<PAGE>   1


                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    FORM 10-Q

[X]     QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
        EXCHANGE ACT OF 1934

                  FOR THE QUARTERLY PERIOD ENDED JULY 31, 1999

                                       OR

[ ]     TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
        EXCHANGE ACT OF 1934

            FOR THE TRANSITION PERIOD FROM             TO
                                           -----------    ------------
                         COMMISSION FILE NUMBER 0-27920

                              Garden Botanika, Inc.
                              ---------------------
             (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

               Washington                              91-1464962
     (STATE OR OTHER JURISDICTION OF        (IRS EMPLOYER IDENTIFICATION NO.)
     INCORPORATION OR ORGANIZATION)

                              8624 154th Avenue NE
                            Redmond, Washington 98052
                            -------------------------
                    (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)

                                 (425) 881-9603
                                 --------------
              (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
REQUIREMENTS FOR THE PAST 90 DAYS. YES [X] NO [ ]

INDICATE BY CHECK MARK WHETHER THE REGISTRANT HAS FILED ALL DOCUMENTS AND
REPORTS REQUIRED TO BE FILED BY SECTION 12, 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 SUBSEQUENT TO THE DISTRIBUTION OF SECURITIES UNDER A PLAN
CONFIRMED BY A COURT. YES [ ] NO [X]



<PAGE>   2

THE REGISTRANT HAD 7,069,098 SHARES OF COMMON STOCK, $0.01 PAR VALUE,
OUTSTANDING AT July 31, 1999.



                                       2

<PAGE>   3

                              GARDEN BOTANIKA, INC.

                               INDEX TO FORM 10-Q

<TABLE>
<CAPTION>
                                                                                   PAGE
                                                                                   ----
<S>                                                                                <C>
PART I - FINANCIAL INFORMATION ..................................................   4

        ITEM 1 -    FINANCIAL STATEMENTS ........................................   4

               Balance Sheets ...................................................  12

               Statements of Operations .........................................  13

               Statements of Cash Flows .........................................  14

               Notes to Financial Statements ....................................  15

        ITEM 2 -    MANAGEMENT'S DISCUSSION AND ANALYSIS OF
                    FINANCIAL CONDITION AND RESULTS OF OPERATIONS ...............   4

PART II - OTHER INFORMATION .....................................................   9

        ITEM 1 - LEGAL PROCEEDINGS ..............................................   9

        ITEM 2 - CHANGES IN SECURITIES ..........................................   9

        ITEM 3 - DEFAULTS UPON SENIOR SECURITIES ................................   9

        ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS ............   9

        ITEM 5 - OTHER INFORMATION ..............................................   9

        ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K ...............................  10

               Exhibit 11 - Calculation of Earnings Per Common and
               Common Equivalent Share ..........................................  17
</TABLE>



                                       3

<PAGE>   4

PART I - FINANCIAL INFORMATION:

ITEM 1 - FINANCIAL STATEMENTS -

        The unaudited balance sheet as of July 31, 1999, audited balance sheet
as of January 30, 1999 and unaudited statements of operations and cash flows of
Garden Botanika, Inc. (the "Company") for the six-month periods ended July 31,
1999 and August 1, 1998 are attached. Notes to the unaudited financial
statements are also attached.

ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS -

        This discussion should be read in conjunction with the "Management's
Discussion and Analysis" section included in the Company's Annual Report on Form
10-K/A dated June 1, 1999, which has previously been filed with the Securities
and Exchange Commission.

        Certain statements in this discussion constitute "forward-looking
statements" and involve known and unknown risks, uncertainties and other factors
that may cause the actual results, performance or achievements of the Company or
its industry to be materially different from any future results, performance or
achievements expressed or implied by such forward-looking statements. Such
factors include, among other things, court or creditors' actions related to the
Company's bankruptcy filing; the Company's losses and lack of profitability to
date; fluctuations and/or declines in comparable store sales results;
competition; and the Company's ability to successfully implement changes in its
business strategies.

