Document:

<PAGE>   1
                                                                   EXHIBIT 10.20

 AMENDMENT NO. 3 TO THE SIXTH AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT

              This AMENDMENT No. 3 TO THE SIXTH AMENDED AND RESTATED LOAN AND
SECURITY AGREEMENT (this "AGREEMENT") is entered into this 21st day of March,
2001 by and among FLEET CAPITAL CORPORATION, as Administrative Agent, The CIT
GROUP/BUSINESS CREDIT, INC., as Co-Administrative Agent, the syndicate of
lenders identified as the Tranche A Lenders in the Loan Agreement referred to
below (the "TRANCHE A LENDERS"), FLEET RETAIL FINANCE INC. (together with Fleet
Capital Corporation, the "Collateral Agent"), BACK BAY CAPITAL FUNDING, LLC (the
"TRANCHE B LENDER"), ENHANCED RETAIL FUNDING, LLC, and GOLDMAN SACHS CREDIT
PARTNERS L.P. (collectively, the "TRANCHE C LENDER") (the Tranche A Lenders, the
Tranche B Lender and the Tranche C Lender, being collectively, the "LENDERS"),
and RESTORATION HARDWARE, INC. (the "LEAD BORROWER" and a "BORROWER"), and THE
MICHAELS FURNITURE COMPANY, INC. (a "BORROWER" or "MICHAELS" and, together with
the Lead Borrower, the "BORROWERS") (each, a "PARTY" and, collectively, the
"PARTIES"), and is made with reference to the following facts:

                                    RECITALS

              A. WHEREAS, Borrowers, the Administrative Agent, Co-Administrative
Agent, Collateral Agent, Tranche A Lenders, Tranche B Lender, Tranche C Lenders
and Clyde Street Investments, LLC (as assignee of Goldman Sachs Credit Partners
LP) have previously entered into that certain Sixth Amended and Restated Loan
and Security Agreement dated as of September 27, 2000 (as amended, modified or
supplemented from time to time, the "LOAN AGREEMENT") and various agreements and
instruments collateral thereto (collectively with the Loan Agreement, the "LOAN
DOCUMENTS"). The Parties also entered into that certain Limited Extension
Agreement and Amendment No. 1 to the Sixth Amended and Restated Loan and
Security Agreement, dated as of February 3, 2001 ("AMENDMENT NO. 1"), and that
certain Amendment No. 2 to the Sixth Amended and Restated Loan and Security
Agreement, dated as of March 2, 2001 ("AMENDMENT NO. 2"). Pursuant to the terms
of the Loan Agreement, the signature of Clyde Street Investments, LLC is not
required for any action or agreement under this Agreement which requires Tranche
C Consent or any other consent involving the Tranche C Lenders. All capitalized
terms used herein, unless otherwise defined herein, shall have the meanings set
forth in the Loan Documents.

              B. WHEREAS, the Borrowers, the Administrative Agent, the
Collateral Agent and the Lenders desire to amend the Loan Agreement on the terms
and subject to the conditions of this Agreement.

              NOW THEREFORE, in consideration of the foregoing recitals and
other good and valuable consideration, the receipt and sufficiency of which are
hereby acknowledged, the Parties agree as follows:

                                       1
<PAGE>   2

                                    ARTICLE I
                          AMENDMENTS TO LOAN AGREEMENT

              1.1 Article I of the Loan Agreement is hereby amended to add the
following definitions:

              "AFFECTED STORES": Defined in Section 4.6(e)(ii)(A).

              "CANADIAN ASSETS": The presently existing or hereafter arising
assets of the Guarantor.

              "CANADIAN INVENTORY": The Inventory of the Guarantor.

              "COMMON STOCK": The Lead Borrower's common stock.

              "CREDIT CARD RECEIVABLES": Accounts due on a non-recourse basis
from major credit card processors.

              "ELIGIBLE CREDIT CARD RECEIVABLES": Credit Card Receivables
(which, if due on account of a private label credit card program, are deemed in
the discretion of the Collateral Agent to be eligible) which accounts have been
outstanding for no more than four (4) Business Days, which are subject to
agreements with the applicable credit card clearinghouse satisfying the terms
and conditions of Section 7.2(b) and otherwise are satisfactory in form and
substance to the Collateral Agent and as to which the Collateral Agent has a
perfected security interest that is prior and superior to all claims and all
Encumbrances, (other than Permitted Encumbrances, subject to the Collateral
Agent's right to establish Reserves therefor).

              "EQUITY TRANSACTION": The transaction on substantially the terms
described in the "Proposed Terms and Conditions: Preferred Stock" annexed hereto
as Exhibit 1.1, or on terms more favorable to the Lead Borrower.

              "FIRST AMENDMENT": That certain Limited Extension Agreement and
Amendment No. 1 to the Sixth Amended and Restated Loan and Security Agreement,
dated as of February 3, 2001.

              "FISCAL YEAR 2002": Defined in Section 5.12(d).

              "NET AVAILABILITY": Availability less amounts needed to bring
trade payables, accrued expenses, and rents within normal terms (excluding those
amounts for which a bona fide dispute exists in the ordinary course of
business), in each case as determined by the Collateral Agent in its discretion,
as set forth in Section 2.19 of the Loan Agreement; provided that, in so
exercising its discretion: (i) during the period between January 26 and July 31,
inclusive, of each year, the Collateral Agent's determination of what
constitutes normal terms for trade payables shall be at least fifty (50) days
from the invoice date in the aggregate for outstanding trade payables; and (ii)
during the period between August 1 and January 25, inclusive, of each year, the
Collateral Agent's determination of what constitutes normal terms for trade
payables shall be at least sixty-five (65) days from the invoice date in the
aggregate for outstanding trade payables."

                                       2
<PAGE>   3

              "PALLADIN": The Palladin Capital Group, Inc.

              "PREFERRED STOCK": Defined in the "Proposed Terms and Conditions:
Preferred Stock" annexed hereto as Exhibit 1.1.

              "RELOCATION SALES": The Lead Borrower's liquidation, through
sales, of the Inventory and Equipment located at its Stores that it may close as
provided in Section 4.6(e), as well as associated or otherwise excess Inventory
located in related Warehouses.

              "REPLACEMENT TENANT": The entity that has been identified to the
Lenders as desiring to lease certain retail Store premises presently leased to
the Lead Borrower.

              "REPLACEMENT TENANT AGREEMENT": The "Agreement for Termination of
Leases" providing for the closure of up to 9 stores, into which the Lead
Borrower expects to enter with the Replacement Tenant, in substantially the form
of the agreement that has been previously disclosed to the Lenders.

              "RESERVOIR": Reservoir Capital Group, Inc.

              "RESTRUCTURING FEE": Defined in the Third Amendment.

              "SECOND AMENDMENT": That certain Amendment No. 2 to the Sixth
Amended and Restated Loan and Security Agreement, dated as of March 2, 2001.

              "SERIES A PREFERRED STOCK": Defined in the Proposed Terms and
Conditions: Preferred Stock annexed hereto as Exhibit 1.1.

              "SERIES B PREFERRED STOCK": Defined in the Proposed Terms and
Conditions: Preferred Stock annexed hereto as Exhibit 1.1.

              "THIRD AMENDMENT": That certain Amendment No. 3 to the Sixth
Amended and Restated Loan Agreement, dated as of March 21, 2001.

              "THIRD AMENDMENT DATE": March 21, 2001.

              1.2 Article I of the Loan Agreement is hereby further amended by
deleting the definitions of the terms "Appraised Inventory Liquidation Value",
"Eligible Inventory", "Fiscal Year 2000", "Fiscal Year 2001", "Inventory Advance
Rate", "Inventory Appraisal Cap", "Overall Inventory Advance Rate", "Overall
Inventory Appraisal Cap", "Receivables Advance Rate", "Tranche A Ceiling",
"Tranche A Dollar Commitment", "Tranche B Senior Collateral", "Tranche C
Maturity Date", "Tranche C Senior Collateral", and inserting the following in
lieu thereof:

              "APPRAISED INVENTORY LIQUIDATION VALUE": The product of (a) the
Cost of Eligible Inventory (net of Inventory Reserves) multiplied by (b) that
percentage, determined from the then most recent appraisal of the Borrowers' and
Guarantor's Inventory obtained by the Collateral Agent, to reflect the
appraiser's estimate of the net realization on the Liquidation of the Cost of
the Borrowers' and Guarantor's Inventory.

                                       3
<PAGE>   4

              "ELIGIBLE INVENTORY": All of the following: Such of Borrowers' and
Guarantor's Inventory at such locations, and of such types, character, qualities
and quantities, as the Collateral Agent in its reasonable discretion from time
to time determines to be acceptable Collateral for Borrowing Base purposes (it
being understood that Inventory of the same type, character and quality as that
held by the Lead Borrower as of the Third Amendment Date will be acceptable for
Borrowing Base purposes), as to which the Collateral Agent has a perfected
security interest that is prior and superior to all claims and all Encumbrances
(other than Permitted Encumbrances, subject to the Collateral Agent's right to
establish Reserves therefor). Notwithstanding the foregoing, Michaels' supply
and label Inventory shall not be Eligible Inventory.

              "FISCAL YEAR 2000": The Borrowers' fiscal year that began on
January 30, 2000 and ended on February 3, 2001.

              "FISCAL YEAR 2001": Defined in Section 5.12(d).

              "INVENTORY ADVANCE RATE": The following percentages during the
periods indicated in the chart below:

<TABLE>
<CAPTION>
---------------------------------------------------------------
                                    Lead
                                   Borrower     Guarantor
           Period                 Percentage   Percentage
---------------------------------------------------------------
<S>                               <C>          <C>
December 25th -- July 31st            68%         61.2%
---------------------------------------------------------------
August 1st -- December 24th           72%         64.8%
---------------------------------------------------------------
</TABLE>

              "INVENTORY APPRAISAL CAP": (i) Eighty-Five Percent (85%) of the
Appraised Inventory Liquidation Value for Inventory of the Lead Borrower, plus
(ii) Seventy-Six and One-Half Percent (76.5%) of the Appraised Inventory
Liquidation Value for Inventory of the Guarantor.

