Bed Bath & Beyond (BBBY)

Review of Equity Grants and Procedures and Related Matters

In June 2006, the Company’s Board of Directors appointed a special committee of independent directors with authority, among other things, to conduct an investigation with respect to the setting of exercise prices for employee stock options and related matters. The review identified various deficiencies in the process of granting and documenting stock options and restricted shares. As a result of the deficiencies, the Company revised the measurement dates for various option grants. Counsel to the special committee notified the SEC of the review. Following such self-reporting, the SEC Staff commenced an informal inquiry and the United States Attorney’s office for the District of New Jersey commenced an inquiry regarding these matters. During fiscal 2007, the United States Attorney’s Office for the District of New Jersey concluded its inquiry and indicated it will take no further action related to this matter. During the fiscal first quarter of 2009, the SEC Division of Enforcement informed the Company that it concluded its inquiry and was recommending that no enforcement action be taken with respect to this matter.

The Company’s past stock option granting procedures have exposed the Company to risk factors that could have a material adverse affect on the Company’s business and financial condition, including any tax implications relating to the Company’s stock option grants.

Review of Equity Grants and Procedures and Related Matters

In June 2006, the Company’s Board of Directors appointed a special committee of independent directors with authority, among other things, to conduct an investigation with respect to the setting of exercise prices for employee stock options and related matters. The review identified various deficiencies in the process of granting and documenting stock options and restricted shares. As a result of the deficiencies, the Company revised the measurement dates for various option grants. Counsel to the special committee notified the SEC of the review. Following such self-reporting, the SEC Staff commenced an informal inquiry and the United States Attorney’s office for the District of New Jersey commenced an inquiry regarding these matters. During fiscal 2007, the United States Attorney’s Office for the District of New Jersey concluded its inquiry and indicated it will take no further action related to this matter. During the fiscal first quarter of 2009, the SEC Division of Enforcement informed the Company that it concluded its inquiry and was recommending that no enforcement action be taken with respect to this matter.

The Company’s past stock option granting procedures have exposed the Company to risk factors that could have a material adverse affect on the Company’s business and financial condition, including any tax implications relating to the Company’s stock option grants.

Review of Equity Grants and Procedures and Related Matters

In June 2006, the Company’s Board of Directors appointed a special committee of independent directors with authority, among other things, to conduct an investigation with respect to the setting of exercise prices for employee stock options and related matters. The review identified various deficiencies in the process of granting and documenting stock options and restricted shares. As a result of the deficiencies, the Company revised the measurement dates for various option grants. Counsel to the special committee notified the SEC of the review. Following such self-reporting, the SEC Staff commenced an informal inquiry and the United States Attorney’s Office for the District of New Jersey commenced an inquiry regarding these matters. During fiscal 2007, the United States Attorney’s Office for the District of New Jersey concluded its inquiry and indicated it will take no further action related to this matter. The Company continues to cooperate with the SEC in conjunction with its inquiry.

The Company’s past stock option granting process has exposed the Company to risk factors that could have a material adverse affect on the Company’s business and financial condition, including the outcome of the informal inquiry commenced by the SEC; the possibility that the SEC may not agree with all of the special committee’s findings and recommendations as set forth in the Company’s Form 8-K filed October 10, 2006, and may require additional or different remediation; any other proceedings which may be brought against the Company by the SEC or other governmental agencies; any tax implications relating to the Company’s stock option grants; the outcome of a shareholder derivative action filed against certain of the Company’s officers and directors and related matters; and the possibility of other private litigation relating to such stock option grants and related matters.