        On April 20, 1999 (the "Petition Date"), Garden Botanika filed a
voluntary petition for relief under Chapter 11, Title 11 of the United States
Code (the "Bankruptcy Code") with the United States Bankruptcy Court for the
Western District of Washington at Seattle, Washington (the "Bankruptcy Court"),
Case No. 99-04464 (the "Chapter 11 Case"). The Company's financial statements
have been prepared on a going-concern basis, which contemplates continuity of
operations, realization of assets, liquidation of liabilities and commitments in
the normal course of business. The Chapter 11 Case, related circumstances and
losses from operations raise substantial doubt about the Company's ability to
continue as a going concern. The appropriateness of reporting on a going-concern
basis is dependent upon, among other things, confirmation of a plan of
reorganization and future profitable operations (see, below, "Liquidity and
Capital Resources," Part II, Item 1--"Legal Proceedings" and Note 1 to "Notes to
Financial Statements"). Realization of the Company's assets and liquidation of
its liabilities at their recorded amounts is subject to significant uncertainty.
While under the protection of Chapter 11, the Company may sell or otherwise
dispose of assets, and liquidate or settle liabilities, for amounts other than
those reflected in the accompanying financial statements. The financial
statements do not include any adjustments relating to the recoverability of the
value of recorded asset amounts or the amounts and classification of liabilities
that might be necessary as a consequence of a plan of reorganization.

        The Company expects to reorganize under Chapter 11 and propose a
reorganization plan that provides for emergence from bankruptcy by or before
2001. Garden Botanika has had its exclusive right to file a reorganization plan
extended through February 28, 2000 (the "Exclusive Period"), and the Bankruptcy
Court may grant an additional request to extend the Exclusive Period. There can
be no assurance, however, that the Company will propose a plan in a timely
fashion or that, if requested, the Bankruptcy Court will grant an extension.
After expiration of the Exclusive Period with any extensions, creditors of the
Company and other parties-in-interest have



                                       4
<PAGE>   5

the right to propose their own reorganization plans. Although management expects
to file a reorganization plan that provides the means for satisfying claims and
interests in the Company, there can be no assurance that a plan will be proposed
or that, if proposed, it will be confirmed by the Bankruptcy Court or that, if
confirmed, it will be consummated. At this time, it is not possible to predict
the outcome of the Chapter 11 Case or its effects on the Company's business.

        The Company had 149 stores in operation at July 31, 1999 compared to 282
stores at August 1, 1998 and 252 stores at January 30, 1999. The average age of
the Company's stores at July 31, 1999 was 52 months.

        The Company reports on a 52/53-week year, consisting of four 13-week
quarters. The fiscal year ends on the Saturday nearest the end of January.

        RESULTS OF OPERATIONS -

        (a)     COMPARISON OF THE QUARTERLY PERIODS ENDED JULY 31, 1999 AND
AUGUST 1, 1998.

        Net Sales. Net sales for the second quarter of fiscal 1999 were $13.5
million, compared to net sales of $20.8 million for the comparable prior period,
a decrease of 35%. Store net sales decreased $8.1 million, or 40%, during the
quarter, primarily due to the decrease in the number of stores, combined with a
9% decrease in comparable store sales (sales for continuing stores open at least
one complete fiscal year). The 9% decrease in comparable store sales for the
quarter was the result of decreases of 8% in May, 11% in June and 9% in July. In
the second quarter of fiscal 1998, comparable store sales decreased 22%,
consisting of decreases of 27% in May, 18% in June and 19% in July.

        Partially offsetting the decreases described above, the Company
recognized revenue of $753,000 in the second quarter of fiscal 1999 from sales
of annual memberships in the Company's discount-based "Garden Club" customer
loyalty program, which membership sales are amortized over the course of a year,
versus $128,000 in the comparable prior period. Combined mail order and Internet
sales in the quarter ending July 31, 1999 increased $179,000, or 37%, over the
comparable prior period.

        Gross Margin. The dollar amount of gross margin decreased $229,000, or
5%, from the second quarter of fiscal 1998, primarily as a result of the
decrease in the number of stores. As a percentage of net sales, gross margin,
which is net of buying and occupancy costs, was 35% in the second quarter of
fiscal 1999 versus 24% in the comparable prior period. This increase was
primarily due to the impact of the closure in the second quarter of poorly
performing stores with lower average margins than the Company's continuing store
base.

