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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549

FORM 10-Q

(MARK ONE)

For the quarterly period ended August 3, 2002 or

For the transition period from ___________ to ____________.

Commission file number 000-24261

RESTORATION HARDWARE, INC.

(415) 924-1005
(Registrant’s Telephone Number, Including Area Code)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirement for the past 90 days.

Yes   [X]      No   [   ]

As of September 10, 2002, 29,951,222 shares of the registrant’s common stock, $0.0001 par value per share, were outstanding.

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FORM 10-Q

FOR THE QUARTER ENDED AUGUST 3, 2002

INDEX

				PAGE
PART I.	FINANCIAL INFORMATION
ITEM 1.	Financial Statements
	Condensed Consolidated Balance Sheets as of August 3, 2002 (unaudited) , February 2, 2002 and August 4, 2001 (unaudited)			3
	Condensed Consolidated Statements of Operations (unaudited) for the three and six months ended August 3, 2002 and August 4, 2001			4
	Condensed Consolidated Statements of Cash Flows (unaudited) for the six months ended August 3, 2002 and August 4, 2001			5
	Notes to Condensed Consolidated Financial Statements (unaudited)			6
ITEM 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations			9
ITEM 3.	Quantitative and Qualitative Disclosures About Market Risk			18
PART II.	OTHER INFORMATION
ITEM 1.	Legal Proceedings			18
ITEM 4.	Submission of Matters to a Vote of Security Holders			18
ITEM 5.	Other information			19
ITEM 6.	Exhibits and Reports on Form 8-K			19
SIGNATURE PAGE				20
EXHIBIT INDEX				22

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PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

RESTORATION HARDWARE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(dollars in thousands)

				August 3,				February 2,				August 4,
				2002				2002				2001
				(Unaudited)								(Unaudited)
ASSETS
Current assets:
	Cash and cash equivalents			$	1,540			$	22,285			$	2,603
	Accounts receivable				3,324				3,278				4,187
	Merchandise inventories				90,485				62,070				82,026
	Prepaid expense and other				12,431				13,800				9,900
		Total current assets			107,780				101,433				98,716
	Property and equipment, net				96,306				87,934				105,388
	Goodwill				4,560				4,560				4,668
	Other assets				20,931				12,817				15,536
		Total assets		$	229,577			$	206,744			$	224,308
LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ EQUITY
Current liabilities:
	Accounts payable and accrued expenses			$	42,253			$	34,909			$	37,113
	Current portion of deferred lease incentives				4,989				4,507				4,530
	Revolving line of credit, net of debt issuance costs				23,159				—				3
	Deferred revenue				3,779				2,855				2,509
	Other current liabilities				9,277				9,183				7,580
		Total current liabilities			83,457				51,454				51,735
	Long-term line of credit, net of debt issuance costs				—				—				14,842
	Long-term portion of deferred lease incentives				36,172				37,101				39,371
	Deferred rent				13,514				12,703				11,784
	Other long-term obligations				80				3,236				1,356
		Total liabilities			133,223				104,494				119,088
	Series A redeemable convertible preferred stock, $.0001 par value, 28,037, shares designated on March 21, 2001 13,470, 14,320 and 15,000 shares issued and outstanding, at August 3, 2002, February 3, 2002 and August 4, 2001, respectively, aggregate liquidation preference and redemption value of $15,426 at August 3, 2002				13,529				14,106				14,170
	Common stock, $.0001 par value; 60,000,000 shares authorized; 29,870,210, 28,827,883, and 23,807,242 issued and outstanding, at August 3, 2002, February 2, 2002 and August 4, 2001, respectively				148,513				143,059				124,366
	Stockholder loan				(2,050	)			(2,050	)			(2,050	)
	Foreign currency translation adjustment				(115	)			(159	)			9
	Accumulated deficit				(63,523	)			(52,706	)			(31,275	)
		Total stockholders’ equity			82,825				88,144				91,050
		Total liabilities, redeemable convertible preferred stock
		and stockholders’ equity		$	229,577			$	206,744			$	224,308

See Notes to Condensed Consolidated Financial Statements.

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RESTORATION HARDWARE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(Unaudited)

				Three Months Ended								Six Months Ended
				August 3,				August 4				August 3,				August 4,
				2002				2001				2002				2001
Net sales				$	85,019			$	75,912			$	154,396			$	146,571
Cost of sales and occupancy					62,106				61,413				120,594				118,204
		Gross profit			22,913				14,499				33,802				28,367
Selling, general and administrative expenses					27,781				23,105				54,852				45,604
Loss from operations					(4,868	)			(8,606	)			(21,050	)			(17,237	)
Interest expense					(811	)			(1,179	)			(1,385	)			(2,687	)
Change in fair value of warrants					—				704				(278	)			(773	)
Interest income					40				48				121				74
		Loss before income taxes			(5,639	)			(9,033	)			(22,592	)			(20,623	)
Income tax benefit					2,030				3,254				12,133				7,419
		Net loss			(3,609	)			(5,779	)			(10,459	)			(13,204	)
Amounts allocable to convertible preferred stock					—				(1,122	)			(358	)			(2,067	)
Net loss available to common stockholders				$	(3,609	)		$	(6,901	)		$	(10,817	)		$	(15,271	)
Net loss per common share:
	Basic and diluted loss per share				($0.12	)			($0.30	)			($0.37	)			($0.74	)
Weighted average shares basic and diluted					29,807				23,254				29,526				20,681

See Notes to Condensed Consolidated Financial Statements.