As described in a Form 8-K dated October 10, 2006, in June 2006, the Company’s Board of Directors appointed a special committee of independent directors to carry out a review with respect to the setting of exercise prices for employee stock options and related matters. The review identified various deficiencies in the process of granting and documenting stock options and restricted shares, as a result of which the measurement dates for various grants were revised. As a consequence, as described in the Company’s Annual Report on Form 10-K for the fiscal year ended March 3, 2007 (“2006 Form 10-K”), the Company (i) recorded an adjustment for unrecorded expense over the affected period (fiscal year 1993 through 2005) of $61.8 million, and pursuant to Staff Accounting Bulletin (“SAB”) No. 108, “Considering the Effects of Prior Year Misstatements in Current Year Financial Statements,” decreased beginning retained earnings for fiscal 2006 by such amount, and (ii) recorded $8.2 million of expense for fiscal 2006. As described in a Form 8-K dated December 28, 2006 and the Company’s 2006 Form 10-K, the Company’s Board of Directors also approved during fiscal 2006 a remediation program intended to protect over 1,600 employees from certain potential adverse tax consequences arising under Section 409A of the Internal Revenue Code. No executive officers received any payments under such remediation program. The Company continues to cooperate with the inquiry of the SEC regarding the Company’s stock option grant practices.

The United States Attorney’s Office for the District of New Jersey has concluded its inquiry with respect to matters arising out of and related to the Company’s historical stock option grants and procedures and related matters and has indicated it will take no further action related to this matter.

As described in a Form 8-K dated October 10, 2006, in June 2006, the Company’s Board of Directors appointed a special committee of independent directors to carry out a review with respect to the setting of exercise prices for employee stock options and related matters. The review identified various deficiencies in the process of granting and documenting stock options and restricted shares, as a result of which the measurement dates for various grants were revised. As a consequence, as described in the Company’s 2006 Form 10-K, the Company (i) recorded an adjustment for unrecorded expense over the affected period (fiscal year 1993 through 2005) of $61.8 million, and pursuant to Staff Accounting Bulletin (“SAB”) No. 108, “Considering the Effects of Prior Year Misstatements in Current Year Financial Statements,” decreased beginning retained earnings for fiscal 2006 by such amount, and (ii) recorded $8.2 million of expense for fiscal 2006. As described in a Form 8-K dated December 28, 2006 and the Company’s 2006 Form 10-K, the Company’s Board of Directors also approved during fiscal 2006 a remediation program intended to protect over 1,600 employees from certain potential adverse tax consequences arising under Section 409A of the Internal Revenue Code. No executive officers received any payments under such remediation program. The Company continues to cooperate with the inquiries of the SEC and United States Attorney’s office for the District of New Jersey regarding the Company’s stock option grant practices.

As described in a Form 8-K dated October 10, 2006, in June 2006, the Company’s Board of Directors appointed a special committee of independent directors to carry out a review with respect to the setting of exercise prices for employee stock options and  related matters.  The review identified various deficiencies in the process of granting and

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documenting stock options and restricted shares, as a result of which the measurement dates for various grants were revised.  As a consequence, as described in the Company’s Form 10-K for fiscal 2006, the Company (i) recorded an adjustment for unrecorded expense over the affected period (fiscal year 1993 through 2005) of $61.8 million, and pursuant to Staff Accounting Bulletin (“SAB”) No. 108, “Considering the Effects of Prior Year Misstatements in Current Year Financial Statements,” decreased beginning retained earnings for fiscal 2006 by such amount, and (ii) recorded $8.2 million of expense for fiscal 2006.  As described in a Form 8-K dated December 28, 2006 and the Company’s 2006 Form 10-K, the Company’s  Board of Directors also approved during fiscal 2006 a remediation program intended to protect over 1,600 employees from certain potential adverse tax consequences arising under Section 409A of the Internal Revenue Code.  No executive officers received any payments under such remediation program.  The Company continues to cooperate with the inquiries of the SEC and United States Attorney’s office for the District of New Jersey regarding the Company’s stock option grant practices.

In June 2006, the Company’s Board of Directors appointed a special committee of two independent members of the Board of Directors, with authority, among other things, to conduct an investigation with respect to the setting of exercise prices for employee stock options and related matters as the special committee deemed appropriate. The special committee retained independent legal counsel who engaged outside accounting advisors to assist with the review. This review was completed and on October 9, 2006, the special committee presented its report to the Company’s Board of Directors.

