.10  “Corporate Dissolution” means a dissolution of the Company that is taxed under Code Section 331.

1.11  “Deferral Account” means, for each Participant, the bookkeeping account maintained by the Committee for the Participant under Section 4.1 which will be the sum of the Participant’s Plan Year Subaccount(s).

1.12  “Disability” or “Disabled” means (a) the inability of a Participant to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment that can be expected to result in death or can be expected to last for a continuous period of not less than twelve (12) months, or (b) the Participant is, by reason of any medically determinable physical or mental impairment that can be expected to result in death or can be expected to last for a continuous period of not less than twelve (12) months, receiving income replacement benefits for a period of not less than three (3) months under an accident and health plan covering employees of the Employer. The Committee will determine whether or not a Participant is Disabled based on such evidence as the Committee deems necessary or advisable.

1.13  “Domestic Relations Order” means a court order that qualifies as a domestic relations order under Code Section 414(p)(1)(B).

1.14  “Election Form” means the form, which may be in electronic format, prescribed from time to time by the Committee that an Eligible Employee or Participant must properly complete, sign and return to the Committee (or its designated agent) to make an election under the Plan.

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1.15    “Eligible Employee” means a member of a group of select management or highly compensated employees of the Company who has been notified that he or she has been selected by the Committee (in its sole discretion) to participate in the Plan.

1.16    “Employer” means Williams-Sonoma, Inc. and any successor corporation.

1.17    “ERISA” means the Employee Retirement Income Security Act of 1974, as amended. Reference to a specific section of ERISA will include such section, any valid regulation promulgated thereunder, and any comparable provision of any future legislation amending, supplementing or superseding such section.

1.18    “401(k) Plan” means the Williams-Sonoma, Inc. 401(k) Plan, as amended from time to time.

1.19    “Fund” or “Funds” means one or more of the mutual funds or other investment vehicles selected by the Committee pursuant to Section 3.2.1.

1.20    “Participant” means an individual who (a) has become a Participant in the Plan pursuant to Section 2.1, and (b) has not ceased to be a Participant pursuant to Section 2.2.

1.21    “Plan” means the Williams-Sonoma, Inc. 2005 Executive Deferred Compensation Plan , as set forth herein and as hereafter amended from time to time.

1.22    “Plan Year” means the calendar year.

1.23    “Plan Year Subaccount” means, with respect to a Participant, the bookkeeping account established and maintained by the Committee for the Participant under Section 4.1 to reflect, for each Plan Year, the deferrals of Salary made by the Participant for such Plan Year, the deferrals of Bonuses (if any) made by the Participant for the fiscal year of the Company which includes the last day of such Plan Year, any deemed earnings credited thereon, and any withdrawals and/or distributions debited thereto.

1.24    “Retirement” means a Participant’s Separation from Service on or after his or her attainment of both age fifty-five (55) and five (5) Years of Service.

1.25    “Salary” means the base pay that is payable to an Eligible Employee by the Company with respect to services performed during any period by the Employee and does not include any other type of remuneration (such as any severance payments, commissions, overtime, bonuses, or fringe benefits). Notwithstanding the foregoing, an Eligible Employee’s Salary will be calculated before any reduction for compensation voluntarily deferred or contributed by the Employee pursuant to all qualified and nonqualified plans of the Company and will be calculated to include amounts not otherwise included in the Employee’s gross income under Code Sections 125, 132, 402(e)(3) or 402(h) pursuant to plans or arrangements maintained by the Company; provided, however, that such amounts will be included in compensation only to the extent that had there been no such plan, the amount would have been payable in cash to the Employee.

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1.26    “Separation from Service” means a Participant’s “separation from service” as defined in Code Section 409A. For this purpose, the employment relationship will be treated as continuing intact while the Participant is on military leave, sick leave or other bona fide leave of absence, except that if the period of such leave exceeds six (6) months and the Participant does not retain a right to re-employment under an applicable statute or by contract, then the employment relationship will be deemed to have terminated on the first day immediately following such six-month period. A leave of absence constitutes a bona fide leave of absence only if there is a reasonable expectation that the Participant will return to perform services for the Company.

1.27    “Specified Employee” means a Participant who, as of the date of his or her Separation from Service, is a key employee of the Company. For this purpose, a Participant is a key employee if he or she meets the requirements of Code Section 416(i)(1)(A)(i), (ii) or (iii) (disregarding Code Section 416(i)(5)). As of 2008, this generally includes (a) the top fifty (50) Company officers with compensation greater than $150,000 per year, (b) a 5% owner of the Company, or (c) a 1% owner of the Company with compensation greater than $150,000 per year. For purposes of the preceding sentence, “compensation” means compensation as such term is defined in the 401(k) Plan for purposes of Code Section 415.

1.28    “Unforeseeable Emergency” means (a) a severe financial hardship to a Participant resulting from an illness or accident of the Participant or his or her spouse, Beneficiary or dependent (as defined in section 152 of the Code, but without regard to subsections (b)(1), (b)(2) and (d)(1)(B) thereof), (b) loss of the Participant’s property due to casualty (including the need to rebuild a home following damage to a home not otherwise covered by insurance, for example, not as a result of a natural disaster), or (c) other similar extraordinary and unforeseeable circumstances arising as a result of events beyond the control of the Participant. The Committee will determine whether or not a Participant has incurred an Unforeseeable Emergency based on such evidence as the Committee deems necessary or advisable.

1.29    “Year of Service” means a full year in which a Participant has been continuously employed by the Company. For this purpose, a year of employment will be a 365 day period (or 366 day period in the case of a leap year) that, for the first year of employment, commences on the Employee’s date of hire and that, for any subsequent year, commences on an anniversary of that hiring date. The Committee may, in its sole discretion, credit a Participant with any partial year of employment. Periods during which an Eligible Employee is on a paid leave of absence or suffers from a Disability will be deemed to be periods of continuous employment.

SECTION 2

PARTICIPATION

2.1    Participation. An Eligible Employee will become a Participant in the Plan by electing to defer his or her Compensation in accordance with Section 3.

2.2    Continuing Participation. An Eligible Employee who has become a Participant will continue to be a Participant until all of his or her benefits are distributed under the Plan. The Committee may determine at any time, in its sole discretion, that a Participant is no longer an

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Eligible Employee. In the event a Participant ceases to be an Eligible Employee, if such individual has not undergone a Separation From Service, he or she shall continue to make Compensation deferral contributions under the Plan through the end of the Plan Year in which he or she ceases to be an Eligible Employee. Thereafter, such individual shall not make any further Compensation deferral contributions to the Plan unless or until he or she again becomes an Eligible Employee.

SECTION 3

COMPENSATION DEFERRAL ELECTIONS

3.1    Elections to Defer Compensation. Each Eligible Employee’s decision to defer his or her Compensation under the terms of the Plan will be entirely voluntary.

3.1.1    General Timing Rule for Compensation Deferral Elections. Except as otherwise provided in this Section 3.1, an Eligible Employee may elect to defer Compensation that is payable for services performed during any Plan Year by submitting an Election Form to the Committee on or before the deadline established by the Committee, in its discretion (the “Submission Deadline”), which in no event may be later than the December 31 that immediately precedes such Plan Year. Any deferral election made in accordance with this Section 3.1.1 will become irrevocable effective as of the Submission Deadline, except as otherwise specified in the Plan.

3.1.2    Timing Rule for Compensation Deferral Elections of Newly-Eligible Employees. An individual who first becomes an Eligible Employee during any Plan Year may elect to defer Compensation that is payable for services performed after the election, as described below, by submitting an Election Form to the Committee on or before the Submission Deadline, which in no event may be later than thirty (30) days after he or she first becomes an Eligible Employee (the “Initial Election Period”). However, no such deferral election may be made if the Eligible Employee was previously eligible to participate in this Plan or in any other plan that is required to be aggregated with this Plan under Code Section 409A. A Compensation deferral election that is made by an Eligible Employee during the Initial Election Period will be effective only (a) with respect to Salary that is payable for services performed beginning with the first pay period immediately following the end of the Initial Election Period, and (b) with respect to the portion of the Bonus (if any) that is payable for services performed after the end of the Initial Election Period, which shall be determined by multiplying the total Bonus (or the percentage of the total Bonus that was deferred) by a fraction, the numerator of which is the number of days remaining in the Plan Year after the initial election becomes irrevocable, and the denominator of which is 365 (or 366 in the event of a leap year). Any deferral election made in accordance with this Section 3.1.2 will become irrevocable effective as of the Submission Deadline, except as otherwise specified in the Plan.

3.1.3    Timing Rule for Bonus Deferral Elections. An Eligible Employee may elect to defer any Bonus that is payable for services performed during any fiscal year of the Company, by submitting an Election Form to the Committee on or before the Submission Deadline, which in no event may be later than the last day of the immediately preceding fiscal year of the Company. Any deferral election made in accordance with this Section 3.1.3 will become irrevocable effective as of the Submission Deadline, except as otherwise specified in the Plan.

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3.1.4    Timing Rule for Performance-Based or Bonus Compensation Deferral Elections. Notwithstanding the provisions of Section 3.1.3, if the Committee (in its discretion) determines that an Eligible Employee’s Bonus qualifies as “performance-based compensation” as defined in Code Section 409A (“Performance-Based Compensation”) or (effective before January 1, 2009) “bonus compensation” that is based on services performed over a period of at least twelve (12) months (as determined under Internal Revenue Notice 2005-1, Q/A-22) (“Bonus Compensation”), then the Eligible Employee may, if the Committee, in its discretion, permits such, elect to defer such Performance-Based or Bonus Compensation (as the case may be) by submitting an Election Form to the Committee on or before the Submission Deadline, which in no event may be later than six (6) months before the end of the performance/ service period. In order for an Eligible Employee to be eligible to make a deferral election for Performance-Based Compensation in accordance with the deadline established pursuant to this Section 3.1.4, he or she must have performed services continuously from the later of the beginning of the performance period for such Compensation or the date on which the performance criteria for such Compensation was established through the date on which the deferral election is made; provided, however, that no such election may be made after the amount of such Compensation has become readily ascertainable. Any deferral election made in accordance with this Section 3.1.4 will become irrevocable effective as of the Submission Deadline, except as otherwise specified in the Plan.

3.1.5    Amount of Deferral. Subject to the other limitations set forth in this Section 3.1, the amount of Compensation that an Eligible Employee may elect to defer is as follows:

(a)    Any whole percentage of Salary up to seventy-five percent (75%); and/or

(b)    Any whole percentage of Bonus up to one hundred percent (100%).

3.1.6    Maximum Deferrals. To the extent permissible under Code Section 409A, a Participant’s Salary or Bonus deferral amount in any Plan Year will be limited to the extent that the amount of the Salary or Bonus remaining undeferred in that Plan Year is less than the amount of payroll taxes that the Company will owe on the Participant’s Compensation and all other compensation that he or she receives from the Company in that Plan Year. In addition, an election to defer Salary or Bonus will not be effective to the extent it exceeds the maximum amount set forth in Section 3.1.5.

3.1.7    Minimum Deferrals. For each Plan Year for which a Participant elects to defer any portion of his or her Salary, the minimum percentage of Salary that may be deferred is five percent (5%) or such lesser percentage (but not below zero percent) as may be established by the Committee pursuant to rules adopted by it and applied in a uniform manner.

3.1.8    Limitation on Changes to Deferral Amounts. Notwithstanding any contrary Plan provision, the dollar amount of any Compensation deferrals may not be reduced or increased by virtue of any Participant election to increase, decrease or terminate his or her rate of deferral in any other Company employee benefit plan, except as permitted under Code Section 409A with respect to

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changes in deferral elections under the 401(k) Plan or a Code Section 125 cafeteria plan (or as otherwise permitted under Code Section 409A).

3.1.9    Duration of Salary Deferral Election. Any Salary deferral election made under Section 3.1.1 or 3.1.2 will be irrevocable with respect to the Plan Year for which it is made, and will remain in effect, notwithstanding any change in the Participant’s Salary, until changed or cancelled in accordance with the terms of the Plan; provided, however, that such election automatically will be cancelled under Section 2.2 for any Plan Year or portion thereof for which the Participant is not an Eligible Employee. Subject to the other limitations set forth in this Section 3.1, an Eligible Employee may increase, decrease or cancel his or her Salary deferral election for any subsequent Plan Year in accordance with Section 3.1.1.

3.1.10    Duration of Bonus Deferral Election. Any Bonus deferral election made under Section 3.1.2, 3.1.3 or 3.1.4 will be irrevocable with respect to the Bonus that is otherwise payable for services performed during the Company’s fiscal year for which the election is made. Subject to the other limitations set forth in this Section 3.1, an Eligible Employee may make a new deferral election with respect to any Bonus that is payable for services performed during any subsequent fiscal year of the Company in accordance with Section 3.1.3 or 3.1.4 (as applicable).

