10-Q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(MARK ONE)

ý	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the quarterly period ended October 30, 2004
	or
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the transition period from                     to

Commission File Number: 000-24261

RESTORATION HARDWARE, INC.

(Exact name of registrant as specified in its charter)

DELAWARE	68-0140361
(State or other jurisdiction of incorporation or organization)	(IRS Employer Identification No.)
15 KOCH ROAD, SUITE J, CORTE MADERA, CA  94925
(Address of principal executive offices)                (Zip Code)

(415) 924-1005

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirement for the past 90 days.

Yes ý     No o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Yes ý     No o

As of November 29, 2004, 33,047,409 shares of the registrant’s common stock, $0.0001 par value per share, were outstanding.

FORM 10-Q

FOR THE QUARTER ENDED October 30, 2004

TABLE OF CONTENTS

PART I.	FINANCIAL INFORMATION
Item 1.	Financial Statements (Unaudited)
	Condensed Consolidated Balance Sheets as of October 30, 2004, January 31, 2004, and November 1, 2003 (as restated)
	Condensed Consolidated Statements of Operations for the third quarter and nine months ended October 30, 2004 and November 1, 2003
	Condensed Consolidated Statements of Cash Flows for the nine months ended October 30, 2004 and November 1, 2003
	Notes to Condensed Consolidated Financial Statements
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 3.	Quantitative and Qualitative Disclosures About Market Risk
Item 4.	Controls and Procedures
PART II.	OTHER INFORMATION
Item 1.	Legal Proceedings
Item 6.	Exhibits
SIGNATURES
EXHIBIT INDEX.

2

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements.

RESTORATION HARDWARE, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Dollars in thousands, except share data)

(Unaudited)

	October 30, 2004				January 31, 2004				November 1, 2003
ASSETS
Current assets:
Cash and cash equivalents	$		1,692		$		2,003		$	3,237
Accounts receivable	6,305				5,745				5,911
Merchandise inventories	157,457				102,926				122,810
Prepaid expense and other current assets	21,016				16,968				16,330
Total current assets	186,470				127,642				148,288
Property and equipment, net	82,701				83,518				84,170
Goodwill	4,560				4,560				4,560
Deferred tax asset	15,194				15,138				15,450
Other assets	7,947				1,422				8,901
Total assets	$	296,872			$	232,280			$		261,369
LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable and accrued expenses	$		65,949		$	45,292			$		46,909
Line of credit, net of debt issuance costs (as restated for November 1, 2003, see Note 2)	64,206				10,286				45,891
Deferred revenue and customer deposits	7,446				7,231				7,864
Other current liabilities	12,247				11,438				9,744
Total current liabilities	149,848				74,247				110,408
Deferred lease incentives	30,513				33,999				35,677
Deferred rent	15,053				14,455				14,554
Other long-term obligations	196				352				155
Total liabilities	195,610				123,053				160,794
Series A redeemable convertible preferred stock, $.0001 par value, 28,037 shares designated, 8,473, 8,683 and 8,683 shares issued and outstanding at October 30, 2004, January 31, 2004 and November 1, 2003, respectively, aggregate liquidation preference and redemption value of $10,429 at October 30, 2004	8,331				8,541				8,541
Stockholders’ equity:
Common stock, $.0001 par value; 60,000,000 shares authorized; 33,025,509, 32,768,065 and 32,718,511 issued and outstanding at October 30, 2004, January 31, 2004 and November 1, 2003, respectively	3				3				3
Additional paid-in capital	158,912				158,174				157,663
Unearned compensation	(22			)	(234			)	(284			)
Accumulated other comprehensive income	1,441				1,040				841
Accumulated deficit	(67,403			)	(58,297			)	(66,189			)
Total stockholders’ equity	92,931				100,686				92,034
Total liabilities, redeemable convertible preferred stock and stockholders’ equity	$		296,872		$	232,280			$		261,369

See Notes to Condensed Consolidated Financial Statements.

3

RESTORATION HARDWARE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Dollars in thousands, except per share amounts)

(Unaudited)

	Third Quarter								First Nine Months
	Fiscal 2004				Fiscal 2003				Fiscal 2004			Fiscal 2003
Net revenue	$	118,165			$	95,814			$	337,965		$	273,553
Cost of revenue and occupancy	80,196				67,027				240,269			200,012
Gross profit	37,969				28,787				97,696			73,541
Selling, general and administrative expense	42,511				33,031				111,199			89,922
Loss from operations	(4,542			)	(4,244			)	(13,503		)	(16,381		)
Interest expense, net	(737			)	(519			)	(1,673		)	(1,674		)
Loss before income taxes	(5,279			)	(4,763			)	(15,176		)	(18,055		)
Income tax benefit	2,161				1,905				6,070			7,222
Net loss	$		(3,118	)	$		(2,858	)	$	(9,106	)	$	(10,833	)
Loss per share of common stock, basic and diluted	$		(0.09	)	$		(0.09	)	$	(0.28	)	$	(0.36	)
Weighted average shares outstanding, basic and diluted	33,017				30,602				32,904			30,246

See Notes to Condensed Consolidated Financial Statements.

4

RESTORATION HARDWARE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in thousands)

(Unaudited)

	First Nine Months
	Fiscal 2004			Fiscal 2003
Cash flows from operating activities:
Net loss	$	(9,106	)	$	(10,833	)
Adjustments to reconcile net loss to net cash used by operating activities:
Depreciation and amortization	11,747			14,154
Changes in operating assets and liabilities:
Accounts receivable	(560		)	(2,559		)
Merchandise inventories	(54,531		)	(28,310		)
Prepaid expense and other current assets	(4,048		)	(2,249		)
Deferred tax and other assets	(6,581		)	(6,326		)
Accounts payable and accrued expenses	20,657			11,260
Deferred revenue and customer deposits	215			1,818
Other current liabilities	809			598
Deferred rent	598			391
Deferred lease incentives and other long-term liabilities	(3,486		)	(3,432		)
Net cash used by operating activities	(44,286		)	(25,488		)
Cash flows from investing activities:
Capital expenditures	(10,090		)	(6,817		)
Net cash used by investing activities	(10,090		)	(6,817		)
Cash flows from financing activities:
Borrowings under line of credit, net	53,555			31,368
(Repayments) borrowings of other long-term obligations	(156		)	11
Proceeds received from stockholder settlement	—			1,050
Issuance of common stock	528			948
Net cash provided by financing activities	53,927			33,377
Effects of foreign currency exchange rate translation on cash	138			535
Net (decrease) increase in cash and cash equivalents	(311		)	1,607
Cash and cash equivalents:
Beginning of period	2,003			1,630
End of period	$	1,692		$	3,237
Additional cash flow information:
Cash paid during the period for interest	$	1,332		$	1,116
Cash paid during the period for taxes	593			150
Non-cash transactions:
Conversion of preferred stock to common stock	$	210		$	4,787

See Notes to Condensed Consolidated Financial Statements.

5

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.

1. NATURE OF BUSINESS AND BASIS OF PRESENTATION

Nature of Business

Restoration Hardware, Inc., a Delaware corporation, and its subsidiaries (collectively, the “Company”) is a specialty retailer of high-quality home furnishings, functional and decorative hardware, bath ware and bath fixtures and related merchandise that reflects its classic and authentic American point of view. These products are sold through retail locations, catalogs and the Internet. As of October 30, 2004, the Company operated 102 retail stores in 30 states, the District of Columbia and Canada.

Basis of Presentation

The accompanying interim condensed consolidated financial statements have been prepared from the Company’s records without audit and, in management’s opinion, include all adjustments (consisting of only normal recurring adjustments) necessary to present fairly the financial position at October 30, 2004, January 31, 2004 and November 1, 2003, results of operations for the third quarters and nine months ended October 30, 2004 and November 1, 2003, respectively, cash flows for the nine months ended October 30, 2004 and November 1, 2003, respectively. The balance sheet at January 31, 2004, as presented, has been derived from the Company’s audited financial statements for the fiscal year then ended.

Accounting policies followed by the Company are described in Note 1 to the audited consolidated financial statements included in the Company’s Form 10-K, for the fiscal year ended January 31, 2004 (“fiscal 2003”). Certain information and disclosures normally included in the notes to annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted for purposes of the interim condensed consolidated financial statements. The interim condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements, including the notes, for fiscal 2003.

The results of operations for the third quarter and nine months ended October 30, 2004, presented in this Form 10-Q are not necessarily indicative of the results to be expected for the full year.

Certain reclassifications have been made to the prior year financial statements in order to conform to the current year presentation.

Stock-based Compensation

The Company accounts for stock-based employee compensation using the intrinsic value method in accordance with the provisions of Accounting Principals Board Opinion No. 25, “Accounting for Stock Issued to Employees.” The following table illustrates the effect on net loss and loss per share of common stock if the Company had applied the fair value recognition provisions of Statement of Financial Accounting Standards (“SFAS”) No. 123, “Accounting for Stock-Based Compensation,” to all stock-based employee compensation:

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	Third Quarter						First Nine Months
(Dollars in thousands, except share data)	Fiscal 2004			Fiscal 2003			Fiscal 2004			Fiscal 2003
Net loss as reported	$	(3,118	)	$	(2,858	)	$	(9,106	)	$	(10,833	)
Add: Stock-based employee compensation expense for all options granted below fair market value included in reported net loss (net of tax)	23			75			127			225
Deduct: Compensation expense for all stock-based employee compensation (net of tax) calculated in accordance with the fair value method	(968		)	(540		)	(2,549		)	(1,515		)
Pro forma net loss	$	(4,063	)	$	(3,323	)	$	(11,528	)	$	(12,123	)
Loss per share of common stock:
Basic and diluted, as reported	$	(0.09	)	$	(0.09	)	$	(0.28	)	$	(0.36	)
Basic and diluted, pro forma	$	(0.12	)	$	(0.11	)	$	(0.35	)	$	(0.40	)

Comprehensive Loss

Comprehensive loss consists of net loss and foreign currency translation adjustments.  The components of comprehensive loss for the third quarters and nine months ended October 30, 2004 and November 1, 2003, respectively, are as follows:

	Third Quarter							First Nine Months
	Fiscal 2004				Fiscal 2003			Fiscal 2004			Fiscal 2003
	(In thousands)
Components of comprehensive loss:
Net loss	$	(3,118		)	$	(2,858	)	$	(9,106	)	$	(10,833	)
Foreign currency translation adjustment	435				410			401			973
Total comprehensive loss	$		(2,683	)	$	(2,448	)	$	(8,705	)	$	(9,860	)

2.  LINE OF CREDIT, NET

As of October 30, 2004, the Company’s revolving credit facility provided for an overall commitment of $100.0 million. The revolving credit facility was amended in June 2004 to provide for additional borrowing capacity, reduced borrowing rates and elimination of limitations on capital expenditures and store openings. In support of continued growth of the Company, the amendment increased the initial available commitment to $100.0 million, and further allows the Company to request and receive incremental increases beyond the initial available commitment of $100.0 million up to a maximum commitment of $150.0 million, provided no default or event of default exists and certain other conditions are met.  The amendment also increased the amount available for letters of credit from $30.0 million to $50.0 million and modified certain other terms in the revolving credit facility, which had the effect of expanding the borrowing base.

As of October 30, 2004, $64.2 million was outstanding under the line of credit, net of unamortized debt issuance costs of $0.8 million, and there was $18.9 million in outstanding letters of credit.  Borrowings made under the revolving credit facility are subject to interest at either the bank’s reference rate or LIBOR plus a margin. As of October 30, 2004, the bank’s reference rate was 5.25% and the LIBOR plus margin rate was 4.06%. The availability of credit at any given time under the revolving credit facility is limited by reference to a borrowing base formula based upon numerous factors, including the value of eligible inventory and eligible accounts receivable, and reserves established by the agent of the revolving credit facility.  The revolving credit facility is structured to increase availability to meet seasonal needs. As a result of the borrowing base formula, the actual borrowing availability under the revolving credit facility could be less than the stated amount of the revolving credit facility reduced by the actual borrowings and outstanding letters of credit.

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The revolving credit facility contains various restrictive covenants, including limitations on the ability to incur additional debt, acquisition of other businesses and payment of dividends and other distributions.  The revolving credit facility does not contain any other significant financial or coverage ratio covenants, nor does the revolving credit facility require the Company to repay all borrowings for a proscribed “clean-up” period each year.

The Company’s revolving credit facility requires a lock-box arrangement, which provides for all receipts to be swept daily to reduce borrowings outstanding under the revolving credit facility.  This arrangement, combined with the existence of a subjective acceleration clause in the revolving credit facility, necessitates that the revolving credit facility be classified a current liability on the balance sheet pursuant to guidance in the Financial Accounting Standards Board’s Emerging Issues Task Force Issue No. 95-22, “Balance Sheet Classification of Borrowings Outstanding under Revolving Credit Agreements That Include both a Subjective Acceleration Clause and a Lock-Box Arrangement.”  The acceleration clause allows the Company’s lenders to forego additional advances should they determine there has been a material adverse change in the Company’s operations, business, properties, assets, liabilities, condition or prospects or a material adverse change in its financial position or prospects reasonably likely to result in a material adverse effect on the Company’s business, condition (financial or otherwise), operations, performance or properties.  Management believes that no such material adverse change has occurred; further, at October 30, 2004, the Company’s lenders had not informed the Company that any such event had occurred.  The revolving credit facility expires in June 2006.  Management believes that it will continue to borrow on the line of credit to fund its operations over the term of the revolving credit facility.   The November 1, 2003 balance sheet has been restated to classify as a current liability $45.9 million of borrowings under the revolving credit facility, which was previously reported as a long-term liability.

3.  INCOME TAXES

SFAS No. 109, “Accounting for Income Taxes,” requires income taxes to be accounted for under an asset and liability approach that requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in the Company’s financial statements or tax returns. In estimating future tax consequences, the Company generally takes into account all expected future events then known to it, other than changes in the tax law or rates, which are not permitted to be considered. Accordingly, the Company records a valuation allowance to reduce its deferred tax assets to the amount that is more likely than not to be realized. The amount of valuation allowance is based upon management’s best estimate of the recoverability of its deferred tax assets. While future taxable income and ongoing prudent and feasible tax planning are considered in determining the amount of the valuation allowance, this allowance is subject to adjustment in the future.  Specifically, in the event the Company was to determine that it would be able to realize its deferred tax assets in the future in excess of their net recorded amounts, an adjustment to the deferred tax assets would increase income in the period such determination was made.  Likewise, should the Company determine that it would not be able to realize all or part of its net deferred tax assets in the future, an adjustment to the deferred tax assets would be charged to income in the period such determination was made.

As of October 30, 2004 and January 31, 2004, the Company recorded net deferred tax assets totaling $21.2 million, which primarily represent the income tax benefit associated with losses reported in prior years.  These losses are subject to federal and state carry-forward provisions of up to 20 years.  As of October 30, 2004 and January 31, 2004, the Company concluded that the net deferred tax asset balances of $21.2 million were more likely than not to be recovered.  If the Company is not able to achieve positive operating results in the near future, a valuation allowance may need to be recorded.  The Company recorded income tax benefits of $2.2 million and $6.1 million for the third quarter and first nine months of fiscal 2004, respectively, which are included in Other Assets on the balance sheet.

4. LOSS PER SHARE OF COMMON STOCK

Basic loss per share of common stock is computed by dividing net loss by the weighted average number of shares of common stock outstanding for the period. Diluted loss per share of common stock is computed by dividing net loss by the weighted average number of shares of common stock and potentially dilutive common stock equivalents outstanding during the period. Diluted loss per share of common stock reflects the potential dilution that could occur if options or warrants to issue common stock were exercised, or preferred stock was converted into common stock. The following table details potential dilutive effects of the weighted average number of certain common stock equivalents that have been excluded from diluted loss per share of common stock, because their inclusion would be anti-dilutive, since the Company experienced a net loss in each of the third quarters and first nine months of fiscal 2004 and 2003, respectively:

8

	Third Quarter		First Nine Months
	Fiscal 2004	Fiscal 2003	Fiscal 2004	Fiscal 2003
Common stock issuable upon conversion of the Series A preferred stock	4,260,572	6,431,752	4,314,982	6,656,027
Common stock subject to outstanding stock options	597,109	875,438	631,949	439,910
Total	4,857,681	7,307,190	4,946,931	7,095,937

The above stock options represent only those stock options whose exercise prices are less than the average market price of the stock for the periods.  The stock options whose exercise prices exceeded the average market price of the stock for the periods are 4,754,306 and 1,776,495 for the third quarters of fiscal 2004 and 2003, respectively, and 4,143,719 and 2,682,336 for the first nine months of fiscal 2004 and 2003, respectively.

5. SEGMENT REPORTING

The Company classifies its business into two identifiable segments: retail and direct-to-customer.  Segment income from operations consists of both direct-to-customer contribution and retail store contribution after district and regional management.  The unallocated portion includes both the costs of corporate expenses as well as unallocated costs of merchandising, sourcing and distribution.  The Company also has a wholly owned furniture manufacturing company located in Sacramento, California, The Michaels Furniture Company, Inc. (“Michaels”).  Michaels revenue is recorded as either retail revenue or direct-to-customer revenue based on the channel in which the sale was initiated, and management decisions on resource allocation and performance assessment are made based on these two identifiable segments.  As a result, management considers it is more appropriate to report its business activities into two rather than three identifiable segments.  The Company evaluates performance and allocates resources based on results from operations, which excludes unallocated costs. Certain segment information, including segment assets, asset expenditures and related depreciation expense, is not presented as all of the Company’s assets are commingled and are not available by segment.

Financial information for the Company’s business segments is as follows:

	Third Quarter						First Nine Months
(In thousands)	Fiscal 2004			Fiscal 2003			Fiscal 2004			Fiscal 2003
Net Revenue:
Retail	$	89,747		$	79,858		$	259,094		$	232,215
Direct-to-customer	28,418			15,956			78,871			41,338
Consolidated net revenue	$	118,165		$	95,814		$	337,965		$	273,553
	Third Quarter						First Nine Months
	Fiscal 2004			Fiscal 2003			Fiscal 2004			Fiscal 2003
Income (loss) from operations:
Retail	$	8,146		$	4,917		$	20,995		$	13,936
Direct-to-customer	1,867			1,091			9,423			4,387
Unallocated	(14,555		)	(10,252		)	(43,921		)	(34,704		)
Consolidated loss from operations	$	(4,542	)	$	(4,244	)	$	(13,503	)	$	(16,381	)

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Item 2. Management’s Discussion And Analysis Of Financial Condition And Results Of Operations

OVERVIEW

Our Company, Restoration Hardware, Inc. (Nasdaq: RSTO), together with our subsidiaries, is a specialty retailer of high quality home furnishings, bath fixtures and bath ware, functional and decorative hardware and related merchandise that reflects our classic and authentic American point of view. We commenced business in 1979 as a purveyor of fittings and fixtures for older homes. Since then, we have evolved into a unique home furnishings retailer offering consumers an array of distinctive, high quality and often hard-to-find merchandise.  Our core merchandise offerings include premium textiles, bath fixtures and hardware, lighting, decorative accessories and furniture. We market our merchandise through retail locations, mail order catalogs and on the Internet at www.restorationhardware.com.

