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                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                   FORM 10-K/A
                  Annual Report Pursuant to Section 13 or 15(d)
                     of the Securities Exchange Act of 1934

                               (Amendment No. 2)

                   For the fiscal year ended FEBRUARY 3, 2001

                        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             (I.R.S. Employer Identification No.)
incorporation of organization)


         15 KOCH ROAD, SUITE J
       CORTE MADERA, CALIFORNIA                                  94925
(Address of principal executive offices)                       (Zip Code)

        Registrant's telephone number, including area code (415) 924-1005

        SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE


Title of each class                   Name of each exchange on which registered
        NONE                                             NONE
        ----                                             ----


           SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:

                         COMMON STOCK, $.0001 PAR VALUE
                                (Title of class)

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

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

The aggregate market value of voting stock held by non-affiliates of the
registrant was approximately $33,176,359 as of April 20, 2001 based upon the
closing price of the registrant's common stock on the Nasdaq National Market
reported for April 20, 2001. Shares of voting stock held by each executive
officer and director and by each person who on that date beneficially owned more
than 5% of the outstanding voting stock have been excluded in that such persons
may under certain circumstances be deemed to be affiliates. This determination
of affiliate status is not necessarily a conclusive determination of affiliate
status for any other purpose.

19,033,723 shares of the registrant's $.0001 par value common stock were
outstanding on April 20, 2001.
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                                TABLE OF CONTENTS


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                                            PART I

Item 1.    Business...................................................................      1
Item 2.    Properties.................................................................     13
Item 3.    Legal Proceedings..........................................................     14
Item 4.    Submission of Matters to a Vote of Security Holders........................     14

                                           PART II

Item 5.    Market for Registrant's Common Equity and Related Stockholder Matters......     14
Item 6.    Selected Financial Data....................................................     16
Item 7.    Management's Discussion and Analysis of Financial
           Condition and Results of Operations........................................     17
Item 7A.   Quantitative and Qualitative Disclosures About Market Risk.................     23
Item 8.    Financial Statements, as Restated, and Supplementary Data..................     24
Item 9.    Changes in and Disagreements with Accountants on
           Accounting and Financial Disclosure........................................     46

                                           PART III

Item 10.   Directors and Executive Officers of the Registrant.........................     47
Item 11.   Executive Compensation and Other Information...............................     52
Item 12.   Security Ownership of Certain Beneficial Owners and Management.............     64
Item 13.   Certain Relationships and Related Transactions.............................     66

                                           PART IV

Item 14.   Exhibits, Financial Statement Schedules, and Reports on Form 8-K...........     69
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                               INTRODUCTORY NOTE

We issued a press release on March 21, 2002, included as an exhibit to a Form
8-K filed with the Securities and Exchange Commission on the same date, and a
press release on March 29, 2002, included as an exhibit to a Form 8-K filed
with the Securities and Exchange Commission on April 1, 2002, relating to our
intention to restate our annual financial statements for fiscal year 2000 and
the first three quarters of fiscal year 2001. This amendment on Form 10-K/A
(Amendment No. 2) amends our annual report on Form 10-K for the year ended
February 3, 2001, as filed with the Securities and Exchange Commission on May
4, 2001, and is being filed to reflect the restatement of our consolidated
financial statements. The significant effects of this restatement on the
financial statements are presented in Note 13 to the consolidated financial
statements and Items 6 and 7 in Part II of this amended annual report on Form
10-K/A (Amendment No. 2). This amendment incorporates certain revisions to
historical financial data and related descriptions but is not intended to
update other information presented in this annual report as originally filed,
except where specifically noted.

This amended annual report on Form 10-K/A (Amendment No. 2) contains certain
forward-looking statements that are based on the beliefs of, and estimates made
by and information currently available to, our management. The words "expect,"
"anticipate," "intend," "plan" and similar expressions identify forward-looking
statements. These statements are subject to risks and uncertainties. Actual
results could differ materially from those discussed here. Factors that could
cause or contribute to such differences include, but are not limited to, those
discussed below in "Factors That May Affect Our Future Operating Results" and
elsewhere in this annual report on Form 10-K/A (Amendment No. 2).

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                                     PART I

ITEM 1. BUSINESS

GENERAL

Our company, Restoration Hardware, Inc., together with our subsidiaries, is a
specialty retailer of home furnishings, functional and decorative hardware and
related merchandise that reflects our classic and authentic American point of
view. We market our merchandise through retail locations, mail order catalogs
and on the worldwide web 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 55
year old customer. We operated 106 stores in 31 states, the District of Columbia
and in Canada at February 3, 2001. We operate on a 52 - 53 week fiscal year
ending on the Saturday closest to January 31. The 2000 fiscal year was a 53-week
year and ended on February 3, 2001.

We commenced business more than 20 years ago 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. We display our broad assortment of
merchandise in an architecturally inviting setting, which we believe appeals to
both men and women. We believe that we create an attractive and entertaining
environment in our stores by virtue of our eclectic product mix, which combines
classic, high-quality furniture, lighting, home furnishings and functional and
decorative hardware. Integral to the shopping experience, most product displays
are complemented by our unique and often whimsical in-store signage program,
which provides historical, anecdotal and sometimes nostalgic descriptions of
products.

In March 1998, we purchased The Michaels Furniture Company, a manufacturer of
classic, mission-style hardwood furniture. Prior to the acquisition, Michaels
was an independent supplier for our retail stores.

RETAIL STORES

MERCHANDISING MIX

We offer a broad but carefully edited selection of merchandise that provides a
consistent point of view throughout our stores. Our collection of merchandise,
not traditionally found in a single store environment, includes classic
American-styled furniture, home furnishings, lighting, functional and decorative
hardware and discovery items. Our merchandise mix also includes proprietary
products and hard-to-find products selected from non-traditional distribution
channels that appear unique to our customers.

PRODUCT SELECTION, PURCHASING AND SOURCING

We make merchandise purchases from over 450 vendors. These vendors include major
domestic manufacturers, specialty niche manufacturers and importers. We maintain
agents in China, England, France, Japan, India, Portugal and Eastern Europe, and
our merchandising team travels to Asia and Europe in search of new products. By
sourcing products offshore, we seek to achieve increased buying effectiveness
and ensure exclusivity for a portion of our product line. In many instances, we
also work closely with our vendors to develop products which are unique to us.

DIRECT TO CUSTOMER -- CATALOG AND INTERNET

Our catalog business complements our retail business by building customer
awareness of a concept and acting as an effective advertising vehicle. In
addition, we maintain a website, www.restorationhardware.com, designed to sell
our products, promote consumer awareness of Restoration Hardware and generate
store traffic.

In fiscal 2000, we distributed approximately 12 million catalogs. We mail
catalogs to persons with demographic profiles similar to those of our retail
customers and who also possess previous mail order purchase histories. For the
fiscal year ended February 3, 2001, these persons were primarily identified
through the exchange or rental of lists from other mail order businesses,
various publications and internally-maintained customer lists. We out-source the
fulfillment aspects of the business, including telemarketing, customer service
and distribution, to National Catalog Corporation. Its facility is located in
Portland, Tennessee.

We believe our catalog is a key resource to further market our brand to both
retail customers and customers outside of the retail trade area.

THE MICHAELS FURNITURE COMPANY

Michaels offers a line of furniture for the home and office. Specific product
lines include living room, bedroom, dining room, home office and accessory
items. Inter-company sales to Restoration Hardware represented virtually all of
Michaels' total sales during the fiscal year ended February 3, 2001 and this
trend is expected to continue. Michaels is located in Sacramento, California.

MANAGEMENT INFORMATION SYSTEMS

Our retail management information systems include fully integrated store,
merchandising, distribution and financial systems. We utilize STS Systems for
our point-of-sale and merchandise management systems, and rely on STS for
software support.
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In spring of 2000, our Baltimore distribution center was opened, and the
implementation of our bi-coastal distribution strategy was completed. We utilize
a four-wall warehouse management package offered through STS Systems, which was
first implemented in our Hayward distribution center in 1999.

COMPETITION

We compete with a wide variety of national, regional and local retailers.
Competition exists from businesses utilizing a similar retail store strategy, as
well as traditional furniture stores and department stores. Many of our
competitors are larger and have substantially greater financial, marketing and
other resources.

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.

TRADEMARKS

We have registered our trademark "Restoration Hardware" in the United States,
Mexico and Canada.

EMPLOYEES

At February 3, 2001, we had approximately 2,100 full-time employees and 1,100
part-time employees. We consider our employee relations to be good. None of our
employees are represented by a collective bargaining agreement, nor have we ever
experienced any work stoppage.

FACTORS THAT MAY AFFECT OUR FUTURE OPERATING RESULTS

Because our revenues are 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. 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 sales and most of our net income 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 November and December, our business, financial
condition and annual operating results may be materially adversely affected.

In addition, we make decisions regarding merchandise well in advance of the
season in which it will be sold, particularly for the holiday selling season. We
also expend a large amount of our available funds on advertising in advance of a
particular season. Moreover, our advertising costs for the past three fiscal
years have increased from approximately $4.4 million per year to approximately
$14.1 million per year. As a result, if we misjudge the directions or trends in
our market, we may significantly overstock unpopular products and understock
popular ones while expending large amounts of our cash on advertising that
generates little return on investment. All of these results would have a
negative impact 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 closings, remodels 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 and investors, the market price of our securities would likely decline.

Fluctuations in comparable store sales may cause our revenues 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 results have fluctuated significantly in
the past and we believe that such fluctuations may continue. Our comparable
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store net sales decreased 1% in fiscal 2000, and increased 0.8% in fiscal 1999
and increased 12.3% in fiscal 1998. Past comparable store sales results may not
be indicative of future results. For example, during February and March 2000, we
experienced negative double-digit comparable store sales. Moreover, we believe
that comparable store sales will be between negative 15% and negative 18% for
the first fiscal quarter of the fiscal year ending February 2, 2002. As a
result, the unpredictability of our comparable store sales may cause our
revenues and operating results to vary quarter to quarter, and an unanticipated
decline in revenues 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 revenues and significantly harm our operating results.

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, Mitchell Gold, a manufacturer of upholstered furniture, and
Robert Abbey Inc., a manufacturer of table and floor lamps, together accounted
for approximately 17% of our aggregate merchandise purchases in the fiscal year
ended February 3, 2001. 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, and we have historically employed a single general contractor to
oversee the construction of our new stores. A failure by the vendor to support
our management information systems or by the contractor to provide its services
adequately upon request in the future could have a material adverse effect on
our business, results of operations and financial condition.

A disruption in either of our two distribution centers' operations would
materially affect our operating results.

The distribution functions for our stores are currently handled from our
facilities in Hayward, California and Baltimore, Maryland. Any significant
interruption in the operation of either of these facilities would 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.

We are dependent on external funding sources.

We, like other emerging-growth retailers, rely significantly 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 $89.0
million credit facility, the amount available under this facility is typically
much less than the $89.0 million stated maximum limit of the facility because
the availability of eligible collateral for purposes of the borrowing base
limitations in the credit facility usually reduces the overall credit amount
otherwise available at any given time. While we currently believe that our cash
flow from operations and funds available under our credit facility will satisfy
our capital requirements for at least the next 12 months, continued weakening
of, or other adverse developments concerning our sales performance or adverse
developments concerning the availability of credit under our credit facility due
to covenant limitations or other factors could limit the overall availability of
funds to us. In particular, we may experience cash flow shortfalls in the future
and any increase in external funding required by these shortfalls may not be
available to us.

Because our business requires a substantial level of liquidity, we are dependent
upon a 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,
publicity for the holiday buying season and other similar advance expenses. In
addition, other activities such as expenses of our direct to customer business
may require additional capital expenditures. We currently have in place a credit
facility with a syndicate of lenders, which include, among others, Fleet Capital
Corporation. Over the past several years, we have entered into numerous
modifications of this credit facility, primarily to address changes in the
covenant requirements to which we are subject. The most recent amendment of our
credit facility occurred in March 2001 in connection with our Series A and B
preferred stock financing. As a result of that amendment, the credit facility
now provides us with a line of credit of up to a maximum of $89.0 million, with
amounts available for letters of credit under the line up to a maximum of $20.0
million. However, covenants in the credit facility include, among others, ones
that limit our ability to incur additional debt, make liens, make investments,
consolidate, merge or acquire other businesses and sell assets, pay dividends
and other distributions, and enter into transactions with affiliates. These
covenants restrict numerous aspects of our business. Moreover, financial
performance covenants require us, among other things, not to exceed particular
capital expenditure limits. The credit facility also includes a borrowing base
formula to address the availability of credit under the facility at any given
time based upon numerous factors, including eligible inventory and eligible
accounts receivable
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(subject to the overall maximum cap on total borrowings). Consequently, the
availability of eligible collateral for purposes of the borrowing base formula
may limit our ability to borrow under the credit facility. Moreover, failure to
comply with the terms of the credit facility would entitle the secured lenders
to foreclose on our assets, including our accounts, inventory, general
intangibles, equipment, goods, fixtures and chattel paper. The secured lenders
would be repaid from the proceeds of the liquidation of those assets before the
assets would be available for distribution to other creditors and, lastly, to
the holders of our capital stock. Our ability to satisfy the financial and other
restrictive covenants may be affected by events beyond our control.

We may be unable to raise additional funds that we will need to remain
competitive.

We depend on a number of different financing sources to fund our continued
operations, including third party financings and borrowings that may include
debt, equity or other securities. 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 take
other actions that otherwise might be important to our operations. Additionally,
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.
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.

We have increasing interest expense which may impact our future operations.

High levels of interest expense have had and could have negative effects on our
future operations. Interest expense, which is net of interest income and
includes amortization of debt issuance costs and interest expense on borrowings
under our credit facility, increased $4.4 million to $5.8 million for the fiscal
year ended February 3, 2001 from $1.4 million for the fiscal year ended January
29, 2000. For the fiscal year ended January 29, 2000, interest expense increased
only $0.5 million to $1.4 million. The increase in interest expense in the past
fiscal year resulted from both an increase in the average borrowings outstanding
and an increase in the average interest rate. However, cash generated from our
operations was not sufficient to cover operating expenses and capital
expenditures. Consequently, we were required to make continuous borrowings under
our credit facility during the fiscal year ended February 3, 2001. While our
credit facility was amended in March 2001 to provide us with a more favorable
interest rate, a substantial portion of our cash flow from operations must be
used to pay our interest expense and will not be available for other business
purposes. Interest expense continues to be a significant use of our available
cash. Our ability to meet our debt and other obligations and to reduce our total
debt depends on our future operating performance and on economic, financial,
competitive and other factors. In addition, we may need to incur additional
indebtedness in the future. Many of these factors are beyond our control. 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
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 fiscal year ended February 3, 2001, we purchased approximately 18% of
our merchandise directly from vendors located abroad and expect that such
purchases will increase as a percentage of total merchandise purchases for the
fiscal year ending on February 2, 2002. As an importer, our future success will
depend in large measure upon our ability to maintain our existing foreign
supplier relationships or to develop new ones. While we rely on our long-term
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, 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, delays in shipments, freight cost
increases, economic uncertainties, including inflation, foreign government
regulations, and political unrest and trade restrictions, including United
States retaliating against protectionist foreign trade practices. 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 a loss of sales revenues to us.

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 have a material adverse effect on our financial condition and
results of operations in the future.
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Increased investments related to our catalog and Internet sales business may not
generate a corresponding increase in profits to our business.

We may invest additional resources in the expansion of our catalog and Internet
sales business which could increase the risks associated with aspects of this
business. While we out-source the fulfillment aspects of our catalog business,
including telemarketing, customer service and distribution, to National Catalog
Corporation, increased efforts in our catalog and Internet 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 product. Although we intend to attempt to mitigate
the impact of these increases by improving efficiencies, we cannot assure you
that cost increases associated with our catalog and Internet sales business will
not have an adverse effect on the profitability of our business.

We may not be able to successfully anticipate changes in consumer trends and our
failure to do so may lead to loss of sales revenues.

Our success depends on our ability to anticipate and respond to changing
merchandise trends and consumer demands in a timely manner. Moreover, our new
management team is redefining and redirecting the focus of our stores, and
implementing changes in the nature and types of many products we sell. If 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 items which prove
popular could 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. The failure of this trend to materialize or a decline in such
a trend could adversely affect 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 our stores or furniture-making operations do not adhere to
our quality control or service procedures or 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.

Our success is highly dependent on new manufacturers and suppliers with whom we
do not have a long history working together.

As our management team changes the nature and types of the many products that we
sell, we anticipate changes in some of the manufacturers and suppliers of our
products. Many of these manufacturers and suppliers will be new to us, and many
of them will be located abroad. We cannot assure you that they will be reliable
sources of our products. Moreover, these manufacturers and suppliers may be
small and undercapitalized firms who 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 would be able, if
necessary, to return product to these suppliers 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 the current downturn in the U.S. or worldwide economy. Significant
failures on the part of these new suppliers or manufacturers could have a
material adverse effect on our operating results.

In addition, many of these suppliers and manufacturers will 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 demand and trends, and any
downturn in the U.S. economy.

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

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 control processes or to take full
advantage of supply chain opportunities could have a material adverse effect on
our operating results.

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 new Chief Executive Officer, Mr. 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. 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

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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.

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

We believe that there currently is a general trend in the economy of weakening
retail sales, and we further believe that we may continue to be hurt by this
trend. In particular, a weakening environment for retail sales could adversely
affect consumer interest in our major product lines. Our comparable store net
sales decreased 1% for the fiscal year ended February 3, 2001. We believe that
our first quarter sales results for the fiscal year ending February 2, 2002 will
be weaker than our first quarter sales results for the fiscal year ending
February 3, 2001. The success of our business depends to a significant extent
upon the level of consumer spending, and 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. They also may 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 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 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.

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 U.S.
equity markets have from time to time experienced significant price and volume
fluctuations that have particularly affected the market prices for the stocks of
emerging-growth companies. These broad market fluctuations may materially
adversely affect the market price of our common stock in the future. Such
variations 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 of emerging-growth companies. 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 public market analyst 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,
investors in our Series A and B preferred stock financing have been granted
demand registration rights under an investor rights agreement pursuant to which
they may make a demand on us at any time beginning September 17, 2001 to
register in excess of 8 million shares of our common stock, assuming that our
stockholders approve the conversion feature of our Series B preferred stock into
Series A preferred stock. Sale, or the availability for sale, of substantial
amounts of common stock by our existing stockholders under Rule 144, through the
exercise of registration rights or the issuance of shares of common stock upon
the exercise of stock options or warrants, 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 certificate of incorporation and 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

<PAGE>
example, our certificate of incorporation and 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.

Separately, the holders of our preferred stock 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 some types of mergers, consolidations, acquisitions and similar
transactions, and 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 our stockholders.

We have made forward-looking statements in this annual report on Form 10-K/A.

This annual report on Form 10-K/A 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
statements as to our plans to open additional stores, the anticipated
performance of new stores, the impact of competition and other statements
containing words such as "believes," "anticipates," "estimates," "expects,"
"may," "intends," 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 credit facility, failure
to anticipate changes in consumer trends, loss of key vendors, changes in the
competitive environment in which we operate, competition for and the
availability of sites for new stores, 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. 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 annual
report.


SUBSEQUENT EVENTS

We entered into an amended and restated Series A and B preferred stock purchase
agreement, dated as of March 21, 2001, with several investors, including
Palladin Capital IX, LLC, Reservoir Capital Partners, LP and several of
Reservoir's affiliates, Glenhill Capital LP and Mr. Friedman. On March 22, 2001,
we sold to these investors an aggregate of 6,820 shares of Series A preferred
stock and 8,180 shares of Series B preferred stock each, at $1,000 per share,
pursuant to the preferred stock purchase agreement. The rights, preferences and
privileges of the preferred stock are briefly described in footnote 12 to the
attached consolidated financial statements and are more fully described in the
certificate of designation of Series A and Series B preferred stock. In
connection with the issuance of these preferred stock, we received aggregate
gross proceeds of approximately $15.0 million. We intend to use the net proceeds
from this private financing to repay existing indebtedness and for general
corporate purposes.

In the preferred stock purchase agreement, we agreed to seek stockholders'
approval of certain antidilution features of the Series A preferred stock and
certain conversion features of the Series B preferred stock at our next
stockholders meeting. In addition to the preferred stock purchase agreement, we
entered into an amended and restated investor rights agreement with all of the
investors. Separately, several of the investors also entered into a short sales
agreement.

Pursuant to the preferred stock purchase agreement and the certificate of
designation, the holders of Series A preferred stock may elect up to two members
to our board of directors. In connection with the issuance of the Series A
preferred stock, the holders of Series A preferred stock nominated, and our
board then appointed, Glenn J. Krevlin and Mark J. Schwartz to our board of
directors as a Class II director and Class I director, respectively. The terms
of Mr. Krevlin and Mr. Schwartz as directors on our board will expire at our
annual meeting in 2002 and 2003, respectively. Provided that the holders of
Series A preferred stock remain entitled to elect such director(s), each
director nominated by the holders of Series A preferred stock will be up for
election upon the expiration of their respective terms.