3.1.11    Year-End Cross-Over Payroll Periods. In the case of a Participant’s Salary deferral election, any payroll period that relates to a period of service that crosses over the calendar year end will be covered by the Participant’s deferral election (if any) in effect for the immediately preceding year.

3.1.12    USERRA Rights. Notwithstanding the foregoing provisions of this Section 3.1, the Committee may (in its discretion) provide an Eligible Employee with a Compensation deferral election to satisfy the requirements of the Uniformed Services Employment and Reemployment Rights Act of 1994, as amended (“USERRA”), if applicable.

3.2    Deemed Investment Elections.

3.2.1    Selection of Funds. The Committee will select the Funds whose performance will measure the amounts to be credited to the Deferral Accounts of Participants pursuant to Section 4.1(c). The Committee may, in its discretion, change its selection of the Funds at any time. If a Participant has elected pursuant to Section 3.2.2 to make a deemed investment of all or a portion of his or her Plan Year Subaccount in a Fund which the Committee decides to discontinue, his or her Plan Year Subaccount will be deemed invested after such discontinuance in the continuing Fund which the Committee determines, in its discretion, most nearly resembles the discontinued Fund.

3.2.2    Deemed Investment Election. The Committee will provide each Participant with a list of the Funds available for hypothetical investment of his or her Deferral Account balance. The Participant will designate, when the Participant makes deferral elections under Section 3.1, on the form prescribed by the Committee for such purpose, one or more of such Funds in which each of his or her Plan Year Subaccounts will be deemed to be invested. The Participant may make a separate designation for each of his or her Plan Year Subaccounts. In making the designation

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pursuant to this Section 3.2.2, the Participant may specify that all or any whole percentage of at least one percent (1%) of his or her Plan Year Subaccount balance be deemed to be invested in one or more of the Funds. If a Participant does not elect to have his or her Plan Year Subaccount deemed invested in any of the Funds as described in this Section 3.2.2, then the Plan Year Subaccount automatically will be deemed invested in the Plan’s default Fund, as determined by the Committee, in its sole discretion.

3.2.3    Changes in Deemed Investment Elections. On or before the twentieth (20^th) day of any calendar month (or such later day as may be prescribed by the Committee, in its discretion, but not later than the last day of the calendar month), a Participant may change the designation of the Funds in which the balances of any of his or her Plan Year Subaccounts will be deemed to be invested. Such change may be made with respect to any whole percentage of at least ten percent (10%) of a Plan Year Subaccount balance. Such change must be made by timely filing an Election Form with the Committee reflecting such change. Such change will be effective as of the first day of the immediately following calendar month. The Committee may provide for more rapid effectiveness of allocation changes for all Participants and for more liberal ability to reallocate deemed investments.

3.2.4    No Actual Investment. Notwithstanding any contrary Plan provision, the Funds are to be used for measurement purposes only, and the Company will not be obligated in any way to actually invest any money in the Funds, or to acquire or maintain any actual investment. In the event that the Company, in its own discretion, decides to invest funds in any or all of the investments on which the Funds are based, no Participant or any other person will have any rights in or to such investments themselves. Without limiting the foregoing, a Participant’s Deferral Account balance will at all times be a bookkeeping entry only and will not represent any investment made on his or her behalf by the Company; the Participant will at all times remain an unsecured creditor of the Company.

3.3    Cancellation of Compensation Deferrals. Notwithstanding any contrary provision of Section 3.1:

3.3.1    Hardship Distribution under 401(k) Plans. In the event that a Participant receives a hardship distribution under the 401(k) Plan or any other plan maintained by the Company that contains a qualified cash or deferred arrangement under Code Section 401(k) (collectively, the “401(k) Plans”), the Participant’s Compensation deferrals (if any) under this Plan will be cancelled for a period of six (6) months from the date that the Participant received such hardship distribution. Notwithstanding the foregoing, the Participant’s Compensation deferrals will not be so cancelled if the Committee determines that such cancellation is not required in order to preserve the tax-qualification of the 401(k) Plans.

3.3.2    Unforeseeable Emergency. A Participant’s deferral election shall be automatically cancelled in the event the Participant obtains an unforeseeable emergency distribution from the Plan pursuant to Section 6.6 hereof. The Participant, if still an Eligible Employee, may re-enroll in the Plan in the next open enrollment period.

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3.3.3    Irrevocability of Prior Compensation Deferrals. Notwithstanding the foregoing, a Participant’s election to make Compensation deferrals under Section 3.1 will be irrevocable as to amounts already deferred as of the effective date of any cancellation in accordance with this Section 3.3.

3.3.4    Resumption of Compensation Deferrals. A Participant whose Compensation deferrals have been cancelled pursuant to this Section 3.3 may later resume making Compensation deferrals under the Plan only in accordance with Section 3.1.

SECTION 4

ACCOUNTING

4.1    Deferral Accounts. The Committee will establish and maintain the Plan Year Subaccounts and the Deferral Account (which will be the sum of all Plan Year Subaccounts) for each Participant. Each Plan Year Subaccount of each Participant will be further divided into separate subaccounts (“Fund Subaccounts”), each of which corresponds to a Fund elected by the Participant pursuant to Section 3.2. Each Plan Year Subaccount of each Participant will be credited as follows:

(a)    Within five (5) business days after deferred Salary has been withheld from a Participant’s paycheck, the Committee will credit each of the Participant’s Fund Subaccounts with amounts equal to the deferred Salary in accordance with the Participant’s election under Section 3.2; that is, the portion of the Participant’s deferred Salary that he or she has elected to be deemed to be invested in a certain Fund will be credited to the Fund Subaccount corresponding to that Fund.

(b)    Within five (5) business days after a deferred Bonus has been withheld from a Participant’s paycheck, the Committee will credit each of the Participant’s Fund Subaccounts with amounts equal to the deferred Bonus in accordance with the Participant’s election under Section 3.2; that is, the portion of the Participant’s deferred Bonus that he or she has elected to be deemed to be invested in a certain Fund will be credited to the Fund Subaccount corresponding to that Fund.

(c)    At least once in each calendar month, each Fund Subaccount of a Participant’s Plan Year Subaccount will be credited with deemed earnings on the Fund corresponding to that Fund Subaccount.

(d)    Any distribution or withdrawal from Participant’s Plan Year Subaccount will be charged to the Plan Year Subaccount as soon as practicable after such distribution or withdrawal is made. The amount of a distribution or withdrawal charged to a Participant’s Plan Year Subaccount will be charged to the Fund Subaccounts in such Plan Year Subaccount in the proportions of the relative balances of such Fund Subaccounts as of the date such distribution or withdrawal is valued.

4.2    Accounting Methods. The accounting methods or formulae to be used under the Plan for the purpose of maintaining the Participants’ Deferral Accounts, including the exact times and method for crediting any deemed earnings, will be determined by the Committee, in its sole

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discretion; provided, however that the exact times and/or method for crediting such deemed earnings will be uniform among all Participants.

4.3    Periodic Reports. Under procedures established by the Committee, each Participant will be furnished with a periodic statement of his or her Deferral Account, reflecting the status of his or her interest in the Plan, at least once with respect to each Plan Year.

SECTION 5

VESTING

Subject to the provisions of Sections 13.1 (Participants are unsecured general creditors) and 13.5 (Company’s right to deduct required tax withholding), a Participant’s Deferral Account balance at all times will be one hundred percent (100%) vested and nonforfeitable.

SECTION 6

DISTRIBUTIONS

6.1    Distribution on Retirement or Disability.

6.1.1    Time for Payment. Subject to the other provisions of Section 6 below, a distribution of a Participant’s Deferral Account balance will be made or commenced on the date (which must be the first day of a calendar year) a number of years after the Participant’s Retirement or Disability (the “Retirement Payment Eligibility Date”), which number may be designated by the Participant to the extent provided for in his or her initial and annual deferral elections and which number may differ for different Plan Year Subaccounts. If the Participant makes no such designation, then the “Retirement Payment Eligibility Date” will be the first day of the calendar quarter immediately following the Participant’s Retirement or Disability, or as soon as practicable thereafter, but in no event later than the end of the same calendar year.

6.1.2    Form of Payment. The distribution in Section 6.1.1 will be paid in a cash lump sum or quarterly installments over five (5), ten (10), fifteen (15) or twenty (20) years, as designated by the Participant in his or her deferral elections in respect of any Plan Year Subaccount. If the Participant makes no such designation, then such distribution will be paid in a cash lump sum. In no event shall any Plan payments be made more than twenty-two (22) years following a Participant’s Separation From Service. Any payment scheduled to be made more than twenty-two (22) years following a Participant’s Separation From Service shall be paid with the last scheduled payment with the twenty-two (22) year period.

6.1.3    Installment Payments. If a Participant’s Deferral Account balance is to be paid in quarterly installments pursuant to Section 6.1.2, his or her first installment will be equal to the balance then credited to the Account, divided by the number of installments to be made. Each subsequent installment will be paid to the Participant on the first day of the immediately following calendar quarter, or as soon as practicable thereafter, but in no event later than the end of the same calendar year, and will be equal to the balance then credited to the Account, divided by the number of installments remaining to be paid. While a Participant’s Deferral Account is in installment payout

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status, the unpaid Account balance will continue to be credited with deemed earnings pursuant to Section 4.1(c). All installment payments under the Plan will be considered a single payment for purposes of complying with Code Section 409A.

6.1.4    Postponement of Retirement Payment Eligibility Date.

(a)    Subject to the other provisions of Section 6, a Participant may elect to extend the Retirement Payment Eligibility Date for his or her Plan Year Subaccounts (the “Prior Retirement Payment Eligibility Date”) by submitting an Election Form to the Committee to that effect, provided that the following requirements are met: (a) the new election will not take effect until at least twelve (12) months after the date on which the Election Form is submitted; (b) if the new election relates to a payment on account of Retirement, the new Retirement Payment Eligibility Date is at least five (5) years after the Prior Retirement Payment Eligibility Date; and (c) the Election Form is submitted no less than twelve (12) months before the Prior Retirement Payment Eligibility Date. A Retirement Payment Eligibility Date that has been so extended may be further extended by submitting another Election Form in the manner and at the times specified in this Section 6.1.4. In no event, however, will a Plan payment be made more than thirty years following the initial Retirement Eligibility Date. If a Plan payment is scheduled to be made more than thirty years following the initial Retirement Eligibility Date, it will instead be paid out in the thirtieth year following the initial Retirement Eligibility Date.

(b)    Because Plan installment payments are considered a single payment for purposes of Code Section 409A, a subsequent election may accelerate the method of distribution. For example, if a Participant initially elected to receive Retirement or Disability payments in five annual installments following her Retirement Eligibility Date, she could make a timely election to instead take a lump-sum distribution five years following her Retirement Eligibility Date. Moreover, a subsequent election may change a lump-sum distribution to an installment election, so long as, in either case, the initial payment is delayed for a period of at least five (5) years, the election is not effective for one (1) year and is made at least one (1) year in advance of the date upon which the first distribution would have otherwise been made.

(c)    Because installment payments are treated as a single payment under the Plan, any subsequent election must apply to all of the installment payments for a particular Plan Year Subaccount. For example, if a Participant initially elected to receive Retirement or Disability payments relating to her 2009 Plan Year Subaccount in five annual installments following her Separation From Service, the Participant may not elect to defer the 1^st, 2d, 3^rd and 5^th installments only, but must also defer the 4^th installment.

6.1.5    Automatic Lump Sum Payment. Notwithstanding any other Plan provisions, if, on the date of a Participant’s Separation From Service, their Deferral Account totals, less than $15,000, then all of the Deferral Account shall be distributed in a lump-sum in the month following such Participant’s Separation From Service, or, if the Participant is a Specified Employee, in the seventh month following such Participant’s Separation From Service (or, if earlier, within 60 days following the death of the Specified Employee); provided, however, that in the event such Deferral Accounts increases in value so that the value exceeds $15,000 on the scheduled payment

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date, such Deferral Account shall instead be paid in accordance with the Plan and plans and the Participant’s deferral elections.

6.2    Distribution on Separation from Service Not Due to Retirement. Subject to a 6-month delay as specified in section 6.4, the Deferral Account balance of a Participant who has neither died nor incurred a Disability and who undergoes a Separation from Service for any reason other than due to Retirement will be distributed in the form of a cash lump sum on the first day of the calendar month immediately following the Separation from Service, or as soon as practicable thereafter, but in no event later than the end of the same calendar year.