              "OVERALL INVENTORY ADVANCE RATE": The following percentages during
the periods indicated in the chart below:

<TABLE>
<CAPTION>
---------------------------------------------------------------
                                     Lead
                                    Borrower     Guarantor
           Period                  Percentage   Percentage
---------------------------------------------------------------
<S>                                <C>          <C>
December 25th -- February 15th        68%         61.2%
---------------------------------------------------------------
February 16th -- April 15th           72%         64.8%
---------------------------------------------------------------
April 16th -- July 31st               74%         66.6%
---------------------------------------------------------------
August 1st -- December 24th           76%         68.4%
---------------------------------------------------------------
</TABLE>

                                       4
<PAGE>   5

              "OVERALL INVENTORY APPRAISAL CAP": (i) Ninety-Two Percent (92%) of
the Appraised Inventory Liquidation Value for Inventory of the Lead Borrower,
plus (ii) Eighty-Two and Eight-Tenths Percent (82.8%) of the Appraised Inventory
Liquidation Value for Inventory of the Guarantor.

              "RECEIVABLES ADVANCE RATE": (i) In the case of Eligible
Receivables of Michaels, Eighty-Five Percent (85%); and (ii) in the case of
Eligible Credit Card Receivables of the Lead Borrower and the Guarantor,
Seventy-Five Percent (75%).

              "TRANCHE A CEILING": The aggregate amount of the Tranche A
commitment of all Tranche A Lenders, which shall equal Eighty Million Dollars
($80,000,000).

              "TRANCHE A DOLLAR COMMITMENT": As set forth on Exhibit 2.24(a)
annexed hereto (as such amounts may change in accordance with the provisions of
this Agreement). The aggregate of Tranche A Dollar Commitments shall not exceed
Eighty Million Dollars ($80,000,000).

              "TRANCHE B SENIOR COLLATERAL": (i) Equipment and Fixtures located
at the Lead Borrower's and Guarantor's Warehouses; (ii) each item of Collateral
now or hereafter owned by Michaels (other than Accounts and Inventory, and all
products, Proceeds, substitutions and accessions of or to any of the foregoing),
wherever located, and all products, Proceeds, substitutions and accessions of or
to any of the foregoing; and (iii) all the capital stock of Michaels, which
shall be pledged to the Collateral Agent pursuant to the Michaels Pledge.

              "TRANCHE C MATURITY DATE": January 31, 2002.

              "TRANCHE C SENIOR COLLATERAL": Equipment located at the Borrowers'
and Guarantor's Stores.

              1.3 The definition of "AVAILABILITY RESERVES" contained in Article
I of the Loan Agreement is amended by adding the following at the end thereof:

              "(viii) Additional reserves related to matters particular to
Canadian Assets, including, without limitation, ad valorem taxes."

              1.4 The definition of "CHANGE IN CONTROL" contained in Article I
of the Loan Agreement is hereby amended by deleting subparagraph (e) in its
entirety.

              1.5 The definition of "CHANGE IN CONTROL" contained in Article I
of the Loan Agreement is further amended:

              (a) By deleting from subsection (c), the phrase "20%" and
replacing it with "40%" and by adding at the end of subsection (c), prior to the
word "or", the phrase: "other than Palladin, Reservoir or Gary Friedman;";

              (b) By deleting subsection (d) in its entirety and inserting in
lieu thereof the following:

                                       5
<PAGE>   6

                     "(d) Directors who served as directors of the Lead Borrower
       on June 1, 2001 (the "INCUMBENT BOARD"), cease for any reason to
       constitute at least a majority of the Board of Directors of the Lead
       Borrower; provided that any individual nominated by Palladin or Reservoir
       to fill a seat held by a prior nominee of Palladin or Reservoir shall be
       considered to be a member of the Incumbent Board."; and

              (c) By adding at the end of this definition the following:

                     "Notwithstanding anything herein to the contrary,
       consummation of the Equity Transaction, including (without limitation)
       the: (i) sale of the Series A and Series B Preferred Stock of Lead
       Borrower to Palladin, Reservoir and Gary Friedman, (ii) the conversion of
       Series B Preferred Stock of the Lead Borrower into Series A Preferred
       Stock of the Lead Borrower, (iii) the conversion of Series A Preferred
       Stock of the Lead Borrower into Common Stock, and (iv) the Sale of Common
       Stock to Gary Friedman, shall not constitute a Change in Control."

              1.6 The definition of "TRANCHE C FEES" contained in Article I of
the Loan Agreement is hereby amended by deleting the phrases "Tranche C
Anniversary Fee" and "Tranche C Early Termination Fee" from this definition.

              1.7 The definition of "INVENTORY RESERVES" contained in Article I
of the Loan Agreement is hereby amended by deleting the first sentence thereof
and replacing it with the following:

                     "Such Reserves as may be established from time to time by
       the Collateral Agent in the Collateral Agent's reasonable discretion
       (pursuant to Section 2.1(g) hereof) with respect to the determination of
       the saleability, at liquidation, of the Eligible Inventory or which
       reflect such other factors as affect the liquidation value of the
       Eligible Inventory."

              1.8 Article I of the Loan Agreement is hereby further amended to
delete the following definitions in their entirety: "Prepaid Inventory Cap"; and
"Actual/Projected EBITDA Percentage".

              1.9 Section 2.1(f) of the Loan Agreement is hereby amended to read
in full as follows:

              "(f) As used herein, "BORROWING BASE" refers at any time to the
least of 2.1(f)(i), 2.1(f)(ii) or 2.1(f)(iii), where

                     (i)    the Tranche A Ceiling plus the Tranche B Ceiling.

                     (ii)   the result of the following:

                            (A)    The Cost of Eligible Inventory (excluding
                                   Eligible L/C Inventory) of the Lead Borrower
                                   (net of Inventory Reserves) multiplied by the
                                   applicable Inventory Advance Rate, not to
                                   exceed the applicable Inventory Appraisal
                                   Cap.

                                       6
<PAGE>   7

                                   plus

                            (B)    The Cost of Eligible L/C Inventory of the
                                   Lead Borrower (net of Inventory Reserves)
                                   multiplied by the applicable Inventory
                                   Advance Rate.

                                   plus

                            (C)    The Cost of Eligible Inventory (excluding
                                   Eligible L/C Inventory) of the Guarantor (net
                                   of Inventory Reserves) multiplied by the
                                   applicable Inventory Advance Rate, not to
                                   exceed the applicable Inventory Appraisal
                                   Cap, which, together with the result of
                                   subsection 2.1(f)(ii)(D), shall not exceed
                                   $1,500,000.00.

                                   plus

                            (D)    The Cost of Eligible L/C Inventory of the
                                   Guarantor (net of Inventory Reserves)
                                   multiplied by the applicable Inventory
                                   Advance Rate, which, together with the result
                                   of subsection 2.1(f)(ii)(C), shall not exceed
                                   $1,500,000.00.

                                   plus

                            (E)    The product of the Cost of Eligible Inventory
                                   of Michaels (net of Inventory Reserves)
                                   multiplied by 25%, which, together with the
                                   result of Subsection 2.1(f)(ii)(E) shall not
                                   exceed $2,000,000.00.

                                   plus

                            (F)    The product of the face amount of Eligible
                                   Receivables of Michaels (net of Receivables
                                   Reserves) multiplied by the applicable
                                   Receivables Advance Rate, which, together
                                   with the result of subsection 2.1(f)(ii)(E),
                                   shall not exceed $2,000,000.00.

                                   plus

                            (G)    The product of the face amount of Eligible
                                   Credit Card Receivables of the Lead Borrower
                                   (net of Receivables Reserves) multiplied by
                                   the applicable Receivables Advance Rate,
                                   which, together with the result of subsection
                                   2.1(f)(ii)(H), shall not exceed
                                   $5,000,000.00.

                                   plus

                                       7
<PAGE>   8

                            (H)    The product of the face amount of Eligible
                                   Credit Card Receivables of the Guarantor (net
                                   of Receivables Reserves) multiplied by the
                                   applicable Receivables Advance Rate, which,
                                   together with the results of subsection
                                   2.1(f)(ii)(G), shall not exceed
                                   $5,000,000.00.

                                   minus

                            (I)    The then aggregate of the Availability
                                   Reserves.

                     (iii) the result of the following:

                            (A)    The Cost of Eligible Inventory (excluding
                                   Eligible L/C Inventory) of the Lead Borrower
                                   (net of Inventory Reserves) multiplied by the
                                   applicable Overall Inventory Advance Rate,
                                   not to exceed the applicable Overall
                                   Inventory Appraisal Cap.

                                   plus

                            (B)    The Cost of Eligible L/C Inventory of the
                                   Lead Borrower (net of Inventory Reserves)
                                   multiplied by the applicable Overall
                                   Inventory Advance Rate.

                                   plus

                            (C)    The Cost of Eligible Inventory (excluding
                                   Eligible L/C Inventory) of the Guarantor (net
                                   of Inventory Reserves) multiplied by the
                                   applicable Overall Inventory Advance Rate,
                                   not to exceed the applicable Overall
                                   Inventory Appraisal Cap, which, together with
                                   the result of subsection 2.1(f)(ii)(D), shall
                                   not exceed $1,500,000.00

                                   plus

                            (D)    The Cost of Eligible L/C Inventory of the
                                   Guarantor (net of Inventory Reserves)
                                   multiplied by the applicable Overall
                                   Inventory Advance Rate, which, together with
                                   the result of subsection 2.1(f)(iii)(C),
                                   shall not exceed $1,500,000.00.

                                   plus

                            (E)    The product of the Cost of Eligible Inventory
                                   of Michaels (net of Inventory Reserves)
                                   multiplied by 25%, which, together with the
                                   result of subsection 2.1(f)(iii)(F), shall
                                   not exceed $2,000,000.00.

                                   plus

                                       8
<PAGE>   9

                            (F)    The product of the face amount of Eligible
                                   Receivables of Michaels (net of Receivables
                                   Reserves) multiplied by the applicable
                                   Receivables Advance Rate, which, together
                                   with the result of subsection 2.1(f)(iii)(E),
                                   shall not exceed $2,000,000.00.

                                   plus

                            (G)    The product of the face amount of Eligible
                                   Credit Card Receivables of the Lead Borrower
                                   (net of Receivables Reserves) multiplied by
                                   the applicable Receivables Advance Rate,
                                   which, together with the results of
                                   subsection 2.1(f)(iii)(H), shall not exceed
                                   $5,000,000.00.