In connection with the Series A and B preferred stock financing, we also hired
Mr. Friedman as our new Chief Executive Officer and our board of directors
appointed Mr. Friedman as a Class III director to our board with a term expiring
at this year's annual meeting of stockholders. Mr. Friedman is standing for
re-election at this year's annual meeting of stockholders. Mr. Friedman
purchased 455 shares of the Series A preferred stock and 545 shares of the
Series B preferred stock for an aggregate purchase price of $1 million. In
addition, as part of Mr. Friedman's compensation package, we sold Mr. Friedman
571,429 shares of common stock at $1.75 per share and Mr. Friedman exercised his
option to purchase 1.2 million shares of common stock at $1.75 per share for an
aggregate sales price of approximately $3.1 million. We also granted Mr.
Friedman an option to purchase 200,000 shares of our common stock at our
exercise price of $6.00 per share. In connection with the sale of preferred and
common stock to Mr. Friedman, we also made a loan to Mr. Friedman in the amount
of $2.05 million. All of the loan proceeds were used by Mr. Friedman to purchase
a portion of this stock. The loan is a full recourse loan and is secured by
shares of the common stock and preferred stock purchased by Mr. Friedman.

We urge you to refer to footnote 12 to the attached consolidated financial
statements for additional details of the private financing and Mr. Friedman's
compensation package. Further, the certificate of designation and the agreements
related to the issuance of the preferred stock and Mr. Friedman's compensation
package are attached as exhibits to our current report on Form 8-K filed with
the Securities and Exchange Commission on April 2, 2001. We urge you to refer to
this Form 8-K for additional and more specific details of the private financing
and Mr. Friedman's compensation package.

ITEM 2. PROPERTIES

We currently lease three properties located in Corte Madera, California, and one
property in San Rafael, California, which are used as our headquarters. The
first

<PAGE>
property in Corte Madera consists of approximately 3,600 square feet of office
space and approximately 11,000 square feet of warehouse space. The lease expires
on November 30, 2002. The second and third properties in Corte Madera consist of
approximately 21,000 square feet of office space in total and the leases expire
on May 15, 2002. The fourth property in San Rafael consists of approximately
15,750 square feet of office space and the lease expires on September 30, 2001.

We lease approximately 160,000 square feet of warehouse space in Hayward,
California, for use as our west coast distribution center. This lease expires on
July 31, 2004, with an option to extend for one additional five-year term. We
lease an additional 191,000 square feet of warehouse space in Tracy, California,
also for use as a distribution center. This lease expires on September 1, 2003.
We lease approximately 50,000 square feet for use as a distribution center in
Oakland, California. This lease expires in May 2001 and we do not expect to
replace this space. We lease approximately 276,000 square feet of warehouse
space in Baltimore, Maryland, for use as our east coast distribution center. The
lease expires on September 30, 2006, with options to extend for two additional
three-year terms.

As of February 3, 2001, we leased approximately 1,222,000 gross square feet for
our 106 retail stores. Our retail stores' lease terms range from 10 to 15 years.
Most leases for our retail stores provide for a minimum rent, typically
including escalating rent increases, plus a percentage rent based upon sales
after certain minimum thresholds are achieved. The leases generally require us
to pay insurance, utilities, real estate taxes, and repair and maintenance
expenses.

Michaels leases two properties used for the manufacturing and storage of
furniture, in Sacramento, California. The main property consists of
approximately 100,000 square feet of manufacturing space and 7,000 square feet
of office space. The lease expires on February 28, 2008, with options to extend
the lease for two additional 5-year terms. The second property consists of
approximately 46,000 square feet of warehouse space which is used to house
finished upholstered goods. This lease expires on July 31, 2001, and we expect
to renew the lease.

ITEM 3. LEGAL PROCEEDINGS

There are no material pending legal proceedings against us. We are, however,
involved in routine litigation arising in the ordinary course of our business.
We believe that the final outcome of such proceedings should not have a material
adverse effect on our consolidated financial condition or results of operations.
However, we cannot assure you that the result of any proceeding will be in our
favor.

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

No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year covered by this annual report.

                                     PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

MARKET INFORMATION

Our common stock is listed on the Nasdaq National Market System under the symbol
"RSTO." The closing price of our common stock on Nasdaq was $5.65 on April 20,
2001.

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. More generally, the U.S. equity markets have from time to time
experienced significant price and volume fluctuations that have particularly
affected the market prices for the stocks of emerging-growth companies such as
ours. These broad market fluctuations 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 of
emerging-growth companies. Variations also may be the result of changes in our
business, operations or prospects, announcements or activities by our
competitors, 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 public market analyst 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.

STOCKHOLDERS

The number of our common stockholders of record as of April 20, 2001 was 138.
This number excludes stockholders whose stock is held in nominee or street name
by brokers.


<PAGE>
DIVIDEND POLICY

No dividends have been declared on our common stock since our 1998 initial
public offering and it is not anticipated that we will pay any dividends in the
foreseeable future on our common stock.

STOCK PRICE INFORMATION

Set forth below are the high and low closing sale prices for shares of our
common stock for each quarter during the fiscal years ended February 3, 2001 and
January 29, 2000 as reported by the Nasdaq National Market System.



<TABLE>
<CAPTION>
              QUARTER ENDING                        HIGH       LOW
-------------------------------------------       ------      ------
<S>                                               <C>         <C>
January 30, 1999                                  $28.25      $17.25
May 1, 1999                                        25.00       15.63
July 31, 1999                                      14.50       10.50
October 30, 1999                                   11.38        7.25
January 29, 2000                                   10.38        5.13
April 29, 2000                                      7.00        3.72
July 29, 2000                                       6.44        4.06
October 28, 2000                                    6.00        2.50
February 3, 2001                                    2.94        0.53
--------------------------------------------------------------------
</TABLE>



RECENT SALES OF UNREGISTERED SECURITIES

We made one sale of our securities which was not registered under the Securities
Act of 1933, as amended, for the fiscal year ended February 3, 2001. Pursuant to
a warrant agreement, dated as of September 27, 2000, we issued a warrant to
purchase 394,167 shares of our common stock to Goldman, Sachs & Co., and 155,833
shares of our common stock to Enhanced Retail Funding, LLC, each at $3.75 per
share. As further discussed in footnote 12 to the attached consolidated
financial statements, we repriced the warrant covering 200,000 of the 500,000
shares of common stock.

ITEM 6. SELECTED FINANCIAL DATA

The following selected financial data of the Company should be read in
conjunction with the consolidated financial statements and related notes for the
year ended February 3, 2001, as well as the "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the other
financial information included elsewhere in this Form 10-K/A (Amendment No. 2).
This selected financial data for fiscal year 2000 contains certain financial
information that has been restated. See Note 13 to the consolidated financial
statements for further discussion of this matter.



<TABLE>
<CAPTION>
                                           2000(2)(7)         1999             1998(1)            1997             1996(2)
                                           ----------         ----             -------            ----             -------
                                            (in thousands except percentages, per-share amounts and retail stores data)
<S>                                      <C>                <C>               <C>               <C>              <C>
Results of Operations
   Net Sales(3)                          $366,236           $298,902          $211,347          $ 98,655         $ 39,989
   Earnings (loss) before income
   taxes                                   (5,977)            (4,773)            8,247             3,056            1,366
   Earnings (loss) before
     cumulative effect of change in
     accounting principle                  (3,741)            (3,040)            4,866             1,748              796
   Cumulative effect of change in
     accounting principle                    (819)                --                --                --               --
   Net income (loss)                       (4,560)            (3,040)            4,866             1,748              796
   Net earnings (loss) avail. To
   common stockholders                     (4,560)            (3,040)            3,867            (5,285)             628
   Basic EPS before cumulative
     effect                                 (0.22)             (0.18)             0.33             (1.20)            0.13
   Cumulative effect on EPS                 (0.05)                --                --                --               --
   Basic EPS                                (0.27)             (0.18)             0.33             (1.20)            0.13
   Diluted EPS before cumulative
     effect                                 (0.22)             (0.18)             0.23             (1.20)            0.06
   Cumulative effect on EPS                 (0.05)                --                --                --               --
   Diluted EPS                              (0.27)             (0.18)             0.23             (1.20)            0.06

Financial Position
   Working capital                          36,196             48,373            34,417             8,188            6,501
   Long term debt & other
   liabilities                              39,470             37,147               470            10,678            1,580
   Total assets                            233,871            221,715           164,245            87,233           32,230
   Redeemable preferred stock                   --                 --                --            43,033           13,856
   Stockholders equity                      78,875             82,882            83,755           (11,748)           1,505

Retail Stores
   Store count                                 106                 93                65                41               20
   Comparable store sales
   growth(4)                                (1.0%)               0.8%             12.3%             11.1%            24.5%
   Average selling
   sq. ft per store(5)                       6,619              6,606             6,431             6,113            4,805
   Store selling sq. ft at year end        701,628            614,343           418,025           250,622          100,897
   Average net sales
   per selling sq. ft.(6)                $     522          $     559         $     567         $     583        $     651
-------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>


(1)   The results of operations for 1998 include the results of Michaels from
      the date of acquisition on March 20, 1998.

(2)   1996 and 2000 were 53-week fiscal years. For purposes of comparable store
      sales increase and average net sales per selling square foot, 1996 and
      2000 results were calculated to correspond with 52-week fiscal years.

(3)   Net sales amounts include shipping fees in accordance with our adoption of
      EITF 00-10, "Accounting for shipping and handling fees and costs."

(4)   Comparable store sales are defined as sales from stores whose gross square
      feet 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. The comparable store percentage in
      1997 includes two stores which were renovated in 1997.

(5)   Average selling square footage per store is calculated by dividing total
      selling square footage by the number of stores open at the end of the
      period indicated.

(6)   Average net sales per selling square foot is calculated by dividing total
      net sales by the weighted average selling square footage of the stores
      open during the period indicated.

(7)   Amounts reflect the change in accounting principle for revenue recognition
      of furniture sales from shipment to upon delivery to the
      customer.

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

The Management's Discussion and Analysis of Financial Condition and Results of
Operations presented below reflects the restatement to previously issued
consolidated financial statements for fiscal year 2000. See Note 13 to the
consolidated financial statements for further discussion of this matter.


<PAGE>
RESULTS OF OPERATIONS

NET SALES

Net sales consist of the following components:



<TABLE>
<CAPTION>
                                           % OF                              % OF                             % OF
                           2000            TOTAL             1999            TOTAL             1998           TOTAL
                           ----            -----             ----            -----             ----           -----
                                  (in thousands except percentages, per-share amounts and retail stores data)
<S>                     <C>              <C>              <C>              <C>              <C>             <C>
Retail sales            $  342,687             93.5%      $  279,225             93.4%      $  192,541            91.1%
Direct-to-customer          22,554              6.2%          12,785              4.3%           3,351             1.6%
Furniture                      995              0.3%           6,892              2.3%          15,455             7.3%
                        ----------       ----------       ----------       ----------       ----------      ----------
Total net sales         $  366,236              100%      $  298,902            100.0%      $  211,347           100.0%
                        ==========       ==========       ==========       ==========       ==========      ==========
</TABLE>


Net sales for our company, Restoration Hardware, and our subsidiaries for the
2000 fiscal year for the 53 weeks ended February 3, 2001, increased $67.3
million, or 23%, over net sales for the 1999 fiscal year for the 52 weeks ended
January 29, 2000. Net sales for 1999 increased $87.6 million, or 41%, over net
sales for the 1998 fiscal year for the 52 weeks ended January 30, 1999. Net
sales for 2000 included shipping fees of $5.7 million, net sales for 1999
included shipping fees of $4.0 million, and net sales for 1998 included shipping
fees of $2.0 million. As of February 3, 2001, we operated 106 stores in 31
states, the District of Columbia and in Canada. Our net sales increase year to
year is principally due to new store openings.

Retail Sales

<TABLE>
<CAPTION>
                                           2000                1999               1998
                                           ----                ----               ----
                                      (in thousands except percentages, sq. footage amounts
                                                     and retail stores data)
<S>                                    <C>                 <C>                <C>
Retail sales                           $    342,687        $    279,225       $    192,541
Retail growth percentage                      22.7%               45.0%              95.5%
Comparable store sales growth                (1.0%)                0.8%              12.3%
Number of stores at beginning of period          93                  65                 41
Store openings                                   13                  28                 24
Number of stores at end of period               106                  93                 65
Average selling sq. ft. per store             6,619               6,606              6,431
Store selling sq. ft. at year-end           701,628             614,343            418,025
Average net sales per sq. ft           $        522        $        559       $        567
------------------------------------------------------------------------------------------
</TABLE>



Retail sales increased in 2000 and 1999 as compared to the respective prior
years, primarily due to new store openings. Comparable store sales decreased
1.0% in 2000. Comparable store sales are defined as sales from stores whose
gross square feet 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. In any given period, the set of stores
comprising comparable stores may be different from the set of the comparable
stores in the previous period, depending on when stores were opened.

Average retail selling square footage increased slightly in 2000 as compared to
1999, while average net sales per square foot decreased to $522 in 2000 from
$559 in 1999. Average selling square footage per store is calculated by dividing
total selling square footage by the number of stores open at the end of the
fiscal year. Average net sales per square foot is calculated by dividing total
net sales by the weighted average selling square footage of stores opened during
the fiscal year.

DIRECT TO CUSTOMER

Direct to customer sales consist of catalog and Internet sales. Net direct to
customer sales in 2000 increased $9.8 million as compared to 1999. Approximately
half of the increase was from sales from the website, which was launched in
August 1999.

FURNITURE SALES

Michaels' Furniture sales consist of Michaels' sales to external customers. Over
the past 3 years, we have reduced Michaels' external sales to third-party
customers so as to be able to increase production capacity for Restoration
Hardware.
<PAGE>
COST OF SALES AND OCCUPANCY

Cost of sales and occupancy expenses expressed as a percentage of net sales
remained flat to the prior year at 69.3% in 2000. Merchandise margin
improvements in 2000 as a result of better sourcing and product flow were offset
by higher occupancy costs. Cost of sales and occupancy expenses expressed as a
percentage of net sales increased 1.5% to 69.3% in 1999 from 67.8% in 1998,
principally as a result of relatively flat merchandise margins offset by
increased occupancy expense.

SELLING, GENERAL AND ADMINISTRATIVE

Selling, general and administrative expenses expressed as a percentage of net
sales improved 0.5% to 30.5% in 2000 from 31.0% in 1999, primarily as a result
of improved cost control throughout the organization, particularly in the retail
division. Selling, general and administrative expenses expressed as a percentage
of net sales increased 4.1% to 31.0% in 1999 from 26.9% in 1998. Overall, we
invested significantly in developing general and administrative infrastructure
during 1999 and expenses increased both in absolute dollars and as a percentage
of sales over 1998.

PRE-OPENING STORE EXPENSE

Pre-opening store expense was $1.0 million in 2000, a decrease of $1.4 million
as compared to 1999. This was principally due to a decrease in the number of new
store openings; whereas 13 new stores opened in 2000, 28 new stores opened in
1999. In 1999, pre-opening store expense increased to $2.4 million as compared
to $2.1 million in 1998, primarily as a result of an increase in the average
pre-opening expense per store. Pre-opening store expense includes all costs
associated with the start-up of the store prior to opening, including
recruiting, payroll, travel, supplies, occupancy related and advertising.

INTEREST EXPENSE, NET

Interest expense, which is net of interest income and includes amortization of
debt issuance costs and interest expense on borrowings under our line of credit
facility, increased $4.4 million to $5.8 million in 2000 from $1.4 million in
1999. This results from both an increase in the average borrowings outstanding
and an increase in the average interest rate. Our cash generated from operations
was not sufficient to cover operating expenses and capital expenditures
resulting in continuous borrowings under our line of credit facility during
2000. In March of 2001, our credit facility was amended to provide for a more
favorable interest rate, as discussed below. In 1999, interest expense increased
$0.5 million to $1.4 million.

INCOME TAXES

Our effective tax benefit rate was 37.1% in 2000, as compared to a tax benefit
rate of 36.3% in 1999 and a tax provision rate of 41.0% in 1998. These rates
reflect the effect of aggregate state tax rates based on a mix of retail sales
and direct to customer sales in the various states in which we have sales
revenue or conduct business.

STORE CLOSURES

Subsequent to our fiscal year-end, we signed agreements to close three
under-performing stores. The closures are expected to be completed by the end of
May 2001. We do not expect the closings to have a material effect on our
financial condition and results of operations.

LIQUIDITY AND CAPITAL RESOURCES

Our main sources of liquidity and capital have been cash flows from operations,
and borrowings under our credit facility. Our primary capital requirements have
been for new store development, working capital and general corporate needs.

Net cash provided by operating activities increased $15.1 million to $19.4
million in 2000 from $4.3 million in 1999. The increase resulted primarily from
a decrease in purchases of merchandise inventories and increased depreciation
and amortization expense, offset by reductions in cash as a result of changes in
deferred lease incentives, accounts payable and other accrued expenses. In 1999,
net cash provided by operating activities decreased $12.0 million to $4.3
million, from $16.3 million in 1998. This decrease resulted primarily from the
decreases in net income, accounts payable, accrued expenses, income tax payable
and deferred tax balances offset by increases in depreciation and amortization
and increases in deferred lease incentives.

Net cash used in investing activities decreased $23.6 million to $23.6 million
in 2000 from $47.2 million in 1999, primarily due to a decrease in the number of
new stores. In 2000, 13 new stores were built as compared to 28 stores in 1999.
In 1999, net cash used in investing activities increased $3.0 million to $47.2
million from $44.2 million in 1998. In 1999, capital was invested in new
information systems and the new Baltimore, Maryland warehouse facility. 24 new
stores were built in 1998.
<PAGE>

Net cash provided by financing activities decreased $37.1 million to $2.2
million in 2000 from $39.3 million in 1999, principally due to reduced
borrowings under our line of credit. In 2000, we were able to fund our capital
expenditures primarily through cash generated from operations. In 1999, net cash
provided by financing activities increased $4.2 million.

Pursuant to our credit facility, as of February 3, 2001, we had a line of credit
of up to $111.0 million with a sub-limit for letters of credit up to $10.0
million. The availability under the credit facility was limited by reference to
a borrowing base calculation, based upon eligible inventory and accounts
receivable. The agreement contained restrictive covenants, including minimum
levels of quarterly earnings before interest, income taxes, depreciation and
amortization or "EBITDA," minimum levels of debt to EBITDA, and annual capital
expenditure limits. As of February 3, 2001, we were in compliance with the
covenants under our credit facility and had outstanding $38.9 million in loans,
which is net of debt issuance costs of $2.5 million, and $5.7 million in
outstanding letters of credit. Interest was paid monthly at the bank's reference
rate or LIBOR plus a margin. The credit facility expires on June 30, 2003.

In connection with an amendment to our line of credit in September 2000, we
issued a warrant for the purchase of 394,167 shares of our common stock to
Goldman, Sachs & Co. and 155,833 shares of our common stock to Enhanced Retail
Funding, LLC, each at $3.75 per share. The warrant expires on September 27,
2005. The fair value of the warrants was calculated using the Black-Scholes
method, and was estimated at $374,000. The deferred debt issuance cost reduces
the carrying value of the related debt and is being amortized over the life of
the debt.

As further discussed in footnote 12 to the attached consolidated financial
statements, on March 21, 2001, we announced the completion of a private
placement offering of our preferred stock with aggregate gross proceeds to us of
approximately $15.0 million, the appointment of Mr. Friedman as our new Chief
Executive Officer and an amendment to our existing bank agreement for our line
of credit. In connection with the amendment to the bank agreement, we repriced
the warrant covering 200,000 of the 500,000 shares of common stock. While we
currently believe that our cash flow from operations and funds available under
our credit facility will satisfy our capital requirements for at least the next
12 months, adverse developments concerning our sales performance or the
availability of credit under our credit facility due to covenant limitations or
other factors could limit the overall availability of funds to us. Moreover, we
may not have successfully anticipated our future capital needs and, should the
need arise, additional sources of financing may not be available or, if
available, may not be on terms favorable to us or our stockholders.

ACCOUNTING CHANGE

The Company implemented U.S. Securities and Exchange Commission's Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements"
("SAB 101") effective January 30, 2000, which resulted in a change in revenue
recognition for furniture sales. Previously, revenue on sales of furniture
delivered to the customer was recognized when the furniture was shipped to the
customer. Upon implementation of SAB 101, the Company's revenue now reflects
the recognition of revenue on furniture sales upon delivery to the customer.

The cumulative effect of the implementation of SAB 101 resulted in a charge to
income of $819,000 (net of income taxes of $570,000), or $.05 per basic and
diluted share recorded on January 30, 2000. Pro forma information with respect
to the impact of SAB 101 on the Company's fiscal 1999 and 1998 statements of
operations have not been presented, as it is impractical to determine such
amounts because, among other things, the Company no longer has access to the
information necessary.

CAUTIONARY STATEMENT REGARDING FORWARD LOOKING STATEMENTS

This annual report on Form 10-K/A 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
statements as to our plans to open additional stores, the anticipated
performance of new stores, the impact of competition and other statements
containing words such as "believes," "anticipates," "estimates," "expects,"
"may," "intends," 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 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,
competition for and the availability of sites for new stores, 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. 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 annual report.

The unaudited quarterly financial data for each of the quarters in the fiscal
years ended February 3, 2001 and January 29, 2000 are presented below. The
unaudited quarterly financial data for the fiscal year ended February 3, 2001
has been restated to give effect to the restatement discussed in Note 13 to the
consolidated financial statements.