        Operating Expenses.

                Stores and Catalog. The dollar amount of store and catalog
expenses decreased by $3.9 million, or 46%, from the comparable prior period,
primarily due to the decrease in the number of stores and reductions in
advertising expense. As a percentage of net sales, store and catalog expenses
decreased to 35% from 42% in the second quarter of fiscal 1998, primarily due to
the decrease in advertising and the leveraging impact of the higher average
sales of the Company's continuing store base.

                General and Administrative. The dollar amount of general and
administrative expenses decreased by $764,000, or 30%, from the comparable prior
period, primarily reflecting the implementation in February of 1999 of
reductions in the Company's workforce. As a percentage of net sales, general and
administrative expenses increased to 13% from 12% in the comparable prior
period.



                                       5
<PAGE>   6

        Provision for Store Closing. No additional provision for store closing
costs was made in the fiscal quarter ending July 31, 1999. In the second quarter
of fiscal 1998, the Company recorded a provision for store closing costs of $3.6
million, which related to the estimated costs of asset writeoffs and other
expenses for stores planned to be closed in that fiscal year.

        Operating Loss. For the reasons explained above, the Company's operating
loss decreased 82%, to $1.8 million from $10.1 million, in the respective
quarters. As a percentage of net sales, the second quarter operating loss
decreased to 13% from 49% in the comparable prior period.

        Reorganization Charges. During the quarter ended July 31, 1999, the
Company incurred net costs of $132,000 relating to the Chapter 11 bankruptcy
proceedings. These costs consisted of legal and other professional fees of
approximately $482,000, which were partially offset by a net gain of $350,000
recognized in connection with the liquidation of inventory at the Company's 95
stores that were closed during the quarter.

        Income Tax Provision. Due to its pre-tax losses, the Company did not
record an income tax provision for the second quarter of either fiscal 1999 or
fiscal 1998.

        Net Loss and Per Share Data. Due to the factors discussed above, the
Company's net loss during the second quarter of fiscal 1999 decreased 81% to
$1.9 million, or $0.27 per share, from $10.2 million, or $1.44 per share, during
the second quarter of fiscal 1998.

        (b)     COMPARISON OF THE SIX-MONTH PERIODS ENDED JULY 31, 1999 AND
AUGUST 1, 1998.

        Net Sales. Net sales for the first six months of fiscal 1999 were $31.4
million, compared to net sales of $42.6 million for the comparable prior period,
a decrease of 26%. Store net sales decreased $12.0 million, or 30%, during the
six-month period, primarily due to the decrease in the number of stores,
combined with an 11% decrease in comparable store sales. In the first six months
of fiscal 1998, comparable store sales declined 19%.

        Partially offsetting the decrease in store net sales, the Company
recognized revenue in the first six months of fiscal 1999 of $1.5 million from
sales of annual memberships in the Company's discount-based "Garden Club"
customer loyalty program, versus $128,000 in the comparable prior period.
Combined mail order and Internet sales increased $192,000, or 16%, versus the
comparable prior period.

        Gross Margin. The dollar amount of gross margin decreased $625,000, or
6%, from the comparable prior period. As a percentage of net sales, gross margin
was 33% for the six months ended July 31, 1999, versus 26% in the comparable
prior period. This increase was primarily due to (i) reduced occupancy costs
(primarily from reduced depreciation expense) in the first quarter, as a result
of property and equipment writedowns taken at January 30, 1999 for potential
impairment of long lived assets at store locations that were closed prior to the
second quarter, and (ii) the impact of the closure in the second quarter of
poorly performing stores with lower average margins than the Company's
continuing store base.

        Operating Expenses.

                Stores and Catalog. The dollar amount of store and catalog
expenses decreased by $4.8 million, or 28%, from the comparable prior period,
primarily as a result of the decrease in the number of stores and reductions in
advertising expense. As a percentage of net sales, store



                                       6
<PAGE>   7

and catalog expenses were 40% in the six-month period ended July 31, 1999,
versus 41% in the comparable prior period.