                                   plus

                            (H)    The product of the face amount of Eligible
                                   Credit Card Receivables of the Guarantor (net
                                   of Receivables Reserves) multiplied by the
                                   applicable Receivables Advance Rate, which,
                                   together with the result of subsection
                                   2.1(f)(iii)(G), shall not exceed
                                   $5,000,000.00.

                                   minus

                            (I)    The then aggregate of the Availability
                                   Reserves.

                                   minus

                            (J)    The unpaid principal balance of the all
                                   outstanding Tranche B Loans and all accrued
                                   and unpaid Tranche B Deferred Interest."

              1.10 Section 2.1(g) of the Loan Agreement is hereby amended to
read in full as follows:

                     "(g) (i) The Collateral Agent reserves the right to
       increase or to establish additional Inventory Reserves upon one (1)
       Business Day's written notice to the Lead Borrower. If the Lead Borrower
       desires to challenge an increased or additional Inventory Reserve, it may
       request the Collateral Agent to obtain an updated Inventory appraisal
       (conducted at Borrowers' expense) by providing a written request to the
       Collateral Agent within two (2) Business Days of the notice by the
       Collateral Agent of the increased or additional Inventory Reserve. The
       Collateral Agent shall instruct the appraisal firm to conduct an
       appraisal diligently, with a target completion of no more than two weeks.
       The Collateral Agent will make appropriate adjustments (if any) in the
       Inventory Reserves based on such updated Inventory appraisal.
       Notwithstanding the foregoing, all increased or additional Inventory
       Reserves will be binding pending completion of the updated appraisal.

                                       9
<PAGE>   10

                            (ii) Any Event of Default that directly results from
              the imposition of increased or additional Inventory Reserves
              pursuant to subsection 2.1(g)(i) above shall be deemed cured in
              the event such Event of Default would not have existed based upon
              the adjusted Inventory Reserves based upon the results of the
              updated appraisal.

                            (iii) Any appraisals obtained pursuant to subsection
              2.1(g)(i) shall be in addition to appraisals obtained by the
              Collateral Agent pursuant to Section 5.10(c)."

              1.11 Section 2.10(d) of the Loan Agreement is hereby amended to
read in full as follows:

                     "(d) The Borrowers may repay the principal balance of the
       Tranche B Loan, in full, pursuant to Section 2.10(j) below. Any amounts
       prepaid on account of the Tranche B Loan may not be reborrowed."

              1.12 Section 2.10(g) of the Loan Agreement is hereby amended by
(i) twice striking the phrase "Tranche C Obligations" contained in the first
sentence thereof and twice replacing it with the phrase "Tranche C Debt", (ii)
striking the phrase "holder of the Warrants after the Tranche C Termination
Date" contained in the second sentence thereof and replacing it with "holder of
the Warrants after June 30, 2003," and (iii) striking the phrase "the Tranche C
Termination Date" contained in the third sentence thereof and replacing it with
"June 30, 2003."

              1.13 Section 2.10(j) of the Loan Agreement is hereby amended to
read in full as follows:

              "(j) The balance of the Tranche B Debt may be prepaid in full, but
       not in part, at any time prior to the Tranche B Maturity Date, following
       indefeasible payment in full of the Tranche C Debt, as follows:

                     (i)    With the net proceeds of the sale of equity
                            securities, the issuance of which is otherwise
                            permitted in this Agreement.

                     (ii)   With the net proceeds of Permitted SubDebt.

                     (iii)  After January 25, 2002, with the proceeds of
                            advances under the Loan Account, provided that:

                            (a)    If such prepayment occurs at any time from
                                   January 26, 2002 through April 28, 2002,
                                   there will exist at least $10,000,000.00 of
                                   Net Availability, after giving effect to such
                                   prepayment;

                            (b)    If such prepayment occurs at any time on or
                                   after April 29, 2002, there will exist Net
                                   Availability of at least One Hundred
                                   Twenty-Five Percent (125%) of the then
                                   applicable minimum Net Availability
                                   requirement set forth

                                       10
<PAGE>   11

                                   in Section 5.12(a), after giving effect to
                                   such prepayment; and

                            (c)    No Suspension Event is then extant and no
                                   Event of Default shall have occurred or will
                                   occur by reason of the making of such
                                   repayment and an Authorized Officer of the
                                   Lead Borrower provides a Certificate to the
                                   Administrative Agent so certifying."

              1.14 Section 2.10(k) of the Loan Agreement is hereby amended as
follows:

              (a) Subsection 2.10(k)(i) of the Loan Agreement is hereby amended
by adding the following words at the end thereof: "; provided, however, that,
simultaneously with the effectiveness of the Third Amendment, the Borrower shall
only be required to use net proceeds of the Equity Transaction in an aggregate
amount equal to $2,000,000 to prepay the Tranche C Loans."

              (b) Subsection 2.10(k)(iii) of the Loan Agreement is hereby
amended to read as follows:

                     "(iii) May be prepaid with proceeds of advances under the
                            Loan Account, provided that, each of the following
                            conditions is met:

                            (A)    Such repayment is not less than $250,000.00
                                   or an integer multiple of $100,000.00.

                            (B)    There will exist Net Availability,
                                   immediately following the making of such
                                   payment, sufficient to satisfy the minimum
                                   Net Availability requirement set forth in
                                   Section 5.12(a).

                            (C)    No Suspension Event is then extant and no
                                   Event of Default shall have occurred or will
                                   occur by reason of making such repayment, and
                                   an Authorized Officer of the Lead Borrower
                                   provides a Certificate to the Administrative
                                   Agent so certifying."

              1.15 Section 2.10(l)(iii) of the Loan Agreement is hereby amended
to read as follows:

                     "(iii) With advances under the Loan Account, providing that
                            (A) each of the conditions set forth in Section
                            2.10(k)(iii)(B) and 2.10(k)(iii)(C) is satisfied."

              1.16 Section 2.10(m) of the Loan Agreement is amended by deleting
the phrase "the Tranche C Termination Date" and replacing it with "June 30,
2003."

                                       11
<PAGE>   12

              1.17 Section 2.10(m)(iii) of the Loan Agreement is hereby amended
to read as follows:

                     "(iii) With advances under the Loan Account, providing that
                            each of the conditions set forth in Section
                            2.10(k)(iii)(B) and 2.10(k)(iii)(C) is satisfied."

              1.18 The Margin Pricing Grid set forth in Section 2.11(a)(vi) of
the Loan Agreement is hereby amended to read in full as follows:

<TABLE>
<CAPTION>
-----------------------------------------------------------------------
             Actual EBITDA for the Prior      Index       Base
             Twelve Months                    Margin      Margin
-----------------------------------------------------------------------
<S>          <C>                              <C>         <C>
Tier I       >$20,000,000                      2.25%       1.00%
-----------------------------------------------------------------------
Tier II      >$17,500,000 < = $20,000,000      2.50%       1.00%
-----------------------------------------------------------------------
Tier III     >$15,000,000 < = $17,500,000      2.75%       1.25%
-----------------------------------------------------------------------
Tier IV      >$12,500,000 < = $15,000,000      3.00%       1.50%
-----------------------------------------------------------------------
Tier V       >$10,000,000 <= $12,500,000       3.25%       1.75%
-----------------------------------------------------------------------
Tier VI      < = $10,000,000                   3.50%       2.00%
-----------------------------------------------------------------------
</TABLE>

              1.19 Section 2.11(a)(vi) of the Loan Agreement is hereby amended
so that the text following the Margin Pricing Grid reads in full as follows:

                     "In calculating EBITDA for the prior twelve months for
       purposes of the Margin Pricing Grid, (i) EBITDA shall include, in the
       sole and complete discretion of the Administrative Agent, one-time
       non-cash additions that are not offset by future cash charges, and (ii)
       to the extent deducted in the computation of earnings, EBITDA shall be
       increased by (x) the Restructuring Fee, and (y) up to $1,250,000.00 of
       one-time cash charges arising from, out of, or in connection with the
       Equity Transaction and transactions with related investors, in connection
       with the First Amendment, Second Amendment and Third Amendment (without
       duplication of the Restructuring Fee) and in connection with Store
       closings permitted by Section 4.06(e)(ii). The interest rate shall be
       adjusted based on the Borrowers' fiscal quarter-end financial statements,
       effective immediately upon such determination by the Administrative
       Agent, which shall be made promptly following receipt of such financial
       statements. Notwithstanding anything herein to the contrary, interest
       shall accrue at the rate set pursuant to Tier III of the foregoing Margin
       Pricing Grid through September 30, 2001."

                                       12
<PAGE>   13

              1.20 Section 2.13(d) of the Loan Agreement is hereby amended to
read in full as follows:

                     "(d) The Borrowers shall not owe or pay the Tranche C
       Lenders the Tranche C Anniversary Fee provided for in the Tranche C Fee
       Letter (the "TRANCHE C ANNIVERSARY FEE") and the Tranche C Fee Letter is
       hereby amended to delete any obligation to pay the Tranche C Anniversary
       Fee."

              1.21 Section 2.17(a) of the Loan Agreement is hereby amended to
read in full as follows:

                     "In the event that prior to the Tranche A Maturity Date
       either (i) all Tranche A Loans are repaid and the Tranche A Commitment
       cancelled, or (ii) the Tranche A Termination Date occurs, for any reason,
       then the Borrowers shall pay to the Administrative Agent, for the Pro
       Rata benefit of the Tranche A Lenders, a fee (the "TRANCHE A EARLY
       TERMINATION FEE") which shall equal (x) 0.5% of the Tranche A Ceiling if
       the event causing the Tranche A Early Termination Fee to become owing
       occurs on or prior to January 31, 2002, and (y) 0.25% of the Tranche A
       Ceiling if such event occurs subsequent to January 31, 2002."

              1.22 Section 2.17(b) of the Loan Agreement is hereby amended to
read in full as follows:

                     "In the event that prior to the Tranche B Maturity Date,
       either (i) any or all Tranche B Loans are repaid, or (ii) the Tranche B
       Termination Date occurs, for any reason, then the Borrowers shall pay to
       the Tranche B Lender a fee equal to 0.50% of: (a) if clause (i) above
       applies, the amount of the Tranche B Loan that is prepaid; or (b) if
       clause (ii) above applies, the Tranche B Loan Ceiling in effect on the
       Third Amendment Date less the amount of the Tranche B Loan previously
       prepaid on account of which the Borrowers have paid the Tranche B Early
       Termination Fee (the "TRANCHE B EARLY TERMINATION FEE"). The Borrowers'
       obligation to pay the Tranche B Early Termination Fee set forth in this
       Section 2.17(b) shall supersede the Borrowers' obligation to pay any
       Tranche B Early Termination Fee pursuant to the Tranche B Fee Letter; and
       the Tranche B Fee Letter is amended to delete the paragraph labeled "(d)
       Early Termination Fee" set forth therein."