QUARTERLY RESULTS OF OPERATIONS

Consolidated Statements of Operations Data:
(dollars in thousands, except percentage and per share data)


<TABLE>
<CAPTION>
                                                                             2000
                                                        FIRST QUARTER                          SECOND QUARTER

                                              AS PREVIOUSLY                           AS PREVIOUSLY
                                                 REPORTED         AS RESTATED            REPORTED          AS RESTATED
                                               -----------         -----------         -----------          -----------
<S>                                          <C>                 <C>                 <C>                 <C>
Net sales(1)                                  $     69,652        $     68,900        $     72,247        $      72,427
Gross profit                                        17,472              16,950              19,005               19,170
    As a % of net sales                               25.1%               24.6%               26.3%                26.5%
Income (loss) from operations                       (6,383)             (6,905)             (4,658)              (4,493)
Comp store net sales increase                        (14.4)                                    0.8
Income (loss) before cumulative
    effect of change in accounting
    principle                                       (4,296)             (4,634)             (3,417)              (3,320)
Net income (loss) per share:
    Basic(2)
        Before cumulative effect              $      (0.25)       $      (0.27)       $      (0.20)       $       (0.19)
        Net income (loss)                     $      (0.25)       $      (0.32)       $      (0.20)       $       (0.19)
    Diluted(3)
        Before cumulative effect              $      (0.25)       $      (0.27)       $      (0.20)       $       (0.19)
        Net income (loss)                     $      (0.25)       $      (0.32)       $      (0.20)       $       (0.19)
</TABLE>


<TABLE>
<CAPTION>
                                                                             2000
                                                        THIRD QUARTER                          FOURTH QUARTER

                                              AS PREVIOUSLY                          AS PREVIOUSLY
                                                 REPORTED          AS RESTATED          REPORTED          AS RESTATED
                                               -----------         -----------        -----------         -----------
<S>                                          <C>                 <C>                 <C>                 <C>
Net sales(1)                                  $     80,952        $     81,247       $    146,613        $    143,662
Gross profit                                        20,408              20,415             56,654              55,939
    As a % of net sales                               25.2%               25.1%              38.6%               38.9%
Income (loss) from operations                       (6,797)             (6,790)            18,730              18,015
Comp store net sales increase (decrease)             (1.70)%                                 5.70%
Income (loss) before cumulative
    effect of change in accounting
    principle                                       (5,123)             (5,119)             9,745               9,332
Net income (loss) per share:
    Basic(2)
        Before cumulative effect              $      (0.30)       $      (0.30)      $       0.57        $       0.55
        Net income (loss)                     $      (0.30)       $      (0.30)      $       0.57        $       0.55
    Diluted(3)
        Before cumulative effect              $      (0.30)       $      (0.30)      $       0.56        $       0.54
        Net income (loss)                     $      (0.30)       $      (0.30)      $       0.56        $       0.54
</TABLE>


<TABLE>
<CAPTION>
                                                                                 1999
                                                    FIRST              SECOND               THIRD              FOURTH
                                                  QUARTER             QUARTER             QUARTER             QUARTER
                                                  -------             -------             -------             -------
<S>                                          <C>                 <C>                 <C>                 <C>
Net sales(1)                                 $     60,795        $     54,606        $     65,550        $    117,951
Gross profit                                       14,049              14,140              20,005              43,483
    As a % of net sales                              23.1%               25.9%               30.5%               36.9%
Income(loss) from operations                       (4,448)             (4,168)             (2,569)              7,831
Comp store net sales increase (decrease)             18.4%                1.2%               (0.2%)              (5.5%)
Net income (loss)                                  (2,657)             (2,581)             (1,744)              3,942
Net income (loss) per share:
    Basic(2)                                 $      (0.16)       $      (0.15)       $      (0.10)       $       0.23
    Diluted(3)                               $      (0.16)       $      (0.15)       $      (0.10)       $       0.23
---------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
----------
(1)   Net sales amounts include shipping fees in accordance with our
      adoption of EITF 00-10, "Accounting for Shipping and Handling Fees and
      Costs."

(2)   Basic earnings per share is calculated for interim periods including the
      effect of stock options exercised in prior interim periods. Basic earnings
      per share for the fiscal year is calculated using weighted shares
      outstanding based on the date stock options were exercised. Therefore,
      basic earnings per share for the cumulative four quarters may not equal
      fiscal year basic earnings per share.

(3)   Diluted earnings per share for the fiscal year and for quarters with net
      earnings are computed based on weighted average common stock equivalents
      (stock options and warrants). Net loss per share for quarters with net
      losses is computed based solely on weighted average common shares
      outstanding. Therefore, the earnings (loss) per share for each quarter do
      not sum up to the earnings for the full fiscal year.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to market risks, which include changes in interest rates and, to
a lesser extent, foreign exchange rates. We do not engage in financial
transactions for trading or speculative purposes.

The interest payable on our credit facility is based on variable interest rates
and is, therefore, affected by changes in market interest rates. If interest
rates on existing variable rate debt rose 10% from the bank's reference rate,
our results of operations and cash flows would not be materially affected. In
addition, we have fixed and variable income investments consisting of cash
equivalents and short-term investments, which are also affected by changes in
market interest rates.

We do enter into a significant amount of purchase obligations outside of the
United States which, to date, have been settled mostly in U.S. dollars and,
therefore, we have only minimal exposure at present to foreign currency exchange
risks. Historically, we have not hedged our currency risk and do not currently
anticipate doing so in the future. However, it is possible that in the future a
growing number of our purchases outside of the United States will be made in
currencies other than the U.S. dollar. Consequently, fluctuations in the rates
of exchange between the U.S. dollar and other currencies may subject us to
foreign currency exchange risks in the future.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (AS RESTATED - SEE NOTE 13
TO THE CONSOLIDATED FINANCIAL STATEMENTS)

INDEPENDENT AUDITORS' REPORT

To the Board of Directors and Stockholders Restoration Hardware, Inc.
Corte Madera, California

We have audited the accompanying consolidated balance sheets of Restoration
Hardware, Inc. and its subsidiaries as of February 3, 2001 and January 29, 2000,
and the related consolidated statements of operations, stockholders' equity, and
cash flows for each of the three fiscal years in the period ended February 3,
2001. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Restoration Hardware, Inc. and its
subsidiaries as of February 3, 2001 and January 29, 2000, and the results of
their operations and their cash flows for each of the three fiscal years in the
period ended February 3, 2001 in conformity with accounting principles generally
accepted in the United States of America.

As discussed in Note 1, effective January 30, 2000, the Company changed its
method of recognizing revenue on sales of furniture products delivered to
customers.

As discussed in Note 13, the accompanying fiscal 2000 financial statements have
been restated.

                            /s/ DELOITTE & TOUCHE LLP
                                San Francisco, CA
                      March 23, 2001 (April 19, 2002 as to
              the effects of the restatement discussed in Note 13)





<PAGE>




                           RESTORATION HARDWARE, INC.

                           CONSOLIDATED BALANCE SHEETS
                             (DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
                                                              FEBRUARY 3,
                                                                2001
                                                             As Restated          JANUARY 29,
                                                            (See Note 13)            2000
---------------------------------------------------------------------------------------------
<S>                                                         <C>                 <C>
ASSETS
Current assets
     Cash and cash equivalents                              $       2,610       $       4,627
     Accounts receivable                                            8,069               6,551
     Merchandise inventories                                       85,067              85,902
     Prepaid expense and other                                      8,975               6,962
                                                            -------------       -------------
           Total current assets                                   104,721             104,042
     Property and equipment, net                                  117,186             108,706
     Goodwill                                                       4,776               4,910
     Other long term assets                                         7,188               4,057
                                                            -------------       -------------
           Total Assets                                     $     233,871       $     221,715
                                                            =============       =============

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
     Accounts payable and accrued expenses                  $      43,321       $      45,375
     Current portion of deferred lease incentives                   4,575               3,777
     Revolving line of credit and short term debt                   5,730                   2
     Deferred revenue                                               6,398                  --
     Other current liabilities                                      8,501               6,515
                                                            -------------       -------------
           Total current liabilities                               68,525              55,669
     Other long-term obligations                                      612                 344
     Long-term line of credit                                      33,128              36,801
     Long-term portion of deferred lease incentives                41,944              37,950
     Deferred rent                                                 10,787               8,069
                                                            -------------       -------------
           Total liabilities                                      154,996             138,833

Stockholders' equity:
     Common stock, $.0001 par value, 40,000,000 shares             94,901              94,318
        authorized, 17,100,142 and 16,901,338 issued
        and outstanding, respectively
     Accumulated other comprehensive income (loss)                     (4)                 26
     Accumulated deficit                                          (16,022)            (11,462)
                                                            -------------       -------------
           Total stockholders' equity                              78,875              82,882
                                                            -------------       -------------
           Total liabilities and stockholders' equity       $     233,871       $     221,715
                                                            =============       =============
</TABLE>


The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
                            RESTORATION HARDWARE INC.

                      CONSOLIDATED STATEMENTS OF OPERATIONS
                (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)


<TABLE>
<CAPTION>
                                                           FISCAL YEAR ENDED
                                           --------------------------------------------------
                                           FEBRUARY 3,
                                               2001
                                          (As Restated        JANUARY 29,        JANUARY 30,
                                           see Note 13)           2000               1999
                                           ------------       ------------       ------------
<S>                                        <C>                <C>                <C>
Net sales                                  $    366,236       $    298,902       $    211,347
Cost of sales and occupancy                     253,762            207,225            143,369
                                           ------------       ------------       ------------
     Gross profit                               112,474             91,677             67,978
Selling, general and administrative
     expenses                                   111,632             92,628             56,749
Pre-opening store expenses                        1,015              2,403              2,064
                                           ------------       ------------       ------------
     Income (loss) from operations                 (173)            (3,354)             9,165
Interest expense, net                            (5,804)            (1,419)              (918)
                                           ------------       ------------       ------------
     Income (loss) before taxes                  (5,977)            (4,773)             8,247
Provision (benefit) for income taxes             (2,236)            (1,733)             3,381
                                           ------------       ------------       ------------
     Income (loss) before
       cumulative effect of change
       in accounting principle                   (3,741)            (3,040)             4,866

Cumulative effect of change in
     accounting policy, net of tax
     effect of $570                                (819)               --                  --
                                           ------------       ------------       ------------
Net income (loss)                                (4,560)            (3,040)             4,866

Accretion of mandatorily redeemable
     preferred stock                                 --                --                 999
                                           ------------       ------------       ------------

Income (loss) available to common
     stockholders                          $     (4,560)      $     (3,040)      $      3,867
                                           ============       ============       ============
Earnings (loss) per common share:
     Basic earnings (loss) per share
       before cumulative effect            $      (0.22)      $      (0.18)      $       0.33
     Cumulative effect of change in
       accounting principle                       (0.05)                --                 --
     Basic earnings (loss) per share              (0.27)             (0.18)              0.33

     Diluted earnings (loss) per share
       before cumulative effect                   (0.22)             (0.18)              0.23
     Cumulative effect of change in
       accounting principle                       (0.05)                --                 --
     Diluted earnings (loss) per share            (0.27)             (0.18)              0.23

Weighted average shares outstanding:
     Basic                                   17,042,052         16,697,668         11,621,117
     Diluted                                 17,042,052         16,697,668         16,469,359
---------------------------------------------------------------------------------------------
</TABLE>

The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
                           RESTORATION HARDWARE, INC.

                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                             (DOLLARS IN THOUSANDS)



<TABLE>
<CAPTION>
                                                                    ACCUM-
                                                                    ULATED                                                TOTAL
                                                                    OTHER                               TOTAL             COMPRE-
                                     COMMON STOCK                   COMPRE-           ACCUM-            STOCK-            HENSIVE
                                                                    HENSIVE           ULATED           HOLDERS'           INCOME
                                SHARES            AMOUNT            INCOME            DEFICIT           EQUITY            (LOSS)
                              -----------       -----------       -----------       -----------       -----------       -----------
<S>                           <C>               <C>               <C>               <C>               <C>               <C>
BALANCE AT
JANUARY 31, 1998                4,171,223       $       541                         $   (12,289)      $   (11,748)
Accretion of
  mandatorily
  redeemable preferred
  stock                                                                                    (999)             (999)
Issuance of common stock        2,923,755            47,595                                                47,595
Conversion of preferred
  stock to common               9,151,282            44,033                                                44,033
Foreign currency translation
  adjustment                                                      $         8                                   8       $         8
Net income                                                                                4,866             4,866             4,866
                              -----------       -----------       -----------       -----------       -----------       -----------

                                                                                                                        $     4,874
                                                                                                                        ===========

BALANCE AT
  JANUARY 30, 1999             16,246,260            92,169                 8            (8,422)           83,755
Issuance of common stock          655,078             2,149                                                 2,149
Foreign currency translation
  adjustment                                                               18                                  18       $        18
Net loss                                                                                 (3,040)           (3,040)           (3,040)
                              -----------       -----------       -----------       -----------       -----------       -----------

                                                                                                                        $    (3,022)
                                                                                                                        ===========


BALANCE AT
  JANUARY 29, 2000             16,901,338            94,318                26           (11,462)           82,882
Issuance of common stock          198,804               583                                                   583
Foreign currency translation
  adjustment                                                              (30)                                (30)      $       (30)
Net loss (as restated,
  see Note 13)                                                                           (4,560)           (4,560)           (4,560)
                              -----------       -----------       -----------       -----------       -----------       -----------

BALANCE AT
  FEBRUARY 3, 2001 (as
  restated, see Note 13)       17,100,142       $    94,901       $        (4)      $   (16,022)      $    78,875       $    (4,590)
                              ===========       ===========       ===========       ===========       ===========       ===========
</TABLE>


The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
                           RESTORATION HARDWARE, INC.

                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                             (DOLLARS IN THOUSANDS)


<TABLE>
<CAPTION>
                                                                                              FISCAL YEAR ENDED
                                                                           ---------------------------------------------------------
                                                                             FEBRUARY 3,
                                                                                2001
                                                                            (As Restated         JANUARY 29,           JANUARY 30,
                                                                             see Note 13)           2000                  1999
                                                                           --------------       --------------       --------------
<S>                                                                        <C>                  <C>                  <C>
Cash flows from operating activities:
   Net income (loss) before cumulative effect of change in
     accounting principle                                                  $       (3,741)      $       (3,040)      $        4,866
   Adjustments to reconcile net income (loss) to net cash provided by
     operating activities:
        Depreciation and amortization                                              15,915               10,788                6,477
        Deferred income taxes                                                      (3,956)              (2,976)                 214
        Changes in assets and liabilities:
            Accounts receivable                                                    (1,518)              (1,376)               1,398
            Merchandise inventories                                                 2,618              (20,504)             (22,828)
            Prepaid expenses and other assets                                        (583)              (1,720)              (4,480)
            Accounts payable and accrued expenses                                  (2,054)               5,679               14,207
            Taxes payable                                                              18               (2,307)               1,608
            Deferred revenue                                                        6,398                   --                   --
            Other current liabilities                                              (1,238)               2,164                2,217
            Deferred rent                                                           2,718                3,788                2,371
            Deferred lease incentives and other long-term liabilities               4,792               13,802               10,256
                                                                           --------------       --------------       --------------
   Net cash provided by operating activities                                       19,369                4,298               16,306
Cash flows from investing activities
   Capital expenditures                                                           (23,506)             (46,620)             (38,546)
   Purchase of The Michaels Furniture Co.                                             (80)                (592)              (6,127)
   Foreign currency translation adjustment                                            (30)                  18                    8
   Repay stockholder advance                                                           --                   --                  509
                                                                           --------------       --------------       --------------
   Net cash used in investing activities                                          (23,616)             (47,194)             (44,156)
Cash flows from financing activities:
   Borrowings (repayments) under revolving line of credit -- net                    1,429               37,447              (11,884)
   Borrowings (repayments) -- other debt                                              218                 (274)                (572)
   Issuance of common stock                                                           583                2,149               47,595
                                                                           --------------       --------------       --------------
        Net cash provided by financing activities                                   2,230               39,322               35,139
                                                                           --------------       --------------       --------------
        Net increase (decrease) in cash and cash equivalents                       (2,017)              (3,574)               7,289
Cash and cash equivalents:
   Beginning of period                                                              4,627                8,201                  912
                                                                           --------------       --------------       --------------
   End of period                                                           $        2,610       $        4,627       $        8,201
                                                                           ==============       ==============       ==============
Additional cash flow information:
   Cash paid during the year for interest (net of amount capitalized)      $        5,137       $        1,333       $          897
                                                                           ==============       ==============       ==============
   Cash paid during the year for taxes                                     $        1,317       $        4,145       $        1,529
                                                                           ==============       ==============       ==============
</TABLE>


The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
                           RESTORATION HARDWARE, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(1) SUMMARY OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES

NATURE OF BUSINESS

Restoration Hardware, Inc. and its subsidiaries (the "Company"), a Delaware
corporation, is a specialty retailer of high-quality home furnishings,
decorative accessories and hardware. These products are sold through retail
locations, catalogs and the Internet. At February 3, 2001 the Company operated a
total of 106 retail stores in 31 states, the District of Columbia and in Canada.
The Company operates on a 52 - 53 week fiscal year ending on the Saturday
closest to January 31. The fiscal year ended February 3, 2001 includes 53 weeks.
All other years presented include 52 weeks.

PRINCIPLES OF CONSOLIDATION

The consolidated financial statements include the accounts of Restoration
Hardware, Inc. and its subsidiaries. All intercompany balances and transactions
are eliminated in consolidation.

USE OF ESTIMATES

The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosures of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results for these and other estimates could differ from those estimates.

CASH AND CASH EQUIVALENTS

Cash equivalents are highly liquid, fixed income instruments purchased with
original maturities of three months of less.

MERCHANDISE INVENTORIES

Retail inventories are stated at the lower of cost or market. Cost is determined
under the weighted-average method. Manufacturing inventories are stated at the
lower of cost (first-in, first-out) or market. Cost includes certain buying and
distribution costs related to the procurement and processing of merchandise.

PREPAID CATALOG EXPENSES

Prepaid catalog expenses consist of the cost to produce, print and distribute
catalogs. Such costs are amortized over the expected sales volume of each
catalog. Typically, over 90% of the cost of a catalog is amortized in the first
four months. At February 3, 2001 and January 29, 2000, the Company had
$1,044,000 and $564,000, respectively, recorded as current assets.

PREOPENING STORE EXPENSES

Preopening store expenses, including store set-up and certain labor and hiring
costs, are expensed as incurred.

PROPERTY AND EQUIPMENT

Furniture, fixtures and equipment are stated at cost. Depreciation is calculated
using the straight-line method over the estimated useful life of the asset,
typically ranging from five to twelve years for equipment. The cost of leasehold
improvements is amortized over the useful life of the asset or the applicable
lease term, whichever is less. Computer hardware and software costs are included
in fixtures and equipment and are amortized over estimated useful lives of three
to five years. Leasehold improvements include capitalized interest of $195,000
and $390,000 as of February 3, 2001 and January 29, 2000, respectively.

GOODWILL

Goodwill represents the excess of the purchase price over the fair value of the
net assets acquired in the purchase of The Michaels Furniture Company
("Michaels"). Goodwill is amortized on a straight-line basis over 25 years.
<PAGE>
CAPITALIZED LEASES

Noncancellable leases which meet the criteria of capital leases are capitalized
as assets and amortized over the lease term, using the interest method.

LONG-LIVED ASSETS

The Company's policy is to review long-lived assets and certain identifiable
intangibles, including goodwill, for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable based on estimated future cash flows calculated on a store by store
basis. Based on the Company's reviews for the years ended February 3, 2001 and
January 29, 2000, no adjustments were recognized to the carrying value of such
assets.

DEFERRED RENT AND DEFERRED LEASE INCENTIVES

Certain of the Company's operating leases contain predetermined fixed
escalations of the minimum rentals during the original term of the lease. For
these leases, the Company recognizes the related rental expense on a
straight-line basis over the life of the lease and records the difference
between the amount charged to operations and amounts paid as deferred rent. As
part of its lease agreements, the Company receives certain lease incentives.
These allowances have been deferred and are amortized on a straight-line basis
over the life of the lease as a reduction of rent expense.

REVENUE RECOGNITION

ACCOUNTING CHANGE

The Company implemented U.S. Securities and Exchange Commission's Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" ("SAB
101") effective January 30, 2000, which resulted in a change in revenue
recognition for furniture sales. Previously, revenue on sales of furniture
delivered to the customer was recognized when the furniture was shipped to the
customer. Following implementation of SAB 101, the Company's revenue now
reflects the recognition of revenue on furniture sales upon delivery to the
customer.

The cumulative effect of the implementation of SAB 101 resulted in a charge to
income of $819,000 (net of income taxes of $570,000), or $.05 per basic and
diluted share recorded on January 30, 2000. Pro forma information with respect
to the impact of SAB 101 on the Company's fiscal 1999 and 1998 statements of
operations have not been presented, as it is impractical to determine such
amounts because, among other things, the Company no longer has access to the
necessary information.

RETAIL STORE SALES: Revenue is recognized at the point of sale for all purchases
which are taken from the store by the customer at the time of purchase.

NON-FURNITURE - DIRECT-TO-CUSTOMER (CATALOG AND INTERNET) SALES: Revenue is
recognized at the time of shipment to the customer.

