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  • Form 4 (Oct 7, 2014)
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  • SC 13D (Aug 4, 2014)
PETsMART DEF 14A 2007

SCHEDULE 14A

(Rule 14a-101)

INFORMATION REQUIRED IN PROXY STATEMENT

SCHEDULE 14A INFORMATION

Proxy Statement Pursuant to Section 14(a) of the
Securities Exchange Act of 1934 (Amendment No. )

Filed by the Registrant [x]
Filed by a Party other than the Registrant [_]

Check the appropriate box:
[_]  Preliminary Proxy Statement                  [_] Soliciting Material Under Rule
[_]  Confidential, For Use of the                        14a-12
       Commission Only (as permitted
       by Rule 14a-6(e)(2))
[x]  Definitive Proxy Statement
[_]  Definitive Additional Materials

PETSMART, INC.
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(Name of Registrant as Specified In Its Charter)

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(Name of Person(s) Filing Proxy Statement, if Other Than the Registrant)

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____________________________________________________________________________________
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____________________________________________________________________________________
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____________________________________________________________________________________
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____________________________________________________________________________________
      4) Date Filed:


 
19601 North 27th Avenue
Phoenix, Arizona 85027
______________________

NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON JUNE 20, 2007
______________________

TO THE STOCKHOLDERS OF PETSMART, INC.:

     NOTICE IS HEREBY GIVEN that the Annual Meeting of Stockholders of PetSmart, Inc., a Delaware corporation, will be held on Wednesday, June 20, 2007, at 10:00 A.M. local time, at The Westin O’Hare, 6100 North River Road, Chicago, Illinois 60018, for the following purposes:

      1.       To elect three Directors to hold office until the 2010 Annual Meeting of Stockholders;
 
2. To ratify the appointment of Deloitte & Touche LLP as our independent registered public accounting firm, for our fiscal year 2007, ending February 3, 2008;
 
3. To approve the continuation of the PetSmart, Inc. Executive Short Term Incentive Plan; and
 
4. To transact such other business as may properly come before the meeting or any adjournment or postponement thereof.

     The foregoing items of business are more fully described in the Proxy Statement accompanying this Notice.

     The Board of Directors has fixed the close of business on April 23, 2007, as the record date for the determination of stockholders entitled to notice of and to vote on the items listed above at this Annual Meeting and at any adjournment or postponement thereof.

By Order of the Board of Directors 

Scott A. Crozier

Secretary

May 7, 2007

     YOUR VOTE IS IMPORTANT. PLEASE FOLLOW THE INSTRUCTIONS ON THE ENCLOSED PROXY CARD FOR VOTING BY INTERNET OR BY TELEPHONE, WHETHER OR NOT YOU PLAN TO ATTEND THE MEETING IN PERSON; OR, IF YOU PREFER, KINDLY MARK, SIGN, AND DATE THE ENCLOSED PROXY CARD AND RETURN IT PROMPTLY IN THE ENCLOSED ENVELOPE (WHICH IS POSTAGE PREPAID, IF MAILED IN THE UNITED STATES). EVEN IF YOU HAVE GIVEN YOUR PROXY, YOU MAY STILL REVOKE YOUR PROXY AND VOTE IN PERSON IF YOU ATTEND THE MEETING. PLEASE NOTE, HOWEVER, THAT IF YOUR SHARES OF RECORD ARE HELD BY A BROKER, BANK, OR OTHER NOMINEE AND YOU WISH TO VOTE AT THE MEETING, YOU MUST OBTAIN FROM THE RECORD HOLDER A PROXY ISSUED IN YOUR NAME.


CONTENTS
________________________________

I. PROXY MATERIALS AND ANNUAL MEETING
  A. Questions and Answers About the Proxy Materials and the Annual Meeting
    1. General — Why am I receiving these materials?
    2.       Date, Time, and Place — When and where is the Annual Meeting of Stockholders?
    3. Purpose — What is the purpose of the Annual Meeting of Stockholders?
    4. Attending the Annual Meeting — How can I attend the Annual Meeting?
    5. Multiple Sets of Proxy Materials — What should I do if I receive more than one set of voting materials?
    6. Householding and Electronic Distribution — How can I receive my proxy materials electronically?
    7. Record Holder and Beneficial Owner — What is the difference between holding shares as a Record Holder versus a Beneficial Owner?
    8. Voting — Who can vote and how do I vote?
    9. Revocation of Proxy — May I change my vote after I return my proxy?
    10. Quorum — What constitutes a quorum?
    11. Voting Results — Where can I find the voting results of the Annual Meeting?
    12. Solicitation — Who will pay the costs of soliciting these proxies?
    13. Additional Matters at the Annual Meeting — What happens if additional matters are presented at the Annual Meeting?
    14. Stockholder Proposals — What is the deadline to propose actions for consideration at next year’s Annual Meeting of Stockholders, or to nominate individuals to serve as Directors?
    15. Nomination of Directors — How do I submit a proposed Director nominee to the Board of Directors for consideration?
II.       CORPORATE GOVERNANCE AND THE BOARD OF DIRECTORS
  A.       Corporate Governance
  B. Proposal One — Election of Directors
  C. Information about our Board of Directors
  D. Director Compensation
III. INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM AND AUDIT COMMITTEE
  A. Proposal Two — Ratification of Appointment of Independent Registered Public Accounting Firm
  B. Fees to Independent Registered Public Accounting Firm for Fiscal Years 2006 and 2005
  C. Audit Committee
  D. Report of the Audit Committee of the Board of Directors
IV. COMPENSATION DISCUSSION AND ANALYSIS AND COMPENSATION COMMITTEE REPORT
  A. Proposal Three — Approval of the Continuation of the PetSmart, Inc. Executive Short Term Incentive Plan
  B. Report of the Compensation Committee of the Board of Directors
  C. Compensation Discussion and Analysis
  D. Summary Compensation
  E. Stock Award Grants, Exercises, and Plans
  F. Employment and Severance Arrangements
V. STOCK
  A. Security Ownership of Certain Beneficial Owners and Management
  B. Section 16(a) Beneficial Ownership Reporting Compliance
VI. CERTAIN RELATIONSHIPS AND TRANSACTIONS
VII. OTHER MATTERS


 
19601 North 27th Avenue
Phoenix, Arizona 85027
_______________________

PROXY STATEMENT
FOR ANNUAL MEETING OF STOCKHOLDERS
JUNE 20, 2007
_______________________

ARTICLE I. PROXY MATERIALS AND ANNUAL MEETING

QUESTIONS AND ANSWERS ABOUT THE PROXY MATERIALS AND THE ANNUAL MEETING

1.       Q:   General — Why am I receiving these materials? 
 
  A:       On or about May 7, 2007, we sent the Notice of Annual Meeting of Stockholders, Proxy Statement, and Proxy Card to you, and to all stockholders of record as of the close of business on April 23, 2007, because the Board of Directors of PetSmart, Inc., is soliciting your proxy to vote at the 2007 Annual Meeting of Stockholders. Also enclosed is our 2006 Annual Report.
 
2. Q: Date, Time, and Place — When and where is the Annual Meeting of Stockholders?
 
  A: The Annual Meeting of Stockholders will be held on Wednesday, June 20, 2007, at 10:00 A.M. local time, at The Westin O’Hare, 6100 North River Road, Chicago, Illinois 60018.
 
3. Q: Purpose — What is the purpose of the Annual Meeting of Stockholders?
 
  A: At our Annual Meeting, stockholders will act upon the matters outlined in this Proxy Statement and in the Notice of Annual Meeting on the cover page of this Proxy Statement, including the election of Directors, ratification of our independent registered public accounting firm and approval of the continuation of our Executive Short Term Incentive Plan. The Annual Meeting will be followed by a management presentation on our performance, and management will respond, if applicable, to questions from stockholders.
 
4. Q: Attending the Annual Meeting — How can I attend the Annual Meeting?
 
  A: You will be admitted to the Annual Meeting if you were a PetSmart stockholder or joint holder as of the close of business on April 23, 2007, or you hold a valid proxy for the Annual Meeting. You should be prepared to present photo identification for admittance. In addition, if you are a stockholder of record, your name will be verified against the list of stockholders of record prior to admittance to the Annual Meeting. If you are not a stockholder of record but hold shares through a broker, trustee, or nominee, you should provide proof of beneficial ownership on the record date, such as your most recent account statement prior to April 23, 2007, a copy of the voting instruction card provided by your broker, trustee, or nominee, or other similar evidence of ownership. If a stockholder is an entity and not a natural person a maximum of two representatives per such stockholder will be admitted to the Annual Meeting. Such representatives must comply with the procedures outlined above and must also present evidence of authority to represent such entity. If a stockholder is a natural person and not an entity, such stockholder and his/her immediate family members will be admitted to the Annual Meeting, provided they comply with the above procedures. In order to be admitted to the Annual Meeting, all attendees must provide photo identification and comply with the other procedures outlined above upon request.
  
5. Q: Multiple Sets of Proxy Materials — What should I do if I receive more than one set of voting materials?
 
  A: You may receive more than one set of voting materials, including multiple copies of this Proxy Statement and multiple Proxy Cards or voting instruction cards. For example, if you hold your shares in more than one brokerage account, you may receive a separate voting instruction card for each brokerage account. If you are a stockholder of record and your shares are registered in more than one name, you will receive more than one Proxy Card. Please vote each Proxy Card and voting instruction card that you receive.



6.       Q: Householding and Electronic Distribution — How can I receive my proxy materials electronically?
 
  A:       If you received your Annual Meeting materials by United States mail, we encourage you to conserve natural resources, and significantly reduce printing and mailing costs by signing up to receive your PetSmart stockholder communications electronically. With electronic delivery, you will be notified via e-mail of the availability of the Annual Report and Proxy Statement on the Internet, and you can easily vote online. Electronic delivery can also help reduce the number of bulky documents in your personal files and eliminate duplicate mailings. To enroll for electronic delivery, visit www.petm.com and click on the link “Reduce Paper.” 
 
The Securities and Exchange Commission, or SEC, has adopted rules that permit companies and intermediaries, such as brokers, to satisfy the delivery requirements for Proxy Statements with respect to two or more stockholders sharing the same address by delivering a copy of these materials, other than the Proxy Card, to those stockholders. This process, which is commonly referred to as “householding,” can mean extra convenience for stockholders and cost savings for PetSmart. Beneficial Owners can request information about householding from their banks, brokers, or other holders of record. Through householding, stockholders of record who have the same address and last name will receive only one copy of our Proxy Statement and Annual Report, unless one or more of these stockholders notifies us that they wish to continue receiving individual copies. This procedure will reduce printing costs and postage fees.
 
    Stockholders who participate in householding will continue to receive separate Proxy Cards. If you are eligible for householding, but you and other stockholders of record with whom you share an address currently receive multiple copies of Proxy Statements and Annual Reports, or if you hold stock in more than one account and wish to receive only a single copy of the Proxy Statement or Annual Report for your household, please contact ADP Householding Department, in writing, at 51 Mercedes Way, Edgewood, New York 11717, or by phone at (800) 542-1061. If, at any time, you no longer wish to participate in householding and would prefer to receive a separate Proxy Statement and Annual Report, please notify your broker if you are a Beneficial Owner. Record Holders may also direct their written requests to PetSmart, Inc., 19601 North 27th Avenue, Phoenix, Arizona 85027, Attention: Corporate Secretary, or by phone at (623) 587-2025.
 
7. Q: Record Holders and Beneficial Owners — What is the difference between holding shares as a Record Holder versus a Beneficial Owner?
 
  A: Most PetSmart stockholders hold their shares through a broker or other nominee rather than directly in their own name. There are some distinctions between shares held of record and those owned beneficially:
 
Record Holders — If your shares are registered directly in your name with our Transfer Agent, Wells Fargo Shareowner Services, you are considered, with respect to those shares, the stockholder of record or Record Holder. As the stockholder of record, you have the right to grant your voting proxy directly to PetSmart or to vote in person at the Annual Meeting. We have enclosed or sent a Proxy Card for you to use.
 
    Beneficial Owner — If your shares are held in a brokerage account or by another nominee, you are considered the Beneficial Owner of shares held in street name, and these proxy materials are being forwarded to you automatically, along with a voting instruction card from your broker, trustee, or nominee. As a Beneficial Owner, you have the right to direct your broker, trustee, or nominee how to vote and are also invited to attend the Annual Meeting. Since a Beneficial Owner is not the stockholder of record, you may not vote these shares in person at the meeting unless you obtain a “legal proxy” from the broker, trustee, or nominee that holds your shares, giving you the right to vote the shares at the meeting. Your broker, trustee, or nominee has enclosed or provided voting instructions for you to use in directing how to vote your shares. If you do not give instructions to your broker, your broker can vote your shares with respect to “discretionary” items, but not with respect to “non-discretionary” items. Discretionary items are proposals considered routine under the rules of the New York Stock Exchange, or NYSE, on which your broker may vote shares held in street name in the absence of your voting instructions. On non-discretionary items for which you do not give your broker instructions, the shares will be treated as broker non-votes.

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8.  Q: Voting — Who can vote and how do I vote?
 
  A: Only holders of our Common Stock at the close of business on April 23, 2007, will be entitled to notice of and to vote at the Annual Meeting. At the close of business on April 23, 2007, we had outstanding and entitled to vote 135,973,770 shares of Common Stock. Each holder of our Common Stock on such date will be entitled to one vote for each share held on all matters to be voted upon at the Annual Meeting.
 
    To ensure that your vote is recorded promptly, please vote as soon as possible, even if you plan to attend the Annual Meeting in person. Most stockholders have four options for submitting their votes:
 
    ·     via the Internet;
    · by phone;
    · by mail, using the paper Proxy Card; or
    · in person at the Annual Meeting with a Proxy Card/legal proxy.
 
    If you have Internet access, we encourage you to record your vote on the Internet at www.proxyvote.com. It is convenient for you and it saves PetSmart significant postage and processing costs. In addition, when you vote via the Internet or by phone prior to the date of our Annual Meeting, your vote is recorded immediately and there is no risk that postal delays will cause your vote to arrive late and, therefore, not be counted. For further instructions on voting, see your Proxy Card or, if applicable, the e-mail you received for electronic delivery of this Proxy Statement. If you attend the Annual Meeting, you may also submit your vote in person, and any previous votes that you submitted, whether by Internet, phone, or mail, will be superceded by the vote that you cast at the Annual Meeting. Please note, however, that if your shares are held of record by a broker, bank, or other nominee and you wish to vote at the Annual Meeting, you must obtain from the Record Holder a legal proxy issued in your name.
 
9. Q: Revocation of Proxy — May I change my vote after I return my proxy?
 
  A: Yes. Even after you have submitted your proxy/vote, you may revoke or change your vote at any time before the proxy is exercised by: the timely delivery of a valid, later-dated proxy, later-dated vote by telephone, or a later-dated vote via the Internet; timely written notice of revocation with our Corporate Secretary at our principal executive office at 19601 North 27th Avenue, Phoenix, Arizona 85027; or by attending the Annual Meeting and voting in person. Attendance at the Annual Meeting will not, by itself, revoke a proxy.
 
10. Q: Quorum — What constitutes a quorum?   
 
  A: Presence at the Annual Meeting, in person or by proxy, of the holders of a majority of the Common Stock outstanding on April 23, 2007, will constitute a quorum, permitting the Annual Meeting to proceed and business to be conducted. As of April 23, 2007, 135,973,770 shares of Common Stock, representing the same number of votes, were outstanding. Thus, the presence of the holders of Common Stock representing at least 67,986,886 votes will be required to establish a quorum. Proxies received but marked as abstentions will be included in the calculation of the number of votes considered to be present at the meeting.
 
11. Q: Voting Results — Where can I find the voting results of the Annual Meeting?
 
  A: We intend to announce preliminary voting results at the Annual Meeting and in the Annual Meeting section of the PetSmart website located at www.petm.com. We will publish final results in our Form 10-Q Quarterly Report for the second quarter of fiscal year 2007.
 
12.       Q: Solicitation — Who will pay the costs of soliciting these proxies?
 
  A:       We will bear the entire cost of solicitation of proxies, including preparation, assembly, printing, and mailing of this Proxy Statement, the Proxy Card, and any additional information furnished to stockholders. Copies of solicitation materials will be furnished to banks, brokerage houses, fiduciaries, and custodians holding shares of Common Stock beneficially owned by others to forward to such Beneficial Owners. We may reimburse persons representing Beneficial Owners of Common Stock for their reasonable costs of forwarding solicitation materials to such Beneficial Owners. Original solicitation of proxies may be

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    supplemented by electronic means, mail, facsimile, telephone, or personal solicitation by our Directors, officers, or other employees. No additional compensation will be paid to our Directors, officers, or other regular employees for such services.
 
13.       Q: Additional Matters at the Annual Meeting — What happens if additional matters are presented at the Annual Meeting?
 
  A:       Other than the three proposals described in this Proxy Statement, we are not aware of any other properly submitted business to be acted upon at the Annual Meeting. If you grant a proxy, the persons named as proxy holders, Philip L. Francis, our Chief Executive Officer and Chairman of the Board, and Scott A. Crozier, our Senior Vice President, General Counsel, Secretary, and Chief Compliance Officer, will have the discretion to vote your shares on any additional matters properly presented for a vote at the meeting. If, for any unforeseen reason, any of our nominees are not available as a candidate for Director, the persons named as proxy holders will vote your proxy for such other candidate or candidates as may be nominated by the Board of Directors.
 
14. Q: Stockholder Proposals — What is the deadline to propose actions for consideration at next year’s Annual Meeting of Stockholders, or to nominate individuals to serve as Directors?
 
  A: Pursuant to Rule 14a-8 under the Securities Exchange Act of 1934, the deadline for submitting a stockholder proposal for inclusion in our Proxy Statement and Proxy Card for our 2008 Annual Meeting of Stockholders is January 8, 2008. Under our Bylaws, stockholders who wish to bring matters or propose Director nominees at our 2008 Annual Meeting of Stockholders must provide specified information to us by January 8, 2008. Stockholders are also advised to review our Bylaws, which contain additional requirements with respect to advance notice of stockholder proposals and Director nominations. PetSmart’s Bylaws have been published in the Corporate Governance section of the PetSmart website located at www.petm.com. Proposals by stockholders must be mailed to our Corporate Secretary at our principal executive office at 19601 North 27th Avenue, Phoenix, Arizona 85027.
 
15. Q: Nomination of Directors — How do I submit a proposed Director nominee to the Board of Directors for consideration?
 
  A: You may propose Director nominees for consideration by the Board of Directors’ Corporate Governance Committee. Any such recommendation should include the nominee’s name and qualifications for Board membership and should be directed to our Corporate Secretary at the address of our principal executive office set forth above. Such recommendation should disclose all relationships that could give rise to a lack of independence and also contain a statement signed by the nominee acknowledging that he or she will owe a fiduciary obligation to PetSmart and our stockholders. The section titled “Corporate Governance and the Board of Directors” below provides additional information on the nomination process. In addition, please review our Bylaws in connection with nominating a Director for election at our Annual Meeting of Stockholders.

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ARTICLE II. CORPORATE GOVERNANCE AND THE BOARD OF DIRECTORS

CORPORATE GOVERNANCE

     Over the course of PetSmart’s history, the Board of Directors has developed corporate governance practices consistent with its duties of good faith, due care, and loyalty, to help fulfill its responsibilities to our stockholders.

Board of Directors Meetings and Committees

     During the fiscal year ended January 28, 2007, the Board of Directors held six meetings. The independent Directors met without any management present at each regularly scheduled Board of Directors meeting. Commencing fiscal year 2006, Mr. Josefowicz became our Lead Director, and typically presided over the executive sessions. The Board of Directors has an Audit Committee, a Corporate Governance Committee, and a Compensation Committee. During fiscal year 2006, all Directors attended at least 75% of the aggregate meetings of the Board of Directors and of the committees on which they served that were held during the period for which they were a Director or committee member, respectively. Directors are invited and are expected to attend the Annual Meeting of Stockholders, and all Directors attended the 2006 Annual Meeting of Stockholders.

     Committee Composition: The following table provides the composition of each of our committees as of January 28, 2007:

      Corporate Governance   Compensation
 Director Audit Committee1 Committee  Committee2
      Lawrence A. Del Santo     ü  ü 
      Philip L. Francis       
      Rita V. Foley       ü 
      Rakesh Gangwal   ü    
      Joseph S. Hardin, Jr.     ü  
      Gregory P. Josefowicz     ü  ü 
      Amin I. Khalifa   ü    
      Ronald Kirk     ü   
      Richard K. Lochridge   ü    
      Barbara A. Munder     ü   
      Thomas G. Stemberg       ü 
      Jeffery W. Yabuki   ü    
____________________

1       Additional information regarding the Audit Committee can be found starting on Page 18
 
2 Additional information regarding the Compensation Committee can be found starting on Page 19

Corporate Governance Committee

     The Corporate Governance Committee acts under a written charter that was approved by the Board of Directors. In addition, the Corporate Governance Committee has adopted the Corporate Governance Guidelines documenting many of the PetSmart governance practices. The Corporate Governance Committee Charter and Corporate Governance Guidelines have been published in the Corporate Governance section of the PetSmart website located at www.petm.com. The Corporate Governance Committee assists the Board of Directors with such duties as fulfilling its responsibility for oversight of corporate governance practices, Board of Directors and committee composition and governance, reviewing and recommending to the Board of Directors the compensation of our independent Directors, succession planning and the nomination process of PetSmart Directors. During fiscal year 2006, the Corporate Governance Committee was initially composed of the following independent Directors: Ms. Munder and Messrs. Del Santo, Hardin, Kirk, and Salmon. Mr. Josefowicz replaced Mr. Salmon who retired from the Board of Directors in June 2006, in accordance with our Corporate Governance Guidelines, Board of Director Retirement Age Policy. All members of our Corporate Governance Committee are independent, as independence is defined in Rule 4200(a)(15) of the listing standards of The NASDAQ Stock Market LLC. The Corporate Governance Committee met three times during fiscal year 2006.

