Document:

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                                                                    EXHIBIT 10.1

                           RESTORATION HARDWARE, INC.
                              15 KOCH ROAD, SUITE J
                             CORTE MADERA, CA 94925

                           DATED AS OF AUGUST 2, 2002

To:     Those investors listed on the signature pages of this Letter Agreement
        (the "Agreement")

        Re:     Waiver of Dividend Participation Right and Covenant Not to
                Declare Dividends

Ladies and Gentlemen:

        We understand that each of the investors listed on the signature pages
hereto (each an "Executing Investor" and collectively, the "Executing
Investors") recognizes that it is the best interests of both Restoration
Hardware, Inc., a Delaware corporation (the "Company"), and the holders of
Series A Preferred Stock of the Company (the "Series A Preferred Stock") and the
holders of common stock of the Company that holders of Series A Preferred Stock
waive their dividend participation right with respect to any dividends that may
be declared upon the common stock of the Company in consideration of the
Company's covenant not to declare dividends payable to holders of the Company's
common stock in certain circumstances as hereinafter provided.

        NOW, THEREFORE, in consideration of the promises and mutual covenants
contained in this Agreement, the parties agree as follows:

        1. WAIVER OF RIGHT FOR SERIES A PREFERRED STOCK TO RECEIVE COMMON STOCK
Dividends. Notwithstanding the express terms of the last sentence of Section
3(C)1(b) of the Certificate of Designation of Series A and Series B Preferred
Stock of the Company (the "Certificate of Designation"), each Executing Investor
hereby fully, unconditionally, irrevocably and without reserve waives his, her
or its right to receive any dividends, whether payable in cash or as a non-cash
distribution, as a holder of issued and outstanding Series A Preferred Stock
pursuant to the last sentence of Section 3(C)1(b) of the Certificate of
Designation, which provides as follows:

        "Upon full payment of the dividends to the Series A Preferred holders
pursuant to Section 1(a) above, any further dividends, whether payable in cash
or non-cash distribution, shall be payable pro rata to the holders of Series A
Preferred and Common Stock on an as-converted basis."

        2. AGREEMENT TO RETURN DIVIDENDS. Notwithstanding the terms of Section 1
above, should the Company declare and pay any dividends to holders of common
stock of the Company at any time during which any shares of the Series A
Preferred Stock are outstanding, and should, as a result of such payment, any
Executing Investor receive payment of any such dividends pursuant to his, her or
its right under the last sentence of Section 3(C)1(b) of the Certificate of
Designation, such Executing Investor hereby agrees and covenants to return
immediately to the Company any such dividends.

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        3. LIMITATION ON DIVIDENDS ON COMMON STOCK. The Company agrees for the
benefit of the holders of the Series A Preferred Stock that the Company shall
not now or in the future declare any dividends payable to the holders of common
stock of the Company so long as any shares of Series A Preferred Stock are
outstanding, unless the Company first obtains the approval (by vote or written
consent, as provided by law) of the holders of at least seventy percent (70%) of
the then outstanding shares of Series A Preferred Stock, such restriction to be
effective from and after the date that all holders of issued and outstanding
Series A Preferred Stock execute this Agreement.

        4. ADEQUATE REMEDY; SPECIFIC ENFORCEMENT. It is agreed and understood
that monetary damages would not adequately compensate an injured party for the
breach of this Agreement by any other party, that this Agreement shall be
specifically enforceable, and that any breach or threatened breach of this
Agreement shall be the proper subject of a temporary or permanent injunction or
restraining order. Further, each party hereto waives any claim or defense that
there is an adequate remedy at law for such breach or threatened breach.

        5. MISCELLANEOUS.

        (a) This Agreement is to be construed in accordance with and governed by
the internal laws of the State of New York without giving effect to any choice
of law rule that would cause the application of the laws of any jurisdiction
other than the internal laws of the State of New York to the rights and duties
of the parties.