              1.23 Section 2.17(c) of the Loan Agreement is hereby amended to
read in full as follows:

                     "(c) The Borrowers shall not owe or pay the Tranche C
       Lenders the Tranche C Early Termination Fee provided for in the Tranche C
       Fee Letter (the "TRANCHE C EARLY TERMINATION FEE") and the Tranche C Fee
       Letter is hereby amended to delete any obligation to pay the Tranche C
       Early Termination Fee."

              1.24 Section 2.19(b)(i) of the Loan Agreement is hereby amended by
striking the word "Accounts" following the word "Eligible" and replacing it with
the word "Receivables", then adding "Eligible Credit Card Receivables".

                                       13
<PAGE>   14

              1.25 Section 2.20(b)(i) of the Loan Agreement is hereby amended to
read in full as follows:

                     "The aggregate Stated Amount of all L/C's then outstanding
       (giving effect to the L/C whose issuance is requested), does not exceed
       Twenty Million Dollars ($20,000,000)."

              1.26 Section 4.6(e)(i) of the Loan Agreement is hereby amended by
adding the following phrase following the word "business":

              "or pursuant to subsection (ii) hereof,".

              1.27 Section 4.6(e)(ii) of the Loan Agreement is hereby amended to
read in full as follows:

              "(ii) Commit to close any location at which the Borrowers
maintain, offer for sale, or store any of the Collateral, provided, however
that:

              (A) The Borrowers may close up to nine (9) Stores pursuant to the
Replacement Tenant Agreement (the "AFFECTED STORES"); and

              (B) The Borrowers may close up to six (6) additional Stores during
any fiscal year;

              (C) Provided further that all payments for termination of Store
leases and all proceeds of Relocation Sales shall be paid directly to the
Concentration Account, to be applied and distributed as set forth in Section
12.4(a) of the Loan Agreement; and

              (D) Provided further that the Lead Borrower shall provide to the
Administrative Agent, the Co-Administrative Agent, and the Collateral Agents,
weekly written updates, (delivered on Tuesday of each week for the prior week
ended Saturday), segregated by location, of the Inventory and Equipment
liquidation and the Relocation Sales, including detail concerning (a) the
average mark-downs; (b) reconciliation of receipts; and (c) a report that
compares actual results against the plan provided by the Lead Borrower pursuant
to Section 4.6(e)(ii)(E) below; and

              (E) Provided further that the Lead Borrower shall provide to the
Administrative Agent, the Co-Administrative Agent, and the Collateral Agents,
written notice immediately upon the execution of any agreement to terminate a
Lease, or upon the Lead Borrower's decision to close one or more Stores,
including: (a) a summary detailing the key economic and timing provisions
thereof; (b) an executed copy of any Lease termination agreement; (c) a weekly
Store closing plan that includes: (i) the starting date of the Relocation Sales
for the affected Store (which shall not be less than ten (10) days following
delivery of the Store closing plan, except in the case of the first Store to be
closed pursuant to the Replacement Tenant Agreement); (ii) a report showing
Inventory at the affected Store, valued at Cost and Retail; (iii) projected
weekly gross sales, net sales, markdowns, Gross Margin, and ending Inventory at
Cost and Retail; (iv) any additions to Inventory (if applicable); (v) the ending
date of the Relocation Sale; and

                                       14
<PAGE>   15

(vi) the plan for disposition of any remaining Inventory after completion of the
Relocation Sale at that Affected Store.

              1.28 Section 4.8(b) of the Loan Agreement is hereby deleted in its
entirety.

              1.29 Section 4.11 of the Loan Agreement is hereby amended by
adding the following sentence after the word "determine":

              "Notwithstanding anything herein to the contrary, the Borrowers
may terminate or assign Leases in connection with Store closings permitted by
Section 4.06(e)."

              1.30 Section 4.14(a) of the Loan Agreement is hereby amended by
inserting the following phrase following the word "tear":

              ", sales of Inventory conducted through Relocation Sales."

              1.31 Section 4.14(b) of the Loan Agreement is hereby amended by
inserting the following phrase following the word "Collateral":

              "(excepting Store closings permitted pursuant to Section 4.06(e)
and Relocation Sales)".

              1.32 Section 4.14(d)(ii) of the Loan Agreement is hereby amended
by deleting the word "and".

              1.33 Section 4.14(d)(iii) of the Loan Agreement is hereby amended
by replacing the period with a semicolon followed by the word "and".

              1.34 Section 4.14(d) of the Loan Agreement is hereby further
amended by adding the following as subparagraph (iv) thereof:

              "(iv) sales of Inventory conducted through Relocation Sales."

              1.35 Section 4.20(a) of the Loan Agreement is hereby amended to
read in its entirety as follows:

                     "(a) Pay any cash dividend or make any other distribution
       in respect of any class of the Borrower's capital stock other than (i)
       dividends paid solely in capital stock, (ii) dividends by Michaels to the
       Parent, (iii) dividends by the Guarantor to the Parent, and (iv) provided
       that no Suspension Event shall have occurred and is continuing, dividends
       paid in cash on the Series B Preferred Stock (that has not been
       converted) in an amount not to exceed the least of (x) taxes owed by the
       holders of the Series B Preferred Stock (that has not been converted) on
       account of accrued dividends on such stock, (y) $500,000 during any
       consecutive six month period, and (z) $1,000,000 during any consecutive
       twelve month period."

              1.36 Section 4.21(b) of the Loan Agreement is hereby amended by
replacing the period at the end of this Section with a semicolon, adding
thereafter the word "and".

                                       15
<PAGE>   16

              1.37 Section 4.21 of the Loan Agreement is hereby further amended
by adding the following as subparagraph (c) thereof:

                     "(c) A loan by the Lead Borrower to Gary Friedman in the
       amount of Two Million Five Hundred Thousand Dollars ($2,500,000) for the
       purpose of buying the Lead Borrower's Preferred Stock and Common Stock,
       if all of the proceeds of such loan are used to pay the Lead Borrower for
       such stock, and the terms and conditions of such loan are pursuant to the
       terms and conditions previously disclosed to the Lenders."

              1.38 Section 5.6(a)(ii) of the Loan Agreement is hereby amended by
replacing the colon at the end of the first line thereof with a comma, followed
by the words "unless such month is the end of a fiscal quarter of the Borrowers,
in which case within Forty-Five (45) days following the end of such fiscal
quarter:"

              1.39 Section 5.10(c) of the Loan Agreement is hereby amended by
replacing the second sentence with the following:

                     "The Collateral Agent contemplates obtaining four (4)
       appraisals during any twelve (12) month period, but may obtain more in
       the event that it deems it reasonably necessary in its discretion."

              1.40 Section 5.11(c) of the Loan Agreement is hereby amended by
replacing the word "three" with the word "two", and by adding the following
phrase at the end of this Section:

              "; provided, however, that the first such forecast to be delivered
subsequent to the Third Amendment Date will not be due until the applicable
period after the end of Fiscal Year 2001."

              1.41 Section 5.11 of the Loan Agreement is hereby further amended
to add Section 5.11(e) to read in full as follows:

                     "(e) The Lead Borrower shall prepare and submit to the
       Administrative Agent and the Tranche B Lender: (i) a preliminary Updated
       Business Plan (as defined in the First Amendment) within sixty (60) days
       of the date on which Gary Friedman assumes his duties as the Chief
       Executive Officer of the Lead Borrower; and (ii) a final Updated Business
       Plan (as defined in the First Amendment) within ninety (90) days of the
       date on which Gary Friedman assumes his duties as the Chief Executive
       Officer of the Lead Borrower. The Updated Business Plan shall address (in
       addition to the items required by the definition in the First Amendment),
       a Lease disposition plan."

              1.42 Sections 5.12(a) and 5.12(d) of the Loan Agreement are hereby
amended to read in full as follows:

                                       16
<PAGE>   17

                            "5.12(a)      MINIMUM NET AVAILABILITY: At no time
                                          shall Borrowers suffer or permit Net
                                          Availability to be less than:

                                 (i)      Five Million Dollars ($5,000,000.00)
                                          at all times during the period January
                                          26th through December 24th; and

                                (ii)      Fifteen Million Dollars
                                          ($15,000,000.00) at all times during
                                          the period December 25th through
                                          January 25th."

                            "5.12(d)      CAPITAL EXPENDITURES:

                                      The Borrowers shall not permit or suffer
                                      to exist Consolidated Net Capital
                                      Expenditures to be more than the following
                                      maxima:

                                      (i)        For the fiscal year ending
                                                 February 2, 2002 ("FISCAL YEAR
                                                 2001"): Five Million Dollars
                                                 ($5,000,000.00).

                                      (ii)       For the fiscal year ending
                                                 February 1, 2003 ("FISCAL YEAR
                                                 2002"): Twelve Million Dollars
                                                 ($12,000,000.00) plus the
                                                 amount allowed for Fiscal Year
                                                 2001 but not expended in such
                                                 year, plus Fifty Percent (50%)
                                                 of the amount by which the
                                                 Borrowers' actual Consolidated
                                                 EBITDA for Fiscal Year 2001
                                                 exceeds Sixteen Million Dollars
                                                 ($16,000,000.00).

                                     (iii)       For the period from February 2,
                                                 2003 through June 30, 2003:
                                                 Seven Million Five Hundred
                                                 Thousand Dollars
                                                 ($7,500,000.00)."

              1.43 Sections 5.12(b) and 5.12(e) of the Loan Agreement are hereby
deleted in their entirety.

              1.44 Section 6.1(a) of the Loan Agreement is hereby amended by
adding the following sentence after the word "Agreement.":

              "other than the sale or disposition of Inventory pursuant to
Relocation Sales."

              1.45 Section 10.14 of the Loan Agreement is hereby amended to read
in full as follows:

                     "The failure, for any reason, of the Lead Borrower's chief
       executive officer or chief financial officer, as of the Third Amendment
       Date, to continue to serve in

                                       17
<PAGE>   18

       such capacity, if a replacement therefor, reasonably satisfactory to the
       Administrative Agent, is not identified within ninety (90) days and
       retained within one hundred twenty (120) days, or the failure of any such
       replacement to continue to serve in such capacity if a replacement
       therefor, not reasonably satisfactory to the Administrative Agent is not
       identified within ninety (90) days and retained within one hundred twenty
       (120) days."