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Corporate Governance Philosophy

     With a view to enhancing stockholder value over the long term, PetSmart is committed to having sound corporate governance practices. The culture at PetSmart demands integrity. The Board of Directors and management recognize that long-term interests of stockholders are advanced by responsibly addressing the concerns of other stakeholders and interested parties, including associates, applicants, customers, suppliers, government officials, and the public at large. Directors, in performing their duties, are expected to promote the best interests of stockholders in terms of corporate governance, fiduciary responsibilities, compliance with applicable laws and regulations, and the maintenance of accounting, financial, disclosure, and other controls. In all actions taken by the Board of Directors, the Directors are expected to exercise their business judgment in what they reasonably believe to be in the best interests of PetSmart.

Independence

     Board member independence is an essential element of PetSmart corporate governance. The Board of Directors has determined that each of the current non-employee Directors and each nominee for Director is free of any relationship that would interfere with his or her individual exercise of independent judgment with regard to PetSmart. Philip L. Francis, Chief Executive Officer and Chairman of the Board is the sole member of the Board of Directors that is not independent due to his position as the Chief Executive Officer. Each member of the Corporate Governance Committee, Compensation Committee, and Audit Committee meets the applicable rules and regulations regarding “independence.”

Corporate Governance Committee Charter

     The Corporate Governance Committee Charter identifies the roles and responsibilities that govern the Corporate Governance Committee, such as:

  • reviewing and approving the Corporate Governance Guidelines and the revised Corporate Governance Committee Charter;
     
  • reviewing the succession planning practices and procedures of PetSmart;
     
  • providing the Board of Directors with a recommendation relating to the succession of the Chief Executive Officer, in the event his employment terminates for any reason;
     
  • evaluating the overall effectiveness of the organization of the Board of Directors and the performance by the Board of Directors and each of its members;
     
  • conducting a formal evaluation of the performance of the Chief Executive Officer;
     
  • reviewing the skills and characteristics required for the Board of Directors with the skills and characteristics actually represented through individuals on the Board of Directors;
     
  • developing lists of desirable Director candidates;
     
  • reviewing and recommending the nominated slate of Directors for election; and
     
  • reviewing and recommending approval by the Board of Directors to fill the position of Lead Director, as well as Committee Chairs and Committee members.

Nomination Process — Qualifications

     The Corporate Governance Committee is responsible for reviewing the appropriate skills and characteristics required of Directors in the context of prevailing business conditions, and in its nominating committee capacity, for making recommendations regarding the size and composition of the Board of Directors. The objective of the Corporate Governance Committee is to create and sustain a Board of Directors that brings to PetSmart a variety of perspectives and skills derived from high-quality business and professional experience. Directors should possess the highest personal and professional ethics, integrity, and values, and be committed to representing the long-term interests of the stockholders. They must also have an inquisitive and objective perspective, practical wisdom, and mature judgment. We endeavor to have a Board of Directors representing diverse experience at policy-making levels

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in business, government, education, and technology, and in areas that are relevant to PetSmart’s business activities. Directors must be willing to devote sufficient time to carrying out their duties and responsibilities effectively, and should be committed to serving on the Board of Directors for an extended period of time.

     We will consider all stockholder recommendations for candidates for the Board of Directors and, to date, we have not received a timely Director nominee from a stockholder or stockholders holding more than 5% of our Common Stock. Any recommendation should be sent to the Corporate Secretary at our principal executive office at 19601 North 27th Avenue, Phoenix, Arizona 85027. The Corporate Governance Guidelines, which are published in the Corporate Governance section of the PetSmart website located at www.petm.com, specify various qualifications and qualities required for Directors. In addition, further details about the nomination process may be found above in the question entitled “Nomination of Directors – How do I submit a proposed Director nominee to the Board of Directors for consideration?”

     We also consider potential candidates recommended by current Directors, officers, employees, and others. We also retain the services of search firms to provide us with candidates, especially when we are looking for a candidate with a particular expertise, quality, skill, or background. The Corporate Governance Committee screens all potential candidates in the same manner, regardless of the source of the recommendation. Our review is typically based on any written materials provided with respect to the potential candidate. The Committee, while considering the current composition of the Board of Directors, determines whether the candidate meets our minimum qualifications, as set forth above, and specific qualities and skills for Directors, and whether requesting additional information or an interview is appropriate. Prior to completing this evaluation, the Committee conducts face-to-face interviews between members of the Corporate Governance Committee and the potential candidate, and then makes a recommendation to the full Board of Directors as to the persons who should be nominated by the Board of Directors. The Board of Directors determines the nominees after considering the recommendation of the Committee.

Code of Business Ethics and Policies

     All PetSmart associates must act ethically at all times and in accordance with the policies comprising the PetSmart Code of Business Ethics and Policies. We demand full compliance with this policy and all designated associates, including our Chief Executive Officer, Chief Financial Officer, Chief Accounting Officer, and such other individuals performing similar positions, have signed a certificate acknowledging that they have read, understood, and will continue to comply with the policy. PetSmart includes the Code of Business Ethics and Policies in new hire materials, has implemented computer-based training on the policy, and periodically requires appropriate associates to recertify as to their understanding of and compliance with the policy. The policy is published and any amendments or waivers thereto will be published in the Corporate Governance section of the PetSmart website located at www.petm.com.

Disclosure and Ethics Committee

     We have a Disclosure and Ethics Committee, comprised of our Chief Executive Officer, Chief Operating Officer, Chief Compliance Officer, Chief Financial Officer, Chief Accounting Officer and certain other executives. The Disclosure and Ethics Committee meets several times each quarter and is responsible for overseeing our significant compliance policies, including the Code of Business Ethics and Policies and reviewing and presenting to the Audit Committee all related-party transactions, if any, that are required to be disclosed in our periodic reports; and maintaining sufficient procedures to provide reasonable assurance that PetSmart is able to collect, process and disclose within the time periods specified in applicable SEC rules and forms, the information, including non-financial information and certifications, required to be disclosed or disclosed in our periodic reports filed pursuant to the Securities Exchange Act of 1934, as amended. The Disclosure and Ethics Committee evaluates the effectiveness of PetSmart’s disclosure controls and procedures on a regular basis, and will continue to monitor developments in the law and stock exchange regulations and will adopt new procedures consistent with new legislation or regulations.

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Officer and Director Stock Ownership Guidelines

     In March 2006, we adopted our Officer and Director Stock Ownership Guidelines due to our belief that our officers and Directors should have a meaningful ownership stake in PetSmart to underscore the clear linkage of officer, Director, and stockholder interests and to encourage a long-term perspective in managing PetSmart. Therefore, the Board of Directors adopted formal stock ownership requirements for the following Directors and officers:

        Minimum Ownership Requirements
Position   (Dollar Value of Shares)
Directors  5 x Annual Retainer Compensation
Chief Executive Officer    5 x Base Salary 
Chief Operating Officer  4 x Base Salary 
Senior Vice Presidents  3 x Base Salary 
Vice Presidents  1 x Base Salary 

     Directors have three years and officers have five years to meet the stock ownership requirements. Participants who do not yet satisfy at least 50% of the ownership requirements at the end of three years must retain at least 50% of the shares acquired on the exercise of stock options that remain after the sale of shares sufficient to cover the exercise price of the options and taxes. Directors other than our Chief Executive Officer must retain ownership of at least 50% of the shares they individually acquire (including both those awarded by PetSmart as an equity grant and those purchased on the open market) during their service as a Director until the expiration of six months following their departure from the Board of Directors. These Officer and Director Stock Ownership Guidelines are subject to modification from time-to-time.

Stockholder Communication

     Stockholders and other parties interested in communicating with our Board of Directors may do so by writing to the Board of Directors, PetSmart, Inc., 19601 North 27th Avenue, Phoenix, Arizona 85027, or by e-mail at PetSmartBoard@ssg.petsmart.com. Our Corporate Governance Guidelines set forth the process for handling letters received by PetSmart and addressed to the Board of Directors. Under that process, the Chief Legal Officer/Corporate Secretary of PetSmart is responsible for reviewing, summarizing, or sending a copy to the Board of Directors, the Lead Director, or Committee Chairperson, whichever is applicable, any correspondence that deals with the functions of the Board of Directors or committees, ethical issues, or general matters that would be of interest to the Board of Directors. Directors may at any time review a log of all relevant correspondence received by PetSmart that is addressed to non-employee members of the Board of Directors and obtain copies of any such correspondence. Stockholder communications relating to accounting, internal controls, or auditing matters are immediately brought to the attention of the PetSmart internal Disclosure and Ethics Committee and handled in accordance with procedures established by the Audit Committee with respect to such matters.

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PROPOSAL ONE

ELECTION OF DIRECTORS

     Our Restated Certificate of Incorporation and Bylaws provide that our Board of Directors be divided into three classes, each class consisting, as nearly as possible, of one-third of the total number of Directors, with each class having a three-year term. Vacancies on our Board of Directors may be filled by persons elected by a majority of the remaining Directors. A Director elected by our Board of Directors to fill a vacancy, including a vacancy created by an increase in size of our Board of Directors, will serve for the remainder of the full term of the class of Directors in which the vacancy occurred and until that Director’s successor is elected and qualified.

     The Board of Directors is presently composed of twelve members, eleven of whom are non-employee, independent Directors. There are no vacancies. There are four Directors in the class whose terms expire in 2007, one of which, Jeffery W. Yabuki, has advised us that he intends to retire from the Board at the Annual Meeting bringing the number of our Board to eleven. Ms. Barbara A. Munder and Messrs. Rakesh Gangwal and Thomas G. Stemberg are the other three Directors whose terms expire in 2007, and all are nominees for re-election and all were previously elected by our stockholders. If elected at the Annual Meeting, each of the nominees would serve until the 2010 Annual Meeting of Stockholders and until their successors are elected and qualified, or until their death, resignation, or removal.

     In December 2006, the Board of Directors amended our Bylaws to provide for a majority voting standard for the election of Directors in uncontested elections. The election of Directors pursuant to this proposal constitutes an uncontested election. Directors in uncontested elections must receive more than fifty percent of the votes present in person or represented by proxy and entitled to vote at the Annual Meeting. Previously, Directors in uncontested elections were elected under a plurality vote standard, in which nominees receiving the most votes were elected, regardless of how many shares were voted against the nominee. Plurality voting will still apply in contested elections where there are more nominees than Directors to be elected. Shares represented by executed proxies will be voted, if authority to do so is not withheld, for the election of the three nominees named below. In the event any nominee should be unavailable for election as a result of an unexpected occurrence, such shares will be voted for the election of such substitute nominee as the Directors may propose. Each person nominated for election has agreed to serve if elected, and we have no reason to believe that any nominee will be unable to serve.

     Under the laws of Delaware, PetSmart’s state of incorporation, if an incumbent Director is not elected, that Director continues to serve as a “holdover Director” until the Director’s successor is duly elected and qualified, even if there are more votes cast “against” than “for” the Director. As a result, the Board of Directors has also adopted a policy that requires incumbent Directors that are nominees for election to tender, in advance of the Annual Meeting, irrevocable resignations that will be effective upon (i) the failure of such Director to receive the required vote at the Annual Meeting, and (ii) Board of Directors acceptance of such resignation. If an incumbent Director does not receive the required vote for election, the Corporate Governance Committee will act on an expedited basis to determine whether to accept the Director’s resignation and will submit such recommendation for prompt consideration by the Board of Directors.

Set forth below is biographical information for each nominee for election for a three-year term expiring at the 2010 Annual Meeting:

     Rakesh Gangwal, age 53, has been a Director of PetSmart since December 2005. Since June 2003, Mr. Gangwal has served as Chairman, President, and Chief Executive Officer of Worldspan Technologies Inc., a provider of travel technology and information services to the travel and transportation industry. From 2002 to 2003, he was involved in various personal business endeavors, including private equity projects and consulting projects. From 1998 to 2001, he served as Chief Executive Officer and President of US Airways Group, Inc., and US Airways, Inc., and from 1996 to 1998, Mr. Gangwal was the President and Chief Operating Officer of US Airways Group. On August 11, 2002, US Airways Group, Inc., and its seven domestic subsidiaries, including its principal operating subsidiary, US Airways, Inc., filed voluntary petitions for relief under Chapter 11 of the United States Bankruptcy Code. US Airways Group, Inc., and its subsidiaries emerged from bankruptcy protection under a reorganization plan, which became effective on March 31, 2003. Mr. Gangwal serves on the board of OfficeMax Incorporated.

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     Barbara A. Munder, age 61, has been a Director of PetSmart since March 1999. Since January 2005, she has served as Executive Director of the operating groups, Institutional Investor Institute and The Hedge Fund Institutional Forum to Euromoney Institutional Investor PLC, an international business-to-business publisher, largely in the international finance, law, tax, energy, and transport sectors. From 2002 to 2004, she served as Senior Advisor to Euromoney Institutional Investor PLC, and as a Director of the operating group, Institutional Investor Institute. From 2001 to 2002, she was a principal of Munder & Associates, a marketing and web strategy-consulting firm. Also during 2001, she was Chief Operating Officer of Womenfuture LLC, a distance learning company. Prior to that Ms. Munder held various positions with The McGraw-Hill Companies, Inc.

     Thomas G. Stemberg, age 58, has been a Director of PetSmart since April 1988. Since February 2005, Mr. Stemberg has served as managing partner with Highland Capital Partners, a venture capital firm. From 1988 to 2005, Mr. Stemberg served as Chairman of Staples, Inc., an office supply superstore retailer, and from 1986 until 2001, he also served as Chief Executive Officer of Staples, Inc. Mr. Stemberg serves on the boards of The NASDAQ Stock Market LLC, CarMax, Inc., and Polycom, Inc.

THE BOARD OF DIRECTORS RECOMMENDS A VOTE IN FAVOR OF EACH NAMED NOMINEE

INFORMATION ABOUT OUR BOARD OF DIRECTORS

Directors Continuing in Office Until the 2008 Annual Meeting

     Lawrence A. Del Santo, age 73, has been a Director of PetSmart since September 1998. From 1994 until his retirement in 1997, Mr. Del Santo served as the Chairman and Chief Executive Officer of The Vons Companies, Inc., a supermarket retailer. From 1993 to 1994, he served as Senior Vice President and Chief Operating Officer of American Stores Company, a grocery retailer. Mr. Del Santo serves on the board of Supervalu Inc.

     Philip L. Francis, age 60, has been a Director of PetSmart since June 1989 and our Chief Executive Officer since March 1998. In September 1999, he was also named Chairman of the Board, and from 1998 to 2001, he was also the President of PetSmart. From 1991 to 1998, he held various positions with Shaw’s Supermarkets, Inc., a subsidiary of J Sainsbury plc, including Chief Executive Officer, Chief Operating Officer, and President. Prior to that he held several senior management positions for Roundy’s, Inc., Cardinal Health, Inc., and the Jewel Companies, Inc. Mr. Francis serves on the boards of Supervalu Inc., and Cardinal Health, Inc.

     Gregory P. Josefowicz, age 54, has been a Director of PetSmart since December 2004. From 1999 until his retirement in August 2006, Mr. Josefowicz has served as a Director, President, and Chief Executive Officer of Borders Group, Inc., and in 2002 he was also named Chairman of the Board. Mr. Josefowicz serves on the boards of Ryerson Tull, Inc., and Winn-Dixie Stores, Inc.

     Richard K. Lochridge, age 63, has been a Director of PetSmart since June 1998. Mr. Lochridge is the founder, and has been President, since 1986, of Lochridge & Company, Inc., a management-consulting firm. Mr. Lochridge serves on the boards of Lowe’s Companies, Inc., John H. Harland Company, and Dover Corp.

Directors Continuing in Office Until the 2009 Annual Meeting

     Rita V. Foley, age 54, has been a Director of PetSmart since June 2004. From 2001 until her retirement in 2006, Ms. Foley served as Senior Vice President of MeadWestvaco Corporation, and in 2002 became the President of the Consumer Packaging Group of MeadWestvaco Corporation, a leading global provider of packaging to the entertainment, healthcare, cosmetics, and consumer products industries. From 2001 to 2002, she was the Chief Operating Officer of MeadWestvaco’s Consumer Packaging Group. Ms. Foley held various senior positions from 1999 to 2001 within Westvaco, the predecessor to MeadWestvaco, including Senior Vice President and Chief Information Officer. Ms. Foley has also held various executive global sales, marketing, and general management positions at Harris Lanier, Digital Equipment Corporation, and QAD, Inc. Ms. Foley serves on the boards of the Council of the Americas and Pro Mujer.

10


     Joseph S. Hardin, Jr., age 61, has been a Director of PetSmart since September 2005. From 1997 until his retirement in 2001, Mr. Hardin was President and Chief Executive Officer of Kinko’s, Inc. From 1986 to April 1997 he served in several executive positions in increasing responsibility at Wal-Mart Stores, Inc., ultimately as Executive Vice President and as President and Chief Executive Officer of SAM’s Club, the wholesale division of Wal-Mart Stores, Inc. Mr. Hardin serves on the boards of American Greetings Corporation and Dean Foods Company.

     Amin I. Khalifa, age 53, has been a Director of PetSmart since March 2005. Since August 2006 Mr. Khalifa has served as Executive Vice President and Chief Financial Officer of Leap Wireless International, Inc. From October 2003 to July 2006, Mr. Khalifa served as Executive Vice President and Chief Financial Officer for Apria Healthcare Group Inc., with responsibility for the company’s financial functions, as well as purchasing, contract services, and investor relations. From June 1999 to September 2003, Mr. Khalifa served as Vice President and Chief Financial Officer of Beckman Coulter, Inc., a manufacturer of diagnostic laboratory equipment and instruments. Prior to that, Mr. Khalifa served as the Chief Financial Officer and held other executive financial positions at the Agricultural Sector of Monsanto Company, Aetna Health Plans, and PepsiCo, Inc.

     Ronald Kirk, age 52, has been a Director of PetSmart since June 2003. Mr. Kirk has been a Partner in the Public Policy and Finance Section of the law firm of Vinson & Elkins, LLP, since February 2005. From 1994 to 2005, he was a Partner in the Corporate and Securities Practice of the law firm of Gardere Wynne Sewell LLP. From 1995 to 2001, he was also Mayor of Dallas, Texas. Mr. Kirk serves on the boards of Brinker International, Inc., and Dean Foods Company.

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DIRECTOR COMPENSATION

Retainer

     Each independent Director receives a quarterly calendar retainer of $7,500. The Lead Director receives an additional quarterly retainer of $12,500. The Compensation Committee and Corporate Governance chairs each receive $2,500 quarterly, and the Audit Committee chair receives $3,750 quarterly. In addition, each independent Director receives a fee of $1,500 for in-person attendance and $1,000 for telephonic attendance at each Board of Directors and committee meeting. Finally, Directors are also eligible for reimbursement for actual expenses incurred in connection with their attendance at Board of Directors and committee meetings. Effective January 1, 2007, the quarterly calendar retainer paid to each independent Director was increased to $10,500.

     Each independent Director must receive at least 50% of their quarterly retainer in shares of common stock, but may elect to receive the remaining 50% of their quarterly retainer in cash. The number of shares of common stock provided to each independent Director in lieu of their quarterly calendar cash retainer is determined by dividing the dollar value that they have elected to receive in shares of common stock by the average closing price of our common stock on the five consecutive trading days prior to the week before the last day of each calendar quarter. Independent Directors may also elect to defer up to 100% of their annual cash compensation into our Deferred Compensation Plan.

Restricted Stock Awards

     Upon their initial election to our Board of Directors, each independent Director receives shares of restricted common stock with a value equal to $125,000. In addition, each independent Director is entitled to receive restricted common stock with a value equal to $60,000 annually. The number of shares of restricted common stock granted to each independent Director for the initial grant and the annual grant is determined by dividing the dollar value of the grant by the fair market value on the date of the grant. The shares of restricted common stock subject to each initial and annual grant cliff vests in four years and is eligible for dividends, if any, that are declared for all stockholders. In fiscal year 2006, each independent Director received an annual restricted stock grant of 2,495 shares under our 1997 Equity Incentive Plan. In February 2007, each independent Director received a restricted stock award of 2,646 shares under our 2006 Equity Incentive Plan.

      Effective January 1, 2007, the value of the annual restricted stock award was increased to $83,000 and such shares will cliff vest on the first anniversary of the date of grant. In addition, initial restricted stock awards will cliff vest on the third anniversary of the date of grant. In fiscal year 2006, we did not grant any options or non-equity incentive plan compensation to our non-employee directors.

     The table below presents compensation earned by each independent Director during fiscal year 2006. Mr. Francis as Chief Executive Officer is not eligible for any Director compensation or Director grants of restricted stock.