        (b) The provisions of this Agreement shall inure to the benefit of, and
shall be binding upon, the successors and assigns of the Company and the
Executing Investors; provided, however, that each of the Executing Investors
covenants and agrees that, as a condition to any transfer of shares of Series A
Preferred Stock, any transferee of shares of Series A Preferred Stock shall
agree in writing to assume all of the rights and obligations of the Executing
Investor under this Agreement with respect to such transferred shares of Series
A Preferred Stock and such transferee shall agree to be bound by the terms of
this Agreement, all in accordance with and pursuant to a duly executed written
instrument in form substantially similar to Exhibit A attached hereto or such
other form reasonably satisfactory to the Company.

        (c) This Agreement constitutes and contains the entire agreement and
understanding of the parties with respect to the subject matter hereof and
supersedes any and all prior negotiations, correspondence, agreements,
understandings, duties or obligations between the parties respecting the subject
matter hereof.

        (d) Except as may be otherwise provided herein, all notices, requests,
waivers and other communications made pursuant to this Agreement shall be in
writing and shall be conclusively deemed to have been duly given as follows: (i)
when hand delivered to the other party; (ii) when received when sent by
facsimile at the address and number set forth below; (iii) when received after
deposit in the U.S. mail with first class or certified mail receipt requested
postage prepaid and addressed to the other party as set forth below; or (iv)
when received after deposit with a national overnight delivery service, postage
prepaid, addressed to the parties as set forth below with next-business-day
delivery guaranteed, provided that the sending party receives a confirmation of
delivery from the delivery service provider.

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               To the Company:

               Restoration Hardware, Inc.
               15 Koch Road, Suite J
               Corte Madera, CA  94925
               Attn:  Kevin W. Shahan
               Fax Number:  (415) 945-4679

               With a copy to:

               Morrison & Foerster LLP
               425 Market Street
               San Francisco, CA 94105
               Attn:  Gavin B. Grover, Esq.
               Fax Number:  415-268-7522

               To the Executing Investors:

               Palladin Capital IX, LLC
               1 Rockefeller Plaza, 10th Floor
               New York, NY  10020
               Attn:  Mark J. Schwartz
               Fax Number:  (212) 218-6802

               With a copy to:

               Gibson, Dunn & Crutcher LLP
               333 South Grand Avenue
               Los Angeles, CA 90071
               Attn:  Kenneth M. Doran, Esq.
               Fax Number:  (213) 229-6537

               Reservoir Capital Partners, L.P.
               Reservoir Capital Associates, L.P.
               Reservoir Capital Master Fund, L.P.
               c/o Reservoir Capital Group, Inc.
               650 Madison Avenue, 26th Floor
               New York, NY  10022
               Attn:  Celia A. Felsher and Daniel H. Stern
               Fax Number:  (212) 610-9020

               With a copy to:

               Milbank, Tweed, Hadley & McCloy LLP
               1 Chase Manhattan Plaza
               New York, NY 10005
               Attn:  Mark L. Weissler, Esq.
               Fax Number:  (212) 530-5219

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               Glenhill Capital LP
               Glenn J. Krevlin
               c/o GJK Capital Management, LLC
               650 Madison Avenue, 26th Floor
               New York, NY  10022
               Fax Number:  (212) 610-9051

               Gary G. Friedman
               Kendal Agins Friedman
               118 Paradise Drive
               Tiburon, CA  94920
               Fax Number:  (415) 789-5361

               MoFo 2001, LP
               c/o Morrison & Foerster LLP
               425 Market Street
               San Francisco, CA 94105
               Attn:  Pamela J. Reed, Esq.
               Fax Number:  415-268-7522

        Each person making a communication hereunder by facsimile shall promptly
confirm by telephone to the person to whom such communication was addressed each
communication made by it by facsimile pursuant hereto but the absence of such
confirmation shall not affect the validity of any such communication. A party
may change or supplement the addresses given above, or designate additional
addresses, for purposes of this Section 5(d), by giving the other parties
written notice of the new address in the manner set forth above.

