<PAGE>

                      SECURITIES AND EXCHANGE COMMISSION
                            Washington, D.C.  20549

                                   FORM 10-K
           (X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                        SECURITIES EXCHANGE ACT OF 1934

                  For the fiscal year ended January 29, 2000

         ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
               SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
            For the transition period from __________ to__________.

                        Commission File Number 0-21406
                               BROOKSTONE, INC.
            (Exact name of registrant as specified in its charter)


                 DELAWARE                                06-1182895
                 --------                                ----------
     (State or other jurisdiction of          (IRS Employer Identification No.)
     incorporation or organization)


     17 RIVERSIDE STREET, NASHUA, NH                        03062
     -------------------------------                        -----
     (Address of principal executive offices)             (Zip Code)

        Registrant's telephone number, including area code 603-880-9500

          Securities registered pursuant to Section 12(b) of the Act:

                              Title of each class
                              -------------------

                                      None

          Securities registered pursuant to Section 12(g) of the Act:
                         Common Stock, par value $.001

                  ------------------------------------------

  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 if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
form 10-K.  (X)
            ---

  The aggregate market value of the voting stock held by non-affiliates of the
registrant on April 11,  2000 was $148,315,060.
                                  ------------

  The number of shares outstanding of the registrant's Common Stock, $.001 par
value, as of April 11, 2000 was 8,297,346 shares.
                                ---------
                      Documents Incorporated By Reference

Portions of the registrant's Proxy Statement for its 2000 Annual Meeting of
Stockholders are incorporated by reference in Part III hereof.

                     Table of Exhibits appears on Page 54.


                                                                               1
<PAGE>

                                BROOKSTONE, INC.
                                ----------------

                          1999 FORM 10-K ANNUAL REPORT
                               Table of Contents
<TABLE>
<CAPTION>

                                                                                                    Page No.
                                                                                                    -------
<S>                                                                                                 <C>
Item 1....Business                                                                                     3
Item 2....Properties                                                                                  11
Item 3....Legal Proceedings                                                                           11
Item 4....Submission of Matters to a Vote of Securities Holders                                       11
Item 4A...Executive Officers of the Registrant                                                        12
Item 5....Market for Registrant's Common Equity and Related Stockholders Matters                      14
Item 6....Selected Financial Data                                                                     15
Item 7....Management's Discussion and Analysis of Financial Condition and Results of Operations       16
Item 8....Financial Statements and Supplementary Data                                                 25
Item 9....Changes in and Disagreements with Accountants on Accounting and Financial Disclosure        25
Item 10....Directors and Executive Officers of the Registrant                                         26
Item 11....Executive Compensation                                                                     26
Item 12....Security Ownership of Certain Beneficial Owners and Management                             26
Item 13....Certain Relationships and Related Transactions                                             26
Item 14....Exhibits, Financial Statement Schedules and Reports on Form 8-K                            27

Exhibits Filed Herewith:
-----------------------------
Exhibit 10.25  Amended and Restated Revolving Credit Agreement                                        60
Exhibit 10.26  Employment Agreement with Kenneth J. Mesnik                                           163
Exhibit 21     Subsidiary of Registrant                                                              167
Exhibit 27     Financial Data Schedule
</TABLE>

2
<PAGE>

ITEM 1.  BUSINESS

     Brookstone, Inc. is a nationwide specialty retailer offering an assortment
of consumer products functional in purpose, distinctive in quality and design
and not widely available from other retailers.  Brookstone's merchandise
includes lawn and garden, health and fitness, home and office and travel and
auto products.  The Company offers approximately 2,500 active stock-keeping
units ("SKUs") at any given time.  Brookstone sells its products through 211
full-year stores (including 11 airport based stores and 3 outlet stores) in 38
states, the District of Columbia and Puerto Rico.  In addition to these full-
year stores, Brookstone operates temporary stores and kiosks during the winter
holiday season; there were a total of 71 such stores operating during the 1999
holiday season.  Brookstone also operates a direct marketing business, which
includes its traditional Hard-to-Find Tools, its Brookstone Gift Collection and
its Gardeners Eden catalogs in addition to an interactive Internet site,
www.Brookstone.com. For a further description of the Company's business
segments, see Note 6 of the Notes to Consolidated Financial Statements on page
40.

     The Company was incorporated in Delaware in 1986. The Company is a holding
company, the principle asset of which is the capital stock of Brookstone
Company, Inc., a New Hampshire corporation that, along with its direct and
indirect subsidiaries, operates Brookstone's business.  As used in this report,
unless the context otherwise requires, the terms "Company" and "Brookstone"
refer collectively to Brookstone, Inc. and its operating subsidiaries.  The
Company's executive offices are located at 17 Riverside Street, Nashua, New
Hampshire 03062 and its telephone number is (603) 880-9500.

Retail Store Business
---------------------

MERCHANDISING AND MARKETING

     Merchandising.  Brookstone seeks to be a leader in identifying and selling
products which are functional in purpose, distinctive in quality and design
and not widely available from other retailers. Brookstone's products are
intended to make some aspect of the user's life easier, better, more enjoyable
or more comfortable. A majority of the Company's products bear the Brookstone
name in an effort to reinforce its franchise value and generate customer
loyalty.

     The following lists the Company's four current product worlds and 23
current product categories:
<TABLE>
<CAPTION>

LAWN & GARDEN       HEALTH & FITNESS      HOME & OFFICE  TRAVEL & AUTO
<S>                 <C>                   <C>            <C>
Backyard Leisure    Personal Care         Audio/Video    Automobile
Garden              Personal Accessories  Optical        Travel
Outdoor Games       Home Comfort          Wine           Safety/Security
Christmas           Household             Kitchen        Lighting
Pool / Beach        Bedding               Games          Tools
Time / Weather      Massage               Stationery
</TABLE>

                                                                               3
<PAGE>

The Company believes that the high quality construction, innovation and design
of its products are apparent to its customers. For example, Brookstone offers a
five-piece garden tool set, which is ergonomically designed, and made of high
strength, rustproof aluminum.  This design and construction are intended to
convey the message that this tool set will tend to outlast and be easier to work
with than competing garden tools in a similar price range. Information on the
features and benefits of products is further conveyed through display cards and
attentive customer service.

     The qualities of Brookstone's products make them suitable for gift giving.
A majority of the Company's sales are attributable to products purchased as
gifts, especially for men, and the Company's two busiest selling seasons occur
prior to Christmas and Father's Day.  The distinctive quality and design of
Brookstone's products are intended to create an image that each product is
special.  In addition, Brookstone's effort to educate its customers about its
products is often important in connection with the purchase of a gift,
particularly if the customer is uncertain as to which product features might be
most attractive to the recipient.

     Brookstone prices its products to be affordable to the typical mall
shopper.  The majority of the Company's products are priced at less than $40.00,
although the items in its stores are priced in a range from $5.00 to
approximately $3,000.  Brookstone closely monitors gross profit dollar
contribution by SKU and adjusts merchandise displays accordingly on a monthly
basis.

     The Company's success depends to a large degree upon its ability to
introduce new or updated products in a timely manner.  The Company's current
policy is to replace or update approximately 30% of the items in its merchandise
assortment every year, thereby maintaining customer interest through the
freshness of its product selections and further establishing Brookstone as a
leader in identifying high quality, functional products which are not widely
available from other retailers.  While the average sales life of Brookstone
products is between two and four years, the sales life of certain products may
be significantly shorter.

     The Brookstone Store.  Brookstone believes its retail stores are
distinctive in appearance and in the shopping experience they provide.  The
Company emphasizes the visual aspects of its merchandise presentation and the
creation of a sense of "theater" in its stores.  Recognizing the functional
nature of many of its products, Brookstone strives to present its merchandise in
a manner that will spark the interest of shoppers and encourage them to pick up
sample products.  At least one sample of each product is displayed with an
information card highlighting the features and benefits of the product in an
easy-to-read format.  Special signs and displays give prominence to selected
products which the Company believes will have particular appeal to shoppers.

     Seasonal Stores.  Brookstone's seasonal stores are typically open during
the winter holiday selling season.  These include both kiosks positioned in
common areas of shopping malls and other retail sites and temporary stores set
up within vacant retail in-line space.  These locations are designed to carry a
limited line of the Company's most popular, gift-oriented merchandise.  The
typical Brookstone kiosk is a temporary structure of approximately 160 square

4
<PAGE>

feet, which can carry approximately 120 SKUs.  The typical temporary store has
approximately 1,500 square feet and is designed to carry up to 300 SKUs.  Both
kiosks and temporary stores are built with reusable, portable and modular
materials.

     Marketing.  The Company's principal marketing vehicle is the Brookstone
store. Brookstone's eye-catching open storefront design and attractive window
displays are designed to attract shoppers into its stores by highlighting
products that are anticipated to be of particular interest to customers and are
appropriate to the season.  In addition, the Company creates in-store displays
of many of its key products in attractively gift-wrapped packages to provide
added convenience to its customers, particularly during its two busiest selling
periods, Christmas and Father's Day.  Both the Company's Brookstone Gift
Collection catalog and its Internet operations identify its retail store
locations, and the stores advertise the Internet program and supply customers
with catalogs.  The Company's merchandising strategy does not depend on price
discounting.

PRODUCT SOURCING

     Brookstone continually seeks to develop, identify and introduce new
products, which meet its quality and profitability standards.  Brookstone
employs nine specialized merchandise buyers who actively participate in the
design process for many new products.  These buyers also travel worldwide
visiting trade shows, manufacturers and inventors in search of new products for
Brookstone's stores, Internet site and catalogs.  The Company has product
development sourcing agents in Hong Kong, Paris, Taipei and Tokyo.  These agents
provide the Company with important venues for developing relationships with
manufacturers and allow the Company to monitor and maintain quality standards
throughout the development and manufacturing process. During Fiscal 1999 the
Company established "Brookstone Labs," an internal product design and
development team which, in cooperation with the merchandise buyers, provides
design and engineering support for innovative Brookstone-branded products.

     Those products not developed in-house meeting the Company's initial
merchandise selection criteria are tested and reviewed by the Company's quality
control department.  Company associates home-test many products as part of this
quality control review.  Once a product has been approved, Brookstone begins
negotiations with the product's vendor to secure a source of supply.  When
determining which products to introduce, the Company takes into account the
probable cost of the product relative to what the Company believes the product's
appropriate selling price will be, as well as whether the vendor expects to
distribute the product through mass merchant channels, thereby diluting the
sense of uniqueness which Brookstone seeks to convey to its customers. While the
time between the approval of a new product and its introduction in the stores
varies widely, the typical period is between two and four months.  For products
designed by the Company, the period from conception of the idea to introduction
in the stores can be significantly longer.


                                                                               5
<PAGE>

STORE OPERATION AND TRAINING

     Three regional managers, 12 district managers and four to six assistant
district managers supervise the Company's stores.  Staffing of a typical store
includes a store manager who supervises an assistant store manager, a second
assistant store manger, and approximately 10 to 15 full- and part-time sales
associates, depending upon the time of year.  Store associates are trained to
inform and assist customers in the features, benefits and operation of
Brookstone merchandise.  Store associates receive weekly product updates from
the Company's headquarters, which highlight both new and other selected
products.  Brookstone has developed incentive compensation programs for
regional, district, assistant district, store and assistant store managers which
reward individual and store performance based on profitability.

     The Company uses "Closing Strong," a selling skills program designed to
train all associates in the art of identifying and qualifying customers, and in
closing the sale.  The program focuses on generating incremental sales through
increasing demo sales, units per transaction and big-ticket sales.

EXPANSION STRATEGY

     Brookstone currently operates 211 stores in 38 states, the District of
Columbia and Puerto Rico. Brookstone's stores are primarily located in high
traffic regional malls, as well as in central retail districts and multi-use
specialty projects, such as Copley Square in Boston, The Forum Shops in Las
Vegas and Rockefeller Center and West 57th Street in New York City.
Brookstone's stores also include airport stores in terminals throughout the
country.

     Brookstone locates its stores in areas which are destinations for large
numbers of shoppers and which reinforce the Company's quality image.  To assess
potential new mall locations, Brookstone applies a stringent set of financial as
well as other criteria to determine the overall acceptability of a mall and the
optimal locations within it.  Non-mall locations are selected based on the level
and nature of retail activity in the area.  Brookstone believes that its
distinctive store and innovative merchandise provide a unique shopping
experience, which makes it a desirable tenant to regional mall developers and
other prospective landlords.  The Company's new stores average approximately
3,500 square feet, approximately 2,800 of which is selling space.  Airport
stores range from 600 to 2,000 square feet in size and typically carry a limited
assortment of the Company's products.

     Brookstone's store expansion strategy is to open stores in existing markets
where it can build on its name recognition and achieve certain operating
economies of scale, and in new markets where management believes it can
successfully transport Brookstone's unique positioning and strategy.  Brookstone
opened 15 stores in Fiscal 1999, including one airport store; 24 stores in
Fiscal 1998, seven of which were airport stores; 19 stores in Fiscal 1997, three
of which were airport stores; 16 stores in Fiscal 1996; and 14 stores in Fiscal
1995.  The Company plans to open approximately 18 to 20 new stores, up to five
of which will be in airport locations, in Fiscal 2000.  Brookstone continually
monitors individual store profitability and will

6
<PAGE>

consider closing any stores that do not meet its performance criteria.
Brookstone closed no stores in Fiscal 1999, five stores in Fiscal 1998, and one
store in each of Fiscal 1997, Fiscal 1996 and Fiscal 1995. The Company
anticipates closing up to two stores during Fiscal 2000.