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Director Compensation

       Change in       
       Pension       
       Value and       
       Nonqualified       
   Fees Earned    Stock  Option    Deferred   All Other  
   or Paid in    Awards    Awards    Compensation   Compensation  
Name          Cash (1)          (2)         (3)          Earnings (4)          (5)         Total 
Lawrence A. Del Santo    $ 48,850     $ 68,037   $   1,571   $    23,325    $  770     $ 142,553 
Rita V. Foley  46,850     66,778       936   114,564 
Rakesh Gangwal  47,350     66,417         802   114,569 
Joseph S. Hardin, Jr.  42,850     66,702         883   110,435 
Gregory P. Josefowicz (6)  97,211     65,090         882   163,183 
Amin I. Khalifa  48,350     67,232       748   116,330 
Ronald Kirk  44,350     52,990   7,276       770   105,386 
Richard K. Lochridge  60,809     68,037 1,571         770     131,187 
Barbara A. Munder  44,350     68,037 1,571       770   114,728 
Walter J. Salmon (7)  25,665     23,216 1,571       117,617 (8)    168,069 
Thomas G. Stemberg  56,822     52,990   2,009         770   112,591 
Jeffery W. Yabuki  44,850     74,287       936   120,073 
____________________

(1)

Includes all fees earned or paid in cash for services as a director in fiscal year 2006, including annual retainer fees, committee chair fees, and meeting fees. Independent Directors must receive at least 50% of their annual retainer fee in shares of our common stock, but may elect to receive the remaining 50% of their annual retainer fee in cash. As a result, the amounts in this column reflect the value of annual retainer fees, committee chair fees, and meeting fees that either must be paid in cash or may be paid in cash at the election of each independent Director. During calendar year 2006 the independent Directors received the following number of shares of common stock in lieu of the cash retainer: Mr. Del Santo – 1,105 shares; Ms. Foley – 552 shares; Mr. Gangwal – 1,105 shares; Mr. Hardin – 1,105 shares; Mr. Joselfowicz – 552 shares; Mr. Khalifa – 1,105 shares; Mr. Kirk – 552 shares; Mr. Lochridge – 1,105 shares; Ms. Munder – 1,105 shares; Mr. Salmon – 276 shares; Mr. Stemberg – 552 shares; and Mr. Yabuki – 828 shares.

 
(2)     

Represents the aggregate proportionate fair value of shares of restricted common stock granted in fiscal year 2002 through fiscal year 2006 recognized as a compensation expense in PetSmart’s financial statements for fiscal year 2006, including amounts paid in shares of our common stock for the annual retainer fee of each independent Director. The grant date fair value for each share of restricted common stock is based on the closing price of PetSmart’s common stock on the date of grant. Restricted stock awards granted prior to January 1, 2007 vest four years from the date of the grant. Restricted stock awards granted subsequent to January 1, 2007 vest as follows: (1) for annual grants on the first anniversary of the date of grant and (2) for initial grants on the third anniversary of the date of grant.

 

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As of January 28, 2007, the directors had received the following aggregate number of shares of common stock and held the following aggregate number of shares of unvested restricted common stock:


   Number of Shares of   Number of Shares of 
     Restricted Common   Unvested Restricted 
Name   Stock Granted     Common Stock 
Lawrence A. Del Santo  7,042  7,042 
Rita V. Foley  8,422  8,422 
Rakesh Gangwal  7,310  7,310 
Joseph S. Hardin, Jr.  7,979  7,979 
Gregory P. Josefowicz  7,974  7,974 
Amin I. Khalifa  6,861  6,861 
Ronald Kirk  7,042  7,042 
Richard K. Lochridge  7,042  7,042 
Barbara A. Munder  7,042  7,042 
Walter J. Salmon  7,042  0   
Thomas G. Stemberg  7,042  7,042 
Jeffery W. Yabuki  8,422  8,422 

(3)     

Represents the aggregate proportionate fair value of options granted in fiscal year 2002 through fiscal year 2003 recognized as a compensation expense in PetSmart’s financial statements for fiscal year 2006. The grant date fair value is determined in accordance with SFAS No. 123(R). We did not grant any stock options to our independent Directors during fiscal years 2004, 2005 and 2006. As of January 28, 2007, the independent Directors held the following aggregate number of stock options: Mr. Del Santo – 62,843 shares; Mr. Kirk – 9,000 shares; Mr. Lochridge – 62,843 shares; Ms. Munder – 53,843 shares; and Mr. Stemberg – 37,028 shares.

 
(4)

Includes earnings on amounts deferred under our Deferred Compensation Plan. Please see the section entitled “Nonqualified Deferred Compensation” for a description of the plan.

 
(5)

Includes the dollar value of any dividends or other earnings paid on shares of restricted common stock to the extent not factored into the grant date fair value of the restricted stock awards. Quarterly dividends of $0.03 per share were paid on shares of restricted common stock during fiscal 2006.

 
(6)

Mr. Josefowicz declined the Corporate Governance Chairman fee due to the additional compensation he received for serving as our Lead Director.

 
(7)

Mr. Salmon retired from the Board of Directors in June 2006. In recognition of Mr. Salmon’s contributions to PetSmart, the Board of Directors accelerated the vesting of all unvested stock options and waived our right to reacquire all unvested shares subject to restricted stock awards held by Mr. Salmon. As a result, the Board of Directors accelerated the vesting of 500 shares subject to outstanding stock options, and waived our right to reacquire 7,042 unvested shares subject to outstanding restricted stock awards.

 
(8)

Represents the incremental fair value of Mr. Salmon’s stock options under SFAS No. 123(R) and shares of restricted common stock as a result of their acceleration on June 21, 2006 in connection with his retirement from the Board of Directors on the following day.

 

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ARTICLE III. INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM AND AUDIT COMMITTEE

PROPOSAL TWO

RATIFICATION OF APPOINTMENT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM

     The Audit Committee of the Board of Directors has appointed Deloitte & Touche LLP as our independent registered public accounting firm for the fiscal year 2007, ending February 3, 2008. Services provided to PetSmart by Deloitte & Touche LLP in fiscal year 2006 are described under “Fees to Independent Registered Public Accounting Firm for Fiscal 2006 and 2005” below. Additional information regarding the Audit Committee is provided in the Report of the Audit Committee on page 18.

     Deloitte & Touche LLP has audited the financial statements of PetSmart since February 1999. Representatives of Deloitte & Touche LLP will be present at the Annual Meeting to respond to appropriate questions and to make such statements as they may desire.

     Stockholder ratification of the selection of Deloitte & Touche LLP as our independent registered public accounting firm is not required by our Bylaws or otherwise. However, the Board of Directors is submitting the selection of Deloitte & Touche LLP to the stockholders for ratification as a matter of good corporate governance practice. If the stockholders fail to ratify the selection, the Audit Committee will reconsider whether or not to retain that firm. Even if the selection is ratified, the Audit Committee, in its discretion, may direct the appointment of a different independent registered public accounting firm at any time during the year if it determines that such a change would be in the best interests of PetSmart and our stockholders.

     The affirmative vote of the holders of a majority of the shares present in person or represented by proxy and entitled to vote at the Annual Meeting will be required to ratify the selection of Deloitte & Touche LLP. Abstentions will be counted toward the tabulation of votes cast on proposals presented to the stockholders and will have the same effect as negative votes. Broker non-votes are counted towards a quorum, but are not counted for any purpose in determining whether this matter has been ratified.

THE BOARD OF DIRECTORS RECOMMENDS A VOTE “FOR” PROPOSAL TWO

15


FEES TO INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM FOR FISCAL 2006 AND 2005

     The following table shows the fees billed to PetSmart for services provided by Deloitte & Touche LLP for our fiscal years 2006 and 2005:

        2006        2005 
Audit Fees  $ 1,983,000  $ 1,816,000 
Audit-Related Fees  47,000  56,000 
Tax Fees  650,000  578,000 
All Other Fees  207,000    0 
Total    $ 2,887,000  $ 2,450,000 

Audit Fees. This category includes the audit of PetSmart’s annual financial statements, audit of internal control over financial reporting, review of financial statements included in PetSmart’s Form 10-Q Quarterly Reports, and services that are normally provided by the independent registered public accounting firm in connection with regulatory filings or engagements for those fiscal years. This category also includes advice on audit and accounting matters that arose during, or as a result of, the audit or the review of interim financial statements, consents related to SEC and other registration statements, and the preparation of an annual “management letter” on internal control matters.

Audit-Related Fees. This category consists of assurance and related services by Deloitte & Touche LLP that are reasonably related to the performance of the audit or review of PetSmart’s financial statements and are not reported above under “Audit Fees.” The services for the fees disclosed under this category include benefit plan audits and other accounting consultations.

Tax Fees. This category consists of professional services rendered by Deloitte & Touche LLP for tax compliance and tax return preparation of $337,000 and $380,000 in fiscal years 2006 and 2005, respectively, and for technical tax advice of $313,000 and $171,000 in fiscal years 2006 and 2005, respectively.

All Other Fees. Other professional services rendered by Deloitte & Touche LLP in fiscal year 2006 related to due diligence for a potential acquisition. There were no other professional services rendered by Deloitte & Touche LLP in fiscal year 2005.

     The Audit Committee has determined that the rendering of tax services by Deloitte & Touche LLP is compatible with maintaining its independence.

     The Audit Committee has established procedures for the pre-approval of all audit and permitted non-audit-related services provided by our independent registered public accounting firm. The procedures include, in part, that: (1) the Audit Committee, on an annual basis, shall pre-approve the independent registered public accounting firm’s engagement letter/annual service plan; (2) the Audit Committee Chair has been delegated the authority to pre-approve any permitted non-audit services up to $50,000 per individual proposed service; (3) the Audit Committee must pre-approve any permitted non-audit services that exceed $50,000 per individual proposed service; and (4) at each regularly scheduled Audit Committee meeting: (a) the Audit Committee Chair will review any services that were pre-approved since the last Audit Committee meeting; and (b) a review will be conducted of the services performed and fees paid since the last Audit Committee meeting.

16


AUDIT COMMITTEE

     The Audit Committee provides assistance to the Board of Directors in fulfilling its responsibility to our stockholders with respect to its oversight of: the quality and integrity of PetSmart’s financial statements and disclosures; our compliance with legal and regulatory requirements; the relationship with our internal auditors and our independent registered public accounting firm, including their independence, the audit, and additional services; and our internal and disclosure controls. During fiscal year 2006, the Audit Committee was composed of the following independent Directors: Messrs. Lochridge, Gangwal, Khalifa, and Yabuki. Messrs. Lochridge, Yabuki, and Khalifa have been designated by the Board of Directors as audit committee financial experts as defined in applicable SEC Rules. The Board of Directors made a qualitative assessment of Messrs. Lochridge’s, Yabuki’s, and Khalifa’s level of knowledge and experience based on a number of factors, including their education and work, management, and director experience. All members of our Audit Committee are financially literate and are independent, as independence is defined in Rule 4350(d)(2)(A)(i) and (ii) of the Nasdaq listing standards and Section 10A(m)(3) of the Securities Exchange Act of 1934, as amended. The Audit Committee met six times during fiscal year 2006, and its report is presented below. The Audit Committee acts under a written charter that was adopted by the Board of Directors and has been published in the Corporate Governance Section of the PetSmart website located at www.petm.com.

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REPORT OF THE AUDIT COMMITTEE OF THE BOARD OF DIRECTORS1

     The Audit Committee assists the Board of Directors in fulfilling its responsibility for oversight of the quality and integrity of the accounting, auditing, and financial reporting practices of PetSmart.

     The Audit Committee oversees PetSmart’s financial process on behalf of the Board of Directors. Management has the primary responsibility for the financial statements and the reporting process, including the systems of internal controls. PetSmart has an Internal Audit Department that is actively involved in examining and evaluating PetSmart’s financial, operational, and information systems activities and reports functionally to the Chair of the Audit Committee and administratively to management. In fulfilling its oversight responsibilities, the Audit Committee reviewed and discussed with management the periodic reports, including the audited financial statements in our Annual Report on Form 10-K. This included a discussion of the quality, not just the acceptability, of the accounting principles, the reasonableness of significant judgments, and the clarity of disclosures in the financial statements.

     The Audit Committee reviewed with the independent registered public accounting firm, who is responsible for expressing an opinion on the conformity of those audited financial statements with accounting principles generally accepted in the United States of America, its judgments as to the quality, not just the acceptability, of PetSmart’s accounting principles and such other matters as are required to be discussed with the Audit Committee under generally accepted auditing standards, including Statement on Auditing Standards No. 61 (Communication with Audit Committees, AU Section 380). In addition, the Audit Committee has discussed with the independent registered public accounting firm the firm’s independence from management and PetSmart, including the matters in the written disclosures and the Letter from the Independent Registered Public Accounting Firm required by the Independence Standards Board, Standard No. 1 (Independence Discussions with Audit Committees).

     The Audit Committee discussed with PetSmart’s independent registered public accounting firm the overall scope and plans for their audit, and developed a pre-approval process for all independent registered public accounting firm services. The Audit Committee meets with the independent registered public accounting firm, with and without management present, to discuss the results of their examination, their evaluation of PetSmart’s internal and disclosure controls, and the overall quality of PetSmart’s financial reporting. The Audit Committee held six meetings during fiscal year 2006.

     The Audit Committee has determined the rendering of tax services by Deloitte & Touche LLP is compatible with maintaining its independence. In reliance on the reviews and discussions referred to above, the Audit Committee recommended to the Board of Directors, and the Board of Directors approved, that the audited financial statements be included in PetSmart’s Annual Report on Form 10-K for the fiscal year 2006, ended January 28, 2007, for filing with the SEC. The Audit Committee has appointed Deloitte & Touche LLP to be PetSmart’s independent registered public accounting firm for the fiscal year 2007, ending February 3, 2008.

Audit Committee of the Board of Directors 
 
Rakesh Gangwal 
Amin I. Khalifa 
Richard K. Lochridge 
Jeffery W. Yabuki 
____________________

1     

This report is not “soliciting material,” is not deemed filed with the SEC, and is not to be incorporated by reference into any PetSmart filing under the Securities Act of 1933 or the Securities Exchange Act of 1934, whether made before or after the date hereof and irrespective of any general incorporation language contained in such filing.

 

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ARTICLE IV. COMPENSATION DISCUSSION AND ANALYSIS
AND COMPENSATION COMMITTEE REPORT

PROPOSAL THREE

APPROVAL OF THE CONTINUATION OF THE EXECUTIVE SHORT-TERM INCENTIVE PLAN

     We are requesting that the stockholders approve the continuation of the PetSmart, Inc. Executive Short-Term Incentive Plan, or the ESTIP.

     The Compensation Committee of the Board of Directors originally adopted the ESTIP in May 2002. The ESTIP was subsequently approved by our stockholders at the 2002 Annual Meeting of Stockholders. In April 2007, the Compensation Committee approved an amendment and restatement to the ESTIP, subject to stockholder approval.

     Section 162(m) of the Internal Revenue Code denies a deduction to any publicly-held corporation such as PetSmart for compensation paid to certain executive officers in a taxable year to the extent that compensation received by each such executive officer exceeds $1 million. However, certain kinds of compensation, including qualified “performance-based compensation,” are disregarded for purposes of the deduction limitation. If approved by our stockholders, compensation paid pursuant to the ESTIP will qualify as performance-based compensation.

     The Board believes that the ESTIP benefits stockholders by linking a portion of executive compensation to our performance. In addition, the ESTIP provides a vehicle to pay performance-based compensation to a select group of executive officers and other key employees who might become executive officers. The compensation to such individuals pursuant to the terms and conditions of the ESTIP will avoid the deduction limitation imposed by Section 162(m) of the Internal Revenue Code. Upon approval by our stockholders, PetSmart may continue to grant performance-based compensation under the ESTIP to eligible participants until the first annual meeting of stockholders that occurs in 2012 (at which time re-approval of the ESTIP by our stockholders will be required).

     The affirmative vote of the holders of a majority of the shares present, in person or represented by proxy and entitled to vote at the Annual Meeting, will be required to approve the continuation of the ESTIP. Abstentions will be counted toward the tabulation of votes cast on proposals presented to our stockholders and will have the same effect as negative votes. Broker non-votes are counted towards a quorum, but are not counted for any purpose in determining whether this matter has been approved. Should our stockholders fail to approve the continuation of the ESTIP at the Annual Meeting, no awards will be granted pursuant to the ESTIP after the date of the 2007 Annual Meeting.

THE BOARD OF DIRECTORS RECOMMENDS A VOTE “FOR” PROPOSAL THREE

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     The material terms of the ESTIP are summarized below. This summary, however, does not purport to be a complete description of the ESTIP. The ESTIP has been filed with the SEC as an appendix to this Proxy Statement and may be accessed from the SEC’s website at www.sec.gov. The following summary is qualified in its entirety by reference to the complete text of the ESTIP. Any stockholder that wishes to obtain a copy of the actual plan document may do so by written request to: Corporate Secretary, PetSmart, Inc., 19601 North 27th Avenue, Phoenix, Arizona 85027.

Purpose

     The purposes of the ESTIP are to enhance PetSmart’s ability to promote its success by providing incentives and rewards for the contributions of plan participants towards the successful achievement of our financial and business goals. The ESTIP is structured to pay cash bonuses as well as restricted stock granted under our 2006 Equity Incentive Plan, or 2006 Plan, that satisfies the requirements for performance-based compensation within the meaning of Section 162(m) of the Internal Revenue Code.

Administration

     The ESTIP is administered by the Compensation Committee of the Board of Directors. All questions of interpretation are determined by the Compensation Committee and its decisions are final and binding on all participants.

Duration

     The ESTIP amendments will become effective immediately following the 2007 Annual Meeting, and the ESTIP will remain effective, as amended, until the first annual meeting of stockholders that occurs in 2012, unless terminated earlier by the Compensation Committee or the Board of Directors. No compensation will be paid under the amended ESTIP until approved by our stockholders.

Participation

     Our executive officers (that is, PetSmart’s officers who are subject to Section 16 of the Securities Exchange Act of 1934) and other key employees of PetSmart, who in the opinion of the Compensation Committee may become executive officers or who otherwise may make comparable contributions to PetSmart, are eligible to participate in the ESTIP. At the beginning of each performance period, the Compensation Committee designates which eligible employees will participate in the ESTIP for such performance period. Participation is generally on an annual basis, and participation in one year does not ensure participation in future years. In fiscal year 2006, 11 executive officers and key employees were designated to participate in the ESTIP. Amounts paid to our named executive officers for fiscal year 2006 are presented below. The participants in the ESTIP will not participate in our regular Short-Term Incentive Plan.

Plan Operation

     Under the ESTIP, the Compensation Committee will establish and approve target bonus amounts for each participant for each performance period. Typically a performance period will be a fiscal year. The Compensation Committee will also establish performance metrics and objectives for the performance period based on the business criteria discussed below. Actual performance relative to those objectives determines to what extent the target bonus amount is paid for such performance period.

Business Criteria on which the Performance Goals are Based

     The ESTIP sets forth a number of business criteria, any one or more of which may be selected by the Compensation Committee as the basis for determining incentive compensation under the ESTIP that may become payable to a participant for a particular fiscal year. The criteria are:

  • Net income of PetSmart, as set forth in PetSmart’s audited financial statements.
     
  • Earnings per share of PetSmart, as set forth in PetSmart’s audited financial statements.
     
  • Customer satisfaction as determined by an independent professional survey research firm.

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  • Increase in the trading price of PetSmart’s stock above the trading price at the time the criteria is established.
     
  • Return on equity, including return on invested capital, as set forth in PetSmart’s audited financial statements.
     
  • Return on assets, as set forth in PetSmart’s audited financial statements.
     
  • Return on investments, as set forth in PetSmart’s audited financial statements.
     
  • Increase in sales, including sales growth, as set forth in PetSmart’s audited financial statements.

     All criteria that are based on PetSmart’s audited financial statements may be modified by the Compensation Committee at the time the specific criteria are selected to take into consideration one or more of the following: (a) changes in accounting principles that become effective during the performance period, (b) extraordinary, unusual or infrequently occurring events, (c) the disposition of a business or significant assets, (d) gains or losses from all or certain claims and/or litigation and insurance recoveries, (e) the impact of impairment of intangible assets, (f) restructuring activities, (g) the impact of investments or acquisitions, and/or (h) changes in corporate capitalization such as stock splits and certain reorganizations. Notwithstanding the foregoing, the Compensation Committee must select criteria that collectively satisfy the requirements of performance-based compensation for the purposes of Section 162(m) of the Internal Revenue Code, including by establishing the targets at a time when the performance relative to such targets is substantially uncertain.

Award Payment

     Following the close of each performance period, the Compensation Committee will determine whether the established performance metrics were attained and determine what amount will be paid to each participant. The ESTIP, however, gives the Compensation Committee the right to reduce the amount paid based on any individual or PetSmart performance factors deemed relevant by the Compensation Committee, including time holding a particular executive position. The ESTIP does not permit the Compensation Committee to increase such payment above the actual determined amount. Such payment will be made in cash within thirty days of the receipt of PetSmart’s audited financial statements for the applicable performance period and certification by the Compensation Committee that the performance and other criteria for payment have been satisfied. Payroll and other taxes will be withheld as required by law.

Plan Limitations

     Individual participants may earn an award payout ranging from zero percent to a maximum of five hundred percent of their target award not to exceed $5 million for any twelve (12) month period. As amended and restated, the ESTIP provides that to the extent that an award is expressed by reference to a number of shares of our common stock (rather than an equivalent amount of cash), the value of such stock is determined by reference to the value of our stock on the date the target bonus amount is determined by the Compensation Committee for purposes of applying the foregoing limitations. For the current fiscal year a maximum of three times a participant’s target percentage of his or her annual salary will be in effect.

Termination of Employment

     Participants who terminate employment for any reason other than death or disability during any performance period will receive no payment under the ESTIP for such performance period. Participants who die or become totally and permanently disabled during any performance period will receive prorated payments under the plan based on the number of whole months of employment completed during the performance period. Participants who terminate employment for any reason after the close of the performance period, but before the distribution of payments under the ESTIP, will be paid all amounts otherwise payable were the participant still an employee.

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Federal Income Tax Consequences

     All amounts paid pursuant to the ESTIP are taxable as ordinary income to the participants when paid. PetSmart may avoid any deduction limitation imposed by Section 162(m) of the Internal Revenue Code by paying performance-based compensation pursuant to the terms and conditions of the ESTIP. Accordingly, compensation attributable to cash bonuses and awards of restricted stock and paid under the ESTIP will qualify as performance-based compensation, provided that: (a) such awards are granted by our Compensation Committee, (b) each award is granted or vests only upon the achievement of an objective performance goal established in writing by the Compensation Committee while the outcome is substantially uncertain, (c) the Compensation Committee certifies in writing prior to the payment or vesting of the award that the performance goal has been satisfied, and (d) prior to the payment of the award, stockholders have approved the material terms of the award (including the class of employees eligible for such award, the business criteria on which the performance goal is based, and the maximum amount, or formula used to calculate the amount, payable upon attainment of the performance goal).