Our merchandise strategy and our stores’ architectural style create a unique and attractive selling environment designed to appeal to an affluent, well educated 35 to 60 year old customer. Over the next decade, we believe the fastest growing segment of the U.S. population will be 45 to 60 year olds. We believe that as these customers evolve, so will their purchasing needs and desires. We believe that our products can fulfill their aspirations to have homes designed with a high quality, classic and timeless style. Our plan is to fill the void in the marketplace above the current home lifestyle retailers, and below the interior design trade, by providing products targeted to 35 to 60 year olds and centered around our core businesses that reflect a predictable, high-quality promise to our customers.

We operate on a 52-53 week fiscal year ending on the Saturday closest to January 31st.  Our current fiscal year is 52 weeks and ends on January 29, 2005 (“fiscal 2004”) and the prior fiscal year was 52 weeks and ended on January 31, 2004 (“fiscal 2003”).

As of October 30, 2004, we operated 102 stores in 30 states, the District of Columbia and Canada. In addition to our retail stores, we operate a direct-to-customer sales channel that includes both catalog and Internet, and a wholly owned furniture manufacturer.

During the third quarter of fiscal 2004, we reopened one store that had previously been closed for expansion.  We did not open any new stores nor close any existing stores during the third quarter, but we did open one new outlet store during the fourth quarter of fiscal year 2004. While we do not currently have any reserves established for store closures, we periodically make judgments about which stores we should close and which stores we should continue to operate.  A material decline in sales and other adverse conditions resulting from our failure to accurately anticipate changes in merchandise trends and consumer demands may cause us to close under-performing stores.

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The following table sets forth for the periods indicated the amount and percentage of net revenue represented by certain line items in our Condensed Consolidated Statements of Operations.

(Dollars in thousands, except per share data)	Third Quarter Fiscal 2004			% of Net Revenue		Third Quarter Fiscal 2003			% of Net Revenue		First Nine Months Fiscal 2004			% of Net Revenue		First Nine Months Fiscal 2003			% of Net Revenue
Retail net revenue	$	89,747		76.0	%	$	79,858		83.3	%	$	259,094		76.7	%	$	232,215		84.9	%
Direct-to-customer net revenue	28,418			24.0		15,956			16.7		78,871			23.3		41,338			15.1
Net revenue	118,165			100.0		95,814			100.0		337,965			100.0		273,553			100.0
Cost of revenue and occupancy	80,196			67.9		67,027			70.0		240,269			71.1		200,012			73.1
Gross profit	37,969			32.1		28,787			30.0		97,696			28.9		73,541			26.9
Selling, general and administrative expense	42,511			35.9		33,031			34.5		111,199			32.9		89,922			32.9
Loss from operations	(4,542		)	(3.8	)	(4,244		)	(4.5	)	(13,503		)	(4.0	)	(16,381		)	(6.0	)
Interest expense, net	(737		)	(0.6	)	(519		)	(0.5	)	(1,673		)	(0.5	)	(1,674		)	(0.6	)
Loss before income taxes	(5,279		)	(4.4	)	(4,763		)	(5.0	)	(15,176		)	(4.5	)	(18,055		)	(6.6	)
Income tax benefit	2,161			1.8		1,905			2.0		6,070			1.8		7,222			2.6
Net loss	$	(3,118	)	(2.6	)	$	(2,858	)	(3.0	)	$	(9,106	)	(2.7	)	$	(10,833	)	(4.0	)
Loss per share of common stock — basic and diluted	$	(0.09	)			$	(0.09	)			$	(0.28	)			$	(0.36	)

Loss from operations increased to $4.5 million for the third quarter of fiscal 2004 as compared to a loss from operations of $4.2 million for the third quarter of fiscal 2003. Net loss was $0.09 per share of common stock, or $3.1 million, for the third quarter of fiscal 2004, compared to a net loss of $0.09 per share of common stock, or $2.9 million, for the third quarter of fiscal 2003.

Loss from operations improved to $13.5 million for the first nine months of fiscal 2004 as compared to a loss from operations of $16.4 million for the first nine months of fiscal 2003. Net loss was $0.28 per share of common stock, or $9.1 million, for the first nine months of fiscal 2004, compared to a net loss of $0.36 per share of common stock, or $10.8 million, for the first nine months of fiscal 2003.

While net revenue increased 23% in the third quarter, as compared to the same period of fiscal 2003, operating results declined slightly as compared to the prior year quarter primarily due to higher advertising, distribution and compliance costs, which more than offset improvements in product margins. Total selling, general and administrative expense increased $9.5 million during the third quarter of fiscal 2004 as compared to the same period in the prior year, or 140 basis points, when stated as a percent of net revenue.  The largest portion of this increase is attributable to a combination of higher advertising costs associated with circulating our catalog coupled with the costs of our initial brand advertising campaign.  Revenue for the second fall catalog book drop fell substantially short of expectations, as we underestimated the influence on prior year sales of the promotional nature of the related book.  This had the effect of deleveraging selling, general and administrative expense, negatively impacting results for the quarter by approximately $1 million.  There were also increases in payroll expenses and professional fees, as well as other selling related expenses.  In addition, we experienced higher costs during the third quarter of fiscal 2004 associated with our distribution and supply chain activities.  This includes increases in freight costs as well as costs associated with investment in process improvement efforts including related temporary labor costs and consultants that had been retained to manage those operations. Those costs are reflected in cost of revenue and occupancy on our Condensed Consolidated Statements of Operations and are reflected in unallocated costs in footnote 5 to the financial statements, Segment Reporting.

On a year to date basis, the $2.9 million improvement in operating results for the first nine months of fiscal 2004 compared to the first nine months of the prior fiscal year resulted primarily from a $64.4 million, or 24%, increase in net

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revenue as a result of increases in both our retail and direct-to-customer divisions, partially offset by a $40.3 million increase in cost of revenue and occupancy incurred to support this revenue growth, and a $21.3 million increase in selling, general and administrative expense. Net revenue growth for the first nine months of fiscal 2004, coupled with improved product margins, drove improvement in our results.  Selling, general and administrative expense, expressed as a percent of net revenue for the first nine months of fiscal 2004 remained unchanged from the prior year period at 32.9% of net revenue. The $21.3 million increase in selling, general and administrative expense was primarily due to an increase in advertising expenses as well as increases in store and direct-to-customer selling expenses.  Year to date results have also been negatively affected by higher costs of our distribution and supply chain activities which costs are reflected in cost of revenue and occupancy on our Condensed Consolidated Statements of Operations.

The increases in our net revenue resulted from continued growth of our direct-to-customer business, which increased $12.5 million, or 78%, in the third quarter of fiscal 2004 as compared to the third quarter of fiscal 2003, and $37.5 million, or 91%, in the first nine months of fiscal 2004 as compared to the first nine months of fiscal 2003.  The revenue growth was also due to an increase in comparable store sales of 8.7% and 9.0%, for the third quarter and first nine months of fiscal 2004, respectively. The increases in net revenue in both our retail and direct-to-customer channels can be partially attributed to our catalog, which is our primary advertising vehicle.

Additionally, during both the third quarter and first nine months of fiscal 2004, our results were impacted by professional fees associated with the implementation of the requirements of the Sarbanes-Oxley Act of 2002, in particular, with respect to Section 404 requiring management to report on, and our independent registered public accounting firm to attest to, the effectiveness of our internal control over financial reporting. Those costs, reflected in selling, general and administrative expense, amounted to approximately $0.5 million in the third quarter of fiscal 2004 and approximately $1 million in the first nine months of fiscal 2004.

Our business is highly seasonal, which reflects a general pattern in the retail industry wherein the highest sales and earnings occur during the holiday season. Historically, a significant portion of our sales are in the fourth fiscal quarter. In our peak holiday selling season, we incur significant additional expenses in connection with, among other things, the hiring of additional seasonal employees in our retail stores and the production and mailing of a higher volume of our catalogs.

REVENUE

Retail Net Revenue

	Third Quarter								First Nine Months
(Dollars in thousands)	Fiscal 2004				Fiscal 2003				Fiscal 2004				Fiscal 2003
Retail net revenue	$	89,747			$	79,858			$	259,094			$	232,215
Retail net revenue growth percentage	12			%	—			%	12			%	6		%
Comparable store sales growth	8.7			%	2.9			%	9.0			%	8.0		%
Income from operations	$		8,146		$		4,917		$		20,995		$	13,936
Income from operations – percent of net revenue	9.1			%	6.2			%	8.1			%	6.0		%
Number of stores at beginning of period	102				102				103				105
Number of stores opened	—				2				1				2
Number of stores closed	—				(1			)	(2			)	(4		)
Number of stores at end of period	102				103				102				103
Store selling square feet at end of period	673,910				675,585				673,910				675,585

Retail net revenue for the third quarter of fiscal 2004 increased by $9.9 million, or 12%, as compared to the third quarter of fiscal 2003 primarily due to a $6.7 million, or 8.7%, increase in comparable store sales.   Retail net revenue for the first nine months of fiscal 2004 increased by $26.9 million, or 12%, as compared to the first nine months of fiscal 2003 primarily due to a $20.1 million, or 9.0%, increase in comparable store sales. Additionally, several previously opened stores, although not open long enough to be included in calculations of comparable store sales, contributed positively to both the third quarter and first nine months of fiscal 2004.  Retail net revenue for the first nine months of fiscal 2004 also reflects $3.6 million of revenue from a July warehouse sales event. Warehouse sales revenue is included in retail

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revenue, but is excluded from our comparable store sales. A warehouse sale event was not held in the same period of fiscal 2003.

Comparable store sales are defined as sales from stores whose gross square footage did not change by more than 20% in the previous 12 months and which have been open at least 12 full months. Stores generally become comparable in their 14th full month of operation. We believe that comparable store sales are a useful indicator of store performance, since comparable store sales exclude the effects of changes in the number of stores open.

Income from operations for the retail segment grew 66% to $8.1 million in the third quarter of fiscal 2004 from $4.9 million in the third quarter of fiscal 2003. Income from retail operations expressed as a percent of related segment net revenue grew 290 basis points to 9.1% from 6.2% in third quarter of fiscal 2003. The expansion of income from operations for the retail segment is attributable to higher product margins realized as well as improvements in payroll and supplies expense offset by the initial costs of brand advertising. Income from operations for the retail segment includes retail stores results less direct costs of the store field operations. For the first nine months of fiscal 2004, income from operations for the retail segment also experienced substantial growth of 51% as compared to the same period in the prior fiscal year, which improvement resulted from both increased revenue and operating margin expansion.

Direct-to-Customer Net Revenue

	Third Quarter						First Nine Months
(Dollars in thousands)	Fiscal 2004			Fiscal 2003			Fiscal 2004			Fiscal 2003
Catalog revenue	$	15,505		$	9,745		$	44,081		$	25,777
Internet revenue	12,913			6,211			34,790			15,561
Total direct-to-customer net revenue	$	28,418		$	15,956		$	78,871		$	41,338
Income from operations	$	1,867		$	1,091		$	9,423		$	4,387
Income from operations - percent of net revenue	6.6		%	6.8		%	11.9		%	10.6		%
Growth percentages:
Direct-to-customer net revenue	78		%	46		%	91		%	53		%
Number of catalogs mailed	—		%	48		%	15		%	16		%

Direct-to-customer net revenue consists of both catalog and Internet sales.  Direct-to-customer net revenue for the third quarter of fiscal 2004 increased $12.5 million, or 78%, as compared to the third quarter of fiscal 2003. Revenue for the second fall catalog book drop fell substantially short of expectations and had the effect of deleveraging selling, general and administrative expense, negatively impacting results for the quarter by approximately $1 million.

Direct-to-customer net revenue for the first nine months of fiscal 2004 increased $37.5 million, or 91%, as compared to the first nine months of fiscal 2003. A portion of this increase was the result of a 15% increase in the number of catalogs mailed for the first nine months of fiscal 2004.

Income from operations for the direct-to-customer segment was $1.9 million in the third quarter of fiscal 2004 as compared to $1.1 million in the same quarter of the prior fiscal year, and it declined to 6.6% of related segment net revenue for the third quarter of 2004 as compared to 6.8% in the third quarter of fiscal 2003, and compared to 15.0% in the second quarter of fiscal 2004.   Segment results were favorably impacted by product margin expansion and other non-advertising expense leverage but were more than offset by the deleveraging of advertising expense experienced during the third quarter with one of our catalog mailings. For the first nine months of fiscal 2004, income from operations for the direct-to-customer segment increased to $9.4 million, or 11.9%, of net segment revenue, as compared to $4.4 million, or 10.6%, of segment net revenue, for the same period in fiscal 2003.

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EXPENSES

Cost of Revenue and Occupancy Expense

Total cost of revenue and occupancy increased $13.2 million during the third quarter of fiscal 2004 as compared to the same period in fiscal 2003.  As a percentage of net revenue, these costs improved approximately 210 basis points to 67.9%, from 70.0% for the third quarter of fiscal 2003. Significant leverage was achieved in improved product margins and our relatively fixed store occupancy costs.  These gains were partially offset by higher costs associated with our customer shipping, distribution and supply chain activities.  These latter costs included increases in freight costs as well as costs associated with investment in process improvements, including costs with respect to temporary labor and consultants that had been retained to manage our customer shipping, distribution and supply chain operations. Those costs are reflected in cost of revenue and occupancy on our Condensed Consolidated Statements of Operations and in unallocated costs in footnote 5 to the financial statements, Segment Reporting.  We recently hired a supply chain executive to oversee these operations who reports to our previously announced new chief operating officer.

For the first nine months of fiscal 2004, cost of revenue and occupancy expense expressed as a percentage of net revenue improved approximately 200 basis points to 71.1%, from 73.1% for the first nine months of fiscal 2003. Significant improvements were achieved due to the leveraging of relatively fixed store occupancy costs and improved product margins, which improvements were partially offset by increased costs related to customer shipping, distribution and supply chain operations.

Selling, General and Administrative Expense

Selling, general and administrative expense expressed as a percentage of net revenue increased approximately 140 basis points to 35.9% for the third quarter of fiscal 2004, from 34.5% for the third quarter of fiscal 2003. Selling, general and administrative expense expressed in absolute dollars increased $9.5 million, to $42.5 million for the third quarter of fiscal 2004 from $33.0 million for the third quarter of fiscal 2003. The increases in absolute dollars are primarily related to an increase in advertising, including catalog production and mailing costs, and to a lesser degree, an increase in payroll expense and professional fees as well as other selling related expenses.

The increase in selling, general and administrative expense as a percentage of net revenue for the third quarter of fiscal 2004 as compared to the same period of fiscal 2003 was primarily due to increases in advertising costs, partially offset by leveraging of retail payroll costs, which declined as a percentage of net revenue, reflecting continued management focus and the implementation of tools to manage retail payroll expense.  Advertising costs include expenses associated with catalog production and mailing as well as the costs of the initial brand advertising campaign launched in the third quarter of fiscal 2004. Costs associated with the second drop of the fall catalog resulted in lower sales than expected and, coupled with the cost of the newly launched brand campaign, had the effect of deleveraging selling, general and administrative costs in the third quarter of fiscal 2004.

Selling, general and administrative expense expressed as a percentage of net revenue for the first nine months of fiscal 2004, remained unchanged at 32.9% as compared to the first nine months of fiscal 2003. Selling, general and administrative expense expressed in absolute dollars increased $21.3 million, to $111.2 million for the first nine months of fiscal 2004 from $89.9 million for the first nine months of fiscal 2003.  As a percentage of net revenue, leverage of relatively fixed payroll, visual merchandising and other overhead costs, which declined as a percentage of net revenue, was offset by an increase in advertising costs.  The increases in absolute dollars are primarily related to an increase in advertising, and to a lesser degree, an increase in store and direct-to-customer selling expenses.  Advertising costs incurred during the first nine months of fiscal 2004 increased due to higher costs of catalog circulation and the launch of a brand advertising campaign in the third quarter of fiscal 2004.

In general, we expect that as the direct-to-customer channel revenue grows at a faster rate than retail revenue, the growth in the cost of advertising (primarily catalog circulation costs) will lead to increases in overall selling, general and administrative expense as a percentage of net revenue. In addition, due to lowered productivity of one of the fall catalog drops, this general dynamic inherent in our business model was more pronounced in both the third quarter and first nine months of fiscal 2004. In contrast, the cost of retail occupancy has declined as a percentage of net revenue, the benefit of which is reflected in improved gross margins. Other increases in selling, general and administrative expense in absolute dollars were incurred largely to support our increase in net revenue. Professional fee expenses have been incurred, and will continue to be incurred, with respect to the implementation of the requirements of the Sarbanes-Oxley Act of 2002, in particular, with respect to Section 404 requiring management to report on, and our independent registered public accounting firm to attest to, the effectiveness of our internal control over financial reporting. Those amounts totaled approximately $0.5 million in the third quarter of fiscal 2004 and approximately $1 million for the first nine months of fiscal 2004.

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Interest Expense, Net

Interest expense, net includes interest on borrowings under our revolving credit facility and amortization of debt issuance costs. For the third quarter of fiscal 2004, interest expense, net was $0.7 million, an increase of $0.2 million as compared to $0.5 million for the third quarter of fiscal 2003. The increase in third quarter interest expense was due primarily to an increase in our average debt levels and secondarily to higher average borrowing rates, partially offset by a decline in amortization of debt issuance costs.  For the first nine months of both fiscal 2004 and fiscal 2003, interest expense, net was $1.7 million, remaining flat due to higher average debt levels which were offset by lower interest rates year over year and a decline in amortization of debt issuance costs.

Income Tax Benefit

As of October 30, 2004, our full year effective tax rate is expected to approximate 40.0%.  As a result, the effective tax rate for the third quarter of fiscal 2004 was 40.9%, bringing the effective tax rate for the first nine months of fiscal 2004 to 40.0%.  This effective tax rate compares with a 40.0% rate utilized in the third quarter and first nine months of fiscal 2003.

As of October 30, 2004 and January 31, 2004, we recorded net deferred tax assets totaling $21.2 million, which primarily represent the income tax benefit associated with losses reported in prior years.  These losses are subject to federal and state carry-forward provisions of up to 20 years.  As of October 30, 2004 and January 31, 2004, we concluded that the net deferred tax asset balance of $21.2 million was more likely than not to be recovered.  If we are not able to achieve positive operating results in the near future, a valuation allowance may need to be recorded.  We recorded income tax benefits of $2.2 million and $6.1 million for the third quarter and first nine months of fiscal 2004, respectively, which are included in the Other Assets line on our Condensed Consolidated Balance Sheets.