              1.46 Section 18.1 is hereby amended by deleting the reference that
begins "Orrick, Herrington & Sutcliffe, LLP" and ends with "Fax: 213-612-2499"
and replacing it with the following:

                      "O'Melveny & Myers, LLP
                      400 South Hope Street
                      Los Angeles, California 90071
                      Attention:  Ben H. Logan, Esq.
                      Fax:  213-430-6407"

              1.47 Section 18.1 is hereby further amended by deleting the
reference that begins "Salans Hertzfeld Heilbronn Christy & Viener" and ends
with "Fax: 212-261-3037" and replacing it with the following:

                      "Morrison & Foerster, LLP
                      1290 Avenue of the Americas
                      New York, New York 10104
                      Attention:  Mark B. Joachim, Esq.
                      Fax:  212-468-7976"

              1.48 Exhibit 2.24(a) of the Loan Agreement is hereby amended as
indicated in the chart below:

------------------------------------------------------------------
               Lender                  Tranche A     Tranche A
                                        Dollar       Percentage
                                       Commitment    Commitment
------------------------------------------------------------------
Fleet Capital Corporation             $48,000,000        60%
------------------------------------------------------------------
The CIT Group/Business Credit, Inc.   $32,000,000        40%
------------------------------------------------------------------
Total Revolving Credit Commitment     $80,000,000       100%
(Tranche  Loan Ceiling)
------------------------------------------------------------------

              1.49 Exhibit 4.2 of the Loan Agreement is hereby amended to add,
as Affiliates, Palladin, Reservoir, and Gary Friedman.

              1.50 The Loan Agreement is hereby amended by adding Section 20.24
which reads in its entirety as follows:

                                       18
<PAGE>   19

              "20.24 Joint Borrower Provisions. Each Borrower represents to the
Lenders that each is an integral part of a consolidated enterprise, and that
each Borrower will receive direct and indirect benefits from the availability of
the joint credit facility provided for herein, and from the ability to access
the collective credit resources of the consolidated enterprise that are
Borrowers.

              Each Borrower is, and at all times shall be, jointly and severally
liable for each and every one of the Liabilities hereunder, regardless of which
Borrower requested, received, used, or directly enjoyed the benefit of the
extensions of credit hereunder. All of the Collateral shall secure all of the
Liabilities. Each Borrower's Liabilities are independent obligations and are
absolute and unconditional. Each Borrower, to the extent permitted by law,
hereby waives any defense to such Liabilities that may arise by reason of the
disability or other defense or cessation of liability of any other Borrower for
any reason other than payment in full. Each Borrower also waives any defense to
such Liabilities that it may have as a result of any Lender's or Agent's
election of or failure to exercise any right, power, or remedy, including,
without limitation, the failure to proceed first against such other Borrower or
any security it holds for such other Borrower's Liabilities under any Loan
Document, if any. Without limiting the generality of the foregoing, each
Borrower expressly waives all demands and notices whatsoever (except for any
demands or notices, if any, that such Borrower expressly is entitled to receive
pursuant to the terms of any Loan Document), and agrees that the Lenders and the
Agents may, without notice (except for such notice, if any, as such Borrower
expressly is entitled to receive pursuant to the terms of any Loan Document) and
without releasing the liability of such Borrower, extend for the benefit of any
other Borrower the time for making any payment, waive or extend the performance
of any agreement or make any settlement of any agreement for the benefit of any
other Borrower, and may proceed against each Borrower, directly and
independently of any other Borrower, as such obligee may elect in accordance
with this Agreement.

              Each Borrower acknowledges that the Liabilities of such Borrower
undertaken herein or in the other Loan Documents, and the grants of security
interests and liens by such Borrower to secure Liabilities of the other Borrower
could be construed to consist, at least in part, of the guaranty of Liabilities
of the other Borrower and, in full recognition of that fact, each Borrower
consents and agrees as hereinafter set forth in the balance of this Section
20.24. The consents, waivers, and agreements of the Borrowers that are contained
in the balance of this Section 20.24 are intended to deal with the suretyship
aspects of the transactions evidenced by the Loan Documents (to the extent that
a Borrower may be deemed a guarantor or surety for the Liabilities of another
Borrower) and thus are intended to be effective and applicable only to the
extent that any Borrower has agreed to answer for the Liabilities of another
Borrower or has granted a lien or security interest in Collateral to secure the
Liabilities of another Borrower. Conversely, the consents, waivers, and
agreements of the Borrowers that are contained in the balance of this Section
20.24 shall not be applicable to the direct Liabilities of a Borrower with
respect to credit extended directly to such Borrower, and shall not be
applicable to security interests or liens on Collateral of a Borrower given to
directly secure direct Liabilities of such Borrower where no aspect of guaranty
or suretyship is involved. Each Borrower consents and agrees that the Lenders
may, at any time and from time to time, without notice or demand, whether before
or after any actual or purported termination, repudiation or revocation of this
Agreement by any one or more Borrowers, and without affecting the enforceability
or continuing

                                       19
<PAGE>   20

effectiveness hereof as to such Borrower, in accordance with the terms of the
Loan Documents: (a) supplement, restate, modify, amend, increase, decrease,
extend, renew, accelerate or otherwise change the time for payment or the terms
of the Liabilities or any part thereof, including any increase or decrease of
the rate(s) of interest thereon; (b) supplement, restate, modify, amend,
increase, decrease or waive, or enter into or give any agreement, approval or
consent with respect to, the Liabilities or any part thereof, or any of the Loan
Documents or any security or guarantees granted or entered into by any Person(s)
other than such Borrower, or any condition, covenant, default, remedy, right,
representation or term thereof or thereunder; (c) accept new or additional
instruments, documents or agreements in exchange for or relative to any of the
Loan Documents or the Liabilities or any part thereof, (d) accept partial
payments on the Liabilities; (e) receive and hold additional security or
guarantees for the Liabilities or any part thereof, (f) release, reconvey,
terminate, waive, abandon, fail to perfect, subordinate, exchange, substitute,
transfer or enforce any security or guarantees, and apply any security and
direct the order or manner of sale thereof as the Lenders in their sole and
absolute discretion may determine; (g) release any other Person (including,
without limitation, any other Borrower) from any personal liability with respect
to the Liabilities or any part thereof, (h) with respect to any Person other
than such Borrower (including, without limitation, any other Borrower), settle,
release on terms satisfactory to the Lenders or by operation of applicable laws
or otherwise liquidate or enforce any Liabilities and any security therefor or
guaranty thereof in any manner, consent to the transfer of any security and bid
and purchase at any sale; or (i) consent to the merger, change or any other
restructuring or termination of the corporate or partnership existence of any
other Borrower or any other Person, and correspondingly agree, in accordance
with all applicable provisions of the Loan Documents, to the restructure of the
Liabilities, and any such merger, change, restructuring or termination shall not
affect the liability of any Borrower or the continuing effectiveness hereof, or
the enforceability hereof with respect to all or any part of the Liabilities.

              Upon the occurrence and during the continuance of any Event of
Default, the Administrative Agent, the Collateral Agent and the Lenders may
enforce the Loan Documents independently as to each Borrower and independently
of any other remedy the Administrative Agent, the Collateral Agent or the
Lenders at any time may have or hold in connection with the Liabilities, and it
shall not be necessary for the Administrative Agent, the Collateral Agent or the
Lenders to marshal assets in favor of any Borrower or any other Person or to
proceed upon or against or exhaust any security or remedy before proceeding to
enforce this Agreement or any other Loan Documents. Each Borrower expressly
waives any right to require the Administrative Agent, the Collateral Agent or
the Lenders to marshal assets in favor of any Borrower or any other Person or to
proceed against any other Borrower or any Collateral provided by any Person, and
agrees that the Administrative Agent, the Collateral Agent and the Lenders may
proceed against Borrowers or any Collateral in such order as they shall
determine in their sole and absolute discretion.

              The Administrative Agent, the Collateral Agent and the Lenders may
file a separate action or actions against any Borrower, whether action is
brought or prosecuted with respect to any security or against any other Person,
or whether any other Person is joined in any such action or actions. Each
Borrower agrees, for itself, that the Administrative Agent, the Collateral
Agent, any Lender and any other Borrower, or any Affiliate of any other Borrower
(other than such Borrower itself), may deal with each other in connection with
the Liabilities or

                                       20
<PAGE>   21

otherwise, or alter any contracts or agreements now or hereafter existing
between any of them, in any manner whatsoever, all without in any way altering
or affecting the continuing efficacy as to such Borrower of the Loan Documents.

              The Administrative Agent's, the Collateral Agent's and the
Lenders' rights hereunder shall be reinstated and revived, and the
enforceability of this Agreement shall continue, with respect to any amount at
any time paid on account of the Liabilities which thereafter shall be required
to be restored or returned by the Administrative Agent, the Collateral Agent or
the Lenders (including, without limitation, the restoration or return of any
amount pursuant to a court order or judgment (whether or not final or
non-appealable), or pursuant to a good faith settlement of a pending or
threatened avoidance or recovery action, or pursuant to good faith compliance
with a demand made by a Person believed to be entitled to pursue an avoidance or
recovery action (such as a bankruptcy trustee or a Person having the avoiding
powers of a bankruptcy trustee, or similar avoiding powers), and without
requiring the Administrative Agent, the Collateral Agent or the Lenders to
oppose or litigate avoidance or recovery demands or actions that it believes in
good faith to be meritorious or worthy of settlement or compliance, or pursue or
exhaust appeals), all as though such amount had not been paid. The rights of the
Administrative Agent, the Collateral Agent or the Lenders created or granted
herein and the enforceability of the Loan Documents at all times shall remain
effective to cover the full amount of all the Liabilities even though the
Liabilities, including any part thereof or any other security or guaranty
therefor, may be or hereafter may become invalid or otherwise unenforceable as
against any other Borrower and whether or not any other Borrower shall have any
personal liability with respect thereto.