        (e) This Agreement may be amended only with the written consent of the
Company and each of the Executing Investors.

        (f) If one or more provisions of this Agreement are held to be
unenforceable under applicable law, then such provision(s) shall be excluded
from this Agreement and the balance of this Agreement shall be interpreted as if
such provision(s) were so excluded and shall be enforceable in accordance with
its terms.

        (g) This Agreement may be executed in any number of counterparts, each
of which shall be an original, but all of which together shall constitute one
instrument.

        (h) Each of the parties hereto agrees (i) to execute and deliver to each
other such other documents and (ii) to do such other acts, all as the other
parties hereto may reasonably request for the purpose of carrying out this
Agreement.

        (i) The captions to sections of this Agreement have been inserted for
identification and reference purposes only and shall not be used to construe or
interpret this Agreement.

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        If the foregoing is acceptable, please acknowledge your acceptance by
countersigning below.

                                       RESTORATION HARDWARE, INC., a Delaware
                                       corporation

                                       By:   /s/ Kevin W. Shahan
                                             -----------------------------------
                                       Name:     Kevin W. Shahan
                                             -----------------------------------
                                       Title:    VP/CFO
                                             -----------------------------------

        AGREED AND ACCEPTED:

        PALLADIN CAPITAL IX, LLC

        By:  Palladin Investments, LLC, Manager

        By:    /s/ Mark Schwartz
           -------------------------------------------
               Name:  Mark Schwartz
               Title:  Managing Member

        RESERVOIR CAPITAL PARTNERS, L.P.

        By:  Reservoir Capital Group, L.L.C., its general partner

                By:       /s/ Daniel H. Stern
                   -------------------------------------------
                   Name:  Daniel H. Stern
                   Title:  Chairman

        RESERVOIR CAPITAL ASSOCIATES, L.P.

        By:  Reservoir Capital Group, L.L.C., its general partner

                By:       /s/ Daniel H. Stern
                   -------------------------------------------
                   Name:  Daniel H. Stern
                   Title:  Chairman

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        RESERVOIR CAPITAL MASTER FUND, L.P.

        By:  Reservoir Capital Group, L.L.C., its general partner

                By:       /s/ Daniel H. Stern
                   -------------------------------------------
                   Name:  Daniel H. Stern
                   Title:  Chairman

        GLENHILL CAPITAL LP

        By:    GJK Capital Management, LLC, its general partner

        By:    Krevlin Advisors, LLC, its managing member

               By:      /s/ Glenn J. Krevlin
                   -------------------------------------------
                   Name:  Glenn J. Krevlin
                   Title:  Managing Member

          /s/ Glenn J. Krevlin
        ------------------------------------
               GLENN J. KREVLIN

          /s/ Gary G. Friedman
        ------------------------------------
               GARY G. FRIEDMAN

          /s/ K. Agins Friedman
        ------------------------------------
               KENDAL AGINS FRIEDMAN

        MOFO 2001, LP

        By:    MoFo Investments, LLC, its general partner

               By:       /s/ Pamela J. Reed
                  -------------------------------------
                       Name:   Pamela J. Reed
                              -------------------------
                       Title: Co Managing Partner for Operations
                              ----------------------------------

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                                    EXHIBIT A

                       ASSIGNMENT AND ASSUMPTION AGREEMENT

        This Assignment and Assumption Agreement ("Agreement") is entered into
as of ______, 20__, by and between_________ (the "Assignor") and ________ (the
"Assignee").

        WHEREAS, the Assignor holds _____ shares of Series A Preferred Stock,
$0.0001 par value per share (the "Securities"), of Restoration Hardware, Inc.
(the "Company"); and

        WHEREAS, the Assignor desires to transfer, and the Assignee desires to
acquire, the Securities (the "Transfer"); and

        WHEREAS, in recognition of the terms of that certain Letter Agreement,
dated as of August 2, 2002, by and among the Company and the other parties named
therein (the "Letter Agreement"), the Assignee is willing, as a condition to the
Transfer, to assume all rights and obligations of the Assignor under the Letter
Agreement with respect to the Securities.