                General and Administrative. The dollar amount of general and
administrative expenses decreased by $1.1 million, or 23%, from the comparable
prior period, primarily reflecting the implementation in February of 1999 of
reductions in the Company's workforce. As a percentage of net sales, general and
administrative expenses were 12% in both periods.

        Provision for Store Closing. In the six-month period ending July 31,
1999, in connection with the Company's reorganization efforts, the Company
recorded a provision for store closures of $6.6 million to cover the estimated
lease termination expenses and other store exit costs associated with the
closure of 95 poorly performing locations and the rejection of the underlying
leases. This amount was partially offset by the reduction of approximately $1.1
million in deferred rent liability for the 95 rejected leases that had
previously been recorded on the Company's balance sheet. As a result, the
additional net charge recorded was $5.5 million. In the comparable prior period,
the Company recorded a provision for store closures of $3.6 million, which
included the estimated costs of asset writeoffs as well as lease termination and
other expenses for stores planned to be closed in that fiscal year.

        Operating Loss. For the reasons explained above, the Company's operating
loss decreased 25%, from $15.2 million to $11.4 million, in the respective
six-month periods. As a percentage of net sales, the operating loss was 36% in
both periods.

        Reorganization Charges. During the six months ended July 31, 1999, the
Company incurred certain costs relating to its Chapter 11 bankruptcy
proceedings. These costs included legal and other professional fees of
approximately $1.1 million and writeoffs and related costs of approximately
$200,000 associated with the Company's early termination of its prior credit
facility with Foothill Capital Corporation. These costs were partially offset by
a net gain of $350,000 realized from the liquidation of inventory at 95 of the
Company's closed store locations.

        Income Tax Provision. Due to its pre-tax losses, the Company did not
record an income tax provision for the six months of either fiscal 1999 or
fiscal 1998.

        Net Loss and Per Share Data. For the reasons explained above, the
Company's net loss decreased 18% to $12.4 million, or $1.76 per share, during
the first six months of fiscal 1999 from $15.2 million, or $2.15 per share,
during the comparable period of fiscal 1998. There were approximately 7.07
million weighted average and common equivalent shares outstanding for both
periods.

                LIQUIDITY AND CAPITAL RESOURCES -

        On April 23, 1999, in connection with the Chapter 11 Case, the Company
entered a Loan and Security Agreement (the "DIP Facility") with BankBoston
Retail Finance Inc. ("BankBoston"), which is intended to provide Garden Botanika
with the cash and liquidity to conduct its operations and pay for inventory
shipments at normal levels for its 149-store base during the course of the
Chapter 11 Case. The DIP Facility consists of a revolving line of credit in the
amount of $7.0 million, subject to a borrowing base calculated as the lesser of
70% of the Company's eligible inventory valued at cost or 80% of the net
liquidation value of the eligible inventory. Advances under the facility are
also subject to certain reserves, as defined in the DIP Facility. The facility
expires on the earlier of April 23, 2001 or on the Company's emergence from
bankruptcy. The Company's ability to borrow under the DIP Facility received the
final approval of the Bankruptcy Court on May 27, 1999.



                                       7
<PAGE>   8

        The DIP Facility, which is secured by the assets of the Company, bears
interest at BankBoston's prime lending rate plus one percent (1.0%). In
addition, the Company is obligated to pay a facility fee of $3,000 monthly and
an annual unused line fee of one quarter of one percent (0.25%) of the average
unused portion of the line. In order to access the DIP Facility, the Company is
required to maintain certain financial covenants, including minimum consolidated
earnings before interest, taxes, depreciation, amortization and restructuring
expense and limitations on capital expenditures. The DIP facility also contains
restrictive covenants including, among other things, the maintenance of certain
inventory levels, limitations on the creation of additional indebtedness and a
prohibition on the payment of dividends. At July 31, 1999, the Company was in
violation of the loan covenant that requires maintenance of minimum inventory
levels of $50,000 per store. BankBoston has provided the Company with a waiver
of its violation, and the Company believes its violation will be cured in the
month of September. As of September 10, 1999, the Company had approximately $3.1
million in outstanding borrowings under the DIP Facility, and excess
availability was approximately $1.0 million.