FURNITURE SALES: Furniture sales are recorded as direct-to-customer or retail
sales dependent upon where the customer sales order was originated. The majority
of furniture sales are delivered to the customer; revenue for these sales is
recognized at the time of receipt of the furniture items by the customer. A
portion of the furniture products for sale at Company stores and catalogues is
produced at the Company's own furniture manufacturing facility. Intercompany
sales are eliminated upon consolidation. Revenue from furniture sales
manufactured by the Company and sold to third parties in fiscal 2000 and 1999
was $995,000 and $6.9 million, respectively.

SHIPPING AND HANDLING FEES: Shipping and handling fees charged to customers for
deliveries are recorded as net revenue in the sales channel (retail store,
catalog or internet) that originated the sales transaction. Shipping and
handling fees included in revenues were $5.7 million, $4.0 million and $2.0
million in fiscal 2000, 1999 and 1998, respectively. Costs incurred for shipping
and handling are included in cost of sales and occupancy.

SALES RETURNS: The Company provides an allowance for sales returns based upon
historical return rates.


<PAGE>
ADVERTISING EXPENSE

Advertising costs are expensed as incurred. For the fiscal years ended February
3, 2001, January 29, 2000, and January 30, 1999, advertising costs were
$14,097,000, $10,882,000, and $4,363,000 respectively.

CONCENTRATION OF CREDIT RISK

Financial instruments, which potentially subject the Company to concentration of
credit risk, consist principally of cash and cash equivalents. The Company
places its cash with financial institutions. At times, such amounts may be in
excess of FDIC insurance limits.

TAXES ON INCOME

Income taxes are accounted for using 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
consolidated financial statements or tax returns. In estimating future tax
consequences, the Company generally considers all expected future events other
than changes in the tax law or rates.

STOCK-BASED COMPENSATION

The Company accounts for stock-based awards to employees using the intrinsic
value method in accordance with APB No. 25, Accounting for Stock Issued to
Employees.

ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS

The carrying value of cash and cash equivalents, accounts receivable, accounts
payable, revolving line of credit borrowings and long-term debt approximates
their estimated fair value.

EARNINGS PER SHARE

Statement of Financial Accounting Standards No. 128 ("SFAS 128"). Earnings Per
Share, requires dual presentation of two earnings per share ("EPS") amounts,
basic EPS and diluted EPS, on the face of all income statements. Basic EPS
excludes dilution and is computed by dividing net income (loss) available to
common stockholders by the weighted average number of common shares outstanding
for the period. Diluted EPS reflects the potential dilution that could occur if
common stock options and warrants were exercised into common stock. An option or
warrant is deemed to be dilutive if its exercise price is less than the average
price of the Company's common stock for the period. Due to the Company's net
losses, including options in EPS would reduce the loss per share, thus dilutive
stock options of 395,440 and 837,053, in the fiscal years ended February 3, 2001
and January 29, 2000, respectively, were not included in the dilutive EPS
calculation.

The following is a reconciliation of the number of shares (denominator) used in
the basic and diluted EPS computations (shares in thousands):

<TABLE>
<CAPTION>
                                                        WEIGHTED AVERAGE SHARES
                                              -------------------------------------------
                                                               EFFECT OF
                                                            DILUTIVE STOCK
                                                              OPTIONS AND
                                               BASIC EPS        WARRANTS      DILUTED EPS
                                              ------------------------------------------
<S>                                           <C>           <C>               <C>
Fiscal year ended January 30, 1999            11,621,117       4,848,242      16,469,359
Fiscal year ended January 29, 2000            16,697,668              --      16,697,668
Fiscal year ended February 3, 2001            17,042,052              --      17,042,052
----------------------------------------------------------------------------------------
</TABLE>


COMPREHENSIVE INCOME

Comprehensive income (loss) consists of net income (loss) and other
comprehensive income (loss) (primarily foreign currency translation
adjustments). The components of comprehensive income (loss) are presented in the
consolidated statements of changes in stockholders' equity.
<PAGE>
FOREIGN CURRENCY TRANSLATION

In the preparation of consolidated financial statements, the assets and
liabilities of the Company and its subsidiaries which are denominated in
currencies other than the US dollar are translated to US dollars at the rate of
exchange in effect at the balance sheet date; income and expenses are translated
at average rates of exchange prevailing during the year. The related translation
adjustments are reflected in the other comprehensive income section of the
consolidated statements of stockholders' equity. Foreign currency gains and
losses resulting from transactions denominated in foreign currencies, including
intercompany transactions, are included in operations.

NEW ACCOUNTING PRONOUNCEMENTS

Statement of Financial Accounting Standards (SFAS) No. 133, Accounting for
Derivative Instruments and Hedging Activities, is effective for all fiscal years
beginning after June 15, 2000. SFAS 133, as amended, establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. Under SFAS
133, certain contracts that were not formerly considered derivatives may now
meet the definition of a derivative. The Company will adopt SFAS 133 effective
February 4, 2001. The adoption of SFAS 133 will not have a significant impact
on the financial position, results of operations, or cash flows of the Company.

RECLASSIFICATIONS

Certain prior year amounts have been reclassified to conform with the fiscal
year ended February 3, 2001 presentation.

(2) PROPERTY AND EQUIPMENT

Property and equipment consist of the following (in thousands):

<TABLE>
<CAPTION>

                                                      ------------------      -------------------
                                                       FEBRUARY 3, 2001        JANUARY 29, 2000
                                                      ------------------      -------------------
<S>                                                   <C>                       <C>
Leasehold improvements                                      $115,527              $ 96,226
Furniture, fixtures and equipment                             38,572                34,367
Equipment under capital leases                                 1,447                 1,447
                                                            --------              --------
Total                                                        155,546               132,040
Less accumulated depreciation and amortization               (38,360)              (23,334)
                                                            --------              --------
Property and equipment, net                                 $117,186              $108,706
                                                            ========              ========
</TABLE>



(3) LEASES

The Company leases certain property consisting of retail stores, corporate
offices, distribution centers and equipment. Leases expire at various dates
through 2018. The retail stores, distribution centers and corporate office
leases generally provide that the Company assume the maintenance and all or a
portion of the property tax obligations on the leased property. Most store
leases also provide for minimum annual rentals, with provisions for additional
rent based on a percentage of sales and for payment of certain expenses.

The aggregate future minimum rental payments under leases in effect at February
3, 2001 are as follows (in thousands):



<TABLE>
<CAPTION>
                                                      CAPITAL        OPERATING
YEAR ENDING                                           LEASES           LEASES         TOTAL
---------------------------------------------------------------------------------------------
<S>                                                  <C>             <C>            <C>
2002                                                 $     150       $  39,195      $  39,345
2003                                                       136          37,855         37,991
2004                                                       113          37,646         37,759
2005                                                        --          36,435         36,435
2006                                                        --          36,123         36,123
Thereafter                                                  --         223,098        223,098
                                                     ---------       ---------      ---------
</TABLE>
<PAGE>
<TABLE>
<S>                                                  <C>             <C>            <C>
Minimum lease commitments                            $     399       $ 410,352      $ 410,751
                                                                     =========      =========
Less amount representing interest                          (61)
                                                     ---------
Present value of capital lease obligations                 338
Less current portion                                      (102)
                                                     ---------
Long-term portion                                    $     236
-------------------------------------------------------------------------------
</TABLE>


Minimum and contingent rental expense, which is based upon certain factors such
as sales volume, under operating leases, are as follows (in thousands):



<TABLE>
<CAPTION>
                                                    FISCAL YEAR ENDED
                               ------------------------------------------------------------------
                                 FEBRUARY 3, 2001      JANUARY 29, 2000      JANUARY 30, 1999
                               -------------------------------------------- ---------------------
<S>                            <C>                     <C>                   <C>
Operating leases:
Minimum rental expense                $34,965               $25,316               $15,110
Contingent rental expense                 838                   621                   746
                                      -------               -------               -------
        Total                         $35,803               $25,937               $15,856
                                      =======               =======               =======
</TABLE>



(4) REVOLVING LINE OF CREDIT AND DEBT

Revolving line of credit and debt consist of the following (in thousands):



<TABLE>
<CAPTION>
                                               FEBRUARY 3, 2001            JANUARY 29, 2000
                                         --------------------------------------------------------
<S>                                      <C>                               <C>
Revolving line of credit and
  short term debt                                  $ 5,730                       $     2
Long term line of credit                            33,128                        36,801
Long term obligations                                  612                           344
                                                   -------                       -------
        Total                                      $39,470                       $37,147
                                                   =======                       =======
</TABLE>



As of February 3, 2001 the Company had a line of credit of up to $111.0 million
with amounts available for letters of credit up to $10 million. The availability
under the credit facility was limited by reference to a borrowing base
calculation, based upon eligible inventory and accounts receivable. Moreover,
the amount available under the credit facility was typically much less than the
$111.0 million stated maximum limit of the facility because the availability of
eligible collateral for purposes of the borrowing base limitations in the credit
facility usually reduced the overall credit amount otherwise available at any
given time. The agreement contained restrictive covenants including minimum
levels of quarterly earnings before interest, income taxes, depreciation and
amortization ("EBITDA"), minimum levels of debt to EBITDA, and annual capital
expenditure limits. As of February 3, 2001, the Company had outstanding $38.9
million in loans (net of debt issuance costs of $2.5 million) and $5.7 million
in outstanding letters of credit. Interest was paid monthly at the bank's
reference rate or LIBOR plus a margin. As of February 3, 2001 and January 29,
2000, the interest rate was 9.75% and 8.5%, respectively. The agreement expires
on June 30, 2003.

In connection with an amendment of the line of credit in September of 2000, the
Company issued warrants for the purchase of 550,000 shares of common stock at an
exercise price of $3.75 per share. The warrants expire September 27, 2005. The
fair value of the putable warrants was calculated at $357,000 using the
Black-Scholes method and has been recorded as a long-term obligation. The
deferred debt issuance cost reduces the carrying value of the related debt and
is being amortized over the life of the debt.
<PAGE>
As further discussed in footnote 12 to the financial statements, the credit
facility was amended in March of 2001 and the Company repriced the warrant
covering 200,000 of the 500,000 shares of Common Stock.


(5) INCOME TAXES

The provision for income taxes consists of the following (in thousands):



<TABLE>
<CAPTION>
                                                     FISCAL YEAR ENDED
                                   --------------------------------------------------------
                                     FEBRUARY 3,          JANUARY 29,          JANUARY 30,
                                        2001                 2000                 1999
                                   --------------       --------------       --------------
<S>                                <C>                  <C>                  <C>
Current payable:
    Federal                        $        1,394       $        1,692       $        2,573
    State                                     326                  366                  598
                                   --------------       --------------       --------------
        Total current payable               1,720                2,058                3,171
                                   --------------       --------------       --------------
Deferred:
    Federal                                (3,169)              (3,106)                 223
    State                                    (787)                (685)                 (13)
                                   --------------       --------------       --------------
        Total deferred                     (3,956)              (3,791)                 210
                                   --------------       --------------       --------------
Provision for income taxes         $       (2,236)      $       (1,733)      $        3,381
                                   ==============       ==============       ==============
</TABLE>


The differences between the U.S. federal statutory tax rate and the Company's
effective rate are as follows:


<TABLE>
<CAPTION>
                                                           FISCAL YEAR ENDED
                                        ---------------------------------------------------------
                                          FEBRUARY 3,             JANUARY 29,         JANUARY 30,
                                             2001                    2000                1999
                                        --------------          -------------        ------------
<S>                                     <C>                     <C>                  <C>
U.S. federal statutory tax rate                  (34.0)%                (34.0)%              34.0%
State income taxes (net of U.S.                   (5.1)                  (4.4)                4.7
    income tax benefit)
Other                                              1.7                    2.1                 2.3
                                        --------------          -------------        ------------
Effective income tax rate                        (37.4)%                (36.3)%              41.0%
                                        ==============          =============        ============
</TABLE>


Significant components of the Company's deferred tax assets and liabilities are
as follows (in thousands):
<PAGE>
<TABLE>
<CAPTION>
                                                       FISCAL YEAR ENDED
                                        --------------------------------------------------
                                         FEBRUARY 3,        JANUARY 29,        JANUARY 30,
                                            2001                2000               1999
                                        ------------       ------------       ------------
<S>                                     <C>                <C>                <C>
Current deferred tax asset
  (liability)
    Accrued expense                     $        827       $        425       $        417
    State tax benefit                           (444)              (198)              (137)
    Deferred revenue                             446                 --                 --
    Inventory                                  1,059                843               (406)
    Other                                     (1,041)            (1,221)            (1,183)
                                        ------------       ------------       ------------
        Net current deferred tax
           asset                                 847               (151)            (1,309)
                                        ------------       ------------       ------------
Long-term deferred tax asset (liability):
    Deferred lease credits                       355                966                633
    Fixed assets                               6,560              3,230                929
    Other                                        239                 --                 --
                                        ------------       ------------       ------------
        Net long-term deferred tax
           asset                               7,154              4,196              1,562
                                        ------------       ------------       ------------
Net deferred tax asset                  $      8,001       $      4,045       $        253
                                        ============       ============       ============
</TABLE>


(6) STOCKHOLDERS' EQUITY

In June 1998, the Company reincorporated in Delaware and adopted a Restated
Certificate of Incorporation, Amended Bylaws and a Stockholder Rights Agreement.
The Restated Certificate of Incorporation authorizes the Company to issue up to
40,000,000 shares of common stock, par value $.0001 per share, and 5,000,000
shares of preferred stock, par value $.0001 per share.

STOCK BASED COMPENSATION PLANS

In April 1998, the Board of Directors approved the 1998 Stock Option Plan ("1998
Plan"), which serves as the successor to all previous plans ("the Predecessor
Plans.") The 1998 Plan is divided into five separate components: (i) the
Discretionary Option Grant Program, (ii) the Stock Issuance Program, (iii) the
Salary Investment Option Grant Program, (iv) the Automatic Option Grant Program
and (v) the Director Fee Option Grant Program. The Discretionary Option Grant
Program and Stock Issuance Program are administered by the Compensation
Committee.

Under the Discretionary Option Grant Program, the Plan has authorized the Board
of Directors to grant options to key employees, directors, and consultants to
purchase an aggregate of 3,287,662 shares of common stock. Such share reserve
consists of (i) the number of shares available for issuance under the
Predecessor Plans on June 19, 1998, including the shares subject to outstanding
options, and (ii) an additional increase of 980,000 shares. In addition, the
number of shares of Common Stock reserved for issuance under the 1998 Plan will
automatically be increased on the first trading day of each calendar year,
beginning in calendar year 2000, by an amount equal to the lessor of (i) three
percent of the total number of shares of Common Stock outstanding on the last
trading day of the preceding calendar year or (ii) 966,202 shares. On January 2,
2001 and January 3, 2000, the Company added 512,668 and 506,973 options,
respectively, to the 1998 Discretionary Option Grant Program in accordance with
the automatic option increase provisions. In no event, however, may any one
participant in the 1998 Plan receive option grants, separately exercisable stock
appreciation rights or direct stock issuances for more than 250,000 shares of
Common Stock in the aggregate per calendar year.

For all Plans, the vesting, exercise prices and other terms of the options are
fixed by the Board of Directors. Options are granted at prices not less than the
fair market value on the date of grant for incentive stock options and not less
than 85% of the fair market value for non-statutory stock options. These options
generally expire ten years from the date of grant and vest ratably over a
three-year period. The options are generally exercisable upon grant but, if any
options are exercised before becoming vested, the holder can not sell or vote
the shares until such shares have vested. If the holder leaves the Company
before the options are fully vested, the Company has the right to repurchase
unvested options at the employee's original exercise price.
<PAGE>
A summary of the activity under the above option Plans is set forth below:

<TABLE>
<CAPTION>
                                                                           WEIGHTED
                                                                           AVERAGE
                                                         NUMBER OF         EXERCISE
                                                           SHARES           PRICE
                                                         ==========       ==========
<S>                                                      <C>              <C>
Outstanding and exercisable, January 31, 1998             1,638,749       $     3.76
    Granted (weighted average fair value of $10.97)         738,290            20.01
    Exercised                                               (46,790)           17.62
    Canceled                                                (76,248)           14.87
                                                         ----------

Outstanding and exercisable, January 30, 1999             2,254,001             8.75
    Granted (weighted average fair value of $4.98)        1,000,126             9.06
    Exercised                                              (561,337)            1.27
    Canceled                                               (282,992)           14.32
                                                         ----------

Outstanding and exercisable, January 29, 2000             2,409,798            11.00
    Granted (weighted average fair value of $2.25)        1,235,316             4.17
    Exercised                                               (78,252)            1.54
    Canceled                                               (623,902)           12.18
                                                         ----------

Outstanding and exercisable, February 3, 2001             2,942,960       $     8.06
                                                         ==========       ==========
Vested at February 3, 2001                                1,387,861
                                                         ==========
Available for future grant at February 3, 2001              677,964
                                                         ==========
</TABLE>







Additional information regarding options outstanding as of February 3, 2001 is
as follows:



<TABLE>
<CAPTION>
                                                WEIGHTED
                                                 AVERAGE             WEIGHTED                                WEIGHTED
                                                REMAINING            AVERAGE                                  AVERAGE
   RANGE OF                 NUMBER             CONTRACTUAL           EXERCISE             NUMBER             EXERCISE
EXERCISE PRICES          OUTSTANDING           LIFE (YEARS)           PRICE               VESTED              PRICE
=====================================================================================================================
<S>                      <C>                   <C>                  <C>                <C>                   <C>
$ 0.66 - 1.43               463,958                4.86             $  0.95              463,958             $  0.95
$ 2.12 - 5.56             1,132,557                9.28             $  4.05              108,797             $  4.39
$ 7.67 - 11.94              804,717                7.91             $ 10.34              467,831             $ 10.44
$12.38 - 14.15               70,618                8.27             $ 14.08               22,124             $ 14.50
$19.00 - 22.00              463,819                7.47             $ 19.79              319,319             $ 19.77
$30.38                        7,291                7.50             $ 30.38                5,832             $ 30.38
                          ---------                                                    ---------
$ 0.66 - $30.38           2,942,960                7.89             $  8.06            1,387,861             $  9.09
                          =========                ====             =======            =========             =======
</TABLE>




Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based
Compensation ("SFAS 123"), requires the disclosure of pro forma net income had
the Company adopted the fair value method as of the beginning of fiscal 1995.
Under SFAS
<PAGE>
123, the fair value of stock-based awards to employees is calculated through the
use of option pricing models, even though such models were developed to estimate
the fair value of freely traded, fully transferable options without vesting
restrictions, which significantly differ from the Company's stock option awards.
These models also require subjective assumptions, including future stock price
volatility and expected time to exercise which greatly affect the calculated
values. The Company's calculations were made using the Black-Scholes option
pricing model with the following weighted average assumptions: expected life 54
months in all three years; stock volatility considered to be 21% in 2000, 50% in
1999 and 45 % in 1998; risk free interest rates of 4.9% in 2000, 6.5% in 1999,
and 7.0% in 1998, and no dividends during the expected term. The Company's
calculations are based on a multiple option valuation approach and forfeitures
are recognized as they occur. If the computed fair values of the awards had been
amortized to expense over the vesting period of the awards, pro forma net income
and per share amounts would have been as follows (dollars in thousands except
per share data):



<TABLE>
<CAPTION>
                                                        FISCAL YEAR ENDED
                                           --------------------------------------------
                                            FEBRUARY 3,     JANUARY 29,     JANUARY 30,
                                               2001            2000            1999
                                           ------------    ------------    ------------
<S>                                        <C>             <C>             <C>
Net income (loss) available to
  common stockholders
  As reported                              $     (4,560)   $     (3,040)   $      3,867
  Pro-forma                                      (5,924)         (5,547)          2,818
  Net Income (loss) per share:
    Basic, as reported                            (0.27)          (0.18)           0.33
    Basic, pro forma                              (0.35)          (0.33)           0.24
    Diluted, as reported                          (0.27)          (0.18)           0.23
    Diluted, pro forma                     $      (0.35)   $      (0.33)   $       0.17
---------------------------------------------------------------------------------------
</TABLE>



EMPLOYEE STOCK PURCHASE PLAN

In April 1998, the Board of Directors adopted the 1998 Employee Stock Purchase
Plan (the "Purchase Plan"). The Purchase Plan is designed to allow eligible
employees, based on specified length of service requirements, of the Company and
participating subsidiaries to purchase shares of common stock, at semi-annual
intervals, through their periodic payroll deductions under the Purchase Plan. A
reserve of 475,000 shares of common stock has been established for this purpose.
Individuals who are eligible employees may enter the Purchase Plan twice yearly
and payroll deductions may not exceed 15% of total cash earnings. The purchase
price per share will equal 85% of the lower of (i) the fair market value of the
common stock on the participant's entry date into the offering period or (ii)
the fair market value on the semi-annual purchase date. The Board may at any
time alter, suspend or discontinue the Purchase Plan. However, certain
amendments to the Purchase Plan may require stockholder approval.

(7) EMPLOYEE BENEFIT PLANS

The Company has a 401(k) plan for its employees who meet certain service and age
requirements. Participants may contribute up to 15% of their salaries to a
maximum of $10,000 and qualify for favorable tax treatment under Section
401(k) of the Internal Revenue Code. In November 1997, the Company began
matching 10% of the employees' contribution up to a maximum of 4% of their base
salary. The Company contributed $221,977, $56,827, and $21,828 in the years
ended February 3, 2001, January 29, 2000, and January 30, 1999, respectively.