        NOW, THEREFORE, in accordance with, and furtherance of, the premises
above, the Assignor and the Assignee agree as follows:

        1. The Assignor does hereby transfer, assign and deliver to the
Assignee, and the Assignee does hereby accept and assume, all rights and
obligations of the Assignor under the Letter Agreement with respect to the
Securities, effective upon the consummation of the Transfer.

        2. The Assignee expressly acknowledges and agrees that the Assignee
shall be bound by the terms of the Letter Agreement, effective upon the
consummation of the Transfer.

        3. This Agreement is to be construed in accordance with and governed by
the internal laws of the State of New York without giving effect to any choice
of law rule that would cause the application of the laws of any jurisdiction
other than the internal laws of the State of New York to the rights and duties
of the parties.

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

        IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed as of the day and year first written above.

ASSIGNOR:                                   ASSIGNEE:

--------------------------                  --------------------------
By:                                         By:
    ----------------------                      ----------------------
Title:                                      Title:
       -------------------                         -------------------

                                       7<PAGE>
                                                                    EXHIBIT 10.2

                           RESTORATION HARDWARE, INC.
                         NOTICE OF GRANT OF STOCK OPTION

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

        Optionee:  Thomas M. Bazzone

        Grant Date:  July 10, 2002

        Vesting Commencement Date:  May 1, 2002

        Exercise Price:  $7.95

        Number of Option Shares:  50,000

        Expiration Date: July 10, 2012

        Type of Option:  Non-Statutory Option

               Exercise Schedule: The Option shall become exercisable for
               thirty-three and one-third percent (33 1/3%) of the Option Shares
               upon Optionee's completion of each of the three (3) years of
               Service measured from and after the Vesting Commencement Date,
               with the first such installment to become exercisable on the
               first anniversary of the Vesting Commencement Date. In no event
               shall the Option become exercisable for any additional Option
               Shares after Optionee's cessation of Service.

               Optionee understands and agrees that the Option is granted
subject to and in accordance with the terms of the Restoration Hardware, Inc.
1998 Stock Incentive Plan Amended and Restated on May 16, 2001 (the "Plan").
Optionee further agrees to be bound by the terms of the Plan and the terms of
the Option as set forth in the Stock Option Agreement attached hereto as Exhibit
A. A copy of the Plan is available upon request made to the Secretary of the
Corporation at the Corporation's principal offices.

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

<PAGE>

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

DATED: ________________________, 2002

                                            RESTORATION HARDWARE, INC.

                                            By:  /s/ Kevin W. Shahan
                                                --------------------------------
                                            Title:  VP/CFO
                                                   -----------------------------

                                              /s/ Thomas M. Bazzone
                                            ------------------------------------
                                            OPTIONEE

                                            Address: P.O. Box 1587

                                                     Burlingame, CA 94011

ATTACHMENTS
EXHIBIT A - STOCK OPTION AGREEMENT

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                                                                       EXHIBIT A
                           RESTORATION HARDWARE, INC.
                             STOCK OPTION AGREEMENT

RECITALS

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

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

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

               NOW, THEREFORE, it is hereby agreed as follows:

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

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

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

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

<PAGE>

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

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

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

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

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

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

               6. SPECIAL ACCELERATION OF OPTION.

                      (a) Change in Control.

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

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<PAGE>

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

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

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

                      (b) Termination of Service Not for Cause.

                             (i) In the event the Optionee's Service is
terminated by the Corporation Not for Cause, this option automatically shall
become vested and exercisable for the Option Shares at the time represented by
this Option which would have vested within one (1) year measured from the
termination of the Optionee's Service.