Amendment and Termination of the ESTIP

     The Compensation Committee or the Board of Directors may suspend, discontinue or amend the ESTIP at any time and for any reason.

Other Compensation

     The ESTIP is not the exclusive means of compensating executive officers. The executive officers have and will continue to receive other compensation, including, for example, salary, bonuses, benefits, stock options, and restricted stock which may be granted outside of the ESTIP.

Payments Under the ESTIP

     The following table sets forth the amounts paid to our named executive officers and the other groups indicated below under the ESTIP in fiscal year 2006.

Name and Position       Amount
Philip L. Francis $   783,490
       Chief Executive Officer and Chairman of the Board     
Timothy E. Kullman (1)  
       Chief Financial Officer and Senior Vice President     
Robert F. Moran   449,634
       President and Chief Operating Officer     
Barbara A. Fitzgerald   180,738
       Senior Vice President, Special Projects     
David K. Lenhardt   153,696
       Senior Vice President, Services and Store Operations     
All current executive officers as a group (11 persons)   2,303,267
All employees, including current officers who are not executive    
       officers, as a group (0 persons)    
____________________

(1)       Mr. Kullman was paid $175,661 pursuant to his retention agreement, which represents the amount Mr. Kullman would have received pursuant to the ESTIP.

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REPORT OF THE COMPENSATION COMMITTEE OF THE BOARD OF DIRECTORS1

     The Compensation Committee of our Board of Directors is responsible for establishing the policies and programs that govern all of the compensation of our executive officers. The Compensation Committee is comprised of independent Directors who are appointed by the Board. The Compensation Committee Charter, approved by the Board, clearly states the duties and responsibilities of the Compensation Committee. The Board reviews all decisions by the Compensation Committee relating to the compensation of our executive officers.

     The Compensation Committee has reviewed and discussed the Compensation Discussion and Analysis with management. Based on its review and discussion, the Compensation Committee recommended to the Board of Directors that the Compensation Discussion and Analysis be included in this Proxy Statement due to its content accurately reflecting our compensation program philosophy and our total compensation program as designed by the Compensation Committee.

Compensation Committee of the Board of Directors
 
Thomas G. Stemberg (Chair)
Lawrence A. Del Santo
Rita V. Foley
Gregory P. Josefowicz
____________________

1       The material in this report is not “soliciting material,” is not deemed filed with the SEC, and is not to be incorporated by reference into any PetSmart filing under the Securities Act of 1933 or the Securities Exchange Act of 1934, whether made before or after the date hereof and irrespective of any general incorporation language contained in such filing.

COMPENSATION DISCUSSION AND ANALYSIS

Overview

     This compensation discussion and analysis provides information about our compensation program as administered by the Compensation Committee of the Board of Directors. This program relates to our chief executive officer, chief financial officer, and the other three most highly compensated executive officers, who are collectively referred to as the “named executive officers,” and our other executive officers. The discussion below explains our compensation philosophy, the structure of our compensation program, and the manner in which it was developed and continues to evolve. It includes the way executive compensation is determined, the compensation elements, and the reasons we use those elements, in our compensation program.

Governance Structure of Compensation Program

     The Board of Directors created the Compensation Committee and its charter to help fulfill its stockholder responsibility to oversee the policies and programs that govern our executive officers’ compensation. The Compensation Committee creates and regularly reviews our compensation philosophy and approves all elements of our compensation program for our executive officers. Currently, the Board of Directors has identified 11 individuals as executive officers, due to the broad scope of their job responsibilities and policy-making authority.

     The Compensation Committee recognizes the importance of maintaining sound principles for the development and administration of our compensation programs which are intended to strengthen the link between executive pay and performance. The Charter for the Compensation Committee outlines its responsibilities, and the Compensation Committee, the Corporate Governance Committee and the Board of Directors periodically review and revise the charter. The Compensation Committee Charter is published in the Corporate Governance section of the PetSmart website located at www.petm.com.

     All members of our Compensation Committee are independent, as defined in Rule 4200(a)(15) of the NASDAQ listing standards and as determined by the Board of Directors. Qualifications for inclusion on the Compensation Committee include independence and experience with: compensation, benefits, leading and motivating people, and

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fiscal responsibility. During fiscal year 2006, the Compensation Committee was composed of the following directors: Ms. Foley and Messrs. Stemberg, Del Santo, and Josefowicz. Mr. Stemberg served as chairperson during fiscal year 2006.

     The Compensation Committee meets at scheduled times during the year, and occasionally considers and takes action by unanimous written consent. The Compensation Committee met four times during fiscal year 2006 and acted by unanimous written consent three times. The Compensation Committee chairperson sets an annual agenda for each meeting. In addition, the chairperson sets a detailed meeting agenda before each meeting in collaboration with the Compensation Committee’s compensation consultant and executive officers.

     The Chief Executive Officer, Chief Financial Officer, General Counsel, Senior Vice President, People, and certain other executive officers may attend the Compensation Committee meetings at the request of the Compensation Committee. They present and discuss agenda items, answer questions, and take the minutes of the meeting. On a regular basis, the Compensation Committee has executive sessions during which no executive officers are present. Periodically, the Chief Executive Officer may be asked to attend a specific executive session. The Compensation Committee may from time to time request the attendance of independent compensation consultants at its meetings as well as at executive sessions.

     The Compensation Committee has the authority to engage the services of outside advisors, experts, and others to assist the committee. During fiscal year 2006, the Compensation Committee retained a compensation consultant, Hay Group, to assist it in ensuring that PetSmart’s compensation programs are consistent with our philosophy and aligned with the strategy of PetSmart. Hay Group advises the Compensation Committee on various compensation related matters, including updates on compensation practices within the retail industry, competitive data, benchmarking and market/peer analysis, special projects and compliance issues. Hay Group also collaborates with PetSmart’s management, with the agreement and approval of the Compensation Committee, to ensure calibration and accuracy of information prior to the presentation of Hay Group’s recommendations to the Compensation Committee.

     In addition, PetSmart has an internal compensation team made up of a cross-section of executive officers, whose purpose is to assist the Compensation Committee in making recommendations and to carry out the administrative aspects of PetSmart’s compensation programs, including those for associates other than the executive officers. To assist the internal compensation team, management retained Hewitt Associates to provide consulting services regarding our benefit plans. Management also retained Hay Group to assist in compiling compensation data, conducting analyses, consulting services, and supplementing internal resources for market analysis. The Compensation Committee believes the work performed by Hay Group for management does not in any way impact its independence.

Compensation Philosophy

     The compensation philosophy of the Compensation Committee is built upon the principles of pay for performance, shared ownership and alignment with the long-term interests of our stockholders. We also believe it is important that our compensation philosophy support PetSmart’s strategy of consistent, efficient long-term growth. As a result, PetSmart’s executive compensation programs emphasize at-risk pay through the use of performance-based incentive awards, long-term equity with significant upside potential, and limited use of perquisites. Base salaries are targeted to be at approximately the 50th percentile of the market for comparable companies. Total cash compensation (the combination of base salary plus short-term incentives) is targeted at the 50th percentile with a payout opportunity at approximately the 75th percentile of the market for superior company performance. Total direct compensation (the combination of base salary plus short and long-term incentives) provides the opportunity to earn above the 75th percentile if PetSmart’s performance is significantly greater than the market. This philosophy supports the need to attract and retain executive talent with the specific skill sets required to ensure PetSmart’s continued success, including solid leadership, long-term strategic vision, a customer-centric focus and strong results orientation. Pay for performance considers individual executive goal attainment, the financial and non-financial goals of PetSmart, and the long-term responsible improvement of stockholder returns.

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Determining Executive Compensation

     When evaluating executive compensation, the Compensation Committee considers, in part:

  • pay for individual and company performance;
     
  • alignment with the stated compensation philosophy;
     
  • the need to attract and retain quality leadership;
     
  • relative internal equity between officers;
     
  • appropriate cost management; and
     
  • continued focus on corporate governance.

     This process includes a review of PetSmart’s entire compensation program, and an analysis for each executive officer of all elements of compensation as compared to individual and PetSmart’s performance and objectives. The Compensation Committee works directly with Hay Group to determine compensation for the Chief Executive Officer. The Chief Executive Officer makes compensation recommendations to the Compensation Committee for the remaining executive officers for its review and approval. The Senior Vice President, People is responsible for the design and implementation of all of PetSmart’s compensation programs as approved by the Compensation Committee or its delegee.

     The Compensation Committee utilizes compensation consultants to analyze our executive compensation compared to the consultant’s own proprietary retail-specific survey as well as the approved peer group. The proprietary retail industry survey includes over 70 retailers and provides data by job title controlling for differences in responsibility and revenue. The Compensation Committee determines our peer group using the following criteria:

  • publicly-held specialty retailers with a similar level of performance, net income growth and total shareholder return;
     
  • revenues typically from one-half to twice that of PetSmart;
     
  • a multi-channel retail structure with an emphasis on hard goods;
     
  • specific characteristics matching PetSmart’s current or potential business model; and/or
     
  • potential competitors for executive talent.

     This peer group is reviewed periodically by the Compensation Committee and may change from time to time based on the current competitive environment. The current peer group is comprised of the following companies:

  • Advance Auto Parts
  • AutoZone
  • Barnes & Noble
  • Borders Group
  • CarMax
  • Dick’s Sporting Goods
  • Dollar General
  • Dollar Tree Stores
  • Family Dollar Stores
  • Foot Locker
  • Guitar Center, Inc.
  • Office Max
  • Payless Shoes
  • Ross Stores
  • Talbots
  • Williams-Sonoma
  • Zale

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     Benchmarking is one component in determining executive officer compensation. The Compensation Committee compares each element of compensation separately and in the aggregate to compensation at certain companies PetSmart benchmarks against, sometimes referred to as our peer group, as well as a larger retail comparator group. As compared to benchmarks in the 2006 study, base salaries for our executives trend slightly below the 50th percentile. Our target annual performance incentives create total cash compensation that is at or slightly below the 50th percentile for most positions. Our total direct compensation trends between the 75th and 90th percentile resulting from long term incentive equity grants between the 75th and 90th percentile. We provide limited benefits and perquisites. The Compensation Committee believes our executive compensation packages are reasonable when considering our business strategy, compensation philosophy, and the competitive market.

Design and Elements of our Compensation Program

     The four elements of executive compensation for our executive officers, including the named executive officers, are: (1) base salary, (2) annual performance incentive, (3) long-term equity incentive compensation consisting of stock options and restricted stock, and (4) benefits. These elements are designed to:

  • ensure that PetSmart executives have clear goals and accountability with respect to PetSmart’s performance;
     
  • ensure pay for performance and encourage responsible business growth;
     
  • establish pay opportunities that are competitive with prevailing industry practices, our stage of growth and the labor markets in which we operate;
     
  • align incentive and equity compensation with PetSmart’s strategy and the long-term interests of PetSmart stockholders; and
     
  • assist PetSmart with attraction, retention and motivation of key executive talent.

     Each of the four elements are discussed below in greater detail:

     1. Base Salary. The base salary for executive officers is set annually by reviewing, in order of importance, the skills and performance levels of individual executives, the needs of PetSmart, and the competitive pay practices of companies with which we compete for executive talent. In determining individual base salaries, the Compensation Committee considers job experience, individual performance, and the internal value of the position. Base salary for new executive officers is also set utilizing the above criteria, and after considering the length and breadth of the individual’s experience within the retail industry and specific functional area.

     The base salaries paid to our named executive officers are set forth in the Summary Compensation Table. For fiscal year 2006, the Chief Executive Officer’s base pay was slightly below the 50th percentile of the market. For the remaining named executive officers, base pay was at or slightly below the 50th percentile. For fiscal year 2007, the Chief Executive Officer’s base pay has been set at $950,000, which is slightly below the 50th percentile of the market. For the remaining executive officers base pay is generally set at the 50th percentile for fiscal year 2007. We believe that the base salary paid to our executive officers during fiscal year 2006 and as set for fiscal year 2007 achieves our executive compensation objectives, compares favorably to our peer group and is within our target of providing base salary at or near the market median.

     2. Annual Performance Incentive. The annual performance incentive is designed to motivate executives to attain short-term objectives that align with long-term business goals. Our policy is to have a significant portion of an executive’s total cash compensation tied to PetSmart’s overall performance. At the beginning of each fiscal year, under the Executive Short-Term Incentive Plan, or the ESTIP, the Compensation Committee assigns each executive officer an incentive target equal to a specified percentage of his or her annual base salary. The Chief Executive Officer’s incentive target is 100%, the President and Chief Operating Officer’s target is 75%, and the target for the remaining executive officers is 50%.

     The ESTIP, which was last approved by the stockholders in 2002 and is proposed to be reapproved at the 2007 Annual Meeting, is designed and administered in a manner intended to qualify incentive awards to our executive officers as “performance-based compensation.” This is intended to allow PetSmart to fully deduct for federal income

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tax purposes the compensation paid under the ESTIP. The incentive targets and the performance metrics for each executive are determined by the Compensation Committee at the beginning of each fiscal year based on the executive’s position and responsibilities.

     For purposes of evaluating performance the Compensation Committee may adjust GAAP results for specific nonrecurring extraordinary items we do not consider core to our operating business, for example certain litigation expenses, insurance recoveries or restructuring activities. In addition, the Compensation Committee has discretion to pay out awards above 200% of base pay in the form of equity.

Fiscal Year 2006

     For fiscal year 2006 the incentive payout to our executive officers was a function of three performance goal measures:

  • PetSmart’s overall performance relative to an earnings per share target;
     
  • return on invested capital; and
     
  • increase in sales.

     The Compensation Committee believes earnings per share is the best indicator to our stockholders of overall business health. Return on invested capital ensures PetSmart’s executive officers focus on creating efficient growth. In a period of rapid expansion, sales growth focuses executive officers on both strengthening PetSmart’s core business and developing new and innovative services. The ESTIP provides for alternative stockholder approved performance goal measures, including net income, customer satisfaction, increase in stock price, return on equity, and return on assets. We have selected some of these in the past and may select some of these in the future based upon our strategic initiatives. For example, customer satisfaction (as determined by an independent professional survey research firm) was a measure utilized in the ESTIP prior to 2006. It was removed because the remaining incremental achievement opportunity was no longer considered significant enough to warrant inclusion in a performance-based incentive pay plan. Increase in sales was added in 2006 as our services business gained momentum.

     The Compensation Committee typically sets realistic but challenging targets for each measure. Targets were based on a formulaic improvement over the previous year’s results tied directly to PetSmart’s strategic plan as well as published guidance given to our stockholders and the investor community. Each measure contained a payout opportunity between 50% and 300% of the target award. The 200% and 300% payouts represent increasingly challenging incremental improvements over the target award. A minimum earnings per share achievement of 90% of target was required in order for any payout to occur from the ESTIP. This also acted as the 50% payout target for the earnings per share measure.

     The total incentive achievement for fiscal year 2006, for Messrs. Francis, Moran and Kullman was at 86.5% and for Ms. Fitzgerald, and Mr. Lenhardt, at 89.0% of their incentive target. Over the past three years ESTIP performance exceeded target levels each year including two years slightly above 100% and one year slightly above 200%. The performance reduction in 2006 is a factor of the increasing weight of return on invested capital as a component of the total incentive payout along with lower achievement in both earnings per share and return on invested capital.

Fiscal Year 2007

     Fiscal year 2007 continues our 2006 philosophy. The same measures will be used but the weighting has been revised to increase the emphasis on capital investment efficiency in support of our new store and PetsHotel expansion strategies. Additionally, weights were standardized for all executive officers to encourage a cross-functional team focus. As in fiscal year 2006, a minimum earnings per share achievement of 90% of target must be met in order for any payout to occur from the ESTIP and each measure contains a payout opportunity between 50% and 300% of the target award.

     3. Equity-Based Incentive Compensation. Equity-based incentive compensation is provided to certain employees, including executive officers, to link a portion of compensation to the long-term financial success of PetSmart and as a retention tool. Equity compensation is comprised of both stock options and restricted stock, which are subject to time based vesting. The Compensation Committee believes stock options are inherently performance-based as the executive officer does not receive any benefit unless the stock price rises after the date the option is

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granted. Restricted stock is generally awarded as a retention vehicle and to support the attraction of leadership talent. However, restricted stock also serves to align our executive officers with the long-term interests of our shareholders through the use of four year cliff vesting and the Officer and Director Stock Ownership Guidelines. See page 9 for a discussion of these guidelines.

     Historically, stock awards have been granted through the 2003 Equity Incentive Plan, or the 2003 Plan, and our 1997 Equity Incentive Plan, or the 1997 Plan. In June 2006, our stockholders approved the combination of these two plans into the 2006 Equity Incentive Plan, or the 2006 Plan, from which future stock awards are expected to be granted.

     The stock options under the 1997 Plan and 2003 Plan historically have a ten-year maximum term from the date of grant, or earlier if employment terminates. Stock option grants are subject to vesting requirements. Commencing in fiscal year 2006 the maximum term for stock options was reduced to seven years. The grant date of such awards is always on or after the date the Compensation Committee or its delegate approves the grants. Options historically have vested over a period of four years with 25% of the shares vesting on the one-year anniversary of the date of grant and the remaining 75% of the shares vesting each month thereafter on a ratable basis over a period of 36 months in accordance with their terms. In January 2005, vesting was changed for future grants to 25% on consecutive yearly anniversaries of the date of grant. Executive officers were granted options to purchase an aggregate of 527,093 shares during fiscal year 2006. Grants to our named executive officers comprised 26.05% of all equity awards granted. In granting options under the 2006 Plan, the Compensation Committee takes into account each executive’s responsibilities, relative position at PetSmart, and past grants.

     In fiscal year 2006, we continued to grant restricted stock to executive officers in addition to stock options. These grants generally become 100% vested on the fourth anniversary of the date of grant. We believe that this vesting schedule acts as a significant retention tool and also links the compensation of our executive officers with the long-term interests of our stockholders. The earlier vesting of restricted stock may occur in the event of a change in control or, in some cases, in the event of an executive retirement that is pursuant to the requirements as set forth in the grant documents.

     Historically, an annual equity award was granted to all eligible participants, including executive officers, within the first two weeks after the close of our fiscal year. Commencing in February 2008, we intend to grant annual equity awards following the release of our year-end financial results. From time to time, the Compensation Committee may also approve additional equity awards to executive officers to recognize exceptional performance, the assumption of additional responsibilities or for retention purposes. Prior to fiscal year 2007, the exercise price of stock option grants was determined by reference to the closing price of our common stock on the last trading day prior to the date of grant. However, the Compensation Committee approved an amendment to the 2006 Plan effective in fiscal year 2007, to determine the exercise price of stock option by reference to the closing price of our common stock on the date of grant.

     Consistent with our compensation philosophy, in fiscal year 2006, equity grants to the named executive officers generally reflected the 90th percentile of the market with the exception of Mr. Francis, whose award was slightly above the 75th percentile. As a result, total direct compensation for the named executive officers on average trended between the 75th percentile and 90th percentile. The specific equity grants awarded to the named executive officers are set forth in the “Summary Compensation Table.” Equity grants in fiscal year 2007, which occurred in February 2007, continued this philosophy.

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     4. Benefits. We provide benefit programs to executive officers and to other employees. The following table generally illustrates such benefit plans and identifies those employees who may be eligible to participate:

    Certain Managers  
    and high-level individual  
Benefit Plan Executive Officers contributors Other Full Time Employees
      401(k) Plan  ü ü ü
      Medical/Dental/Vision Plans  ü ü ü
      Life and Disability Insurance (1)  ü ü ü
      Employee Stock Purchase Plan  ü ü ü
      Short Term Incentive Plan (2)  ü ü ü
      Equity Incentive Plans  ü ü Not Offered
      Change in Control and Severance Plan (3)  ü ü Not Offered
      Deferred Compensation Plan (4)  ü ü Not Offered
      Supplemental Early Retirement Plan  Not Offered Not Offered Not Offered
      Employee Stock Ownership Plan  Not Offered Not Offered Not Offered
      Defined Benefit Pension Plan  Not Offered Not Offered Not Offered
____________________

(1)       PetSmart provides company-paid Long-Term Disability insurance to eligible full-time employees with a monthly benefit in the amount of 60% of qualified salary to a maximum of $10,000 per month. All of PetSmart’s officers receive Company-paid Long-Term Disability coverage that provides a monthly benefit of 66.67% of qualified salary to a maximum of $15,000 per month.
 
(2) PetSmart has two short-term incentive plans, the Executive Short Term Incentive Plan, or ESTIP, and the Short Term Incentive Plan, or STIP. The ESTIP covers our executive officers, while the STIP is for all other eligible employees. The incentive targets and the company performance metrics for the ESTIP and the STIP are determined by the Compensation Committee at the beginning of each fiscal year based on the position and responsibility of each employee.
 
(3) Details of the Change in Control and Severance Plan may be found below.
 
(4) PetSmart has implemented a Deferred Compensation Plan that allows executive officers and certain management-level employees to defer receipt of certain salary and cash bonus payments on a pre-tax basis. The amount deferred under the Deferred Compensation Plan may be indexed to certain approved investment funds. PetSmart matches a percentage of employee deferrals up to a maximum employee deferral of 10% of the salary of the employee. The actual amount PetSmart matches is a function of PetSmart’s overall performance relative to an earnings per share target. PetSmart also provides a 401(k) restoration match equal to 50% of the participant’s annual deferral amount up to 6% of the participant’s annual base salary reduced by the amount of any matching contributions made to the 401(k) Plan.