6.3    Distribution on Death. If a Participant dies while some or all of his or her Deferral Account balance is in installment payout status, the balance credited to the Deferral Account as of the last day of the calendar month in which the Participant dies will be paid to the Participant’s Beneficiary in a cash lump sum on the first day of the calendar month immediately following such last day, or as soon as practicable thereafter, but in no event later than the end of the same calendar year. In all other cases of the Participant’s death, the balance then credited to his or her Deferral Account will be paid to the Participant’s Beneficiary in a cash lump sum on the first day of the calendar quarter immediately following the calendar quarter in which the Participant dies.

6.4    Required Six-Month Delay in Payment for Specified Employees. Except as permitted by the Plan and Code Section 409A in connection with a Corporate Dissolution, pursuant to a Bankruptcy Court Approval, a conflicts of interest or ethics rules distribution under Section 6.5.2, a FICA and related income tax distribution under Section 6.5.3, a state, local or foreign tax distribution under Section 6.5.5, or a Code Section 409A distribution under Section 6.5.4, in no event may a Specified Employee’s account be distributed earlier than (i) six (6) months following the Specified Employee’s Separation From Service (or if earlier, the Specified Employee’s death), (ii) the Specified Employee’s Disability, (iii) the Specified Employee’s death, (iv) a Change of Control Event, or (v) the occurrence of an Unforeseeable Emergency. In the event a Specified Employee’s Plan distributions are delayed due to the six-month delay requirement, the amounts otherwise payable to the Specified Employee during such period of delay shall be paid on a date that is at least six months and one day following Separation From Service, but no later than the end of the calendar year in which such six month and one day period ends (or, if earlier, within 60 days following the death of the Specified Employee).

6.5    Acceleration of Payment(s) Permitted Under Certain Circumstances. Notwithstanding the foregoing provisions of Section 6 and except as otherwise provided below:

6.5.1    Compliance With Ethics Agreements. The Committee, in its sole discretion, may accelerate the distribution of a Participant’s Deferral Account balance to the extent necessary for any U.S. federal officer or employee in the executive branch of the U.S. federal government to comply with an ethics agreement with the U.S. federal government, as specified in Code Section 409A.

6.5.2    Compliance With Ethics Laws or Conflicts of Interest Laws. The Committee, in its sole discretion, may accelerate the distribution of a Participant’s Deferral Account

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balance to the extent reasonably necessary to avoid a violation of an applicable U.S. federal, state, local or foreign ethics law or conflicts of interest law, as specified in Code Section 409A.

6.5.3    Payment of Employment Taxes. The Committee, in its sole discretion, may accelerate the distribution of a Participant’s Deferral Account balance sufficient to pay any Federal Insurance Contributions Act tax due under Code Sections 3101, 3121(a) and 3121(v)(2) on amounts deferred under the Plan (the “FICA Amount”), as well as to satisfy the corresponding tax withholding requirements with respect to the FICA Amount and the additional income tax payments due pursuant to this Section 6.5.3, as specified in Code Section 409A. In no event, however, may the total accelerated payment under this Section 6.5.3 exceed the aggregate of the FICA Amount and the related income tax withholding.

6.5.4    Income Inclusion Under Section 409A of the Code. Subject to Section 6.4, in the event that the Plan fails to satisfy the requirements of Code Section 409A, the Committee, in its sole discretion, may accelerate the distribution of a Participant’s Deferral Account up to the maximum amount required to be included in income as a result of the failure to comply with Code Section 409A.

6.5.5    Payment of State, Local or Foreign Taxes. Subject to Section 6.4, the Committee, in its sole discretion, may accelerate the distribution of a Participant’s Deferral Account sufficient to pay any state, local or foreign tax obligations arising from participation in the Plan that apply to an amount deferred under the Plan before the scheduled distribution of such amount, as specified in Code Section 409A. In the event the Committee exercises such discretion, the Committee may also permit a distribution sufficient to pay related income tax withholding in accordance with Code Section 409A. In no event, however, may the total payment under this Section 6.5.5 exceed the aggregate amount of such taxes due.

6.5.6    Certain Offsets. Subject to Section 6.4, the Committee, in its sole discretion, may accelerate the distribution of a Participant’s Deferral Account balance as satisfaction of a debt of the Participant to the Company, as specified in Code Section 409A.

6.5.7    Bona Fide Disputes as to a Right to a Payment. Subject to Section 6.4, the Committee, in its sole discretion, may accelerate the distribution of a Participant’s Deferral Account balance in accordance with Code Section 409A where such distribution occurs as part of a settlement between the Participant and the Company of an arm’s length, bona fide dispute as to the Participant’s right to the deferred amount.

6.6    Unforeseeable Emergency. If a Participant incurs an Unforeseeable Emergency, the Committee, in its sole discretion, may determine that all or part of the Participant’s Deferral Account balance will be distributed to him or her in a cash lump sum payment on the date that immediately follows the date on which the Committee determines that the Participant has incurred the Unforeseeable Emergency; provided, however, that the amount paid to the Participant pursuant to this Section 6.6 will be limited to the amount reasonably necessary to satisfy the Unforeseeable Emergency (which may include amounts necessary to pay any federal, state, local, or foreign income taxes or penalties reasonably anticipated to result from the payment). Also, no payment under this

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Section 6.6 will be made to the extent that the Participant’s Unforeseeable Emergency is or may be relieved through reimbursement or compensation from insurance or otherwise, by liquidation of the Participant’s assets (to the extent the liquidation of such assets would not itself cause severe financial hardship), or by the cancellation of the Participant’s Compensation Deferrals in accordance with Section 3.3.2. Notwithstanding the foregoing, any determination to accelerate the distribution of the Deferral Account of any member of the Committee under this Section 6.6 will be made by the Board.

6.7    Inability to Locate Participant or Beneficiary. If the Committee is unable to locate a Participant or his or her Beneficiary on any date on which a distribution is to be made from such Participant’s Deferral Account, the Company will retain the distribution which was to be made on such date until such time as the Committee can locate the Participant or Beneficiary; provided, however, that the Company may deduct from such retained distributions all taxes which are required to be withheld by the Company. No additional deemed earnings will be credited pursuant to Section 4.1(c) on any distribution retained pursuant to this Section 6.7. If the Committee is unable to locate a Participant or Beneficiary within five (5) years following a date on which a distribution is to be made from such Participant’s Deferral Account, the amount of such distribution will be forfeited. In seeking to locate a Participant or Beneficiary, the Committee may take any reasonable action, but will not be required to take any action other than communicating by registered mail to the address or addresses last provided to the Committee by the Participant or Beneficiary.

6.8    Domestic Relations Order Distributions. The Committee, in its sole discretion, may accelerate a payment (or payments) or make such payments to an individual other than the Participant as necessary to comply with the terms of a Domestic Relations Order.

SECTION 7

CHANGE OF CONTROL

7.1    No New Participants Following Change of Control. The Committee may, in its sole discretion, provide that no individual may commence participation in the Plan following a Change of Control Event.

7.2    No Deferrals Following a Change of Control. The Committee may, in its sole discretion, provide that Plan deferrals shall cease as of the date of a Change of Control Event.

7.3    Discretionary Termination and Accelerated Plan Distributions 30 Days Prior to or Within 12 Months Following a Change in Control. Notwithstanding any other Plan provisions, the Board, in its sole discretion, may terminate the Plan and accelerate all scheduled Plan distributions within 30 days prior to or 12 months following a Change in Control Event by means of an irrevocable election; provided that such termination and distribution acceleration complies with the requirements of Code Section 409A.

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SECTION 8

TERMINATION DUE TO CORPORATE DISSOLUTION OR PURSUANT TO

BANKRUPTCY COURT APPROVAL

8.1    Corporate Dissolution. The Board, in its sole discretion, may terminate the Plan and accelerate all scheduled Plan distributions within 12 months following a Corporate Dissolution; provided that such termination and distribution acceleration complies with the requirements of Code Section 409A.

8.2    Bankruptcy Court Approval. The Administrator, in its sole discretion, may terminate the Plan and accelerate all scheduled Plan distributions pursuant to Bankruptcy Court Approval; provided that such termination and distribution acceleration complies with the requirements of Code Section 409A.

SECTION 9

BENEFICIARY DESIGNATION

9.1    Beneficiary. Each Participant will have the right, at any time, to designate his or her Beneficiary(ies) (both primary as well as contingent) to receive any benefits payable under the Plan to a beneficiary upon the death of a Participant under such rules as is established by the Committee. The Beneficiary designated under the Plan may be the same as or different from the beneficiary designation under any other plan of the Company in which the Participant participates.

9.2    Beneficiary Designation; Change; Spousal Consent. A Participant may designate his or her Beneficiary by properly completing and signing the form prescribed by the Committee for such purpose (the “Beneficiary Designation Form”), and returning it to the Committee or its designated agent in accordance with such rules and procedures as is established by the Committee. A Participant will have the right to change his or her Beneficiary by properly completing, signing and otherwise complying with the terms of the Beneficiary Designation Form and the Committee’s rules and procedures, as in effect from time to time. If the Participant names someone other than his or her spouse as his or her Beneficiary, spousal consent to such designation is required to be provided in the form designated by the Committee, signed by that Participant’s spouse and returned to the Committee or its designated agent. Upon the proper completion, submission and acceptance by the Committee of a new Beneficiary Designation Form, all Beneficiary designations previously filed will be cancelled. The Committee will be entitled to rely on the last Beneficiary Designation Form, which has been properly completed and submitted by the Participant in accordance with the applicable rules and procedures established with respect to the filing of such forms, and accepted by the Committee or its designated agent prior to the Participant’s death.

9.3    Acknowledgment. No designation or change in designation of a Beneficiary will be effective until properly completed, submitted, and accepted by the Committee or its designated agent in accordance with the rules and procedures established by the Committee for this purpose.

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9.4    No Beneficiary Designation. If a Participant fails to designate a Beneficiary as provided in this Section 9 or, if all designated Beneficiaries predecease the Participant or die prior to the complete distribution of the Participant’s Deferral Account balance under the Plan, then the Participant’s surviving spouse will be deemed to be the designated Beneficiary of the Participant. If the Participant has no surviving spouse, any benefits remaining under the Plan to be paid to a Beneficiary will be paid to the Participant’s estate in care of the duly appointed and currently acting personal representative of the estate (which includes either the Participant’s probate estate or living trust). In any case where there is no such personal representative of the Participant’s estate duly appointed and acting in that capacity within ninety (90) days after the Participant’s death (or such extended period as the Committee determines is reasonably necessary to allow such personal representative to be appointed, but not to exceed one hundred eight (180) days after the Participant’s death), then such benefits will be paid to the person or persons who can verify by affidavit or court order to the satisfaction of the Committee that they are legally entitled to receive such benefits under the Plan.

9.5    Doubt as to Beneficiary. If the Committee has any doubt as to the proper Beneficiary to receive payments pursuant to this Plan, the Committee will have the right, exercisable in its discretion, to cause the Company to withhold such payments until such matter is resolved to the Committee’s satisfaction.

9.6    Discharge of Obligations. The payment of benefits under the Plan to a Beneficiary will fully and completely discharge the Company and the Committee from all further obligations under the Plan with respect to the Participant, and that Participant’s rights (if any) under the Plan will terminate upon such full payment of benefits.

9.7    Death of Spouse or Dissolution of Marriage. Notwithstanding the foregoing, a Participant’s Beneficiary designation will be deemed to be automatically revoked if the Participant names his or her spouse as his or her Beneficiary and the marriage to such spouse is later dissolved. Without limiting the generality of the preceding sentence, the interest in benefits of a spouse of a Participant who has predeceased the Participant or whose marriage has been dissolved will automatically pass to the Participant, and will not be transferable by such spouse in any manner, including but not limited to such spouse’s will, nor will such interest pass under the laws of intestate succession.

SECTION 10

ADMINISTRATION OF THE PLAN

10.1    Committee. The Committee is hereby designated as the administrator of the Plan (within the meaning of ERISA Section 3(16)(A)). The Committee will consist of not less than one person, who will be appointed by and serve at the pleasure of the Compensation Committee of the Board. A member of the Committee may resign at any time by notice in writing mailed or delivered to the Compensation Committee of the Board. The Compensation Committee of the Board may remove any member of the Committee by resolution at any time. Any vacancies in the membership of the Committee will be filled by the Compensation Committee of the Board.

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10.2    Committee Action. The Committee will act at meetings by the affirmative vote of a majority of its members. Any action permitted to be taken at a meeting may be taken without a meeting if, prior to or contemporaneously with such action, a written consent to the action is signed by all members of the Committee, and such written consent is filed with the minutes of the proceedings of the Committee. The Chairperson or any other member or members of the Committee designated by the Chairperson may execute any certificate or other written direction on behalf of the Committee.