     Brookstone operated 71 seasonal stores (44 kiosk and 27 temporary in-line)
during the 1999 winter holiday selling season. During the 1998 winter holiday
selling season, Brookstone operated 95 seasonal stores (52 kiosk and 43
temporary in-line) and 50 temporary in-line seasonal stores during the 1998
summer season; 138 seasonal stores (75 kiosk and 63 temporary in-line) during
the 1997 winter holiday selling season and 13 temporary in-line seasonal stores
during the 1997 summer season; 121 seasonal stores (62 kiosk and 59 temporary
in-line) during the 1996 winter holiday selling season, and 125 seasonal stores
(78 kiosk and 47 temporary in-line) during the 1995 winter holiday selling
season.  Brookstone plans to operate approximately 65-70 seasonal stores during
the 2000 winter holiday selling season based on the availability of acceptable
sites.  Use of seasonal stores also provides the Company the ability to test
retail sites during the period of the year when customer traffic and sales
prospects are greatest.  In certain cases, seasonal stores may be operated at a
mall where there is a Brookstone retail store.  See "Management's Discussion and
Analysis of Financial Condition and Results of Operations - - Outlook: Important
Factors and Uncertainties" (found on 21 -24 of this document).


DIRECT MARKETING BUSINESS
-------------------------

     Brookstone was founded in 1965 as a mail order marketer of hard-to-find
tools.  In Fiscal 1999, the direct marketing business accounted for
approximately 16% of the Company's net sales as compared to 11% of the Company's
net sales in Fiscal 1998 and 12% in Fiscal 1997.  The Company operates three
catalogs, Hard-to-Find-Tools, Brookstone Gift Collection and Gardeners Eden.


     The Hard-To-Find Tools catalog features a broad assortment of approximately
1,500 products, set forth in what the Company believes to be an informative and
convenient format. Whereas most of the products sold through the Company's
stores are sold as gifts, most of the products sold through the Hard-To-Find
Tools catalog are primarily sold directly to the end-user. Approximately 80-85%
of the products in the Hard-To-Find Tools catalog are not available in the
Company's stores.

     The Company also produces the Brookstone Gift Collection catalog, which
offers a selection of merchandise generally available in the Company's retail
stores.  The Brookstone Gift Collection catalog is usually distributed before
Father's Day and Christmas, the Company's two busiest selling seasons.  The
Brookstone Gift Collection catalog is mailed to persons with demographic
profiles similar to those of buyers in the Company's stores.

In May 1999, the Company acquired the Gardeners Eden catalog from Williams-
Sonoma, Inc.  The core product categories of the catalog are; Plants, Furniture
& Accessories, Plant Containers & Accessories, Wreath & Dried Arrangements,
Garden Tools, Indoor and Outdoor Decorative,

                                                                               7
<PAGE>

Entry, Tabletop and Personal Care. Product assortment within these categories
ranges from fine teak furniture to fresh plants.

     In Fiscal 1999, Brookstone mailed a total of approximately 32 million
catalogs, with 28 separate mail dates.  In addition, during Fiscal 1999,
Brookstone also promoted products via SkyMall (an in-flight selection of
catalogs available on many U.S. airlines).  Orders for SkyMall are taken by
SkyMall, then transmitted to the Company's distribution center where they are
fulfilled.  The Company's agreement with SkyMall expired in December 1999.

     During Fiscal 1997, Brookstone created an interactive Internet site at
www.Brookstoneonline.com, featuring an offering of current products from both
the Hard-To-Find-Tools and Brookstone Gift Collection catalogs.  In January of
1999, following the successful resolution of lengthy negotiations, the Company
obtained the domain name of www.Brookstone.com.__ The site has subsequently been
upgraded to include enhanced speed, additional product categories and SKU
content and increased site functionality.  During the fourth quarter of Fiscal
1999, Brookstone entered into an agreement with Cyberian Outpost, Inc. pursuant
to which Cyberian Outpost, Inc. purchases product from Brookstone to sell to
third parties via a Brookstone-specific section of Cyberian Outpost, Inc.'s
website located at www.outpost.com

MERCHANDISING, MARKETING AND PRODUCT SOURCING

     Brookstone employs a two-person merchandising team that is dedicated
exclusively to identifying products for the Company's Hard-To-Find-Tools
catalog.  The approval process for new Hard-To-Find-Tools products is similar to
the approval process for new products in the Company's stores. One dedicated
buyer selects products for the Brookstone Gift Collection catalog from the
product assortment available in the Company's stores, plus catalog-exclusive
product in existing categories.  A three person merchandising team is dedicated
to the selection of products for the Gardeners Eden catalog. Products for all
catalogs are chosen based on their previous or estimated direct marketing order
productivity.

       The Company also employs a four-person marketing team responsible for
list selection, management of marketing offers and tests of catalog activity.
As noted in more detail below, the Company's Mexico, Missouri distribution and
call centers, handle almost all in-bound telemarketing and fulfillment for all
three catalog titles and the Internet.


Distribution and Management Information Systems
-----------------------------------------------

     The Company operates a single 181,000 square foot distribution facility
located in Mexico, Missouri.  Nearly all of the Company's inventory is received
and distributed through this facility, which supports both the retail store and
direct marketing distribution systems.  The Company maintains an inventory of
products in the distribution center in order to ensure a sufficient supply for
sale to customers.  Distributions to stores are made, at a minimum, on a weekly
basis via UPS.  Distributions to direct marketing customers are made daily via
UPS and

8
<PAGE>

the U.S. Postal Service. The facility also houses the Company's direct marketing
call center. Also, the Company uses an outside call center to handle overflow
order calls and to provide coverage during off-peak hours. In addition the
Company leases approximately 90,000 square feet in Mexico, Missouri to handle
its distribution support functions.

     The efficient coordination of inventory planning, inventory logistics and
store operations is a primary focus for the Company.  The Company uses
distribution control software and a sales forecasting system.  These systems,
along with the store-based point-of-sale system, provide daily tracking of item
activity and availability to the Company's inventory allocation and distribution
teams.  Additionally, the Company uses an inventory planning and distribution
requirements planning client-server based system.  This system uses weekly sales
forecasts by SKU and selling location to determine inventory replenishment
requirements and will recommend inventory purchases to the merchandise
procurement team.

VENDORS
-------

     Brookstone currently conducts business with approximately 930 vendors, of
which approximately 255 are located overseas.  In Fiscal 1999, no single vendor
supplied products representing more than 13% of net sales, with the 10 largest
vendors representing approximately 36% of net sales.  Although the Company's
sales are not dependent on any single vendor, there can be no assurance that the
Company's operating results would not be adversely affected if any of its 10
largest vendors were unable to continue to fill the Company's orders for such
vendor's products or failed to fill those orders in a timely way.

SEASONALITY
------------

     The Company's sales in the second fiscal quarter are generally higher than
sales during the first and third quarters as a result of sales in connection
with Father's Day.  The fourth fiscal quarter, which includes the winter holiday
selling season, has historically produced a disproportionate amount of the
Company's net sales and substantially all of its income from operations.

     The seasonal nature of the Company's business increased in Fiscal 1999 and
is expected to continue to increase in Fiscal 2000 as the Company opens
additional retail stores and continues its program to operate a significant
number of small, temporary locations during the winter holiday selling season.
In Fiscal 1999, most of the Company's new stores were opened in the second half
of the fiscal year.

Competition
-----------

     Competition is highly intense among specialty retailers, traditional
department stores and mass-merchant discount stores in regional shopping malls
and other high-traffic retail locations. Brookstone competes for customers
principally on the basis of product assortment, convenience, customer service,
price and the attractiveness of its stores.  Brookstone also competes against
other retailers for suitable real estate locations and qualified management
personnel.  Because of

                                                                               9
<PAGE>

the highly seasonal nature of Brookstone's business, competitive factors are
most important during the winter holiday selling season.

     Brookstone differentiates itself from department and mass-merchant discount
stores, which offer a broader assortment of consumer products, by providing a
concentrated selection of functional, hard-to-find products of distinctive
quality and design.  The Company believes that the uniqueness, functionality and
generally affordable prices of its products differentiate it from other mall-
based specialty retailers and specialty companies, which primarily or
exclusively offer their products through direct marketing channels.

The Company's direct marketing business competes with other direct marketing
retailers offering similar products.  The direct marketing industry has become
increasingly competitive in recent years, as the number of catalogs mailed to
consumers has increased and with the advent of the Internet.

In addition, the Company's retail and direct marketing businesses have begun to
experience competition from other businesses that sell via the Internet.  While
the extent of that competition remains to be seen, the Company expects that it
will have to compete over the Internet both with its traditional competitors as
they begin to use the Internet as a channel to sell their goods and with new
"Internet-only" businesses that are seeking to compete in areas where the
Company does business.

EMPLOYEES
---------

     As of April 4, 2000, Brookstone had 1,174 regular full-time associates, of
which 608 were salaried staff and 566 were hourly workers.  As of such date, the
Company also employed an additional 1,204 part-time associates and 202 temporary
hourly workers.  The Company regularly supplements its workforce with temporary
workers, especially in the fourth quarter of each year to service increased
customer traffic during the peak winter holiday selling season.  The Company
believes that the success of its business depends, in part, on its ability to
attract and retain qualified personnel.  None of Brookstone's employees are
represented by labor unions, and Brookstone believes its employee relations are
excellent.

Trademarks
----------

     The Company's "BROOKSTONE" trademark has been registered in various product
classifications with the United States Patent and Trademark Office and in
several foreign countries.  In addition, the Company has applications to
register the "BROOKSTONE" trademark still pending in several foreign countries.
The Company acquired the trademarks "GARDENERS EDEN" and "GARDENERS EDEN (with
Design)" and their associated registrations with the United States Patent and
Trademark Office from Williams-Sonoma, Inc. in connection with its acquisition
of the Gardeners Eden catalog in May 1999.  The Company also owns or is seeking
registration of in various jurisdictions of other marks used by the Company in
its business.

10
<PAGE>

ITEM 2.  PROPERTIES

     Brookstone leases all of its retail stores.  New retail store leases have
an average initial term of 10 years.  As of January 29, 2000, the unexpired
terms under the Company's then existing store leases averaged just under seven
years.  Store leases may permit Brookstone to terminate the lease after five
years if the store does not achieve specified levels of sales.  In most cases,
the Company pays a minimum fixed rent plus a contingent rent based upon net
sales of the store in excess of a certain threshold.  The Company does not
believe the termination of any particular lease would have a material adverse
effect on the Company.  The following chart describes the number of store leases
which will expire in the periods indicated:

<TABLE>
<CAPTION>

               YEAR                             LEASES EXPIRING
               ----                             ---------------
               <S>                              <C>
               2000                                    19
               2001                                    12
               2002                                    13
               2003                                    11
               2004                                    12
               2005 and thereafter                    144




</TABLE>

     The space for a seasonal store is leased only for the period during which
the temporary location will be operating. Generally, each such location is
leased only for the season in question, although certain agreements have been
reached with landlords covering more than a single season. The Company generally
pays a minimum fixed rent for each temporary location plus a contingent rent
based upon net sales in excess of a certain threshold.


ITEM 3.   LEGAL PROCEEDINGS

     Brookstone is involved in various routine legal proceedings incidental to
the conduct of its business. The Company does not believe that any of these
legal proceedings will have a material adverse effect on Brookstone's financial
condition or results of operations.

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

     No matters were submitted to a vote of security holders of the Company
during the fourth quarter of Fiscal 1999.

                                                                              11
<PAGE>

ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT

          The executive officers of the Company are as follows:

<TABLE>
<CAPTION>

NAME                       AGE  PRESENT POSITION
-----------------------------------------------------------------------------
<S>                        <C>  <C>
Michael F. Anthony          45  Chairman of the Board, President and
                                  Chief Executive Officer
Philip W. Roizin            41  Executive Vice President, Finance &
                                  Administration
Kenneth J. Mesnik           50  Executive Vice President, Merchandising

Alexander M. Winiecki       52  Senior Vice President, Store Operations

Steven C. Strickland        37  Vice President, Marketing

Carol A. Lambert            46  Vice President, Human Resources
</TABLE>

          MICHAEL F. ANTHONY was appointed Chairman of the Board, President and
Chief Executive Officer of the Company in March 1999.  He was President and
Chief Executive Officer of the Company from September 1995 until March 1999.
From October 1994 until September 1995, Mr. Anthony served as President and
Chief Operating Officer of the Company.  From 1989 to October 1994, he held
various senior executive positions with Lechter's, Inc., a nationwide chain of
600 specialty stores, including President in 1994, Executive Vice President from
1993 to 1994 and Vice President/General Merchandise Manager from 1989 to 1993.
From 1978 to 1989, he was with Gold Circle, which at the time was a division of
Federated Department stores, where he held various merchandising positions,
including Divisional Vice President/Divisional Merchandise Manager from February
1986 to 1989.

          PHILIP W. ROIZIN has been Executive Vice President, Finance and
Administration of the Company since December 1996.  From May 1995 to December
1996, Mr. Roizin served as Chief Financial Officer of The Franklin Mint.  From
July 1989 to May 1995, he held various senior positions with Dole Food Company,
including Vice President / General Manager of Dole Beverages and Vice President
of Strategic Services.  From 1985 to 1989, Mr. Roizin served as a consultant for
Bain & Co., a management consulting firm.