(8) OTHER RELATED PARTY TRANSACTIONS

The Company leases a store from the Chairman of the Board of Directors and his
spouse and a partnership of which the Chairman is a partner. For the fiscal
years ended February 3, 2001, January 29, 2000, and January 30, 1999, rents of
$65,657, $64,222, and $54,600 were paid in the aggregate to the Chairman and the
partnership, respectively.

(9) COMMITMENTS AND CONTINGENCIES

The Company is a party to various legal claims, actions and complaints. Although
the ultimate resolution of legal proceedings cannot be predicted with certainty,
management believes that disposition of these matters will not have a material
adverse effect on the
<PAGE>
Company's consolidated financial statements.

(10) SEGMENT REPORTING

The Company classifies its business interests into three identifiable segments:
retail, direct to customer and furniture. The retail segment includes revenue
and expense associated with the 106 retail locations. The direct to customer
segment includes revenue and expenses associated with catalog and Internet
sales. The furniture segment includes all revenue and expense associated with
Michaels. The accounting policies of the segments are the same as those
described in the summary of significant accounting policies (Note 1). The
Company evaluates performance and allocates resources based on income from
operations which excludes unallocated corporate general and administrative
costs. Certain segment information, including segment assets, asset expenditures
and related depreciation expense, is not presented as all assets of the Company
are commingled and are not available by segment.

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



<TABLE>
<CAPTION>
                                                        FISCAL YEAR ENDED
                                           --------------------------------------------
                                           FEBRUARY 3,     JANUARY 29,     JANUARY 30,
                                               2001            2000            1999
                                           ------------    ------------    ------------
<S>                                        <C>             <C>             <C>
Net sales
    Retail                                 $    342,687    $    279,225    $    192,541
    Direct-to-customer                           22,554          12,785           3,351
    Furniture                                    19,980          26,376          23,777
    Intersegment sales                          (18,985)        (19,484)         (8,322)
                                           ------------    ------------    ------------
Consolidated net sales                     $    366,236    $    298,902    $    211,347
                                           ============    ============    ============
Income from operations
    Retail                                       42,740          26,837          27,900
    Direct-to-customer                              278            (257)           (650)
    Furniture                                    (1,799)          2,494           2,930
    Unallocated                                 (40,454)        (29,505)        (19,626)
    Intersegment income from
    operations                                     (938)         (2,923)         (1,389)
                                           ------------    ------------    ------------
Consolidated income from operations        $       (173)    $    (3,354)   $      9,165
                                           ============    ============    ============
</TABLE>




(11) ACQUISITION OF THE MICHAELS FURNITURE COMPANY

On March 20, 1998, the Company acquired 100% of the outstanding stock of
Michaels, a privately owned manufacturer of wood furniture, from its sole
shareholder and then-current President. The Michaels acquisition was accounted
for under the purchase method of accounting and all acquired assets and
liabilities were recorded at their estimated fair market values.

Consideration given for the Michaels' stock consisted of an initial cash payment
of $5.0 million at March 20, 1998, the date of the close. Additionally, the
Company is required to pay the former owner contingent cash consideration equal
to 35% of Michaels' earnings before interest, taxes, depreciation and
amortization ("EBITDA") for the period from March 20, 1998 to January 30, 1999
and 25% of Michaels' EBITDA for fiscal years ending January 29, 2000 and
February 3, 2001. EBITDA based payments of $80,000, $592,000 and $647,000 were
paid for the years ending February 3, 2001, January 29, 2000 and January 30,
1999, respectively, to the President of Michaels.

The Company leases the manufacturing operations buildings from Michael
Vermillion, the former President. For each of the years ended February 3, 2001
and January 29, 2000, rent of $346,560 was paid to Mr. Vermillion, and from the
date of acquisition through January 30, 1999, rent of $395,200 was paid to Mr.
Vermillion.

<PAGE>
(12) SUBSEQUENT EVENT -- PRIVATE PLACEMENT, APPOINTMENT OF NEW CEO AND AMENDMENT
OF CREDIT FACILITY

On March 21, 2001, the Company completed a sale of its preferred stock with
aggregate proceeds to the Company of approximately $15 million, appointed Mr.
Friedman as the Company's new Chief Executive Officer and amended the bank
agreement for its line of credit. In addition, the Company sold Mr. Friedman
571,429 shares of Common Stock at a price per share of $1.75 and Mr. Friedman
exercised his option to purchase 1,200,000 shares of common stock at a price of
$1.75 per share for an aggregate sales price of approximately $3,100,000.

REDEEMABLE CONVERTIBLE PREFERRED STOCK SERIES A AND REDEEMABLE PREFERRED STOCK
SERIES B

The Second Amended and Restated Certificate of Incorporation of the Company (the
"Amended Certificate") authorizes 5,000,000 shares of preferred stock (the
"Preferred Stock"). In connection with the private placement transaction in
March 2001, the Board of Directors designated, by resolution, 28,037 shares of
the undesignated Preferred Stock as Series A Preferred Stock ("Series A") and
21,217 shares of the undesignated Preferred Stock as Series B Preferred Stock
("Series B"). Each has a par value of $.0001 per share.

The Company entered into an Amended and Restated Series A and B Preferred Stock
Purchase Agreement (the "Preferred Stock Purchase Agreement") dated as of March
21, 2001 with several investors, including Mr. Friedman who purchased 455 shares
of the Series A and 545 shares of the Series B. Pursuant to the terms of the
Preferred Stock Purchase Agreement, the Company received approximately $15
million in consideration for the sale of 6,820 shares of Series A and 8,180
shares of Series B, for $1,000 per share. The proceeds from the financing will
be used to repay existing indebtedness and for general corporate purposes.

REDEEMABLE CONVERTIBLE PREFERRED STOCK SERIES A ("SERIES A")

CONVERTIBILITY

The Series A is immediately convertible at the option of the holder into shares
of the Company's common stock ("Common Stock"). The initial conversion formula
is equal to the original issue price ($1,000) divided by $2.00 per share.
Therefore, each share of Series A is initially convertible into 500 shares of
Common Stock. The conversion price of the Series A is subject to certain
adjustments for future dilutive events. The Series A, is not, however,
convertible into more than 3,410,000 shares of Common Stock without the prior
approval of the Company's stockholders. The Company may require conversion of
the Series A, in whole or in part, by sending written notice of the conversion
to holders of Series A at any time after March 22, 2004 if the average closing
price per share of the Common Stock for the 20 trading days ending 3 business
days preceding the date that the request is sent exceeds three times the
then-current conversion price of the Series A. Upon the Company's notice of
conversion, holders of Series A shall be deemed to have demanded registration of
their shares of Series A. If such holders subsequently choose not to include
their shares in the registration statement, they may request redemption of their
shares of Series A, in which case the Company must redeem the shares of Series A
in accordance with the terms of the Certificate of Designation of the Series A
and Series B (the "Certificate of Designation"). Any such redemption would be
for a redemption price of $1,000 plus all accrued and unpaid dividends. If the
holders do not participate in the registration, but also do not request
redemption, their shares will automatically convert into Common Stock.

REDEMPTION

The Company may redeem the Series A, in whole or part, at any time after March
22, 2006, on at least 30 days prior written notice requesting redemption, at a
redemption price per share equal to the greater of (a) the average of the
closing price per share of the Common Stock for 20 trading days ending three
business days prior to the date that the written request is sent, or (b) $1,000
per share plus all accrued and unpaid dividends.

DIVIDENDS

If the Board of Directors declares a dividend, each share of Series A is
entitled to dividends at the rate of $100 per share per annum. Such dividends
are cumulative and deemed to have accrued from the original date of issuance of
the Series A for purposes of the exercise of the Company's redemption rights and
the redemption rights of the holders of Series A in connection with the
Company's conversion rights described above and in the Certificate of
Designation and the determining of the liquidation preferences of the holders of
the Series A. Such dividends shall not be deemed to be cumulative and shall not
be deemed to have so accrued upon any conversion of the Series A into Common
Stock. Except for dividends payable to holders of the Series B, the Company
shall not pay or declare any dividend on any Common Stock or any of its other
securities that are junior to the Series A during any fiscal year unless and
until full dividends on the Series A are declared and paid for such fiscal year.

VOTING

Holders of the Series A generally have the right to one vote for each share of
Common Stock into which such Series A is convertible. Subject to the terms of
the Preferred Stock Purchase Agreement and the Certificate of Designation, the
holders of the Series A are entitled to elect two designees to the Board of
Directors. At least one of the designees shall also be represented on all
committees of the Board of Directors. In addition, the holders of Series A vote

<PAGE>
separately as a class in certain circumstances, including, without limitation,
amendments to the Company's Amended Certificate, creation or issuance by the
Company of any new class of securities having a preference senior to or on
parity with the Series A, declaration or payment by the Company of any dividends
or other distributions on the Common Stock, or the Company entering into certain
transactions involving a merger, consolidation, or sale of all or substantially
all of its assets.

LIQUIDATION PREFERENCE

If the Company were dissolved or liquidated, voluntarily or involuntarily, the
holders of the Series A would be entitled to receive, prior and in preference to
any distribution of the Company's assets to the holders of any of its other
equity securities, other than the Series B, an amount equal to the greater of:
(a) $1,000 per share (as adjusted for any stock splits, stock dividends and
recapitalizations) plus accrued and unpaid dividends; or (b) the amount which
such holder of the Series A would have received assuming all shares of Series A
had been converted into Common Stock at the then applicable conversion rate
immediately prior to any such dissolution or liquidation. Subject to the
preferential rights of the holders of Series B, if the Company has insufficient
assets and funds to distribute to the holders of Series A their full liquidation
preference, then all of its assets and funds legally available for distribution
shall be distributed pro rata among the holders of the Series A in proportion to
the preferential amount each such holder is entitled to receive.

In addition, certain events, including, without limitation, a sale of all or
substantially all of the Company's assets, or a change of control of the
Company, may be designated by holders of Series A as a liquidation or
dissolution, in which case, the above-described mechanisms for distribution of
the Company's assets are applicable.

REDEEMABLE PREFERRED STOCK SERIES B ("SERIES B")

CONVERTIBILITY

The Series B is not convertible into Common Stock. The Series B shall be
automatically converted on a one-for-one basis into Series A at such time as a
majority of the Company's common stockholders approve the conversion. Upon
stockholder approval, such conversion shall be deemed to have taken place on the
original date of issuance of the Series A.

REDEMPTION

The Company shall redeem all outstanding Series B on June 30, 2006. At any time
and from time to time after March 22, 2004, the holders of the Series B may
require the Company to redeem, at such holder's option, some or all of their
shares of Series B. At any time and from time to time after March 22, 2004, the
Company may redeem, at its option, some or all of the outstanding shares of
Series B. The redemption price shall be $1,000 per share plus all accrued and
unpaid dividends.

DIVIDENDS

The holders of Series B shall be entitled to receive a cumulative dividend of
$200 per share per annum unless the Company's stockholders approve the
conversion feature of the Series B into Series A by August 31, 2001. The right
to receive these dividends will accrue to holders of Series B even if the
Company fails to declare or pay dividends for the Series B for any prior year.
The dividend is payable in cash or, if the Company's lenders do not approve a
cash dividend, in additional shares of Series B. The dividend accrues from the
date of issuance of the Series B and is first payable commencing on September
15, 2001. The payment of dividends on the Series B shall be payable in
preference and priority to any payment of any dividend on the Common Stock, the
Series A and any of the Company's other equity securities. The Company shall not
declare or pay a dividend or any other distribution in any fiscal year on any of
its other equity securities, and it shall not purchase, redeem or otherwise
acquire any of its other equity securities, unless and until full dividends on
the Series B shall have been declared and paid for such fiscal year.

VOTING

Except for the rights to vote as a single class to approve certain actions as
specifically provided in the Certificate of Designation, the holders of Series B
do not have any voting rights.

LIQUIDATION PREFERENCE

If the Company were dissolved or liquidated, voluntarily or involuntarily, the
holders of Series B shall be entitled to receive, prior and in preference to any
distribution of the Company's assets to the holders of Common Stock or Series A,
an amount per share equal to $1,000 (as adjusted for any stock splits, stock
dividends and recapitalizations) plus accrued and unpaid dividends. If the
Company has insufficient assets and funds to distribute to the holders of Series
B their full liquidation preference, then all of its assets and funds legally
available for distribution shall be distributed pro rata among the holders of
the Series B in proportion to the preferential amount each such holder is
entitled to receive.

<PAGE>
In addition, certain events, including, without limitation, a sale of all or
substantially all of the Company's assets, or a change of control of the
Company, may be designated by holders of Series B as a liquidation or
dissolution, in which case, the above-described mechanisms for distribution of
the Company's assets are applicable.

STOCK OPTION GRANT AND COMMON STOCK PURCHASE

As a condition to the completion of the private placement transactions in March
2001, Mr. Friedman was named as the Company's new Chief Executive Officer on
March 21, 2001. The Company entered into a stock purchase agreement with Mr.
Friedman, and, upon commencement of his employment, Mr. Friedman purchased
571,429 shares of Common Stock at $1.75 per share for a total purchase price of
approximately $1 million. The difference between the fair market value of
$2.1875 per share on the closing date of the private placement transaction and
the purchase price of $1.75 per share results in a $250,000 charge that will be
expensed as compensation on the closing date.

Additionally, the Company granted Mr. Friedman an option to purchase 1,200,000
shares of Common Stock at $1.75 per share which he subsequently exercised. The
terms of the option allow the Company to repurchase shares not fully vested at
the time Mr. Friedman ceases, for any reason, to be an employee of the Company.
The 1,200,000 shares vest and are no longer subject to the Company's repurchase
option at the rate of 33 1/3% upon completion of each year he is employed by the
Company. The difference between the fair market value of $2.1875 per share on
the closing date of the private placement transaction and the purchase price of
$1.75 results in a $525,000 charge that will be expensed as compensation over
the option's thirty-six month vesting period. Furthermore, the Company granted
Mr. Friedman an option to purchase 200,000 shares of Common Stock at $6.00 per
share. The 200,000 shares vest at the rate of 33-1/3% upon completion of each
year he is employed with the Company.

The aggregate purchase price for Mr. Friedman's purchase of the Common Stock was
approximately $3,100,000, of which approximately $1,050,000 was paid in cash by
Mr. Friedman and $2,050,000 was paid by Mr. Friedman in the form of a note,
dated March 22, 2001, evidencing a loan from the Company to Mr. Friedman.
Pursuant to the terms of the note, the interest rate on the outstanding
principal amount of the loan in the original principal amount of $2,050,000 is
8.5% per annum, which interest is payable on the first, second and third
anniversaries of the date of this note. The principal is due on March 22, 2004
but the due date may be accelerated due to a number of factors, including, Mr.
Friedman's failure to make payments due under the note, expiration of the
six-months period following the date Mr. Friedman ceases to be in the Company's
employment as a result of termination for cause, or 90 days after the closing of
an acquisition of the Company. The loan is a full recourse loan and is secured
by shares of the common stock and preferred stock purchased by Mr. Friedman.

NET PROCEEDS

The cash proceeds received from the sale of Series A and Series B in the private
placement transactions in March 2001 and the sale of Common Stock to Mr.
Friedman were approximately $16.05 million. Expenses incurred in connection with
the private place transactions were approximately $1.3 million, resulting in net
proceeds to the Company of approximately $14.75 million.

AMENDMENT OF THE CREDIT FACILITY

On March 21, 2001, the Company amended its existing credit facility. The
amendment reduced the overall commitment under the line of credit from $111
million to $89 million, increased the amounts available for letters of credit
from $10 million to $20 million and eliminated the minimum earnings before
interest, taxes, depreciation and amortization ("EBITDA") requirement.
Additionally, the borrowing base calculation was modified to provide the Company
with more liquidity due to the pledge of additional collateral, and the interest
rate was reduced by 25 basis points, with possible additional reductions based
on achievement of future EBITDA. The amended credit facility contains minimum
availability requirements based on seasonality.

In September 2000, as part of an amendment to the then-existing credit facility,
warrants to purchase 550,000 shares of Common Stock were issued to the lenders.
At the time of the grant, the fair market value of the Common Stock exceeded the
exercise price of the warrants. In connection with the amendment to the credit
facility in March 2001, the Company repriced the warrant covering 200,000 of the
500,000 shares of Common Stock from $3.75 to $2.00 per share. All other
provisions of the credit facility remained substantially unchanged.

13) RESTATEMENT OF FINANCIAL STATEMENTS FOR CHANGE IN REVENUE RECOGNITION POLICY

Subsequent to the issuance of the Company's consolidated financial statements
for the fiscal year ended February 3, 2001, the Company's management determined
that a change in its revenue recognition policy for sales of furniture delivered
to the customer should have been made as of January 30, 2000 in order to comply
with the Securities and Exchange Commission Staff Accounting Bulletin 101,
Revenue Recognition in Financial Statements", ("SAB 101"). Previously, the
Company's policy was to recognize sales of furniture as revenue when shipped.
The Company should have changed this policy effective January 30, 2000, in
accordance with SAB 101, to recognize such sales as revenue upon delivery to the
customer. As a result, the consolidated financial statements as of and for the
year ended February 3, 2001 have been restated from the amounts previously
reported. A summary of significant effects of the restatement is as follows:

<PAGE>
<TABLE>
<CAPTION>
                                                    AS OF FEBRUARY 3, 2001

                                                 AS PREVIOUSLY
                                                    REPORTED        AS RESTATED
<S>                                              <C>                <C>

Merchandise inventories                           $  81,123         $  85,067
Prepaid expense and other                             7,954             8,975
Total current assets                                 99,756           104,721
Other long term assets                                7,217             7,188
Deferred revenue                                         --             6,398
Other current liabilities                             8,494             8,501
Accumulated deficit                                 (14,553)          (16,022)
Total stockholders' equity                           80,344            78,875
</TABLE>

<TABLE>
<CAPTION>
                                                FISCAL YEAR ENDED FEBRUARY 3, 2001
                                                 AS PREVIOUSLY
                                                    REPORTED        AS RESTATED
<S>                                             <C>                 <C>

Net sales                                         $ 369,462         $ 366,236
Cost of sales and occupancy                         255,923           253,762
Gross profit                                        113,539           112,474
Income (loss) from operations                           892              (173)
Income (loss) before taxes                           (4,912)           (5,977)
Income tax benefit                                    1,821             2,236
Income (loss) before cumulative
  effect of change in accounting principle           (3,091)           (3,741)
Cumulative effect of change in accounting
  principle, net of tax effect of $570                   --              (819)
Income (loss) available to common
  stockholders                                       (3,091)           (4,560)
Net loss per share to common
  shareholders:
Basic and diluted loss per share
  before cumulative effect of change
  in accounting principle                             (0.18)            (0.22)
Cumulative effect of
  change in accounting principle                         --             (0.05)
Basic and diluted loss per common share               (0.18)            (0.27)
</TABLE>
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

None.

                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The following table sets forth information regarding our executive officers and
directors as of the fiscal year ended February 3, 2001, as well as information
about our new Chief Executive Officer who was hired and appointed to the board
after the fiscal year end, two other directors who were appointed to the board
after the fiscal year-end in connection with the private financing discussed in
"Item 1 -- Subsequent Events" and persons nominated by our board of directors to
serve as members of the board. Please reference "Item 1 -- Subsequent Events"
for additional information on management changes that occurred after the fiscal
year ended February 3, 2001.




<TABLE>
<CAPTION>
           NAME                  AGE                        POSITION
--------------------------------------------------------------------------------------
<S>                              <C>    <C>
Stephen J. Gordon(4)(5)           50    Chairman of the Board of Directors, Former
                                        Chief Executive Officer and Director Nominee

Gary G. Friedman(9)(10)           43    Chief Executive Officer, Director and Director
                                        Nominee

Thomas Christopher(3)             53    Former President, Former Chief Operating
                                        Officer, Former Assistant Secretary and Former
                                        Director

Walter J. Parks                   42    Executive Vice President, Chief Financial
                                        Officer, Secretary and Chief Administrative
                                        Officer

Cornelia S. Hunter                53    Former Executive Vice President, Merchandise

Damon H. Ball(1)(3)(4)(6)         43    Director

Robert B. Camp(1)(3)              57    Director

Raymond C. Hemmig(1)(2)(3)(6)     51    Director

Glenn J. Krevlin(7)(9)            41    Director

Marshall B. Payne(2)(6)           44    Director

Ann Rhoades(11)                   56    Former Director

Mark J. Schwartz(8)(9)            43    Director
--------------------------------------------------------------------------------------
</TABLE>

(1) Member of the audit committee as of and after February 3, 2001

(2) Member of the compensation committee as of and after February 3, 2001

(3) Member of the real estate committee as of February 3, 2001, the committee
    has since dissolved

(4) Member of the nominating committee as of and after February 3, 2001

(5) Member of the stock option plan secondary committee as of and after February
    3, 2001

(6) Member of the finance committee as of February 3, 2001, the committee has
    since dissolved

(7) Member of the audit committee after February 3, 2001

<PAGE>
(8) Member of the compensation committee after February 3, 2001

(9) Member of the nominating committee after February 3, 2001

(10) Member of the stock option plan secondary committee after February 3, 2001

(11) Member of the compensation and nominating committees until March 22, 2001

Stephen J. Gordon founded the company in 1980 and is currently the Chairman of
our board of directors. Until the recruitment of a professional management team
in 1994 and 1995, Mr. Gordon actively managed all aspects of the business,
including acting as both our President and Chief Executive Officer from June
1987 to August 1998 and continued as our Chief Executive Officer from August
1998 until March 2001.