        On April 30, 1999, the Bankruptcy Court authorized the Company to reject
leases for 95 poorly performing stores, and the Company engaged the services of
a liquidator to sell inventory at the stores that were to be closed. The Company
paid occupancy costs during the liquidating period, but the liquidator assumed
all other operating expenses associated with the stores to be closed. All of the
95 stores were closed and the related liquidations were completed on or before
June 12, 1999. Following an accounting of the final sale of inventory, the
Company realized a net gain of $350,000 from the liquidation of its closed store
locations.

        The Company partially funded its net cash loss of $10.2 million (net
loss before depreciation and amortization) in the first six months of fiscal
1999 with existing cash of $3.2 million, with a reduction in inventory levels of
$2.0 million and with a net increase of $5.4 million in accounts payable,
accrued expenses and liabilities subject to compromise.

        The Company believes that its cash balance at the end of the second
quarter of fiscal 1999, combined with its cash flow from operations and
borrowings under its DIP Facility, will be sufficient to satisfy its currently
anticipated working capital and capital expenditure requirements through fiscal
1999. The Company's uses of capital for the remainder of fiscal 1999 are
expected to include working capital for operating expenses and satisfaction of
liabilities incurred subsequent to the Petition Date, expenditures related to
maintaining its stores, interest payments on outstanding borrowings and costs
associated with the Chapter 11 Case. The Company's future working capital
requirements consist primarily of the purchase of inventory, which is expected
to be maintained at the level of $55,000 per store at cost, exclusive of the raw
materials and components held at the Company's manufacturing facility and at
suppliers. The Company's capital requirements, and its ability to obtain
continued financing, may vary significantly from those anticipated, however,
depending particularly on operating results and other factors. The Company's
long-term liquidity and the adequacy of the Company's capital resources cannot
be determined until a plan of reorganization has been developed and confirmed in
connection with the Chapter 11 Case.

        As a debtor-in-possession, actions against the Company to collect
pre-petition indebtedness are stayed and certain contractual obligations may not
be enforced against the Company. With the approval of the Bankruptcy Court,
certain of these obligations may be paid prior to the confirmation of a
reorganization plan. To date, the Company has received approval to pay customary
obligations associated with the daily operations of its business, including the
timely payment of new inventory shipments, employee wages and other obligations.
The ultimate amount of, and settlement terms for, the Company's pre-petition
liabilities are subject to the approval of a plan of reorganization and,
accordingly, the timing and form of settlement are not presently determinable.



                                       8
<PAGE>   9

PART II - OTHER INFORMATION:

ITEM 1 - LEGAL PROCEEDINGS -

        On April 20, 1999, Garden Botanika filed a voluntary petition for relief
under the Bankruptcy Code, Chapter 11, Title 11 of the United States Code, with
the United States Bankruptcy Court for the Western District of Washington,
Seattle, Washington 98101, Case No. 99-04464. Under Section 362 of the
Bankruptcy Code, during the Chapter 11 Case, creditors and other parties in
interest are limited in their remedies and ability to recover claims against the
Company that arose before the commencement of the case. Similarly, although the
Company is authorized to operate its business and manage its properties as a
debtor-in-possession, it may not engage in transactions outside of the ordinary
course of business without complying with the notice and hearing provisions of
the Bankruptcy Code and obtaining Bankruptcy Court approval. See Item 1
"Business--Chapter 11 Filing," Item 3 "Legal Proceedings," and Item 7
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--General" in the Company's Annual Report on Form 10K/A dated June 1,
1999.

        On May 27, 1999, the Company received the final approval of the
Bankruptcy Court to borrow under the DIP Facility, and on August 13, 1999, the
Bankruptcy Court granted the Company's request to extend through February 28,
2000 the Exclusive Period within which it has the exclusive right to file a plan
of reorganization.