          KENNETH J.  MESNIK was appointed Executive Vice President,
Merchandising in February 2000.  From December 1998 to February 2000, Mr. Mesnik
was Senior Vice President of Merchandising for 1-800-Flowers.com.  From April
1993 to November 1998, he served as Senior Vice President for Federated
Department stores.  From January 1990 until April 1993, Mr. Mesnik was a Vice
President of Merchandising for May Department stores.

          ALEXANDER M. WINIECKI has been Senior Vice President, Store Operations
of the Company since March 1994, having previously served as Vice President,
Store Operations of the

12
<PAGE>

Company beginning in October 1990. Mr. Winiecki was Executive Vice President of
Decor Corporation, a retailer of framed fine art prints and posters, from
November 1989 until September 1990. He was Vice President, Administration of
Claire's Boutiques, Inc., a chain of women's costume jewelry and accessory
specialty stores, from November 1986 until October 1989. From February 1985
until November 1986, Mr. Winiecki was a Regional Vice President of The Ben
Franklin Stores, a chain of craft and variety stores, which was a division of
Household Merchandising Inc. He was a Regional Manager of The Gap Stores, Inc.,
a specialty retailer of apparel, from May 1978 until January 1985.

       STEVEN C. STRICKLAND has been Vice President, Marketing of the Company
since March 1997.  Prior to such time, Mr. Strickland held the position of
Operating Vice President, Creative  & Visual Services for the Company from
September 1995 to March 1997.  From March 1994 to September 1995, he served as
Vice President Strategic Design & Visual Merchandising for Women's Specialty
Retailing, a division of U.S. Shoe Corporation and a retailer of women's ready-
to-wear.  From April 1985 to March 1994, Mr. Strickland was with The Limited,
Inc. where he held various positions including Corporate Design Manager from
March 1991 through March 1994.

          CAROL A. LAMBERT was appointed Vice President of Human Resources in
April 2000.  Prior to such time, Ms. Lambert held the position of Director of
Compensation and Benefits for the Company from August 1996 to April 2000.  From
1990 until August 1996 she served as Senior Vice President of Human Resources
for Home Bank where she was employed since 1979.

          Each executive officer has been elected to hold office until the first
meeting of the Board of Directors following the next annual meeting of
stockholders and until such executive officer's successor is chosen or qualified
or until such executive officer sooner dies, resigns, is removed or becomes
disqualified.

                                                                              13
<PAGE>

PART II.

ITEM 5.   MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDERS'
MATTERS.

          Stock exchange listing: The Company's common stock trades on the
NASDAQ National Market tier of The NASDAQ Stock Market under the Symbol: BKST

<TABLE>
<CAPTION>

----------------------------------------------------------------------------------------------------------------------------------
Common Stock:                           Fiscal 1998                                    Fiscal 1999
                                       --------------                                  ------------
                          Quarter                     High    Low             Quarter                     High    Low
                          ----------------------------------------           -----------------------------------------
<S>                                                <C>      <C>             <C>                      <C>        <C>
                           First                     $14.94  $11.50           First                      $15.50  $12.00
                           Second                    $15.47  $13.63           Second                     $15.88  $13.75
                           Third                     $14.13  $ 9.19           Third                      $17.81  $13.50
                           Fourth                    $17.81  $11.25           Fourth                     $18.25  $15.56
----------------------------------------------------------------------------------------------------------------------------------
</TABLE>


          As of April 11, 2000, there were 8,297,346 shares of common stock,
$.001 par value per share, outstanding and held of record by 182 stockholders.
The Company has never paid a cash dividend and currently plans to retain any
earnings for use in the operations of the business.  Any determination by the
Board of Directors to pay future cash dividends will be based upon conditions
then existing, including the Company's earnings, financial condition and
requirements, restrictions in its financing arrangements and other factors.

14
<PAGE>

ITEM 6. SELECTED FINANCIAL DATA


                                Brookstone, Inc.
                            Selected Financial Data
              (In thousands, except operating and per share data)

<TABLE>
<CAPTION>
                                                                          Fiscal
                                                   ----------------------------------------------------
                                                     1999       1998       1997       1996       1995*
--------------------------------------------------------------------------------------------------------
<S>                                                <C>        <C>        <C>        <C>        <C>
      Income Statement Data:
      Net sales                                    $319,631   $271,858   $239,866   $218,044   $196,333
      Cost of sales                                 191,213    170,639    151,633    137,612    123,413

      Gross profit                                  128,418    101,219     88,233     80,432     72,920
      Selling, general and administrative           105,686     84,138     75,023     69,856     64,328
      expenses
      Income from operations                         22,732     17,081     13,210     10,576      8,592


      Interest expense, net                           1,125      1,672      1,084        885        845
      Provision for income taxes                      8,297      6,071      4,778      3,818      3,130

      Net income                                   $ 13,310   $  9,338   $  7,348   $  5,873   $  4,617
--------------------------------------------------------------------------------------------------------

      Earnings per share - basic                      $1.63      $1.17      $0.94      $0.76      $0.60
      Earnings per share - diluted                    $1.58      $1.13      $0.91      $0.73      $0.58
--------------------------------------------------------------------------------------------------------

      Weighted average shares outstanding - basic     8,155      7,988      7,824      7,744      7,662
      Weighted average shares outstanding - diluted   8,422      8,285      8,119      8,061      7,973
--------------------------------------------------------------------------------------------------------

      Operating Data:  (Unaudited)
      ----------------------------
      Increase in same store sales (1)                  5.8%       6.0%       3.6%       5.6%    2.2%**
      Net sales per square foot of
        selling space (2)                          $    521   $    501   $    469   $    461   $    452
      Number of stores:
      Beginning of period                               196        177        159        144        131
      Opened during period                               15         24         19         16         14
      Closed during period                                0          5          1          1          1
      End of period                                     211        196        177        159        144
      Number of winter holiday seasonal stores           71         95        138        121        125

      Balance Sheet Data (at period end) :
      -------------------------------------------
      Total assets                                 $141,906   $114,561   $105,318   $ 87,261   $ 77,757
      Long-term debt, excluding current portion       2,511      2,612      2,698      2,784      2,863
      Total shareholders' equity                     87,310     72,310     61,766     53,957     47,714
      *Fifty-three week year **Based upon
      fifty-two weeks
</TABLE>

(1)  Same store sales percentage is calculated using net sales of stores, which
     were open for the full current period and the entire preceding fiscal year.
(2)  Net sales per square foot of selling space dollar amount is calculated
     using net sales generated for stores open for the entire fiscal period
     divided by the square feet of selling space of such stores. Selling space
     does not include stock rooms.

                                                                              15
<PAGE>

ITEM 7.   MANAGEMENT'S DISCUSSION AND ANALYSIS OF
          FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

Results of Operations
---------------------

The following table sets forth certain financial data of the Company expressed
as a percentage of net sales for Fiscal 1999, Fiscal 1998 and Fiscal 1997.

<TABLE>
<CAPTION>
                                  Fiscal Year
                              ----------------------
                               1999    1998    1997
                              ------  ------  ------
<S>                           <C>     <C>     <C>
 Net sales                    100.0%  100.0%  100.0%

Cost of sales                  59.8    62.8    63.2
                              -----   -----   -----

Gross profit                   40.2    37.2    36.8

Selling, general and
  administrative expenses      33.1    30.9    31.3

Income from operations          7.1     6.3     5.5
Interest expense, net           0.3     0.6     0.4
                              -----   -----   -----

Income before taxes             6.8     5.7     5.1
Provision for income taxes      2.6     2.3     2.0
                              -----   -----   -----

Net income                      4.2%    3.4%    3.1%
                              -----   -----   -----

</TABLE>
--------------------------------------------------------------------------------

Fifty-two weeks ended January 29, 2000 versus Fifty-two weeks ended January 30,
-------------------------------------------------------------------------------
1999
----

     Net sales for Fiscal 1999 increased by $47.8 million, or 17.6%, over Fiscal
1998, primarily as the result of a $26.6 million, or 11.0%, increase in retail
sales, combined with a $21.2 million, or 72.7%, increase in direct marketing
sales.  Of the increase in retail sales, $11.3 million was attributable to the
opening of 15 new stores (14 full line and 1 airport store), $10.5 million to
additional sales from the operation of 24 stores for the full year in Fiscal
1999 that were only open for a portion of Fiscal 1998 (17 full line and 7
airport stores), and $12.3 million from a 5.8% increase in same store sales.
Partially offsetting such sales increases was the loss of  $1.4 million in sales
from 5 stores closed in Fiscal 1998 and $6.1 million less sales from temporary
winter holiday locations in Fiscal 1999 and from not operating temporary summer
locations during Fiscal 1999 that were open in Fiscal 1998.  The reduced holiday
sales from temporary locations, are primarily the result of operating 24 less
stores during holiday season of Fiscal 1999 versus Fiscal 1998.  The $21.2
million, or 72.7%, increase in direct marketing sales was primarily attributable
to $15.1 million in sales from the Gardeners Eden catalog acquired in May 1999
and a $3.6 million increase in Internet sales.  The remaining increase of $2.5
million is the result of a 8.5% increase in sales primarily from a 17.7%
increase in circulation for the Hard-To-Find-Tools and Brookstone Gift
Collection catalogs.

16
<PAGE>

          Gross profit as a percentage of net sales increased 3.0% to 40.2% in
Fiscal 1999 compared to 37.2% in Fiscal 1998.  The increase was primarily due to
a 2.0% reduction in net material costs as a percentage of net sales, resulting
primarily from lower sourcing costs.  The lower sourcing costs resulted as the
Company continued to increase the penetration of products bearing the
"Brookstone Brand".  As a percentage of net sales, Fiscal 1999 occupancy costs
decreased by 1.0% as compared to Fiscal 1998.  The decrease in occupancy is the
primarily the result of additional sales from the Company's Direct Marketing
business without any associated occupancy costs and the strong increase in same
store sales.

     Selling, general and administrative ("SG&A") expenses increased $21.6
million to $105.7 million in Fiscal 1999 from $84.1 million in Fiscal 1998. As a
percent of net sales, SG&A rose to 33.1% in Fiscal 1999 from 30.9% in Fiscal
1998. This $21.6 million increase included $8.4 million associated with the
acquisition and operation of the Gardeners Eden catalog, $1.5 million associated
with catalog costs as a result of increased circulation and $1.2 million
associated with Internet operating costs. Additionally, $4.4 million was
expended for operating expenses associated with new stores opened in Fiscal 1999
and stores open for the full year in Fiscal 1999 that were only open for a
partial year in Fiscal 1998, $5.1 million increase in compensation and benefits
to support the base business and distribution center and $1.0 million associated
with upgrading and modifying systems as part of Y2k remediation efforts.

     Income from operations was $22.7 million, or 7.1% of net sales, in Fiscal
1999 versus $17.1 million, or 6.3% of net sales, in Fiscal 1998.

     Net interest expense decreased to $1.1 million, or 0.3% of net sales, in
Fiscal 1999 from $1.7 million, or 0.6% of net sales, in Fiscal 1998, primarily
due to refinement of inventory management coupled with a strong operating
performance.  In Fiscal 1999, the Company recorded a provision for income taxes
of $8.3 million, or 2.6% of net sales, as compared to $6.1 million, or 2.3% of
net sales, in Fiscal 1998, resulting from an increase in pre-tax income offset
by a reduction in the effective tax rate.

     As a result of the foregoing factors, net income increased to $13.3 million
in Fiscal 1999 versus $9.3 million in Fiscal 1998.  Net income was 4.2% and 3.4%
of net sales in Fiscal 1999 and Fiscal 1998, respectively.  Earnings per share
on a diluted basis increased to $1.58 in Fiscal 1999 from $1.13 in Fiscal 1998.

FIFTY-TWO WEEKS ENDED JANUARY 30, 1999 VERSUS FIFTY-TWO WEEKS ENDED JANUARY 31,
-------------------------------------------------------------------------------
1998
----

Net sales for Fiscal 1998 increased by $32.0 million, or 13.3%, over Fiscal
1997, primarily as the result of a $30.8 million, or 14.5%, increase in retail
sales, combined with a $1.2 million, or 4.2%, increase in direct marketing
sales.  Of the increase in retail sales, $11.6 million was attributable to the
opening of 24 new stores (17 full line and 7 airport stores), $9.7 million to
additional sales from the operation of 19 stores for the full year in Fiscal
1998 that were only open for a portion of Fiscal 1997 (16 full line and 3
airport stores), and $11.1 million from a 6.0% increase in same store sales.
The retail sales increase also included $1.6 million in sales primarily
attributable to operating 50 temporary summer seasonal locations and 95
temporary winter holiday locations in Fiscal 1998, versus 13 temporary summer
seasonal locations and 138 temporary winter holiday locations in

                                                                              17
<PAGE>

Fiscal 1997. Partially offsetting such sales increases was the loss of $3.2
million in sales from the closing of five stores during Fiscal 1998. The $1.2
million, or 4.2% increase in direct marketing sales was primarily attributable
to a $1.0 million increase in sales from the Brookstone Gift Collection catalog
combined with a $0.5 million increase in Internet sales, partially offset by a
$0.3 million decrease in sales from the Hard-to-Find-Tools catalog. Catalog
circulation was decreased by approximately 8.0% in Fiscal 1998 as compared to
Fiscal 1997.

     Gross profit as a percentage of net sales increased 0.4% to 37.2% in Fiscal
1998 compared to 36.8% in Fiscal 1997.  The increase was primarily due to a 0.4%
reduction in net material costs as a percentage of net sales, resulting
primarily from lower sourcing costs.  As a percentage of net sales, Fiscal 1998
occupancy costs were flat as compared to Fiscal 1997.