LIQUIDITY AND CAPITAL RESOURCES

Operating Cash Flows

For the first nine months of fiscal 2004, net cash used by operating activities was $44.3 million compared to $25.5 million of net cash used by operating activities for the first nine months of fiscal 2003. The increase in net cash used by operating activities resulted primarily from higher merchandise inventory purchases related to our higher sales levels as well as the upcoming fourth quarter holiday season. In addition, under our current payment arrangements, our higher levels of foreign sourced merchandise in 2004 have had the effect of accelerating the timing of payments for goods.  Additionally, net cash used by operating activities increased due to higher prepaid expenses associated with advertising.  These increases in net cash used were partially offset by higher accounts payable and accrued expenses balances.

Investing Cash Flows

Net cash used by investing activities was $10.1 million for the first nine months of fiscal 2004, an increase of $3.3 million compared to $6.8 million for the first nine months of fiscal 2003. The cash used for investing activities for the first nine months of fiscal 2004 primarily related to the expansion of one of our stores, the opening of another store and to information systems upgrades.

Financing Cash Flows

Net cash provided by financing activities was $53.9 million for the first nine months of fiscal 2004, compared to $33.4 million for the first nine months of fiscal 2003. Substantially all of the increase in net cash provided by financing activities resulted from an increase in net borrowings of $53.6 million for the first nine months of fiscal 2004, as compared to $31.4 million for the first nine months of fiscal 2003, under our revolving credit facility. Cash financing requirements were higher in the first nine months of fiscal 2004 as compared to the same period of fiscal 2003 primarily due to the effect of higher inventory levels overall, and higher inventory of predominately foreign sourced merchandise, which under current payment arrangements, have resulted in an acceleration of the timing of payment for our goods.

As of October 30, 2004, our revolving credit facility provided for an overall commitment of $100.0 million. The revolving credit facility was amended in June 2004 to provide for additional borrowing capacity, reduced borrowing

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rates and elimination of limitations on capital expenditures and store openings. In support of our expected continued growth, the amendment increased the initial available commitment to $100.0 million, and further allows us to request and receive incremental increases beyond the initial available commitment of $100.0 million up to a maximum commitment of $150.0 million, provided no default or event of default exists and certain other conditions are met.  The amendment also increased the amount available for letters of credit from $30.0 million to $50.0 million and modified certain other terms in the revolving credit facility, which had the effect of expanding the borrowing base.

As of October 30, 2004, $64.2 million was outstanding under the line of credit, net of unamortized debt issuance costs of $0.8 million, and there was $18.9 million in outstanding letters of credit.  Borrowings made under the revolving credit facility are subject to interest at either the bank’s reference rate or LIBOR plus a margin. As of October 30, 2004, the bank’s reference rate was 5.25 % and the LIBOR plus margin rate was 4.06%. The availability of credit at any given time under the revolving credit facility is limited by reference to a borrowing base formula based upon numerous factors, including the value of eligible inventory and eligible accounts receivable, and reserves established by the agent of the revolving credit facility.  The revolving credit facility is structured to increase availability to meet seasonal needs. As a result of the borrowing base formula, the actual borrowing availability under the revolving credit facility could be less than the stated amount of the revolving credit facility reduced by the actual borrowings and outstanding letters of credit.

The revolving credit facility contains various restrictive covenants, including limitations on the ability to incur additional debt, acquisition of other businesses and payment of dividends and other distributions.  The revolving credit facility does not contain any other significant financial or coverage ratio covenants, nor does the revolving credit facility require us to repay all borrowings for a proscribed “clean-up” period each year.

Our revolving credit facility requires a lock-box arrangement, which provides for all receipts to be swept daily to reduce borrowings outstanding under the revolving credit facility. This arrangement, combined with the existence of a subjective acceleration clause in the revolving credit facility, necessitates that the revolving credit facility be classified as a current liability on our balance sheet, pursuant to guidance in the Financial Accounting Standards Board’s Emerging Issues Task Force Issue No. 95-22, “Balance Sheet Classification of Borrowings Outstanding under Revolving Credit Agreements That Include both a Subjective Acceleration Clause and a Lock-Box Arrangement.” However, we do not expect to repay, or be required to repay, within one year, the balance of the revolving credit facility classified as a current liability. The acceleration clause, which is a typical requirement in commercial credit agreements such as ours, allows our lenders to forego additional advances should they determine there has been a material adverse effect in our operations, business, properties, assets, liabilities, condition or prospects or a material adverse change in our financial position or prospects that is reasonably likely to result in a material adverse effect on our business, condition (financial or otherwise), operations, performance or properties. However, the revolving credit facility does not expire or have a maturity date within one year, but rather has a final expiration date in June 2006. Additionally, our lenders have not notified us of any indication that a material adverse effect exists at October 30, 2004 or that a material adverse change has occurred. We believe that no material adverse change has occurred and we believe that we will continue to borrow on the line of credit to fund our operations over the term of the revolving credit facility. We do not anticipate any changes in our business practices that would result in any determination that there has been a material adverse effect in our operations, business, properties, assets, liabilities, condition or prospects. However, we cannot be certain that our lenders will not make such a determination in the future.

We currently believe that our cash flows from operations and funds available under our revolving credit facility will satisfy our expected working capital and capital requirements, for at least the next 12 months. However, the weakening of, or other adverse developments concerning our sales performance or adverse developments concerning the availability of credit under our revolving credit facility due to covenant limitations or other factors could limit the overall availability of funds to us. Moreover, to the extent we increase the levels of foreign sourced merchandise that we purchase, we may need access to funds sooner than has typically been the case in the past in order to meet the accelerated timing requirements for payments of such goods.  We may not have successfully anticipated our future capital needs or the timing of such needs and we may need to raise additional funds in order to take advantage of unanticipated opportunities. We also may need to raise additional funds to respond to changing business conditions or unanticipated competitive pressures. However, should the need arise, additional sources of financing may not be available or, if available, may not be on terms favorable to our stockholders or us. If we fail to raise sufficient funds, we may be required to delay or abandon some of our planned future expenditures or aspects of our current operations. For more information, please see the section “Factors That May Affect Our Future Operating Results,” below, in particular the sections “We are dependent on external funding sources which may not make available to us sufficient funds when

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we need them,” and “Because our business requires a substantial level of liquidity, we are dependent upon a revolving credit facility with numerous restrictive covenants that limit our flexibility.”

FACTORS THAT MAY AFFECT OUR FUTURE OPERATING RESULTS

We may not be able to successfully anticipate changes in consumer trends and our failure to do so may lead to loss of sales revenue and the closing of under-performing stores.

Our success depends on our ability to anticipate and respond to changing merchandise trends and consumer demands in a timely manner. If, for example, we misjudge market trends, we may significantly overstock unpopular products and be forced to take significant inventory markdowns, which would have a negative impact on our operating results. Conversely, shortages of popular items could result in loss of potential sales revenue and have a material adverse effect on our operating results.

We believe there is a lifestyle trend toward increased interest in home renovation and interior decorating, and we further believe we are benefiting from such a trend. If this trend fails to continue to directly benefit us or if there is an overall decline in the trend, we could experience an adverse decline in consumer interest in our major product lines. Moreover, our products must appeal to a broad range of consumers whose preferences cannot always be predicted with certainty and may change between sales seasons. If we misjudge either the market for our merchandise or our customers’ purchasing habits, we may experience a material decline in sales or be required to sell inventory at reduced margins. We could also suffer a loss of customer goodwill if we do not maintain a high level of quality control and service procedures or if we otherwise fail to ensure satisfactory quality of our products. These outcomes may have a material adverse effect on our business, operating results and financial condition.

During the first nine months of fiscal 2004, we closed two under-performing stores.

A material decline in sales and other adverse conditions resulting from our failure to accurately anticipate changes in merchandise trends and consumer demands may cause us to close additional under-performing stores. While we believe that we benefit in the long run financially by closing under-performing stores and reducing nonproductive costs, the closure of such stores would subject us to additional increased short-term costs including, but not limited to, employee severance costs, charges in connection with the impairment of assets and costs associated with the disposition of outstanding lease obligations.

Our success is highly dependent on improvements to our planning and supply chain processes.

An important part of our efforts to achieve efficiencies, cost reductions and sales growth is the identification and implementation of improvements to our planning, logistical and distribution infrastructure and our supply chain, including merchandise ordering, transportation and receipt processing.  An inability to improve our planning and supply chain processes or to take full advantage of supply chain opportunities could have a material adverse effect on our operating results.

Because our revenue is subject to seasonal fluctuations, significant deviations from projected demand for products in our inventory during a selling season could have a material adverse effect on our financial condition and results of operations.

Our business is highly seasonal. We make decisions regarding merchandise well in advance of the season in which it will be sold, particularly for the holiday selling season. The general pattern associated with the retail industry is one of peak sales and earnings during the holiday season. Due to the importance of the holiday selling season, the fourth quarter of each year has historically contributed, and we expect it will continue to contribute, a disproportionate percentage of our net revenue and our gross profit for the entire year. In anticipation of increased sales activity during the fourth quarter, we incur significant additional expenses both prior to and during the fourth quarter. These expenses may include acquisition of additional inventory, catalog preparation and mailing, advertising, in-store promotions, seasonal staffing needs and other similar items. If, for any reason, our sales were to fall below our expectations in the fourth quarter, our business, financial condition and annual operating results may be materially adversely affected.

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Increased catalog and other marketing expenditures without increased revenue may have a negative impact on our operating results.

Over the past several fiscal years, we have substantially increased the amount that we spend on catalog and other marketing costs, and we expect to continue to invest at these increased levels in the current fiscal year and in the future.  As a result, if we misjudge the directions or trends in our market, we may expend large amounts of cash that generate little return on investment, which would have a negative effect on our operating results.

Our quarterly results fluctuate due to a variety of factors and are not a meaningful indicator of future performance.

Our quarterly results have fluctuated in the past and may fluctuate significantly in the future, depending upon a variety of factors, including, among other things, the mix of products sold, the timing and level of markdowns, promotional events, store openings, closings, remodelings or relocations, shifts in the timing of holidays, timing of catalog releases or sales, competitive factors and general economic conditions. Accordingly, our profits or losses may fluctuate. Moreover, in response to competitive pressures, we may take certain pricing or marketing actions that could have a material adverse effect on our business, financial condition and results of operations. Therefore, we believe that period-to-period comparisons of our operating results are not necessarily meaningful and cannot be relied upon as indicators of future performance. If our operating results in any future period fall below the expectations of securities analysts or investors, or if our operating results do not meet the guidance that we issue from time to time, the market price of our shares of common stock would likely decline.

Fluctuations in comparable store sales may cause our revenue and operating results from period-to-period to vary.

A variety of factors affect our comparable store sales including, among other things, the general retail sales environment, our ability to efficiently source and distribute products, changes in our merchandise mix, promotional events, the impact of competition and our ability to execute our business strategy efficiently. Our comparable store sales increased 9.0 % for the first nine months of fiscal 2004 and 8.0% for the first nine months of fiscal 2003. Past comparable store sales results may not be indicative of future results. As a result, the unpredictability of our comparable store sales may cause our revenue and operating results to vary from quarter to quarter, and an unanticipated decline in revenue may cause our stock price to fluctuate.

We depend on a number of key vendors to supply our merchandise and provide critical services, and the loss of any one of our key vendors may result in a loss of sales revenue and significantly harm our operating results.

We make merchandise purchases from over 500 vendors. Our performance depends on our ability to purchase our merchandise in sufficient quantities at competitive prices. Although we have many sources of merchandise, two of our vendors - one, a manufacturer of upholstered furniture, and the other, a buying agent - together accounted for approximately 22% of our aggregate merchandise purchases for fiscal 2003.  We expect this situation to continue in the future. In addition, our smaller vendors generally have limited resources, production capacities and operating histories, and some of our vendors have limited the distribution of their merchandise in the past. We have no long-term purchase contracts or other contractual assurances of continued supply, pricing or access to new products, and any vendor or distributor could discontinue selling to us at any time. We may not be able to acquire desired merchandise in sufficient quantities on terms acceptable to us in the future, or be able to develop relationships with new vendors to expand our options or replace discontinued vendors. Our inability to acquire suitable merchandise in the future or the loss of one or more key vendors and our failure to replace any one or more of them may have a material adverse effect on our business, results of operations and financial condition.

In addition, a single vendor supports the majority of our management information systems. A failure by the vendor to support our management information systems adequately in the future could have a material adverse effect on our business, results of operations and financial condition.

We routinely purchase products from new vendors from time to time, many of whom are located abroad. We cannot assure you that they will be reliable sources of our products. Moreover, a number of these manufacturers and suppliers are small and undercapitalized firms that produce limited numbers of items. Given their limited resources, these firms might be susceptible to production difficulties, quality control issues and problems in delivering agreed-upon quantities on schedule. We cannot assure you that we will be able, if necessary, to return products to these suppliers and manufacturers and obtain refunds of our purchase price or obtain reimbursement or indemnification from them if their products prove defective. These suppliers and manufacturers also may be unable to withstand a downturn

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in the U.S. or worldwide economy. Significant failures on the part of these suppliers or manufacturers could have a material adverse effect on our operating results.

In addition, many of these suppliers and manufacturers require extensive advance notice of our requirements in order to produce products in the quantities we desire. This long lead time requires us to place orders far in advance of the time when certain products will be offered for sale, thereby exposing us to risks relating to shifts in customer demands and trends, and any downturn in the U.S. economy.

A disruption in any of our distribution operations would materially affect our operating results.

The distribution functions for our stores as well as all of our furniture orders are currently handled from our facilities in Hayward and Tracy, California and Baltimore, Maryland. Any significant interruption in the operation of any of these facilities may delay shipment of merchandise to our stores and customers, damage our reputation or otherwise have a material adverse effect on our financial condition and results of operations. Moreover, a failure to successfully coordinate the operations of these facilities also could have a material adverse effect on our financial condition and results of operations.  Separately, significant disruptions to the operations of the third party vendor who handles, among other things, the distribution and fulfillment functions for our direct-to-customer business on an outsourced basis could be expected to have similar negative consequences.

Labor activities could cause labor relations difficulties for us.

As of October 30, 2004, we had approximately 3,400 full and part time employees, and we believe our relations with our employees are generally good.  While approximately 48 of our employees at our Baltimore, Maryland distribution facility voted in September 2003 to unionize, we currently do not have a contract with a union. We cannot predict the effect of any future organizational activities on our business and operations, although our distribution facilities to date have not experienced any material work stoppages.  However, if we were to negotiate a contract with a union, or if we were to become subject to work stoppages, we could experience disruption in our operations and increases in our labor costs, either of which could materially adversely affect our business, financial condition or results of operations.

We are dependent on external funding sources, which may not make available to us sufficient funds when we need them.

We have significantly relied and may rely in the future on external funding sources to finance our operations and growth. Any reduction in cash flow from operations could increase our external funding requirements to levels above those currently available to us. While we currently have in place a $100.0 million revolving credit facility, which may be increased to $150.0 million under certain circumstances, the amount available under this facility could be less than the stated amount if there is a shortfall in the availability of eligible collateral to support the borrowing base and reserves as established by the terms of the revolving credit facility. We currently believe that our cash flow from operations and funds available under our revolving credit facility will satisfy our capital and operating requirements for at least the next 12 months. However, the weakening of, or other adverse developments concerning, our sales performance or adverse developments concerning the availability of credit under our revolving credit facility due to covenant limitations or other factors could limit the overall amount of funds available to us.

Our revolving credit facility contains a subjective borrowing provision, which is a typical requirement in commercial credit agreements such as ours.  This clause allows our lenders to forego additional advances should they determine there has been a material adverse change in our operations, business, properties, assets, liabilities, condition or prospects or a condition or event that is reasonably likely to result in a material adverse change in our financial position or prospects reasonably likely to result in a material adverse effect on our business, condition (financial or otherwise), operations, performance or properties taken as a whole.  However, our lenders have not notified us of any indication that a material adverse effect exists at October 30, 2004 or that a material adverse change has occurred.  We believe that no material adverse change has occurred and we believe that we will continue to borrow on the line of credit to fund our operations over the term of the revolving credit facility.  We do not anticipate any changes in our business practices that would result in any determination that there has been a material adverse effect in our operations, business, properties, assets, liabilities, condition or prospects.  However, we cannot be certain that our lenders will not make such a determination in the future.

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In particular, we may experience cash flow shortfalls in the future and we may require additional external funding beyond the amounts available under our revolving credit facility. However, we cannot assure you that we will be able to raise funds on favorable terms, if at all, or that future financing requirements would not be dilutive to holders of our capital stock. In the event that we are unable to obtain additional funds on acceptable terms or otherwise, we may be unable or determine not to take advantage of new opportunities or defer on taking other actions that otherwise may be important to our operations. Additionally, we may need to raise funds to take advantage of unanticipated opportunities. We also may need to raise funds to respond to changing business conditions or unanticipated competitive pressures. If we fail to raise sufficient additional funds, we may be required to delay or abandon some of our planned future expenditures or aspects of our current operations.

Because our business requires a substantial level of liquidity, we are dependent upon a revolving credit facility with numerous restrictive covenants that limit our flexibility.

Our business requires substantial liquidity in order to finance inventory purchases, the employment of sales personnel for the peak holiday period, advertising for the holiday buying season and other similar advance expenses.  We currently have in place a revolving credit facility that provides for an overall commitment of $100.0 million, which may be increased to $150.0 million under certain circumstances. Over the past several years, we have entered into modifications, amendments and restatements of this revolving credit facility, primarily to address changes in the requirements applicable to us under the revolving credit facility documents, and, most recently, to increase the stated amount of commitment under the facility.

Covenants in the revolving credit facility include, among others, ones that limit our ability to incur additional debt, make liens, make investments, consolidate, merge or acquire other businesses, sell assets, pay dividends or other distributions, and enter into transactions with affiliates. These covenants restrict numerous aspects of our business. The revolving credit facility also includes a borrowing base formula to address the availability of credit at any given time based upon numerous factors, including the value of eligible inventory and eligible accounts receivable, in each case, subject to the overall aggregate cap on borrowings. Consequently, for purposes of the borrowing base formula, the value of eligible inventory and eligible accounts receivable may limit our ability to borrow under the revolving credit facility.