     We believe perquisites for executive officers should be extremely limited in scope and value. As a result, PetSmart has historically given nominal perquisites. The following table generally illustrates the perquisites we do and do not provide and identifies those employees who may be eligible to receive them:

Types of Perquisites Executive Officers Certain Managers Full Time Employees
      Employee Discount  ü ü ü
      Financial Planning Allowance (1)  ü ü Not Offered
      Automobile Allowance  Not Offered Not Offered     Not Offered (2)
      Country Club Memberships  Not Offered Not Offered Not Offered
      Personal Use of Company Aircraft  Not Offered Not Offered Not Offered
      Security Services  Not Offered Not Offered Not Offered
      Dwellings for Personal Use (3)  Not Offered Not Offered Not Offered
____________________

(1)       We provide our officers with a limited taxable reimbursement allowance for professional services such as financial planning, life insurance, estate planning and tax preparation. See the “Summary Compensation Table” for details regarding actual levels provided to executive officers.

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(2)       Certain field employees receive reimbursement, in accordance with the Internal Revenue Code, for various costs incurred in connection with utilization of their personal vehicle for business travel that is in addition to typical business expenses.
 
(3) We do not provide dwellings for personal use other than short-term temporary housing related to relocation.

Severance and Change in Control Arrangements

     We have entered into agreements with our executive officers providing severance and change in control benefits, the terms of which are described below under “Employment and Severance Agreements.” We believe these severance and change in control benefits are an essential element of our overall executive compensation package and assist us in recruiting and retaining talented individuals and aligning the executive officer’s interests with the interests of our stockholders.

Change in Control Arrangements

     With respect to change of control benefits, we provide severance compensation if an executive officer is terminated in connection with a change of control transaction. These change of control benefits that are structured on a “double-trigger” basis, meaning that before an executive officer can receive severance compensation: (1) a change of control must occur and (2) three months prior to or within 36 months following the change in control, the executive officer’s employment must be terminated for good reason or without cause. These provisions were included to motivate our executive officers to act in the best interests of our stockholders by removing the distraction of post-change of control uncertainties faced by the executive officers with regard to their continued employment and compensation. We believe that double-trigger change of control severance compensation is attractive to maintain continuity and retention of key management personnel and is consistent with our compensation philosophy. We also provide single trigger acceleration of 50% of outstanding stock awards and “double trigger” full acceleration of such stock awards in the event of a covered termination pursuant to our Executive Change in Control and Severance Benefit Plan.

Severance Arrangements

     We also believe that the other severance benefits described below are appropriate, particularly with respect to a termination by PetSmart without cause. In that scenario, both PetSmart and the executive officer have a mutually-agreed-upon severance package that is in place prior to any termination event. We believe this arrangement provides PetSmart with greater flexibility to make a change in executive management if such a change is in the stockholders’ best interests.

Limitation on Deduction of Compensation Paid to Certain Executive Officers

     Section 162(m) of the Internal Revenue Code denies a deduction to any public corporation such as PetSmart for compensation paid in a taxable year to certain executive officers to the extent that compensation exceeds $1 million. Compensation exceeding $1 million may be deducted only if it is “performance-based compensation” within the meaning of Section 162(m).

     The ESTIP and the 2006 Plan have been designed in a manner to permit the grant of cash bonus awards and stock options to the named executive officers that qualify as “performance-based compensation.” PetSmart believes that the tax deduction of compensation is an important factor in setting executive compensation policy. PetSmart makes an effort to structure individual compensation and compensation programs to allow it to fully deduct compensation in accordance with Section 162(m). However, if compliance with Section 162(m) conflicts with the PetSmart compensation philosophy, or what is believed to be in the best interests of PetSmart and its stockholders, we may conclude that paying non-deductible compensation is more consistent with that philosophy and in the best interests of PetSmart and our stockholders. For example, in prior years we approved awards of restricted stock to certain executive officers, including Mr. Francis, all subject to four-year cliff vesting. It is likely that any deduction in connection with the award could be limited by the application of Section 162(m). We believe the award forms an important part of our executive officers’ total compensation and incentive program, notwithstanding the possible application of the Section 162(m) deduction limitation.

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Compensation Committee Interlocks and Insider Participation

     No member of the Compensation Committee is an officer or employee of PetSmart, and none of our executive officers serve as a member of a compensation committee of any entity that has one or more executive officers serving as a member of our Compensation Committee.

EXECUTIVE COMPENSATION

     The following table shows for the fiscal year ended January 28, 2007 compensation awarded to, paid to, or earned by, our Chief Executive Officer, Chief Financial Officer and our three other most highly compensated executive officers as of January 28, 2007.

Summary Compensation Table

                              Change in          
            Pension    
            Value and    
          Non-Equity Nonqualified    
      Stock Option Incentive Plan Deferred All Other  
  Fiscal   Awards Awards Compensation   Compensation   Compen-  
Name and Principal Position  Year Salary (1) (2) (3) Earnings (4) sation (5) Total
Philip L. Francis 2006 $905,769 $1,252,489 $778,869 $783,490   $197,930   $135,485 $4,054,032
       Chief Executive Officer                 
       and Chairman of the                 
       Board                 
  
Timothy E. Kullman 2006 406,154 923,040  288,572 175,661   13,804   41,061 1,848,292
       Chief Financial Officer                 
       and Senior Vice                 
       President                 
  
Robert F. Moran 2006 693,077 476,549  653,039 449,634   286,347   113,343 2,671,989
       President and Chief                 
       Operating Officer                 
  
Barbara A. Fitzgerald 2006 406,154 375,724  265,455 180,738   239,984   49,144 1,517,199
       Senior Vice President,                 
       Special Projects                 
  
David K. Lenhardt 2006 345,384 419,374  265,455 153,696   129,054   48,251 1,361,214
       Senior Vice President,                             
       Services and Store                     
       Operations                 
____________________
 
(1)       Represents the aggregate proportionate fair value of shares of restricted common stock granted in fiscal year 2002 through fiscal year 2006 recognized as a compensation expense in PetSmart’s financial statements for fiscal year 2006. The grant date fair value for each share of restricted common stock is based on the closing price of PetSmart’s common stock on the date of grant. Generally, the restricted stock awards vest four years from the date of the grant. Quarterly dividends of $0.03 per share were paid on shares of restricted stock during fiscal year 2006.
 
(2) Represents the aggregate proportionate fair value of stock options granted in fiscal year 2002 through fiscal year 2006 recognized as a compensation expense in PetSmart’s financial statements for fiscal year 2006. The grant date fair value is determined in accordance with SFAS No. 123(R), disregarding any estimates of forfeitures.
 
(3) Represent performance bonuses paid under our Executive Short-Term Incentive Plan.
 
(4) Represents aggregate earnings under our Deferred Compensation Plan.

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(5)       Includes the following dividends on restricted stock held by each named executive officer: Philip L. Francis – $31,950; Timothy E. Kullman – $10,200; Robert F. Moran – $22,590; Barbara A. Fitzgerald – $8,550; and David K. Lenhardt – $11,100. In addition, the aggregate value of perquisites and other personal benefits provided to the named executive officers is included in this column and set forth in detail in the table below this note, even if the amount is less than the reporting threshold established by the SEC.
 
               Deferred                                                  
    Deferred Comp.   Group Executive         Short    
    Comp. Plan Plan 401(k) 401(k) Term Life   Long Term   Executive Life     Term   Annual
    Performance-   Restoration   Company   (Imputed   Disablity Choice   Insurance   Medical Dental   Disability   Executive   Perquisite
Name Year   Based Match Match Match Income)   Premium (a) Premium   Premium   Premium   Premium   Physical   Total
Philip L. Francis  2006 $8,750 $20,242   $6,114   $6,571   $5,802    $40,000  $1,086   $8,399   $193    $1,272   $5,106   $103,535 
Timothy E. Kullman    2006     2,239 5,104     6,151     968     2,775    0  487   8,386      193    1,272   3,286   30,861 
Robert F. Moran  2006   6,700   14,048   6,145   3,217   4,495      40,000    831     8,386    193      1,272   5,466   90,753 
Barbara A. Fitzgerald  2006   4,000 5,895   6,151   1,811   2,775    6,421  487   5,335    193    1,272     6,254   40,594 
David K. Lenhardt  2006   3,300 3,890   6,190   305   2,328    13,924  414   5,335    193    1,272   0   37,151 
____________________
 
(a)       Represents a limited taxable reimbursement allowance for professional services such as financial planning, life insurance, estate planning and tax preparation, which are focused on assisting executive officers in achieving the highest value from their compensation package

GRANTS OF PLAN-BASED AWARDS

                            All Other                        
            Stock All Other      
            Awards: Stock Exercise    
            Number Awards: of Base   Grant Date
      Estimated Future Payouts Under of Shares Number of Price of Closing Fair Value of
  Date of   Non-Equity Incentive Plan of Stock Securities Option Price on Stock and
  Corporate Grant Awards (1) or Units   Underlying   Awards Grant Stock Option
Name  Approval Date Threshold     Target     Maximum (2) Options (3)   ($/Sh) Date Awards
Philip L. Francis  1/27/2006 2/6/2006 $0 $905,769 $2,717,300 35,000     120,000    $24.04(4) $24.84(6) $1,871,000(8)
Timothy E. Kullman    1/27/2006 2/6/2006   0 203,077   609,231   17,000   35,000     24.04(4)    24.84(6) 708,980(8)
Robert F. Moran  1/27/2006   2/6/2006   0   519,808 1,559,423 30,000   95,000      24.04(4)  24.84(6) 1,536,300(8)
Barbara A. Fitzgerald  1/27/2006 2/6/2006     0 203,077 609,231 12,000   35,000     24.04(4)  24.84(6)   588,780(8)
David K. Lenhardt  1/27/2006 2/6/2006   0 172,692 518,076 12,000   35,000     24.04(4) 24.84(6) 588,780(8)
5/22/2006 5,000    27.20(5) 26.75(7) 136,000(9)
____________________
 
(1)       Represents amounts payable under the Executive Short Term Incentive Plan. On January 27, 2006, the Compensation Committee of the Board of Directors selected the following business criteria pursuant to the Executive Short Term Incentive Plan for determining the amount of cash bonuses to be awarded to each named executive officer for fiscal year 2006: (a) earnings per share, (b) return on investment, and (c) increase in sales. The Compensation Committee approved the following target bonuses: Philip L. Francis – 100% of salary; Timothy E. Kullman – 50% of salary; Robert F. Moran – 75% of salary; Barbara A. Fitzgerald – 50% of salary; and David K. Lenhardt – 50% of salary. In addition, the Compensation Committee approved a maximum payment of three times the amount of each named executive officer’s target bonus. Finally, the Compensation Committee approved the following business criteria weightings: Philip L. Francis, Timothy E. Kullman, Robert F. Moran – 50% earnings per share, 30% return on investment, and 20% increase in sales; and Barbara A. Fitzgerald and David K. Lenhardt – 60% earnings per share, 20% return on investment, and 20% increase in sales. Pursuant to the Executive Change in Control and Severance Benefit Plan (described under “Employment and Severance Arrangements” below), should a participant experience a covered termination either within three months prior to or 36 months following a change in control of PetSmart, cash incentive payments and restricted stock paid in lieu of cash incentive payments under the Executive Short Term Incentive Plan will be paid promptly thereafter.

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(2)       Represents a restricted stock award granted under the 2003 Equity Incentive Plan. Restricted stock awards generally cliff vest after four years. Vesting will accelerate: (a) in the event of a qualified retirement termination, or (b) in the event of termination covered by the Executive Change in Control and Severance Benefit Plan, please see “Employment and Severance Arrangements” below.
 
(3) Represents a stock option granted under the 2003 Equity Incentive Plan. Options allow the participant to purchase a share of PetSmart common stock at the fair market value per share of PetSmart common stock on the date of grant. Stock option vests and becomes exercisable as to 25% of the shares on the yearly anniversary of the date of grant over four years. Vesting will accelerate: (a) in the event of termination covered by the Executive Change in Control and Severance Benefit Plan, or (b) pursuant to certain employment agreements, please see “Employment and Severance Arrangements” below. Options generally terminate three months after termination of a participant’s service for any reason other than disability or death, 12 months after termination due to disability, 18 months after termination due to death, and 12 months after a change in control of PetSmart.
 
(4) Represents the closing price of our common stock on February 3, 2006 as reported on the NASDAQ Global Select Market, the last trading day prior to the date of grant on February 6, 2006.
 
(5) Represents the closing price of our common stock on May 19, 2006 as reported on the NASDAQ Global Select Market, the last trading day prior to the date of grant on May 22, 2006.
 
(6) Represents the closing price of our common stock on February 6, 2006 as reported on the NASDAQ Global Select Market.
 
(7) Represents the closing price of our common stock on May 22, 2006 as reported on the NASDAQ Global Select Market.
 
(8) Represents the aggregate grant date fair value of each award computed in accordance with SFAS No. 123(R). The per-share fair value of each stock option is $8.58. The per-share fair value of each share of restricted common stock is $24.04.
 
(9) Represents the aggregate grant date fair value of each award computed in accordance with SFAS No. 123(R). The per-share fair value of each share of restricted common stock is $27.20.

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OUTSTANDING EQUITY AWARDS AT FISCAL YEAR END

       Option Awards      Stock Awards
                                       Equity
              Incentive
              Plan
              Awards:
              Number of
  Number of Number of     Number   Unearned
  Securities Securities     of Shares Market Value of Shares, Units
  Underlying Underlying     or Units of Shares or Units or Other
  Unexercised Unexercised Option Option Stock That of Stock That Rights That
  Options (#) Options (#) Exercise Expiration Have Not Have Not Vested Have Not
Name  Exercisable Unexercisable Price Date Vested (#) (3) (4) Vested (#)
Philip L. Francis  115,773   0 $ 7.6250 2/26/2008 45,000   $1,367,100   45,000   
  50,000   0 8.7500 3/29/2009 100,000   3,038,000   100,000   
  200,000   0 10.5500 2/5/2012 50,000   1,519,000   50,000   
  200,000   0 12.9500 3/24/2012 45,000   1,367,100   45,000   
  132,188   2,812 (1)  14.8800 2/4/2013 35,000   1,063,300   35,000   
  72,917   27,083 (1)  23.4200 2/4/2014      
  23,750   71,250 (2)  30.2000 2/2/2015      
  0   120,000 (2)  24.0400 2/5/2013      
  
Timothy E. Kullman  0   0 14.5600 7/7/2012 17,000   516,460   17,000   
  2,500   1,250 (1)  14.8800 2/4/2013 20,000   607,600   20,000   
  1,771   11,510 (1)  23.4200 2/4/2014 21,250   645,575   21,250   
  7,500   22,500 (2)  30.2000 2/2/2015 14,000   425,320   14,000   
  0   35,000 (2)  24.0400 2/5/2013 12,000   364,560   12,000   
          5,000   151,900   5,000   
  
Robert F. Moran  6,772   0 8.4375 7/18/2009 35,000   1,063,300   35,000   
  302,596   0 8.4375 7/18/2009 50,000   1,519,000   50,000   
  125,000   0 3.0625 3/27/2010 43,750   1,329,125   43,750   
  100,000   0 3.0300 3/27/2011 37,000   1,124,060   37,000   
  100,000   0 3.0300 3/27/2011 30,000   911,400   30,000   
  130,991   0 9.0000 12/10/2011      
  100,000   0 10.5500 2/5/2012      
  100,000   0 12.9500 3/24/2012      
  117,500   2,500 (1)  14.8800 2/4/2013      
  63,802   23,698 (1)  23.4200 2/4/2014      
  20,250   60,750 (2)  30.2000 2/2/2015      
  0   95,000 (2)  24.0400 2/5/2013      
  
Barbara A. Fitzgerald  0   0 4.6300 9/17/2010 17,000   516,460   17,000   
  75,000   0 3.0300 3/27/2011 21,250   645,575   21,250   
  75,000   0 10.5500 2/5/2012 10,000   303,800   10,000   
  58,750   1,250 (1)  14.8800 2/4/2013 14,000   425,320   14,000   
  30,990   11,510 (1)  23.4200 2/4/2014 12,000   364,560   12,000   
  7,500   22,500 (2)  30.2000 2/2/2015      
  0   35,000 (2)  24.0400 2/5/2013      
   
David K. Lenhardt  25,000   0 4.6600 10/1/2010 17,000   516,460   17,000   
  25,000   0 3.0300 3/27/2011 20,000   607,600     20,000   
    75,000   0   10.5500 2/5/2012 21,250   645,575   21,250   
  58,750     1,250 (1)  14.8800 2/4/2013 10,000   303,800   10,000   
  30,990   11,510 (1)  23.4200   2/4/2014 14,000     425,320   14,000   
  7,500   22,500 (2)  30.2000 2/2/2015   12,000   364,560   12,000   
  0   35,000 (2)  24.0400 2/5/2013 5,000     5,000   

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____________________
 
(1)       Stock option vests as to 25% of the shares on the one-year anniversary of the date of grant, and the remaining 75% of the option shares vest and become exercisable each month thereafter on a ratable basis over a period of 36 months in accordance with their terms. Vesting will accelerate: (a) in the event of termination covered by the Executive Change in Control and Severance Benefit Plan, or (b) pursuant to certain employment agreements, please see “Employment and Severance Arrangements” below.
 
(2) Stock option vests and becomes exercisable as to 25% of the shares on the yearly anniversary of the date of grant over four years. Vesting will accelerate: (a) in the event of termination covered by the Executive Change in Control and Severance Benefit Plan, or (b) pursuant to certain employment agreements, please see “Employment and Severance Arrangements” below.
 
(3) Shares of restricted common stock generally cliff vest after four years. Vesting will accelerate: (a) in the event of a retirement termination, (b) in the event of termination covered by the Executive Change in Control and Severance Benefit Plan, or (c) pursuant to certain employment agreements, please see “Employment and Severance Arrangements” below.
 
(4) Calculated by multiplying the number of shares of restricted common stock by the closing price ($30.38) of PetSmart’s common stock on January 26, 2007, the last trading day before the end of the 2006 fiscal year, as reported on the NASDAQ Global Select Market.

OPTION EXERCISES AND STOCK VESTED

        Option Awards       Stock Awards
  Number of Shares         Number of Shares        
  Acquired on Value Realized Acquired on Value Realized
Name  Exercise (#) on Exercise (1) Vesting (#) on Vesting
Philip L. Francis  225,000       $5,038,927 
Timothy E. Kullman    100,886         1,231,150 
Robert F. Moran              
Barbara A. Fitzgerald  154,000       3,770,758 
David K. Lenhardt  75,000       1,906,918 
____________________
 
(1)       Amounts are based on the sales price of our common stock on the exercise date less the aggregate exercise price. The value realized was determined without considering any taxes that may have been owed. The exercise price of each stock option was equal to the closing price of our common stock as reported on the NASDAQ Global Select Market for the last trading day prior to the date of grant.

NONQUALIFIED DEFERRED COMPENSATION

        Executive       Registrant       Aggregate       Aggregate       Aggregate
  Contributions Contributions Earnings in Withdrawals/ Balance at
Name  in Last FY in Last FY (1) Last FY (2) Distributions Last FYE (3)
Philip L. Francis    $414,643   $28,992   $197,930   $2,290,822
Timothy E. Kullman  6,481     7,343     13,804   123,846
Robert F. Moran  147,665   20,748   286,347     3,135,135
Barbara A. Fitzgerald  202,610   9,895   239,984     2,075,379
David K. Lenhardt  80,647   7,190   129,054 $137,906  1,172,977
____________________
 
(1)       Amounts in this column are PetSmart’s are reflected in the “All Other Compensation” column in the “Summary Compensation Table” and are comprised of Performance-Based Match and 401(k) Restoration Match. Please see footnote 5 to the “Summary Compensation Table.”

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(2)       Amounts in this column are included in the “Non-Equity Incentive Plan Compensation” column in the “Summary Compensation Table.”
 
(3) Amounts in this column previously were reported as compensation to the named executive officer in the “Summary Compensation Table” for prior years.

Nonqualified Deferred Compensation Plans

General

     We maintain the PetSmart, Inc. Amended and Restated Deferred Compensation Plan, or Frozen Deferred Compensation Plan, and the PetSmart, Inc. 2005 Deferred Compensation Plan, or the 2005 Deferred Compensation Plan and collectively, the Deferred Compensation Plans. The Frozen Deferred Compensation Plan was established effective as of March 26, 2002 and its terms govern amounts that were earned and vested by participants as of December 31, 2004 (and any earnings on such amounts). No further deferrals or contributions may be made under the Frozen Deferred Compensation Plan as of December 31, 2004. The 2005 Deferred Compensation Plan was established effective after January 1, 2005 and its terms govern all amounts that were deferred by participants or other contributions to participants’ accounts by PetSmart on or after January 1, 2005 (and any earnings on such amounts).

     The Deferred Compensation Plans are non-tax-qualified, unfunded and unsecured deferred compensation plans that are intended to provide a select group of management and highly compensated employees (including executive, senior and corporate officers) and directors the opportunity to defer receipt and taxation of certain forms of compensation.

Compensation Eligible for Deferral and Company Contributions

     The 2005 Deferred Compensation Plan allows participants to defer the following amounts: (i) up to 75% of annual base salary; (ii) up to 100% of bonus or incentive compensation that is payable in cash; (iii) up to 100% of directors’ fees that are payable in cash; (iv) 100% of any annual 401(k) plan refund offset amounts (amounts that may be refunded to participants from the Company’s 401(k) plan as a result of certain nondiscrimination testing); and (v) 100% of any annual 401(k) plan reduction amounts (amounts that participants may not be able to defer under our 401(k) plan as a result of certain nondiscrimination testing). The same types of compensation were permitted to be deferred under the Frozen Deferred Compensation Plan.

     Under the 2005 Deferred Compensation Plan, we may contribute to participants’ accounts annual 401(k) plan restoration matching contributions that are intended to provide participants with amounts that were not able to be made as matching contributions under our 401(k) plan due to certain nondiscrimination requirements. In addition, we may contribute to participants’ accounts annual performance-based matching amounts (up to 10% of annual base salary) that are contingent on our achievement of certain pre-tax earnings targets established by the 401(k) and our deferred compensation committee, or the Deferred Compensation Committee. The Frozen Deferred Compensation Plan also provided for 401(k) plan restoration matching contributions and performance-based matching amounts.