The review identified various deficiencies in the process of granting and documenting stock options and restricted shares. As a result of these deficiencies, the special committee recommended, among other things, revised

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measurement dates for certain stock option grants.  The exercise price for most of these stock option grants was less than the fair market value of the Company’s common stock on the revised measurement date.

As a result of these revised measurement dates, and the correction of various other errors, the Company has determined that it had certain unrecorded non-cash equity-based compensation charges related to fiscal years prior to 2006.  (See “Staff Accounting Bulletin No. 108, Considering the Effects of Prior Year Misstatements When Quantifying Misstatements in Current Year Financial Statements,” Note 2).

The Company’s Board of Directors also approved a remediation program intended to protect over 1,600 employees from certain potential adverse tax consequences. These adverse tax consequences arise pursuant to Internal Revenue Code Section 409A as a result of historical deficiencies associated with certain of the Company’s stock option grants that were disclosed through the Company’s stock option review. As a result of this program, the Company made cash payments totaling approximately $30.0 million to over 1,600 employees in the fourth quarter of fiscal 2006, which resulted in a non-recurring, pre-tax stock-based compensation charge.   The cash outlay primarily represents payments to employees in connection with increasing the exercise prices on certain stock option grants so as to protect them from certain potential adverse tax consequences.  No executive officer received such payments. The Company believes it is likely the Company will recoup a substantial portion of the anticipated cash outlay over the next several years through higher proceeds from future stock option exercises, although this recovery would not flow through the income statement.

The Company continues to cooperate with the informal inquiry of the SEC regarding the Company’s stock option grant practices.  In addition, the Company is also cooperating with the United States Attorney’s office for the District of New Jersey in connection with its inquiry into such matters.

Incentive Compensation Plans

During fiscal 2004, in anticipation of adopting SFAS No. 123R, the Company revised its overall approach to compensation for its employees, including stock-based compensation, and adopted the Bed Bath & Beyond 2004 Incentive Compensation Plan (the “2004 Plan”). The 2004 Plan is a flexible compensation plan that enables the Company to offer incentive compensation through stock options, stock appreciation rights, restricted stock awards and performance awards, including cash awards. As a result, during fiscal 2006 and fiscal 2005, awards consisting of a combination of stock options and performance-based restricted stock were granted to executive officers and other executives and awards consisting of restricted stock were granted to the Company’s other employees who traditionally have received stock options. Awards of stock options and restricted stock generally vest in five equal annual installments beginning one to three years from the date of grant.

Prior to fiscal 2004, the Company had adopted various stock option plans (the “Prior Plans”), all of which solely provided for the granting of stock options. Upon adoption of the 2004 Plan, the common stock available under the Prior Plans became available for issuance under the 2004 Plan. No further option grants may be made under the Prior Plans, although outstanding awards under the Prior Plans will continue to be in effect.

Under the 2004 Plan and the Prior Plans, an aggregate of 83.4 million shares of common stock were authorized for issuance. The Company generally issues new shares for stock option exercises and restricted stock awards. Under the 2004 Plan, grants are determined by the Compensation Committee for those awards granted to executive officers and by an appropriate committee for all other awards granted.

As of March 3, 2007, unrecognized compensation expense related to the unvested portion of the Company’s stock options and restricted stock awards, based on the Company’s historical treatment of options and awards as having been granted at fair market value, was $71.9 million and $56.2 million, respectively, which is expected to be recognized over a weighted average period of 3.1 years and 4.9 years, respectively (however, see “Review of Equity Grants and Procedures and Related Matters” for a discussion of a special committee review of equity grant matters which resulted in, among other things, the use of revised measurement dates for certain grants).