                      (c) Involuntary Termination of Service. If a Change in
Control materially affects the Optionee's employment, responsibilities or
compensation such that Optionee's Service is terminated by reason of:

                             (i) Optionee's involuntary dismissal or discharge
by the Corporation for reasons other than Misconduct; or

                             (ii) Optionee's voluntary resignation following (A)
a change in Optionee's position with the Corporation which materially reduces
Optionee's duties and responsibilities or the level of management to which
Optionee reports, (B) a reduction in Optionee's level of compensation (including
base salary, fringe benefits and target bonus under any corporate-performance
based bonus or incentive programs), or (C) a relocation of such Optionee's place
of employment by more than fifty (50) miles, provided and only if such change,
reduction or relocation is effected by the Corporation without Optionee's
consent,

                                       3
<PAGE>

this option automatically shall become vested and exercisable for the Option
Shares at the time represented by this option which would have vested within one
(1) year measured from the termination of the Optionee's Service.

                      (d) This option may also be subject to acceleration in
accordance with the terms of any special addendum attached to this Agreement.

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

               7. ADJUSTMENT IN OPTION SHARES.

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

               8. STOCKHOLDER RIGHTS. The holder of this option shall not have
any stockholder rights with respect to the Option Shares until such person shall
have exercised the option, paid the Exercise Price and become a holder of record
of the purchased shares.

               9. MANNER OF EXERCISING OPTION.

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

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

                             (ii) Pay the aggregate Exercise Price for the
purchased shares in one or more of the following forms:

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

                                    (B) A promissory note payable to the
Corporation, but only to the extent authorized by the Plan Administrator in
accordance with Paragraph 13 below; or

                                    (C) Shares of Common Stock held by Optionee
(or any other person or persons exercising the option) for the requisite period
necessary to

                                       4
<PAGE>

avoid a charge to the Corporation's earnings for financial reporting purposes
and valued at their Fair Market Value on the Exercise Date; or

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

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

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

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

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

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

               10. COMPLIANCE WITH LAWS AND REGULATIONS.

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

                      (b) The inability of the Corporation to obtain approval
from any regulatory body having authority deemed by the Corporation to be
necessary to the lawful issuance and sale of any Common Stock pursuant to this
option shall relieve the Corporation of any liability with respect to the
non-issuance or sale of Common Stock as

                                       5
<PAGE>

to which such approval shall not have been obtained. The Corporation, however,
shall use its best efforts to obtain all such approvals.

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

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

               13. FINANCING. The Plan Administrator may, in its absolute
discretion and without any obligation to do so, permit Optionee to pay the
Exercise Price for the purchased Option Shares by delivering a full-recourse
promissory note payable to the Corporation, provided the Corporation is not
otherwise prohibited by law from accepting such promissory note from Optionee.
The terms of any such promissory note (including the interest rate, the
requirements for collateral and the terms of repayment) shall be established by
the Plan Administrator in its sole discretion.

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

               15. GOVERNING LAW. The interpretation, performance and
enforcement of this Agreement shall be governed by the laws of the State of
California without resort to that State's conflict-of-laws rules.

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

                                       6
<PAGE>

                                    EXHIBIT I
                               NOTICE OF EXERCISE

               I hereby notify Restoration Hardware, Inc. (the "Corporation")
that I elect to purchase ____________ shares of the Corporation's common stock
(the "Purchased Shares") at the option exercise price of $7.95 per share (the
"Exercise Price") pursuant to that certain option (the "Option") granted to me
on July 10, 2002 under the Corporation's 1998 Stock Incentive Plan Amended and
Restated on May 16, 2001.