ITEM 2 - CHANGES IN SECURITIES -

        None

ITEM 3 - DEFAULTS UPON SENIOR SECURITIES -

        None

ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS -

        None

ITEM 5 - OTHER INFORMATION -

        None



                                       9
<PAGE>   10

ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K -

        (a)     Exhibits:

<TABLE>
<CAPTION>
      EXHIBIT
      NUMBER   DESCRIPTION
      -------  -----------
<S>             <C>
        11      Calculation of Earnings Per Common and Common Equivalent Share
</TABLE>

        (b)     Reports on Form 8-K:

        During the quarter ended July 31, 1999, the Company filed a Report on
Form 8-K indicating that it had filed a voluntary petition under Chapter 11 of
the United States Bankruptcy Code in order to address obligations associated
with the Company's financial difficulties and related reorganization efforts.
The Report also disclosed that the Bankruptcy Court had approved interim
debtor-in-possession financing of up to $2.2 million under the terms of a $7.0
million credit facility obtained from BankBoston and had issued an order
granting the Company the authority to close 95 of its retail stores. The Report
was filed on May 3, 1999.



                                       10
<PAGE>   11

SIGNATURES:

Pursuant to the requirements of the Securities Act of 1934, the Registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.


                                      GARDEN BOTANIKA, INC.
                                      Registrant

September 13, 1999                    /s/ Arlee J. Jensen
------------------                    ----------------------------------------
Date                                  Arlee J. Jensen
                                      President and Chief Executive Officer
                                      and Director (Principal Executive Officer)


September 13, 1999                    /s/ George W. Newman
------------------                    ----------------------------------------
Date                                  George W. Newman
                                      Vice President, Chief Financial Officer,
                                      Secretary and Director (Principal
                                      Financial and Accounting Officer)



                                       11
<PAGE>   12

                              GARDEN BOTANIKA, INC.
                                 BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                         (UNAUDITED)
                                                                           July 31,       January 30,
                                                                             1999             1999
                                                                         -----------      -----------
                                                                             (amounts in thousands)
<S>                                                                        <C>              <C>
                                               ASSETS

Current assets:
   Cash and cash equivalents                                               $  1,046         $  4,295
   Inventories                                                               12,638           16,204
   Deposits in merchandise                                                    1,542
   Prepaid expenses:
     Rent                                                                       958            1,580
     Other                                                                    1,380            1,338
                                                                           --------         --------
       Total current assets                                                  17,564           23,417

Property and equipment:
   Leasehold improvements                                                    23,645           23,920
   Furniture and equipment                                                   11,028           11,244
   Equipment under capital lease                                                261              261
                                                                           --------         --------
                                                                             34,934           35,425
   Less accumulated depreciation and amortization                           (18,376)         (16,754)
                                                                           --------         --------
     Net property and equipment                                              16,558           18,671
                                                                           --------         --------
       Total assets                                                        $ 34,122         $ 42,088
                                                                           ========         ========

                                LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities:
   Checks drawn in excess of bank balances                                 $  1,736         $  1,522
   Accounts payable                                                           1,075            9,436
   Reserve for store closing                                                     65            1,327
   Accrued salaries, wages and benefits                                       1,027            1,890
   Accrued sales tax                                                            219              680
   Garden Club- deferred revenue                                              1,247            1,607
   Other                                                                      1,240            1,307
                                                                           --------         --------
       Total current liabilities                                              6,609           17,769

Liabilities subject to compromise                                            16,576               --
Deferred rent and other                                                       2,361            3,357
                                                                           --------         --------
       Total liabilities                                                     25,546           21,126

Commitments
Shareholders' equity:
   Preferred Stock, $.01 par value;
     10,000,000 shares authorized; none issued and outstanding                   --               --
   Common  Stock, $.01 par value;
     36,092,374 shares authorized; 7,069,098 issued and outstanding          98,663           98,633
   Accumulated deficit                                                      (90,087)         (77,671)
                                                                           --------         --------
       Total shareholders' equity                                             8,576           20,962

       Total liabilities & shareholders' equity                            $ 34,122         $ 42,088
                                                                           ========         ========
</TABLE>



   The accompanying notes are an integral part of these financial statements.