     Selling, general and administrative expenses increased $9.1 million to
$84.1 million in Fiscal 1998 from $75.0 million in Fiscal 1997, and decreased as
a percentage of net sales to 30.9% in Fiscal 1998 from 31.3% in Fiscal 1997.
This $9.1 million increase included a $4.4 million increase for operating
expenses associated with new stores opened in Fiscal 1998 and stores open for
the full year in Fiscal 1998 that were only open for a partial year in Fiscal
1997 and a $4.7 million increase in compensation and benefits to support the
base business and distribution center.  These increases were partially offset by
a decrease in catalog costs as a result of decreased circulation.

     Income from operations was $17.1 million, or 6.3% of net sales, in Fiscal
1998 versus $13.2 million, or 5.5% of net sales, in Fiscal 1997.

     Net interest expense increased to $1.7 million, or 0.6% of net sales, in
Fiscal 1998 from $1.1 million, or 0.4% of net sales, in Fiscal 1997 primarily to
finance earlier inventory acquisition combined with increased fees associated
with the refinancing of the Company's revolving credit agreement during the
third quarter of Fiscal 1997.  In Fiscal 1998, the Company recorded a provision
for income taxes of $6.1 million, or 2.3% of net sales, as compared to $4.8
million, or 2.0% of net sales, in Fiscal 1997, resulting from an increase in
pre-tax income.

     As a result of the foregoing factors, net income increased to $9.3 million
in Fiscal 1998 versus $7.3 million in Fiscal 1997.  Net income was 3.4% and 3.1%
of net sales in Fiscal 1998 and Fiscal 1997, respectively.  Earnings per share
on a diluted basis increased to $1.13 in Fiscal 1998 from $0.91 in Fiscal 1997.

18
<PAGE>

QUARTERLY RESULTS
-----------------

     The following table sets forth certain unaudited quarterly information for
Fiscal 1999 and Fiscal 1998, which in the opinion of the Company, has been
prepared on the same basis as the Consolidated Financial Statements.  This
information includes normal recurring adjustments, which management considers
necessary for a fair presentation when read in conjunction with the Consolidated
Financial Statements, including the notes thereto.  The operating results for
any quarter are not necessarily indicative of results for any future period.

<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------

(Unaudited, in thousands, except per share data)                  Fiscal 1999
--------------------------------------------------             ------------------
                                                     First     Second    Third     Fourth
                                                    Quarter   Quarter   Quarter   Quarter
                                                    --------  --------  --------  --------
<S>                                                 <C>       <C>       <C>       <C>
Net sales                                           $42,100   $64,104   $53,234   $160,193
Gross profit                                         10,281    23,045    15,964     79,128
Income (loss)
 from operations                                     (7,371)      363    (6,759)    36,499
Net income (loss)                                    (4,624)        9    (4,489)    22,414
Earnings (loss) per share:
 Basic                                              $ (0.57)  $  0.00   $ (0.55)  $   2.72
 Diluted                                              (0.57)     0.00     (0.55)      2.64
------------------------------------------------------------------------------------------

(Unaudited, in thousands, except per share data)                 Fiscal 1998
--------------------------------------------------               ------------
                                                      First    Second    Third     Fourth
                                                     Quarter   Quarter   Quarter   Quarter
                                                     -------   -------   -------   -------
Net sales                                           $37,919   $53,756   $43,459   $136,724
Gross profit                                          8,887    17,303    11,383     63,646
Income (loss)
 from operations                                     (7,059)     (319)   (6,780)    31,239
Net income (loss)                                    (4,417)     (475)   (4,464)    18,694
Earnings (loss) per share:
 Basic                                              $ (0.56)  $ (0.06)  $ (0.56)  $   2.32
 Diluted                                              (0.56)    (0.06)    (0.56)      2.25
------------------------------------------------------------------------------------------
</TABLE>
     The Company's sales in the second fiscal quarter are generally higher than
sales during the first and third quarters as a result of sales in connection
with Father's Day. The fourth fiscal quarter, which includes the winter holiday
selling season, has historically produced a disproportionate amount of the
Company's net sales and all of its income from operations.

     The seasonal nature of the Company's business increased in Fiscal 1999 and
is expected to continue to increase in Fiscal 2000 as the Company opens
additional retail stores and continues its program to operate a significant
number of small, temporary locations during the winter holiday selling season.
In Fiscal 1999, most of the Company's new stores were opened in the second half
of the fiscal year.

                                                                              19
<PAGE>

LIQUIDITY AND CAPITAL RESOURCES__
-------------------------------

     During Fiscal 1999, the Company generated a total of $25.8 million of cash
including $24.1 million from operations and $1.7 million from the exercise of
stock options and related tax benefits.  In addition, the Company's working
capital decreased approximately $7.5 million principally from income and sales
taxes payable and compensation liability as compared to Fiscal 1998.  The
Company applied $9.6 million to acquire the Gardeners Eden catalog and $9.7
million to fund capital expenditures.  The capital expenditures included $3.7
million for new stores, $4.7 million for remodeling and maintenance in existing
stores, $0.9 million for information systems developments and $0.4 million for
distribution center and infrastructure improvements.  The Company's cash
position increased $14.0 million from the end of the prior fiscal year, with
total cash on hand amounting to $31.4 million.

     During Fiscal 1998, the Company generated a total of $18.5 million of cash
including $17.3 million from operations and $1.2 million from the exercise of
stock options, the employee stock purchase plan and related tax benefits.  In
addition, the Company's working capital increased approximately $5.9 million
principally from the timing of trade payments as compared to Fiscal 1997.  The
Company applied $12.1 million to fund capital expenditures.  The capital
expenditures included $5.4 million for new stores, $5.1 million for remodeling
and maintenance in existing stores, $0.8 million for information systems
developments and $0.8 million for distribution center and infrastructure
maintenance.  The Company's cash position increased $0.5 million from the end of
the prior fiscal year, with total cash on hand amounting to $17.4 million.

      The Company's primary short-term liquidity needs consist of financing
seasonal merchandise inventory build-ups.  The Company's primary sources of
financing for such needs are from operations, borrowings under its revolving
credit facility and trade credit.  The Company's borrowings under the revolving
credit facility are typically at low levels from January through April,
increases through May as inventory is increased in anticipation of Father's Day,
declines in June, increases somewhat through August and sharply increases from
September through November to finance purchases of merchandise inventory in
advance of the winter holiday selling season.  The Company generally repays all
outstanding borrowings under its revolving credit facility prior to Christmas
and relies on cash from operations obtained during the winter holiday selling
season until it begins to borrow again under its revolving credit facility the
following fiscal year.  At January 29, 2000, the Company had no outstanding
borrowings under its revolving credit facility, although certain letters of
credit in an aggregate amount of approximately $7.5 million were outstanding.
During Fiscal 1999, the Company borrowed a maximum amount of $30.0 million under
the revolving credit facility.

     The Company's revolving credit facility provides for borrowings of up to
$75 million for letters of credit and working capital, as long as the Company
meets a borrowing base test equal to 50% of the amount of eligible inventory and
outstanding documentary letters of credit (increasing to 65% June through July
and to 75% August through November).  Amounts available for borrowings are
reduced by the aggregate amount of outstanding letters of credit, which may not
exceed $40 million, and borrowings.  The revolving credit agreement requires the
Company to have no more than $10 million in borrowings (excluding letters of
credit) outstanding for one 30 consecutive day period during the December 15 to
April 30 period.

20
<PAGE>

Borrowings outstanding under this facility bear interest, at the election by the
Company, equal to the agent bank's base lending rate or the Eurodollar rate for
the applicable period plus an additional 1.0%, 1.25% or 1.5% depending on the
applicable cash flow coverage ratio (at January 29, 2000 the rate was 7.03% and
was 6.44% at January 30, 1999). In addition, the Company is obligated to pay a
fee of 0.25% or 0.30% on the unused portion of the commitment and 0.50%, 0.625%
or 0.75% on documentary letters of credit (depending on the applicable cash flow
coverage ratio). The facility expires July 31, 2002. At the Lender's option, all
positive cash balances held by the lender banks may be applied to the
outstanding balance of the revolving line of credit. The revolving credit
agreement contains a number of restrictive covenants, including limitations on
incurring additional indebtedness, granting liens, selling assets, engaging in
mergers and other similar transactions, engaging in new business lines and
making capital expenditures. In addition, the agreement prohibits the paying of
cash dividends on common stock and requires that the Company maintain certain
financial ratios, including tests pertaining to net worth, ratio of liabilities
to net worth and cash flow coverage. During the year ended, and as of, January
29, 2000, the Company was in compliance with these covenants.

     The Company has never paid a cash dividend and currently plans to retain
any earnings for use in the operations of the business.  Any determination by
the Board of Directors to pay future cash dividends will be based upon
conditions then existing, including the Company's earnings, financial condition
and requirements, restrictions in its financing arrangements and other factors.

Fiscal 2000 Store Openings and Capital Expenditure Expectations
---------------------------------------------------------------

     The following discussion includes certain forward-looking statements of
management's expectations for store growth and related capital expenditures.
These statements should be read in light of the considerations presented under
the caption OUTLOOK: IMPORTANT Factors and Uncertainties (found on pages 21 - 24
of this document).

     The Company expects to add approximately 18-20 new stores, including five
airport locations, in Fiscal 2000.  The Company anticipates the cost of opening
a new store, including leasehold improvements (net of landlord allowances),
furniture and fixtures, and pre-opening expenses, to average approximately
$355,000.  In addition, the Company expects new stores to require $150,000 of
working capital per store.  The Company anticipates the cost of opening airport
stores, including leasehold improvements, furniture and fixtures, and pre-
opening expenses, to average approximately $235,000, and expects airport stores
to require $95,000 of working capital per store.  The Company expects to
identify approximately 10 stores for remodeling, and update and maintain other
stores, during Fiscal 2000, incurring capital expenditures of approximately $5.0
million. The Company plans to operate approximately 65 to 70 seasonal stores
during the Fiscal 2000 winter holiday season subject to the availability of
acceptable sites. In addition to the capital expenditures listed above, the
Company anticipates making capital expenditures of approximately $5.8 million in
Fiscal 2000, primarily to enhance the Company's management information and other
support systems.

     In Fiscal 2000, the Company expects to open most of its new stores in the
second half of the year.  The Company's retail operations are not generally
profitable until the fourth quarter of each fiscal year.

                                                                              21
<PAGE>

     The Company anticipates closing up to two stores during Fiscal 2000.  The
Company does not expect the closings to have a materially adverse effect on its
financial condition or results of operations for current or future periods.

     The Company believes its cash balances, funds to be generated by future
operations and borrowing capacity will be sufficient to finance its capital
requirements during Fiscal 2000.

OUTLOOK: IMPORTANT FACTORS AND UNCERTAINTIES

     The Private Securities Litigation Reform Act of 1995 (the "Act") provides a
"safe harbor" for forward-looking statements to encourage companies to provide
prospective information about themselves without fear of litigation so long as
the forward-looking information is accompanied by meaningful cautionary
statements identifying important factors that could cause actual results to
differ materially from those set forth in the forward-looking statement.
Statements in this 1999 Annual Report on Form 10-K which are not historical
facts, including statements about the Company's or management's confidence or
expectations, seasonality of the Company's future sales and earnings, plans for
opening new stores and other retail locations, introduction of new or updated
products, opportunities for sales growth or cost reductions and other statements
about the Company's operational outlook, are forward-looking statements subject
to risks and uncertainties that could cause actual results to vary materially.
The following are important factors, among others, that should be considered in
evaluating these forward-looking statements, as well as in evaluating the
Company's business prospects generally:

     Concentration of Sales in Winter Holiday Season. A high percentage of the
     Company's annual sales and all or substantially all of its annual income
     from operations have historically been attributable to the winter holiday
     selling season.  In addition, like many retailers, the Company must make
     merchandising and inventory decisions for the winter holiday selling season
     well in advance of actual sales.  Accordingly, unfavorable economic
     conditions and/or deviations from projected demand for products during this
     season could have a material adverse effect on the Company's results of
     operations for the entire fiscal year.  While the Company anticipates
     implementing certain measures to improve its results during periods outside
     of the winter holiday selling season, such as the opening of stores in
     airports, the Company expects that its annual results of operations will
     remain dependent on the Company's performance during the winter holiday
     selling season.

     Dependence on Innovative Merchandising.  Successful implementation of the
     Company's merchandising strategy depends on its ability to introduce in a
     timely manner new or updated products which are affordable, functional in
     purpose, distinctive in quality and design and not widely available from
     other retailers.  If the Company's products or substitutes for such
     products become widely available from other retailers (especially
     department stores or discount retailers), demand for these products from
     the Company may decline or the Company may be required to reduce their
     retail prices.  A decline in the demand for, or a reduction in the retail
     prices of, the Company's important existing products can cause fluctuations
     in the Company's sales and profitability if the Company

22
<PAGE>

     is unable to introduce in a timely fashion new or replacement products of
     similar sales levels and profitability.

     New Stores and Temporary Locations.   The Company's ability to open new
     stores, including airport locations, and to operate its temporary location
     program successfully depends upon, among other things, the Company's
     capital resources and its ability to locate suitable sites, negotiate
     favorable rents and other lease terms and implement its operational
     strategy.  In addition, because the Company's store designs must evolve
     over time so that the Company may effectively compete for customers in top
     malls, airports and other retail locations, actual store-related capital
     expenditures may vary from historical levels (and projections based
     thereon) due to such factors as the scope of remodeling projects, general
     increases in the costs of labor and materials and unusual product display
     requirements.