10.3    Powers and Duties of the Committee. The Committee will enforce the Plan in accordance with its terms, will be charged with the general administration of the Plan, and will have full discretion, power, and authority necessary to accomplish its purposes, including, but not by way of limitation, the following discretionary powers:

(a)    To construe and interpret the meaning and validity of the provisions of the Plan and to determine any question arising under, or in connection with, the administration, operation, or validity of the Plan or any amendment thereto;

(b)    To determine who are Eligible Employees, subject to the limitations described in the Plan;

(c)    To cause a Deferral Account and/or Plan Year Subaccounts to be maintained for each Participant;

(d)    To decide any and all considerations affecting the eligibility of any employee to become a Participant or remain a Participant in the Plan;

(e)    To determine the manner and form for making elections under the Plan;

(f)    To determine, establish and revise an accounting method or formula for the Plan, as provided in Section 4.2;

(g)    To determine the status and rights of Participants and their spouses, Beneficiaries or estates;

(h)    To administer the claims and review procedures set forth in Section 12;

(i)    To establish, from time to time, rules for the performance of its powers and duties and for the administration of the Plan as are not inconsistent with the terms of the Plan;

(j)    To delegate to any one or more of its members or to any other person, severally or jointly, the authority to perform for and on behalf of the Committee one or more of the functions of the Committee under the Plan;

(k)    To arrange for the distribution to each Participant of a statement of any benefits accrued under the Plan, at least annually; or

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(l)    To decide all issues and questions regarding Deferral Account and/or Plan Year Subaccount balances, and the time, form, manner and amount of distributions to Participants or their Beneficiaries in accordance with the terms of the Plan.

10.4    Decisions of the Committee and its Delegates. All actions, interpretations, and decisions of the Committee (and its delegates) will be conclusive and binding on all persons, and will be given the maximum possible deference allowed by law.

10.5    Eligibility to Participate. No member of the Committee who is also an employee of the Company will be excluded from participating in the Plan if otherwise eligible, but he or she will not be entitled, as a member of the Committee, to act or pass upon any matters pertaining specifically to his or her own Deferral Account under the Plan.

10.6    Compensation and Expenses. The members of the Committee will serve without compensation for their services under the Plan. The Committee is authorized at the expense of the Employer to employ such legal counsel, accountants and other advisers as it may deem advisable to assist in the performance of its duties under the Plan. Any expenses and fees incurred in connection with the administration of the Plan by the Committee, or otherwise, will be paid and borne by the Employer.

10.7    Information. To enable the Committee to perform its functions under the Plan, each Company will supply full and timely information to the Committee on all matters related to the Compensation of all Participants, their deaths or other cause of their Separations from Service, and such other pertinent facts as the Committee may require.

10.8    Indemnity. To the fullest extent permitted by applicable law, each Company will indemnify, hold harmless, and defend the Committee and each member thereof, the Board of Directors, and any delegate of the Committee who is an employee of the Company, against any and all expenses, liabilities and claims, including legal fees as they are incurred to defend against such liabilities and claims arising out of their discharge in good faith of responsibilities under or incident to the Plan, other than expenses and liabilities arising out of willful misconduct. This indemnity will not preclude such further indemnities as may be available under insurance purchased by the Company or provided by the Company under any bylaw, agreement or otherwise.

SECTION 11

CLAIMS AND REVIEW PROCEDURE

11.1    Presentation of Claim. If a Participant or Beneficiary (a “Claimant”) asserts a right to a benefit under the Plan which has not been received, the Claimant must file a written claim for such benefit with the Committee. All other claims must be made in writing and filed with the Committee within one hundred eighty (180) days of the date on which the event that caused the claim to arise occurred. Any claim must state with particularity the determination desired by the Claimant. The claims and review procedure set forth in this Section 13 will be administered in accordance with ERISA Section 503. Any written notice that is required to be given to the Claimant

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may, at the option of the Committee and in accordance with applicable guidance issued under ERISA Section 503, be provided electronically.

11.2    Non-Disability Claims.

11.2.1    Notification of Decision. The Committee will consider a Claimant’s claim (other than a claim for benefits due to a Disability) (a “Non-Disability Claim”) within a reasonable time, but no later than ninety (90) days after its receipt of the Claim, unless the Committee determines that special circumstances require an extension of time for processing the Claim, in which case written notice of the extension will be furnished to the Claimant before the termination of the initial ninety (90) day period. In no event will such extension exceed a period of ninety (90) days from the end of the initial ninety (90) day period. The extension notice will indicate the special circumstances requiring the extension of time and the date by which the Committee expects to render its decision on the Non-Disability Claim. The Committee will notify the Claimant in writing:

(a)    that the Claimant’s requested determination has been made, and that the Non-Disability Claim has been allowed in full; or

(b)    that the Committee has reached a conclusion contrary, in whole or in part, to the Claimant’s requested determination, which notice will set forth:

(i)    the specific reason(s) for the denial of the Claim;

(ii)    specific reference(s) to pertinent provisions of the Plan upon which the denial was based;

(iii)    a description of any additional material or information necessary for the Claimant to perfect the Claim, and an explanation of why such material or information is necessary;

(iv)    an explanation of the Plan’s Claims review procedure and the time limits applicable to such procedure; and

(v)    a statement of the Claimant’s right to bring a civil action under ERISA Section 502(a) following an adverse benefit determination on review (as set forth in Section 11.4).

11.2.2    Review of a Denied Non-Disability Claim. On or before sixty (60) days after receiving a notice from the Committee that the Claimant’s Non-Disability Claim has been denied, in whole or in part, the Claimant (or the Claimant’s duly authorized representative) may file with the Committee a written request for a review of the denial of the Claim. The Claimant (or the Claimant’s duly authorized representative):

(a)    may, upon request and free of charge, have reasonable access to, and copies of, all documents, records and other information relevant (as defined in ERISA) to the Non-Disability Claim;

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(b)    may submit written comments or other documents to the Committee; and/or

(c)    may request a hearing, which the Committee, in its sole discretion, may grant.

11.2.3    Decision on Review of the Non-Disability Claim. The Committee will render its decision on review promptly, but not later than sixty (60) days after the Committee receives the Claimant’s timely written request for a review of the denial of the Non-Disability Claim. If the Committee determines that special circumstances require an extension of time for reviewing the Non-Disability Claim, written notice of the extension will be furnished to the Claimant before the termination of the initial sixty (60) day period. In no event will such extension exceed a period of sixty (60) days from the end of the initial sixty (60) day period. The extension notice will indicate the special circumstances requiring the extension of time and the date by which the Committee expects to render its decision on review. In rendering its decision, the Committee will take into account all comments, documents, records and other information submitted by the Claimant (if any) relating to the Non-Disability Claim, without regard to whether such information was submitted or considered in the initial Claim determination. If the Committee wholly or partly denies the Non-Disability Claim on review, the Committee will provide written notice to the Claimant which will set forth:

(a)    the specific reasons for the denial of the Claim;

(b)    the specific reference(s) to the pertinent Plan provisions upon which the denial was based;

(c)    a statement that the Claimant is entitled to receive, upon request and free of charge, reasonable access to and copies of, all documents, records and other information relevant (as defined in ERISA) to his or her Claim for benefits; and

(d)    a statement of the Claimant’s right to bring a civil action under ERISA Section 502(a).

11.3    Disability Claims.

11.3.1    Notification of Decision. The Committee will consider a Claimant’s claim for benefits due to a Disability (a “Disability Claim”) within a reasonable time, but no later than forty-five (45) days after its receipt of the Claim, unless the Committee determines that special circumstances require an extension of time to process the Claim, in which case written notice of the extension will be furnished to the Claimant before the termination of the initial forty-five (45) day period. In no event will such extension exceed a period of thirty (30) days from the end of the initial forty-five (45) day period. However, if the Committee determines that special circumstances require an additional extension of time to process the Disability Claim, the Committee will notify the Claimant in writing before the end of the initial thirty (30) day extension period. In no event will such additional extension exceed a period of thirty (30) days from the end of the initial thirty (30)

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day extension period. The extension notice will indicate the special circumstances requiring the extension of time and the date by which the Committee expects to render its decision on the Disability Claim. The extension notice also will explain the standards on which the entitlement to a benefit is based, the unresolved issues that prevent a decision on the Disability Claim and the additional information needed to resolve those issues, and notice that the Claimant will be afforded at least forty-five (45) days within which to provide the specified information. The Committee will notify the Claimant in writing:

(a)    that the Claimant’s requested determination has been made, and that the Disability Claim has been allowed in full; or

(b)    that the Committee has reached a conclusion contrary, in whole or in part, to the Claimant’s requested determination, which notice will set forth:

(i)    the specific reason(s) for the denial of the Claim;

(ii)    specific reference(s) to pertinent provisions of the Plan upon which the denial was based;

(iii)    a description of any additional material or information necessary for the Claimant to perfect the Claim, and an explanation of why such material or information is necessary;

(iv)    an explanation of the Plan’s Claims review procedure and the time limits applicable to such procedure;

(v)    a copy of any internal rule, guideline, protocol or other similar criteria relied on in denying the Claim or a statement that such rule, guideline, protocol or other similar criteria was relied on in denying the Claim and that a copy of it will be provided without charge upon request; and

(vi)    a statement of the Claimant’s right to bring a civil action under ERISA Section 502(a) following an adverse benefit determination on review (as set forth in Section 11.4).

11.3.2    Review of a Denied Disability Claim. On or before one hundred eighty (180) days after receiving a notice from the Committee that the Claimant’s Disability Claim has been denied, in whole or in part, a Claimant (or the Claimant’s duly authorized representative) may file with the Committee a written request for a review of the denial of the Claim. The Claimant (or the Claimant’s duly authorized representative):

(a)    may, upon request and free of charge, have reasonable access to, and copies of, all documents, records and other information relevant (as defined in ERISA) to the Disability Claim;

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(b)    may submit written comments or other documents to the Committee; and/or

(c)    may request a hearing, which the Committee, in its sole discretion, may grant.

11.3.3    Decision on Review of the Disability Claim. The Committee will render its decision on review promptly, but not later than forty-five (45) days after the Committee receives the Claimant’s timely written request for a review of the denial of the Disability Claim, unless the Committee determines that special circumstances require an extension of time for processing the Claim, in which case written notice of the extension will be furnished to the Claimant before the termination of the initial forty-five (45) day period. In no event will such extension exceed a period of forty-five (45) days from the end of the initial forty-five (45) day period. The extension notice will indicate the special circumstances requiring an extension of time and the date by which the Committee expects to render its decision on the Disability Claim. In rendering its decision, the Committee will take into account all comments, documents, records and other information submitted by the Claimant (if any) relating to the Disability Claim, without regard to whether such information was submitted or considered in the initial Claim determination. The review of the denied Disability Claim will not be conducted by the individual who decided the Claimant’s initial Claim nor the subordinate of such individual. In deciding an appeal of any denied Disability Claim that is based in whole or in part on a medical judgment, the Committee will consult with a health care professional (who will neither be an individual who was consulted in connection with the initial Claim denial nor the subordinate of such individual) who has appropriate training and experience in the field of medicine involved in the medical judgment. Any medical or vocational experts whose advice was obtained on behalf of the Committee in connection with the denial of the Disability Claim will be identified, regardless of whether the advice was relied upon in denying the Claim. If the Committee wholly or partly denies the Disability Claim on review, the Committee will provide written notice to the Claimant which will set forth:

(a)    the specific reasons for the denial of the Claim;

(b)    specific reference(s) to the pertinent Plan provisions upon which the denial was based;

(c)    a statement that the Claimant is entitled to receive, upon request and free of charge, reasonable access to and copies of, all documents, records and other information relevant (as defined in ERISA) to the Claimant’s Claim for benefits;

(d)    a copy of any internal rule, guideline, protocol or other similar criteria relied on in denying the Claim or a statement that such rule, guideline, protocol or other similar criteria was relied on in denying the Claim and that a copy of it will be provided without charge upon request; and

(e)    a statement of the Claimant’s right to bring a civil action under ERISA Section 502(a).

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11.4    Exhaustion of Claims and Review Procedure and Legal Action. No action in law or equity may be brought more than one (1) year after the Committee’s affirmation of a denial of a claim under the Plan, or, if earlier, more than four (4) years after the facts or events giving rise to the Claimant’s allegation(s) or claim(s) first occurred.