Gary G. Friedman joined as our Chief Executive Officer in March 2001. He was
appointed by our board as a director at the same time. Prior to joining us, Mr.
Friedman was with Williams-Sonoma for 12 years, where he served in various
capacities, including most recently as President and Chief Operating Officer
from May 2000 to March 2001, and as Chief Merchandising Officer and President of
Retail Stores from 1995 to 2000.

Thomas Christopher joined us in June 1994 as Executive Vice President, Chief
Operating Officer and director and became our President in August 1998. He
continued as our President, Chief Operating Officer, Assistant Secretary and a
director until March 2001. Prior to joining us, Mr. Christopher was with Barnes
& Noble, Inc. for five years where he served in various capacities, including
Chief Executive Officer of Bookstop Inc. and President of Barnes & Noble
Superstores. Previously, Mr. Christopher worked for 19 years at Pier 1 Imports,
a national chain of home furnishing retail stores, where he served in a variety
of capacities, including Executive Vice President of Operations. The
circumstances of Mr. Christopher's departure from the company is discussed
further under "Item 11 -- Employment Contracts, Termination of Employment and
Change of Control Arrangements."

Walter J. Parks joined us in September 1999 as our Executive Vice President and
Chief Administrative Officer. In addition to his duties as Chief Administrative
Officer, Mr. Parks assumed the position of our Chief Financial Officer in March
2000. Mr. Parks has also served as our Secretary since March 2001. Prior to
joining us, Mr. Parks was with Ann Taylor for 11 years where he served in a
variety of capacities, including as Chief Financial Officer and Treasurer from
March 1997 to April 1999 and as Senior Vice President of Finance from 1995 to
March 1997.

Cornelia S. Hunter was our Executive Vice President, Merchandise until the
termination of her employment with us effective April 6, 2001. Prior to joining
us, Ms. Hunter was a principal at the consulting firm of Hunter & Associates
from January 1998 to November 1999. She was the Vice President, Merchandise, at
Eddie Bauer Inc. from April 1990 to January 1998.

Damon H. Ball has served as one of our directors since May 1997. Since May
1999, Mr. Ball has served as the President of Sextant Capital Advisors, LLC, a
venture fund and financial advisory company formed by Mr. Ball. Previously,
Mr. Ball was with Desai Capital Management Incorporated for nine years where
he served as a Senior Vice President from 1993 to 1999, and as a Vice
President prior to such time.

Robert B. Camp has served as one of our directors since June 1994. He has
served as the Chairman and Chief Executive Officer of Kitchen Etc., Inc. since
July 1999. Mr. Camp also owns and operates Hero's Welcome Inc., a general
store and mail order operation, which he and his wife founded in 1993. He is
the former Chief Executive Officer of Pier 1, Inc. and was associated with
that company from 1967 to 1985. In 1971, Mr. Camp co-founded Import Bazaar
Ltd., a Canadian-based import business, which was subsequently sold to Pier 1.
In 1986, he founded Simpson and Fisher Companies, Inc., a specialty retail
holding company.

Raymond C. Hemmig has served as one of our directors since June 1994. He has
served as the Chairman of Ace Cash Express, Inc., a chain of retail financial
services stores, since October 1988 and the Chairman, Chief Executive Officer
and General Partner of Retail & Restaurant Growth Capital, L.P., a private
investment partnership, since 1995. Mr. Hemmig served as the Chief Executive
Officer of ACE from 1988 to 1994. Previously, Mr. Hemmig was a foodservice,
retail and franchise industries consultant from 1985 to 1988. He served as an
Executive Vice President of Grandy's Inc., a subsidiary of Saga Corp., from
1983 to 1985, and was a Vice President and the Chief Operating Officer of
Grandy's Country Cookin', the predecessor restaurant company, from 1980 to
1983. He also worked with Hickory Farms of Ohio, Inc. from 1973 to 1980 in
various operational and executive positions. He is a director on the boards of
several private companies.

Glenn J. Krevlin was appointed by our board of directors to serve as a member of
the board in March 2001. Mr. Krevlin has served as a General Partner at Glenhill
Capital LP, an investment partnership, since January 2000. Previously, he was a
General Partner at Cumberland Associates LLC, an investment limited liability
company, from 1994 to December 2000.

Marshall B. Payne has served as one of our directors since June 1994. He has
been with Cardinal Investment Company, Inc., an
<PAGE>
investment company, since 1983 and currently serves as a Vice President. Mr.
Payne also serves on the boards of several public companies, including, Ace Cash
Express, Inc., a chain of retail financial services stores, Texas Capital
Bancshares, a holding company for Texas Capital Bank, and Leslie Building
Products, Inc., a building products manufacturer.

Ann Rhoades served as one of our directors from August 1999 to March 2001. Since
January 1999, Ms. Rhoades has served as the President of People Ink, a
consulting company. Since March 1999, she has been an Executive Vice President
of JetBlue Airways, a private airline company. From January 1995 to March 1999,
Ms. Rhoades was an Executive Vice President for Promus/Doubletree Hotels. From
July 1989 to January 1995, she was a Vice President for Southwest Airlines.

Mark J. Schwartz was appointed by our board of directors to serve as a member
of the board in March 2001. Mr. Schwartz has served as the President and Chief
Executive Officer of Palladin Capital Group, Inc., a New York-based merchant
banking firm, since August 1997. He also served as the Chairman and Chief
Executive Officer of Nine West Group, Inc. from June 1999 to February 2000.
From April 1994 to July 1997, Mr. Schwartz was a member of Rosecliff, Inc., a
New York-based merchant banking firm, most recently as the President. Mr.
Schwartz also serves on the boards of several private companies, including
MarketMax, Inc., a leading provider of collaborative planning and optimization
software for retailers and suppliers, and Balance Pharmaceuticals, Inc., a
bio-pharmaceutical company developing therapeutics relating to oncology and
women's health.

CLASSIFIED BOARD

Our board is currently composed of the following classes of directors:

<TABLE>
<CAPTION>
CLASS        EXPIRATION    MEMBER
---------------------------------------------------------------------------------
<S>          <C>           <C>
Class III    2001          Stephen J. Gordon and Gary G. Friedman

Class I      2002          Damon H. Ball, Raymond C. Hemmig and Glenn J. Krevlin

Class II     2003          Robert B. Camp, Marshall B. Payne and Mark J. Schwartz
---------------------------------------------------------------------------------
</TABLE>

In connection with our Series A and B preferred stock financing in March 2001,
we hired Mr. Friedman as our new Chief Executive Officer and our board of
directors appointed Mr. Friedman as a Class III director to our board. Mr.
Friedman filled a vacancy on our board created by the resignation of Thomas
Christopher just prior to the effective date of the board's appointment of Mr.
Friedman. Mr. Friedman's term as a Class III director expires at this year's
annual meeting of stockholders. He is standing for re-election at this annual
meeting.

In addition, in connection with the issuance of the Series A preferred stock,
the holders of Series A preferred stock may elect up to two directors to our
board of directors. Accordingly, the holders of Series A preferred stock
nominated, and our board then appointed, Glenn J. Krevlin and Mark J. Schwartz
to the board of directors. Mr. Krevlin filled a newly-created directorship on
our board. Mr. Schwartz filled a vacancy on our board created by the resignation
of Ann Rhoades on March 22, 2001. The terms of Mr. Krevlin and Mr. Schwartz as
directors on our board will expire at our annual meeting of stockholders in 2002
and 2003, respectively. Provided that the holders of the Series A preferred
stock remain entitled to elect such Series A director(s), each Series A director
will be up for election upon the expiration of their respective terms.

At each annual meeting of stockholders, directors will be elected by a plurality
of votes represented and voted at the annual meeting to succeed those directors
whose terms are expiring. In addition, our bylaws provide that the authorized
number of directors may be changed only by resolution of the board of directors.
The number of directors will be distributed among the three classes so that, as
nearly as possible, each class will consist of one-third of the total number of
directors. This classification of the board of directors may have the effect of
delaying or preventing changes in control of our company.

COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934

The members of our board of directors, our executive officers and persons who
hold more than 10% of a registered class of our equity securities are subject to
the reporting requirements of Section 16(a) of the Securities Exchange Act of
1934, as amended, which require them to file reports with respect to their
ownership and changes in ownership of our common stock and other equity
securities. To our knowledge, based upon (i) copies of Section 16(a) reports
which we received from such persons for their transactions relating to our
common stock and other equity securities during the fiscal year ended February
3, 2001 and their common stock holdings, and (ii) written representations

<PAGE>
received from one or more of such persons that no annual Form 5 reports were
required to be filed by them for the fiscal year ended February 3, 2001, we
believe that all reporting requirements under Section 16(a) for the fiscal year
ended February 3, 2001 were met in a timely manner by our directors, executive
officers and greater than 10% beneficial owners except as set forth below:

<TABLE>
<CAPTION>
                                                          NUMBER OF TRANSACTIONS
                                           NUMBER OF         NOT REPORTED ON A
                                         LATE FILINGS          TIMELY BASIS
--------------------------------------------------------------------------------
<S>                                      <C>              <C>
 Robert B. Camp                                2                     1
 Raymond C. Hemmig                             2                     1
--------------------------------------------------------------------------------
</TABLE>

ITEM 11. EXECUTIVE COMPENSATION AND OTHER INFORMATION

The following table provides summary information concerning the compensation
earned by our Chief Executive Officer and each of our three other most highly
compensated executive officers whose salary and bonus for the fiscal year ended
February 3, 2001 were in excess of $100,000, for their services to the company
and our subsidiaries, for the fiscal years ended February 3, 2001, January 29,
2000, and January 30, 1999. No executive officer who would have otherwise been
included in the following table on the basis of salary and bonus earned for the
fiscal year ended February 3, 2001 has been excluded by reason of his or her
termination of employment or change in executive status during the fiscal year
end. The executive officers listed below are referred to as the "Named Executive
Officers."

                           SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
                                                                                    LONG-TERM
                                                                                   COMPENSATION
                                                                                  AWARDS NUMBER
                                                                      OTHER       OF SECURITIES
                                                                      ANNUAL        UNDERLYING
                                               SALARY     BONUS    COMPENSATION       OPTIONS       ALL OTHER
NAME AND PRINCIPAL POSITION           YEAR      ($)        ($)        ($)(1)           (#)(2)     COMPENSATION(3)
----------------------------------------------------------------------------------------------------------------
<S>                                   <C>    <C>         <C>       <C>            <C>             <C>
Stephen J. Gordon                     2000   $ 275,000        --     $ 11,400              --     $       2,010
  Chairman of the Board and           1999     272,115        --       11,400              --               808
  former Chief Executive Officer      1998     250,000   125,000       11,400          67,900               810
----------------------------------------------------------------------------------------------------------------
Thomas Christopher                    2000   $ 220,000        --     $ 11,400              --     $       2,242
  Former President, Former            1999     221,414        --       11,400              --               804
  Chief Operating Officer, Former     1998     200,000    80,000       11,400          58,100               558
  Assistant Secretary and
  Former Director
----------------------------------------------------------------------------------------------------------------
Walter J. Parks                       2000   $ 250,000        --     $ 121,176          15,000     $       1,875
  Executive Vice President,           1999      71,154    50,000         5,963         120,000                --
  Chief Financial Officer,            1998          --        --            --              --                --
  Secretary and Chief
  Administrative Officer
----------------------------------------------------------------------------------------------------------------
Cornelia S. Hunter                    2000   $ 225,000        --            --           5,000     $       1,688
  Former Executive Vice               1999      17,308   125,000        29,000          80,000                --
  President, Merchandise              1998          --        --            --              --                --
----------------------------------------------------------------------------------------------------------------
</TABLE>

(1) "Other Annual Compensation" includes: (i) for each of fiscal years 2000,
1999 and 1998, car allowances provided to Messrs. Gordon and Christopher, (ii)
for fiscal 1999, compensation paid to Ms. Hunter prior to her employment with us
as an outside consultant, and (iii) for each of fiscal years 2000 and 1999,
relocation expenses paid on behalf of Mr. Parks.

(2) The options listed in the table were granted under our 1995 and 1998 stock
option plans. See "Item 11 -- Aggregate Option/SAR Exercises and Fiscal Year-End
Values" for a description of the terms of these options.
<PAGE>
(3) "All Other Compensation" represents contributions made by us to our 401(k)
plan, which was implemented in November 1997, on behalf of the executive
officers.

STOCK OPTIONS AND STOCK APPRECIATION RIGHTS

The following table contains information concerning the stock options granted to
the Named Executive Officers during the fiscal year ended February 3, 2001. All
grants were made under our 1998 stock incentive plan. No stock appreciation
rights were granted to the Named Executive Officers during such fiscal year.

                                      NAME

<TABLE>
<CAPTION>
                                                                                     POTENTIAL
                                  INDIVIDUAL GRANTS                                  REALIZABLE
                        ---------------------------------------                   VALUE AT ASSUMED
                        NUMBER OF     PERCENTAGE OF                               ANNUAL RATES OF
                        SECURITIES    TOTAL OPTIONS                                  STOCK PRICE
                        UNDERLYING       GRANTED                                  APPRECIATION FOR
                         OPTIONS     TO EMPLOYEES IN   EXERCISE    EXPIRATION       OPTION TERM(3)
                        GRANTED(1)     FISCAL YEAR     PRICE(2)       DATE          5%         10%
-----------------------------------------------------------------------------------------------------
<S>                     <C>          <C>               <C>         <C>           <C>        <C>
Stephen J. Gordon             --             --%       $     --           --     $    --    $    --
Thomas Christopher            --             --%       $     --           --     $    --    $    --
Walter J. Parks           15,000            1.2%       $ 2.9375     10/30/10     $   981    $ 27,661
Cornelia S. Hunter         5,000            0.4%       $ 2.9375     10/30/10     $   327    $  9,220
-----------------------------------------------------------------------------------------------------
</TABLE>

(1) The options become exercisable in three equal annual installments upon the
optionee's completion of each of the three years of service with us after the
grant date. The options have a maximum term of ten years measured from the grant
date, subject to earlier termination following the optionee's cessation of
service with us. The shares subject to each option will vest in full in the
event we are acquired by merger or asset sale, unless the options are assumed by
the successor corporation.

(2) The exercise price may be paid in cash or in shares of common stock valued
at fair market value on the exercise date. Alternatively, the option may be
exercised through a cashless exercise procedure pursuant to which the optionee
provides irrevocable instructions to a brokerage firm to sell the purchased
shares and to remit to us, out of the sale proceeds, an amount equal to the
exercise price plus all applicable withholding taxes. Our compensation committee
may also assist an optionee in the exercise of an option by (i) authorizing a
loan from us in a principal amount not to exceed the aggregate exercise price
plus any tax liability incurred in connection with the exercise, or (ii)
permitting the optionee to pay the option price in installments over a period of
time upon terms established by our compensation committee.

(3) We provide no assurance to any executive officer or other holders of our
securities that the actual stock appreciation over the ten year option term will
be at the assumed 5% and 10% levels or at any other defined level. Unless the
market price of our common stock appreciates over the option term, no value will
be realized from the options granted to the Named Executive Officers.

AGGREGATED OPTION\SAR EXERCISES AND FISCAL YEAR-END VALUES

The following table sets forth information, with respect to the Named Executive
Officers, concerning the exercise of options during the fiscal year ended
February 3, 2001 and the unexercised options held by them at such fiscal year
end. No stock appreciation rights were exercised by any Named Executive Officer
during the fiscal year ended February 3, 2001, and no stock appreciation rights
were outstanding at such fiscal year end.

<TABLE>
<CAPTION>
                                                      NUMBER OF SECURITIES             VALUE OF UNEXERCISED
                                                           UNDERLYING                IN-THE-MONEY OPTIONS AT
                                                     UNEXERCISED OPTIONS AT           FISCAL YEAR-END($)(3)
                          SHARES        VALUE           FISCAL YEAR-END(#)                OPTION TERM(3)
                        ACQUIRED ON    REALIZED   ------------------------------   ---------------------------
                        EXERCISE(#)      (1)      EXERCISABLE(2)   UNEXERCISABLE   EXERCISABLE   UNEXERCISABLE
--------------------------------------------------------------------------------------------------------------
<S>                     <C>            <C>        <C>              <C>             <C>           <C>
Stephen J. Gordon            --           --          283,262         22,638        $ 194,698             --
Thomas Christopher                                    119,233         19,367           21,725             --
Walter J. Parks              --           --           39,995         95,005               --             --
Cornelia S. Hunter           --           --           26,663         58,337               --             --
--------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
(1) Based upon the market price of the purchased shares on the exercise date
less the option price paid for those shares.

(2) A number of the shares subject to options held by the Named Executive
Officers are immediately exercisable, but the shares purchasable under such
options are subject to repurchase by us, at the exercise price paid per share,
upon the optionee's cessation of service with us prior to full vesting of the
shares. The table includes under the column titled "Exercisable" the shares
subject to options that have vested and under the column titled "Unexercisable"
the shares subject to options that remain unvested.

(3) Based upon the fair market value of our common stock as of February 2, 2001
($1.84 per share), less the option exercise price payable for those shares.

EMPLOYMENT CONTRACTS, TERMINATION OF EMPLOYMENT AND CHANGE IN CONTROL AGREEMENTS

We do not presently have employment contracts in effect with any of our
executive officers, and their employment may be terminated at any time at the
discretion of our board of directors.

MR. GORDON'S SEVERANCE AGREEMENT

We entered into a severance agreement with Mr. Gordon effective as of March 21,
2001, whereby we agreed to provide Mr. Gordon with a number of benefits should
his employment with us terminate.

- If Mr. Gordon's employment with us is terminated by us for cause, or due to
his disability, death or retirement, or by Mr. Gordon, he is entitled to accrued
salary and vacation pay through the termination date.

- If Mr. Gordon's employment with us is terminated by us other than for cause,
death or disability before the second anniversary of the date of the agreement,
he is entitled to (a) all accrued salary and vacation pay through the
termination date, (b) continuation of his base salary at the time of termination
for 24 months, and (c) continuation of his medical benefit coverage until the
later of the date he becomes entitled to medical benefits from another employer
or 24 months, at his expense at the same rate that would have applied had he
remained an officer of our company.

- If Mr. Gordon's employment is terminated by us other than for cause, death or
disability on or after the second anniversary of the date of the agreement, he
is entitled to (a) all accrued salary and vacation pay through the termination
date, (b) continuation of his base salary at the time of termination until the
later of the fourth anniversary of the date of the agreement or one year after
the termination date, and (c) continuation of his medical benefits until the
later of the date he becomes entitled to medical benefits from another employer
or the end of the period of his base salary continuation, at his expense at the
same rate that would have applied had he remained an officer of our company.

Further, Mr. Gordon agrees not to solicit, directly or indirectly, any of our
employees or assist a competitor or other employer in taking such action during
his period of employment with us and for twelve months following termination of
his employment.

MR. FRIEDMAN'S EMPLOYMENT ARRANGEMENT

In connection with the hiring of Mr. Friedman as our new Chief Executive
Officer, we agreed upon the terms and conditions of his employment in an offer
letter dated March 15, 2001. Mr. Friedman's offer letter provides for an initial
annual salary of $400,000 and eligibility for annual bonus compensation,
targeted at 100% of his annual salary, with the amount actually payable based on
the level of achievement of performance goals mutually agreed to by Mr. Friedman
and our board of directors or our compensation committee. Mr. Friedman is
eligible for other benefits, including group health benefits, participation in
our 401(k) plan, a car allowance of $950 per month and extra contribution to
disability insurance coverage. In addition, as part of Mr. Friedman's
compensation package, we sold Mr. Friedman 571,429 shares of common stock at
$1.75 per share and Mr. Friedman exercised his option to purchase 1.2 million
shares of common stock at $1.75 per share for an aggregate sales price of
approximately $3.1 million. Mr. Friedman also purchased 455 shares of the Series
A preferred stock and 545 shares of the Series B preferred stock for an
aggregate purchase price of $1.0 million in our Series A and B preferred stock
financing which occurred in connection with, and was in fact conditioned upon,
the hiring of Mr. Friedman as our new Chief Executive Officer. We also granted
Mr. Friedman an option to purchase 200,000 shares of our common stock at an
exercise price of $6.00 per share. In connection with the sale of preferred and
common stock to Mr. Friedman, we also made a loan to Mr. Friedman in the amount
of $2.05 million. All of the loan proceeds were used by Mr. Friedman to purchase
a portion of this stock. The loan is a full recourse loan and secured by shares
of the common stock and preferred stock purchased by Mr. Friedman. Mr.
Friedman's employment is at will and may be terminated by either party at any
time, with or without cause, but is subject to the terms of the compensation and
severance agreement discussed below.