     Competition.  The Company faces intense competition for customers,
     personnel and innovative products.  This competition comes primarily from
     other specialty retailers, department stores, discount retailers and direct
     marketers, including Internet sites.  Many of the Company's competitors
     have substantially greater financial, marketing and other resources than
     the Company.

     Retention of Qualified Employees.  The Company's success depends upon its
     ability to attract and retain highly skilled and motivated, full-time and
     temporary associates with appropriate retail experience to work in
     management and in its stores and temporary locations.  Because of the
     robust U.S. economy and resulting low unemployment, it has become more
     difficult to locate and hire suitable associates.  Further, because of the
     limited time periods during which temporary locations are open each year,
     the availability of suitable associates for such locations is limited.

     Seasonal Fluctuation of Operating Results. The Company's quarterly results
     of operations fluctuate based upon such factors as the amount and timing of
     sales contributed by new stores, the success of its temporary location
     program, capital expenditures and the timing of catalog mailings and
     associated expenses.

     Centralized Distribution.  The Company conducts all of its distribution
     operations and a significant portion of its direct marketing processing
     functions from a single facility in Mexico, Missouri.  A disruption in
     operations at the distribution center may significantly increase the
     Company's distribution costs and prevent goods from flowing to stores and
     customers.

     Direct Marketing Costs.  Increases in the costs of printing and mailing
     catalogs could have an adverse effect on the Company's direct marketing
     business.

     Dependence on Key Vendors.  Because the Company strives to sell only unique
     merchandise, adequate substitutes for certain key products may not be
     widely available in the marketplace.  Because of this, there can be no
     assurance that vendor manufacturing or

                                                                              23
<PAGE>

     distribution problems, or the loss of the Company's exclusive rights to
     distribute important products, would not have a material adverse effect on
     the Company's performance.

     Foreign Vendors.  The Company is purchasing an increasing portion of its
     merchandise from foreign vendors.  Although management expects this
     strategy to increase profit margins for these products, the Company's
     reliance on such vendors subjects the Company to associated legal, social,
     political and economic risks, including import, licensing and trade
     restrictions.  In addition, while the shortage of cargo containers used to
     transport goods from Asia to the United States experienced in recent years
     has eased somewhat, the Company remains vulnerable should such shortages
     reemerge.  In such a situation, the Company could face inventory shortages
     in certain products, increased transportation costs and increased interest
     expense as a result of moving inventory receipts forward.

     Increased Petroleum Prices.  Recent increases in petroleum prices have
     resulted in increased transportation and shipping costs for the Company.
     Further increases in petroleum prices, or failure of such prices to
     decline, could continue to increase the Company's costs for transportation
     and shipping and also cause increases in the cost of goods that are
     manufactured from plastics and other petroleum-based products.

     Increased Reliance on E-Commerce.  As a greater proportion of the Company's
     sales begin to be made via the Internet, and as the Company begins to look
     more to that channel to increase overall sales, the Company will become
     more subject to the uncertainties inherent in the quickly developing area
     of e-commerce.  Such uncertainties include, but are not limited to, the
     extent to which the Company's customers will adopt the Internet as their
     method of purchase, and the effect that government regulation of the
     Internet (or lack thereof) will have on the Internet as a medium of
     commerce.

     Many of the foregoing factors and uncertainties have been discussed in the
Company's prior SEC filings but, because the Act did not become effective until
December 1995, were not presented in a format intended to comply with the Act.
The foregoing review of important factors and uncertainties is intended to
comply with the substantive and presentation requirements of the Act, but should
not be construed as exhaustive or as an admission regarding the adequacy of
disclosures made by the Company prior to the effective date of the Act.

Impact of Year 2000

     In prior years, the Company discussed the nature and progress of its plans
to become Year 2000 ready.  In late 1999, the Company completed its remediation
and testing of systems.  As a result of those planning and implementation
efforts, the Company experienced no significant disruptions in mission critical
information technology and non-information technology systems and believes those
systems successfully responded to the Year 2000 date change.  The Company is not
aware of any material problems resulting from Year 2000 issues, either with its
products, its internal systems, or the products and services of third parties.
The

24
<PAGE>

Company will continue to monitor its mission critical computer applications and
those of its suppliers and vendors throughout the year 2000 to ensure that any
latent Year 2000 matters that may arise are addressed promptly.


ADOPTION OF ACCOUNTING STANDARDS

     In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities," which
establishes accounting and reporting standards for derivative instruments,
including derivative instruments embedded in other contracts, collectively
referred to as derivatives, and for hedging activities.  The Company will adopt
SFAS No. 133 as required by SFAS No.137, "Deferral of the Effective Date of the
FASB Statement No. 133," in fiscal year 2001.  To date the Company has not
utilized derivative instruments or hedging activities and, therefore, the
adoption of SFAS 133 is not expected to have a material impact on our financial
position or results of operations.

     In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial
Statements."  SAB 101 summarizes the SEC's view in applying generally accepted
accounting principles to selected revenue recognition issues.  The application
of the guidance in SAB 101 which will be required in the Company's second
quarter of the fiscal year 2000, is under study; no estimate of its possible
effect is presently available.


ITEM 8.   FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

     The financial statements, together with the report thereon of
PricewaterhouseCoopers LLP, dated March 21, 2000, appear on pages 27 through 31
of this document.

     In addition, information in response to this item may be found under the
caption "Management's Discussion and Analysis of Financial Condition and Results
of Operations--Results of Operations--Quarterly Results"

ITEM 9.   CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
          FINANCIAL DISCLOSURE.
     None.

                                                                              25
<PAGE>

PART III.


ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

     Information in response to this item with respect to directors of the
Company may be found in the sections entitled "Election of Directors" and
"Timeliness of Certain SEC Filings" of the Company's definitive Proxy Statement
for the Company's 2000 Annual Meeting of Stockholders (the "Proxy Statement"),
and such information is incorporated herein by reference.

     Information in response to this item with respect to executive officers of
the Company appears in Item 4A entitled "Executive Officers of the Registrant"
on pages 12 through 13 of this report, and such information is incorporated
herein by reference.

ITEM 11.  EXECUTIVE COMPENSATION.

     Information in response to this item may be found in the sections entitled
"Board of Directors Committees" and "Compensation of Executive Officers" of the
Proxy Statement, and such information is incorporated herein by reference.

ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

     Information in response to this item may be found in the section entitled
"Security Ownership of Certain Beneficial Owners and Management" of the Proxy
Statement, and such information is incorporated herein by reference.


ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

     Information in response to this item may be found in the section entitled
"Certain Relationships and Related Transactions" of the Proxy Statement, and
such information is incorporated herein by reference.


26
<PAGE>

PART IV.


ITEM 14.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.

(a) List of Financial Statements, Financial Statement Schedules, and Exhibits.

1. FINANCIAL STATEMENTS

   The financial statements appear on the following pages of this document.


<TABLE>
<CAPTION>


                                                                                           Page in
                                                                                           Report
                                                                                           ------
<S>                                                                                     <C>
Report of Independent Accountants                                                             28

Consolidated balance sheet as of January 29, 2000 and January 30, 1999                        29

Consolidated statement of income for the years ended January 29, 2000,
January 30, 1999 and January 31, 1998                                                         30

Consolidated statement of cash flows for the years ended January 29, 2000,
January 30, 1999 and January 31, 1998                                                         31

Consolidated statement of changes in shareholders' equity for the years ended
January 29, 2000, January 30, 1999 and January 31, 1998                                       32

Notes to Consolidated Financial Statements                                                    33

</TABLE>

                                                                              27
<PAGE>

REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and
Shareholders of Brookstone, Inc.

In our opinion, the consolidated financial statements listed in the accompanying
index present fairly, in all material respects, the financial position of
Brookstone, Inc. and its subsidiaries at January 29, 2000 and January 30, 1999,
and the results of their operations and their cash flows for each of the three
years in the period ended January 29, 2000, in conformity with accounting
principles generally accepted in the United States.  In addition, in our
opinion, the financial statement schedules listed in the accompanying index
present fairly, in all material respects, the information set forth therein when
read in conjunction with the related consolidated financial statements.  These
financial statements and financial statement schedules are the responsibility of
the Company's management; our responsibility is to express an opinion on these
financial statements and financial statement schedules based on our audits.  We
conducted our audits of these statements in accordance with auditing standards
generally accepted in the United States, which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement.  An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for the opinion expressed
above.



/s/ PricewaterhouseCoopers LLP
------------------------------
PRICEWATERHOUSECOOPERS LLP

Boston, Massachusetts
March 21, 2000


28
<PAGE>

                                BROOKSTONE, INC.

                           CONSOLIDATED BALANCE SHEET
                       (IN THOUSANDS, EXCEPT SHARE DATA)

<TABLE>
<CAPTION>

                                                                   January 29, 2000           January 30, 1999
                                                                   ----------------           ----------------
<S>                                                            <C>                        <C>
  Assets
 -------

Current assets:
    Cash and cash equivalents                                          $ 31,389                   $ 17,391
    Receivables, less allowances of $325 at January                       5,425                      6,256
     29, 2000 and $176 at January 30, 1999
    Merchandise inventories                                              43,639                     37,444
    Deferred income taxes                                                 2,561                      2,175
    Other current assets                                                  4,572                      4,229
                                                                     ----------                  ---------
        Total current assets                                             87,586                     67,495
                                                                     ----------                  ---------

Deferred income taxes                                                     3,806                      3,643
Property and equipment, net                                              43,074                     42,124
Intangible assets, net                                                    5,906                        ---
Other assets                                                              1,534                      1,299
                                                                     ----------                  ---------
                                                                       $141,906                   $114,561
                                                                     ==========                  =========
Liabilities and Shareholders' Equity
------------------------------------

Current liabilities:
   Accounts payable                                                    $ 15,759                   $ 10,727
   Other current liabilities                                             25,530                     18,950
                                                                     ----------                  ---------
      Total current liabilities                                          41,289                     29,677

Other long term liabilities                                              10,796                      9,962
Long term obligation under capital lease                                  2,511                      2,612

Commitments and contingencies (Note 11)

Shareholders' equity:
Preferred stock, $0.001 par value: Authorized -
 2,000,000 shares; issued and outstanding - 0 shares
 at January 29, 2000 and January 30, 1999
Common stock, $0.001 par value: Authorized-
 50,000,000 shares; issued and outstanding -
 8,296,890 shares at January 29, 2000 and 8,064,586
 shares at January 30, 1999                                                   8                          8

Additional paid-in capital                                               50,020                     48,330
Retained earnings                                                        37,329                     24,019
Treasury stock, at cost - 3,616 shares at January
 29, 2000 and January 30, 1999                                              (47)                       (47)
                                                                     ----------                  ---------
      Total shareholders' equity                                         87,310                     72,310
                                                                     ----------                  ---------
                                                                       $141,906                   $114,561
                                                                     ==========                  =========
</TABLE>
See Notes to Consolidated Financial Statements

                                                                              29
<PAGE>

                                BROOKSTONE, INC.

                        CONSOLIDATED STATEMENT OF INCOME
                     (IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
                                                                           Year Ended
                                                -----------------------------------------------------------------
                                                 January 29, 2000       January 30, 1999       January 31, 1998
                                               ---------------------  ---------------------  ---------------------

<S>                                            <C>                    <C>                    <C>
Net sales                                            $319,631               $271,858               $239,866
Cost of sales                                         191,213                170,639                151,633
                                                     --------               --------               --------
Gross profit                                          128,418                101,219                 88,233

Selling, general and administrative
    expenses                                          105,686                 84,138                 75,023
                                                     --------               --------               --------

    Income from operations                             22,732                 17,081                 13,210

Interest expense, net                                   1,125                  1,672                  1,084
                                                     --------               --------               --------

    Income before taxes                                21,607                 15,409                 12,126

    Income tax provision                                8,297                  6,071                  4,778
                                                     --------               --------               --------

Net income                                           $ 13,310               $  9,338               $  7,348
                                                     ========               =========              =========
Earnings per share - basic                           $   1.63               $   1.17               $   0.94
                                                     ========               =========              =========
Earnings per share - diluted                         $   1.58               $   1.13               $   0.91
                                                     ========               =========              =========
Weighted average shares outstanding - basic             8,155                  7,988                  7,824
                                                     ========               =========              =========
Weighted average shares outstanding - diluted           8,422                  8,285                  8,119
                                                     ========               =========              =========

</TABLE>

See Notes to Consolidated Financial Statements


30
<PAGE>

                                BROOKSTONE, INC.
                      CONSOLIDATED STATEMENT OF CASH FLOWS
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                                        Year Ended
                                                                   ------------------------------------------------------
                                                                   January 29, 2000   January 30, 1999   January 31, 1998
                                                                   -----------------  ----------------   -----------------
<S>                                                                <C>                <C>                <C>
Cash flows from operating activities:
Net income                                                             $ 13,310           $  9,338           $  7,348
Adjustments to reconcile net income to net cash provided by
 operating activities:

  Depreciation and amortization                                           9,144              7,792              6,921
  Amortization of debt issuance costs                                       154                143                 55
  Deferred income taxes                                                    (549)               297             (3,244)
  (Increase) Decrease in other assets                                     1,240               (377)               178
  Increase in other long term liabilities                                   834                150                889

Changes in working capital:
   Accounts receivable, net                                                 831               (724)               (84)
   Merchandise inventories                                               (3,792)              (159)            (6,019)
   Other current assets                                                    (343)            (3,668)             2,525
   Accounts payable                                                       5,032             (3,713)             5,824
   Other current liabilities                                              5,849              2,349              3,609
                                                                       --------           --------           --------
Net cash provided by operating activities                                31,710             11,428             18,002

Cash flows from investing activities:
   Expenditures for Gardeners Eden acquisition                           (9,616)               ---                ---
   Expenditures for property and equipment                               (9,684)           (12,062)           (11,362)
                                                                       --------           --------           --------
Net cash used for investing activities                                  (19,300)           (12,062)           (11,362)

Cash flows from financing activities:
   Payments for capitalized lease                                          (102)               (87)               (74)
   Payment of debt issuance costs                                           ---                ---               (697)
   Proceeds from exercise of stock options, employee stock
    purchase plan and related tax benefits                                1,690              1,206                461
                                                                       --------           --------           --------
Net cash provided / (used) by financing activities                        1,588              1,119               (310)
                                                                       --------           --------           --------
Net increase in cash and cash equivalents                                13,998                485              6,330

Cash and cash equivalents at beginning of period                         17,391             16,906             10,576
                                                                       --------           --------           --------
Cash and cash equivalents at end of period                             $ 31,389           $ 17,391           $ 16,906
                                                                       ========           ========           ========
Supplemental disclosures of cash flow information:
   Cash paid for interest                                              $    706           $    917           $    471
   Cash paid for income taxes                                          $  5,901           $  5,737           $  4,461
</TABLE>
See Notes to Consolidated Financial Statements
                                                                              31
<PAGE>

                                BROOKSTONE, INC.

           CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
  FOR THE YEARS ENDED JANUARY 31, 1998, JANUARY 30, 1999 AND JANUARY 29, 2000
                       (IN THOUSANDS, EXCEPT SHARE DATA)


<TABLE>
<CAPTION>

                                                     Additional                            Total
                                            Common    Paid-In     Retained  Treasury   Shareholders'
                                  Shares    Stock     Capital     Earnings    Stock       Equity
                                 --------  -------    ---------  ----------  --------   ----------
<S>                              <C>        <C>     <C>           <C>       <C>        <C>
Balance at February 1, 1997      7,793,613      $8       $46,663   $ 7,333      $(47)        $53,957
  Options exercised including
   related tax benefit              77,771                   461                                 461
  Net income                                                         7,348                     7,348

----------------------------------------------------------------------------------------------------
Balance at January 31, 1998      7,871,384       8        47,124    14,681       (47)         61,766

  Issuance of common stock
    under employee stock
     purchase plan                  17,102                   178                                 178
  Options exercised including
   related tax benefit              176,100                1,028                               1,028
  Net income                                                         9,338                     9,338
----------------------------------------------------------------------------------------------------
Balance at January 30, 1999      8,064,586       8        48,330    24,019       (47)         72,310

  Options exercised including
     related tax benefit           232,304                 1,690                               1,690
  Net income                                                        13,310                    13,310
----------------------------------------------------------------------------------------------------
Balance at January 29, 2000      8,296,890      $8       $50,020   $37,329      $(47)        $87,310
=====================================================================================================

</TABLE>

See Notes to Consolidated Financial Statements


32
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. NATURE OF BUSINESS AND ORGANIZATION
--------------------------------------

     Brookstone, Inc. (the "Company") is a nationwide specialty retailer that
offers an assortment of consumer products that are functional in purpose,
distinctive in quality and design and not widely available from other retailers.
The Company sells its products nationally through 211 retail stores in 38
states, the District of Columbia and Puerto Rico, temporary stores typically
operated during the winter holiday season and direct marketing vehicles
including its Hard-to-Find Tools, Brookstone Gift Collection and Gardeners Eden
catalogs and the Internet.  The Company's merchandise includes lawn and garden,
health and fitness, home and office and travel and auto products.

     The Company's fiscal year end is the Saturday nearest the last day in
January.  Results of operations for Fiscal 1999 are for the 52 weeks ended
January 29, 2000.  Results for Fiscal 1998 are for the 52 weeks ended January
30, 1999, and results for Fiscal 1997 are for the 52 weeks ended January 31,
1998.

2. SIGNIFICANT ACCOUNTING POLICIES
----------------------------------

Principals of Consolidation
---------------------------

     The accompanying consolidated financial statements include the accounts of
the Company and Brookstone Company, Inc., its wholly owned subsidiary and the
direct and indirect wholly owned subsidiaries of Brookstone Company, Inc.
(Brookstone Stores, Inc., Brookstone Purchasing, Inc., Brookstone Properties,
Inc., Brookstone By Mail, Inc. Fork Distribution Corporation, Gardeners Eden By
Mail, Inc., Brookstone Retail Puerto Rico, Inc. and Brookstone Holdings, Inc.).
All significant intercompany accounts and transactions have been eliminated in
consolidation.

Cash and Cash Equivalents
-------------------------

     The Company considers all highly liquid investment instruments purchased
with a remaining maturity of three months or less to be cash equivalents.  These
instruments are carried at cost plus accrued interest.  The Company invests its
excess cash in money market funds and commercial paper with institutions with
strong credit ratings.  These investments are subject to minimal credit and
market risk.

Fair Value of Financial Instruments
-----------------------------------

     The recorded amounts for cash and cash equivalents, other current assets,
accounts receivable, accounts payable and other current liabilities approximate
fair value due to the short-term nature of these financial instruments. The fair
values of amounts outstanding under the Company's debt instruments approximate
their book values in all material respects due to the variable nature of the
interest rate provisions associated with such instruments.

                                                                              33
<PAGE>

Use of Estimates
----------------

     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
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period.  Actual results may differ from those estimates.

Merchandise Inventories
-----------------------

     Merchandise inventories are stated at the lower of cost or market.  Cost is
determined using the weighted average cost method.  In addition to the cost of
merchandise purchased, certain costs related to the purchasing, storage and
handling of merchandise are included in inventory.

Property and Equipment
----------------------

     Property and equipment are recorded at cost.  Expenditures for maintenance
and repairs of minor items are charged to expense as incurred.  Depreciation and
amortization of property and equipment (excluding temporary locations) are
determined using the straight-line method over the estimated useful lives shown
below.  Materials used in the construction of temporary locations such as kiosks
are depreciated based on usage over a maximum five-year period and are included
in equipment and fixtures.

          Equipment, furniture and fixtures    3 to 10 years
          Leasehold improvements           The lesser of the lease term or the
                                           estimated useful life

     The Company leases retail store locations under operating lease agreements,
which sometimes provide for leasehold completion allowances to be received from
the lessors.  These allowances are recorded against the cost of leasehold
improvements related to individual retail store locations.

Advertising Costs
------------------

     Direct response advertising costs, which consist of catalog production and
postage costs, are deferred and amortized over the period of expected direct
marketing revenue, which is less than one year.  Deferred costs were $1.3
million and $0.9 million at January 29, 2000 and January 30, 1999, respectively
and are classified as non-current assets.  The Company expenses in-store and
print advertising costs as incurred. Advertising expense was approximately $18.2
million, $11.6 million and $12.3 million for the years ended January 29, 2000,
January 30, 1999 and January 31, 1998, respectively.

34
<PAGE>

Intangible Assets
-----------------

     Intangible assets include trade name and customer lists. Intangible assets
are amortized on the straight -line basis over the estimated useful lives
ranging from 3 years to 20 years.

Impairment of Long-Lived Assets
-------------------------------

     The Company reviews long-lived assets for impairment whenever events or
changes in business circumstances indicate that the carrying amount of the
assets may not be fully recoverable or that the useful lives of these assets are
no longer appropriate.  Each impairment test is based on a comparison of the
undiscounted cash flows to the recorded value of the asset.  If an impairment is
indicated, the asset is written down to its estimated fair value on a discounted
cash flow basis.

Revenue Recognition
-------------------

     The Company recognizes revenue from sales of merchandise at the time of
sale in its stores, or at the time of shipment for direct marketing sales.
Revenue is recognized net of actual merchandise returns and allowances.  Revenue
from merchandise credits and gift certificates is deferred until redemption.

Store Closings
--------------

     The Company continually assesses the operating financial results of its
retail stores. As a result of this assessment, management may decide to remodel
or phase out and close certain stores. When such determinations are made, a
provision for store closing costs is recorded in the Statement of Income.

Employee Benefit Programs
-------------------------

     The Company accounts for post-retirement benefits in accordance with
Statement of Financial Accounting Standards No. 106, "Employers' Accounting for
Post-retirement Benefits Other Than Pension" (FAS 106).  FAS 106 requires the
recognition of a liability for post-retirement benefits as earned during an
employee's years of service.

     The Company accounts for pension benefits in accordance with Statement of
Financial Accounting Standards No. 87, "Employers' Accounting for Pensions" (FAS
87). Pension expense is determined using the projected unit credit actuarial
cost method.

     Statement of Financial Accounting Standards No. 132, "Employers'
Disclosures about Pensions and Other Post-Retirement Benefits" (FAS 132), issued
in February 1998, amends both FAS 106 and FAS 87, by standardizing disclosure
requirements, requiring additional information on changes in benefit obligations
and fair value of plan assets, and eliminating certain disclosures.  The Company
adopted this statement for the fiscal year ended January 30, 1999.

                                                                              35
<PAGE>

Income Taxes
------------

The Company accounts for income taxes under Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes," ("SFAS 109").  Under the asset
and liability method of SFAS 109, deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and liabilities and
their respective tax bases.  Deferred tax assets and liabilities are measures
using enacted tax rates expected to be applied to taxable income in the fiscal
year in which those temporary differences are expected to be recovered or
settled.  The effect of any future change in tax rates is recognized in the
period in which the change occurs.

Earnings Per Share
------------------

     Earnings per share are presented in accordance with Statement of Financial
Accounting Standards No. 128, Earnings Per Share, ("SFAS 128") which requires
the presentation of  "basic" earnings per share and "diluted" earnings per
share.  Basic earnings per share is computed by dividing income available to
common shareholders by the weighted-average shares of common stock outstanding
during the period.  For the purposes of calculating diluted earnings per share,
the denominator includes both the weighted average number of shares of common
stock outstanding during the period and the weighted average number of potential
common stock, such as stock options.

Segment Reporting
-----------------

     The Company presents its financial information in accordance with Statement
of Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information" ("SFAS 131"). Under FAS 131, the Company's
business is comprised of two distinct business segments determined by the method
of distribution channel. The retail segment is comprised of all full-year stores
in addition to all temporary stores and kiosks. Retail product distribution is
conducted directly through the store location. The direct marketing segment is
comprised of the Hard-to-Find-Tools, Brookstone Gift Collection and Gardeners
Eden catalogs, products promoted via SkyMall and the interactive Internet site
www.Brookstone.com. Direct marketing product distribution is conducted through
the Company's direct marketing call center and distribution facility located in
Mexico, Missouri.

Reclassifications
-----------------

     Certain reclassifications have been made to the Fiscal 1998 and Fiscal 1997
balances to conform with the current year.

36
<PAGE>

Recent Accounting Pronouncements
--------------------------------

          In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities," which
establishes accounting and reporting standards for derivative instruments,
including derivative instruments embedded in other contracts, collectively
referred to as derivatives, and for hedging activities.  The Company will adopt
SFAS No. 133 as required by SFAS No.137, "Deferral of the Effective Date of the
FASB Statement No. 133," in fiscal year 2001.  To date the Company has not
utilized derivative instruments or hedging activities and, therefore, the
adoption of SFAS 133 is not expected to have a material impact on our financial
position or results of operations.

          In December 1999, the Securities and Exchange Commission ("SEC")
issued Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in
Financial Statements."  SAB 101 summarizes the SEC's view in applying generally
accepted accounting principles to selected revenue recognition issues. The
application of the guidance in SAB 101 which will be required in the Company's
second quarter of the fiscal year 2000, is under study; no estimate of its
possible effect is presently available.