     Participants are fully vested in all amounts deferred or credited to their accounts under the Deferred Compensation Plans, except that any 401(k) plan restoration matching contributions and performance-based matching amounts become fully vested only after participants have completed five years of service with PetSmart. However, in the event of a participant’s retirement, disability, death during employment or a change in control of PetSmart, all amounts become immediately and fully vested. In the event that any benefits provided to a participant under the Deferred Compensation Plans constitute “parachute payments” under Section 280G of the Internal Revenue Code and would be subject to the excise tax imposed by Section 4999 of the Internal Revenue Code, benefits will be provided to the participant either in full or to a lesser extent which would result in no portion of the benefits being subject to the excise tax, whichever of such amounts, when taking into account the excise tax and all other applicable taxes, would result in the participant’s receipt of the greatest amount of benefits on an after-tax basis.

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Earnings

     Account balances under the Deferred Compensation Plans are credited with investment earnings (or losses) based on the performance of certain measurement funds selected by participants. The measurement funds offered under the Deferred Compensation Plans are selected by the Compensation Committee and may change from time to time. As of December 31, 2006, the measurement funds offered under the Deferred Compensation Plans are as follows (with 2006 annual rates of return indicated for each): Gartmore VIT Money Market Fund (4.61%); PIMCO VIT Total Return Fund (3.85%); Fidelity VIP Equity Income Fund (20.08%); Dreyfus Stock Index Fund (15.50%); Fidelity VIP Contrafund (11.59%); Oppenheimer Capital Appreciation Fund (7.96%); Goldman VIT Mid Cap Value Fund (16.16%); Gartmore VIT Mid Cap Index Fund (9.90%); AIM V.I. Capital Development Fund (16.51%); Royce Micro Cap Fund (21.07%); Dreyfus Small Cap Index Fund (14.41%); and Fidelity VIP Overseas Fund (17.94%). Participants may change their investment selections prospectively on a daily basis.

Distributions and Withdrawals

     Timing of Distributions and Withdrawals. In general, distributions and withdrawals are permitted on dates pre-selected by participants or upon certain other events. In the case of the Frozen Deferred Compensation Plan, distribution elections in effect on December 31, 2004 will remain in effect, subject to the ability of a participant to change such elections as provided in the Frozen Deferred Compensation Plan. In the case of the 2005 Deferred Compensation Plan, the time and manner of making and of changing elections is governed by Section 409A of the Internal Revenue Code. Distribution events include:

  • Termination of employment (including retirement);
     
  • Change in control of PetSmart (2005 Deferred Compensation Plan only);
     
  • Death;
     
  • Disability;
     
  • Unforeseen financial emergency, as determined by the Deferred Compensation Committee; and
     
  • In the case of the Frozen Deferred Compensation Plan only, a participant may elect to withdraw his or her entire account balance at any time, less a 10% withdrawal penalty.
     

    Limitations on distributions elections:
     
  • Under the 2005 Deferred Compensation Plan, amounts attributable to our 401(k) plan restoration matching contributions or performance-based matching amounts (except for installments payable upon retirement) will only be paid upon the earliest to occur of death, disability, termination of employment or retirement.
     
  • In accordance with Section 409A of the Internal Revenue Code, all distributions under the 2005 Deferred Compensation Plan that are payable to certain “specified employees” upon a separation from service with the Company will be delayed for at least six months following separation.
     
  • A participant may elect to receive a distribution of amounts in his or her account under the Deferred Compensation Plans (other than any amounts attributable to 401(k) plan refund offset or reduction amounts, 401(k) plan restoration matching contributions and performance-based matching amounts) on a date designated by the participant, provided that such date is at least three plan years after the end of the plan year in which the amount is deferred.

     Form of Distribution or Withdrawal. In general, permitted distributions or withdrawals may be made in the form of either a lump sum distribution or in installments as pre-selected by the participants subject to a number of restrictions and limitations. Some of the more material limitations are as follows:

  • Under the Deferred Compensation Plans, amounts that are payable upon retirement may be made in the form of a lump sum or in installments not to exceed fifteen years.

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  • Under the 2005 Deferred Compensation Plan, amounts payable upon termination of employment (prior to retirement, death or disability) may be made in two annual installments if the account balance exceeds $100,000 or in a lump sum if the account balance is $100,000 or less.
     
  • Under the Frozen Deferred Compensation Plan, amounts payable upon termination of employment (prior to retirement, death or disability) may be made in a lump sum or installments of up to five years if the account balance is $50,000 or more, or in a lump sum if the account balance is less than $50,000.
     
  • If a participant dies before he or she retires, terminates employment or incurs a disability, the participant’s beneficiary will receive a benefit equal to the participant’s account balance. Any such benefit under the 2005 Deferred Compensation Plan will be paid in the form of a lump sum, while any such benefit under the Frozen Deferred Compensation Plan will be paid in the form of a lump sum if the amount is less than $50,000, or in a lump sum or installments of up to five years if the amount is $50,000 or more.
     
  • If a participant becomes disabled before his or her account balance under the Deferred Compensation Plans has been fully distributed, the remaining amount will be distributed in a lump sum.
     
  • To the extent permitted by Section 409A of the Code, upon a change in control of PetSmart, participants’ account balances under the 2005 Deferred Compensation Plan will be immediately paid in a lump sum.

EMPLOYMENT AND SEVERANCE ARRANGEMENTS

Employment Agreements

     We have entered into employment agreements or offer letters with our executive officers, which provide for an annual salary and performance incentive payout to be determined from time to time by the Board of Directors, at its discretion, and participation in our employee benefit programs. The agreements also provide for a grant of options to purchase shares of Common Stock under our stock option plans at an exercise price equal to the fair market value of the Common Stock on the date of grant in accordance with our standard vesting policy.

     We have entered into employment agreements with Philip L. Francis, our Chief Executive Officer and Chairman of the Board, and Robert F. Moran, our President and Chief Operating Officer, dated February 10, 1998, and August 25, 1999, respectively. Under the terms of such agreements, in addition to the severance and change in control benefits provided under our Executive Change in Control and Severance Benefit Plan (detailed below), if either Mr. Francis’ or Mr. Moran’s employment is terminated without cause, or either is constructively terminated, the vesting of all stock options then held by Mr. Francis or Mr. Moran, as the case may be, shall continue for one year following such termination.

Executive Change in Control and Severance Benefit Plan

     On March 25, 2003, we adopted an Executive Change in Control and Severance Benefit Plan for our executive officers and other officers to provide certain severance benefits and/or certain benefits upon a change in control.

     Upon a change in control, the plan provides that:

  • 50% of all outstanding stock awards for the executive officers will immediately vest, and the remaining outstanding stock awards will vest on the earliest of: (1) a termination that is covered by the plan; (2) normal vesting; or (3) the passage of three years from the change in control; and
     
  • the executive officer will, subject to certain exceptions, have at least a 12-month period to exercise his or her options following a change in control.

     Upon a termination of employment that is covered by the plan (whether or not in connection with a change in control), the plan provides:

  • for a lump sum salary payment equal to 1.5 to 2.0 multiplied by the greater of: (1) the executive officer’s current monthly salary multiplied by 12; or (2) the greatest amount of base salary received in any 12- month period within the prior three years. Such payment may be reduced in the event the executive officer is employed with PetSmart for less than 12 months; and

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  • that the executive officer will be entitled (but not obligated) to continue health care coverage, life insurance coverage, outplacement benefits, and other enumerated executive benefits with PetSmart. PetSmart will continue to subsidize the portion of the premiums and benefits payable on account of the executive officer for 1.5 to 2.0 years (one year in the case of outplacement benefits or, in the case of health care coverage, until the executive officer obtains coverage from another source).

     Upon a covered termination within three months prior to or within 36 months following a change in control, the plan provides:

  • for a lump sum bonus payment equal to 1.5 to 2.0 multiplied by the sum of the largest amount of any cash incentive payouts (including certain restricted stock or restricted stock units paid in lieu of cash incentive payouts) that were paid to the executive officer during any consecutive 12-month period in the three years immediately preceding the change in control.

     In the event the executive officer is subject to the “golden parachute” excise tax under Section 4999 of the Code in connection with any payment under the plan, we will provide a gross-up payment to offset the financial impact of such tax to the executive officer.

     As a condition of receiving these severance benefits, our executive officers will be required to sign a release of claims and confirm their existing post-termination obligations regarding keeping confidential our proprietary information; refraining from soliciting our employees, other service providers, or suppliers for a limited period of time; and/or not competing with PetSmart for a limited period of time.

Non-Competition Agreements

     Each executive officer has entered into a non-competition agreement that prohibits such executive officer from competing with us for a period of one year after termination of his or her employment with PetSmart.

Retirement, Disability and Death Benefits

     Our executive officers are not generally entitled to any special benefits upon retirement, the occurrence of disability or death, except as follows.

Retirement

     The vesting of restricted stock granted under the 2006 Equity Incentive Plan will accelerate in the event of a retirement termination which occurs when an eligible retiree terminates service with PetSmart either: (a) as a result of their death or disability, or (b) pursuant to their voluntary cessation of employment, but only if: (i) such voluntary cessation has been designated by PetSmart, in our sole discretion, as a retirement, (ii) PetSmart determines that such resignation is not detrimental to it, and (iii) the employee enters into a non-competition agreement in a form acceptable to PetSmart. An employee is an eligible retiree if, at the time of their cessation of employment, they are: (1) an employee, (2) at least 55 years of age, (3) have been continuously employed by PetSmart during the five-year period ending on the date of their termination, and (4) the sum of their age and the number of years of continuous employment with PetSmart ending on the date of their termination, is at least 62. The shares of restricted stock for those eligible retirees who have a retirement termination will vest 25% for each full year (not to exceed 100%) between the date of grant and the date of their retirement termination.

Disability

     PetSmart provides company-paid long-term disability insurance to eligible full-time employees with a monthly benefit in the amount of 60% of qualified salary to a maximum of $10,000 per month. All of our executive officers receive company-paid long-term disability coverage that provides a monthly benefit of 66.67% of qualified salary to a maximum of $15,000 per month.

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Benefits Derived from a Departure

Philip L. Francis

     The following table describes the potential payments to Mr. Francis upon his termination without good cause, or constructive termination, if applicable, both in connection with a change of control and not in connection with a change of control, as if such termination or resignation had occurred on January 28, 2007:

                     Stock      Restricted Stock             Excise Tax
Type of Event  Salary (1) Bonus (2) Options Awards Benefits (6) Gross-Up
Termination with Cause 
Termination without Good               
       Cause or Constructive               
       Termination  $1,830,000   $3,580,500   $ 412,074 (3)        $84,938
Termination in connection with             
       Change in Control  $1,830,000 $3,580,500 $ 1,005,709 (4)  $8,354,500 (5) $84,938
____________________
 
(1)       Represents Mr. Francis’ base salary as of January 28, 2007 multiplied by 2.0.
 
(2) Represents Mr. Francis’ incentive bonus for the fiscal year ending January 28, 2007 multiplied by 2.0.
 
(3) Represents the value of unvested stock options held by Mr. Francis as of January 28, 2007 that would vest over the next 12 months following such termination calculated by multiplying the number of such unvested shares by the closing price of our common stock as reported on the NASDAQ Global Select Market on January 26, 2007 (the last trading day of fiscal year 2006) less the exercise price of such stock options.
 
(4) Represents the value of all unvested stock options held by Mr. Francis as of January 28, 2007 that would accelerate calculated by multiplying the number of unvested shares by the closing price of our common stock as reported on the NASDAQ Global Select Market on January 26, 2007 (the last trading day of fiscal year 2006) less the exercise price of such stock options.
 
(5) Represents the value of all unvested restricted stock awards as of January 28, 2007 that would accelerate calculated by multiplying the number of unvested shares by the closing price of our common stock as reported on the NASDAQ Global Select Market on January 26, 2007 (the last trading day of fiscal year 2006).
 
(6) Represents the value of healthcare coverage, life insurance, outplacement benefits and the enumerated benefits for two years.

Robert F. Moran

     The following table describes the potential payments to Mr. Moran upon his termination without good cause, or constructive termination, if applicable, both in connection with a change of control and not in connection with a change of control, as if such termination or resignation had occurred on January 28, 2007:

                     Stock      Restricted Stock             Excise Tax
Type of Event  Salary (1) Bonus (2) Options Awards Benefits (6) Gross-Up(7)
Termination with Cause   
Termination without Good                 
       Cause or Constructive                         
       Termination  $1,400,000 $1,953,000 $345,221 (3) $84,480 
Termination in connection with             
       Change in Control  $1,400,000 $1,953,000 $816,923 (4) $5,946,885 (5) $84,480  $1,829,777
____________________
 
(1)       Represents Mr. Moran’s base salary as of January 28, 2007 multiplied by 2.0.
 
(2) Represents Mr. Moran’s incentive bonus for the fiscal year ending January 28, 2007 multiplied by 2.0.

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(3)     Represents the value of unvested stock options held by Mr. Moran as of January 28, 2007 that would vest over the next 12 months following such termination calculated by multiplying the number of unvested shares by the closing price of our common stock as reported on the NASDAQ Global Select Market on January 28, 2007 (the last trading day of fiscal year 2006) less the exercise price of such stock options.
 
(4) Represents the value of all unvested stock options held by Mr. Moran as of January 28, 2007 that would accelerate calculated by multiplying the number of unvested shares by the closing price of our common stock as reported on the NASDAQ Global Select Market on January 26, 2007 (the last trading day of fiscal year 2006) less the exercise price of such stock options.
 
(5) Represents the value of all unvested restricted stock awards as of January 28, 2007 that would accelerate calculated by multiplying the number of unvested shares by the closing price of our common stock as reported on the NASDAQ Global Select Market on January 26, 2007 (the last trading day of fiscal year 2006).
 
(6) Represents the value of healthcare coverage, life insurance, outplacement benefits and the enumerated benefits for two years.
 
(7) Represents a cash payment that would be paid to Mr. Moran to offset tax payments that would be owed by Mr. Moran pursuant to Section 4999 of the Code.

Barbara A. Fitzgerald

     The following table describes the potential payments to Ms. Fitzgerald upon her termination without good cause, or constructive termination, if applicable, both in connection with a change of control and not in connection with a change of control, as if such termination or resignation had occurred on January 28, 2007:

Stock Restricted Stock Excise Tax
Type of Event       Salary (1)       Bonus (2)       Options (3)       Awards (4)       Benefits (5)       Gross-Up
Termination with Cause   — 
Termination without Good      
     Cause or Constructive  
     Termination $612,000   $577,776   $56,169 
Termination in connection with        
     Change in Control $612,000 $577,776 $325,438 $2,255,715   $56,169 
____________________
 
(1)     Represents Ms. Fitzgerald’s base salary as of January 28, 2007 multiplied by 1.5.
 
(2) Represents Ms. Fitzgerald’s incentive bonus for the fiscal year ending January 28, 2007 multiplied by 1.5.
 
(3) Represents the value of all unvested stock options held by Ms. Fitzgerald as of January 28, 2007 that would accelerate calculated by multiplying the number of unvested shares by the closing price of our common stock as reported on the NASDAQ Global Select Market on January 26, 2007 (the last trading day of fiscal year 2006) less the exercise price of such stock options.
 
(4) Represents the value of all unvested restricted stock awards as of January 28, 2007 that would accelerate calculated by multiplying the number of unvested shares by the closing price of our common stock as reported on the NASDAQ Global Select Market on January 26, 2007 (the last trading day of fiscal year 2006).
 
(5) Represents the value of healthcare coverage, life insurance, outplacement benefits and the enumerated benefits for one and half years.

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David K. Lenhardt

     The following table describes the potential payments to Mr. Lenhardt upon his termination without good cause, or constructive termination, if applicable, both in connection with a change of control and not in connection with a change of control, as if such termination or resignation had occurred on January 28, 2007:

Stock Restricted Stock Excise Tax
Type of Event       Salary (1)       Bonus (2)       Options (3)       Awards (4)       Benefits (5)       Gross-Up
Termination with Cause       — 
Termination without Good    
     Cause or Constructive  
     Termination   $525,000 $437,805   $51,352 
Termination in connection with  
     Change in Control $525,000 $437,805 $325,438 $3,015,215   $51,352 
____________________
 
(1)     Represents Mr. Lenhardt’s base salary as of January 28, 2007 multiplied by 1.5.
 
(2) Represents Mr. Lenhardt’s incentive bonus for the fiscal year ending January 28, 2007 multiplied by 1.5.
 
(3) Represents the value of all unvested stock options held by Mr. Lenhardt as of January 28, 2007 that would accelerate calculated by multiplying the number of unvested shares by the closing price of our common stock as reported on the NASDAQ Global Select Market on January 26, 2007 (the last trading day of fiscal year 2006) less the exercise price of such stock options.
 
(4) Represents the value of unvested restricted stock awards as of January 28, 2007 that would accelerate calculated by multiplying the number of unvested shares by the closing price of our common stock as reported on the NASDAQ Global Select Market on January 26, 2007 (the last trading day of fiscal year 2006).
 
(5) Represents the value of healthcare coverage, life insurance, outplacement benefits and the enumerated benefits for one and half years.

Timothy E. Kullman

     We entered into a retention agreement with Timothy E. Kullman, our Senior Vice President and Chief Financial Officer, dated December 12, 2006, pursuant to which Mr. Kullman resigned from PetSmart effective as of a date to be determined by PetSmart, which effective date shall be no earlier than February 6, 2007, but not later than after April 30, 2007, or the Last Day. Mr. Kullman resigned on April 1, 2007. Under the retention agreement, we agreed to pay Mr. Kullman $622,500, less applicable payroll taxes and deductions, no later than 14 days after Mr. Kullman’s execution of a resignation letter, which he executed on December 12, 2006, and his execution of a release of claims and a confidentiality, non-solicitation and non-compete agreement. Mr. Kullman executed a release of claims and the confidentiality, non-solicitation and non-compete agreement on his Last Day.

     The confidentiality, non-solicitation and non-compete agreement requires Mr. Kullman to agree that he will not solicit or attempt to solicit any employee, consultant or independent contractor of PetSmart or any affiliate thereof to terminate his or her relationship with PetSmart in order to become an employee, consultant or independent contractor of any other person or entity for a period of one year following Mr. Kullman’s Last Day and, for a similar period, Mr. Kullman to agree that he will not accept a position with, become employed by or otherwise enter into a relationship with a competitor, or a PetSmart Competitor. Under the Separation Agreement, a PetSmart Competitor is defined as any entity engaged in business, in whole or in part, in the pet retail or pet services industry that has annual gross revenues related to pets, pet products or services of at least $100 million, including, but not limited to, Petco, Pet Supplies Plus, Pet Supermarket, Pet Value (Canada), Super Pet (Canada) and the pet business of Wal-Mart, Target or other mass merchandisers.

     Mr. Kullman’s health benefits with us will terminate on his Last Day, but we agreed under the Separation Agreement to pay a portion of Mr. Kullman’s COBRA payments until the earlier of (a) the 18 month anniversary of his Last Day or (b) until he becomes eligible for medical, dental or vision coverage through a subsequent provider. The portion to be paid by us of these COBRA benefits shall be equal to the portion of the premium paid by us prior to his separation from PetSmart. Similarly, if Mr. Kullman is covered by life insurance and we pay the premiums

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prior to Mr. Kullman’s Last Day, we agree under the Separation Agreement to provide Mr. Kullman with life insurance coverage until the earlier of (a) the 18 month anniversary of his Last Day or (b) until he becomes eligible for life insurance coverage through a subsequent provider. Mr. Kullman’s rights under any current stock option or restricted stock agreement will continue to be governed by the actual plan documents. Mr. Kullman was also be entitled to receive any amount otherwise due him under our executive incentive program for 2006 performance, less applicable payroll taxes and deductions, which amount is set forth above in the table entitled “Summary Compensation Table.”

       Any benefits or payments owing under the Separation Agreement to Mr. Kullman shall terminate immediately upon the occurrence of any of the following events:

  • Mr. Kullman breaches the confidentiality, non-solicitation and non-compete agreement attached to the Separation Agreement or any similar confidentiality, non-competition or non-solicitation agreement with us;
     
  • Mr. Kullman becomes employed or associated with a PetSmart Competitor or engages in actions prohibited by the Separation Agreement;
     
  • Mr. Kullman owns, manages, operates, joins or controls or participates in the ownership, management, or control of, or is employed by or connected in any manner with any person, enterprise or entity that is engaged in any business competitive with us other than passive investments of less than 2% in a publicly traded company;
     
  • Mr. Kullman encourages or solicits any of our current employees to leave our employ for any reason or interferes in any other manner with our employment relationships with our current employees; or
     
  • Mr. Kullman induces any of our current clients, customers, suppliers, vendors, distributors or other third parties to terminate an existing business relationship with us or otherwise interferes in any other manner with existing business relationships with these parties.
          Severance         Bonus (1)         Stock Awards         Benefits (2)
Timothy E. Kullman    $622,500   $175,661     $35,165
____________________
 
(1)     Represents the amount Mr. Kullman would have received pursuant to our Executive Short Term Incentive Plan for fiscal year 2006, such amount was paid in fiscal year 2007.
 
(2) Represents 18 months of partial COBRA benefits, Executive Choice 2007 balance, and value of executive annual physical.

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ARTICLE V. STOCK

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     The following table sets forth certain information regarding the ownership of our common stock as of March 2, 2007, by:

  • all those known by us to be beneficial owners of more than 5% of our common stock;
     
  • each Director and nominee;
     
  • each of the executive officers named in the Summary Compensation Table; and
     
  • all of PetSmart’s executive officers, Directors, and nominees as a group.