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On June 19, 2006, the Company’s Board of Directors appointed a special committee of two independent members of the Board of Directors, with authority, among other things, to conduct an investigation with respect to the setting of exercise prices for employee stock options and related matters as the special committee deemed appropriate. The special committee retained independent legal counsel who engaged outside accounting advisors to assist with the review. This review was completed and on October 9, 2006, the special committee presented its report to the Company’s Board of Directors.

The review identified various deficiencies in the process of granting and documenting stock options and restricted shares. As a result of the deficiencies, the special committee recommended, among other things, that the Company revise the measurement dates under Accounting Principles Board Opinion (“APB”) No. 25, “Accounting for Stock Issued to Employees,” for 16 annual option grant dates, 26 monthly grant dates and 2 special grant dates (revisions of  2 annual, 4 monthly and 1 special grant dates have no accounting impact because prices on the revised dates were lower than on the measurement dates previously recorded by the Company). As a result of these new measurement dates and the correction of various other errors relating to the accounting for equity-based compensation, the Company has determined that from fiscal year 1993 through the second quarter of fiscal 2006, it had certain unrecorded non-cash equity-based compensation charges associated with its equity-based compensation plans. The Company believes, however, that the charges from fiscal 1993 through fiscal 2005 are not material to its financial statements in any of the periods to which such charges would have related and therefore, has not recorded such charges and will not revise its historic financial statements.

The Company will, however, in accordance with the transition provisions of Staff Accounting Bulletin (“SAB”) No. 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in the Current Year Financial Statements,” record a reclassification, within the equity section of the consolidated balance sheet to be included in its Form 10-K for the fiscal year ending March 3, 2007, of approximately $65 million, excluding any related tax effect.  This reclassification represents the effect of the adjustment resulting from the non-cash charges discussed above that relate to fiscal 2005 and prior years.  The Company recorded a year-to-date non-cash selling, general and administrative expense charge in its consolidated statement of earnings of approximately $7.2 million in fiscal third quarter. This approximately $7.2 million pre-tax charge represents the total of the first and second quarter charges related to the impact of the revised measurement dates (and the correction of various other immaterial errors referred to above), and the applicable charge for the third quarter. The Company is reviewing any potential corporate tax implications relating to the Company’s stock option grants and restricted share awards, but believes that such matters will not have a material impact on the Company’s financial position.

The Company filed a Form 8-K dated October 10, 2006, which provides further details regarding the special committee’s review.

In addition, on December 21, 2006, subsequent to the end of the fiscal third quarter, the Company’s Board of Directors approved a program intended to protect over 1,600 employees from certain

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potential adverse tax consequences. These adverse tax consequences arise pursuant to Internal Revenue Code Section 409A as a result of historical deficiencies associated with some of the Company’s stock option grants that were disclosed through the Company’s stock option review. The Company anticipates it will incur a non-recurring charge in the fourth quarter of fiscal 2006 related to this program. The Company anticipates the cash payments pursuant to the program to be approximately $40 million. While the Company is currently reviewing the accounting treatment related to the program, the Company anticipates the pre-tax income statement impact in the fourth quarter to be slightly more than the cash payments, with any difference between the cash payments and the associated pre-tax expense to be recorded as an adjustment to Additional Paid-In Capital in the Shareholders’ Equity section of the Company’s Balance Sheet.  The cash outlay primarily represents payments to employees in connection with increasing the exercise prices on certain stock option grants so as to protect them from certain potential adverse tax consequences.  The Company believes it is likely the Company will recoup a substantial portion of the anticipated cash outlay over the next several years through higher proceeds from future stock option exercises, although this recovery would not flow through the income statement.

The Company also filed a Form 8-K dated December 28, 2006 which provides further details regarding the program.

The Company continues to cooperate fully with the informal inquiry of the SEC regarding the Company’s stock option grant practices.  In addition, the Company is also cooperating fully with the United States Attorney’s office for the District of New Jersey in connection with its inquiry into such matters.

Derivative actions have been filed naming several officers and directors of the Company; see “Part II-Item 1.Legal Proceedings” for further information.

 Results of Operations