MR. FRIEDMAN'S COMPENSATION AND SEVERANCE AGREEMENT

In order to retain the services of Mr. Friedman, we also entered into a
compensation and severance agreement with Mr. Friedman effective as of March 21,
2001, whereby we agreed to provide Mr. Friedman with a number of benefits should
his employment with us terminate.
<PAGE>

- If Mr. Friedman's employment with us is terminated by us for cause, or due to
his disability, death or retirement, or by Mr. Friedman other than for good
reason, as specified in the agreement, he is entitled to accrued salary and
vacation pay through the termination date.

- If Mr. Friedman's employment with us terminates within 18 months of a change
of control of our company (other than as specified in the preceding sentence),
he is entitled to (a) all accrued salary and vacation pay through the
termination date, (b) a bonus pro-rated for the year of termination, and (b) an
amount in cash equal to three times the sum of (i) his base salary at the time
of termination and (ii) a bonus amount equal to the greater of 100% of the last
annual incentive payment paid to Mr. Friedman prior to the termination date and
Mr. Friedman's incentive target bonus for the fiscal year in which the change of
control of our company occurs.

- If Mr. Friedman's employment with us is terminated before the second
anniversary of the date of the agreement and is terminated by us for reasons
other than for cause, or due to his disability, death or retirement, or by Mr.
Friedman for good reason, as specified in the agreement, but not within
18-months after a change of control of our company, he is entitled to (a) all
accrued salary and vacation pay through the termination date, (b) a bonus
pro-rated for the year of termination, (c) continuation of his base salary at
the time of termination for 24 months, (d) continuation of his medical benefit
coverage until the later of the date he becomes entitled to medical benefits
from another employer or 24 months, at his expense at the same rate that would
have applied had he remained an officer of our company; and (e) acceleration of
all his options so that the shares subject to the options are immediately
exercisable.

- If Mr. Friedman's employment with us terminates on or after the second
anniversary of the date of the agreement and is terminated by us for reasons
other than for cause, or due to his disability, death or retirement, or by Mr.
Friedman for good reason, as specified in the agreement, but not within
18-months after a change of control of our company, he is entitled to (a) all
accrued salary and vacation pay through the termination date, (b) a bonus
pro-rated for the year of termination, (c) continuation of his base salary at
the time of termination until the later of the fourth anniversary of the date of
the agreement or one year after the termination date, (d) continuation of his
medical benefits until the later of the date he becomes entitled to medical
benefits from another employer or the end of the period of his base salary
continuation, at his expense at the same rate that would have applied had he
remained an officer of our company; and (e) acceleration of all his options so
the shares subject to the options are immediately exercisable and the lapsing of
vesting repurchase rights, in some cases to the extent that such options or
shares would have vested during the period of base salary continuation had he
remained employed with our company throughout such period.

Further, Mr. Friedman agrees not to (a) solicit, directly or indirectly, any of
our employees, or assist a competitor or other employer in taking such action,
and (b) work, directly or indirectly, for or make a significant investment in a
competitor during his period of employment with us and for twelve months
following his termination of employment or the second anniversary of the date of
change of control of our company, whichever comes first.

Mr. Friedman's offer letter, and compensation and severance agreement were
attached as exhibits to a report on our current report on Form 8-K filed with
the Securities and Exchange Commission on April 2, 2001. Please review such
filed Form 8-K for additional details of the offer letter and agreement.

MR. CHRISTOPHER'S SEPARATION AGREEMENT AND RELEASE

In connection with Mr. Christopher's departure from the company, we entered into
a separation agreement and release with him, dated as of March 20, 2001. Mr.
Christopher agreed to resign as our President, Chief Operating Officer,
Assistant Secretary and a member of our board of directors. Mr. Christopher
agreed to maintain his obligation to keep confidential our trade secrets. We
agreed to provide Mr. Christopher with (i) a cash payment of $440,000 payable in
installments, which is equal to two times his base salary; such payment is
subject to reduction if Mr. Christopher obtains other permanent employment
before the end of the payment period, (ii) continuation of his medical benefit
coverage until the later of the date he becomes entitled to medical benefits
from another employer or one year from the date of the agreement, (iii)
reimbursement of outplacement services expense, not to exceed $25,000, (iv)
acceleration of all his options such that the shares subject to the options are
immediately exercisable, and (v) modification of the terms of his promissory
note payable to us as detailed below in "Item 11 - Loans to Officers." The
benefits provided to Mr. Christopher pursuant to the agreement constituted full
and complete satisfaction of any and all amounts due and owing to him as a
result of his employment with us and/or the termination of that employment. Each
party further released the other from any and all future claims, suits and
damages.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

At February 3, 2001, the members of the compensation committee of our board of
directors were Messrs. Hemmig and Payne and Ms. Rhoades. After our fiscal
year-end, Mr. Schwartz was appointed by the board as a member of our board and
was also appointed to the compensation committee, filling the vacancy created by
Ms. Rhoades' resignation from the board and all board committees. None of the
individuals on our compensation committee were officers or employees of our
company at any time during the fiscal year ended February 3, 2001 or at any
other time. None of our current executive officers served as members of the
board of directors or compensation committee of any other entity which has one

<PAGE>
or more executive officers serving as a member of our board of directors or
compensation committee.

DIRECTOR COMPENSATION

Under the automatic option grant program in effect under our 1998 stock
incentive plan, each individual who first joins our board of directors as a
non-employee director will receive, at the time of his or her initial election
or appointment, an option to purchase 7,000 shares of our common stock, provided
such person has not previously been in our employment. In addition, on the date
of each annual stockholders meeting, each individual who continues to serve as a
non-employee director, whether or not such individual is standing for
re-election at that particular annual meeting, will be granted an option to
purchase additional 3,500 shares of our common stock, provided such individual
has not received an option grant under the automatic option grant program within
the preceding six months. Each grant under the automatic option grant program
will have an exercise price per share equal to the fair market value per share
of our common stock on the grant date, and will have a maximum term of 10 years,
subject to earlier termination should the optionee cease to serve as one of our
directors.

Each of Messrs. Ball, Camp, Hemmig and Payne and Ms. Rhoades received an
automatic option grant on June 16, 2000 for 3,500 shares of our common stock.
The exercise price per share in effect under each such option was $5.50, which
was the fair market value per share of our common stock on the grant date. Each
option granted under the automatic option grant program is immediately
exercisable for all the shares subject to the option, but any shares purchased
under the option grant will be subject to repurchase by us, at the exercise
price paid per share, upon the optionee's cessation of service as a director
prior to the full vesting of those shares. The 3,500 shares subject to each
annual automatic option grant shall vest, and our repurchase right shall lapse,
upon the completion of three years of continued service as a board member
measured from the option grant date.

Directors who are not employees of our company or one of our subsidiaries
receive an annual retainer fee of $5,000, payable in $1,250 increments at the
end of each calendar quarter. In addition, for each board meeting attended in
such year in excess of four board meetings, each non-employee board member
receives an additional fee of $1,000, and for each committee meeting of our
board of directors attended in a calendar year in excess of two committee
meetings, each non-employee board member receives an additional fee of $500.

Under the director fee option grant program in effect under our 1998 stock
incentive plan, each non-employee board member has the opportunity to apply all
or a portion of any annual $5,000 retainer fee otherwise payable in cash to the
acquisition of a below-market option grant. The option grant will automatically
be made on the first trading day in January in the year for which the meeting
fees would otherwise be payable in cash. The option will have an exercise price
per share equal to one-third of the fair market value of the option shares on
the grant date, and the number of shares subject to the option will be
determined by dividing the amount of the meeting fee applied to the program by
two-thirds of the fair market value per share of our common stock on the grant
date. The shares subject to the option will become exercisable in twelve equal
monthly installments over the calendar year in which the below-market option
grant was made. However, the shares subject to the option will become
immediately exercisable upon (i) specified changes in the ownership or control
of our company, or (ii) the death or disability of the optionee while serving as
a board member.

Each of Messrs. Ball, Camp, Hemmig and Payne and Ms. Rhoades received an option
grant under the director fee option grant program on January 2, 2001 for 5000
shares of our common stock. The exercise price per share in effect under each
such option was $0.32 or one-third of the fair market value per share of our
common stock on the grant date.

In the discretion of our board of directors, we may provide our directors with
additional compensation for their services as a director or a member of a board
committee. In January 2001, we provided additional compensation to Mr. Ball for
his additional duties associated with his position as Chairman of our board's
finance committee and such committee's active involvement in our company's
Series A and B preferred stock financing. The additional compensation were in
the forms of an option grant to purchase 30,000 additional shares of our common
stock at $1.72 per share on February 5, 2001 and an option grant to purchase
20,000 additional shares of our common stock at $2.19 per share on March 21,
2001, both under the director fee option grant program of our 1998 stock
incentive plan, as well as a cash award of $20,000 per month from January 29,
2001 until the end of March.


REPORT OF THE COMPENSATION COMMITTEE ON EXECUTIVE COMPENSATION

The compensation committee report is not "soliciting material," is not deemed
"filed" with the Securities and Exchange Commission and is not incorporated by
reference in any of our company's filings under the Securities Act of 1933, as
amended, or the Securities and Exchange Act of 1934, as amended, whether made
before or after this filing and irrespective of any general language to the
contrary.

It is the duty of the compensation committee to review and determine the
salaries and bonuses of our executive officers, including the Chief Executive
Officer, and to establish the general compensation policies for such
individuals. Our committee also has the sole and exclusive authority to make
discretionary option grants to executive officers under our company's 1998 stock
incentive plan.
<PAGE>
Our committee believes that the compensation programs for our executive officers
should reflect the company's performance and the value created for our
stockholders. In addition, the compensation programs should support the
short-term and long-term strategic goals of our company and goals and should
reward individual contribution to its success. Our company is engaged in a very
competitive industry, and its success depends upon its ability to attract and
retain qualified executives through the competitive compensation packages it
offers to such individuals.

GENERAL COMPENSATION POLICY

Our committee's policy is to provide our executive officers with compensation
opportunities which are based upon their personal performance, the financial
performance of our company and their contribution to that performance. Our
committee also strives to provide compensation opportunities which are
competitive with our industry to attract and retain highly skilled individuals.
Each executive officer's compensation package is comprised of three elements:
(i) base salary that is competitive within our industry and reflects individual
performance, (ii) annual variable performance awards payable in cash and tied to
our company's achievement of annual financial performance goals, and (iii)
long-term stock-based incentive awards designed to strengthen the mutuality of
interests between our executive officers and our stockholders. As an officer's
level of responsibility increases, a greater proportion of his or her total
compensation will depend upon our company's financial performance and stock
price appreciation rather than base salary.

FACTORS

The principal factors that were taken into account in establishing each
executive officer's compensation package for the fiscal year ended February 3,
2001 are described below. However, our committee may in its discretion apply
entirely different factors, such as different measures of financial performance,
for future fiscal years.

BASE SALARY

In setting base salaries, our committee periodically reviewed published
compensation survey data for the industry. The base salary for each of our
executive officers were guided by the salary levels for comparable positions in
the industry, as well as the individual's personal performance and internal
alignment considerations. The relative weight given to each factor varies with
each individual in our sole discretion. Each executive officer's base salary is
adjusted each year on the basis of (i) our evaluation of the executive officer's
personal performance for the year, and (ii) the competitive marketplace for
persons in comparable positions. The performance and profitability of our
company may also be a factor in determining the base salaries for our executive
officers.

ANNUAL INCENTIVES

The annual incentive bonus for our executive officers is discretionary in nature
and is determined by our committee. No annual incentive bonuses were paid for
the fiscal year ended February 3, 2001.

LONG TERM INCENTIVES

Generally, stock option grants are made annually by our committee to each
executive officer. Each grant is designed to align the interests of our
executive officers with those of our stockholders and provide each officer with
a significant incentive to manage our company from the perspective of an owner
with an equity stake in the business. Each grant allows the officer to acquire
shares of the common stock at the fair market value per share on the grant date
over a specified period of time not to exceed ten years. Shares subject to the
option grant becomes exercisable in a series of installments over a three-year
period, contingent upon the executive officer's continued employment with the
company. Accordingly, the option grant will provide a positive return to our
executive officer only if he or she remains employed by the company during the
vesting period, and then only if the market price of the shares appreciates over
the option term.

The size of the option grant to each executive officer, including the Chief
Executive Officer, is set by our committee at a level that is intended to create
a meaningful opportunity for stock ownership based upon the individual's current
position with our company, the individual's personal performance in recent
periods and his or her potential for future responsibility and promotion over
the option term. We also take into account the number of unvested options held
by the executive officer in order to maintain an appropriate level of equity
incentive for that individual. The relevant weight given to each of these
factors varies from individual to individual. We have established certain
guidelines with respect to the option grants made to our executive officers, but
have the flexibility to make adjustments to those guidelines in our discretion.

CEO COMPENSATION

Our committee adjusted Mr. Gordon's base salary after the fiscal year ended
January 29, 2000 in recognition of his personal performance and with the
objective of maintaining his base salary at a competitive level as compared to
the base salary levels in effect
<PAGE>
for similarly-situated chief executive officers. With respect to Mr. Gordon's
base salary, it was our intent to provide him with a level of stability and
certainty each year and not have this particular component of compensation
affected to any significant degree by the performance factors of our company.
For the fiscal year ended February 3, 2001, Mr. Gordon's base salary was
approximately at the median of the base salary levels of other chief executive
officers of the surveyed companies.

COMPLIANCE WITH INTERNAL REVENUE CODE SECTION 162(M)

Section 162(m) of the Internal Revenue Code, as amended, disallows a tax
deduction to publicly-held companies for compensation paid to certain of their
executive officers, to the extent that such compensation exceeds $1 million per
covered officer in any fiscal year. The limitation applies only to compensation
which is not considered to be performance-based. Non-performance based
compensation paid to our executive officers for the fiscal year ended February
3, 2001 did not exceed the $1 million limit per officer, and we do not
anticipate that the non-performance based compensation to be paid to our
executive officers for the fiscal year ending February 2, 2002 will exceed that
limit. Our company's 1998 stock incentive plan has been structured so that any
compensation deemed paid in connection with the exercise of option grants made
under that plan with an exercise price equal to the fair market value of the
option shares on the grant date will qualify as performance-based compensation
which will not be subject to the $1 million limitation. Because it is unlikely
that the cash compensation payable to any of our executive officers in the
foreseeable future will approach the $1 million limit, we have decided at this
time not to take any action to limit or restructure the elements of cash
compensation payable to our executive officers. We will reconsider this decision
should the individual cash compensation of any executive officer approach the $1
million limit.

It is the opinion of our committee that the executive compensation policies and
plans provide the necessary total remuneration program to properly align the
performance of our executive officers with the interests of our stockholders
through the use of competitive and equitable executive compensation in a
balanced and reasonable manner, for both the short and long-term.

Submitted by the compensation committee of the board of directors for the fiscal
year ended February 3, 2001:

Raymond C. Hemmig
Marshall B. Payne

STOCK PERFORMANCE GRAPH

The stock performance graph below is not "soliciting material," is not deemed
"filed" with the Securities and Exchange Commission and is not incorporated by
reference in any of our filing under the Securities Act of 1933, as amended, or
the Securities and Exchange Act of 1934, as amended, whether made before or
after this filing and irrespective of any general language to the contrary.

                               [PERFORMANCE GRAPH]

(1) The graph covers the period from June 19, 1998, the commencement date of our
initial public offering of our common stock, to January 1, 2001.

(2) The graph assumes that $100 was invested in the company on June 19, 1998, in
our common stock and in each index, and that all dividends, if any, were
reinvested. No cash dividends have been declared on our common stock.

(3) Stockholder returns over the indicated period should not be considered
indicative of future stockholder returns.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth information known to us with respect to the
beneficial ownership of each class of our voting securities as of April 20,
2001, by (i) all persons who are beneficial owners of 5% or more of each class
of our voting securities, (ii) each director, including former director, Ann
Rhoades, (iii) each Named Executive Officer and our new Chief Executive Officer,
and (iv) all directors and executive officers as a group, including our new
Chief Executive Officer. Unless otherwise indicated, each of the stockholders
has sole voting and investment power with respect to the shares beneficially
owned, subject to community property laws, where applicable. Unless otherwise
indicated, the principal address of each of the stockholders listed below is c/o
Restoration Hardware, Inc., 15 Koch Road, Suite J., Corte Madera, California
94925.
<PAGE>
<TABLE>
<CAPTION>
                                                               PERCENTAGE OF
                                                               SHARES OF EACH
                                                                  CLASS OF
                                               SHARES         VOTING SECURITIES
                                             BENEFICIALLY       BENEFICIALLY
             BENEFICIAL OWNER                   OWNED             OWNED(1)
             ----------------                ------------     -----------------
<S>                                          <C>              <C>

SERIES A PREFERRED STOCK

  Palladin Capital IX, LLC                        2,796             41.0%
  Glenhill Capital LP                             1,364             20.0%
  Reservoir Capital Partners, L.P.(2)             1,364             20.0%
  Mark J. Schwartz(3)                             2,796             41.0%
  Glenn J. Krevlin(4)                             1,364             20.0%
  Gary G. Friedman(5)                               569              8.3%
  All directors and executive officers
    as a group (3 persons)                        4,729             69.3%

COMMON STOCK
  Stephen J. Gordon(6)                        3,473,208             18.0%
  Brown Capital Management, Inc.              2,542,700             13.4%
     1201 N. Calvert Street
     Baltimore, MD 21201
  Gary G. Friedman(7)                         2,055,929             10.6%
  Weston Presidio Capital II LP               1,577,681              8.3%
     One Federal Street, 21st Floor
     Boston, MA 02181-2204
  J.P. Morgan Partners SAIC LLC               1,430,030              7.5%
  Palladin Capital IX, LLC(8)                 1,398,000              6.8%
  Mark J. Schwartz(9)                         1,398,000              6.8%
  E.W. Rose                                   1,263,858              6.6%
  Desai Funds(10)                               911,452              4.8%
  Thomas Christopher(11)                        735,784              3.9%
  Glenhill Capital LP(12)                       682,000              3.5%
  Reservoir Capital Partners, L.P.(13)          682,000              3.5%
  Glenn J. Krevlin(14)                          682,000              3.5%
  Marshall B. Payne(15)                         572,036              3.0%
  Raymond C. Hemmig(16)                         233,897              1.2%
  Robert B. Camp(17)                             84,046               *
  Walter J. Parks(18)                            40,495               *
  Cornelia S. Hunter(19)                         33,163               *
  Damon H. Ball(20)                              31,361               *
  Ann Rhoades(21)                                 8,439               *
  All directors and executive officers
    as a group (12 persons)                   9,348,358             42.4%
</TABLE>

* Less than one percent of our outstanding securities.

(1) Percentage of ownership is based on 19,033,723 shares of our common stock
and 6,820 shares of our Series A preferred stock outstanding as of April 20,
2001. Shares of our common stock subject to stock options which are currently
exercisable or will become exercisable within 60 days of April 20, 2001 are
deemed outstanding for computing the percentage of the person or group holding
such options, but are not deemed outstanding for computing the percentage of any
other person or group. Shares of our Series A preferred stock which are
convertible into shares of our common stock on a 500-to-1 basis at any time at
the option of the holder are deemed outstanding for computing the percentage of
the person or group holding such securities, but are not deemed outstanding for
computing the percentage of any other person or group.

(2) Includes 3 shares of Series A preferred stock held by Reservoir Capital
Associates, L.P. and 196 shares of Series A preferred stock held by Reservoir
Capital Master Fund, L.P.

(3) Mr. Schwartz is the President and Chief Executive Officer of Palladin
Capital Group, Inc. which is an affiliate of Palladin Capital IX, LLC. He
disclaims beneficial ownership of the securities held by Palladin, except to the
extent of his pecuniary interest in Palladin.

(4) Mr. Krevlin is a General Partner at Glenhill Capital LP. He disclaims
beneficial ownership of the securities held by Glenhill, except to the extent of
his pecuniary interest in Glenhill.
<PAGE>
(5) Includes 114 shares of Series A preferred stock held by Kendal A. Friedman,
the spouse of Mr. Friedman.

(6) Includes 305,900 shares of common stock subject to options exercisable
within 60 days of April 20, 2001 held by Mr. Gordon, 103,541 shares of common
stock held by the Christine B. Gordon 1998 Qualified Grantor Retained Annuity
Trust, of which Christine B. Gordon, the spouse of Stephen J. Gordon, is the
sole trustee, 30,505 shares held by the Christine B. Gordon Trust, of which
Christine B. Gordon is the sole trustee, and 103,541 shares held by the Stephen
J. Gordon 1998 Qualified Grantor Retained Annuity Trust, of which Stephen J.
Gordon is the sole trustee.

(7) Includes 569 shares of Series A preferred stock which are convertible into
shares of common stock on a 500-to-1 basis at any time at the option of the
holder.

(8) Includes 2,796 shares of Series A preferred stock which are convertible into
shares of common stock on a 500-to-1 basis at any time at the option of the
holder.

(9) Includes 2,796 shares of Series A preferred stock which are convertible into
shares of common stock on a 500-to-1 basis at any time at the option of the
holder. Mr. Schwartz disclaims beneficial ownership of the securities held by
Palladin, except to the extent of his pecuniary interest in Palladin.

(10) Includes shares of common stock held by Equity Linked Investors II and
Private Equity Investors III, L.P.