We have drawn upon the revolving credit facility in the past and we expect to draw upon it in the future.  As a result, failure to comply with the terms of the revolving credit facility would entitle the secured lenders to prevent us from further borrowing, and upon acceleration by the lenders, they would be entitled to begin foreclosure procedures against our assets, including accounts receivable, inventory, general intangibles, equipment, goods, and fixtures. The secured lenders would then be repaid from the proceeds of such foreclosure proceedings, using all available assets.  Only after such repayment and the payment of any other secured and unsecured creditors would the holders of our capital stock receive any proceeds from the liquidation of our assets.  Our ability to comply with the terms of the revolving credit facility may be affected by events beyond our control.

Future increases in interest and other expense may impact our future operations.

High levels of interest and other expense have had in the past and could have in the future negative effects on our operations.  An increase in the variable interest rate under our revolving credit facility coupled with an increase in our outstanding debt could result in material amounts otherwise available for other business purposes being used to pay for interest expense.

Our ability to continue to meet our future debt and other obligations and to minimize our average debt level depends on our future operating performance and on economic, financial, competitive and other factors.  Many of these factors are beyond our control.  In addition, we may need to incur additional indebtedness in the future. We cannot assure you that our business will generate sufficient cash flow or that future financings will be available to provide sufficient proceeds to meet our needs or obligations or to service our total debt.

We are subject to trade restrictions and other risks associated with our dependence on foreign imports for our merchandise.

During the third quarter of fiscal 2004, we purchased approximately 60% of our merchandise directly from vendors located abroad and we do not expect that such purchases will decline as a percentage of total merchandise purchases for the balance of fiscal 2004. As an importer, our future success will depend in large measure upon our ability to maintain our existing foreign supplier relationships and to develop new ones. While we rely on our long-term

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relationships with our foreign vendors, we have no long-term contracts with them. Additionally, many of our imported products are subject to existing duties, tariffs and quotas that may limit the quantity of some types of goods, which we may import into the United States. Our dependence on foreign imports also makes us vulnerable to risks associated with products manufactured abroad, including, among other things, risks of damage, destruction or confiscation of products while in transit to our distribution centers located in the United States, changes in import duties, tariffs and quotas, loss of “most favored nation” trading status by the United States in relation to a particular foreign country, work stoppages including without limitation as a result of events such as longshoremen strikes, transportation and other delays in shipments including without limitation as a result of heightened security screening and inspection processes or other port-of-entry limitations or restrictions in the United States, freight cost increases, economic uncertainties, including inflation, foreign government regulations, and political unrest and trade restrictions, including the United States retaliating against protectionist foreign trade practices. Furthermore, some or all of our foreign vendors’ operations may be adversely affected by political, financial or other instabilities that are particular to their home countries, including without limitation local acts of terrorism or economic, environmental or health and welfare-related crises, which may in turn result in limitations or temporary or permanent halts to their operations, restrictions on the transfer of goods or funds and/or other trade disruptions.  If any of these or other factors were to render the conduct of business in particular countries undesirable or impractical, our financial condition and results of operations could be materially adversely affected.

While we believe that we could find alternative sources of supply, an interruption or delay in supply from our foreign sources, or the imposition of additional duties, taxes or other charges on these imports, could have a material adverse effect on our business, financial condition and results of operations unless and until alternative supply arrangements are secured. Moreover, products from alternative sources may be of lesser quality and/or more expensive than those we currently purchase, resulting in reduction or loss of our profit margin on such items.

As an importer we are subject to the effects of currency fluctuations related to our purchases of foreign merchandise.

While most of our purchases outside of the United States currently are settled in U.S. dollars, it is possible that a growing number of them in the future may be made in currencies other than the U.S. dollar. Historically, we have not hedged our currency risk and do not currently anticipate doing so in the future. However, because our financial results are reported in U.S. dollars, fluctuations in the rates of exchange between the U.S. dollar and other currencies may decrease our sales margins or otherwise have a material adverse effect on our financial condition and results of operations in the future.

Rapid growth in our direct-to-customer business may not be sustained and may not generate a corresponding increase in profits to our business.

For the third quarter of fiscal 2004, revenue through our direct-to-customer channel grew by 78% as compared to the same period in the prior fiscal year. Increased activity in our direct-to-customer business could result in material changes in our operating costs, including increased merchandise inventory costs and costs for paper and postage associated with the distribution and shipping of catalogs and products. Although we intend to attempt to mitigate the impact of these increases by improving sales revenue and efficiencies, we cannot assure you that we will succeed in mitigating expenses with increased efficiency or that cost increases associated with our direct-to-customer business will not have an adverse effect on the profitability of our business. Additionally, while we outsource to a third party the fulfillment of our direct-to-customer division, including customer service and non-furniture distribution, the third party may not have the capacity to accommodate our growth. This lack of capacity may result in delayed customer orders and deficiencies in customer service, both of which may adversely affect our reputation, cause us to lose sales revenue and limit or counter recent growth in our direct-to-customer business.

We depend on key personnel and could be affected by the loss of their services because of the limited number of qualified people in our industry.

The success of our business will continue to depend upon our key personnel, including our President and Chief Executive Officer, Gary G. Friedman. Competition for qualified employees and personnel in the retail industry is intense. The process of locating personnel with the combination of skills and attributes required to carry out our goals is often lengthy.  Our success depends to a significant degree upon our ability to attract, retain and motivate qualified management, marketing and sales personnel, in particular store managers, and upon the continued contributions of these people. We cannot assure you that we will be successful in attracting and retaining qualified executives and personnel.

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In addition, our employees may voluntarily terminate their employment with us at any time. We also do not maintain any key man life insurance. The loss of the services of key personnel or our failure to attract additional qualified personnel could have a material adverse effect on our business, financial condition and results of operations.

Recent regulatory changes may cause us to incur increased costs.

Recent changes in the laws, regulations and rules affecting public companies, including the provisions of the Sarbanes-Oxley Act of 2002, will increase our expenses as we evaluate the implications of these new requirements and devote resources to respond to them. In particular, we expect to incur additional expenses as we implement Section 404 of the Sarbanes-Oxley Act of 2002 and the rules issued in connection with it, which require management to report on, and our independent  registered public accounting firm to attest to, our internal control over financial reporting.  Compliance with these new requirements could also result in continued diversion of management’s time and attention, which could prove to be disruptive to normal business operations.  Further, the impact of these laws, regulations and rules and activities in response to them could also make it more difficult for us to attract and retain qualified persons to serve on our board of directors or as executive officers, which could harm our business.

We are currently conducting evaluations required to ensure compliance with the management certification and attestation requirements under Section 404 of the Sarbanes-Oxley Act of 2002.  As this is an evolving process, we have no precedent available by which to measure compliance adequacy. Consequently, we cannot be certain as to the timing of completion of our evaluation, testing, remediation (if and where necessary) and related actions or the impact of any of them on our operations. While we currently anticipate that we will timely complete all such actions, we are not certain of the consequences of a failure, although possible consequences include sanction or investigation by regulatory authorities, such as the Securities and Exchange Commission or The Nasdaq National Market, and an inability to timely file our next annual report on Form 10-K.

Changes in general economic conditions affect consumer spending and may significantly harm our revenue and results of operations.

The success of our business depends to a significant extent upon the level of consumer spending. A number of economic conditions affect the level of consumer spending on merchandise that we offer, including, among other things, the general state of the economy, general business conditions, the level of consumer debt, interest rates, taxation and consumer confidence in future economic conditions. More generally, reduced consumer confidence and spending may result in reduced demand for our products and limitations on our ability to increase prices, and may also require increased levels of selling and promotional expenses. Adverse economic conditions and any related decrease in consumer demand for discretionary items such as those offered by us could have a material adverse effect on our business, results of operations and financial condition.

We face an extremely competitive specialty retail business market.

The retail market is highly competitive. We compete against a diverse group of retailers ranging from specialty stores to traditional furniture stores and department stores. Our product offerings also compete with a variety of national, regional and local retailers. We also compete with these and other retailers for customers, suitable retail locations, suppliers and qualified employees and management personnel. Many of our competitors have significantly greater financial, marketing and other resources. Moreover, increased competition may result, and has resulted in the past, in potential or actual litigation between us and our competitors relating to such activities as competitive sales and hiring practices, exclusive relationships with key suppliers and manufacturers and other matters. As a result, increased competition may adversely affect our future financial performance, and we cannot assure you that we will be able to compete successfully in the future.

We believe that our ability to compete successfully is determined by several factors, including, among other things, the breadth and quality of our product selection, effective merchandise presentation, customer service, pricing and store location.  Although we believe that we are able to compete favorably on the basis of these factors, we may not ultimately succeed in competing with other retailers in our market.

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Terrorist attacks and threats or actual war may negatively impact all aspects of our operations, revenue, costs and stock price.

Threats of terrorist attacks in the United States, as well as future events occurring in response to or in connection with them, including, without limitation, future terrorist attacks or threats against United States targets, rumors or threats of war, actual conflicts involving the United States or its allies, including the on-going U.S. wars in Iraq and Afghanistan, further conflicts in the Middle East and in other developing countries, or military or trade disruptions affecting our domestic or foreign suppliers of merchandise, may impact our operations. The potential impact to our operations includes, among other things, delays or losses in the delivery of merchandise to us and decreased sales of the products we carry. Additionally, any of these events could cause consumer confidence and spending to decrease or result in increased volatility in the United States and worldwide financial markets and economies. Also, any of these events could result in economic recession in the United States or abroad. Any of these occurrences could have a significant impact on our operating results, revenue and costs and may result in the volatility of the future market price of our common stock.

Our common stock price may be volatile.

The market price of our common stock has fluctuated significantly in the past, and is likely to continue to be highly volatile. In addition, the trading volume in our common stock has fluctuated, and significant price variations can occur as a result. We cannot assure you that the market price of our common stock will not fluctuate or decline significantly in the future. In addition, the United States equity markets have from time to time experienced significant price and volume fluctuations that have particularly affected the market prices for the stocks of companies such as ours.  These broad market fluctuations may materially adversely affect the market price of our common stock in the future. Variations in the market price of our common stock may be the result of changes in the trading characteristics that prevail in the market for our common stock, including low trading volumes, trading volume fluctuations and other similar factors that are particularly common among highly volatile securities. Variations also may be the result of changes in our business, operations or prospects, announcements or activities by our competitors, entering into new contractual relationships with key suppliers or manufacturers by us or our competitors, proposed acquisitions by us or our competitors, financial results that fail to meet our guidance or public market analysts’ expectations, changes in stock market analysts’ recommendations regarding us, other retail companies or the retail industry in general, and domestic and international market and economic conditions.

Future sales of our common stock in the public market could adversely affect our stock price and our ability to raise funds in new equity offerings.

We cannot predict the effect, if any, that future sales of shares of our common stock or the availability for future sale of shares of our common stock or securities convertible into or exercisable for our common stock will have on the market price of our common stock prevailing from time to time. For example, in connection with our March 2001 preferred stock financing, we filed a registration statement on Form S-3 with the Securities and Exchange Commission to register approximately 6.4 million shares of our common stock issued, or to be issued, upon the conversion of our Series A preferred stock to some of our stockholders. The registration statement was declared effective by the Securities and Exchange Commission on October 31, 2002 and may remain effective under certain circumstances until as long as March 2009.  Sale, or the availability for sale, of substantial amounts of common stock by our existing stockholders pursuant to an effective registration statement or under Rule 144, through the exercise of registration rights or the issuance of shares of common stock upon the exercise of stock options, or the conversion of our preferred stock, or the perception that such sales or issuances could occur, could adversely affect prevailing market prices for our common stock and could materially impair our future ability to raise capital through an offering of equity securities.

We are subject to anti-takeover provisions and the terms and conditions of our preferred stock financing that could delay or prevent an acquisition and could adversely affect the price of our common stock.

Our Second Amended and Restated Certificate of Incorporation, as amended, and Amended and Restated Bylaws, certain provisions of Delaware law and the certificate of designation governing the rights, preferences and privileges of our preferred stock may make it difficult in some respects to cause a change in control of our company and replace incumbent management. For example, our Second Amended and Restated Certificate of Incorporation, as amended, and Amended and Restated Bylaws provide for a classified board of directors. With a classified board of directors, at least two annual meetings of stockholders, instead of one, will generally be required to effect a change in the majority of the board. As a result, a provision relating to a classified board may discourage proxy contests for the election of directors or purchases of a substantial block of our common stock because its provisions could operate to prevent obtaining control of the board in a relatively short period of time.

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Separately, the holders of our preferred stock presently have the right to designate two members of our board of directors, and they also have a number of voting rights pursuant to the terms of the certificate of designation which could potentially delay, defer or prevent a change of control. In particular, the holders of our Series A preferred stock have the right to approve a number of actions by us, including mergers, consolidations, acquisitions and similar transactions in which the holders of Series A preferred stock and common stock do not receive at least three times the then existing conversion price per share of the Series A preferred stock. This right may create a potentially discouraging effect on, among other things, any third party’s interest in completing these types of transactions with us. Consequently, the terms and conditions under which we issued our preferred stock, coupled with the existence of other anti-takeover provisions, may collectively have a negative impact on the price of our common stock, may discourage third-party bidders from making a bid for our company or may reduce any premiums paid to our stockholders for their common stock.

In addition, our board of directors has the authority to fix the rights and preferences of, and to issue shares of, our preferred stock, which may have the effect of delaying or preventing a change in control of our company without action by holders of our common stock.

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

This quarterly report on Form 10-Q contains “forward-looking statements,” within the meaning of the Private Securities Litigation Reform Act of 1995, that involve known and unknown risks. Such forward-looking statements include without limitation statements relating to our future plans, statements relating to anticipated future costs and expenses, in particular in connection with Section 404 under the Sarbanes-Oxley Act of 2002, statements relating to anticipated future revenue growth, statements relating to future availability under our revolving credit facility, statements relating to our working capital and capital expenditure needs, and other statements containing words such as “believe,” “anticipate,” “expect,” “may,” “intend,” and words of similar import or statements of our management’s opinion. These forward-looking statements and assumptions involve known and unknown risks, uncertainties and other factors that may cause our actual results, market performance or achievements to differ materially from any future results, performance or achievements expressed or implied by such forward-looking statements. Important factors that could cause such differences include, but are not limited to, changes in economic or business conditions in general, changes in product supply, fluctuations in comparable store sales, limitations resulting from restrictive covenants in our revolving credit facility, failure of our management to anticipate changes in consumer trends, loss of key vendors, changes in the competitive environment in which we operate, changes in our management information needs, changes in management, failure to raise additional funds when required, changes in customer needs and expectations and governmental actions and consequences stemming from the continued wars in Iraq and Afghanistan or from terrorist activities in or related to the United States, and other factors described above in the section “Factors That May Affect Our Future Operating Results.” We undertake no obligation to update any forward-looking statements in order to reflect events or circumstances that may arise after the date of this quarterly report on Form 10-Q.

OTHER INFORMATION

We entered into a Letter Agreement, dated as of August 17, 2004, with some of our existing investors to amend the terms of our Amended and Restated Series A and B Preferred Stock Purchase Agreement, dated as of March 21, 2001, by and among us and the investors listed on Schedule A thereto.  In particular, the Letter Agreement terminated, among other things, certain rights of the investors in connection with our board of directors and committees of our board of directors under the existing Amended and Restated Series A and B Preferred Stock Purchase Agreement.  The Letter Agreement had no effect, however, on any rights granted to holders of our Series A preferred stock pursuant to our certificate of designation.

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Item 3. Quantitative and Qualitative Disclosures About Market Risk.

Our market risk disclosures set forth in Item 7A of our Annual Report on Form 10-K, for the year ended January 31, 2004, have not changed materially during the nine months ended October 30, 2004.

Item 4. Controls and Procedures.

We evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of October 30, 2004. This evaluation was done under the supervision and with the participation of management, including our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”).  Based on that evaluation, our CEO and CFO concluded that our disclosure controls and procedures as of October 30, 2004 were effective in timely alerting them to material information required to be included in this report.  There has been 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.

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PART II. OTHER INFORMATION

Item 1. Legal Proceedings.

There are no material pending legal proceedings against us. We are, however, involved from time to time in legal proceedings, including litigation arising in the ordinary course of our business.  At the present time, we believe no legal proceedings will have a material adverse effect on our business, financial condition or results of operations. However, we cannot assure you that the results of any proceeding will be in our favor.  Moreover, due to the uncertainties inherent in any legal proceeding, we cannot accurately predict the ultimate outcome of any proceeding and may incur substantial costs to defend the proceeding, irrespective of the merits.  An unfavorable outcome of any legal proceeding could have an adverse impact on our business, financial condition, and results of operations.

Item 6. Exhibits.

See attached exhibit index.

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SIGNATURES

Pursuant to the requirements 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.

	Restoration Hardware, Inc.
Date: December 1, 2004
	By:	/s/ Gary G. Friedman
		Gary G. Friedman
		President and Chief Executive Officer
	By:	/s/ Patricia A. McKay
		Patricia A. McKay
		Executive Vice President and Chief Financial Officer
		(Principal Financial Officer)
	By:	/s/ Murray Jukes
		Murray Jukes
		Vice President, Controller
		(Principal Accounting Officer)

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EXHIBIT INDEX

EXHIBIT NUMBER	DOCUMENT DESCRIPTIONS
3.1	Second Amended and Restated Certificate of Incorporation, as amended (incorporated by reference to exhibit number 3.1 of Form 8-K filed by Restoration Hardware, Inc. with the Securities and Exchange Commission on October 24, 2001).
3.2	Certificate of Designation of Series A and Series B Preferred Stock (incorporated by reference to exhibit number 4.6 of Form 8-K filed by Restoration Hardware, Inc. with the Securities and Exchange Commission on April 2, 2001).
3.3	Amended and Restated Bylaws, as amended to date (incorporated by reference to exhibit number 3.2 of Form 10-Q for the quarterly period ended October 31, 1998 filed by Restoration Hardware, Inc. with the Securities and Exchange Commission on December 15, 1998).
10.1	Employment Agreement, effective as of May 24, 2004, by and between Restoration Hardware, Inc. and Stephen Gordon.
10.2	Employment Offer Letter dated August 13, 2004, from Restoration Hardware, Inc. to John W. Tate (incorporated by reference to exhibit number 99.2 of Form 8-K, filed by Restoration Hardware, Inc. with the Securities Exchange Commission on August 19, 2004).
10.3	Letter Agreement, dated as of August 17, 2004, by and among Restoration Hardware, Inc. and the investors named therein (incorporated by reference to exhibit number 10.5 of Form 10-Q for the quarterly period ended July 31, 2004 filed by Restoration Hardware, Inc. with the Securities and Exchange Commission on August 30, 2004).
10.4	Notice of Grant of Stock Option and Stock Option Agreement between Restoration Hardware, Inc. and John W. Tate, dated August 24, 2004.
10.5	Notice of Grant of Stock Option and Stock Option Agreement between Restoration Hardware, Inc. and John W. Tate, dated August 24, 2004.
10.6	Form of Notice of Grant of Stock Option and Stock Option Agreement for the Discretionary Option Grant Program under the Restoration Hardware, Inc. 1998 Stock Incentive Plan as Amended and Restated October 9, 2002 (incorporated by reference to exhibit number 10.1 of Form 8-K filed by Restoration Hardware, Inc. with the Securities Exchange Commission on November 9, 2004).
10.7	Form of Notice of Grant of Stock Option, Stock Option Agreement and Early Exercise Stock Purchase Agreement for the Automatic Option Grant Program under the Restoration Hardware, Inc. 1998 Stock Incentive Plan as Amended and Restated October 9, 2002 (incorporated by reference to exhibit number 10.2 of Form 8-K filed by Restoration Hardware, Inc. with the Securities Exchange Commission on November 9, 2004).
10.8	Form of Notice of Grant of Stock Option and Stock Option Agreement for the Director Fee Option Grant Program under the Restoration Hardware, Inc. 1998 Stock Incentive Plan as Amended and Restated October 9, 2002 (incorporated by reference to exhibit number 10.3 of Form 8-K filed by Restoration Hardware, Inc. with the Securities Exchange Commission on November 9, 2004).
31.1	Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer.
31.2	Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer.
32.1	Section 1350 Certification of Chief Executive Officer.
32.2	Section 1350 Certification of Chief Financial Officer.