SECTION 12

MODIFICATION OR TERMINATION OF THE PLAN

12.1    Companies’ Obligations Limited. The Companies intend to continue the Plan indefinitely, and to maintain each Participant’s Deferral Account until it is scheduled to be paid to him or her in accordance with the provisions of the Plan. However, the Plan is voluntary on the part of the Companies and the Companies do not guarantee to continue the Plan. The Board of Directors, in its sole discretion, at any time may, by amendment of the Plan, suspend or discontinue Compensation deferrals under the Plan, with or without cause.

12.2    Right to Amend or Terminate. The Board of Directors, in its sole discretion, may amend or terminate the Plan, or any part thereof, in such manner as it may determine, at any time and for any reason; provided, however that no such amendment or termination will have any retroactive effect to reduce any amounts allocated to a Participant’s Deferral Account on the date of such amendment or termination. The Board of Directors may from time to time make any amendment to the Plan that may be necessary to satisfy Code Section 409A, ERISA or other applicable laws.

12.3    Retroactive Amendment Permitted. An amendment made by the Board of Directors in accordance with Section 12.2 may be made effective on a date prior to the first day of the Plan Year in which it was adopted if such amendment is necessary or appropriate to enable the Plan to satisfy the applicable requirements of Code Section 409A, ERISA or other applicable laws or to conform the Plan to any change in applicable laws or to any regulations or rulings thereunder, so long as such retroactive amendment is permitted by applicable law.

12.4    Effect of Termination. If the Plan is terminated pursuant to this Section 12, then no further Compensation deferrals may be made under the Plan and the balances credited to the Deferral Accounts of the affected Participants will be distributed to them at the time and in the manner set forth in Section 6.

SECTION 13

GENERAL

13.1    Unsecured General Creditors. All amounts credited to a Participant’s Deferral Account under the Plan will continue for all purposes to be a part of the general assets of the Company. Participants and their Beneficiaries, heirs or successors will have no legal or equitable rights, claims, or interest in any specific property or assets of any Company. No assets of the Company will be held under a trust, or held in any way as collateral security for the fulfilling of any obligations of the Company under the Plan. The Plan will not cause the Company’s assets to be pledged or restricted. The Company’s obligations (if any) under the Plan will be merely that of an

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unfunded and unsecured promise of that Company to pay money in the future, and the rights of the Participants and their Beneficiaries will be no greater than those of unsecured general creditors of the Company. The Company may, but need not, acquire investments corresponding to the Funds, and it is under no obligation to maintain any investment it may make. Any such investments, if made, will be in the name of the Company, and will be its sole property in which no Participant or Beneficiary will have any interest. The Plan is intended to be an unfunded plan for purposes of Title I of ERISA.

13.2    Restriction Against Assignment. The Company will pay all amounts payable hereunder only to the person or persons designated by the Plan and not to or for any other person. No part of a Participant’s Deferral Account will be liable for the debts, contracts, or engagements of any Participant, his or her Beneficiary, or successors in interest, nor will a Participant’s Deferral Account be subject to execution by levy, attachment, or garnishment or by any other legal or equitable proceeding, nor will any such person have any right to alienate, anticipate, transfer, commute, pledge, encumber, or assign any benefits or payments hereunder in any manner whatsoever; provided, however, that a Deferral Account hereunder may be transferred to a Participant’s former spouse pursuant to a Domestic Relations Order. Any purported alienation, anticipation, transfer, commutation, pledge, encumbrance, or assignment will be void and of no effect.

13.3    Governing Law. The Plan is intended to comply with the provisions of Code Section 409A. Notwithstanding any contrary Plan provision, the Plan will be construed, administered and enforced in a manner that is consistent with such intent. The Plan also will be construed, administered and enforced in accordance with the applicable provisions of ERISA, and to the extent not preempted by ERISA, the applicable laws of the State of California (other than its conflict of laws provisions).

13.4    Receipt and Release. Any payment to a Participant or his or her Beneficiary in accordance with the provisions of the Plan will, to the extent thereof, be in full satisfaction of any and all claims against the Committee and/or the Company.

13.5    Tax Withholding. Notwithstanding any contrary Plan provision, the Company will have the right to deduct from a Participant’s Deferral Account and/or any payments due to the Participant or his or her Beneficiary under the Plan any and all taxes determined by the Committee to be applicable with respect to such benefits. If any taxes, including employment taxes with respect to the Deferral Account, are required to be withheld prior to the time of payment, the Company may withhold such amounts from other compensation that is payable to the Participant by the Company.

13.6    Severability. If any provision of the Plan is held to be invalid or unenforceable, its invalidity or unenforceability will not affect any other provisions of the Plan, and in lieu of each provision which is held invalid or unenforceable, there will be added as part of the Plan a provision that will be as similar in terms to such invalid or unenforceable provision as may be possible and be valid, legal, and enforceable.

13.7    No Guarantees Regarding Tax Treatment; Disclaimer. Participants (or their Beneficiaries) will be completely responsible for all taxes with respect to any benefits under the Plan.

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The Committee, the Board of Directors and the Companies make no guarantees regarding the tax treatment to any person of any deferrals or payments made under the Plan. Neither the Companies nor any of their employees shall have any liability to any Participant should the Plan or its administration fail to comply with Code Section 409A.

13.8    Captions. The captions contained in and the table of contents prefixed to the Plan are inserted only as a matter of convenience and for reference, and in no way define, limit, enlarge or describe the scope or intent of the Plan nor in any way will affect the construction of any provision of the Plan.

13.9    No Employment Rights. Neither the establishment or maintenance of the Plan, the making of any deferrals under the Plan nor any action of any Company or the Committee, will be held or construed to confer upon any person any right to be employed by the Company, nor upon dismissal, any right or interest in any specific assets of the Companies other than as provided in the Plan. Each Company expressly reserves the right to discharge any employee at any time, with or without cause or notice.

13.10    Payments on Behalf of Persons Under Incapacity. In the event that any amount becomes payable under the Plan to a person who, in the sole judgment of the Committee, is considered by reason of physical or mental condition to be unable to give a valid receipt therefor, the Committee may direct that such payment be made to any person found by the Committee, in its sole judgment, to have assumed the care of such person. Any payment made pursuant to such determination will constitute a full release and discharge of any and all claims against the Committee and/or the Company.

13.11    Rights and Duties. Neither the Company nor the Committee will be subject to any liability or duty under the Plan except as expressly provided in the Plan, or for any action taken, omitted or incurred in good faith.

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EX-10.43

Exhibit 10.43

AMENDMENT TO

THE WILLIAMS-SONOMA, INC. 401(K) PLAN

WHEREAS, Williams-Sonoma, Inc. (the “Company”) sponsors the Williams-Sonoma, Inc. 401(k) Plan (the “Plan”), which is intended to qualify under sections 401(a), 401(k), and 401(m) of the Internal Revenue Code of 1986, as amended (the “Code”), and the related Trust Agreement, which is tax-exempt under Section 501(c) of the Code;

WHEREAS, in Section 11.1 of the Plan, the Company reserves the right to amend the Plan, at any time by an instrument in writing that is duly executed by an authorized representative of the Company;

WHEREAS, the Compensation Committee has been vested with the authority to amend the Plan with respect to all matters other than the termination of the Plan and the availability of employer securities for investment in the Plan, by resolution of the Board of Directors of the Company dated May 28, 2003;

WHEREAS, the Company wishes to attract and retain the services of highly qualified individuals to serve in positions with responsibility for the administration and operation of the Plan, including but not limited to employees who serve as members of the Williams-Sonoma, Inc. 401(k) Plan Administrative Committee (“Administrative Committee”);

WHEREAS, in furtherance of this, the Company wishes to provide reasonable indemnification rights to protect members of the Administrative Committee and other employees whose positions of employment with the Company require them to exercise responsibility for the Plan;

WHEREAS, the Company wishes to clarify the ineligibility of associates who have their worksites in Puerto Rico to participate in the Plan;

WHEREAS, some associates of the Company and its subsidiaries move from one employment status to another (such as from full-time to part-time status or from part-time to full-time status), and the Company wishes to clarify the Plan’s eligibility provisions as they relate to such associates; and

WHEREAS, the Company has determined that it is desirable to have eligibility for matching contributions begin in the quarter following one year of service and to allocate matching contributions semi-annually.

NOW, THEREFORE, BE IT RESOLVED, that the Plan is amended to read as follows, effective as of the date indicated in each amendment.

I.

Section 2.1 and 2.2 of the Plan are amended to read as follows:

“2.1    Eligibility.

An Associate who meets the eligibility requirements in this Article II is an Eligible Associate. If the Eligible Associate elects to make Pre-tax Contributions pursuant to Section 3.1, the Eligible Associate will become a Participant.

(a) Full-Time Regular Associates. Each Full-Time Regular Associate shall be eligible to participate in the Plan as soon as administratively practicable (e.g., 30 days) after the later of:

(i) Such Associate’s Start Date, and

(ii) Such Associate’s 21st birthday.

(b) Part-Time Associates and Casual Associates. Effective as of May 1, 1997, each Part-Time Associate and Casual Associate shall be eligible to participate in the Plan as soon as administratively practicable (e.g., 30 days) after the later of:

(i) The first date on which the Associate completes 1,000 Hours of Service within one Eligibility Computation Period, without regard to whether the applicable Eligibility Computation Period has ended and without regard to the Associate’s age at the time, and

(ii) Such Associate’s 21st birthday.

For purposes of the 1,000 Hours of Service requirement, all Hours of Service completed as an Associate with the Company’s Controlled Group are counted, including Hours of Service earned as a Temporary Associate and Hours of Service for which the Associate is paid but does not actually perform services such as vacation time or paid Leaves of Absence. An Associate who becomes an Eligible Associate based on employment as a Full-Time Regular Associate, and who is then reclassified as a Part-Time or Casual Associate, shall continue to be treated as an Eligible Associate while so classified (without regard to whether the Associate has satisfied the 1,000 Hours of Service requirement. For purposes of the preceding sentence, the special rule in subsection (f) below shall apply.

(c) Temporary Associates. A Temporary Associate is not eligible to become an Eligible Associate, except as provided in the next sentence. An Eligible Associate (e.g., a Full-Time Regular Associate, Part-Time Associate or Casual Associate who meets the requirements of this Section 2.1) who is reclassified as a Temporary Associate shall continue to be treated as an Eligible Associate while so classified. For purposes of the preceding sentence, the special rule in subsection (f) below shall apply.

(d) Pre-May 1, 1997 Rule. This subsection (b) governs eligibility in the Plan before May 1, 1997. Notwithstanding the preceding provisions of this Section 3.1, before May 1, 1997, each Full-Time Regular Associate, Part-Time Associate and Casual Associate shall be eligible to participate in the Plan on the January 1 or July 1 next following the later of:

(i) The date on which such Associate completes 1,000 Hours of Service, provided that he or she completes the 1,000 Hours of Service within one Eligibility Computation Period, and

(ii) Such Associate’s 21st birthday,

even if such date occurs before the end of the applicable Eligibility Computation Period.

(e) Excluded Classifications. Notwithstanding the preceding provisions of this Section 2.1, no Associate shall be an Eligible Associate or Participant hereunder while such Associate is:

(i) Neither a citizen nor a resident of the United States, and derives no earned income from the Employer that would constitute income from sources within the United States;

(ii) A member of a collective bargaining unit covered by a collective bargaining agreement with respect to which retirement benefits were the subject of good-faith bargaining between the employee representatives and the Employer and that does not specifically provide for coverage of such Associate under this Plan;

(iii) Not a common law employee of an Employer;

(iv) Any individual classified by an Employer as an independent contractor;

(v) Any individual classified by an Employer as a leased employee within the meaning of Code § 414(n) unless: (A) the leasing organization is an Employer, (B) the recipient organization is a member of the Company’s Controlled Group, and (C) the individual is otherwise eligible;

(vi) An Associate who is eligible to participate in one or more employee benefit plans of a third party with whom an Employer has contracted for the provision of the Associates’ services; or

(vii) Effective for payroll periods with respect to which payment of Eligible Pay would be made after April 21, 2008, an Associate whose worksite location (as specified by his or her Employer) is within the Commonwealth of Puerto Rico.

For purposes of this Section, it is expressly intended that individuals whom an Employer classifies as independent contractors (under subsection (f)(iv) above) and any other individuals classified as excluded associates under this Section cannot be Eligible Associates until the Plan Administrator affirmatively changes their classification. Therefore, an independent contractor or any other individual who is reclassified by a court, administrative agency, governmental unit, tribunal or other party as an Eligible Associate will nevertheless not be considered an Eligible Associate hereunder for periods before the Plan Administrator implements the reclassification decision, even if the decision applies retroactively.