     Beneficial ownership is determined in accordance with the rules of the SEC, and generally includes voting or investment power with respect to securities. Unless otherwise indicated in the footnotes to this table, and subject to community property laws where applicable, we believe that each of the stockholders named in this table has sole voting and investment power with respect to the shares indicated as beneficially owned. Beneficial ownership also includes shares of common stock subject to options currently exercisable on or before May 1, 2007. These shares are not deemed outstanding for computing the percentage ownership of each other person. Beneficial ownership also includes shares of restricted common stock that are unvested as of May 1, 2007 and that are therefore subject to forfeiture. Percentage of beneficial ownership is based on 135,925,427 shares of our common stock outstanding as of March 2, 2007. Unless otherwise indicated, the address of each of the individuals and entities listed below is c/o PetSmart, Inc., 19601 North 27th Avenue, Phoenix, Arizona 85027.

Beneficial Ownership
Number of Shares Percent of
        Beneficially Owned         Total
T. Rowe Price Associates, Inc. (1) 13,237,470     9.73% 
     100 E. Pratt Street
     Baltimore, MD 21202
Philip L. Francis (2)(3) 1,036,438     *    
Richard K. Lochridge (4)(5) 91,035     *    
Lawrence A. Del Santo (4) 79,035     *    
Thomas G. Stemberg (4)(6) 73,291     *    
Barbara A. Munder (4) 70,035     *    
Ronald Kirk (4) 20,227     *    
Amin I. Khalifa (4)(7) 13,544     *    
Jeffery W. Yabuki (4) 13,448     *    
Joseph S. Hardin, Jr. (4)(8) 12,567       *    
Rita V. Foley (4) 12,452     *    
Gregory P. Josefowicz (4) 11,767     *    
Rakesh Gangwal (4) 11,115     *    
Robert F. Moran (3)(9) 1,814,898     1.34% 
Barbara A. Fitzgerald (3)   544,753     *    
David K. Lenhardt (3) 397,536     *    
Timothy E. Kullman (3) 108,651     *    
All executive officers, Directors, and nominees as
     a group (23 persons) (3)(4)(10) 5,317,157     3.91% 
____________________
 

*

Less than one percent.
 
(1)     Based upon a Schedule 13G filed by T. Rowe Price Associates, Inc., on February 14, 2007, in which T. Rowe Price Associates, Inc., and certain affiliates reported that they had sole voting power over 2,245,450 of such shares, sole dispositive power over 13,237,470 of such shares, shared voting power over none of such shares,

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  and shared dispositive power over none of such shares as of December 31, 2006. T. Rowe Price Associates, Inc., has informed us that they have expressly disclaimed that they are, in fact, the Beneficial Owner of such securities.
 
(2)     Includes 14,852 shares of common stock held by the two children of Mr. Francis.
 
(3) Includes restricted stock granted pursuant to our 1997 Equity Incentive Plan, or the 1997 Plan, and our 2003 Equity Incentive Plan, or the 2003 Plan, and our 2006 Equity Incentive Plan, or the 2006 Plan. All such shares will generally vest in four years from their grant date, and are subject to forfeiture in the event the executive officer is not continuously employed by PetSmart until such date. As of May 1, 2007, the following number of shares of restricted common stock were unvested: Mr. Francis – 156,786; Mr. Moran – 132,753 shares; Ms. Fitzgerald – 57,250 shares; Mr. Kullman – 52,250 shares; Mr. Lenhardt – 71,816 shares. All executive officers as group held 756,901 shares of unvested restricted common stock. Also includes shares exercisable pursuant to vested stock options as of May 1, 2007 as follows: Mr. Francis – 782,440; Mr. Moran –1,218,880 shares; Ms. Fitzgerald – 267,396 shares; Mr. Kullman – 31,927 shares; Mr. Lenhardt – 242,396 shares. All executive officers as group held vested stock options to purchase 3,036,856 shares of common stock as of May 1, 2007.
 
(4) Includes shares of restricted common stock granted pursuant to the 1997 Plan and 2006 Plan. In fiscal years 2004, 2005, and 2006, all such shares generally vest on the four year anniversary of the grant date and are subject to forfeiture in the event the Director ceases to be a member of the Board of Directors until such date. In fiscal year 2007, and all such shares generally vest on the one year anniversary of the grant date and are subject to forfeiture in the event the Director ceases to be a member of the Board of Directors until such date. As of May 1, 2007, the following number of shares of restricted common stock were unvested: Mr. Lochridge – 9,688 shares; Mr. Del Santo – 9,688 shares; Mr. Stemberg – 9,688 shares; Ms. Munder – 9,688 shares; Mr. Kirk – 9,688 shares; Mr. Khalifa – 9,507 shares; Mr. Yabuki – 11,068 shares; Mr. Hardin – 10,625 shares; Ms. Foley – 11,068 shares; Mr. Josefowicz – 10,620 shares; and Mr. Gangwal – 9,956 shares. All Directors and nominees as group held 111,284 shares of unvested restricted common stock as of May 1, 2007. Also includes shares exercisable pursuant to vested stock options as of May 1, 2007 as follows: Mr. Lochridge – 62,843 shares; Mr. Del Santo – 62,843 shares; Mr. Stemberg – 37,028 shares; Ms. Munder – 53,843 shares; Mr. Kirk – 8,625 shares. All Directors and nominees as group held vested stock options to purchase 225,182 shares of common stock as of May 1, 2007.
 
(5) Includes 18,504 shares of common stock held by the Lochridge Living Trust of which Mr. Lochridge is a trustee.
 
(6) Includes 1,660 shares of common stock held by Thomas Stemberg Trust of which Mr. Stemberg is a trustee, and 1,025 shares of common stock held in trust for the three minor children of Mr. Stemberg.
 
(7) Includes 2,000 shares of common stock held by the Khalifa Family Trust of which Mr. Khalifa is a trustee.
 
(8) Includes 500 shares of common stock held by the Judy Ridlen Trust of which Mr. Hardin is a trustee.
 
(9) Includes 34,019 shares of common stock held by Mr. Moran’s spouse.
 
(10) Includes 1,006,365 shares of common stock beneficially owned by other executive officers of PetSmart, of which 1,000 shares of common stock are held by Mr. Crozier’s spouse, and 493,817 shares are subject to stock options exercisable on or before May 1, 2007.

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SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

     Section 16(a) of the Securities Exchange Act of 1934 requires our Directors and executive officers, and persons who own more than 10% of a registered class of our equity securities, to file with the SEC initial reports of ownership and reports of changes in ownership of common stock and other equity securities of PetSmart. Officers, Directors, and greater than 10% stockholders are required by SEC regulations to furnish us with copies of all Section 16(a) forms they file.

     To our knowledge, based solely on a review of the copies of such reports furnished to us and written representations that no other reports were required, during the fiscal year ended January 28, 2007, all Section 16(a) filing requirements applicable to our officers, Directors, and greater than 10% stockholders were met.

Equity Compensation Plans

     All share numbers and information in the table and footnotes below are as of January 28, 2007.

Number of Securities
Remaining Available
for Issuance Under
Number of Securities to Weighted Average Equity Compensation
be Issued Upon Exercise Exercise Price of Plans Excluding
of Outstanding Options, Outstanding Options, Securities Reflected in
Plan Category         Warrants and Rights (a)         Warrants and Rights (b)         Column (a)(c)
Equity compensation plans approved by
     stockholders (1) 6,281,391 $16.83567 11,938,518 (2)   
Equity compensation plans not approved by
     stockholders (3)   1,045,573 $12.75268   215,948  
Total 7,326,964   $16.25302     12,154.466  
____________________
 
(1)     The plans included in this row are the: 1996 Non-Employee Director’s Equity Plan, 2002 Employee Stock Purchase Plan, and 2006 Equity Incentive Plan.
 
(2) Under the 2006 Equity Incentive Plan, we may grant stock bonuses, stock options, and stock appreciation rights for the full amount of the share reserve of 8,941,577.
 
(3) The plan included in this row is the 1997 Equity Incentive Plan, and includes restricted stock grants.

1996 Non-Employee Directors Equity Plan

     As of April 23, 2007, 204,557 shares of common stock were subject to outstanding stock options under PetSmart’s 1996 Non-Employee Directors Equity Plan with exercise prices ranging from $3.03 to $10.5 per share. The 1996 Non-Employee Directors Equity Plan expired on May 11, 2002, and no further options may be granted under this plan.

1997 Equity Incentive Plan

     Our Board of Directors adopted the 1997 Equity Incentive Plan, or the 1997 Plan, in May 1997. The 1997 Plan was not approved by our stockholders. The 1997 Plan provided for the grant of nonstatutory stock options, stock bonuses, and restricted stock to our employees, Directors, and consultants. In addition, shares of our common stock were issued to members of our Board of Directors, at their election, in lieu of cash payments for their Directors’ fees. As of April 23, 2007, 848,347 shares were subject to outstanding stock options, and 1,220,827 shares were subject to outstanding stock bonuses and unvested restricted stock. No additional stock awards were granted under the 1997 Plan following stockholder approval of the 2006 Equity Incentive Plan, or the 2006 Plan, at our 2006 Annual Meeting.

     Our Board of Directors, or a committee appointed by our Board, set the terms of stock awards granted under the 1997 Plan subject to the terms of the plan. The exercise price of nonstatutory stock options granted under the 1997 Plan is not less than 100% of the fair market value of the stock subject to the option on the date of grant. Options

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under the 1997 Plan generally terminate three months after termination of service for any reason other than death or disability, 12 months after termination due to disability, and 18 months following death. In no event may an option be exercised beyond the expiration of its maximum 10 year term. Stock awards generally vest over four years.

     Upon a significant corporate transaction, a surviving entity will either assume or substitute outstanding awards under the 1997 Plan, or, in the event the surviving entity refuses to assume or substitute outstanding awards, the vesting and exercisability of such stock awards will accelerate in full. In the event of a change in control transaction and a participant’s service with PetSmart or a successor entity is terminated without cause or constructively terminated within 18 months following the occurrence of such transaction, the vesting and exercisability of the stock awards held by such participants will be accelerated in full.

     The vesting of certain grants of restricted stock under the 1997 Plan may accelerate in the event of a plan retirement. A plan retirement occurs when an eligible retiree terminates service with PetSmart either: (a) as a result of their death or disability, or (b) pursuant to their voluntary cessation of employment, but only if: (i) such voluntary cessation has been designated by PetSmart, in our sole discretion, as a retirement, (ii) PetSmart determines that such resignation is not detrimental to it, and (iii) the employee enters into a non-competition agreement in a form acceptable to PetSmart. An employee is an eligible retiree if, at the time of their cessation of employment, they are: (1) an employee, (2) at least 55 years of age, (3) have been continuously employed by PetSmart during the five-year period ending on the date of their termination, and (4) the sum of their age and the number of years of continuous employment with PetSmart ending on the date of their termination, is at least 62. The shares of restricted stock for those eligible retirees who have a plan termination may vest 25% for each full year between the date of grant and the date of their retirement termination.

2002 Employee Stock Purchase Plan

     Our Board of Directors adopted the 2002 Employee Stock Purchase Plan, or the Purchase Plan, in December 2001. The Purchase Plan was approved by our stockholders at the 2002 Annual Meeting. An aggregate of 4,000,000 shares is reserved for issuance under the Purchase Plan. As of April 23, 2007, 1,330,319 shares of Common Stock had been purchased under the Purchase Plan and 2,669,681 shares remained available for future issuance. The rights to purchase Common Stock granted under the Purchase Plan are intended to qualify as options issued under an “employee stock purchase plan” within the meaning of Section 423(b) of the Code. Eligible employees can have up to 15% of their earnings withheld and applied to the purchase of shares of Common Stock on specified dates determined by the Board of Directors, generally once every six months. The price of Common Stock purchased under the Purchase Plan will be equal to 85% of the lower of the fair market value of the Common Stock on the commencement date of each offering period or the specified purchase date. The Board of Directors may specify an offering period of up to 27 months. Currently, no participant may purchase more than 3,750 shares of Common Stock on any purchase date, and no more than 300,000 shares may be sold in the aggregate to all participants on any purchase date.

     Upon a significant corporate transaction, then as determined by the Board of Directors in its sole discretion: (a) any surviving corporation may assume outstanding rights or substitute similar rights for those under the Purchase Plan, (b) such rights may continue in full force and effect, or (c) participants accumulated payroll deductions may be used to purchase our Common Stock within five business days prior to the consummation of the corporate transaction and the participant’s rights under the ongoing offering terminate.

     The Board of Directors may suspend or terminate the Purchase Plan at any time. Unless terminated earlier, the Purchase Plan will automatically terminate on July 31, 2012, or the date on which the shares available under the Purchase Plan are exhausted.

2003 Equity Incentive Plan

     Our Board of Directors adopted the 2003 Equity Incentive Plan, or the 2003 Plan, in March 2003. The 2003 Plan was approved by our stockholders at the 2003 Annual Meeting. The 2003 Plan provided for the grant of incentive stock options, nonstatutory stock options, stock bonuses, restricted stock, and stock appreciation rights to our employees, Directors, and consultants. In addition, shares of our Common Stock were issued to members of our Board of Directors, at their election, in lieu of cash payments for their Directors’ fees. As of April 23, 2007, 5,339,602

47


shares were subject to outstanding stock options, and 601,506 shares were subject to outstanding stock bonuses and restricted stock under the 2003 Plan. No additional stock awards were granted under the 2003 Plan following stockholder approval of the 2006 Plan at our 2006 Annual Meeting.

     Our Board of Directors, or a committee appointed by our Board, set the terms of stock awards granted under the 2003 Plan subject to the terms of the plan. The exercise price of stock options granted under the 2003 Plan is not less than 100% of the fair market value of the stock subject to the option on the date of grant. Options under the 2003 Plan generally terminate three months after termination of service for any reason other than death or disability, 12 months after termination due to disability, and 18 months following death. In no event may an option be exercised beyond the expiration of its maximum 10 year term. Stock awards generally vest over four years.

     Upon a significant corporate transaction, a surviving entity will either assume or substitute outstanding awards under the 2003 Plan, or, in the event the surviving entity refuses to assume or substitute outstanding awards, the vesting and exercisability of such stock awards will accelerate in full. In the event of a change in control transaction and a participant’s service with PetSmart or a successor entity is terminated without cause or constructively terminated within 18 months following the occurrence of such transaction, the vesting and exercisability of the stock awards held by such participants will be accelerated in full.

     Restricted stock granted under the 2003 Plan generally cliff vests after four years. However, the vesting of certain grants of restricted stock may accelerate in the event of a retirement termination. A retirement termination occurs when an eligible retiree terminates service with PetSmart either: (a) as a result of their death or disability, or (b) pursuant to their voluntary cessation of employment, but only if: (i) such voluntary cessation has been designated by PetSmart, in our sole discretion, as a retirement, (ii) PetSmart determines that such resignation is not detrimental to it, and (iii) the employee enters into a non-competition agreement in a form acceptable to PetSmart. An employee is an eligible retiree if, at the time of their cessation of employment, they are: (1) an employee, (2) at least 55 years of age, (3) have been continuously employed by PetSmart during the five-year period ending on the date of their termination, and (4) the sum of their age and the number of years of continuous employment with PetSmart ending on the date of their termination, is at least 62. The shares of restricted stock for those eligible retirees who have a retirement termination will vest 25% for each full year (not to exceed 100%) between the date of grant and the date of their retirement termination.

2006 Equity Incentive Plan

     Our Board of Directors adopted the 2006 Plan in December 2005 as a complete amendment and restatement of both the 1997 Plan and 2003 Plan. The 2006 Plan was approved by our stockholders at the 2006 Annual Meeting. All outstanding stock awards granted under the 1997 Plan and 2003 Plan upon the effective date of the 2006 Plan will remain subject to the terms of those predecessor plans.

     The maximum number of shares reserved for issuance under the 2006 Plan is approximately 20,680,000, which includes shares subject to outstanding stock awards under the 1997 Plan and 2003 Plan. As of April 23, 2007, 941,980 shares were subject to outstanding stock options, 839,980 shares were subject to outstanding stock bonuses and restricted stock, and 7,316,674 shares remained available for future issuance under the 2006 Plan.

     The 2006 Plan provides for the grant of incentive stock options, nonstatutory stock options, stock bonuses, restricted stock, and stock appreciation rights to our employees, Directors, and consultants. Our Board of Directors, or a committee appointed by our Board, sets the terms of stock awards granted under the 2006 Plan subject to the terms of the plan. The exercise price of stock options granted under the 2006 Plan is not less than 100% of the fair market value of the stock subject to the option on the date of grant. Options under the 2006 Plan generally terminate three months after termination of service for any reason other than death or disability, 12 months after termination due to disability, and 18 months following death. In no event may an option be exercised beyond the expiration of its maximum 10 year term. Stock awards generally vest over four years.

     Any stock bonuses or restricted stock granted under the 2006 Plan with a purchase price less than 100% of the fair market value of Common Stock on the date of grant must have a cumulative weighted average vesting period of at least three years from the date of grant (when combined with the cumulative weighted average period for similar stock awards previously granted under the 2003 Plan after January 31, 2003 and before the 2006 Annual Meeting).

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However, such stock awards vesting on an accelerated basis pursuant to performance criteria, a corporate transaction or a change in control (as described below), or our Executive Change in Control and Severance Benefit Plan, are not taken into account for purposes of this limitation.

     Upon a significant corporate transaction, outstanding stock awards may be assumed, continued, or substituted by any surviving corporation. If the surviving corporation does not assume, continue, or substitute such stock awards, then (a) with respect to any such stock awards that are held by individuals then performing services for PetSmart, the vesting and exercisability provisions of such stock awards will be accelerated in full and such stock awards will be terminated if not exercised prior to the effective date of the corporate transaction, and (b) all other outstanding stock awards will be terminated if not exercised prior to the effective date of the corporate transaction. In the event of a change in control transaction and a participant’s service with PetSmart or a successor entity is terminated without cause or constructively terminated within 18 months following the occurrence of such transaction, the vesting and exercisability of the stock awards held by such participants will be accelerated in full. Please see the section above entitled “Employment and Severance Agreements” for a description of such arrangements and agreements.

     Restricted stock granted under the 2006 Plan generally cliff vests after four years. However, the vesting of certain grants of restricted stock may accelerate in the event of a retirement termination. A retirement termination occurs when an eligible retiree terminates service with PetSmart either: (a) as a result of their death or disability, or (b) pursuant to their voluntary cessation of employment, but only if: (i) such voluntary cessation has been designated by PetSmart, in our sole discretion, as a retirement, (ii) PetSmart determines that such resignation is not detrimental to it, and (iii) the employee enters into a non-competition agreement in a form acceptable to PetSmart. An employee is an eligible retiree if, at the time of their cessation of employment, they are: (1) an employee, (2) at least 55 years of age, (3) have been continuously employed by PetSmart during the five-year period ending on the date of their termination, and (4) the sum of their age and the number of years of continuous employment with PetSmart ending on the date of their termination, is at least 62. The shares of restricted stock for those eligible retirees who have a retirement termination will vest 25% for each full year (not to exceed 100%) between the date of grant and the date of their retirement termination.

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ARTICLE VI. CERTAIN RELATIONSHIPS AND TRANSACTIONS

Related Party Transaction Approval Policy

     The Audit Committee is responsible for the review, approval, or ratification of “related-person transactions” between PetSmart or its subsidiaries and related persons. Under SEC rules, a related person is a director, officer, nominee for director, or 5% stockholder of PetSmart since the beginning of the last fiscal year and their immediate family members. Transactions involving related persons are reviewed by PetSmart’s disclosure committee. The disclosure committee determines whether a related person could have a significant interest in such a transaction, and any such transaction is forwarded to the Audit Committee for review. The Audit Committee determines whether the related person has a material interest in a transaction and may approve, ratify, rescind, or take other action with respect to the transaction in its discretion.

Related Party Transactions and Relationships

     During the fiscal year ending January 28, 2007, we had the following related party relationships:

Indemnity Agreements

     We have entered into indemnity agreements with our Directors and executive officers which provide, among other things, that we will indemnify such Director or executive officer, under the circumstances and to the extent provided for therein, for expenses, damages, judgments, fines, and settlements he or she may be required to pay in actions or proceedings to which he or she is or may be made a party by reason of his or her position as a Director, executive officer, or other agent of PetSmart, and otherwise to the full extent permitted under Delaware law and our Bylaws.

Change in Control and Severance Agreements

     Please see the section above entitled “Employment and Severance Arrangements” for a description of such arrangements and agreements.

Relationships

     Mr. Francis, our Chief Executive Officer and Chairman of the Board; Mr. Moran, our President and Chief Operating Officer; Ms. Fitzgerald, our Senior Vice President, Retail Operations; Mr. Kenneth T. Hall, our Senior Vice President, Merchandising and Ms. Francesca M. Spinelli, our Senior Vice President, People, are all members of the board of directors of PetSmart Charities, Inc., an independent 501(c)(3) organization, to which PetSmart provides in-kind services and charitable contributions. Ms. Fitzgerald, Messrs. Francis, Moran and Hall, and Ms. Spinelli do not receive any remuneration for their involvement with PetSmart Charities, Inc. PetSmart’s charitable contributions to PetSmart Charities, Inc., are immaterial to our business, and the disinterested members of the Board of Directors have determined that such relationship does not in any way interfere with the performance of their duties to PetSmart.

     Mr. Francis and Mr. Moran are both members of the board of directors of MMI Holdings, Inc., which, through its subsidiary Medical Management International, Inc., conducts business in our stores as Banfield, The Pet Hospital. For a more detailed description of the relationship with Medical Management International, Inc., please see our 2006 Annual Report on Form 10-K, filed with the SEC on March 28, 2007.

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ARTICLE VII. OTHER MATTERS

     The Board of Directors knows of no other matters that will be presented for consideration at the Annual Meeting of Stockholders. If any other matters are properly brought before the Annual Meeting of Stockholders, it is the intention of the persons named on the accompanying Proxy Card to vote on such matters in accordance with their best judgment.