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EX-10.1

EXHIBIT 10.1

EMPLOYMENT AGREEMENT

This Employment Agreement, effective as of May 24, 2004 (the “Agreement”), is by and between Restoration Hardware, Inc., a Delaware corporation (the “Company”), and STEPHEN GORDON (“EXECUTIVE”), and supercedes that certain Severance Agreement, by and between the Company and Executive, dated as of March 21, 2001 (“Severance Agreement”).

1.POSITION AND RESPONSIBILITIES

a.Position.  Executive is employed by the Company to render services to the Company on a part-time basis in the position of Founder/Merchant, reporting to the Chief Executive Officer, as set forth in more detail on Exhibit A hereto.  Executive shall perform the duties and responsibilities as described in Exhibit A.  Executive shall abide by the rules, regulations, and practices as adopted or modified from time to time in the Company’s sole discretion.

b.Other Activities.  Except upon the prior written consent of the Company, Executive will not, during the term of this Agreement, (i) engage, directly or indirectly, in any other business activity (whether or not pursued for pecuniary advantage) that interferes with Executive’s duties and responsibilities hereunder or create a conflict of interest with the Company or (ii) engage, directly or indirectly, in any other business activity that is competitive with the Company.

c.No Conflict.  Executive represents and warrants that Executive’s execution of this Agreement, Executive’s employment with the Company, and the performance of Executive’s proposed duties under this Agreement shall not violate any obligations Executive may have to any other employer, person or entity, including any obligations with respect to proprietary or confidential information of any other person or entity.

d.Location.  Executive shall continue to perform his duties at the Company’s headquarters in Corta Madera, California.  Throughout the term of his employment under this Agreement, Executive shall be entitled to use the office and administrative space used by Executive immediately before the effective date of this Agreement.

2.COMPENSATION AND BENEFITS

a.Base Salary.  In consideration of the services to be rendered under this Agreement, the Company shall pay Executive a salary at the rate of Three

Hundred Seventy-Five Thousand Dollars ($375,000) per year (“Base Salary”).  The Base Salary shall be paid in accordance with the Company’s regularly established payroll practices.  Executive’s Base Salary will be reviewed from time to time in accordance with the established procedures of the Company for adjusting salaries for similarly situated employees and may be adjusted in the sole discretion of the Company.

b.Benefits.  Executive shall be eligible to participate in the health and welfare benefits made generally available by the Company to other officers of the Company, in accordance with the benefit plans established by the Company, and as may be amended from time to time in the Company’s sole discretion.  In addition, Executive shall be entitled to the following:

(i)Discretionary Incentive Bonus:  Entitlement to an incentive bonus, if any, will be subject to the recommendation of the Company’s Chief Executive Officer, in his sole discretion, to the Compensation Committee of the Board of Directors of the Company and approval of the Compensation Committee, in its sole discretion.

(ii)Car Allowance:  Executive shall be entitled to a monthly car allowance of $1,100.

(iii)Tax Preparation Benefit:  Executive shall be entitled to reimbursement of up to $5,000 annually for costs incurred to prepare Executive’s annual income tax returns.

(iv)Disability Insurance:  Executive shall be entitled to disability insurance that will provide a full annual salary benefit in the event Executive is terminated by the Company due to a Disability (as defined in Section 4(c) of this Agreement) pursuant to the terms of this Agreement or coverage otherwise is triggered during the term of this Agreement or as otherwise provided under such disability insurance policy.

(v)Personal Assistant:  Executive shall be entitled to the use of a personal assistant on a half-time basis during the term of this Agreement.

c.Expenses.  The Company shall reimburse Executive for reasonable business expenses incurred in the performance of Executive’s duties hereunder in accordance with the Company’s expense reimbursement guidelines.

d.Stock Option.  Executive will be awarded a stock option pursuant to the Company’s 1998 Stock Incentive Plan, as amended and restated, to acquire up to 150,000 shares of the common stock of the Company at an exercise price per share equal to the fair market value of one share of the Company’s common stock on the date of grant.  The foregoing stock option shall have a ten year term, shall vest annually over the three (3) year Term of Employment (unless earlier vested pursuant to Section 3(b) of this Agreement) in accordance with the Company’s 1998 Stock Incentive Plan’s vesting schedule and shall otherwise

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be issued in accordance with the Company’s standard form of Notice of Grant of Stock Option and Stock Option Agreement.  The Company acknowledges and agrees that such shares of common stock issued pursuant to the Company’s 1998 Stock Incentive Plan are, or shall be at the time of exercise of the stock option (or any portion thereof), registered pursuant to a registration statement on Form S-8, provided that the Company continues to be subject to the reporting requirements of the Securities Exchange Act of 1934, as amended.

3.TERM OF EMPLOYMENT; TERMINATION OF EMPLOYMENT

a.Term of Employment.   The term of this Agreement shall be for three (3) years following the effective date of this Agreement (“Term of Employment”).  During the Term of Employment, the Company may terminate Employee’s employment with the Company at any time, without any advance notice, for any reason or no reason at all.  Upon expiration of the Term of Employment, the Company shall pay to Executive any compensation then due and owing.  Thereafter, all obligations of the Company under this Agreement shall cease.

b.Severance.  In the event that the Company terminates the employment of Executive during the Term of Employment without Cause, or Executive terminates his employment for Good Reason, Executive shall receive, subject to Executive’s continued compliance with the terms of Section 6(b) of this Agreement regarding non-interference, his then-current Base Salary, payable in periodic installments, in the form of salary continuation in accordance with the Company’s normal payroll practices for the lesser of (i) two (2) years from the date of termination of employment if Executive’s employment is so terminated at any time prior to the second anniversary of this Agreement and (ii) one (1) year from the date of termination of employment if Executive’s employment is so terminated at any time thereafter during the Term of Employment.  In addition, Executive shall be entitled to receive (i) any bonus already approved by the Compensation Committee of the Board of Directors of the Company in accordance with Section 2(b)(i) of this Agreement and (ii) continued medical benefit coverage for himself and his eligible dependents until the earlier of the date that Executive becomes entitled to medical benefits from another employer or the end of the period of Base Salary continuation, subject to Executive’s payment of applicable premiums, if any, at the same rate that would have applied had Executive remained in the employment of the Company.  Executive shall also receive full and immediate vesting of any unvested portion of the stock option granted in accordance with this Agreement.  Executive’s eligibility for salary continuation and medical benefit coverage is conditioned on Executive having first signed a release agreement in a form acceptable to the Company containing terms and conditions for the release of any and all claims against the Company through the effective date of that

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Agreement.  Notwithstanding the foregoing, any payment or benefit (within the meaning of Section 280G(b)(2) of the Internal Revenue Code (“IRC”)) provided to Executive under this Section 3(b) (collectively referred to as the “Payment”) shall not exceed the maximum amount necessary to avoid subjecting the Payment to the excise tax imposed by IRC Section 4999.  Executive shall not be required to mitigate the amount of any payment provided for in this Agreement by seeking other employment or otherwise, and no such payment shall be offset or reduced by the amount of any compensation or benefits provided to Executive in any subsequent employment.

4.TERMINATION OF EMPLOYMENT

a.Termination for Cause.  The Company may terminate Executive’s employment for Cause at any time during the Term of Employment.  Upon a termination for Cause, the Company shall pay to Executive all compensation to which Executive is entitled up through the date of termination, subject to any other rights or remedies of Executive under law; and thereafter all obligations of the Company under this Agreement shall cease.  For purposes of this Agreement, “Cause” shall mean:  if Executive has been convicted of a felony involving fraud or dishonesty, or the termination is evidenced by a resolution adopted in good faith by a majority of the Board of Directors of the Company to the effect that Executive (i) intentionally and continually failed substantially to perform his reasonably assigned duties with the Company, which failure continued for a period of at least thirty (30) days after a written notice of demand for substantial performance has been delivered to Executive specifying the manner in which Executive has failed substantially to perform, or (ii) intentionally engaged in conduct which is demonstrably and materially injurious to the Company; provided, that no termination of Executive’s employment shall be for Cause as set forth in clause (ii) above until there shall have been delivered to Executive a copy of a written notice setting forth the conduct set forth in clause (ii) and specifying the particulars thereof in detail.  No act, nor failure to act, shall be considered “intentional” unless Executive has acted, or failed to act, with a lack of good faith and with a lack of reasonable belief that Executive’s action or failure to act was in the best interest of the Company.

b.By Death.  Executive’s employment shall terminate automatically upon Executive’s death.  Upon a termination as a result of Executive’s death, the Company shall pay to Executive’s beneficiaries or estate, as appropriate, any compensation then due and owing.  Thereafter, all obligations of the Company under this Agreement shall cease.  Nothing in this Section 4.b. shall affect any entitlement of Executive’s heirs or devisees to the benefits of any life insurance plan or other applicable benefits to which they are entitled as a result of Executive’s death.

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c.By Disability.  If Executive suffers from a Disability, then, to the extent permitted by law, the Company may terminate Executive’s employment.  “Disability” shall mean that Executive is unable to carry out the responsibilities and functions of the position held by Executive by reason of any physical or mental impairment for more than 120 days in any twelve-month period.  Upon a termination as a result of Executive’s Disability, the Company shall pay to Executive all compensation to which he is entitled up through the date of termination, and thereafter all obligations of the Company under this Agreement shall cease.  Nothing in this Agreement shall affect Executive’s rights under any disability plan in which Executive is a participant.

d.For Good Reason.  Executive’s termination shall be for “Good Reason” if Executive provides written notice to the Company’s Chief Executive Officer and the Board of Directors of the Company of the Good Reason within thirty (30) days of the event constituting Good Reason and provides the Company with a period of twenty (20) days to cure the event constituting Good Reason and the Company fails to cure the Good Reason within that period.  For purposes of this Agreement, “Good Reason” shall mean either (A) a material reduction in Executive’s Base Salary or (B) a relocation of Executive’s place of employment by more than fifty (50) miles, provided and only if such change, reduction or relocation is effected by the Company without Executive’s consent.

5.TERMINATION OBLIGATIONS

a.Return of Property.  Executive agrees that all property (including without limitation all equipment, tangible proprietary information, documents, records, notes, contracts and computer-generated materials) furnished to or created or prepared by Executive incident to Executive’s employment belongs to the Company and shall be promptly returned to the Company upon termination of Executive’s employment.

b.Termination and Cooperation.  Upon termination of Executive’s employment with the Company, Executive shall be deemed to have terminated all employment positions then held with the Company and its affiliates and from all positions as a director of any of the Company’s subsidiaries but not as a director of the Company itself.  Following any termination of employment, Executive shall cooperate with the Company in the winding up of pending work on behalf of the Company and the orderly transfer of work to other employees.  Executive shall also cooperate with the Company, at the Company’s expense to the extent allowed by law, in the defense of any action brought by any third party against the Company that relates to Executive’s employment by the Company, whether brought before or after Executive’s termination of employment with the Company.

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6.CONFIDENTIAL INFORMATION; PROHIBITION ON THIRD PARTY INFORMATION

a.Confidential Information Agreement.  Executive shall hold in confidence for the benefit of the Company all secret or confidential information, knowledge or data, including proprietary information and trade secrets, relating to the Company and its businesses, which shall have been obtained by Executive prior to or in the course of Executive’s employment by the Company (“Confidential Information”), provided, however, that Confidential Information shall not retain its status as such if the Confidential Information (i) is publicly known through no act or omission of Executive, (ii) becomes available to Executive on a non-confidential basis from a source other than the Company, provided that such source is not bound by a confidentiality agreement with, or other obligation of secrecy to, the Company or another party, or (iii) is know by Executive prior to receiving it from the Company, provided that such information is not subject to another confidentiality agreement with, or other obligation of secrecy to, the Company or another party.  Executive also shall have the right to disclose Confidential Information to the extent required by law, provided that Executive first gives prompt written notice to the Company regarding the intention to make such disclosure and, provided, further, Executive requests confidential treatment of such Confidential Information to the fullest extent permitted by law. Whether before or after termination of Executive’s employment with the Company, Executive shall not, without the prior written consent of the Company, communicate or divulge any Confidential Information, other than to the Company and to those persons or entities designated by the Company or as otherwise is reasonably necessary for Executive to carry out his or her responsibilities as an executive of the Company.

b.Non-Interference.  Executive acknowledges that, because of Executive’s position in the Company, Executive will have access to Confidential Information belonging to the Company.  To preserve and protect this information and the assets of the Company, and in consideration of the severance and benefits provided to Executive under this Agreement, Executive agrees that during the term of Executive’s employment and for the longer of either (i) the period during which Executive continues to receive, or except for Executive’s voluntary waiver of salary continuation or breach of this Section 6.b. Executive would be entitled to receive, salary continuation pursuant to the terms of this Agreement and (ii) one (1) year after the termination of Executive’s employment with the Company, in addition to Executive’s other obligations hereunder or under any other proprietary information agreement between Executive and the Company, Executive shall not, for Executive or any third party, directly or indirectly (a) divert or attempt to divert from the Company any business of any kind, including without limitation the solicitation of or interference with any of its customers, clients, members, business partners or

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suppliers, (b) solicit, raid, entice or induce, either directly or through a third party, any current or former employee of the Company to be employed by another person, or either directly or through a third party hire or otherwise employ any current or former employee of the Company, or (c) work in any capacity that would compete directly with the Company.  In addition to any other remedies to which Company would be entitled, in the event of a breach of this Section 6.b. by Executive, all salary continuation and other benefits to which Executive would be entitled shall cease.

c.Non-Disclosure of Third Party Information.  Executive represents and warrants and covenants that Executive shall not disclose to the Company, or use, or induce the Company to use, any confidential or proprietary information or trade secrets of others at any time, and Executive acknowledges and agrees that any violation of this provision shall be grounds for Executive’s immediate termination and could subject Executive to substantial civil liabilities and criminal penalties.  Executive further specifically and expressly acknowledges that no officer or other employee or representative of the Company has requested or instructed Executive to disclose or use any such third party confidential or proprietary information or trade secrets.

7.AMENDMENTS; WAIVERS; REMEDIES

This Agreement may not be amended or waived except by a writing signed by Executive and by a duly authorized representative of the Company other than Executive.  Failure to exercise any right under this Agreement shall not constitute a waiver of such right.  Any waiver of any breach of this Agreement shall not operate as a waiver of any subsequent breaches.  All rights or remedies specified for a party herein shall be cumulative and in addition to all other rights and remedies of the party hereunder or under applicable law.

8.ASSIGNMENT; BINDING EFFECT

a.Assignment.  The performance of Executive is personal hereunder, and Executive agrees that Executive shall have no right to assign and shall not assign or purport to assign any rights or obligations under this Agreement.  This Agreement may be assigned or transferred by the Company, and nothing in this Agreement shall prevent the consolidation, merger or sale of the Company or a sale of any or all or substantially all of its assets.

b.Binding Effect.  Subject to the foregoing restriction on assignment by Executive, this Agreement shall inure to the benefit of and be binding upon each of the parties; the affiliates, officers, directors, agents, successors and assigns of the Company; and the heirs, devisees, spouses, legal representatives and successors of Executive.

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9.SEVERABILITY

If any provision of this Agreement shall be held by a court or arbitrator to be invalid, unenforceable, or void, such provision shall be enforced to the fullest extent permitted by law, and the remainder of this Agreement shall remain in full force and effect.  In the event that the time period or scope of any provision is declared by a court or arbitrator of competent jurisdiction to exceed the maximum time period or scope that such court or arbitrator deems enforceable, then such court or arbitrator shall reduce the time period or scope to the maximum time period or scope permitted by law.

10.ARBITRATION

a.Agreement To Arbitrate Claims.  The Company and Executive agree that any existing or future dispute, controversy, claim or action (“dispute” or “claim”) arising out of the retention or employment of Executive by the Company, the termination of that employment, or arising under this Agreement shall be resolved by final and binding arbitration.  Such arbitration shall occur in accordance with the National Rules for the Resolution of Employment Disputes of the American Arbitration Association.

b.Scope of Disputes and Claims to Be Arbitrated. Company and Executive understand and agree that this Agreement shall apply to any and all disputes arising from or relating to Executive’s hiring, employment with or termination of employment by the Company or arising under this Agreement. This agreement to arbitrate applies to disputes arising in tort or contract, pursuant to statute, regulation or otherwise, now in existence or which may in the future be enacted, amended or judicially recognized, including but not limited to the following:

(i)claims for fraudulent inducement of contract or breach of contract or contractual obligation, whether such alleged contract or obligation be oral, written, express, or implied by fact or law;

(ii)claims of fraud, or wrongful termination, including violation of public policy and constructive discharge;

(iii)claims of discrimination or harassment under any and all state and federal statutes that prohibit discrimination in employment, as well as claims for violation of any other state or federal statute except as set forth below;

(iv)claims of non-payment or incorrect payment of wages, commissions, bonuses, severance, Executive fringe benefits, stock options and the like, whether such claims be pursuant to alleged express or implied contract or obligation, equity, the California Labor Code, the Fair Labor Standards Act, the Employee Retirement Income Securities Act, and

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any other local, state or federal law concerning wages, compensation or Executive benefits;

(v)claims for infliction of emotional distress, misrepresentation, interference with contract or prospective economic advantage, violation of public policy, defamation, unfair business practices, and any other tort or tort-like causes of action relating to or arising from the employment relationship or the formation or termination thereof; and

(vi)claims arising out of or relating to the grant, exercise, vesting and/or issuance of equity in the Company or options to purchase equity in the Company.

c.Sole and Exclusive Remedy.  The Company and Executive understand and agree that except for such limited post-arbitration judicial review as may be permitted by law, arbitration of such disputes, as provided for herein, shall be the sole and exclusive mechanism for resolving any and all existing and future disputes, and that no other forum for dispute resolution will be available to either party.  The only exceptions are the claims identified below, which may be resolved in any appropriate fora, including courts of law, as required by the laws then in effect:

(i)claims for benefits under the workers’ compensation, unemployment insurance and state disability insurance laws; or

(ii)claims concerning the validity, infringement or enforceability of any trade secret, patent right, copyright, trademark, or any other intellectual or confidential property right held or sought by the Company.

d.Decision of Arbitrator Binding; Waiver of Trial Before Court, Jury or Government Agency.  Company and Executive understand and agree that arbitration shall be instead of a trial before a court or jury, or a hearing before a government agency.  The Company and Executive understand and agree that the decision of the arbitrator shall be final and binding on both the Company and Executive, and it shall provide the exclusive remedy(ies) for resolving any and all disputes between the Company and Executive, as provided herein, and it shall be enforceable by any court having proper jurisdiction.