(f) Special Rule – Prior Status as an Eligible Associate. When an Associate’s eligibility subsequent to a reclassification or rehire depends on the Associate’s status as an Eligible Associate prior to the reclassification or rehire, the Associate will be treated as having been an Eligible Associate prior to the reclassification or rehire if the Associate had attained the applicable age and service milestones prior to such time. Accordingly, such an Associate’s status as an Eligible Associate after the reclassification or rehire shall not be affected by the Associate’s having been reclassified or Separated from Service before such Associate’s prior status as an Eligible Associate could be implemented “as soon as administratively practicable” in accordance with subsection (a) or (b) above.

2.2      Resumption After Separation from Service.

If an Associate has a Separation from Service, the following rules apply, and the Associate must notify the Company of his or her pre-separation service so that the Associate can be properly credited with all service to which he or she is entitled.

(a) Full-Time Associate Who Has a Separation from Service. If a Full-Time Associate has a Separation from Service and later resumes employment, the rules in this subsection (a) apply.

(i) Full-Time Associate After the Separation. If the individual is re-employed as a Full-Time Associate after the Separation from Service, the individual will become an Eligible Associate in accordance with the provisions of Section 2.1(a) (with the Full-Time Associate’s Start Date determined in accordance with the rule for rehires in Section 1.58(b)).

(ii) Part-Time Associate or Casual Associate After the Separation from Service. If the individual is re-employed as a Part-Time Associate or Casual Associate after the Separation from Service, the following rules apply.

(A) If the individual was an Eligible Associate before the Separation from Service, the individual will resume Eligible Associate status immediately and will be eligible to resume making Pre-tax Contributions as soon as administratively practicable (e.g., within

30 days), even if the individual has never satisfied the 1,000 hour requirement of Section 2.1(b).

(B) If the individual was not an Eligible Associate before the Separation from Service, the individual will become an Eligible Associate upon meeting the requirements of Section 2.1(b), including the 1,000 Hours of Service requirement therein. Hours of Service that were credited to the Associate prior to the Separation from Service shall be taken into account for purposes of applying such 1,000 Hours of Service requirement.

For purposes of (A) and (B) above, the special rule in Section 2.1(f) shall apply.

(iii) Temporary Associate After the Separation from Service. If the individual is re-employed as a Temporary Associate after the Separation from Service, the following rules apply.

(A) If the individual was an Eligible Associate before the Separation from Service, the individual will resume Eligible Associate status immediately and will be eligible to resume making Pre-tax Contributions as soon as administratively practicable (e.g., within 30 days).

(B) If the individual was not an Eligible Associate before the Separation from Service, the individual will not be eligible to become an Eligible Associate while a Temporary Employee.

For purposes of (A) and (B) above, the special rule in Section 2.1(f) shall apply.

(b) Part-Time or Casual Associate Who Has a Separation from Service. If a Part-Time Associate or Casual Associate has a Separation from Service and later resumes employment, the rules in this subsection (b) apply.

(i) Full-Time Associate After the Separation. If the individual is re-employed as a Full-Time Associate after the Separation from Service, the individual will become an Eligible Associate upon meeting the requirements of Section 2.1(a).

(ii) Part-Time or Casual Associate After the Separation. If the individual is re-employed as a Part-Time Associate, Casual Associate or Temporary Associate after the Separation from Service, the following rules apply.

(A) If the individual was an Eligible Associate before the Separation from Service, the individual will resume Eligible Associate status

immediately and will be eligible to resume making Pre-tax Contributions as soon as administratively practicable (e.g., within 30 days).

(B) If the individual was not an Eligible Associate before the Separation from Service, the individual will become an Eligible Associate upon meeting the requirements of Section 2.1(b), including the 1,000 Hours of Service requirement therein. Hours of Service that were credited to the Associate prior to the Separation from Service shall be taken into account for purposes of applying such 1,000 Hours of Service requirement.

For purposes of (A) and (B) above, the special rule in Section 2.1(f) shall apply.

(iii) Temporary Associate After the Separation. If the individual is re-employed as a Temporary Associate after the Separation from Service, the following rules apply.

(A) If the individual was an Eligible Associate before the Separation from Service, the individual will resume Eligible Associate status immediately and will be eligible to resume making Pre-tax Contributions as soon as administratively practicable (e.g., within 30 days).

(B) If the individual was not an Eligible Associate before the Separation from Service, the individual will not be eligible to become an Eligible Associate while a Temporary Associate.

For purposes of (A) and (B) above, the special rule in Section 2.1(f) shall apply.

(c) Temporary Associate Who Has a Separation from Service. If a Temporary Associate has a Separation from Service and later resumes employment, the rules in this subsection (c) apply.

(i) Full-Time Associate After the Separation. If the individual is re-employed as a Full-Time Associate after the Separation from Service, the individual will become an Eligible Associate upon meeting the requirements of Section 2.1(a).

(ii) Part-Time or Casual Associate After the Separation. If the individual is re-employed as a Part-Time Associate, Casual Associate or Temporary Associate after the Separation from Service, the individual will become an Eligible Associate upon meeting the requirements of Section 2.1(b), including the 1,000 Hours of Service requirement therein. Hours of

Service that were credited to the Associate prior to the Separation from Service shall be taken into account for purposes of applying such 1,000 Hours of Service requirement.

(iii) Temporary Associate After the Separation. If the individual is re-employed as a Temporary Associate after the Separation, the individual will not be eligible to become an Eligible Associate while a Temporary Associate.”

II.

Section 3.2(a) of the Plan is amended to read as follows:

“(a) Plan’s Percentage Limit for Regular Pre-Tax Contributions. Subject to a special limitation for certain highly paid Associates in subsection (c) below, each Participant who is an Eligible Associate may elect to reduce his or her Eligible Pay for a pay period by at least 1% and not more than 75% in whole percentages, and have that amount contributed to the Trust by the Employer as a Pre-tax Contribution. A separate rule applies to Age 50 Catch-up Contributions, which are addressed in subsection (d) below. “15%” replaced “75%” and was in effect from January 1, 1999 through December 31, 2008 and “10%” was in effect before January 1, 1999.”

III.

Section 3.3 of the Plan is amended to read as follows:

“3.3    Matching Contributions.

The Employer shall make discretionary Matching Contributions to the Matching Contributions Accounts of each Participant in the Plan who makes Pre-tax Contributions, subject to the following rules, and subject to Articles XIII (Code § 415) and XIV (nondiscrimination).

(a) Post-2008 Eligibility Rule for Matching Contributions. To be eligible to receive Matching Contributions, a Participant must complete the one-year eligibility requirement in paragraph (i) below, the quarterly entry date requirement in paragraph (ii) below, and the June 30/December 31 requirement in paragraph (iii) below.

(i) One-Year Eligibility Requirement. The Participant must complete a year of eligibility service, which means a 365-day period of service commencing on the Associate’s Employment Commencement Date (or Reemployment Commencement Date) and ending on the next Service Cutoff Date. Separate periods of service shall be aggregated in calculating

years of eligibility service. A Participant’s period of service shall include a Period of Severance that lasts no more than 12 consecutive months.

(ii) Quarterly Entry Date. The Participant will be eligible to receive Matching Contributions with respect to Pre-tax Contributions the Participant makes in pay periods that begin after the calendar quarter in which the Participant meets the one-year eligibility requirement in paragraph (i) above, subject to the remainder of this paragraph and paragraph (iii) below. To provide for this, the Plan will have January 1, April 1, July 1 and October 1 entry dates for the Plan’s matching contribution feature that will occur in each Plan Year beginning on and after January 1, 2009. Ordinarily an Associate must be employed by an Employer on an applicable entry date to enter on that date into eligibility for matching contributions. However, if an Associate would have entered into eligibility on an entry date (but for having terminated service prior to such date), then the Associate will enter into eligibility for matching contributions (subject to paragraph (iii) below) immediately on the date of the Associate’s rehire into a position that is eligible to make Pre-tax Contributions to the Plan.

(iii) June 30/December 31 Employment.

(A) January 1 to June 30. To receive an allocation of Matching Contributions with respect to eligible Pre-tax Contributions that a Participant makes between January 1 and June 30 of a calendar year, the Participant must be an Associate on June 30 of that calendar year.

(B) July 1 to December 31. To receive an allocation of Matching Contributions with respect to eligible Pre-tax Contributions that a Participant makes between July 1 and December 31 of a calendar year, the Participant must be an Associate on December 31 of that calendar year.

This subsection (a) does not apply with respect to Pre-tax Contributions made before January 1, 2009.

(b) Matching Contribution Formula. Matching Contributions on behalf of each Participant shall equal 50% of the Participant’s Pre-tax Contributions made from pay checks paid during a calendar half, i.e., January 1 to June 30, or July 1 to December 31 (excluding Age 50 Catch-up Contributions) that do not exceed 6% of the Participant’s Eligible Pay from such pay checks (i.e., the maximum Pre-tax Contribution is 3% of Eligible Pay that is paid in the calendar half). Effective before January 1, 2009, “pay period” shall replace “calendar half” every time it is used in this subsection (b).

(i) Applicable Percentage for 1997 to 2003. “100%” shall replace “50%” in the preceding sentence, effective only for Pre-tax Contributions beginning

May 1, 1997 and ending with the last pay period beginning on or before August 1, 2003.

(ii) Pre-August 2, 2003 Requirement for Williams-Sonoma Inc. Stock Fund. A Participant’s Pre-tax Contributions are eligible for Matching Contributions regardless of how such Participant’s Pre-tax Contributions are invested. Notwithstanding the foregoing, effective for pay periods that began on or before August 1, 2003, a Participant’s Pre-tax Contributions were eligible for Matching Contributions only to the extent they were invested in the Williams-Sonoma Inc. Stock Fund.

(c) Timing of Matching Contributions.

(i) The Company shall make such Matching Contributions at such times as may be determined by the Plan Administrator in its discretion (provided that such times shall be substantially uniform among all Participants).

(ii) A Participant’s Matching Contribution is made solely on the basis of the measuring periods specified in subsection (b) above (or paragraph (iii) below) and is not made with reference to Pre-tax Contributions for the full Plan Year.

(iii) Before the Effective Date, the Company could use a quarterly or other measuring period instead of the pay period.

(d) Excess Deferrals and Excess Contributions. Notwithstanding anything in this Section to the contrary, Matching Contributions will be forfeited to the extent they are made with respect to Pre-tax Contributions which are Excess Deferrals or Excess Contributions. For this purpose, any Excess Deferrals and Excess Contributions are deemed to have been made with respect to Pre-tax Contributions that are not otherwise eligible for Matching Contributions to the maximum extent possible, pursuant to rules determined by the Plan Administrator.

(e) Changes in Matching Contributions Formula. The Company shall have the authority to change the Matching Contributions formula at any time.”

IV.

Section 12.7 of the Plan is hereby amended in its entirety, to read as follows:

“12.7  Indemnification.

(a) Indemnification Generally. The Company shall indemnify, to the full extent permitted by law and without regard to any limit on indemnification not in this Section 12.7, any current or former employee of the Company, who acted in good faith, for liabilities (including, but not

limited to, attorneys’ fees) related to actions and inactions that occur in carrying out his or her responsibilities related to the Plan.

(b) Indemnification Procedure. To be indemnified under subsection (a) above, the current or former employee shall promptly submit to the Company notice of the claim, charge or other proceeding against him or her (“Proceeding”) and provide a copy of any materials that have been received in connection with the Proceeding. The failure to provide reasonably prompt notice shall not relieve the Company of its indemnification obligation under subsection (a) above, unless such failure is prejudicial to the Company. Upon receipt of such notice, the Company may choose to assume the affected individual’s defense of such Proceeding by giving written notice to the affected individual of the Company’s decision to do so. If the Company assumes the defense, indemnification under subsection (a) above shall not be available for any fees or expenses of separately retained counsel subsequently incurred by the affected individual in connection with the same Proceeding (except to the extent that such counsel is necessary because of a conflict between the affected individual and the Company). Further, as a condition to indemnification, each current or former employee must cooperate with the Company and its counsel in all reasonable respects in the investigation, mediation, settlement, trial, appeal and other aspects of any Proceeding for which indemnification is sought hereunder, and any settlement of a Proceeding by a current or former employee must be consented to by the Company in writing, which the Company shall not unreasonably withhold.

(c) Exceptions to Indemnification. Notwithstanding any other provision of this Section 12.7, the Company shall not indemnify any current or former employee pursuant to subsection (a) under the following circumstances:

(i) No Duplication: To the extent the current or former employee receives payment for amounts (otherwise indemnifiable hereunder) pursuant to: (i) a liability insurance policy maintained by the Company; (ii) the Company’s Articles of Incorporation or Bylaws; (iii) any provision of federal, state or local law that results in payments from the Company or the Plan; or (iv) any other agreement or right that results in payments from the Company or the Plan.