              To the maximum extent permitted by applicable law, each Borrower,
for itself, expressly waives any and all defenses now or hereafter arising or
that otherwise might be asserted by reason of (a) any disability or other
defense of any other Borrower with respect to the Liabilities or with respect to
the enforceability of the Collateral Agent's security interest in or Encumbrance
on any collateral securing any of the Liabilities (including, without
limitation, the Collateral), (b) the unenforceability or invalidity of any
security or guaranty for the Liabilities or the lack of perfection or continuing
perfection or failure of priority of any security for the Liabilities, (c) the
cessation for any cause whatsoever of the liability of any other Borrower (other
than by reason of the full payment and performance of all Liabilities), (d) any
failure of the Administrative Agent or the Collateral Agent to give notice of
sale or other disposition of Collateral to any other Borrower or any other
Person other than such waiving Borrower, or any defect in any notice that may be
given to any other Borrower for any other Person other than such waiving
Borrower, in connection with any sale or disposition of any collateral securing
the Liabilities or any of them (including, without limitation, the Collateral),
(e) any failure of the Administrative Agent or the Collateral Agent to comply
with applicable law in connection with the sale or other disposition of any
collateral or other security for any Liabilities that is owned by another
Borrower or by any other Person other than such waiving Borrower, including any
failure of the Administrative Agent to conduct a commercially reasonable sale or
other disposition of any such collateral or other security for any Liabilities,
(f) any act or omission of the Administrative Agent or others that directly or
indirectly results in or aids the discharge or release of any other Borrower, or
the Liabilities of any other Borrower, or any security or guaranty therefor, by
operation of law or otherwise, or (g) any law which provides that the obligation
of a surety or guarantor must neither be larger in amount nor in other respects
more

                                       21
<PAGE>   22

burdensome than that of the principal or which reduces a surety's or guarantor's
obligation in proportion to the principal obligation. Until such time, if any,
as all of the Liabilities (other than contingent Liabilities and indemnities
which survive repayment of the Loans) have been paid and performed in full and
no portion of any commitment of the Lenders to any Borrower under any Loan
Document remains in effect, no Borrower shall have any right of subrogation,
contribution, reimbursement or indemnity, and each Borrower expressly waives any
right to enforce any remedy that the Administrative Agent and the Collateral
Agent now have or hereafter may have against any other Person and waives the
benefit of, or any right to participate in, any collateral now or hereafter held
by the Administrative Agent or the Collateral Agent. Except to the extent
expressly provided for in any Loan Document, each Borrower expressly waives, to
the maximum extent permitted by applicable law, all rights or entitlements to
presentments, demands for payment or performance, notices of nonpayment or
nonperformance, protests, notices of protest, notices of dishonor and all other
notices or demands of any kind or nature whatsoever with respect to the
Liabilities, and all notices of acceptance of the Loan Documents or of the
existence, creation or incurring of new or additional Liabilities.

              In the event that all or any part of the Liabilities at any time
should be or become secured by any one or more deeds of trust or mortgages or
other instruments creating or granting liens on any interests in real property,
each Borrower authorizes the Collateral Agent, upon the occurrence of and during
the continuance of any Event of Default, at its sole option, without notice or
demand except as is or may be expressly required by the terms of any Loan
Document or by the provisions of any applicable law, to foreclose any or all of
such deeds of trust or mortgages or other instruments by judicial or
non-judicial sale, without affecting or diminishing, except to the extent of the
effect of the application of the proceeds realized therefrom, and except to the
extent mandated by any non-waivable provision of applicable law, the Liabilities
of any Borrower (other than the Liabilities of a grantor of a foreclosed deed of
trust, mortgage, or other instrument, to the extent, if any, that applicable law
affects or diminishes the Liabilities of such grantor), the enforceability of
this Agreement or any other Loan Document, or the validity or enforceability of
any remaining security interests or liens of, or for the benefit of, the
Lenders, the Administrative Agent and the Collateral Agent on any Collateral.

              Each Borrower hereby agrees to keep each other Borrower fully
apprised at all times as to the status of its business, affairs, finances, and
financial condition, and its ability to perform its Liabilities under the Loan
Documents, and in particular as to any adverse developments with respect
thereto. Each Borrower hereby agrees to undertake to keep itself apprised at all
times as to the status of the business, affairs, finances, and financial
condition of each other Borrower, and of the ability of each other Borrower to
perform its Liabilities under the Loan Documents, and in particular as to any
adverse developments with respect to any thereof. Each Borrower hereby agrees,
in light of the foregoing mutual covenants to inform each other, and to keep
themselves and each other informed as to such matters, that the Lenders, the
Administrative Agent and the Collateral Agent shall have no duty to inform any
Borrower of any information pertaining to the business, affairs, finances, or
financial condition of any other Borrower, or pertaining to the ability of any
other Borrower to perform its Liabilities under the Loan Documents, even if such
information is adverse, and even if such information might influence the
decision of one or more of the Borrowers to continue to be jointly and severally
liable for, or to provide Collateral for, Liabilities of one or more of the
other Borrowers. To the fullest extent permitted by applicable law, each
Borrower hereby expressly waives any duty of

                                       22
<PAGE>   23

the Lenders, the Administrative Agent and the Collateral Agent to inform any
Borrower of any such information.

              Borrowers and each of them warrant and agree that each of the
waivers and consents set forth herein are made after consultation with legal
counsel and with full knowledge of their significance and consequences, with the
understanding that events giving rise to any defense or right waived may
diminish, or otherwise adversely affect rights that Borrowers otherwise may have
against other Borrowers, Lenders, the Administrative Agent, the Collateral
Agent, or others, or against Collateral, and that, under the circumstances, the
waivers and consents herein given are reasonable. If any of the waivers or
consents herein is determined to be contrary to any applicable law or public
policy, such waivers and consents shall be effective to the maximum extent
permitted by law."

                                   ARTICLE II
                              ADDITIONAL AGREEMENTS

              2.1 The "ADDITIONAL AVAILABILITY RESERVE" (as defined in the
Second Amendment) established in the First Amendment and Second Amendment is
hereby released.

              2.2 Notwithstanding the release of the Additional Availability
Reserve, the Parties acknowledge the Collateral Agent's right to establish
Availability Reserves as set forth in the definition of "AVAILABILITY RESERVES"
in the Loan Agreement and the other terms and conditions of the Loan Agreement.
Nothing herein shall limit the Collateral Agent's right to establish
Availability Reserves as set forth in the Loan Agreement.

              2.3 Borrowers shall pay on the Third Amendment Date, the following
fees (the "RESTRUCTURING FEES"):

                            A. $200,000 to the Administrative Agent, for the Pro
              Rata benefit of the Tranche A Lenders; and

                            B. $50,000 to the Tranche B Lender.

              2.4 RELEASE. THE BORROWERS, THEIR SUBSIDIARIES AND THE GUARANTOR,
JOINTLY AND SEVERALLY, FOR THEMSELVES AND THEIR RESPECTIVE SUCCESSORS AND
ASSIGNS, EACH HEREBY ACKNOWLEDGE THAT NONE OF THE BORROWERS, THEIR SUBSIDIARIES
OR THE GUARANTOR, JOINTLY AND SEVERALLY, FOR THEMSELVES AND THEIR RESPECTIVE
SUCCESSORS AND ASSIGNS, HAS ANY DEFENSE, COUNTERCLAIM, OFFSET, CROSS-COMPLAINT,
CLAIM OR DEMAND OF ANY KIND OR NATURE WHATSOEVER THAT CAN BE ASSERTED TO REDUCE
OR ELIMINATE ALL OR ANY PART OF BORROWERS', THEIR SUBSIDIARIES' OR THE
GUARANTOR'S LIABILITY TO PAY THE OBLIGATIONS PROVIDED IN THE LOAN DOCUMENTS OR
TO SEEK AFFIRMATIVE RELIEF OR DAMAGES OF ANY KIND OR NATURE FROM ANY AGENT OR
ANY LENDER. EACH OF THE BORROWERS, THEIR SUBSIDIARIES, AND THE GUARANTOR JOINTLY
AND SEVERALLY, FOR THEMSELVES AND THEIR RESPECTIVE SUCCESSORS AND ASSIGNS EACH
HEREBY UNCONDITIONALLY AND IRREVOCABLY REMISES, ACQUITS, AND FULLY AND FOREVER
RELEASES AND

                                       23
<PAGE>   24

DISCHARGES EACH AGENT AND EACH LENDER AND ALL AFFILIATES AND SUBSIDIARIES OF
EACH AGENT AND EACH LENDER, THEIR RESPECTIVE OFFICERS, EMPLOYEES, AGENTS,
ATTORNEYS, PRINCIPALS, DIRECTORS AND SHAREHOLDERS, AND THEIR RESPECTIVE HEIRS,
LEGAL REPRESENTATIVES, SUCCESSORS AND ASSIGNS (COLLECTIVELY, THE "RELEASED
LENDER PARTIES") FROM ANY AND ALL CLAIMS, DEMANDS, CAUSES OF ACTION,
OBLIGATIONS, REMEDIES, SUITS, DAMAGES AND LIABILITIES (COLLECTIVELY, THE
"BORROWER CLAIMS") OF ANY NATURE WHATSOEVER, WHETHER NOW KNOWN, SUSPECTED OR
CLAIMED, WHETHER ARISING UNDER COMMON LAW, IN EQUITY OR UNDER STATUTE, WHICH THE
BORROWERS, THEIR SUBSIDIARIES, AND THE GUARANTOR, JOINTLY AND SEVERALLY, FOR
THEMSELVES AND THEIR RESPECTIVE SUCCESSORS AND ASSIGNS EVER HAD OR NOW HAVE
AGAINST THE RELEASED LENDER PARTIES WHICH MAY HAVE ARISEN AT ANY TIME ON OR
PRIOR TO THE DATE OF THIS AGREEMENT AND WHICH WERE IN ANY MANNER RELATED TO THIS
AGREEMENT, OR ANY OTHER "LOAN DOCUMENTS," OF THE BORROWERS, THEIR SUBSIDIARIES
AND THE GUARANTOR, JOINTLY AND SEVERALLY, FOR THEMSELVES AND THEIR RESPECTIVE
SUCCESSORS AND ASSIGNS COVENANT AND AGREE NEVER TO COMMENCE, VOLUNTARILY OR IN
ANY OTHER WAY, PROSECUTE OR CAUSE TO BE COMMENCED OR PROSECUTED AGAINST ANY OF
THE RELEASED LENDER PARTIES ANY ACTION OR OTHER PROCEEDING BASED UPON ANY OF THE
BORROWER CLAIMS WHICH MAY HAVE ARISEN AT ANY TIME ON OR PRIOR TO THE DATE OF
THIS AGREEMENT AND WERE IN ANY MANNER RELATED TO THIS AGREEMENT, ANY OTHER LOAN
DOCUMENTS OR THE TRANSACTIONS ASSOCIATED THEREWITH.