THE COMPANY AND EXECUTIVE FURTHER UNDERSTAND AND AGREE THAT BY SIGNING THIS AGREEMENT, EACH IS EXPRESSLY WAIVING ANY AND ALL RIGHTS TO A TRIAL BEFORE A COURT OR JURY OR BEFORE A GOVERNMENT AGENCY REGARDING ANY DISPUTE OR CLAIM WHICH EACH NOW HAS OR MAY IN THE FUTURE HAVE, AS PROVIDED FOR HEREIN.

e.Place of Arbitration.  The Company and Executive understand and agree that arbitration of disputes provided for herein shall take place in San

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Francisco, California.  If, at the time the dispute in question arises, Executive lives and works more than one hundred (100) miles from San Francisco, California, then Executive has the option of requesting that the arbitration take place in the county in which the Company has an executive office that is nearest to Executive’s residence at the time the dispute in question arises.

f.Costs of Arbitration.  The Company and Executive understand and agree that the arbitrator’s fee will be borne solely by the Company.  Additionally, the Company will bear all other costs related to the arbitration, assuming such costs are not expenses that Executive would be required to bear if he were bringing an action in a court of law.  The Company and Executive shall each bear their own attorneys’ fees incurred in connection with the arbitration, and the arbitrator will not have authority to award attorneys’ fees unless a statute at issue in the dispute or other appropriate law authorizes the award of attorneys’ fees to the prevailing party, in which case the arbitrator shall have the authority to make an award of attorneys’ fees as permitted by the applicable statute.

g.Procedure.  The arbitration shall be conducted in accordance with the National Rules for the Resolution of Employment Disputes of the American Arbitration Association.

h.Written Arbitration Decision.  The Company and Executive understand and agree that, in any arbitration arising from this agreement to arbitrate, the arbitrator will be required to issue a written arbitration decision that clearly sets forth the essential findings on which that award is based.

i.Preservation of Remedies.  The Company and Executive understand and agree that, in any arbitration arising from this agreement to arbitrate, Executive and the Company will preserve all remedies to which each would otherwise be entitled in a court of law, except as limited under the terms of this Agreement.

j.Necessary Minimum Standard of Discovery.  The Company and Executive understand and agree that, in any arbitration arising from this agreement to arbitrate, the Company and Executive will be entitled to discovery in accordance with the provisions of California Code of Civil Procedure Section 1283(a).

k.Knowing and Voluntary Agreement to Arbitrate.  The Company and Executive have been advised to consult with attorneys of their own choosing before agreeing to arbitrate, and have had an opportunity to do so.

THE COMPANY AND EXECUTIVE HAVE READ THIS AGREEMENT TO ARBITRATE CAREFULLY AND UNDERSTAND THAT BY SIGNING IT, EACH IS WAIVING ALL RIGHTS TO A TRIAL OR HEARING BEFORE A COURT OR

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JURY OR GOVERNMENT AGENCY OF ANY AND ALL DISPUTES AS PROVIDED FOR HEREIN.

11.GOVERNING LAW

a.Governing Law.  The Company and Executive understand and agree that this Agreement, including the obligation to arbitrate, and its validity, construction and performance shall be governed by, and construed in accordance with, the laws of the State of California without regard to conflict of law principles.

b.No Employee Benefit Plan.  The parties specifically intend that this Agreement and the provision of benefits hereunder shall not constitute an “employee benefit plan” subject to any of the provisions of the Employee Retirement Income Security Act of 1974, as amended.

12.INTERPRETATION

This Agreement shall be construed as a whole, according to its fair meaning, and not in favor of or against any party.  Sections and section headings contained in this Agreement are for reference purposes only, and shall not affect in any manner the meaning or interpretation of this Agreement.  Whenever the context requires, references to the singular shall include the plural and the plural the singular.

13.CERTAIN OBLIGATIONS SURVIVE TERMINATION OF AGREEMENT

Sections 3(b), 5, 6(a), 6(b), and 9 through 15 of this Agreement shall survive the termination of this Agreement.

14.ENTIRE AGREEMENT

This Agreement supercedes the Severance Agreement and any other agreement between the Company and Executive in connection with Executive’s employment or compensation by the Company, except this Agreement shall not supersede any proprietary information agreement between the Company and Executive, and this Agreement is intended to be the final, complete, and exclusive statement of the terms of Executive’s employment by the Company and may not be contradicted by evidence of any prior or contemporaneous statements or agreements, except for agreements specifically referenced herein.  To the extent that the practices, policies or procedures of the Company, now or in the future, apply to Executive and are inconsistent with the terms of this Agreement, the provisions of this Agreement shall control.  Any subsequent change in Executive’s duties, position, or compensation will not affect the validity or scope of this Agreement.

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15.EXECUTIVE ACKNOWLEDGEMENT

EXECUTIVE ACKNOWLEDGES EXECUTIVE HAS HAD THE OPPORTUNITY TO CONSULT LEGAL COUNSEL CONCERNING THIS AGREEMENT, THAT EXECUTIVE HAS READ AND UNDERSTANDS THE AGREEMENT, THAT EXECUTIVE IS FULLY AWARE OF ITS LEGAL EFFECT, AND THAT EXECUTIVE HAS ENTERED INTO IT FREELY BASED ON EXECUTIVE’S OWN JUDGMENT AND NOT ON ANY REPRESENTATIONS OR PROMISES OTHER THAN THOSE CONTAINED IN THIS AGREEMENT.

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IN WITNESS WHEREOF, the parties have duly executed this Agreement as of the date first written above.

Restoration Hardware, inc.:			Stephen Gordon:
By:	/s/ Gary Friedman		/s/ S. J. Gordon
	Gary Friedman		S.J. Gordon
Title:		Chief Executive Officer

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EXHIBIT A

A.The Company and Executive agree that Executive shall seek to devote approximately 80 days per calendar year (or such proportionately lesser number of days for any partial calendar year during the Term of Employment) in performing services under this Agreement, provided that each of the Company and Executive acknowledge that such calendar day amount shall be considered by both parties as a goal rather than a requirement under this Agreement and that performance of a lesser or greater amount, as necessary, to perform Executive’s services under this Agreement shall be the expectation of both parties hereto.

B.The job duties of Executive shall be the following:

Supporting the Company in merchandising, concepting and sourcing vendor goods domestically and internationally.

The above shall include, without limitation:

1.Involvement (to the extent not conflicting with other activities undertaken by Executive on behalf of the Company) in those certain regularly scheduled merchandising meetings, including without limitation as set forth below:

a.“Winter, Spring, Fall and Holiday Seasonal Concept Meetings” with merchants, the Company’s product development team, the Company’s product design team and the Company’s Chief Executive Officer for purposes of strategizing both new concepts and the Company’s business strategy;

b.“Winter, Spring, Fall and Holiday Assortment Review Meetings” to define the Company’s competitive strategy, to review physical samples and to address pro forma business plan metrics based on agreed upon assortments;

c.The “Annual Holiday Re-cap Meeting” to review successes and misses as well as define initial strategies for the next upcoming holiday season;

d.The “Annual Holiday Buy-Plan Meeting” for sku-by-sku, seasonal department-by-department inventory commitments and sales plan finalization;

e.The “Annual Holiday Floor Plan Review Meeting” to review all samples and gain concurrence on the placement of and planned volume of approved product;

f.Finalization of windows and associated marketing meetings for both retail and catalog; and

g.“April (Spring) and August (Fall) Strategy Offsite Meetings.”

2.Proactive domestic and international sourcing trips per Founder/Merchant discretion.

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3.Domestic and international travel for sourcing and concepting with merchant teams per the direction of the Company’s Chief Executive Officer.

4.Periodic concepting/brainstorming/idea generation meetings with the Company’s product design and product development teams.

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EX-10.4

EXHIBIT 10.4

RESTORATION HARDWARE, INC.
NOTICE OF GRANT OF STOCK OPTION

Notice is hereby given of the following option grant (the “Option”) to purchase shares of Common Stock of Restoration Hardware, Inc. (the “Corporation”):

Optionee:	John W. Tate
Grant Date:	August 24, 2004
Vesting Commencement Date:	August 24, 2004
Exercise Price:	$5.70
Number of Option Shares:	70,172
Expiration Date:	August 24, 2014
Type of Option:	Incentive Stock Option

Exercise Schedule:  The Option shall become exercisable for twenty-five percent (25%) of the Option Shares upon Optionee’s completion of each of the four (4) years of Service measured from and after the Vesting Commencement Date, with the first such installment to become exercisable on the first anniversary of the Vesting Commencement Date.  In no event shall the Option become exercisable for any additional Option Shares after Optionee’s cessation of Service.

Optionee understands and agrees that the Option is granted subject to and in accordance with the terms of the Restoration Hardware, Inc. 1998 Stock Incentive Plan Amended and Restated on October 9, 2002 (the “Plan”).  Optionee further agrees to be bound by the terms of the Plan and the terms of the Option as set forth in the Stock Option Agreement attached hereto as Exhibit A.  A copy of the Plan is available upon request made to the Secretary of the Corporation at the Corporation’s principal offices.

No Employment or Service Contract.  Nothing in this notice or in the attached Stock Option Agreement or in the Plan shall confer upon Optionee any right to continue in Service for any period of specific duration or interfere with or otherwise restrict in any way the rights of the Corporation (or any Parent or Subsidiary employing or retaining Optionee) or of Optionee, which rights are hereby expressly reserved by each, to terminate Optionee’s Service at any time for any reason, with or without cause.

Definitions.  All capitalized terms in this notice shall have the meaning assigned to them in this notice or in the attached Stock Option Agreement.

DATED: August 24, 2004
	RESTORATION HARDWARE, INC.
	By:	/s/Patricia A. McKay
	Title: Executive Vice President and Chief Financial Officer
	/s/ John W. Tate
	John W. Tate, Optionee
	Address:			530 Belmeade Way Trail
			Lewisville, NC 27023
ATTACHMENTS
Exhibit A - Stock Option Agreement

RESTORATION HARDWARE, INC.
STOCK OPTION AGREEMENT

RECITALS

A.The Board has adopted the Plan for the purpose of retaining the services of selected Employees, non-employee members of the Board or of the board of directors of any Parent or Subsidiary and consultants and other independent advisors who provide services to the Corporation (or any Parent or Subsidiary).

B.Optionee is to render valuable services to the Corporation (or a Parent or Subsidiary), and this Agreement is executed pursuant to, and is intended to carry out the purposes of, the Plan in connection with the Corporation’s grant of an option to Optionee.

C.All capitalized terms in this Agreement shall have the meaning assigned to them in the attached Appendix.

NOW, THEREFORE, it is hereby agreed as follows:

1.Grant of Option.  The Corporation hereby grants to Optionee, as of the Grant Date, an option to purchase up to the number of Option Shares specified in the Grant Notice.  The Option Shares shall be purchasable from time to time during the option term specified in Paragraph 2 below at the Exercise Price.

2.Option Term.  This option shall have a maximum term of ten (10) years measured from the Grant Date and shall accordingly expire at the close of business on the Expiration Date, unless sooner terminated in accordance with Paragraph 5 or 6 below.

3.Limited Transferability.  This option shall be neither transferable nor assignable by Optionee other than by will or by the laws of descent and distribution following Optionee’s death and may be exercised, during Optionee’s lifetime, only by Optionee.  However, if this option is designated a Non-Statutory Option in the Grant Notice, then this option may, in connection with the Optionee’s estate plan, be assigned in whole or in part during Optionee’s lifetime to one or more members of the Optionee’s immediate family or to a trust established for the exclusive benefit of the Optionee and/or one or more such family members.  The assigned portion shall be exercisable only by the person or persons who acquire a proprietary interest in the option pursuant to such assignment.  The terms applicable to the assigned portion shall be the same as those in effect for this option immediately prior to such assignment.

4.Date of Exercise.  This option shall become exercisable for the Option Shares in one or more installments as specified in the Grant Notice.  As the option becomes exercisable for such installments, those installments shall accumulate and the option shall remain exercisable for the accumulated installments until the Expiration Date or sooner termination of the option term under Paragraph 5 or 6 below.

5.Cessation of Service.  The option term specified in Paragraph 2 above shall terminate (and this option shall cease to be outstanding) prior to the Expiration Date should any of the following provisions become applicable:

(a)Should Optionee cease to remain in Service for any reason (other than death, Permanent Disability or Cause) while this option is outstanding, then the period for exercising this option shall be reduced to a three (3)-month period commencing with the date of such cessation of Service, but in no event shall this option be exercisable at any time after the Expiration Date.

(b)Should Optionee die while holding this option, then the personal representative of Optionee’s estate or the person or persons to whom the option is transferred pursuant to Optionee’s will or in accordance with the laws of inheritance shall have the right to exercise this option.  Such right shall lapse, and this option shall cease to be outstanding, upon the earlier of (i) the expiration of the twelve (12)-month period measured from the date of Optionee’s death or (ii) the Expiration Date.

(c)Should Optionee cease Service by reason of Permanent Disability while this option is outstanding, then the period for exercising this option shall be reduced to a twelve (12)-month period commencing with the date of such cessation of Service, but in no event shall this option be exercisable at any time after the Expiration Date.

(d)During the limited period of post-Service exercisability, this option may not be exercised in the aggregate for more than the number of vested Option Shares for which the option is exercisable at the time of Optionee’s cessation of Service.  Upon the expiration of such limited exercise period or (if earlier) upon the Expiration Date, this option shall terminate and cease to be outstanding for any otherwise exercisable Option Shares for which the option has not been exercised.  However, this option shall, immediately upon Optionee’s cessation of Service for any reason, terminate and cease to be outstanding with respect to any Option Shares for which this option is not otherwise at that time exercisable.

(e)Should Optionee’s Service be terminated for Cause, then this option shall terminate immediately and cease to remain outstanding.

6.Special Acceleration of Option.

(a)Change of Control.

(i)This option to the extent outstanding at the time of a Change of Control transaction but not otherwise fully exercisable, shall automatically accelerate so that this option shall, immediately prior to the effective date of such Change of Control, become exercisable for all of the Option Shares at the time subject to this option and may be exercised for any or all of those Option Shares as fully vested shares of Common Stock.  However, this option shall not become exercisable on such an

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accelerated basis if and to the extent:  (i) this option is, in connection with the Change of Control, to be assumed by the successor corporation (or parent thereof) or otherwise continued in full force and effect pursuant to the terms of the Change of Control transaction; or (ii) this option is to be replaced with a cash incentive program of the successor corporation which preserves the spread existing at the time of the Change of Control on the Option Shares for which this option is not otherwise at that time exercisable (the excess of the Fair Market Value of those Option Shares over the aggregate Exercise Price payable for such shares) and provides for subsequent payout in accordance with the same option exercise/vesting schedule set forth in the Grant Notice.

(ii)Immediately following the Change of Control, this option shall terminate and cease to be outstanding, except to the extent assumed by the successor corporation (or parent thereof) or otherwise continued in full force and effect pursuant to the terms of the Change of Control transaction.

(iii)If this option is assumed in connection with a Change of Control (or otherwise continued in full force and effect), then this option shall be appropriately adjusted, immediately after such Change of Control, to apply to the number and class of securities or other property which would have been issuable to Optionee in consummation of such Change of Control had the option been exercised immediately prior to such Change of Control, and appropriate adjustments shall also be made to the Exercise Price, provided the aggregate Exercise Price shall remain the same.

(iv)If this option is assumed in connection with a Change of Control (or otherwise continued in full force and effect) and the Optionee’s Service is terminated Not for Cause by the Company or the successor corporation (or parent thereof) within eighteen (18) months after the Change of Control, this option automatically shall become vested and exercisable for all of the Option Shares at the time represented by this option.

(b)This Agreement shall not in any way affect the right of the Corporation to adjust, reclassify, reorganize or otherwise change its capital or business structure or to merge, consolidate, dissolve, liquidate or sell or transfer all or any part of its business or assets.

7.Adjustment in Option Shares.

Should any change be made to Common Stock by reason of any stock split, stock dividend, recapitalization, combination of shares, exchange of shares or other change affecting the outstanding Common Stock as a class without the Corporation’s receipt of consideration, appropriate adjustments shall be made to (i) the total number and/or class of securities subject to this option and (ii) the Exercise Price in order to reflect such change and thereby preclude a dilution or enlargement of benefits hereunder.

8.Stockholder Rights.  The holder of this option shall not have any stockholder rights with respect to the Option Shares until such person shall have

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exercised the option, paid the Exercise Price and become a holder of record of the purchased shares.

9.Manner of Exercising Option.

(a)In order to exercise this option with respect to all or any part of the Option Shares for which this option is at the time exercisable, Optionee (or any other person or persons exercising the option) must take the following actions:

(i)Execute and deliver to the Corporation a Notice of Exercise for the Option Shares for which the option is exercised;

(ii)Pay the aggregate Exercise Price for the purchased shares in one or more of the following forms, subject to Applicable Laws:

(A)Cash or check made payable to the Corporation; or

(B)Shares of Common Stock held by Optionee (or any other person or persons exercising the option) for the requisite period necessary to avoid a charge to the Corporation’s earnings for financial reporting purposes and valued at their Fair Market Value on the Exercise Date; or

(C)Through a special sale and remittance procedure pursuant to which Optionee (or any other person or persons exercising the option) shall concurrently provide irrevocable instructions (I) to a Corporation-designated brokerage firm to effect the immediate sale of the purchased shares and remit to the Corporation, out of the sale proceeds available on the settlement date, sufficient funds to cover the aggregate Exercise Price payable for the purchased shares plus all applicable federal, state and local income and employment taxes required to be withheld by the Corporation by reason of such exercise and (II) to the Corporation to deliver the certificates for the purchased shares directly to such brokerage firm in order to complete the sale.