(ii) No Section 16(b) Claims: For expenses and the payment of profits arising from the current or former employee’s purchase and sale of securities in violation of Section 16(b) of the Securities Exchange Act of 1934, as amended, or any successor statute.”

In all other respects, the terms and provisions of the Plan remain unchanged.

IN WITNESS WHEREOF, this Amendment has been executed this 6th day of November, 2008.

WILLIAMS-SONOMA, INC.
By:	/s/ Sharon L. McCollam
	Sharon L. McCollam
	Executive Vice President, Chief Operating and Chief Financial Officer (in her role as head of Human Resources)

EX-10.44

Exhibit 10.44

JANUARY 2009 AMENDMENT TO

THE WILLIAMS-SONOMA, INC. 401(K) PLAN

WHEREAS, Williams-Sonoma, Inc. (the “Company”) sponsors the Williams-Sonoma, Inc. 401(k) Plan (the “Plan”), which is intended to qualify under sections 401(a), 401(k), and 401(m) of the Internal Revenue Code of 1986, as amended (the “Code”), and the related Trust Agreement, which is tax-exempt under Section 501(c) of the Code;

WHEREAS, in Section 11.1 of the Plan, the Company reserves the right to amend the Plan, at any time by an instrument in writing that is duly executed by an authorized representative of the Company;

WHEREAS, the Board of Directors of the Company, by resolution dated May 28, 2003, vested the Compensation Committee with the authority to amend the Plan with respect to all matters other than availability of employer securities for investment under the Plan, the termination of the Plan, or the adoption of a new retirement plan (which matters are reserved to the Board of Directors);

WHEREAS, the Compensation Committee, November 6, 2008, in turn delegated to the Head of Human Resources certain limited Plan amendment authority;

WHEREAS, the Company is undergoing a reorganization of its business structure, which will result in the termination of some of its associates, and the Company has determined to provide some of these associates with wages related to the 60-day notice period under The Worker Adjustment and Retraining Notification Act and the California Worker Adjustment and Retraining Notification Act (collectively “WARN”), while they are on an authorized leave of absence;

WHEREAS, the Plan presently permits eligible associates to make elective deferrals to the Plan from their “eligible pay” which is defined as “the amount of regular, recurring compensation of an Associate, including base salary and hourly wages plus overtime pay”;

WHEREAS, the Company has determined that it is desirable to ensure the associates that it classifies as being on a WARN-related leave (and similarly situated associates in the future) have the opportunity to make elective deferrals from WARN-related wages;

WHEREAS, the Head of Human Resources has determined that she has been delegated authority to amend the Plan to so provide because (i) this amendment is not within the retained jurisdiction of the Board, (ii) does not have a net annual cost to the corporation in excess of $250,000, and (iii) this amendment is appropriate, and it will not increase the contributions or allocations under the Plan for any officer of this corporation;

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NOW, THEREFORE, BE IT RESOLVED, that the Plan is amended as follows, effective January 1, 2009.

I.

A new Appendix B is added to read as follows:

APPENDIX B – WSI WARN ASSOCIATES

From time to time, the Company may reorganize its business structure, resulting in the termination of some of its Associates. In the case of those affected Associates who are classified by the Company, in the exercise of its sole discretion, as eligible for wages related to the 60-day notice period applicable under The Worker Adjustment and Retraining Notification Act and the California Worker Adjustment and Retraining Notification Act (collectively “WARN”), while they are on an authorized leave of absence from the Company, “Eligible Pay” shall include wages related to the WARN notice period that are paid for a WARN-related leave of absence, regardless of whether these wages are paid at pay period intervals or in a single lump sum. The Company’s discretionary classification shall solely govern the application of this provision, and it shall apply for purposes of the Plan notwithstanding any different determination that may become applicable regarding rights under WARN.

In all other respects, the terms and provisions of the Plan remain unchanged.

IN WITNESS WHEREOF, this Amendment has been executed this 20th day of January, 2009.

WILLIAMS-SONOMA, INC.
By:	/s/ Sharon L. McCollam
	Sharon L. McCollam
	Executive Vice President, Chief Operating and Chief Financial Officer (in her role as head of Human Resources)

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EX-10.62

Exhibit 10.62

WILLIAMS-SONOMA, INC.

AMENDMENT TO EMPLOYMENT AGREEMENT

This Amendment to the Agreement (the “Amendment”) is made as of November 11, 2008, by and between Williams-Sonoma, Inc. (the “Company”), and Laura Alber (the “Executive”).

RECITALS

WHEREAS, the Company and Executive entered into that certain employment Agreement dated March 19, 2001 (the “Agreement”).

WHEREAS, the Company and Executive desire to amend the Agreement to comply with the requirements of Section 409A of the Internal Revenue Code of 1986, as amended.

NOW, THEREFORE, the Company and Executive agree that in consideration of the foregoing and the promises and covenants contained herein, the parties agree as follows:

AGREEMENT

1.        The first WHEREAS clause of the Agreement is hereby amended to read in its entirety as follows:

WHEREAS, the Company presently employs the Executive as President, Williams-Sonoma, Inc.;

2.        Disability. Section 4 of the Agreement, entitled “Disability,” is hereby amended to read in its entirety as follows:

4.   Disability.  If the Company reasonably shall determine that the Executive has become physically or mentally incapable of performing her duties (“disabled”) and the Company reasonably determines that such incapacity is likely to last for a period of at least 180 days from the onset of such disability, the Company may, at its election at any time after the date of such onset while the Executive remains disabled, terminate the Executive’s employment hereunder by giving the Executive written notice of such termination, effective following the expiration of any short term disability leave (typically thirteen (13) weeks) to which Executive is entitled under the Company’s short term disability policy as in effect at such time. However, following the date of notice of such termination and during the time of such short-term disability leave, Executive shall cease to be an officer of the Company. After such short-term disability leave, Executive shall be eligible to receive any payments to which

she is entitled under the Company’s long-term disability policy, provided that she qualifies for coverage, and the Company shall have no other obligation to the Executive or her dependents other than Entitlements, Rights, accrued vacation pay and amounts due under the Company’s long-term disability plan, and any benefits offered by the Company under its then policy to employees who become disabled while employed by the Company.

3.        Termination for Good Reason or Without Cause.  Section 7 of the Agreement, entitled “Termination for Good Reason or Without Cause,” is hereby amended to read in its entirety as follows:

7. Termination for Good Reason or Without Cause.  In the event of a termination of the Executive’s employment pursuant to Section 6 hereof, or in the event the Company shall terminate the Executive’s employment without cause, then the Company shall have no obligation to Executive except as follows:

(a) The Executive shall receive her Entitlements and have her Rights. In addition, from the date of such termination until the earliest of (i) the Severance Period Termination Date, as hereinafter defined, (ii) the Executive’s death, or (iii) the Executive’s material violation of the post employment requirements of Section 8 hereof, following the date of such termination (hereinafter referred as the “Severance Period”), the Company shall make payments to the Executive in accordance with the payroll schedule applicable to officers of the Company (subject to the timing provisions of Section 15 hereof), calculated at the annual rate of base salary which the Executive was receiving immediately prior to such termination. As used herein the “Severance Period Termination Date” shall mean the first anniversary of the date of termination of Executive’s employment with the Company.

(b) During the Severance Period the Executive shall not be an employee and shall not be entitled to receive any fringes, perquisites or benefits from the Company, except the Company shall pay the premiums for her and her dependents’ health coverage under the Consolidated Omnibus Budget Reconciliation Act of 1985, as amended (“COBRA”) until the earliest of (i) the end of the usual COBRA continuation period of eighteen (18) months, or (ii) such time as she commences other employment or (iii) such time as she or a dependent, as the case may be, is no longer eligible for continued coverage under COBRA.

(c) The Company shall provide the Executive, at no cost to the Executive, with out-placement services at a level commensurate with the Executive’s position. Such outplacement services may not be incurred later than December 31 of the second year following the calendar year in which Executive’s termination occurred. The Company shall pay the cost of such outplacement services directly to the Company-selected or approved provider.

(d) The Executive shall not be required to mitigate the amount of any payment provided for in the second sentence of paragraph (a) or in paragraph, (b) by seeking other employment nor shall any amounts to be received by the Executive hereunder be reduced by any other compensation earned.

(e) The Company shall be entitled to withhold from any payments made to the Executive under this Section 7 any amounts required to be withheld by applicable federal, state or local tax law.

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4.        Section 409A.  Section 15 of the Agreement, to be entitled “Section 409A,” is hereby added to the Agreement and shall read in its entirety as follows:

15.  Section 409A.

 (a) Notwithstanding anything to the contrary in this Agreement, no Deferred Compensation Separation Benefits payable under this Agreement will be considered due or payable until and unless Executive has a “separation from service” within the meaning of Section 409A of the U.S. Internal Revenue Code of 1986, as amended and the final regulations and any guidance promulgated thereunder, as each may be amended from time to time (together, “Section 409A”). Notwithstanding anything to the contrary in this Agreement, if Executive is a “specified employee” within the meaning of Section 409A at the time of Executive’s “separation from service” other than due to Executive’s death, then any severance benefits payable pursuant to this Agreement and any other severance payments or separation benefits, that in each case when considered together may be considered deferred compensation under Section 409A (together, the “Deferred Compensation Separation Benefits”) and are otherwise due to Executive on or within the six (6) month period following Executive’s “separation from service” will accrue during such six (6) month period and will instead become payable in a lump sum payment on the date six (6) months and one (1) day following the date of Executive’s “separation from service.” All subsequent Deferred Compensation Separation Benefits, if any, will be payable in accordance with the payment schedule applicable to each payment or benefit. Each payment and benefit payable under this Agreement is intended to constitute separate payments for purposes of Section 1.409A-2(b)(2) of the Treasury Regulations.

 (b) Notwithstanding anything herein to the contrary, if Executive dies following her “separation from service” but prior to the six (6) month anniversary of the date of her “separation from service,” then any Deferred Compensation Separation Benefits delayed in accordance with this Section will be payable in a lump sum as soon as administratively practicable after the date of Executive’s death, but not later than ninety (90) days after the date of Executive’s death, and all other Deferred Compensation Separation Benefits will be payable in accordance with the payment schedule applicable to each payment or benefit.

 (c) For the avoidance of doubt, if, as a result of Executive’s death or Executive’s material violation of the post employment requirements of Section 8 hereof, the Severance Period ends prior to the payment of any Deferred Compensation Separation Benefits delayed in accordance with this Section, any Deferred Compensation Separation Benefits accrued prior to the end of the Severance Period will not be forfeited but will be paid in accordance with the timing of payment provisions of this Section.

 (d) It is the intent of this Agreement to comply with the requirements of Section 409A so that none of the severance payments and benefits to be provided hereunder will be subject to the additional tax imposed under Section 409A, and any ambiguities herein will be interpreted to so comply. The Company and Executive agree to work together in good faith to consider amendments to this Agreement and to take such reasonable actions which are necessary, appropriate or desirable to avoid imposition of any additional tax or income recognition under Section 409A prior to actual payment to Executive.

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5.        Full Force and Effect.  To the extent not expressly amended hereby, the Agreement shall remain in full force and effect.

6.        Entire Agreement.  This Amendment and the Agreement constitute the full and entire understanding and agreement between the parties with regard to the subjects hereof and thereof.

7.        Successors and Assigns.  This Amendment and the rights and obligations of the parties hereunder shall inure to the benefit of, and be binding upon, their respective successors, assigns, and legal representatives.

8.        Counterparts.  This Amendment may be executed in counterparts, all of which together shall constitute one instrument, and each of which may be executed by less than all of the parties to this Amendment.

9.        Governing Law.  This Amendment shall be governed in all respects by the internal laws of California, without regard to principles of conflicts of law.

10.        Amendment.  Any provision of this Amendment may be amended, waived or terminated by a written instrument signed by the Company and Executive.

(Signature page follows)

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IN WITNESS WHEREOF, the undersigned parties have caused this Amendment to be executed as of the date first set forth above.

LAURA ALBER	WILLIAMS-SONOMA, INC.
/s/  Laura Alber	/s/  W. Howard Lester
Signature	Signature
Laura Alber	W. Howard Lester
Print Name	Print Name
	Chairman and Chief Executive Officer
	Print Title

(Signature page to Amendment to L. Alber Agreement)

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EX-10.64

Exhibit 10.64

WILLIAMS-SONOMA, INC.