                                                                              37
<PAGE>

     3. CONSOLIDATED BALANCE SHEET DETAILS
     -------------------------------------

<TABLE>
<CAPTION>
                                            January 29, 2000        January 30, 1999
-------------------------------------------------------------------------------------
<S>                                      <C>                     <C>
Other Current Assets:
Prepaid rent                                      $  3,200,000            $  2,760,000
Prepaid leases and deposits                            785,000                 383,000
Prepaid insurances, postage and other                  587,000               1,086,000
                                                  ------------            ------------
                                                  $  4,572,000            $  4,229,000
                                                  ============            ============
Property and Equipment:
  Leasehold improvements                          $ 37,292,000            $ 34,311,000
  Equipment and fixtures                            52,516,000              49,421,000
                                                  ------------            ------------
Total property and equipment                        89,808,000              83,732,000
                                                  ============            ============

Accumulated depreciation and
 amortization                                      (46,734,000)            (41,608,000)
                                                  ------------            ------------
                                                  $ 43,074,000            $ 42,124,000
                                                  ============            ============


Intangible Assets:
  Trade Name                                      $  5,407,000                     ---
  Customer List                                        908,000                     ---
                                                  ------------            ------------
Total intangible assets                              6,315,000                     ---
Accumulated amortization                              (409,000)                    ---
                                                  ------------            ------------

                                                  $  5,906,000                     ---
                                                  ============            ============

Other Current Liabilities:
Merchandise credits and gift
 certificates                                     $  4,344,000            $  3,357,000

Accrued employee compensation and
 benefits                                            6,792,000               6,013,000

Rent payable                                           924,000                 966,000
Income taxes payable                                 8,249,000               5,337,000
Accrued expenses                                     5,221,000               3,277,000
                                                  ------------            ------------
                                                  $ 25,530,000            $ 18,950,000
                                                  ============            ============

Other Long-term Liabilities:
Straight-line rent liability                      $  5,796,000            $  5,156,000
Employee benefit obligations and other
 long term liabilities                               5,000,000               4,806,000
                                                  ------------            ------------
                                                  $10,796, 000            $  9,962,000
                                                  ============            ============
</TABLE>

38
<PAGE>

4. GARDENERS EDEN ACQUISITION
-----------------------------

     Effective on May 3, 1999, the Company acquired certain assets relating to
the Gardeners Eden catalog from Williams-Sonoma, Inc. at a purchase price of
approximately $9.6 million.  The acquisition was accounted for as a purchase.
The assets acquired were comprised of inventory valued at approximately $2.4
million, prepaid catalog costs of approximately $.3 million and deferred catalog
costs valued at approximately $1.3 million.  The value of these assets was
offset by a liability of approximately $0.7 million for open customer orders
under the Gardeners Eden continuity program.  The Company allocated the
remaining purchase price, approximately $6.3 million to the valuation of
intangible assets consisting of trade name for $5.4 million and customer lists
for $0.9 million.  The intangible assets are being amortized straight-line, from
3 years to 20 years.


5. INCOME TAXES
---------------

     Temporary differences, which give rise to deferred tax assets and
liabilities for Fiscal 1999 and Fiscal 1998, are as follows:

<TABLE>
<CAPTION>
                                        January 29, 2000        January 30, 1999
----------------------------------------------------------------------------------
Deferred tax assets:

<S>                                  <C>                     <C>
 Rent expense                              $2,173,000              $1,920,000
 Inventory capitalization and
  reserves                                    439,000                 323,000

 Employee benefit obligations               1,667,000               1,645,000
 Vacation accrual                             269,000                 267,000
 Merchandise credits and
   gift certificates                        1,301,000                 920,000
 Tax depreciation                             463,000                 598,000
 Other items                                  635,000                 559,000
                                           ----------              ----------
 Total deferred tax asset                  $6,947,000              $6,232,000
                                           ===========             ==========

Deferred tax liabilities:

 Deferred catalog costs                    $  477,000              $  347,000
 Other items                                  103,000                  67,000
                                           ----------              ----------
 Total deferred tax liability              $  580,000              $  414,000
                                           ----------              ----------
Net deferred tax asset                     $6,367,000              $5,818,000
                                           ===========             ==========
</TABLE>
     Current and non-current deferred tax assets and liabilities within the same
tax jurisdiction are offset for presentation in the consolidated balance sheet.
A valuation allowance has not been

                                                                              39
<PAGE>

established as management expects that it is more likely than not that the net
deferred tax asset will be realized.

   The provision for income taxes is comprised of the following:
<TABLE>
<CAPTION>
                                                           Year Ended
                                 ----------------------------------------------------------------------
                                 January 29, 2000          January 30, 1999          January 31, 1998
-------------------------------------------------------------------------------------------------------
<S>                    <C>                      <C>                     <C>
Current:
    Federal                        $7,962,000               $4,894,000             $ 6,713,000
    State                             884,000                  880,000                 915,000

Deferred:
    Federal                          (476,000)                 225,000              (2,534,000)
    State                             (73,000)                  72,000                (316,000)
                                   ----------               ----------             -----------
                                   $8,297,000               $6,071,000             $ 4,778,000
                                   ==========               ==========             ===========
</TABLE>


     Reconciliation of the U. S. Federal statutory rate to the Company's
effective tax rate is as follows:
<TABLE>
<CAPTION>
                                                             Year Ended
----------------------------------------------------------------------------------------------------
                                 January 29, 2000         January 30, 1999         January 31, 1998
                                 ----------------         ----------------         ----------------
<S>                    <C>                      <C>                      <C>
Statutory federal
 income tax rate                     35%                      34%                      34%

State income taxes,
 net of federal tax
 benefit                              2%                       3%                       3%

Other                                 1%                       2%                       2%
                                   -------                  ------                   ------
Effective income tax
 rate                                38%                      39%                      39%
                                   =======                  ======                   ======
</TABLE>

     The exercise of stock options which have been granted under the Company's
stock option plans (refer to Note 8) gives rise to compensation which is
includable in the taxable income of the optionees and deductible by the Company
for federal and state income tax purposes.  Such compensation considers
increases in the fair market value of the Company's common stock subsequent to
the date of the grant.  For financial reporting purposes, the tax effect of this
deduction is accounted for as a credit to additional paid-in capital rather than
as a reduction of

40
<PAGE>

income tax expense. Such exercises resulted in a tax benefit to the Company of
approximately $782,000, $832,000, and $256,000 in Fiscal 1999, Fiscal 1998 and
Fiscal 1997, respectively.

SEGMENT REPORTING
-----------------

     Business conducted by the Company can be segmented into two distinct areas
determined by the method of distribution channel.  The retail segment is
comprised of all full-year stores in addition to all temporary stores and
kiosks.  Retail product distribution is conducted directly through the store
location.  The direct marketing segment is comprised of the Hard-to-Find Tools,
Brookstone Gift Collection and Gardeners Eden catalogs, products promoted via
SkyMall and the interactive Internet site www.Brookstone.com.   Direct marketing
product distribution is conducted through the Company's direct marketing call
center and distribution facility located in Mexico, Missouri.  Both segments of
the Company sell similar products, although not all Company products are fully
available within both segments.

     All costs directly attributable to the direct marketing segment are charged
accordingly while all remaining operating costs are charged to the retail
segment.  The Company's management does not review assets by segment.

     The following table discloses segment net sales, pre-tax income and
depreciation and amortization expense for Fiscal 1999, Fiscal 1998 and Fiscal
1997 (in thousands):

<TABLE>
<CAPTION>
                                         Net Sales                              Pre-tax Income
                           ---------------------------------------------------------------------------------
                             1999          1998          1997          1999           1998           1997
                           ------------------------------------  -------------------------------------------
<S>                        <C>           <C>           <C>           <C>            <C>            <C>
Reportable segment:
   Retail                  $269,384      $242,769      $211,938       $21,729        $16,273        $12,964
   Direct marketing          50,247        29,089        27,928         1,003            808            246

Reconciling items:
   Interest income              ---           ---           ---           535            206            220
   Interest expense             ---           ---           ---        (1,660)        (1,878)        (1,304)
                           ------------------------------------  -------------------------------------------
Consolidated:              $319,631      $271,858      $239,866       $21,607        $15,409        $12,126
                           ====================================  ===========================================
</TABLE>

<TABLE>
<CAPTION>

                                Depreciation & Amortization
                            ------------------------------------
                              1999          1998          1997
                            ------------------------------------
<S>                         <C>           <C>           <C>
Reportable segment:
   Retail                    $8,514        $7,575        $6,708
   Direct marketing             630           217           213
                            ------------------------------------
Consolidated:                $9,144        $7,792        $6,921
                            ====================================
</TABLE>

                                                                              41
<PAGE>

7. DEBT
-------

Revolving Credit Agreement

     The Company has a revolving credit agreement that provides for borrowings
of up to $75 million for letters of credit and working capital as long as the
Company meets a borrowing base test equal to 50% of the amount of eligible
inventory and outstanding documentary letters of credit (increasing to 65% June
through July and to 75% August through November).  Amounts available for
borrowings are reduced by the aggregate amount of outstanding letters of credit,
which may not exceed $40 million, and borrowings.  The revolving credit
agreement requires the Company to have no more than $10 million in borrowings
(excluding letters of credit) outstanding for one 30 consecutive day period
during the December 15 to April 30 period.  Borrowings outstanding under this
facility bear interest, at the election by the Company, equal to the agent
bank's base lending rate or the Eurodollar rate for the applicable period plus
an additional 1.0%, 1.25% or 1.5% depending on the applicable cash flow coverage
ratio (at January 29, 2000 the rate was 7.03%).  In addition, the Company is
obligated to pay a fee of 0.25% or 0.30% on the unused portion of the commitment
and 0.50%, 0.625% or 0.75% on documentary letters of credit (depending on the
applicable cash flow coverage ratio).  The facility expires July 31, 2002.  At
the Lender's option, all positive cash balances held by the Lender's banks may
be applied to the outstanding balance of the revolving line of credit.  The
revolving credit agreement contains a number of restrictive covenants, including
limitations on incurring additional indebtedness, granting liens, selling
assets, engaging in mergers and other similar transactions, engaging in new
business lines and making capital expenditures.  In addition, the agreement
prohibits the paying of cash dividends on common stock and requires that the
Company maintain certain financial ratios, including tests pertaining to net
worth, ratio of liabilities to net worth and cash flow coverage. During the year
ended and as of January 29, 2000, the Company was in compliance with these
covenants.

     On May 11, 1999 the Company amended and restated the above-mentioned credit
agreement to accommodate the Company's acquisition of the Gardeners Eden catalog
from Williams-Sonoma, Inc.  The amended agreement remains substantially the same
as outlined above.

     During Fiscal 1999, the Company borrowed a maximum amount of $30.0
million under the revolving credit facility.  There were no outstanding
borrowings under the revolving credit agreement respectively at January 29, 2000
and January 30, 1999.  There were $6.0 million and $5.7 million in outstanding
documentary letters of credit at January 29, 2000 and January 30, 1999,
respectively.  In addition, $1.5 million in stand-by letters of credit were
drawable by store lessors at January 29, 2000 and January 30, 1999.

Capital Lease Obligation

     The Company's lease for its Mexico, Missouri distribution facility extends
over twenty years at prime plus 1% per annum (9.25% at January 29, 2000 and
9.50% at January 30, 1999).  The interest rate is adjusted annually on November
1.

42
<PAGE>

     The principal balance of this obligation amounted to $2.6 million at
January 29, 2000 and $2.7 million at January 30,1999.  Property capitalized
under this capital lease amounted to $3.1 million, with accumulated amortization
of $631,000 and $533,000 at January 29, 2000 and January 30, 1999, respectively.

     Scheduled payments of the capital lease obligation as of January 29, 2000
are as follows:

<TABLE>
<CAPTION>
Fiscal Year
<S>                                          <C>
2000                                               $   338,000
2001                                                   338,000
2002                                                   338,000
2003                                                   338,000
2004                                                   338,000
Thereafter                                           2,924,000
                                                  ------------
                                                   $ 4,614,000

Interest on capital lease obligation
 included above                                     (2,003,000)
                                                  ------------
Remaining principal                                $ 2,611,000
                                                  ============
</TABLE>

     Current portion of the capital lease obligation equaled $100,000 and
$89,000 at January 29, 2000 and January 30, 1999, respectively.


8. SHAREHOLDERS' EQUITY
-----------------------

Preferred Stock

     The Board of Directors is authorized, subject to any limitations prescribed
by law, to issue shares of preferred stock in one or more series.  Each such
series of preferred stock shall have rights, preferences, privileges and
restrictions, including voting rights, dividend rights, conversion rights,
redemption privileges and liquidation preferences, as shall be determined by the
Board of Directors.

Employee Stock Plans

The Company has stock option plans for key associates, officers and directors of
the Company, which provide for nonqualified and incentive stock options.  The
Board of Directors determines the term of each option, option price and number
of shares at the date of grant.  For all options granted after Fiscal 1991, such
option prices equaled the fair market value at the date of grant. Options
granted generally vest over four years from the date of grant and expire after
ten years. Certain non-qualified options become exercisable five years from the
date of grant, however, the exercise date of all or a portion of such options
may be accelerated if the price of the Company's common stock reaches certain
target amounts.  At January 29, 2000, options of 498,884 shares

                                                                              43
<PAGE>

were exercisable under the various associate stock option plans, and 37,997
shares were exercisable under the Directors' stock option plan. At January 29,
2000, options of 638,095 shares were available for future grants under the
various associate stock option plans, and 94,000 shares were available for
future grants under the Directors' stock option plan.

     The Company also has an employee stock purchase plan, which covers
substantially all associates and allows for the issuance of a maximum of 60,000
shares of common stock.  The options are exercisable at the lower of 85% of
market value at the beginning or end of the six-month period, through
accumulation of payroll deductions of up to 10% of each participating employee's
regular base pay during such period.  Purchases occur at the end of one or more
option periods.  Since adoption, there have been three, six-month option
periods, which began on July 1, 1993, January 1, 1994 and November 4, 1997.  The
six-month option period that began on November 4, 1997 expired on May 4, 1998,
resulting in the issuance of 17,102 shares to participating associates.  The
Board of Directors may, at its discretion, extend the 1992 Employee Stock
Purchase Plan for additional periods.  As of January 29, 2000, there were 14,033
options available for future grants under this plan.