              2.5 Waiver of Civil Code Section 1542. To the extent that the
foregoing release is a release as to which Section 1542 of the California Civil
Code or similar provisions of other applicable law applies, it is the intention
of each of the signatories hereto that the foregoing release shall be effective
as a bar to any and all causes of action of whatsoever character, nature and
kind, known or unknown, suspected or unsuspected, herein and above specified to
be so barred. In furtherance of this intention, the Borrowers and the Guarantor
hereby expressly waive any and all rights and benefits conferred upon them by
the provisions of Section 1542 of the California Civil Code or similar
provisions of other applicable law, and acknowledge that Section 1542 of the
California Civil Code provides:

              A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR
              DOES NOT KNOW OR SUSPECT TO EXIST IN ITS FAVOR AT THE TIME OF
              EXECUTING THE RELEASE, WHICH IF KNOWN BY HIM MUST HAVE MATERIALLY
              AFFECTED HIS SETTLEMENT WITH THE DEBTOR.

              2.6 The Borrowers shall promptly execute and deliver an agreement
with respect to Discovery Card (and any other credit card clearinghouses
processing the Credit Card Receivables of the Borrowers or the Guarantor)
satisfying the requirements of Section 7.2(b) and otherwise satisfactory in form
and substance to the Collateral Agent.

                                       24
<PAGE>   25

              2.7 The First Amendment is hereby amended by deleting Sections
1(a) and 2 thereof.

              2.8 The Second Amendment is hereby amended by providing that the
desktop appraisals for Priority Leases shall be delivered at the times provided
for Non-Priority Leases and by deleting the requirement for delivery of Lease
Plans.

              2.9 The Lenders hereby consent to the Equity Transaction.

                                   ARTICLE III
                         CONFIRMATION OF LOAN DOCUMENTS

              3.1 Each Party, by its execution and delivery of this Agreement,
irrevocably and unconditionally ratifies and confirms that it consents to the
terms and conditions of the Loan Agreement as it has been amended by this
Agreement and that each Loan Document to which such Party is a party shall
continue in full force and effect in accordance with its terms, as it has been
amended on the date hereof, and is and shall continue to be applicable to all of
the Party's obligations.

                                   ARTICLE IV
                              CONDITIONS PRECEDENT

              This Agreement shall become effective upon satisfaction of the
following conditions:

              4.1 The execution and delivery of counterparts hereof by the
Borrowers, the Guarantor, the Tranche A Lenders, the Tranche B Lender, the
Tranche C Lenders (other than Clyde Street Investments, LLC), the Collateral
Agent, the Administrative Agent and Co-Administrative Agent.

              4.2 Execution of a definitive employment agreement for the
position of Chief Executive Officer of the Lead Borrower, by and between the
Lead Borrower and Gary Friedman, on terms previously disclosed to the Lenders.

              4.3 The Lead Borrower shall have received cash proceeds of at
least Fourteen Million Dollars ($14,000,000.00), net of closing and transaction
fees and costs, from the Equity Transaction.

              4.4 The Borrowers shall have paid the Restructuring Fees.

              4.5 The Borrowers shall have paid counsel to the Administrative
Agent, counsel to the Collateral Agent, and counsel to each Lender all fees
charged, and costs and expenses incurred, by such counsel in connection with the
transactions contemplated by this Agreement and in connection with the Loan
Documents.

              4.6 The Administrative Agent and the Tranche B Lender shall have
received: (a) reasonable and customary opinions of counsel to the Lead Borrower
pertaining to the transactions contemplated by this Agreement, which opinions
are satisfactory to the

                                       25
<PAGE>   26

Administrative Agent and the Tranche B Lender in their sole discretion in all
respects; and (b) such corporate resolutions, certificates and other documents
as the Administrative Agent and the Tranche B Lender shall reasonably request.

              4.7 There are no material misstatements in or omissions from the
materials previously furnished to the Administrative Agent or any Lender for its
review. The Administrative Agent and the Tranche B Lender are satisfied, in
their sole discretion in all respects, that each and every all financial
statement delivered to either or both of them fairly present the business and
financial condition of the Borrowers and their subsidiaries, and that there has
been no Material Adverse Change.

              4.8 Neither the Borrowers nor their Subsidiaries shall be in
default of any contract or agreement, or any material provision thereof, to
which they individually or collectively are a party.

              4.9 No material changes in governmental regulations or policies
have occurred which affect, or have the potential to affect, the Borrowers, the
Administrative Agent, or any Lender involved in this transaction.

              4.10 The pledge by the Lead Borrower of its stock in the Guarantor
shall be amended so that such pledge grants a lien on 100% of the issued and
outstanding stock of the Guarantor.

              4.11 The Lead Borrower shall have delivered to the Collateral
Agent stock certificates constituting 100% of the issued and outstanding stock
of the Guarantor.

              4.12 The Administrative Agent shall have received such other
documents as it, the Lenders or any of their counsel shall reasonably deem
necessary.

              4.13 The Tranche C Lenders shall have received Two Million Dollars
($2,000,000.00) as a Tranche C Debt Payment and the Lead Borrower and the
Tranche C Lenders shall have executed and delivered an amendment to the Warrant
Agreement.

                                    ARTICLE V
                                  MISCELLANEOUS

              5.1 Each Borrower and the Guarantor reaffirms and restates the
representations and warranties set forth in Article IV of the Loan Agreement, as
amended by this Agreement and, after giving effect to the transactions
contemplated herein, all such representations and warranties shall be true and
correct in all material respects on and as of the date hereof (except insofar as
such representations and warranties expressly relate to an earlier date).

              5.2 Each Borrower and the Guarantor warrants and represents (which
warranty and representation shall survive the execution and delivery hereof)
that:

              (a) It has the corporate power and authority to execute, deliver,
and carry out the terms and provisions of this Agreement and the transactions
contemplated hereby and has

                                       26
<PAGE>   27

taken or caused to be taken all necessary corporate action to authorize the
execution, delivery, and performance of this Agreement and the transactions
contemplated hereby;

              (b) No consent of any other person (including, without limitation,
its shareholders or creditors), and no action of, or filing with any
governmental or public body or authority is required to authorize, or is
otherwise required in connection with the execution, delivery and performance of
this Agreement;

              (c) The execution, delivery and performance of this Agreement will
not violate any law, statute or regulation, or any order or decree of any court
or governmental instrumentality, or conflict with, or result in the breach of,
or constitute a default under any contractual obligation; and

              (d) This Agreement has been duly executed and delivered by a duly
authorized officer, and constitutes a legal, valid and binding obligation of it,
enforceable in accordance with its terms, subject to laws affecting the
enforcement of creditors' rights generally and the exercise of judicial
discretion in accordance with general principles of equity.

              5.3 The Loan Documents, subject to the foregoing terms and
conditions provided by this Agreement, constitute the complete agreement of the
Parties with respect to the subject matters referred to herein and supersede all
prior or contemporaneous negotiations, promises, agreements, or representations,
all of which have become merged and finally integrated into the Loan Documents
and this Agreement. No agreements or undertakings varying, modifying, amending,
extending, discharging or terminating the same shall be binding upon any Party
unless in writing signed by a duly authorized official or agent thereof. No
waiver by any Party of any breach hereunder shall be deemed a waiver of any
other or subsequent breach.

              5.4 Each Borrower agrees to pay, on demand, all attorneys' fees
and costs incurred in connection with the negotiation, documentation, and
execution of this Agreement. If any legal action or proceeding shall be
commenced at any time by any Party in connection with its interpretation or
enforcement, the prevailing Party or Parties in such action or proceeding shall
be entitled to reimbursement of its reasonable attorneys' fees and costs in
connection therewith, in addition to all other relief to which the prevailing
Party or Parties may be entitled. Each of the Parties waives its right to a
trial by jury in any action to enforce, defend, or interpret, or otherwise
concerning this Agreement.

              5.5 Except as herein expressly amended, the Loan Agreement is
ratified and confirmed in all respects and shall remain in full force and effect
in accordance with its terms.

              5.6 This Agreement and all rights and obligations hereunder,
including matters of construction, validity, and performance, shall be governed
by and construed under the laws of the Commonwealth of Massachusetts and shall
inure to the benefit of and binding upon the successors, heirs and assigns of
the Parties.

              5.7 All references to the Loan Agreement contained in the Loan
Agreement and the other Loan Documents and the other documents and instruments
delivered pursuant to or

                                       27
<PAGE>   28

in connection therewith shall mean the Loan Agreement, as amended hereby and as
may in the future be amended, restated, supplemented or modified from time to
time.

              5.8 This Agreement may be executed in counterparts, each of which
shall be deemed an original and all of which together shall constitute one and
the same instrument.

              5.9 Delivery of an executed counterpart of a signature page to
this Agreement by telecopier shall be effective as delivery of a manually
executed counterpart of this Agreement.