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RESTORATION HARDWARE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
(Unaudited)

						Six Months Ended
						August 3, 2002				August 4, 2001
Cash flows from operating activities:
	Net loss					$	(10,463	)		$	(13,204	)
	Adjustments to reconcile net loss to net cash used in operating activities:
		Depreciation and amortization					9,580				8,831
		Change in fair value of warrants					278				773
		Deferred income taxes					(8,732	)			(7,419	)
		Other					—				43
		Changes in assets and liabilities:
			Accounts receivable				(47	)			3,881
			Merchandise inventories				(28,416	)			1,949
			Prepaid expenses and other assets				(149	)			(1,854	)
			Accounts payable and accrued expenses				7,327				(6,230	)
			Deferred revenue				925				(3,889	)
			Other current liabilities				94				(1,109	)
			Deferred rent				810				1,268
			Deferred lease incentives and other long-term liabilities				(448	)			(1,728	)
			Net cash used in operating activities				(29,241	)			(18,688	)
Cash flows from investing activities:
	Proceeds from store closing agreements						—				5,325
	Capital expenditures						(16,770	)			(991	)
			Net cash provided by (used in) investing activities				(16,770	)			4,334
Cash flows from financing activities:
	Net proceeds from private placement of preferred stock						—				13,511
	Net proceeds from private placement of common stock						—				24,357
	Borrowings (repayments) under revolving line of credit — net						24,041				(17,719	)
	Repayments on long-term debt						—				(6,000	)
	Debt issuance costs						—				(1,150	)
	Other long-term obligations						(106	)			(29	)
	Issuance of common stock						1,273				1,345
				Net cash provided by financing activities			25,208				14,315
Effects of foreign currency exchange rate translation on cash							58				32
Net increase (decrease) in cash and cash equivalents							(20,745	)			(7	)
Cash and cash equivalents:
	Beginning of period						22,285				2,610
	End of period					$	1,540			$	2,603
Non-cash transactions:
	Conversion of Preferred Series A stock to common stock					$	935			$	—
	Exercise of warrants					$	2,956			$	—
	Stockholder loan					$	—			$	2,050
	Beneficial conversion feature — preferred stock					$	—			$	1,406
	Beneficial conversion charge — preferred stock					$	—			$	(1,406	)
	Dividends attributable to preferred stock					$	358			$	(661	)

See Notes to Condensed Consolidated Financial Statements.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS THREE MONTHS ENDED AUGUST 3, 2002 AND August 4, 2001

1. NATURE OF BUSINESS AND BASIS OF PRESENTATION

Nature of Business

     Restoration Hardware, Inc., a Delaware corporation, together with its subsidiaries, is a specialty retailer of high-quality home furnishings, decorative accessories and hardware. These products are sold through retail locations, catalogs and the Internet. As of August 3, 2002, we operated 105 retail stores in 31 states, the District of Columbia and Canada.

Basis of Presentation

     The accompanying interim condensed consolidated financial statements have been prepared from our records without audit and, in management’s opinion, include all adjustments (consisting of only normal recurring adjustments) necessary to present fairly the financial position at August 3, 2002 and August 4, 2001 and results of operations and cash flows for the six fiscal months ended August 3, 2002 and August 4, 2001. The balance sheet at February 2, 2002, as presented, has been derived from our audited financial statements for the fiscal year then ended. Certain reclassifications have been made to the fiscal 2001 presentation to conform to the fiscal 2002 presentation, including the reclassification of distribution-center-to-store freight and third party warehousing costs from selling, general and administrative expenses to cost of sales and occupancy.

     Our accounting policies are described in Note 1 to the audited consolidated financial statements included in our Form 10-K for the fiscal year ended February 2, 2002. Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted for purposes of the interim condensed consolidated financial statements. You should read the interim condensed consolidated financial statements in conjunction with the audited consolidated financial statements, including the notes, for the fiscal year ended February 2, 2002.

     The results of operations for the three months presented in this Form 10-Q are not necessarily indicative of the results to be expected for any future quarter or the full year.

2. RECENTLY ISSUED ACCOUNTING STANDARDS

     In June 2001, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 141, Business Combinations, and SFAS No. 142, Goodwill and Other Intangible Assets. SFAS No. 141 requires that all business combinations be accounted for using the purchase method of accounting and addresses the initial recognition and measurement of goodwill and other intangible assets acquired in a business combination. Under SFAS No. 142, goodwill and certain other intangible assets deemed to have indefinite lives will no longer be amortized, but must be tested for impairment annually, or more frequently if events and circumstances indicate there may be an impairment. We adopted SFAS No. 141 and SFAS No. 142 in the first quarter of fiscal 2003. The adoption of SFAS No. 141 did not have a material impact on our financial position or results of operations. As required by SFAS 142, we performed a transitional goodwill impairment test as of February 3, 2002, the date of adoption of the standard. Based upon an independent valuation, there was no impairment of goodwill upon our adoption of SFAS No. 142.

     Upon the adoption of SFAS No 142, we discontinued the amortization of goodwill with a carrying value of $4.6 million. Had the non-amortization provisions of SFAS No. 142 been applied for the three and six fiscal months ended August 4, 2001, our net loss available to common stockholders and loss per common share would have been as follows (in thousands, except per share amounts):

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