                                       12
<PAGE>   13

                              GARDEN BOTANIKA, INC.
                            STATEMENTS OF OPERATIONS
                  (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
                                                                    (UNAUDITED)                      (UNAUDITED)
                                                                   QUARTER ENDED                   SIX MONTHS ENDED
                                                            --------------------------        --------------------------
                                                            JULY 31,         AUGUST 1,        JULY 31,         AUGUST 1,
                                                              1999             1998             1999             1998
                                                            --------         ---------        --------         ---------
<S>                                                         <C>              <C>              <C>              <C>
Net sales                                                   $ 13,477         $ 20,862         $ 31,416         $ 42,568
Cost of sales (including buying and occupancy costs)           8,789           15,945           21,014           31,541
                                                            --------         --------         --------         --------
     Gross margin                                              4,688            4,917           10,402           11,027

Operating expenses:
   Stores and catalog                                          4,716            8,671           12,432           17,283
   General and administrative                                  1,762            2,526            3,915            5,060
Provision for store closing                                       --            3,550            5,480            3,550
Preopening and facility relocation expenses                       --              340               --              350
                                                            --------         --------         --------         --------
     Operating loss                                           (1,790)         (10,170)         (11,425)         (15,216)

Interest income (expense), net                                   (16)              (3)             (59)              46
Reorganization charges                                          (132)              --             (932)              --
                                                            --------         --------         --------         --------
     Net loss                                               $ (1,938)        $(10,173)        $(12,416         $(15,170)
                                                            ========         ========         ========         ========

Net loss per share                                          $  (0.27)        $  (1.44)        $  (1.76)        $  (2.15)

Weighted average common and common equivalent shares           7,069            7,069            7,069            7,069
</TABLE>



   The accompanying notes are an integral part of these financial statements.



                                       13
<PAGE>   14

                              GARDEN BOTANIKA, INC.
                            STATEMENTS OF CASH FLOWS
                             (amounts in thousands)

<TABLE>
<CAPTION>
                                                                       (UNAUDITED)
                                                                     SIX MONTHS ENDED
                                                                 --------------------------
                                                                 JULY 31,        AUGUST 1,
                                                                   1999             1998
                                                                 --------        ----------
<S>                                                              <C>              <C>
Cash flows from operating activities:
   Net loss                                                      $(12,416)        $(15,170)
                                                                 --------         --------

   Adjustments to reconcile net loss to net cash
     used by operating activities:
     Depreciation and amortization                                  1,874            4,063
     Loss on retirement of property and equipment                     243              440
     Provision for store closures                                                    3,174
     Changes in assets and liabilities:
       Inventories and deposits on merchandise                      2,024            4,610
       Prepaid rent  and other assets                                 606           (1,444)
       Accounts payable, accrued expenses and liabilities
         subject  to compromise                                     5,416           (1,441)
       Deferred rent and other                                       (996)             427
                                                                 --------         --------
        Total adjustments                                           9,167            9,829
                                                                 --------         --------
        Net cash used by operating activities                      (3,249)          (5,341)
                                                                 --------         --------

Cash flows from investing activities:
   Additions to property and equipment                                 --           (1,018)
                                                                 --------         --------
        Net cash used by investing activities                          --           (1,018)
                                                                 --------         --------

(Decrease) increase in cash and cash equivalents                   (3,249)          (6,359)
Cash and cash equivalents, beginning of period                      4,295            8,594
                                                                 --------         --------

Cash and cash equivalents, end of period                         $  1,046         $  2,235
                                                                 ========         ========
</TABLE>



   The accompanying notes are an integral part of these financial statements.



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<PAGE>   15

GARDEN BOTANIKA, INC.
NOTES TO FINANCIAL STATEMENTS
JULY 31, 1999 (UNAUDITED)
--------------------------------------------------------------------------------

1.      The accompanying unaudited financial statements include the accounts of
Garden Botanika, Inc. (the "Company"), a Washington corporation. These financial
statements have been prepared in accordance with generally accepted accounting
principles for interim financial reporting and pursuant to the rules and
regulations of the Securities and Exchange Commission. While these statements
reflect all normal recurring adjustments which are, in the opinion of
management, necessary for fair presentation of the results of the interim
period, they do not include all of the information and footnotes required by
generally accepted accounting principles for complete financial statements. For
further information, refer to the financial statements and footnotes thereto
included in the Company's Annual Report on Form 10-K/A dated June 1, 1999, which
has previously been filed with the Securities and Exchange Commission.