Except to the extent the sale and remittance procedure is utilized in connection with the option exercise, payment of the Exercise Price must accompany the Notice of Exercise delivered to the Corporation in connection with the option exercise;

(iii)Furnish to the Corporation appropriate documentation that the person or persons exercising the option (if other than Optionee) have the right to exercise this option; and

(iv)Make appropriate arrangements with the Corporation (or Parent or Subsidiary employing or retaining Optionee) for the satisfaction of all federal, state and local income and employment tax withholding requirements applicable to the option exercise.

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(b)As soon as practical after the Exercise Date, the Corporation shall issue to or on behalf of Optionee (or any other person or persons exercising this option) a certificate for the purchased Option Shares, with the appropriate legends, if any, affixed thereto.

(c)In no event may this option be exercised for any fractional shares of Common Stock.

10.Compliance with Laws and Regulations.

(a)The exercise of this option and the issuance of the Option Shares upon such exercise shall be subject to compliance by the Corporation and Optionee with all applicable requirements of law relating thereto and with all applicable regulations of any stock exchange (or the Nasdaq National Market, if applicable) on which Common Stock may be listed for trading at the time of such exercise and issuance.

(b)The inability of the Corporation to obtain approval from any regulatory body having authority deemed by the Corporation to be necessary to the lawful issuance and sale of any Common Stock pursuant to this option shall relieve the Corporation of any liability with respect to the non-issuance or sale of Common Stock as to which such approval shall not have been obtained.  The Corporation, however, shall use its best efforts to obtain all such approvals.

11.Successors and Assigns.  Except to the extent otherwise provided in Paragraphs 3 and 6 above, the provisions of this Agreement shall inure to the benefit of, and be binding upon, the Corporation and its successors and assigns and Optionee, Optionee’s assigns and the legal representatives, heirs and legatees of Optionee’s estate.

12.Notices.  Any notice required to be given or delivered to the Corporation under the terms of this Agreement shall be in writing and addressed to the Corporation at its principal corporate offices.  Any notice required to be given or delivered to Optionee shall be in writing and addressed to Optionee at the address indicated below Optionee’s signature line on the Grant Notice.  All notices shall be deemed effective upon personal delivery or upon deposit in the U.S. mail, postage prepaid and properly addressed to the party to be notified.

13.Construction.  This Agreement and the option evidenced hereby are made and granted pursuant to the Plan and are in all respects limited by and subject to the terms of the Plan.  All decisions of the Plan Administrator with respect to any question or issue arising under the Plan or this Agreement shall be conclusive and binding on all persons having an interest in this option.  For purposes of this Agreement, whenever the context requires, the singular number shall include the plural, and vice versa.

14.Governing Law.  The interpretation, performance and enforcement of this Agreement shall be governed by the laws of the State of California without resort to that State’s conflict-of-laws rules.

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15.Excess Shares.  If the Option Shares covered by this Agreement exceed, as of the Grant Date, the number of shares of Common Stock which may without stockholder approval be issued under the Plan, then this option shall be void with respect to those excess shares, unless stockholder approval of an amendment sufficiently increasing the number of shares of Common Stock issuable under the Plan is obtained in accordance with the provisions of the Plan.

16.Additional Terms Applicable to an Incentive Option.  In the event this option is designated an Incentive Option in the Grant Notice, the following terms and conditions shall also apply to the grant:

(a)This option shall cease to qualify for favorable tax treatment as an Incentive Option if (and to the extent) this option is exercised for one or more Option Shares:  (A) more than three (3) months after the date Optionee ceases to be an Employee for any reason other than death or Permanent Disability; or (B) more than twelve (12) months after the date Optionee ceases to be an Employee by reason of Permanent Disability.

(b)No installment under this option shall qualify for favorable tax treatment as an Incentive Option if (and to the extent) the aggregate Fair Market Value (determined at the Grant Date) of the Common Stock for which such installment first becomes exercisable hereunder would, when added to the aggregate value (determined as of the respective date or dates of grant) of Common Stock or other securities for which this option or any other Incentive Options granted to Optionee prior to the Grant Date (whether under the Plan or any other option plan of the Corporation or any Parent or Subsidiary) first become exercisable during the same calendar year, exceed One Hundred Thousand Dollars ($100,000) in the aggregate.  Should such One Hundred Thousand Dollar ($100,000) limitation be exceeded in any calendar year, this option shall nevertheless become exercisable for the excess shares in such calendar year as a Non-Statutory Option.

(c)Should the exercisability of this option be accelerated upon a Change of Control transaction, then this option shall qualify for favorable tax treatment as an Incentive Option only to the extent the aggregate Fair Market Value (determined at the Grant Date) of Common Stock for which this option first becomes exercisable in the calendar year in which the Change of Control occurs does not, when added to the aggregate value (determined as of the respective date or dates of grant) of the Common Stock or other securities for which this option or one or more other Incentive Options granted to Optionee prior to the Grant Date (whether under the Plan or any other option plan of the Corporation or any Parent or Subsidiary) first become exercisable during the same calendar year, exceed One Hundred Thousand Dollars ($100,000) in the aggregate.  Should the applicable One Hundred Thousand Dollar ($100,000) limitation be exceeded in the calendar year of such Change of Control, the option may nevertheless be exercised for the excess shares in such calendar year as a Non-Statutory Option.

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(d)Should Optionee hold, in addition to this option, one or more other options to purchase Common Stock which become exercisable for the first time in the same calendar year as this option, then the foregoing limitations on the exercisability of such options as Incentive Options shall be applied on the basis of the order in which such options are granted.

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EXHIBIT I
NOTICE OF EXERCISE

I hereby notify Restoration Hardware, Inc. (the “Corporation”) that I elect to purchase                            shares of the Corporation’s common stock (the “Purchased Shares”) at the option exercise price of $                           per share (the “Exercise Price”) pursuant to that certain option (the “Option”) granted to me on August 24, 2004 under the Corporation’s 1998 Stock Incentive Plan Amended and Restated on October 9, 2002.

Concurrently with the delivery of this Exercise Notice to the Corporation, I shall hereby pay to the Corporation the Exercise Price for the Purchased Shares in accordance with the provisions of my agreement with the Corporation (or other documents) evidencing the Option and shall deliver whatever additional documents may be required by such agreement as a condition for exercise.  Alternatively, I may utilize the special broker-dealer sale and remittance procedure specified in my agreement to effect payment of the Exercise Price.

, 20
Date
	Optionee
	Address:
Print name in exact manner
it is to appear on the
stock certificate:
Address to which certificate
is to be sent, if different
from address above:
Social Security Number:
Employee Number:

APPENDIX

The following definitions shall be in effect under the Agreement:

A.Agreement shall mean this Stock Option Agreement.

B.Applicable Laws shall mean the legal requirements relating to the administration of stock option plans, if any, under applicable provisions of federal securities laws, state corporate and securities laws, the Code, the rules of any applicable stock exchange or national market system, and the rules of any foreign jurisdiction applicable to the granting of stock options and the issuance of shares of Common Stock to residents therein.

C.Board shall mean the Corporation’s Board of Directors.

D.Cause shall mean, in connection with the termination of the Optionee’s Service by the Corporation, (a) the Optionee has been convicted of a felony involving fraud, dishonesty or personal injury to another human being, or (b) the termination of Service is evidenced by a resolution adopted in good faith by a majority of the members of the Board to the effect that the Optionee (i) intentionally and continually failed substantially to perform the Optionee’s reasonably assigned duties with the Corporation, which failure continued for a period of at least thirty (30) days after a written notice of demand for substantial performance has been delivered to the Optionee specifying the manner in which the Optionee has failed substantially to perform, or (ii) intentionally engaged in conduct which is demonstrably and materially injurious to the Corporation; provided, that no termination of the Optionee’s Service shall be for Cause as set forth in clause (ii) above until there shall have been delivered to the Optionee a copy of a written notice setting forth that the Optionee was guilty of the conduct set forth in clause (ii) and specifying the particulars thereof in detail. No act, nor failure to act, on the Optionee’s part shall be considered “intentional” unless the Optionee has acted, or failed to act, with a lack of good faith and with a lack of reasonable belief that the Optionee’s action or failure to act was in the best interest of the Corporation.  A termination of the Optionee’s Service shall also be considered for “Cause” if the termination is evidenced by a resolution adopted in good faith by a majority of the members of the Board following a notification from the Optionee, or following the occurrence, of any of the following events: (w) the Optionee becomes a named subject of a pending criminal proceeding (excluding traffic violations and other minor offenses); (x) the Optionee becomes the subject of any order, judgment or decree of any legal tribunal of competent jurisdiction, permanently or temporarily enjoining the Optionee from, or otherwise limiting, the following activities: (i) engaging in any type of business practice; or (ii) engaging in any activity in connection with the purchase or sale of any security or commodity or in connection with any violation of federal or state securities laws or federal commodities laws; (y) the Optionee is found by a court of competent jurisdiction in a civil action or by the Securities and Exchange Commission to have violated any federal or state securities law; or (z) the Optionee receives a “Wells notice”.

A-1

E.Change of Control shall mean any of the following:

(a)A merger or consolidation in which securities possessing more than fifty percent (50%) of the total combined voting power of the Corporation’s outstanding securities are transferred to a person or persons different from the persons holding those securities immediately prior to such transaction; or

(b)The sale, transfer or other disposition of all or substantially all of the Corporation’s assets in complete liquidation or dissolution of the Corporation; or

(c)The acquisition, directly or indirectly, by any person or related group of persons (other than the Corporation or a person that directly or indirectly controls, is controlled by, or is under common control with, the Corporation) of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the 1934 Act) of securities possessing more than fifty percent (50%) of the total combined voting power of the Corporation’s outstanding securities pursuant to a tender or exchange offer made directly to the Corporation’s stockholders; or

(d)A change in the composition of the Board over a period of thirty-six (36) consecutive months or less such that a majority of the Board members ceases, by reason of one or more contested elections for Board membership, to be comprised of individuals who either (i) have been Board members continuously since the beginning of such period or (ii) have been elected or nominated for election as Board members during such period by at least a majority of the Board members described in clause (i) who were still in office at the time the Board approved such election or nomination.

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

G.Common Stock shall mean shares of the Corporation’s common stock.

H.Corporation shall mean Restoration Hardware, Inc., a Delaware corporation.

I.Employee shall mean an individual who is in the employ of the Corporation (or any Parent or Subsidiary), subject to the control and direction of the employer entity as to both the work to be performed and the manner and method of performance.

J.Exercise Date shall mean the date on which the option shall have been exercised in accordance with Paragraph 9 of the Agreement.

K.Exercise Price shall mean the exercise price per Option Share as specified in the Grant Notice.

A-2

L.Expiration Date shall mean the date on which the option expires as specified in the Grant Notice.

M.Fair Market Value per share of Common Stock on any relevant date shall be determined in accordance with the following provisions:

(a)If Common Stock is at the time traded on the Nasdaq National Market, then the Fair Market Value shall be deemed equal to the closing selling price per share of Common Stock on the date in question, as the price is reported by the National Association of Securities Dealers on the Nasdaq National Market.  If there is no closing selling price for Common Stock on the date in question, then the Fair Market Value shall be the closing selling price on the last preceding date for which a closing selling price is reported; or

(b)If Common Stock is at the time listed on any Stock Exchange, then the Fair Market Value shall be deemed equal to the closing selling price per share of Common Stock on the date in question on the Stock Exchange determined by the Plan Administrator to be the primary market for Common Stock, as such price is officially quoted in the composite tape of transactions on such exchange.  If there is no closing selling price for Common Stock on the date in question, then the Fair Market Value shall be the closing selling price on the last preceding date for which such quotation exists.

N.Grant Date shall mean the date of grant of the option as specified in the Grant Notice.

O.Grant Notice shall mean the Notice of Grant of Stock Option accompanying the Agreement, pursuant to which Optionee has been informed of the basic terms of the option evidenced hereby.

P.Incentive Option shall mean an option which satisfies the requirements of Section 422 of the Code.

Q.1934 Act shall mean the Securities Exchange Act of 1934, as amended.

R.Non-Statutory Option shall mean an option not intended to satisfy the requirements of Section 422 of the Code.

S.Not for Cause shall mean termination of the Optionee’s Service by the Corporation for reasons other than for Cause.

T.Notice of Exercise shall mean the notice of exercise in the form attached hereto as Exhibit I.

U.Option Shares shall mean the number of shares of Common Stock subject to the option as specified in the Grant Notice.

A-3

V.Optionee shall mean the person to whom the option is granted as specified in the Grant Notice.

W.Parent shall mean any corporation (other than the Corporation) in an unbroken chain of corporations ending with the Corporation, provided each corporation in the unbroken chain (other than the Corporation) owns, at the time of the determination, stock possessing fifty percent (50%) or more of the total combined voting power of all classes of stock in one of the other corporations in such chain.

X.Permanent Disability shall mean that the Optionee is unable to carry out the responsibilities and functions of the position held by the Optionee by reason of any physical or mental impairment for more than 120 days in any twelve-month period.

Y.Plan shall mean the Corporation’s 1998 Stock Incentive Plan Amended and Restated on October 9, 2002.

Z.Plan Administrator shall mean either the Board or a committee of the Board acting in its capacity as administrator of the Plan.

AA.Service shall mean the Optionee’s performance of services for the Corporation (or any Parent or Subsidiary) in the capacity of an Employee, a non-employee member of the board of directors or a consultant or independent advisor.

BB.Stock Exchange shall mean the American Stock Exchange or the New York Stock Exchange.

CC.Subsidiary shall mean any corporation (other than the Corporation) in an unbroken chain of corporations beginning with the Corporation, provided each corporation (other than the last corporation) in the unbroken chain owns, at the time of the determination, stock possessing fifty percent (50%) or more of the total combined voting power of all classes of stock in one of the other corporations in such chain.

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EX-10.5

EXHIBIT 10.5

RESTORATION HARDWARE, INC.
NOTICE OF GRANT OF STOCK OPTION

Notice is hereby given of the following option grant (the “Option”) to purchase shares of Common Stock of Restoration Hardware, Inc. (the “Corporation”):

Optionee:	John W. Tate
Grant Date:	August 24, 2004
Vesting Commencement Date:	August 24, 2004
Exercise Price:	$5.70
Number of Option Shares:	329,828
Expiration Date:	August 24, 2014
Type of Option:	Non Statutory Option

Exercise Schedule:  The Option shall become exercisable for twenty-five percent (25%) of the Option Shares upon Optionee’s completion of each of the four (4) years of Service measured from and after the Vesting Commencement Date, with the first such installment to become exercisable on the first anniversary of the Vesting Commencement Date.  In no event shall the Option become exercisable for any additional Option Shares after Optionee’s cessation of Service.

Optionee understands and agrees that the Option is granted subject to and in accordance with the terms of the Restoration Hardware, Inc. 1998 Stock Incentive Plan Amended and Restated on October 9, 2002 (the “Plan”).  Optionee further agrees to be bound by the terms of the Plan and the terms of the Option as set forth in the Stock Option Agreement attached hereto as Exhibit A.  A copy of the Plan is available upon request made to the Secretary of the Corporation at the Corporation’s principal offices.

No Employment or Service Contract.  Nothing in this notice or in the attached Stock Option Agreement or in the Plan shall confer upon Optionee any right to continue in Service for any period of specific duration or interfere with or otherwise restrict in any way the rights of the Corporation (or any Parent or Subsidiary employing or retaining Optionee) or of Optionee, which rights are hereby expressly reserved by each, to terminate Optionee’s Service at any time for any reason, with or without cause.

Definitions.  All capitalized terms in this notice shall have the meaning assigned to them in this notice or in the attached Stock Option Agreement.

DATED: August 24, 2004
	RESTORATION HARDWARE, INC.
	By:	/s/Patricia A. McKay
	Title: Executive Vice President and Chief Financial Officer
	/s/ John W. Tate
	John W. Tate, Optionee
	Address:		530 Belmeade Way Trail
	Lewisville, NC 27023
ATTACHMENTS
Exhibit A - Stock Option Agreement

RESTORATION HARDWARE, INC.
STOCK OPTION AGREEMENT

RECITALS

A.The Board has adopted the Plan for the purpose of retaining the services of selected Employees, non-employee members of the Board or of the board of directors of any Parent or Subsidiary and consultants and other independent advisors who provide services to the Corporation (or any Parent or Subsidiary).

B.Optionee is to render valuable services to the Corporation (or a Parent or Subsidiary), and this Agreement is executed pursuant to, and is intended to carry out the purposes of, the Plan in connection with the Corporation’s grant of an option to Optionee.

C.All capitalized terms in this Agreement shall have the meaning assigned to them in the attached Appendix.

NOW, THEREFORE, it is hereby agreed as follows:

1.Grant of Option.  The Corporation hereby grants to Optionee, as of the Grant Date, an option to purchase up to the number of Option Shares specified in the Grant Notice.  The Option Shares shall be purchasable from time to time during the option term specified in Paragraph 2 below at the Exercise Price.

2.Option Term.  This option shall have a maximum term of ten (10) years measured from the Grant Date and shall accordingly expire at the close of business on the Expiration Date, unless sooner terminated in accordance with Paragraph 5 or 6 below.

3.Limited Transferability.  This option shall be neither transferable nor assignable by Optionee other than by will or by the laws of descent and distribution following Optionee’s death and may be exercised, during Optionee’s lifetime, only by Optionee.  However, if this option is designated a Non-Statutory Option in the Grant Notice, then this option may, in connection with the Optionee’s estate plan, be assigned in whole or in part during Optionee’s lifetime to one or more members of the Optionee’s immediate family or to a trust established for the exclusive benefit of the Optionee and/or one or more such family members.  The assigned portion shall be exercisable only by the person or persons who acquire a proprietary interest in the option pursuant to such assignment.  The terms applicable to the assigned portion shall be the same as those in effect for this option immediately prior to such assignment.

4.Date of Exercise.  This option shall become exercisable for the Option Shares in one or more installments as specified in the Grant Notice.  As the option becomes exercisable for such installments, those installments shall accumulate and the option shall remain exercisable for the accumulated installments until the Expiration Date or sooner termination of the option term under Paragraph 5 or 6 below.

5.Cessation of Service.  The option term specified in Paragraph 2 above shall terminate (and this option shall cease to be outstanding) prior to the Expiration Date should any of the following provisions become applicable:

(a)Should Optionee cease to remain in Service for any reason (other than death, Permanent Disability or Cause) while this option is outstanding, then the period for exercising this option shall be reduced to a three (3)-month period commencing with the date of such cessation of Service, but in no event shall this option be exercisable at any time after the Expiration Date.

(b)Should Optionee die while holding this option, then the personal representative of Optionee’s estate or the person or persons to whom the option is transferred pursuant to Optionee’s will or in accordance with the laws of inheritance shall have the right to exercise this option.  Such right shall lapse, and this option shall cease to be outstanding, upon the earlier of (i) the expiration of the twelve (12)-month period measured from the date of Optionee’s death or (ii) the Expiration Date.