AMENDMENT TO EMPLOYMENT AGREEMENT

This Amendment to the Agreement (the “Amendment”) is made as of November 11, 2008, by and between Williams-Sonoma, Inc. (the “Company”), and Sharon L. McCollam (the “Executive”).

RECITALS

WHEREAS, the Company and Executive entered into that certain employment Agreement dated December 28, 2002 (the “Agreement”).

WHEREAS, the Company and Executive desire to amend the Agreement to comply with the requirements of Section 409A of the Internal Revenue Code of 1986, as amended.

NOW, THEREFORE, the Company and Executive agree that in consideration of the foregoing and the promises and covenants contained herein, the parties agree as follows:

AGREEMENT

1.        The first WHEREAS clause of the Agreement is hereby amended to read in its entirety as follows:

WHEREAS, the Company presently employs the Executive as Executive Vice President, Chief Operating and Chief Financial Officer;

2.        Disability.  Section 4 of the Agreement, entitled “Disability,” is hereby amended to read in its entirety as follows:

4.   Disability.  If the Company reasonably shall determine that the Executive has become physically or mentally incapable of performing her duties (“disabled”) and the Company reasonably determines that such incapacity is likely to last for a period of at least 180 days from the onset of such disability, the Company may, at its election at any time after the date of such onset while the Executive remains disabled, terminate the Executive’s employment hereunder by giving the Executive written notice of such termination, effective following the expiration of any short-term disability leave (typically thirteen (13) weeks) to which Executive is entitled under the Company’s short-term disability policy as in effect at such time. However, following the date of notice of such termination and during the time of such short-term disability leave, Executive shall cease to be an officer of the Company. After such short-term disability leave, Executive shall be eligible to receive any payments to which she is entitled under the Company’s long-term disability policy, provided that she qualifies

for coverage. Unless the Executive becomes disabled in the course of performing her duties as an officer of the Company (in which case the Company shall have the additional obligations specified in Section 7(a) the Company shall have no other obligation to the Executive or her dependents other than Entitlement, Rights, accrued vacation pay and amounts due under the Company’s long-term disability plan, and any benefits offered by the Company under its then policy to employees who become disabled while employed by the Company.

3.        Termination for Good Reason or Without Cause.  Section 7 of the Agreement, entitled “Termination for Good Reason or Without Cause,” is hereby amended to read in its entirety as follows:

7. Termination for Good Reason or Without Cause.  In the event of a termination of the Executive’s employment pursuant to Section 6 hereof, or in the event the Company shall terminate the Executive’s employment without cause, or, in the event the Executive dies or terminates due to becoming disabled during the course of performance of her duties as an officer of the Company, then the Company shall have no obligation to Executive except as follows:

(a) The Executive shall receive her Entitlements and have her Rights. In addition, from the date of such termination until the earliest of (i) the Severance Period Termination Date, as hereinafter defined, or (ii) the Executive’s material violation of the post employment requirements of Section 8 hereof, following the date of such termination (hereinafter referred as the “Severance Period”), the Company shall (x) make payments to the Executive in accordance with the payroll schedule applicable to officers of the Company (subject to the timing provisions of Section 17 hereof), calculated at the annual rate of base salary which the Executive was receiving immediately prior to such termination, plus (y) provide Executive with an additional lump sum payment equal to eighty percent (80%) of Executive’s annual base salary as in effect immediately prior to such termination, payable, subject to the timing provisions of Section 17, on or within fifteen (15) days of such termination. As used herein the “Severance Period Termination Date” shall mean the first anniversary of the date of termination of Executive’s employment with the Company.

(b) During the Severance Period the Executive shall not be an employee and shall not be entitled to receive any fringes, perquisites or benefits from the Company, except the Company shall pay the premiums for her and her dependents’ health coverage under the Consolidated Omnibus Budget Reconciliation Act of 1985, as amended (“COBRA”) until the earliest of (i) the end of the usual COBRA continuation period of eighteen (18) months, or (ii) such time as she commences other employment or (iii) such time as she or a dependent, as the case may be, is no longer eligible for continued coverage under COBRA.

(c) The Company shall provide the Executive, at no cost to the Executive, with out-placement services at a level commensurate with the Executive’s position. Such outplacement services may not be incurred later than December 31 of the second year following the calendar year in which Executive’s termination occurred. The Company shall pay the cost of such outplacement services directly to the Company-selected or approved provider.

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(d) The Executive shall not be required to mitigate the amount of any payment provided for in the second sentence of paragraph (a) or in paragraph, (b) by seeking other employment nor shall any amounts to be received by the Executive hereunder be reduced by any other compensation earned.

(e) The Company shall be entitled to withhold from any payments made to the Executive under this Section 7 any amounts required to be withheld by applicable federal, state or local tax law.

4.        Section 409A.  Section 17 of the Agreement, to be entitled “Section 409A,” is hereby added to the Agreement and shall read in its entirety as follows:

17.  Section 409A.

 (a) Notwithstanding anything to the contrary in this Agreement, no Deferred Compensation Separation Benefits payable under this Agreement will be considered due or payable until and unless Executive has a “separation from service” within the meaning of Section 409A of the U.S. Internal Revenue Code of 1986, as amended and the final regulations and any guidance promulgated thereunder, as each may be amended from time to time (together, “Section 409A”). Notwithstanding anything to the contrary in this Agreement, if Executive is a “specified employee” within the meaning of Section 409A at the time of Executive’s “separation from service” other than due to Executive’s death, then any severance benefits payable pursuant to this Agreement and any other severance payments or separation benefits, that in each case when considered together may be considered deferred compensation under Section 409A (together, the “Deferred Compensation Separation Benefits”) and are otherwise due to Executive on or within the six (6) month period following Executive’s “separation from service” will accrue during such six (6) month period and will instead become payable in a lump sum payment on the date six (6) months and one (1) day following the date of Executive’s “separation from service.” All subsequent Deferred Compensation Separation Benefits, if any, will be payable in accordance with the payment schedule applicable to each payment or benefit. Each payment and benefit payable under this Agreement is intended to constitute separate payments for purposes of Section 1.409A-2(b)(2) of the Treasury Regulations.

 (b) Notwithstanding anything herein to the contrary, if Executive dies following her “separation from service” but prior to the six (6) month anniversary of the date of her “separation from service,” then any Deferred Compensation Separation Benefits delayed in accordance with this Section will be payable in a lump sum as soon as administratively practicable after the date of Executive’s death, but not later than ninety (90) days after the date of Executive’s death, and all other Deferred Compensation Separation Benefits will be payable in accordance with the payment schedule applicable to each payment or benefit.

 (c) For the avoidance of doubt, if, as a result of Executive’s material violation of the post employment requirements of Section 8 hereof, the Severance Period ends prior to the payment of any Deferred Compensation Separation Benefits delayed in accordance with this Section, any Deferred Compensation Separation Benefits accrued prior to the end of the Severance Period will not be forfeited but will be paid in accordance with the timing of payment provisions of this Section.

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 (d) It is the intent of this Agreement to comply with the requirements of Section 409A so that none of the severance payments and benefits to be provided hereunder will be subject to the additional tax imposed under Section 409A, and any ambiguities herein will be interpreted to so comply. The Company and Executive agree to work together in good faith to consider amendments to this Agreement and to take such reasonable actions which are necessary, appropriate or desirable to avoid imposition of any additional tax or income recognition under Section 409A prior to actual payment to Executive.

5.        Full Force and Effect.  To the extent not expressly amended hereby, the Agreement shall remain in full force and effect.

6.        Entire Agreement.  This Amendment and the Agreement constitute the full and entire understanding and agreement between the parties with regard to the subjects hereof and thereof.

7.        Successors and Assigns.  This Amendment and the rights and obligations of the parties hereunder shall inure to the benefit of, and be binding upon, their respective successors, assigns, and legal representatives.

8.        Counterparts.  This Amendment may be executed in counterparts, all of which together shall constitute one instrument, and each of which may be executed by less than all of the parties to this Amendment.

9.        Governing Law.  This Amendment shall be governed in all respects by the internal laws of California, without regard to principles of conflicts of law.

10.        Amendment.  Any provision of this Amendment may be amended, waived or terminated by a written instrument signed by the Company and Executive.

(Signature page follows)

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IN WITNESS WHEREOF, the undersigned parties have caused this Amendment to be executed as of the date first set forth above.

SHARON L. MCCOLLAM	WILLIAMS-SONOMA, INC.
/s/  Sharon L. McCollam	/s/  W. Howard Lester
Signature	Signature
Sharon L. McCollam	W. Howard Lester
Print Name	Print Name
	Chairman and Chief Executive Officer
	Print Title

(Signature page to Amendment to S. McCollam Agreement)

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EX-21.1

Exhibit 21.1

SUBSIDIARIES

Subsidiary Name	Jurisdiction/Date of Incorporation
Williams-Sonoma Stores, Inc.	California, October 11, 1984
Pottery Barn, Inc.	California, August 18, 1986
Williams-Sonoma Home, Inc. (f.k.a. Chambers Catalog Company, Inc.)	California, February 1, 1995
Pottery Barn Kids, Inc.	California, June 23, 1998
Williams-Sonoma Stores, LLC	Delaware, July 29, 1998
Williams-Sonoma Retail Services, Inc.	California, January 25, 1999
Williams-Sonoma Direct, Inc.	California, August 9, 1999
Williams-Sonoma DTC, Inc. (f.k.a. Williams-Sonoma Publishing, Inc.)	California, October 26, 2000
West Elm, Inc.	California, January 17, 2001
Pottery Barn Teen, Inc.	California, August 16, 2002
Williams-Sonoma Canada, Inc.	Canada, June 13, 2003
Williams-Sonoma Gift Management, Inc.	Virginia, January 22, 2004
Williams-Sonoma Sourcing, Inc.	California, January 4, 2007
Williams-Sonoma UK Limited	United Kingdom, January 9, 2007
Williams-Sonoma Italy S.r.l.	Italy, February 7, 2007
Williams-Sonoma France SARL	France, February 20, 2007
Sutter Street Manufacturing, Inc.	California, September 13, 2007
Williams-Sonoma Singapore Pte. Ltd.	Singapore, November 4, 2008
3229869 Nova Scotia Company	Nova Scotia, January 23, 2009

EX-23.1

Exhibit 23.1

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We consent to the incorporation by reference in Registration Statements No. 2-89801, No. 33-28490, No. 33-33693, No. 33-60787, No. 33-65656, No. 333-48247, No. 333-39811, No. 333-58833, No. 33-82205, No. 333-48750, No. 333-58026, No. 333-105726, No. 333-134897 and No. 333-118351 on Form S-8 of our report dated April 2, 2009, relating to the consolidated financial statements of Williams-Sonoma, Inc. and subsidiaries, and the effectiveness of the Company’s internal control over financial reporting (which expresses an unqualified opinion and includes an explanatory paragraph related to the adoption of a new accounting pronouncement), appearing in this Annual Report on Form 10-K of Williams-Sonoma, Inc. for the year ended February 1, 2009.

/s/ DELOITTE & TOUCHE LLP

San Francisco, California

April 2, 2009

EX-31.1

Exhibit 31.1

CERTIFICATION

I, W. Howard Lester, certify that:

1. I have reviewed this Annual Report on Form 10-K of Williams-Sonoma, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: April 2, 2009

By:	/s/    W. HOWARD LESTER
	W. Howard Lester
	Chief Executive Officer

EX-31.2

Exhibit 31.2

CERTIFICATION

I, Sharon L. McCollam, certify that:

1. I have reviewed this Annual Report on Form 10-K of Williams-Sonoma, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: April 2, 2009

By:	/s/    SHARON L. MCCOLLAM
	Sharon L. McCollam Executive Vice President, Chief Operating and Chief Financial Officer

EX-32.1

Exhibit 32.1

CERTIFICATION BY CHIEF EXECUTIVE OFFICER

PURSUANT TO 18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report on Form 10-K for the period ended February 1, 2009 of Williams-Sonoma, Inc. (the “Company”) as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, W. Howard Lester, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

1. The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company as of and for the periods presented in the Report.

By:	/s/ W. Howard Lester
	W. Howard Lester
	Chief Executive Officer

Date: April 2, 2009

EX-32.2

Exhibit 32.2

CERTIFICATION BY CHIEF FINANCIAL OFFICER

PURSUANT TO 18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report on Form 10-K for the period ended February 1, 2009 of Williams-Sonoma, Inc. (the “Company”) as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Sharon L. McCollam, Executive Vice President, Chief Operating and Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

1. The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company as of and for the periods presented in the Report.

By:	/s/ Sharon L. McCollam
	Sharon L. McCollam
	Executive Vice President,
	Chief Operating and Chief Financial Officer

Date: April 2, 2009