                  (remainder of page intentionally left blank)

                                       28
<PAGE>   29

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

<TABLE>
<S>                                          <C>
RESTORATION HARDWARE, INC.                   THE MICHAELS FURNITURE COMPANY, INC. (a
(the "Lead Borrower" and a "Borrower")       "Borrower")

By: /s/ Walter Parks                          By: /s/ Walter Parks
   --------------------------------              ------------------------------------

Name:                                        Name:
     ------------------------------                ----------------------------------

Title: EVP - CAO                             Title:  EVP - CAO
     -----------------------------                ----------------------------

RESTORATION HARDWARE CANADA, INCORPORATED    THE CIT GROUP/BUSINESS CREDIT,INC.
(the "Guarantor")                            (the "Co-Administrative Agent")

By: /s/ Walter Parks                          By:  /s/ Jeff Chu
----------------------                        ----------------------------------

Name:                                         Name:
    ---------------------                         ------------------------------

Title:  EVP-CAO                               Title:  AVP
       --------------------                           --------------------------

FLEET CAPITAL CORPORATION                    FLEET CAPITAL CORPORATION
(the "Administrative Agent")                 (a "Collateral Agent")

By: /s/Matt R. Van Steenhuyse                By: /s/ Matt R. Van Steenhuyse
   --------------------------------              ------------------------------------

Name:                                        Name:
     ------------------------------                ----------------------------------

Title: SVP                                      Title: SVP
      -----------------------------                ----------------------------------

FLEET RETAIL FINANCE INC.
(a "Collateral Agent")

By:  /s/ Michael L. Pretep
     ------------------------

Name:
     ------------------------

Title: Managing Director
       -----------------------

</TABLE>

      Signature Pages to Amendment No. 3 to the Sixth Amended and Restated
                           Loan and Security Agreement

                                       S-1
<PAGE>   30

<TABLE>
<S>                                          <C>
FLEET CAPITAL CORPORATION                    THE CIT GROUP/BUSINESS CREDIT, INC.
(a "Tranche A Lender")                       (a "Tranche A Lender")

By: /s/ Matt R. Van Steenhuyse               By: /s/ Jeff Chu
   --------------------------------              ------------------------------------

Name:                                        Name:
     ------------------------------                ----------------------------------

Title: SVP                                      Title:  AVP
      -----------------------------                ----------------------------------

BACK BAY CAPITAL FUNDING, LLC                ENHANCED RETAIL FUNDING, LLC
(the "Tranche B Lender")                     (a "Tranche C Lender")

By: /s/ Kristan O'Connor                     By: /s/ Art P. Goroster
   --------------------------------              ------------------------------------

Name:                                        Name:
     ------------------------------                ----------------------------------

Title: Director                              Title: CFO-MGR
      -----------------------------                ----------------------------------

GOLDMAN SACHS CREDIT PARTNERS, LP
(a "Tranche C Lender")

By: /s/ Mark Denatale
   --------------------------------

Name:
     ------------------------------

Title:
      -----------------------------
</TABLE>

      Signature Pages to Amendment No. 3 to the Sixth Amended and Restated
                           Loan and Security Agreement

                                      S-2<PAGE>   1
                                                                   EXHIBIT 10.30

                                 March 15, 2001

Mr. Gary G. Friedman
2485 Union Street
San Francisco, CA 91423

       Re: Offer of Employment

Dear Gary:

       In response to your expressed interest in employment with Restoration
Hardware, Inc. (the "Company") pursuant to terms that you have outlined and
based on our prior discussions concerning those terms, the Company is pleased to
offer you employment on the terms and conditions outlined in this offer letter.

       Your position would be the position of Chief Executive Officer and would
report to the Board of Directors. You would be appointed a member of the Board
of Directors upon acceptance of this offer and the Company would continue to
nominate you for reelection to the Board of Directors so long as you remain
Chief Executive Officer.

       In such role, your job duties will include such duties as are customarily
associated with the position of Chief Executive Officer and member of the Board
of Directors We would like for you to begin work with the Company as soon as
your are able.

       Although your employment by the Company is a full-time position, the
Company agrees that you may engage in outside activities that do not interfere
with the performance of your duties, as outlined in the form of Compensation and
Severance Agreement attached as Exhibit A.

       Your initial rate of compensation will be a minimum base salary of
$400,000.00 per year less applicable withholding taxes, to be paid in
installments in accordance with the Company's standard payroll practices. Your
base salary shall be subject to adjustment at least annually during your
employment. Adjustments will be at the sole discretion of the Board or the
Compensation Committee of the Board and may be based upon milestones that are
set by the Compensation Committee in advance.

       In addition, you will be eligible for annual bonus compensation, targeted
at 100% of your annual salary, with the amount actually payable based on the
level of achievement of performance goals mutually agreed to by you and the
Board or its Compensation Committee.

       You will be eligible for standard company benefits available to senior
executives, including the following benefits: You will be permitted, to the
extent eligible, to participate in any group health and life insurance benefits,
401(k) plan and other benefit programs which are

<PAGE>   2

March 15, 2001
Page 2 of 4

provided to other senior executives of the Company generally, pursuant to the
terms and conditions of each such plan or program. Your dependents may
participate in group health benefits programs to the same extents as other
senior executives' dependents, and subject to plan eligibility requirements. You
will be entitled to 4 weeks annual paid vacation. You will be entitled to
perquisites no less generous than those available to other senior executives,
including a car allowance of $950 per month and extra contribution to disability
coverage. With appropriate documentation pursuant to Company policy, the Company
shall reimburse you for reasonable, out-of-pocket business expenses incurred in
the course of your duties.

       Upon the commencement of your employment by the Company, the Board will
have pre-approved a grant to you of options to purchase 1,200,000 shares of
common stock at an exercise price per share equal to the lesser of (i) $2.00 or
(ii) the fair market value of one share of the Company's common stock on the
date of grant and options to purchase 200,000 shares of common stock at an
exercise price per share of $6.00. All such options shall be granted on the date
you begin employment and will be subject to terms substantially identical to
those of the forms set forth as Exhibit B; provided that if you so request the
options will be revised to permit you to exercise them immediately, in which
case the Company would have the right to repurchase, at your original exercise
price, any shares that are unvested upon your termination of employment (after
giving effect to any acceleration of vesting provided in you Compensation and
Severance Agreement attached as Exhibit A). The Company would lend you 50% of
the purchase price for such early exercise on terms substantially similar to the
terms of the form of note attached as Exhibit C.

       You will be eligible to make Company-assisted purchases of Company stock
as follows: You may purchase up to $1 million of preferred stock as part of and
at same price and on the same terms as our contemplated 3rd party financing .
You may also purchase up to $1 million of common stock at a per share price of
$1.75 per share. The Company will extend a loan to you to purchase the common
stock in the principal amount of $1 million or, if you do not purchase the full
$2 million of common and preferred stock, the lesser of (i) the actual purchase
price of the common stock that you purchase or (ii) 50% of the amount of the
actual aggregate purchase price for your common and preferred purchases. The
loan will be secured by the shares of common and preferred stock that you
purchase and will have terms substantially identical to those set forth in the
form of promissory note attached as Exhibit C. If the currently contemplated 3rd
party financing does not occur, you may participate in a future round of 3rd
party financing or you may, in lieu of participating in a 3rd party financing
and within 30 days of your acceptance of this offer, purchase an additional $1
million of shares of common stock for cash at an exercise price of $1.75. You
shall have registration rights with respect to these shares that are comparable
to those provided to the investors in the 3rd party financing.

       It is understood that the shares of Company stock that you acquire
pursuant to the prior two paragraphs may be subject to such restrictions on
incremental sales as may be negotiated in connection with the 3rd party
financing.

       You will be entitled to reimbursement for reasonable expenses, including
attorney's fees, incurred by you in negotiating the terms of your employment
reflected in this offer letter and the

                                      -2-
<PAGE>   3

March 15, 2001
Page 3 of 4

exhibits hereto, not to exceed $25,000 (plus any gross up to cover taxes on any
such amount that is not deductible by you) unless approved by the Company.

       You shall primarily work from the Company's Corte Madera, California
office, but you duties may require reasonable business travel.

       Your employment with the Company, should you accept this offer, will not
be for any specific term and may be terminated by you or by the Company at any
time, with or without cause. Any contrary representations or agreements that may
have been made to you are superseded by this offer. The at-will term of your
employment can only be changed in a writing signed by you and an authorized
member of the Board, which expressly states the intention to modify the at-will
term of your employment. By signing below and accepting this offer, you
acknowledge and agree that length of employment, promotions, positive
performance reviews, pay increases, bonuses, increases in job duties or
responsibilities and other changes during employment will not change the at will
term of your employment with the Company and will not create any implied
contract requiring cause for termination of employment. Notwithstanding the
above, upon termination of employment you will be entitled to severance and
other benefits in accordance with the form of Compensation and Severance
Agreement, provided you become eligible for such benefits under the terms of
that agreement.

       The offer embodied in this letter is made to you based solely on
Company's desire to employ you for the education, skills and qualifications
personal to you, and is not made for the purpose of obtaining confidential or
trade secret information relating to any previous employer or third party which
you may be prohibited from disclosing or using. Indeed, you are prohibited from
using or disclosing trade secret or confidential information in connection with
which you have nondisclosure obligations, in relation to Company or your
employment with Company.

       The Company has represented to you that to the best of its knowledge,
information and belief, your hiring, recruitment, employment, participation in
the contemplated third party financing and any other activities heretofore
related to Company has not breached and will not breach any contractual or other
legal obligation to any person or entity.

       You have represented that to the best of your knowledge, information and
belief, your hiring, recruitment, employment , participation in the contemplated
third party financing and any other activities heretofore related to Company has
not breached and will not breach any contractual or other legal obligation to
any person or entity.

       You will be entitled to standard indemnification applicable to senior
officers of the Company as set forth in the form of agreement attached as
Exhibit D. That agreement, including but not limited to paragraph 2(a) thereof,
shall be interpreted to include indemnification for claims by any previous
employer or other parties relating to your hiring, recruitment, participation in
the contemplated third party financing and any other activities heretofore
related to Company, prior to you becoming an employee of Company.

                                      -3-
<PAGE>   4

March 15, 2001
Page 4 of 4

       Your employment pursuant to this offer is contingent upon you providing
the Company with the legally-required proof of your identity and authorization
to work in the United States.]

       As an employee of the Company, you will be required to comply with all
Company policies and procedures. In particular, you will be required to
familiarize yourself with and to comply with the Company's policy prohibiting
unlawful harassment and discrimination and the policy concerning drugs and
alcohol. Violations of these policies may lead to immediate termination of
employment.

       Any and all disputes relating to your employment, including termination
thereof, shall be resolved by binding arbitration pursuant to the procedures and
terms of your Compensation and Severance Agreement. Certain other provisions of
such agreement shall apply to this letter agreement, as provided in Section 1 of
such agreement.

       If you wish to accept this offer, please sign below and return the fully
executed letter to us. You should keep one copy of this letter for your own
records.

       This offer of employment will expire at 6:00 p.m. Pacific time March 23,
2001. If you have any questions, please call me.

       We are looking forward to having you join us at the Company.

                                        Sincerely yours,

                                        Restoration Hardware, Inc.

                                        By:  /s/ Walter Parks
                                       ---------------------------

       I have read this employment offer, received advice of counsel, and I
accept it.

       Dated:                                  /s/ Gary Friedman
             --------------------            -----------------------------------
                                                   Gary G. Friedman

                                      -4-

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