(c)Should Optionee cease Service by reason of Permanent Disability while this option is outstanding, then the period for exercising this option shall be reduced to a twelve (12)-month period commencing with the date of such cessation of Service, but in no event shall this option be exercisable at any time after the Expiration Date.

(d)During the limited period of post-Service exercisability, this option may not be exercised in the aggregate for more than the number of vested Option Shares for which the option is exercisable at the time of Optionee’s cessation of Service.  Upon the expiration of such limited exercise period or (if earlier) upon the Expiration Date, this option shall terminate and cease to be outstanding for any otherwise exercisable Option Shares for which the option has not been exercised.  However, this option shall, immediately upon Optionee’s cessation of Service for any reason, terminate and cease to be outstanding with respect to any Option Shares for which this option is not otherwise at that time exercisable.

(e)Should Optionee’s Service be terminated for Cause, then this option shall terminate immediately and cease to remain outstanding.

6.Special Acceleration of Option.

(a)Change of Control.

(i)This option to the extent outstanding at the time of a Change of Control transaction but not otherwise fully exercisable, shall automatically accelerate so that this option shall, immediately prior to the effective date of such Change of Control, become exercisable for all of the Option Shares at the time subject to this option and may be exercised for any or all of those Option Shares as fully vested shares of Common Stock.  However, this option shall not become exercisable on such an

2

accelerated basis if and to the extent:  (i) this option is, in connection with the Change of Control, to be assumed by the successor corporation (or parent thereof) or otherwise continued in full force and effect pursuant to the terms of the Change of Control transaction; or (ii) this option is to be replaced with a cash incentive program of the successor corporation which preserves the spread existing at the time of the Change of Control on the Option Shares for which this option is not otherwise at that time exercisable (the excess of the Fair Market Value of those Option Shares over the aggregate Exercise Price payable for such shares) and provides for subsequent payout in accordance with the same option exercise/vesting schedule set forth in the Grant Notice.

(ii)Immediately following the Change of Control, this option shall terminate and cease to be outstanding, except to the extent assumed by the successor corporation (or parent thereof) or otherwise continued in full force and effect pursuant to the terms of the Change of Control transaction.

(iii)If this option is assumed in connection with a Change of Control (or otherwise continued in full force and effect), then this option shall be appropriately adjusted, immediately after such Change of Control, to apply to the number and class of securities or other property which would have been issuable to Optionee in consummation of such Change of Control had the option been exercised immediately prior to such Change of Control, and appropriate adjustments shall also be made to the Exercise Price, provided the aggregate Exercise Price shall remain the same.

(iv)If this option is assumed in connection with a Change of Control (or otherwise continued in full force and effect) and the Optionee’s Service is terminated Not for Cause by the Company or the successor corporation (or parent thereof) within eighteen (18) months after the Change of Control, this option automatically shall become vested and exercisable for all of the Option Shares at the time represented by this option.

(b)This Agreement shall not in any way affect the right of the Corporation to adjust, reclassify, reorganize or otherwise change its capital or business structure or to merge, consolidate, dissolve, liquidate or sell or transfer all or any part of its business or assets.

7.Adjustment in Option Shares.

Should any change be made to Common Stock by reason of any stock split, stock dividend, recapitalization, combination of shares, exchange of shares or other change affecting the outstanding Common Stock as a class without the Corporation’s receipt of consideration, appropriate adjustments shall be made to (i) the total number and/or class of securities subject to this option and (ii) the Exercise Price in order to reflect such change and thereby preclude a dilution or enlargement of benefits hereunder.

8.Stockholder Rights.  The holder of this option shall not have any stockholder rights with respect to the Option Shares until such person shall have

3

exercised the option, paid the Exercise Price and become a holder of record of the purchased shares.

9.Manner of Exercising Option.

(a)In order to exercise this option with respect to all or any part of the Option Shares for which this option is at the time exercisable, Optionee (or any other person or persons exercising the option) must take the following actions:

(i)Execute and deliver to the Corporation a Notice of Exercise for the Option Shares for which the option is exercised;

(ii)Pay the aggregate Exercise Price for the purchased shares in one or more of the following forms, subject to Applicable Laws:

(A)Cash or check made payable to the Corporation; or

(B)Shares of Common Stock held by Optionee (or any other person or persons exercising the option) for the requisite period necessary to avoid a charge to the Corporation’s earnings for financial reporting purposes and valued at their Fair Market Value on the Exercise Date; or

(C)Through a special sale and remittance procedure pursuant to which Optionee (or any other person or persons exercising the option) shall concurrently provide irrevocable instructions (I) to a Corporation-designated brokerage firm to effect the immediate sale of the purchased shares and remit to the Corporation, out of the sale proceeds available on the settlement date, sufficient funds to cover the aggregate Exercise Price payable for the purchased shares plus all applicable federal, state and local income and employment taxes required to be withheld by the Corporation by reason of such exercise and (II) to the Corporation to deliver the certificates for the purchased shares directly to such brokerage firm in order to complete the sale.

Except to the extent the sale and remittance procedure is utilized in connection with the option exercise, payment of the Exercise Price must accompany the Notice of Exercise delivered to the Corporation in connection with the option exercise;

(iii)Furnish to the Corporation appropriate documentation that the person or persons exercising the option (if other than Optionee) have the right to exercise this option; and

(iv)Make appropriate arrangements with the Corporation (or Parent or Subsidiary employing or retaining Optionee) for the satisfaction of all federal, state and local income and employment tax withholding requirements applicable to the option exercise.

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(b)As soon as practical after the Exercise Date, the Corporation shall issue to or on behalf of Optionee (or any other person or persons exercising this option) a certificate for the purchased Option Shares, with the appropriate legends, if any, affixed thereto.

(c)In no event may this option be exercised for any fractional shares of Common Stock.

10.Compliance with Laws and Regulations.

(a)The exercise of this option and the issuance of the Option Shares upon such exercise shall be subject to compliance by the Corporation and Optionee with all applicable requirements of law relating thereto and with all applicable regulations of any stock exchange (or the Nasdaq National Market, if applicable) on which Common Stock may be listed for trading at the time of such exercise and issuance.

(b)The inability of the Corporation to obtain approval from any regulatory body having authority deemed by the Corporation to be necessary to the lawful issuance and sale of any Common Stock pursuant to this option shall relieve the Corporation of any liability with respect to the non-issuance or sale of Common Stock as to which such approval shall not have been obtained.  The Corporation, however, shall use its best efforts to obtain all such approvals.

11.Successors and Assigns.  Except to the extent otherwise provided in Paragraphs 3 and 6 above, the provisions of this Agreement shall inure to the benefit of, and be binding upon, the Corporation and its successors and assigns and Optionee, Optionee’s assigns and the legal representatives, heirs and legatees of Optionee’s estate.

12.Notices.  Any notice required to be given or delivered to the Corporation under the terms of this Agreement shall be in writing and addressed to the Corporation at its principal corporate offices.  Any notice required to be given or delivered to Optionee shall be in writing and addressed to Optionee at the address indicated below Optionee’s signature line on the Grant Notice.  All notices shall be deemed effective upon personal delivery or upon deposit in the U.S. mail, postage prepaid and properly addressed to the party to be notified.

13.Construction.  This Agreement and the option evidenced hereby are made and granted pursuant to the Plan and are in all respects limited by and subject to the terms of the Plan.  All decisions of the Plan Administrator with respect to any question or issue arising under the Plan or this Agreement shall be conclusive and binding on all persons having an interest in this option.  For purposes of this Agreement, whenever the context requires, the singular number shall include the plural, and vice versa.

14.Governing Law.  The interpretation, performance and enforcement of this Agreement shall be governed by the laws of the State of California without resort to that State’s conflict-of-laws rules.

5

15.Excess Shares.  If the Option Shares covered by this Agreement exceed, as of the Grant Date, the number of shares of Common Stock which may without stockholder approval be issued under the Plan, then this option shall be void with respect to those excess shares, unless stockholder approval of an amendment sufficiently increasing the number of shares of Common Stock issuable under the Plan is obtained in accordance with the provisions of the Plan.

6

EXHIBIT I
NOTICE OF EXERCISE

I hereby notify Restoration Hardware, Inc. (the “Corporation”) that I elect to purchase                       shares of the Corporation’s common stock (the “Purchased Shares”) at the option exercise price of $                      per share (the “Exercise Price”) pursuant to that certain option (the “Option”) granted to me on August 24, 2004 under the Corporation’s 1998 Stock Incentive Plan Amended and Restated on October 9, 2002.

Concurrently with the delivery of this Exercise Notice to the Corporation, I shall hereby pay to the Corporation the Exercise Price for the Purchased Shares in accordance with the provisions of my agreement with the Corporation (or other documents) evidencing the Option and shall deliver whatever additional documents may be required by such agreement as a condition for exercise.  Alternatively, I may utilize the special broker-dealer sale and remittance procedure specified in my agreement to effect payment of the Exercise Price.

, 20
Date
	Optionee
	Address:
Print name in exact manner
it is to appear on the
stock certificate:
Address to which certificate
is to be sent, if different
from address above:
Social Security Number:
Employee Number:

APPENDIX

The following definitions shall be in effect under the Agreement:

A.Agreement shall mean this Stock Option Agreement.

B.Applicable Laws shall mean the legal requirements relating to the administration of stock option plans, if any, under applicable provisions of federal securities laws, state corporate and securities laws, the Code, the rules of any applicable stock exchange or national market system, and the rules of any foreign jurisdiction applicable to the granting of stock options and the issuance of shares of Common Stock to residents therein.

C.Board shall mean the Corporation’s Board of Directors.

D.Cause shall mean, in connection with the termination of the Optionee’s Service by the Corporation, (a) the Optionee has been convicted of a felony involving fraud, dishonesty or personal injury to another human being, or (b) the termination of Service is evidenced by a resolution adopted in good faith by a majority of the members of the Board to the effect that the Optionee (i) intentionally and continually failed substantially to perform the Optionee’s reasonably assigned duties with the Corporation, which failure continued for a period of at least thirty (30) days after a written notice of demand for substantial performance has been delivered to the Optionee specifying the manner in which the Optionee has failed substantially to perform, or (ii) intentionally engaged in conduct which is demonstrably and materially injurious to the Corporation; provided, that no termination of the Optionee’s Service shall be for Cause as set forth in clause (ii) above until there shall have been delivered to the Optionee a copy of a written notice setting forth that the Optionee was guilty of the conduct set forth in clause (ii) and specifying the particulars thereof in detail. No act, nor failure to act, on the Optionee’s part shall be considered “intentional” unless the Optionee has acted, or failed to act, with a lack of good faith and with a lack of reasonable belief that the Optionee’s action or failure to act was in the best interest of the Corporation.  A termination of the Optionee’s Service shall also be considered for “Cause” if the termination is evidenced by a resolution adopted in good faith by a majority of the members of the Board following a notification from the Optionee, or following the occurrence, of any of the following events: (w) the Optionee becomes a named subject of a pending criminal proceeding (excluding traffic violations and other minor offenses); (x) the Optionee becomes the subject of any order, judgment or decree of any legal tribunal of competent jurisdiction, permanently or temporarily enjoining the Optionee from, or otherwise limiting, the following activities: (i) engaging in any type of business practice; or (ii) engaging in any activity in connection with the purchase or sale of any security or commodity or in connection with any violation of federal or state securities laws or federal commodities laws; (y) the Optionee is found by a court of competent jurisdiction in a civil action or by the Securities and Exchange Commission to have violated any federal or state securities law; or (z) the Optionee receives a “Wells notice”.

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E. Change of Control shall mean any of the following:

(a)A merger or consolidation in which securities possessing more than fifty percent (50%) of the total combined voting power of the Corporation’s outstanding securities are transferred to a person or persons different from the persons holding those securities immediately prior to such transaction; or

(b)The sale, transfer or other disposition of all or substantially all of the Corporation’s assets in complete liquidation or dissolution of the Corporation; or

(c)The acquisition, directly or indirectly, by any person or related group of persons (other than the Corporation or a person that directly or indirectly controls, is controlled by, or is under common control with, the Corporation) of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the 1934 Act) of securities possessing more than fifty percent (50%) of the total combined voting power of the Corporation’s outstanding securities pursuant to a tender or exchange offer made directly to the Corporation’s stockholders; or

(d)A change in the composition of the Board over a period of thirty-six (36) consecutive months or less such that a majority of the Board members ceases, by reason of one or more contested elections for Board membership, to be comprised of individuals who either (i) have been Board members continuously since the beginning of such period or (ii) have been elected or nominated for election as Board members during such period by at least a majority of the Board members described in clause (i) who were still in office at the time the Board approved such election or nomination.

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

G.Common Stock shall mean shares of the Corporation’s common stock.

H.Corporation shall mean Restoration Hardware, Inc., a Delaware corporation.

I. Employee shall mean an individual who is in the employ of the Corporation (or any Parent or Subsidiary), subject to the control and direction of the employer entity as to both the work to be performed and the manner and method of performance.

J.Exercise Date shall mean the date on which the option shall have been exercised in accordance with Paragraph 9 of the Agreement.

K.Exercise Price shall mean the exercise price per Option Share as specified in the Grant Notice.

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L.Expiration Date shall mean the date on which the option expires as specified in the Grant Notice.

M.Fair Market Value per share of Common Stock on any relevant date shall be determined in accordance with the following provisions:

(a)If Common Stock is at the time traded on the Nasdaq National Market, then the Fair Market Value shall be deemed equal to the closing selling price per share of Common Stock on the date in question, as the price is reported by the National Association of Securities Dealers on the Nasdaq National Market.  If there is no closing selling price for Common Stock on the date in question, then the Fair Market Value shall be the closing selling price on the last preceding date for which a closing selling price is reported; or

(b)If Common Stock is at the time listed on any Stock Exchange, then the Fair Market Value shall be deemed equal to the closing selling price per share of Common Stock on the date in question on the Stock Exchange determined by the Plan Administrator to be the primary market for Common Stock, as such price is officially quoted in the composite tape of transactions on such exchange.  If there is no closing selling price for Common Stock on the date in question, then the Fair Market Value shall be the closing selling price on the last preceding date for which such quotation exists.

N.Grant Date shall mean the date of grant of the option as specified in the Grant Notice.

O.Grant Notice shall mean the Notice of Grant of Stock Option accompanying the Agreement, pursuant to which Optionee has been informed of the basic terms of the option evidenced hereby.

P.1934 Act shall mean the Securities Exchange Act of 1934, as amended.

Q.Non-Statutory Option shall mean an option not intended to satisfy the requirements of Section 422 of the Code.

R.Not for Cause shall mean termination of the Optionee’s Service by the Corporation for reasons other than for Cause.

S.Notice of Exercise shall mean the notice of exercise in the form attached hereto as Exhibit I.

T.Option Shares shall mean the number of shares of Common Stock subject to the option as specified in the Grant Notice.

U.Optionee shall mean the person to whom the option is granted as specified in the Grant Notice.

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V.Parent shall mean any corporation (other than the Corporation) in an unbroken chain of corporations ending with the Corporation, provided each corporation in the unbroken chain (other than the Corporation) owns, at the time of the determination, stock possessing fifty percent (50%) or more of the total combined voting power of all classes of stock in one of the other corporations in such chain.

W.Permanent Disability shall mean that the Optionee is unable to carry out the responsibilities and functions of the position held by the Optionee by reason of any physical or mental impairment for more than 120 days in any twelve-month period.

X.Plan shall mean the Corporation’s 1998 Stock Incentive Plan Amended and Restated on October 9, 2002.

Y.Plan Administrator shall mean either the Board or a committee of the Board acting in its capacity as administrator of the Plan.

Z.Service shall mean the Optionee’s performance of services for the Corporation (or any Parent or Subsidiary) in the capacity of an Employee, a non-employee member of the board of directors or a consultant or independent advisor.

AA.Stock Exchange shall mean the American Stock Exchange or the New York Stock Exchange.

BB.Subsidiary shall mean any corporation (other than the Corporation) in an unbroken chain of corporations beginning with the Corporation, provided each corporation (other than the last corporation) in the unbroken chain owns, at the time of the determination, stock possessing fifty percent (50%) or more of the total combined voting power of all classes of stock in one of the other corporations in such chain.

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EX-31.1

Exhibit 31.1

CERTIFICATION

I, Gary G. Friedman,certify that:

1.I have reviewed this quarterlyreport on Form 10-Q of Restoration Hardware, 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(s) 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)) 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)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

c)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(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s independent registered public accounting firm 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:  December 1, 2004

By:	/s/ Gary G. Friedman
	Gary G. Friedman
	President andChief Executive Officer

EX-31.2

Exhibit 31.2

CERTIFICATION

I, Patricia A. McKay,certify that:

1.I have reviewed this quarterlyreport on Form 10-Q of Restoration Hardware, 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(s) 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)) 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)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

c)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(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s independent registered public accounting firm 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:  December 1, 2004

By:	/s/ Patricia A. McKay
	Patricia A. McKay
	Executive Vice President andChief Financial Officer

EX-32.1

Exhibit 32.1

RESTORATION HARDWARE, INC.

CERTIFICATION

In connection with the periodic report of Restoration Hardware, Inc. (the “Company”) on Form 10-Q for the period ended October 30, 2004 as filed with the Securities and Exchange Commission (the “Report”), I, Gary G. Friedman, Chief Executive Officer of the Company, hereby certify as of the date hereof, solely for purposes of Title 18, Chapter 63, Section 1350 of the United States Code, that to the best of my knowledge:

(1)the Report fully complies with the requirements of Section 13(a) or 15(d), as applicable, 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 at the dates and for the periods indicated.

This Certification has not been, and shall not be deemed, “filed” with the Securities and Exchange Commission.

Date:  December 1, 2004

By:	/s/ Gary G. Friedman
	Gary G. Friedman
	President andChief Executive Officer

EX-32.2

Exhibit 32.2

RESTORATION HARDWARE, INC.

CERTIFICATION

In connection with the periodic report of Restoration Hardware, Inc. (the “Company”) on Form 10-Q for the period ended October 30, 2004 as filed with the Securities and Exchange Commission (the “Report”), I, Patricia A. McKay, Chief Financial Officer of the Company, hereby certify as of the date hereof, solely for purposes of Title 18, Chapter 63, Section 1350 of the United States Code, that to the best of my knowledge:

(1)the Report fully complies with the requirements of Section 13(a) or 15(d), as applicable, 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 at the dates and for the periods indicated.

This Certification has not been, and shall not be deemed, “filed” with the Securities and Exchange Commission.

Date:  December 1, 2004

By:		/s/ Patricia A. McKay
	Patricia A. McKay
	Executive Vice President andChief Financial Officer