By Order of the Board of Directors

Scott A. Crozier
Secretary

 May 7, 2007

     A COPY OF PETSMART’S ANNUAL REPORT TO THE SEC ON FORM 10-K FOR THE FISCAL YEAR ENDED JANUARY 28, 2007, IS AVAILABLE WITHOUT CHARGE THROUGH OUR WEBSITE WWW.PETM.COM UNDER INVESTOR MATERIALS AND UPON WRITTEN REQUEST TO: INVESTOR RELATIONS, PETSMART, INC., 19601 NORTH 27TH AVENUE, PHOENIX, ARIZONA 85027.

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PETSMART, INC.
EXECUTIVE SHORT-TERM INCENTIVE PLAN
Adopted effective February 4, 2002
Approved by the Stockholders: June 27, 2002
Amended effective June 20, 2007
Subject to Approval by the Stockholders: June 20, 2007

Section 1 - Purposes.

This PetSmart Executive Short-Term Incentive Plan (the “Plan”) provides for incentive compensation to those key officers and employees of PetSmart, Inc. or any affiliated entity (collectively, the “Company”), who, from time to time may be selected for participation. The Plan is intended to provide incentives and rewards for the contributions of such employees toward the successful achievement of the Company’s financial and business goals established for the applicable performance period. The Company’s policy is to have a significant portion of a participant’s total compensation tied to the Company’s performance. Payments pursuant to the Plan are intended to qualify as “performance-based compensation” within the meaning of Section 162(m) of the Internal Revenue Code (“Section 162(m)”).

Section 2 – Administration.

The Plan shall be administered by the committee (the “Committee”) of the Board of Directors of PetSmart, Inc. (“PetSmart”) that has been designated to administer programs intended to qualify as “performance-based compensation” within the meaning of Section 162(m). The Committee shall have authority to make rules and adopt administrative procedures in connection with the Plan and shall have discretion to provide for situations or conditions not specifically provided for herein consistent with the purposes of the Plan. The Committee shall determine the beginning and ending dates for each performance period. Unless otherwise determined by the Committee, the performance period shall correspond to PetSmart’s fiscal year. Notwithstanding any other provision of the Plan to the contrary, the Plan shall be administered and its provisions interpreted so that payments pursuant to the Plan qualify as “performance-based compensation” within the meaning of Section 162(m). Determinations by the Committee shall be final and binding on the Company and all participants.

Section 3 – Selection of Participants.

The executive officers of the Company as well as those other key employees of the Company who, in the opinion of the Committee, may become executive officers of the Company or who otherwise may make comparable contributions to the Company shall be eligible to participate in the Plan. Each performance period, the Committee may designate from among those employees who are eligible to participate in the Plan those employees who shall participate in the Plan for such performance period. In the event an individual is selected to participate in the Plan, such individual shall not also participate in the Company’s regular Short-Term Incentive Plan.

Section 4 – Establishing Performance Objectives.

During the first ninety (90) days of each performance period the Committee shall establish one or more performance objectives, at least one of which shall be based on a shareholder approved business criteria. The Committee shall have discretion to establish objectives that are not based on shareholder approved business criteria, including objectives the achievement of which may require subjective assessments by the Committee. Notwithstanding the foregoing, the maximum possible payout shall be based solely on shareholder approved business criteria. The use of non-shareholder approved business criteria shall be used solely to reduce an award. The shareholder approved business criteria are as follows:

  • Net income of PetSmart as set forth in PetSmart’s audited financial statements
     
  • Earning per share of PetSmart as set forth in PetSmart’s audited financial statements
     
  • Customer satisfaction as determined by an independent professional survey research firm
     
  • Increase in the trading price of PetSmart’s stock above the trading price at the time the criteria is established

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  • Return on equity, including return on invested capital as calculated from PetSmart’s audited financial statements
     
  • Return on assets as calculated from PetSmart’s audited financial statements
     
  • Return on investments as calculated from PetSmart’s audited financial statements
     
  • Increase in sales, including sales growth as calculated from PetSmart’s audited financial statements

All criteria that are based on PetSmart’s audited financial statements may be modified by the Committee at the time the specific criteria are selected to take into consideration one or more of the following: (1) changes in accounting principles that become effective during the performance period, (2) extraordinary, unusual or infrequently occurring events, (3) the disposition of a business or significant assets, (4) gains or losses from all or certain claims and/or litigation and insurance recoveries, (5) the impact of impairment of intangible assets, (6) restructuring activities, (7) the impact of investments or acquisitions, and/or (8) changes in corporate capitalization such as stock splits and certain reorganizations. Notwithstanding the foregoing, the Committee must select criteria that collectively satisfy the requirements of performance-based compensation for the purposes of Section 162(m), including by establishing the targets at a time when the performance relative to such targets is substantially uncertain.

Section 5 – Establishing Target Awards.

During the first ninety (90) days of each performance period the Committee shall establish a target award, expressed as a percentage of eligible salary for that performance period, for each participant in the Plan. Unless otherwise determined by the Committee, eligible salary shall be annual base salary determined at the time the Committee establishes the target award, excluding pay for disability, overtime, bonuses, sick pay and other reimbursements and allowances. Individual participants may earn an award payout ranging from zero percent to a maximum of five hundred percent of their target award. The Committee will establish an award payout schedule based upon the extent to which the Company performance objectives and/or other performance objectives are or are not achieved or exceeded. Pursuant to Section 4, entitlement to an award shall be based solely on shareholder approved business criteria; however, non-shareholder approved criteria may be used to reduce the amount of an award payable to one or more participants. Notwithstanding the foregoing, no participant shall receive a payment pursuant to the Plan that exceeds $5 million for any twelve (12) month period. To the extent that a target award is expressed by reference to a number of shares of the Company’s common stock, for the purpose of applying the limitations on a maximum award as set forth in this Section 5, unless otherwise determined by the Committee when determining the target award, the value of such stock shall be determined as follows: (a) if the Company’s common stock is listed on any established stock exchange or national market system, by reference to the closing sales price of the Company’s common stock as quoted on such exchange or system (or the exchange with the greatest volume of trading in the Company’s common stock) on the date the target award is determined by the Committee as reported in The Wall Street Journal or such other source as the Committee deems reliable; and (b) if there is no closing sales price for the Company’s common stock on the date the target award is determined by the Committee, the closing sales price on the last preceding day for which such quotation exists.

Section 6 – Determining Final Awards.

No later than thirty (30) days after the receipt by the Committee of the audited financial statements for a performance period, the Committee shall determine whether the established performance objectives for each participant in the Plan were achieved. The Committee shall have discretion to reduce final awards from the target award depending on (a) the extent to which the Company performance objective(s) is either exceeded or not met, and (b) the extent to which other objectives, e.g. subsidiary, division, department, unit or other performance objectives are attained. The Committee shall have full discretion to reduce individual final awards based on individual performance as it considers appropriate in the circumstances. The Committee shall not have discretion to increase awards for the performance period.

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Section 7 – Termination of Employment.

Participants whose employment by the Company is terminated for any reason other than death or disability during any performance period will receive no payment under the Plan for such performance period. Participants who die or become totally and permanently disabled during any performance period will receive prorated payments under the Plan based on the number of whole months of employment completed during the performance period. Except as provided in Section 9, participants whose employment by the Company is terminated for any reason after the close of the performance period but before the distribution of payments under the Plan will be paid all amounts applicable under this Plan for such performance period.

Section 8 – Time of and Payment of Awards.

Payment of awards shall be made within thirty (30) days following the later of (a) the receipt by the Committee of the audited financial statements for the applicable performance period or (b) the certification by the Committee that the performance and other criteria for payment have been satisfied (the “Certification Date”). The Committee shall have the discretion to pay awards in the form of (i) cash, (ii) Common Stock, (iii) Restricted Stock, (iv) Stock Units, (v) Restricted Stock Units, or (vi) a combination of the foregoing. Payroll and other taxes shall be withheld as determined by the Company. Notwithstanding the foregoing, the Committee, in its sole discretion, may provide the participants the opportunity to elect to defer any payments pursuant to the Plan under a nonqualified deferred compensation plan. In the case of any such deferred payment, the terms of such deferred compensation plan shall control; provided, however, that, unless the Committee determines that the alternative deferred payment does not have to comply with the following limitations in order to avoid the application of Section 162(m), any amount payable pursuant to such deferred compensation plan in excess of the amount otherwise payable pursuant to this Plan shall not exceed, as determined by the Committee, either (a) an amount based on either Moody’s Average Corporate Bond Yield (or such other rate of interest that is deemed to constitute a “reasonable rate of interest” for the purpose of Section 162(m)) over the deferral period or (b) the return over the deferral period of one or more predetermined actual investments, as determined by the Committee, such that the amount payable at the later date will be based upon actual returns, including any decrease or increase in the value of the investment(s).

For the purposes of this Section 8, the following definitions shall apply:

Common Stock” shall mean common stock of the Company.

Restricted Stock” shall mean Common Stock that is subject to Vesting as set forth in the Restricted Stock Agreement adopted by the Committee.

Stock Units” shall mean an unfunded, unsecured commitment by the Company to deliver a pre-determined number of shares of Common Stock (or the cash equivalent of such Common Stock) to a participant at a future time in accordance with the terms and conditions of a Stock Unit Agreement adopted by the Committee.

Restricted Stock Unit” shall mean a Stock Unit that is subject to Vesting as set forth in the Restricted Stock Unit Agreement adopted by the Committee.

Vesting” shall mean a requirement that a participant remain an employee of the Company, or an affiliate of the Company, for an additional period of time in order to retain the Common Stock (in the case of Restricted Stock) or the Stock Unit (in the case of a Restricted Stock Unit).

Value of Common Stock” shall mean: (a) if the Common Stock is listed on any established stock exchange or a national market system, the closing sales price of the Common Stock as quoted on such exchange or system (or the exchange with the greatest volume of trading in the Common Stock) on the day of valuation, as reported in The Wall Street Journal or such other source as the Committee deems reliable; and (b) if there is no closing sales price for the Common Stock on the day of valuation, the closing sales price on the last preceding day for which such quotation exists. Vesting shall not be taken into account in determining the Value of Common Stock for this purpose.

In the event the Committee does not specify the form of the payment at the time the Committee establishes the target award, the form of payment shall be in the form of cash unless the Committee determines (a “Retroactive Determination”) on or before the Certification Date that the form of payment will include some non-cash

54


consideration. In the event the Committee makes a Retroactive Determination, the total value of the payment shall not exceed the value if the payment were made only in cash. The Committee shall be deemed to be in compliance with the preceding sentence if the sum of (i) the Value of Common Stock, (ii) the Value of Common Stock that is Restricted Stock, (iii) the Value of Common Stock that is subject to Stock Units or Restricted Stock Units, and (iv) the cash in the payment pursuant to the Retroactive Determination would be less than or equal to an all-cash payment on both the last day of the performance period and the Certification Date.

Shares of Common Stock issued directly or as Restricted Stock or pursuant to Stock Units or Restricted Stock Units shall be issued pursuant to the 2006 Equity Incentive Plan unless otherwise determined by the Committee.

Section 9 – Forfeiture.

It shall be an overriding precondition to the payment of any award (a) that the participant not engage in any activity that, in the opinion of the Committee, is in competition with any activity of the Company or any affiliated entity or otherwise inimical to the best interests of the Company and (b) that the participant furnish the Committee with all such information confirming satisfaction of the foregoing condition as the Committee shall reasonably request. If the Committee makes a determination that a participant has engaged in any such competitive or otherwise inimical activity, such determination shall operate to immediately cancel all then unpaid award amounts.

Section 10 – Death.

Any award remaining unpaid, in whole or in part, at the death of a participant shall be paid to the participant’s legal representative or to a beneficiary designated by the participant in accordance with the rules established by the Committee.

Section 11 – No Right to Employment or Award.

No person shall have any claim or right to receive an award, and selection to participate in the Plan shall not confer upon any employee any right with respect to continued employment by the Company or continued participation in the Plan. Further the Company reaffirms its at-will relationship with its employees and expressly reserves the right at any time to dismiss a participant free from any liability or claim for benefits pursuant to the Plan, except as provided under this Plan or other written plan adopted by the Company or written agreement between the Company and the participant.

Section 12 – Discretion of Company, Board of Directors and Committee.

Any decision made or action taken by the Company or by the Board of Directors of PetSmart or by the Committee arising out of or in connection with the creation, amendment, construction, administration, interpretation or effect of the Plan shall be within the absolute discretion of the Company, the Board of Directors, or the Committee, as the case may be, and shall be conclusive and binding upon all persons. To the maximum extent possible, no member of the Committee shall have any liability for actions taken or omitted under the Plan by such member or any other person.

Section 13 – No Funding of Plan.

The Company shall not be required to fund or otherwise segregate any cash or any other assets which may at any time be paid to participants under the Plan. The Plan shall constitute an “unfunded” plan of the Company. The Company shall not, by any provisions of the Plan, be deemed to be a trustee of any property, and any rights of any participant or former participant shall be no greater than those of a general unsecured creditor or shareholder of the Company, as the case may be.

Section 14 – Non-Transferability of Benefits and Interests.

Except as expressly provided by the Committee, no benefit payable under the Plan shall be subject in any manner to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance or charge, any such attempted action shall be void, and no such benefit shall be in any manner liable for or subject to debts, contracts, liabilities, engagements

55


or torts of any participant or former participant. This Section 14 shall not apply to an assignment of a contingency or payment due (i) after the death of a participant to the deceased participant’s legal representative or beneficiary or (ii) after the disability of a participant to the disabled participant’s personal representative.

Section 15 – Law to Govern.

All questions pertaining to the construction, regulation, validity and effect of the provisions of the Plan shall be determined in accordance with the laws of the State of Arizona.

Section 16 – Non-Exclusivity.

The Plan does not limit the authority of the Company, the Board of Directors or the Committee, or any current or future subsidiary of the Company to grant awards or authorize any other compensation to any person under any other plan or authority, other than that specifically prohibited herein.

Section 17 – Section 162(m) Conditions; Bifurcation of Plan.

It is the intent of the Company that the Plan and all payments made hereunder satisfy and be interpreted in a manner that, in the case of participants who are persons whose compensation is subject to Section 162(m), satisfies any applicable requirements as performance-based compensation. Any provision, application or interpretation of the Plan inconsistent with this intent to satisfy the standards in Section 162(m) shall be disregarded. Notwithstanding anything to the contrary in the Plan, the provisions of the Plan may at any time be bifurcated by the Board of Directors or the Committee in any manner so that certain provisions of the Plan or any payment intended (or required in order) to satisfy the applicable requirements of Section 162(m) are only applicable to persons whose compensation is subject to Section 162(m).

Section 18 – Arbitration of Disputes.

The Federal Arbitration Act shall apply to and govern all disputes arising under or pursuant to the Plan. Any disputes with respect to the terms of this Plan or any rights granted hereunder, including, without limitation, the scope of this arbitration, shall be subject to arbitration pursuant to the rules of the American Arbitration Association governing commercial disputes. Arbitration shall occur in Phoenix, Arizona. Judgment on any arbitration award may be entered in any court having jurisdiction. A single arbitrator shall be used unless the amount in dispute exceeds $200,000 and a party to the arbitration proceeding requests that the arbitration be heard by a panel of three arbitrators. If a panel of three arbitrators is used, the arbitration decision shall be made by a majority of the three arbitrators. By electing to participate in the Plan, the Company and each participant EXPRESSLY AGREE TO ARBITRATION AND WAIVE ANY RIGHT TO TRIAL BY JURY, JUDGE, OR ADMINISTRATIVE PROCEEDING. An arbitrator shall have the same powers that a judge for a United States District Court located in the State of Arizona may exercise in comparable circumstances. Nothing in this Plan shall limit or restrict any right of offset a party may have.

Section 19 – Amendment or Termination.

The Board of Directors of the Company and the Committee each reserves the right at any time to make any changes in the Plan as it may consider desirable or may suspend, discontinue or terminate the Plan at any time.

  PetSmart, Inc., a Delaware corporation
 
By:   
Name:  Philip L. Francis 
Its:  Chief Executive Officer 
 
 
By:   
Name:  Scott Crozier 
Its:  Secretary 

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19601 N. 27TH AVENUE
PHOENIX, AZ 85027
VOTE BY INTERNET - www.proxyvote.com
Use the Internet to transmit your voting instructions and for electronic delivery of information up until 11:59 P.M. Eastern Time the day before the cut-off date or meeting date. Have your proxy card in hand when you access the web site and follow the instructions to obtain your records and to create an electronic voting instruction form.
 
ELECTRONIC DELIVERY OF FUTURE STOCKHOLDER
COMMUNICATIONS
If you would like to reduce the costs incurred by PetSmart, Inc. in mailing proxy materials, you can consent to receiving all future proxy statements, proxy cards and annual reports electronically via e-mail or the Internet. To sign up for electronic delivery, please follow the instructions above to vote using the Internet and, when prompted, indicate that you agree to receive or access stockholder communications electronically in future years.
 
VOTE BY PHONE - 1-800-690-6903
Use any touch-tone telephone to transmit your voting instructions up until 11:59 P.M. Eastern Time the day before the cut-off date or meeting date. Have your proxy card in hand when you call and then follow the instructions.
 
VOTE BY MAIL
Mark, sign, and date your proxy card and return it in the postage-paid envelope we have provided or return it to PetSmart, Inc., c/o Broadridge, 51 Mercedes Way, Edgewood, NY 11717.


 
TO VOTE, MARK BLOCKS BELOW IN BLUE OR BLACK INK AS FOLLOWS: PETSM1
KEEP THIS PORTION FOR YOUR RECORDS
  DETACH AND RETURN THIS PORTION ONLY
THIS PROXY CARD IS VALID ONLY WHEN SIGNED AND DATED.
PetSmart, Inc.
 
     Vote on Directors  
 
1.   To elect three Directors to hold office until the 2010 Annual Meeting of Stockholders.
01)    Rakesh Gangwal
02) Barbara A. Munder
03) Thomas G. Stemberg
   
 
 
   
 
For
All
Withhold
All
For All
Except
      To withhold authority to vote for any individual nominee(s), mark “For All Except” and write the number(s) of the nominee(s) on the line below.
          
 
o o o


 

 
     Vote on Proposals         For Against Abstain
 
  2.   To ratify the appointment of Deloitte & Touche LLP as our independent registered public accounting firm, for our fiscal year 2007, ending February 3, 2008. o o o
 
3.   To approve the continuation of the PetSmart, Inc. Executive Short Term Incentive Plan; and o o o
 
4.   To transact such other business as may properly come before the meeting or any adjournment or postponement thereof.
 
 
The foregoing items of business are more fully described in the Proxy Statement accompanying this Notice.        
The Board of Directors has fixed the close of business on April 23, 2007, as the record date for the determination of stockholders entitled to notice of, and to vote at, this Annual Meeting and at any adjournment or postponement thereof.
 
   
   
       Yes No  
 
Please indicate if you plan to attend this meeting. o o
 
 
  
    
   
Signature [PLEASE SIGN WITHIN BOX] Date Signature (Joint Owners) Date


2007 Annual Meeting of Stockholders

June 20, 2007, at 10:00 A.M. local time at

The Westin O'Hare, 6100 North River Road, Chicago, Illinois 60018

If you submit your proxy by telephone or Internet, do not return your proxy card.
Thank you for your proxy submission.

 

 

 

 

 

THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF

PetSmart, Inc.
19601 North 27th Avenue
Phoenix, Arizona 85027

NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON JUNE 20, 2007

The undersigned hereby appoints Philip L. Francis and Scott A. Crozier, or either of them, as proxies, each with the power to appoint his substitute, and hereby authorizes them to represent and to vote, as designated on the reverse side, all of the shares of Common Stock of PetSmart, Inc., a Delaware corporation, for use at the Annual Meeting of Stockholders to be held on Wednesday, June 20, 2007, at 10:00 A.M. local time, or at any adjournment or postponement thereof, for the purposes set forth herein and in the accompanying Notice of Annual Meeting. The Annual Meeting will be held at The Westin O'Hare, 6100 North River Road, Chicago, Illinois 60018. We intend to mail this proxy card on or about May 7, 2007, to all stockholders entitled to vote at the Annual Meeting.

THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED AS DIRECTED BY THE UNDERSIGNED STOCKHOLDER. IF NO SUCH DIRECTIONS ARE MADE, THIS PROXY WILL BE VOTED FOR THE ELECTION OF THE NOMINEES LISTED ON THE REVERSE SIDE FOR THE BOARD OF DIRECTORS IN PROPOSAL 1 AND FOR PROPOSALS 2 AND 3.

YOUR VOTE IS IMPORTANT. PLEASE FOLLOW THE INSTRUCTIONS ON THIS PROXY CARD FOR VOTING BY INTERNET OR BY TELEPHONE, WHETHER OR NOT YOU PLAN TO ATTEND THE MEETING IN PERSON; OR, IF YOU PREFER, KINDLY MARK, SIGN AND DATE THIS PROXY CARD AND RETURN IT PROMPTLY IN THE ENCLOSED ENVELOPE (WHICH IS POSTAGE PREPAID IF MAILED IN THE UNITED STATES). EVEN IF YOU HAVE GIVEN YOUR PROXY, YOU MAY STILL VOTE IN PERSON IF YOU ATTEND THE MEETING. PLEASE NOTE, HOWEVER, THAT IF THE SHARES ARE HELD OF RECORD BY A BROKER, BANK OR OTHER NOMINEE AND YOU WISH TO VOTE AT THE MEETING, YOU MUST OBTAIN FROM THE RECORD HOLDER A PROXY ISSUED IN YOUR NAME.

PLEASE MARK, SIGN, DATE AND RETURN THIS PROXY CARD PROMPTLY USING THE ENCLOSED REPLY ENVELOPE.

CONTINUED AND TO BE SIGNED ON REVERSE SIDE

 

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