On April 20, 1999, the Company filed a voluntary petition for relief under
Chapter 11 of the United States Bankruptcy Code and is presently operating its
business as a debtor-in-possession subject to the jurisdiction of the United
States Bankruptcy Court for the Western District of Washington. The Company's
financial statements have been prepared on a going-concern basis, which
contemplates continuity of operations, realization of assets, liquidation of
liabilities and commitments in the normal course of business. The Chapter 11
case, related circumstances and the losses from operations raise substantial
doubt about the Company's ability to continue as a going concern. The
appropriateness of reporting on a going-concern basis is dependent upon, among
other things, confirmation of a plan of reorganization and future profitable
operations. Realization of its assets and liquidation of its liabilities at
their recorded amounts is subject to significant uncertainty. While under the
protection of Chapter 11, the Company may sell or otherwise dispose of assets,
and liquidate or settle liabilities, for amounts other than those reflected in
the accompanying financial statements. The financial statements do not include
any adjustments relating to the recoverability of the value of recorded asset
amounts or the amounts and classification of liabilities that might be necessary
as a consequence of a plan of reorganization.

2.      The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the financial
statements, as well as the amounts of revenues and expenses reported during the
period. Actual results could differ from those estimates.

3.      The results of operations for the quarterly period ended July 31, 1999
are not necessarily indicative of the results to be expected for the full fiscal
year. In each of the past three fiscal years, 39% to 49% of the Company's annual
net sales and all of its profits, if any, have been realized during its fourth
fiscal quarter, particularly during the November and December holiday selling
period. The Company expects this pattern to continue during the current fiscal
year. The Company's quarterly results of operations may also fluctuate
significantly as a result of a variety of other factors, including, among
others, increases or decreases in comparable store sales, adverse weather
conditions, shifts in the timing of holidays, shifts in the timing of promotions
and catalog mailings and changes in the Company's product mix.

4.      In fiscal 1998 the Company closed 29 stores and recorded a provision to
close an additional 24 stores in the amount of $7.3 million. Seven of these
stores were closed in the first quarter of fiscal 1999. At the conclusion of the
1998 holiday season, the Company reviewed the asset values of individual stores
in accordance with Statement of Financial Accounting Standards ("SFAS") No. 121.
As a result of that review, a charge of $20.1 million was recorded in fiscal
1998



                                       15
<PAGE>   16

to recognize potential impairment of long lived assets for 118 stores. This
amount reduced property and equipment.

On April 30, 1999, the Bankruptcy Court authorized the Company to reject leases
for 95 poorly performing stores. Seventeen of these stores had been identified
for closure in fiscal 1998 and were already included in the reserves for store
closings taken that year. In the three months ended May 1, 1999, an additional
net charge of $5.5 million was recorded to cover the estimated additional costs
for closure and lease termination expenses of 78 of the 95 stores. The carrying
value of the long lived assets of all 95 stores was substantially reduced as
impaired under SFAS No. 121 in the fourth quarter of fiscal 1998.

5.      In the Chapter 11 case, substantially all unsecured liabilities as of
the petition date are subject to compromise or other treatment under a plan of
reorganization to be confirmed by the bankruptcy court after submission to any
required vote by the affected parties. For financial reporting purposes, those
liabilities and obligations whose treatment and satisfaction is dependent on the
outcome of the Chapter 11 case have been segregated and classified as
liabilities subject to compromise in the accompanying balance sheet. The
ultimate amount of and settlement terms for such liabilities are subject to an
approved plan of reorganization and are not presently determinable. Included in
liabilities subject to compromise as of July 31, 1999 are pre-petition accounts
payable of $9.7 million and estimated lease termination costs of $6.9 million.



                                       16