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

_____________________, 20__
Date

                                    --------------------------------------------
                                    Optionee

                                    Address:
                                             -----------------------------------

                                    --------------------------------------------

Print name in exact manner
it is to appear on the
stock certificate:
                                    --------------------------------------------

Address to which certificate
is to be sent, if different
from address above:
                                    --------------------------------------------

                                    --------------------------------------------
Social Security Number:
                                    --------------------------------------------
Employee Number:
                                    --------------------------------------------

<PAGE>

                                    APPENDIX

               The following definitions shall be in effect under the Agreement:

               A. AGREEMENT shall mean this Stock Option Agreement.

               B. BOARD shall mean the Corporation's Board of Directors.

               C. CAUSE shall mean (i) there is a serious failure by Optionee to
follow a specific, lawful direction or order of the Board; (ii) there is a
serious neglect of duty by Optionee; (iii) Optionee exhibits persistent
deficiencies in performance or gross incompetence; (iv) Optionee is convicted
of, or pleads guilty or "no contest" to, a felony involving dishonesty,
intentional misconduct or breach of trust or moral turpitude; (v) Optionee dies;
(vi) Optionee is involved in fraud, misappropriation of trade secrets or
embezzlement related to the business or property of the Corporation (or any
Parent or Subsidiary); (vii) Optionee commits a material and serious act of
dishonesty or misconduct that is incompatible with service to the Corporation
(or any Parent or Subsidiary) or which causes discredit or would reasonably tend
to cause discredit to fall upon the Corporation (or any Parent or Subsidiary) or
any of its affiliates; or (viii) Optionee breaches any material term of the
Offer Letter dated June 26, 2001 and signed by Optionee.

               D. CHANGE IN CONTROL shall mean a change in ownership or control
of the Corporation effected through any of the following transactions:

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

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

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

                      (iv) A change in the composition of the Board over a
period of thirty-six (36) consecutive months or less such that a majority of the
Board members ceases, by reason of one or more contested elections for Board
membership, to be comprised of individuals who either (A) have been Board
members continuously since the beginning of such period or (B) have been elected
or nominated for election as Board

                                      A-1
<PAGE>

members during such period by at least a majority of the Board members described
in clause (A) who were still in office at the time the Board approved such
election or nomination.

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

               F. COMMON STOCK shall mean shares of the Corporation's common
stock.

               G. CORPORATION shall mean Restoration Hardware, Inc., a Delaware
corporation.

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

               I. EXERCISE DATE shall mean the date on which the option shall
have been exercised in accordance with Paragraph 9 of the Agreement.

               J. EXERCISE PRICE shall mean the exercise price per Option Share
as specified in the Grant Notice.

               K. EXPIRATION DATE shall mean the date on which the option
expires as specified in the Grant Notice.

               L. FAIR MARKET VALUE per share of Common Stock on any relevant
date shall be determined in accordance with the following provisions:

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

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

                                      A-2
<PAGE>

               M. GRANT DATE shall mean the date of grant of the option as
specified in the Grant Notice.

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

               O. MISCONDUCT shall mean the commission of any act of fraud,
embezzlement or dishonesty by Optionee, any unauthorized use or disclosure by
Optionee of confidential information or trade secrets of the Corporation (or any
Parent or Subsidiary), or any other intentional misconduct by Optionee adversely
affecting the business or affairs of the Corporation (or any Parent or
Subsidiary) in a material manner. The foregoing definition shall not be deemed
to be inclusive of all the acts or omissions which the Corporation (or any
Parent or Subsidiary) may consider as grounds for the dismissal or discharge of
Optionee or any other individual in the Service of the Corporation (or any
Parent or Subsidiary).

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

               Q. NON-STATUTORY OPTION shall mean an option not intended to
satisfy the requirements of Section 422 of the Code.

               R. NOT FOR CAUSE shall mean termination of Optionee's Service by
the Company for any reason other than Cause.

               S. NOTICE OF EXERCISE shall mean the notice of exercise in the
form attached hereto as Exhibit I.

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

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

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

               W. PERMANENT DISABILITY shall mean the inability of Optionee to
engage in any substantial gainful activity by reason of any medically
determinable physical or mental impairment which is expected to result in death
or has lasted or can be expected to last for a continuous period of twelve (12)
months or more.

                                      A-3
<PAGE>

               X. PLAN shall mean the Corporation's 1998 Stock Incentive Plan
Amended and Restated on May 16, 2001.

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

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

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

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

                                      A-4

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