Restoration Hardware (RSTO)

Mr. Dunaj’s Employment Arrangement

In connection with the hiring of Mr. Dunaj as our Chief Operating Officer, we agreed upon the terms and conditions of his employment in an offer letter dated May 9, 2006. Mr. Dunaj’s offer letter provides for an initial annual base salary of $450,000. The offer letter also provides for a signing bonus of $100,000, and he is guaranteed a minimum bonus of $200,000 for our 2006 fiscal year. Mr. Dunaj also will be eligible to participate in our management incentive program. Mr. Dunaj’s guaranteed bonus amount, other than his signing bonus, for fiscal 2006 will be credited against any actual bonuses received by Mr. Dunaj for such year.

Pursuant to his offer letter, Mr. Dunaj received stock options to purchase 400,000 shares of our common stock on May 9, 2006, at an exercise price of $6.77 per share pursuant to our 1998 stock incentive plan. The options vest over four years, with 25% of the shares subject to the options vesting on each anniversary of the grant date.

Should Mr. Dunaj’s employment be terminated by the company not for cause, other than in connection with a change of control of the company, Mr. Dunaj will receive salary continuation for a period of one year from such termination date. Should there be a change of control of the company and Mr. Dunaj’s employment is, within 12 months thereafter, subject to an involuntary termination by the company, he will receive, in lieu of any other severance pursuant to the offer letter, salary continuation for a period of one year from such termination date and his initial stock options will vest in full. Mr. Dunaj’s entitlement to any severance payments and acceleration of his stock options, if applicable, will be contingent upon his execution of a written release. Further, Mr. Dunaj has agreed that, for a period of one year following the effective date of his resignation from the company or the termination of his employment by the company, he will not work in a capacity that would compete directly with the company and he shall not solicit any employees or customers of the company during such period. In the event that Mr. Dunaj breaches this obligation, all severance and other benefits shall cease.