(11) Includes 66,733 shares of common stock subject to options exercisable
within 60 days of April 20, 2001 held by Mr. Christopher, 98,189 shares of
common stock held by the Barbara Christopher 1997 Qualified Grantor Retained
Annuity Trust, of which Barbara Christopher, the spouse of Thomas A.
Christopher, is the sole trustee, 2,625 shares held directly by Barbara
Christopher and 98,189 shares of common stock held by the Thomas A. Christopher
1997 Qualified Grantor Annuity Trust, of which Thomas A. Christopher is the sole
trustee.

(12) Includes 1364 shares of Series A preferred stock which are convertible into
shares of common stock on a 500-to-1 basis at any time at the option of the
holder.

(13) Includes 1364 shares of Series A preferred stock which are convertible into
shares of common stock on a 500-to-1 basis at any time at the option of the
holder.

(14) Includes 1364 shares of Series A preferred stock which are convertible into
shares of common stock on a 500-to-1 basis at any time at the option of the
holder. Mr. Krevlin disclaims beneficial ownership of the securities held by
Glenhill, except to the extent of his pecuniary interest in Glenhill.

(15) Includes 54,861 shares of common stock subject to options exercisable
within 60 days of April 20, 2001 held by Mr. Payne.

(16) Includes 55,187 shares of common stock subject to options exercisable
within 60 days of April 20, 2001 held by Mr. Hemmig.

(17) Includes 55,187 shares of common stock subject to options exercisable
within 60 days of April 20, 2001 held by Mr. Camp.

(18) Includes 39,995 shares of common stock subject to options exercisable
within 60 days of April 20, 2001 held by Mr. Parks.

(19) Includes 26,663 shares of common stock subject to options exercisable
within 60 days of April 20, 2001 held by Ms. Hunter.

(20) Includes 28,361 shares of common stock subject to options exercisable
within 60 days of April 20, 2001 held by Mr. Ball.

(21) Includes 3,439 shares of common stock subject to options exercisable within
60 days of April 20, 2001 held by Ms. Rhoades.


ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

EQUITY INVESTMENT TRANSACTIONS

On March 22, 2001, we sold to several investors an aggregate of 6,820 shares of
Series A preferred stock and 8,180 shares of Series B preferred stock, each at
$1,000 per share, pursuant to an amended and restated preferred stock purchase
agreement. In connection with the Series A and B preferred stock financing, we
received aggregate gross proceeds of approximately $15 million. Listed below are
our directors, executive officers, and stockholders who beneficially own 5% or
more of a class of our voting securities who participated in this financing.
<PAGE>
<TABLE>
<CAPTION>
DIRECTORS, EXECUTIVE OFFICERS AND
         5% STOCKHOLDERS              SERIES A PREFERRED STOCK    SERIES B PREFERRED STOCK
------------------------------------------------------------------------------------------
<S>                                   <C>                         <C>
Palladin Capital IX, LLC                      2,796                         3,354
Glenhill Capital LP                           1,364                         1,636
Reservoir Capital Partners, L.P.              1,364                         1,636
Gary G. Friedman                                455                           545
Kendal A. Friedman                              114                           136
------------------------------------------------------------------------------------------
</TABLE>

Mr. Schwartz, who is a member of our board of directors, is the President and
Chief Executive Officer of Palladin Capital Group, Inc., which is an affiliate
of Palladin Capital IX, LLC. He disclaims beneficial ownership of the securities
held by Palladin, except to the extent of his pecuniary interest in Palladin.

Mr. Krevlin, who is a member of our board of directors, is a General Partner at
Glenhill Capital LP. He disclaims beneficial ownership of the securities held by
Glenhill, except to the extent of his pecuniary interest in Glenhill.

Reservoir Capital Partners, L.P. has 1,165 shares of Series A preferred stock
and 1,398 shares of Series B preferred stock. Reservoir Capital Associates, L.P.
has 3 shares of Series A preferred stock and 3 shares of Series B preferred
stock. Reservoir Capital Master Fund, L.P. has 196 shares of Series A preferred
stock and 235 shares of Series B preferred stock.

Kendal A. Friedman is the spouse of Mr. Friedman.

In connection with the Series A and B preferred stock financing, we also hired
Mr. Friedman as our new Chief Executive Officer and our board of directors
appointed Mr. Friedman as a director to our board. Mr. Friedman purchased 455
shares of the Series A preferred stock and 545 shares of the Series B preferred
stock for an aggregate purchase price of $1 million. In addition, as part of Mr.
Friedman's compensation package, we sold Mr. Friedman 571,429 shares of common
stock at $1.75 per share and Mr. Friedman exercised his option to purchase 1.2
million shares of common stock at $1.75 per share for an aggregate sales price
of approximately $3.1 million. We also granted Mr. Friedman an option to
purchase 200,000 shares of our common stock at an exercise price of $6.00 per
share.

In connection with the Series A and B preferred stock financing, we also granted
each of the investors who purchased preferred stock in that financing, as well
as Mr. Friedman, certain registration rights pursuant to an amended and restated
investors rights agreement, dated as of March 21, 2001. Pursuant to that
agreement, the investors have the right to require us to register their common
stock issuable upon conversion of the Series A preferred stock as well as, in
the case of Mr. Friedman, common stock he purchased separately in connection
with the Series A and B preferred stock financing. At any time beginning
September 17, 2001, we may be required to file a registration statement upon
demand, provided particular threshold requirements are met. We will not be
required to file more than four such demand registrations, one of which may be
initiated exclusively by Palladin Capital IX, LLC and one of which may be
initiated exclusively by the group consisting of Reservoir Capital Partners,
L.P., Reservoir Capital Associates, L.P. and Reservoir Capital Master Fund, L.P.
The demand registrations are subject to underwriters' cutbacks. In addition, we
have granted the investors and Mr. Friedman unlimited "piggyback" registration
rights, subject to underwriters' cutbacks. Furthermore, the amended and restated
investor rights agreement requires us to effect registrations on Form S-3 or its
equivalent with respect to all registrable securities owned by the investors and
Mr. Friedman as would permit or facilitate the sale and distribution of all
their registrable securities on a delayed and continuous basis, upon the later
of (a) the time that the Form S-3 becomes available for use by us and (b) 30
days following the filing with the Securities and Exchange Commission of our
Form 10-K for the fiscal year 2001. All registration expenses associated with
the demand registrations, Form S-3 registrations and "piggyback" registrations,
other than underwriters' and brokers' discounts and commissions, shall be borne
by us.

The amended and restated investor rights agreement further provides that, to the
extent and solely to the extent that parties to our restated investors rights
agreement, dated as of May 16, 1997, continue to possess registration rights
granted by us pursuant to the terms of Section 6 of that agreement, then the
investors under the amended and restated investor rights agreement will have
their registration rights subordinated to the registration rights of parties to
the earlier agreement.

In January 2001, we provided additional compensation to Mr. Ball for his
additional duties associated with his position as Chairman of our board's
finance committee and such committee's active involvement in our company's
Series A and B preferred stock financing. The additional compensation were in
the forms of an option grant to purchase 30,000 additional shares of our common
stock at $1.72 per share on February 5, 2001 and an option grant to purchase
20,000 additional shares of our common stock at $2.19 per share on March 21,
2001, both under the director fee option grant program of our 1998 stock
incentive plan, as well as a cash award of $20,000 per month from January 29,
<PAGE>
2001 until the end of March, 2001.

OTHER RELATED PARTY TRANSACTIONS

We lease our store at 417 Second Street, Eureka, California, from Mr. and Mrs.
Gordon and a partnership of which Mr. Gordon is a partner. Pursuant to the
written lease, we pay rent annually to Mr. and Mrs. Gordon and the partnership
for use of the store. The aggregate lease payments paid to Mr. and Mrs. Gordon
and the partnership were $65,657 for the fiscal year ended February 3, 2001.

LOANS TO OFFICERS

In October 2000, we extended a loan to Mr. Christopher, who was at the time, the
President, Chief Operating Officer, Assistant Secretary and a director of our
company, in the amount of $150,000 at an interest rate of 8% per annum. The
principal plus interest on the loan were originally to become due on June 29,
2001. In connection with his departure from the company, we entered into a
separation agreement and release with Mr. Christopher. We agreed to extend the
maturity date of the loan and modify the repayment terms. In lieu of payment by
Mr. Christopher of the full loan amount and accrued interest on June 29, 2001,
Mr. Christopher shall pay us monthly installments of $25,000 beginning on June
29, 2001 until the loan amount and accrued interest are repaid in full. We have
the right to withhold any payment due to Mr. Christopher under his separation
agreement and release should he default on any monthly installment. In
connection with the loan to Mr. Christopher, we secured the loan with 150,000
shares of common stock owned by Mr. Christopher, and the loan, as modified,
remains secured by these shares of common stock.

In connection with the Series A and B preferred stock financing, Mr. Friedman
purchased 455 shares of the Series A preferred stock and 545 shares of the
Series B preferred stock for an aggregate purchase price of $1 million. We also
hired him as our new Chief Executive Officer. In addition, as part of Mr.
Friedman's compensation package, we sold Mr. Friedman 571,429 shares of common
stock at $1.75 per share and Mr. Friedman exercised his option to purchase 1.2
million shares of common stock at $1.75 per share for an aggregate sales price
of approximately $3.1 million. In connection with this sale of preferred and
common stock to Mr. Friedman, we also made a loan to Mr. Friedman in the amount
of $2.05 million. All of the loan proceeds were used by Mr. Friedman to purchase
a portion of this stock. The loan is a full recourse loan and is secured by
shares of the common stock and preferred stock purchased by Mr. Friedman. This
loan is evidenced by a note, dated March 22, 2001. Pursuant to the terms of the
note, the interest rate on the outstanding principal amount of the loan is 8.5%
per annum, payable on the first, second and third anniversaries of the date of
the note. The principal is due on March 22, 2004 but the due date may be
accelerated due to a number of factors, including, failure to make payments due
under the note, expiration of the six-months period following the date Mr.
Friedman ceases to be an employee of our company as a result of termination by
us for cause, or 90 days after the closing of an acquisition of our company.

                                     PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K

(a) The following are filed as a part of this annual report on Form 10-K.

Consolidated financial statements as of February 3, 2001 and January 29, 2000
and for each of the three years in the period ended February 3, 2001.

(b) Exhibits.

The following exhibits to this annual report on Form 10-K are filed pursuant to
the requirements of Item 601 of Regulation S-K:


<TABLE>
<CAPTION>
EXHIBIT NUMBER   DOCUMENT DESCRIPTION
---------------------------------------------------------------------------------------------
<S>              <C>
       3.1       Amended and Restated Certificate of Incorporation(1)
       3.2       Bylaws, as amended to date(2)
       4.1       Reference is made to Exhibit 3.1
       4.2       Reference is made to Exhibit 3.2
       4.3       Specimen Common Stock Certificate(1)
       4.4       Specimen Series A Preferred Stock Certificate(3)
       4.5       Specimen Series B Preferred Stock Certificate(3)
       4.6       Certificate of Designation of Series A and Series B Preferred Stock(3)
     +10.1       Form of 1995 Stock Option Plan(1)
     +10.2       Form of 1998 Stock Incentive Plan(1)
     +10.3       Form of 1998 Employee Stock Purchase Plan(1)
      10.4       Form of Indemnity Agreement for Officers and Directors(1)
      10.5       Restated Investors Rights Agreement, dated May 16, 1997, among the Company,
                 the founders and Common Stock Warrantholders, Series D Warrantholders and
                 Common Stock holders and Investors(1)
      10.6       Stock Purchase Agreement, dated March 20, 1998, between the Company and
                 Michael Vermillion(1)
      10.7       Supply Agreement, dated March 20, 1998, between the Company, Michaels
                 Concepts in Wood, Inc. and Michael Vermillion(1)
      10.8       Lease Agreement, dated may 4, 1994, between the Company and Stephen and
                 Christine Gordon(1)
      10.9       Commercial lease and Deposit Receipt, dated October 18, 1994, and Addenda,
                 dated October 20, 1994 and November 21, 1994, between the Company and
                 H. Koch and Sons(1)
     10.10       Office Lease, dated February 21, 1997, between the Company and Paradise
                 Point Partners(1)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NUMBER   DOCUMENT DESCRIPTION
---------------------------------------------------------------------------------------------
<S>              <C>
     10.11       Standard Industrial/Commercial Multi-Tenant Lease, dated May 12, 1997,
                 between the Company and Mortimer B. Zuckerman(1)
     10.12       Fourth Amended and Restated Loan and Security Agreement, dated April,
                 1998(1)
     10.13       Second Amendment to the Fourth Amended and Restated Loan and Security
                 Agreement, dated October, 1998(2)
     10.14       Fifth Amended and Restated Loan and Security Agreement, dated February 2,
                 2000
     10.15       First Amendment to the Fifth Amended and Restated Loan and Security
                 Agreement, dated March 31, 2000.
     10.18       Amended and Restated Investors Rights Agreement, dated as of March 21, 2001,
                 between the Company and the Series A and B Preferred Stock investors
     10.19       Amended and Restated Series A and B Preferred Stock Purchase Agreement
                 dated as of March 21, 2001(3), between the Company and the Series A and B
                 Preferred Stock investors
     10.20       Third Amendment to the Sixth Amended and Restated Loan and Security
                 Agreement date as of March 21, 2001(3)
     10.30       Offer of Employment Letter for Mr. Friedman dated as of March 15, 2001(3)
     10.31       Compensation and Severance Agreement between the Company and Gary G.
                 Friedman, effective as of March 21, 2001(3)
     10.32       Stock Pledge Agreement between the Company and Mr. Friedman, dated as of
                 March 22, 2001(3)
     10.33       Stock Purchase Agreement between the Company and Gary G. Friedman, dated as
                 of March 18, 2001(3)
     10.34       Early Exercise Stock Purchase Agreement between the Company and Gary G.
                 Friedman, dated as of March 18, 2001(3)
     10.35       Note Secured by Stock between the Company and Gary G. Friedman, dated as of
                 March 22, 2001(3)
     10.36       Notice of Grant of Stock Option for Gary. G. Friedman(3)
     10.37       Stock Option Agreement between the Company and Gary G. Friedman, dated as
                 of March 18, 2001(3)
    *10.38       Separation Agreement and Release between the Company and Thomas Christopher,
                 dated as of March 20, 2001
    *10.39       Amended and Restated Promissory Note between the Company and Thomas
                 Christopher, dated as of May 1, 2001
    *10.40       Severance Agreement between the Company and Stephen J. Gordon, effective as
                 of March 21, 2001*
       *21       List of Subsidiaries
     *23.1       Consent of Independent Auditors
</TABLE>


(1) Incorporated by reference to the exhibit with the same number filed with the
Company's Registration Statement on Form S-1 (File No. 333-51027) filed on June
17, 1998.

(2) Incorporated by reference to the exhibit with the same number filed with the
Company's Quarterly Report on Form 10-Q for the quarterly period ended October
31, 1998.
<PAGE>
(3) Incorporated by reference to the exhibit with the same number filed with the
Company's Report on Form 8-K (File No. 000-24261) filed on April 2, 2001.

+ Management contract, compensatory plan or arrangement.

* Filed herewith.

(c) Reports on Form 8-K.

The Company filed a Form 8-K on April 2, 2001.

                                   SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Act of
1934, the registrant has duly caused this Amendment No. 2 to the annual report
on Form 10-K to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Corte Madera, State of California on this 3rd day of
May, 2001.

                           RESTORATION HARDWARE, INC.


                           By: /s/ GARY G. FRIEDMAN
                              ------------------------------
                               Gary G. Friedman
                               Chief Executive Officer
                               (Principal Executive Officer)


Date: May 3, 2002

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


<TABLE>
<CAPTION>
          SIGNATURE                            TITLE                   DATE
-------------------------------    -----------------------------    -----------
<S>                                <C>                              <C>

                                   Chairman                         May _, 2002
-------------------------------
Stephen J. Gordon


/s/ GARY G. FRIEDMAN               President, Chief Executive       May 3, 2002
-------------------------------    Officer and Director
Gary G. Friedman


                                   Executive Vice President,        May _, 2002
-------------------------------    Chief Operating Officer,
Thomas M. Bazzone                  Assistant Secretary and Director



/s/ KEVIN W. SHAHAN                Vice President, Chief            May 3, 2002
-------------------------------    Financial Officer and
Kevin W. Shahan                    Secretary (Principal
                                   Financial and Accounting
                                   Officer)


                                   Director                         May _, 2002
-------------------------------
Robert B. Camp


                                   Director                         May _, 2002
-------------------------------
Raymond C. Hemmig


                                   Director                         May _, 2002
-------------------------------
Glenn J. Krevlin


                                   Director                         May _, 2002
-------------------------------
Mark J. Schwartz
</TABLE>


<PAGE>

                                  EXHIBIT INDEX


<TABLE>
<CAPTION>
EXHIBIT NUMBER   DOCUMENT DESCRIPTION
---------------------------------------------------------------------------------------
<S>              <C>
       3.1       Amended and Restated Certificate of Incorporation(1)
       3.2       Bylaws, as amended to date(2)
       4.1       Reference is made to Exhibit 3.1
       4.2       Reference is made to Exhibit 3.2
       4.3       Specimen Common Stock Certificate(1)
       4.4       Specimen Series A Preferred Stock Certificate(3)
       4.5       Specimen Series B Preferred Stock Certificate(3)
       4.6       Certificate of Designation of Series A and Series B Preferred Stock(3)
     +10.1       Form of 1995 Stock Option Plan(1)
     +10.2       Form of 1998 Stock Incentive Plan(1)
     +10.3       Form of 1998 Employee Stock Purchase Plan(1)
      10.4       Form of Indemnity Agreement for Officers and Directors(1)
      10.5       Restated Investors Rights Agreement, dated May 16, 1997, among the Company,
                 the founders and Common Stock Warrantholders, Series D Warrantholders and
                 Common Stock holders and Investors(1)
      10.6       Stock Purchase Agreement, dated March 20, 1998, between the Company and
                 Michael Vermillion(1)
      10.7       Supply Agreement, dated March 20, 1998, between the Company, Michaels
                 Concepts in Wood, Inc. and Michael Vermillion(1)
      10.8       Lease Agreement, dated may 4, 1994, between the Company and Stephen and
                 Christine Gordon(1)
      10.9       Commercial lease and Deposit Receipt, dated October 18, 1994, and Addenda,
                 dated October 20, 1994 and November 21, 1994, between the Company and H.
                 Koch and Sons(1)
     10.10       Office Lease, dated February 21, 1997, between the Company and Paradise Point
</TABLE>
<PAGE>
<TABLE>
<S>              <C>
                 Partners(1)
     10.11       Standard Industrial/Commercial Multi-Tenant Lease, dated May 12, 1997,
                 between the Company and Mortimer B. Zuckerman(1)
     10.12       Fourth Amended and Restated Loan and Security Agreement, dated April,
                 1998(1)
     10.13       Second Amendment to the Fourth Amended and Restated Loan and Security
                 Agreement, dated October, 1998(2)
     10.14       Fifth Amended and Restated Loan and Security Agreement, dated February
                 2, 2000
     10.15       First Amendment to the Fifth Amended and Restated Loan and Security
                 Agreement, dated March 31, 2000
     10.18       Amended and Restated Investors Rights Agreement, dated as of March 21,
                 2001, between the Company and the Series A and B Preferred Stock investors
     10.19       Amended and Restated Series A and B Preferred Stock Purchase Agreement
                 dated as of March 21, 2001(3), between the Company and the Series A and B
                 Preferred Stock investors
     10.20       Third Amendment to the Sixth Amended and Restated Loan and Security Agreement
                 date as of March 21, 2001(3)
     10.30       Offer of Employment Letter for Mr. Friedman dated as of March 15, 2001(3)
     10.31       Compensation and Severance Agreement between the Company and Gary G.
                 Friedman, effective as of March 21, 2001(3)
     10.32       Stock Pledge Agreement between the Company and Mr. Friedman, dated as of
                 March 22, 2001(3)
     10.33       Stock Purchase Agreement between the Company and Gary G. Friedman, dated as
                 of March 18, 2001(3)
     10.34       Early Exercise Stock Purchase Agreement between the Company and Gary G.
                 Friedman, dated as of March 18, 2001(3)
     10.35       Note Secured by Stock between the Company and Gary G. Friedman, dated as of
                 March 22, 2001(3)
     10.36       Notice of Grant of Stock Option for Gary. G. Friedman(3)
     10.37       Stock Option Agreement between the Company and Gary G. Friedman, dated as of
                 March 18, 2001(3)
    *10.38       Separation Agreement and Release between the Company and Thomas Christopher,
                 dated as of March 20, 2001
    *10.39       Amended and Restated Promissory Note between the Company and Thomas
                 Christopher, dated as of May 1, 2001
    *10.40       Severance Agreement between the Company and Stephen J. Gordon, effective as
                 of March 21, 2001
       *21       List of Subsidiaries
    **23.1       Consent of Independent Auditors
</TABLE>


(1) Incorporated by reference to the exhibit with the same number filed with the
Company's Registration Statement on Form S-1 (File No. 333-51027) filed on June
17, 1998.

(2) Incorporated by reference to the exhibit with the same number filed with the
Company's Quarterly Report on Form 10-Q for the quarterly period ended October
31, 1998.

(3) Incorporated by reference to the exhibit with the same number filed with the
Company's Report on Form 8-K (File No. 000-24261) filed on April 2, 2001.

 + Management contract, compensatory plan or arrangement.

 * Previously filed.

** Filed herewith.