     Transactions under the Company's stock option plans for each of the
three years in the period ended January 29, 2000 are as follows:

<TABLE>
<CAPTION>
                                                               Weighted Average  Exercise
                                     Number of Shares                     Price
-------------------------------------------------------------------------------------------

Outstanding at
<S>                           <C>                             <C>
  February 1, 1997                      1,173,643                          $ 6.51
     Granted                              354,000                          $ 8.79
     Exercised                            (77,771)                         $ 2.14
     Canceled                            (188,250)                         $ 8.65
                                       ----------                          -------
Outstanding at
  January 31, 1998                      1,261,622                          $ 7.10
     Granted                              113,500                          $12.89
     Exercised                           (176,100)                         $ 0.53
     Canceled                             (67,625)                         $ 9.26
                                       ----------                          -------

Outstanding at
  January 30, 1999                      1,131,397                          $ 8.58
     Granted                               68,000                          $15.21
     Exercised                           (232,304)                         $ 3.91
     Canceled                             (85,584)                         $12.84
                                       ----------                          -------
Outstanding at
January 29, 2000                          881,509                          $ 9.90
                                       ==========                          ======
</TABLE>

44
<PAGE>

          Of the 881,509 shares outstanding at January 29, 2000, 817,509 shares
were outstanding under the various associate stock option plans, and 64,000
shares were outstanding under the Directors' stock option plan.

          SFAS No. 123, "Accounting for Stock-Based Compensation" permits
the Company to follow the measurement provisions of APB Opinion No. 25,
"Accounting for Stock Issued to Employees", and not recognize compensation
expense for its stock-based incentive plans. Had compensation cost for the
Company's stock-based incentive compensation plans been determined based on the
fair value at the grant dates of awards under those plans, consistent with the
methodology prescribed by SFAS No. 123, the Company's net income and related
earnings per share for fiscal 1999, 1998 and 1997 would have been reduced to the
pro forma amounts indicated below:
<TABLE>
<CAPTION>

                                             Fiscal Year
                                 ---------------------------------
                                   1999         1998         1997
                                 ---------    --------    --------
<S>                             <C>          <C>          <C>
Net income - as reported        $13,310,000   $9,338,000  $7,348,000
Net income - pro forma           12,958,000    8,973,000   6,992,000

Earnings per share - basic
             As reported        $      1.63   $     1.17  $     0.94
             Pro forma                 1.59         1.12        0.89

Earnings per share - diluted
             As reported        $      1.58   $     1.13  $     0.91
             Pro forma                 1.54         1.08        0.86

</TABLE>

     The fair value of each option grant is estimated on the date of grant using
the Black - Scholes option-pricing model with the following weighted-average
assumptions.
<TABLE>
<CAPTION>


                                             Fiscal Year
                                   --------------------------------
                                     1999        1998        1997
                                   --------  ------------  --------
<S>                                <C>       <C>           <C>
Expected stock price volatility       47.9%         47.8%     49.9%
Risk-free interest rate                5.8%          5.4%      6.1%
Expected life of options           5 years       5 years   5 years
Dividend yield                         ---           ---       ---
</TABLE>

     The weighted average fair value of options granted for Fiscal 1999, Fiscal
1998 and Fiscal 1997 are $7.52, $6.30 and $4.49, respectively.

                                                                              45
<PAGE>

     The following table summarizes information about stock options outstanding
at January 29, 2000:


<TABLE>
<CAPTION>
                                 Options Exercisable                  Options Outstanding
                       ---------------------------------------------------------------------------
  Range of Exercise        Number          Weighted        Weighted       Number       Weighted
      Prices           Outstanding at       Average        Average      Exercisable     Average
                           1/29/00         Remaining       Exercise     at 1/29/00     Exercise
                                          Contractual       Price                        Price
                                             Life
                       ----------------------------------------------------------------------------
<S>                    <C>              <C>              <C>           <C>            <C>
$0.002                          31,882     1.6 years           $0.002         31,882       $0.002
$0.63                            2,000     2.3 years           $ 0.63          2,000       $ 0.63
$5.375-$8.00                   111,502     4.7 years           $ 5.58        111,502       $ 5.58
$8.125-$11.8125                506,125     6.7 years           $ 9.34        231,332       $ 9.38
$13.4375-$15.3125              230,000     6.1 years           $14.70        160,165       $14.51
----------------------------------------------------------------------------------------------------
                               881,509                                       536,881
</TABLE>

     Because the determination of the fair value of all options granted includes
vesting periods over several years and additional option grants are expected to
be made each year, the above pro forma disclosures are not representative of pro
forma effects of reported net income for future periods.

EARNINGS PER COMMON SHARE

     The following is an analysis of the differences between basic and diluted
earnings per common share in accordance with SFAS No. 128, "Earnings per Share".

<TABLE>
<CAPTION>
                                      January 29, 2000      January 30, 1999      January 31,1998
                                      -----------------     -----------------     ----------------
<S>                                 <C>                   <C>                   <C>
Net income                                   $13,310,000            $9,338,000            $7,348,000
                                             ===========            ==========            ==========
Weighted average common shares
 outstanding                                   8,155,000             7,988,000             7,824,000


Effect of dilutive securities:
  Stock options                                  267,000               297,000               295,000
                                             -----------            ----------            ----------
Weighted average common shares
 and common share equivalents                  8,422,000             8,285,000             8,119,000
                                             ===========            ==========            ==========


</TABLE>

46
<PAGE>

9. PENSION AND 401(K) PLANS
---------------------------

     The Company sponsors the Brookstone Pension Plan, which provides retirement
benefits for its employees who have completed one year of service and who were
participating in the plan prior to May 31, 1998.  As of May 30, 1998, the Board
of Directors approved freezing future benefits under this plan.  As a result,
the Company recorded a gain on curtailment of $111,000 in Fiscal 1998.  The
Company anticipates that curtailment of the plan will not have a material effect
on the Company's consolidated financial statements.  The retirement plan is a
final average pay plan.  It is the Company's policy to fund the cost of benefits
expected to accrue during the year plus amortization of any unfunded accrued
liabilities related to periods of service prior to the valuation date.

     The Company sponsors a 401(k) plan for all associates who have completed at
least one year of service with a minimum of 1,000 hours and have attained the
age of 21. The Board of Directors, concurrently with freezing the pension plan,
approved the increase of the Company's 401(k) matching contribution of each
participating employee's salary from a maximum of 1.5% to a maximum of 4.0%. The
Company's matching 401(k) contribution was $618,000, $402,000 and $175,000 in
Fiscal 1999, Fiscal 1998 and Fiscal 1997, respectively.

     The following tables set forth the pension plan's funded status and amounts
recognized in the Company's consolidated financial statements.

<TABLE>
<CAPTION>
                                 January 29, 2000        January 30, 1999
---------------------------------------------------------------------------
<S>                           <C>                     <C>
Change in projected benefit
 obligation:

Projected benefit
 obligation at beginning
 of fiscal year                          $4,092,000             $ 4,576,000
Service cost                                120,000                 230,000
Interest cost                               282,000                 284,000
Actuarial loss (gain)                      (344,000)                385,000
Expenses paid                              (117,000)               (120,000)
Benefits paid                              (193,000)               (168,000)
Curtailment                                     ---              (1,095,000)
                                         ----------             -----------
Projected benefit
 obligation at end of
 fiscal year                             $3,840,000             $ 4,092,000
                                         ==========             ===========
</TABLE>

                                                                              47
<PAGE>

     The change in plan assets was:

<TABLE>
<CAPTION>
                                            January 29, 2000      January 30, 1999
-----------------------------------------------------------------------------------
<S>                                      <C>                    <C>
Fair value at beginning of fiscal year             $3,940,000             $3,373,000
Actual return on plan assets                          553,000                458,000
Employer contributions                                 28,000                397,000
Expenses paid                                        (117,000)              (120,000)
Benefits paid                                        (193,000)              (168,000)
                                                   ----------             ----------
Fair value at end of fiscal year                   $4,211,000             $3,940,000
                                                   ==========             ==========
</TABLE>

     The funded status was:
<TABLE>
<CAPTION>
                                           January 29, 2000       January 30, 1999
-----------------------------------------------------------------------------------
<S>                                      <C>                    <C>
Funded status at end of year                        $ 371,000              $(152,000)
Unrecognized net actuarial gain                      (812,000)              (255,000)
                                                   ----------             ----------
Accrued benefit cost                                $(441,000)             $(407,000)
                                                   ==========             ==========
</TABLE>


             Assumptions used in computing the funded status were as follows:

<TABLE>
<S>                                      <C>                    <C>
Weighted average discount rate                           7.50%                  6.75%
Expected return on plan assets                              9%                     9%
Rate of increase in compensation levels                     4%                     4%
</TABLE>

             The components of net periodic pension cost were as follows:

<TABLE>
<CAPTION>
                                            January 29, 2000          January 30, 1999
                                         ----------------------------------------------
<S>                                      <C>                      <C>
Service cost                                          $ 120,000                  $ 230,000
Interest cost                                           282,000                    284,000
Expected return on plan assets                         (340,000)                  (334,000)
Amortization of prior service cost                          ---                     (8,000)
Recognized net actuarial loss                               ---                      6,000
                                                      ---------                  ---------
Net periodic benefit cost                             $  62,000                  $ 178,000
                                                      =========                  =========
</TABLE>

48
<PAGE>

10. POST-RETIREMENT BENEFITS OTHER THAN PENSIONS
------------------------------------------------

          The Company sponsors a defined benefit post-retirement medical plan
that covers all of its full time associates.  All associates who retire from the
Company's defined benefit pension plan who have either attained age 65 with five
years of service, or who have attained age 55 with 10 years of service and 70
points are eligible.  Associates, who retire prior to age 65, and their spouses,
are each required to contribute 50% of the premium.  Spouses of associates who
retire after age 65 with 10 years of service are required to contribute 50% of
their premium.  Associates, who retire at age 65 with five to nine years of
service, and their spouses, are required to contribute 50% and 75% of the
premium, respectively.  Associates not eligible for retirement as of February 1,
1992 will be required to contribute the amount of premium in excess of $4,200
pre-65 and $2,225 post-65; spouses are not eligible.  The plan is not funded.

          The following tables set forth the post-retirement plans funded status
and amounts recognized in the Company's consolidated financial statements.

<TABLE>
<CAPTION>
                                            January 29, 2000       January 30, 1999
------------------------------------------------------------------------------------
Accumulated post-retirement benefit
 obligation:
<S>                                       <C>                    <C>
APBO at end of prior fiscal year                    $1,192,000             $1,378,000
Service Cost                                            81,000                 72,000
Interest Cost                                           86,000                 78,000
Actuarial loss / (gain) and assumption
 change                                                 41,000               (287,000)

Benefits paid                                          (68,000)               (49,000)
                                                    ----------             ----------
APBO at end of current fiscal year                  $1,332,000             $1,192,000
                                                    ==========             ==========
</TABLE>

The change in plan assets was:
<TABLE>
<CAPTION>
                                           January 29, 2000       January 30, 1999
----------------------------------------------------------------------------------
<S>                                      <C>                    <C>
Fair value at beginning of fiscal year        $    ---               $    ---
Actual return on plan assets                       ---                    ---
Employer contributions                          68,000                 49,000
Participant contributions                          ---                    ---
Expenses paid                                      ---                    ---
Benefits paid                                  (68,000)               (49,000)
                                              --------               --------
Fair value at end of fiscal year              $      0               $      0
                                              ========               ========
</TABLE>

                                                                              49
<PAGE>

  The amounts recognized in the statement of financial position consisted of:

<TABLE>
<CAPTION>
                                           January 29, 2000       January 30, 1999
-----------------------------------------------------------------------------------
<S>                                      <C>                    <C>

Accrued benefit cost (other plans)                $(2,901,000)           $(2,929,000)
                                                 ------------            -----------
Accrued benefit cost                              $(2,901,000)           $(2,929,000)

Funded status at end of fiscal year                (1,332,000)            (1,192,000)
Unrecognized prior service cost                      (945,000)            (1,047,000)
Unrecognized net actuarial gain                      (624,000)              (690,000)
                                                 ------------            -----------
Accrued benefit cost                              $(2,901,000)           $(2,929,000)
</TABLE>

     The components of the net periodic post-retirement benefit cost were:

<TABLE>
<CAPTION>
                                           January 29, 2000       January 30, 1999
----------------------------------------------------------------------------------
<S>                                      <C>                    <C>

Service cost                                        $  81,000              $  72,000
Interest cost                                          86,000                 78,000
Amortization of prior service cost                   (102,000)              (102,000)
Recognized net actuarial gain                         (25,000)               (34,000)
                                                 ------------            -----------
Net periodic benefit cost                           $  40,000              $  14,000
</TABLE>

  The weighted average discount rate used in determining the accumulated post-
retirement benefit obligation was 7.50% as of January 29, 2000 and 6.75% as of
January 30, 1999. For measurement purposes, an 8.0% annual rate of increase in
the per capita cost of covered health care benefits was assumed for Fiscal 1999;
this rate was assumed to decrease gradually down to 5% for Fiscal 2004 and
remain at that level thereafter.

     The medical cost trend rate assumption has a significant effect on the
amounts reported.  However, the impact of medical inflation eventually
diminishes because of the limit of the Company's share of plan cost for accruals
for associates who were not eligible to retire as of February 1, 1992. A one
percentage point change in assumed health care cost trend rate would have had
the following effects on January 29, 2000:

<TABLE>
<CAPTION>
                                           Increase      Decrease
                                           --------      --------
<S>                                     <C>             <C>
Effect on total of service
  and interest cost components              $  3,200      $  (3,400)

Effect on accumulated post-retirement
  benefit obligation                        $ 39,500      $ (38,500)

</TABLE>


50
<PAGE>

11. COMMITMENTS AND CONTINGENCIES
---------------------------------

Lease Commitments

     The Company leases all of its retail store locations and its corporate
headquarters.  These leases are non-cancelable and have terms of up to 15 years.
Certain leases provide for additional rents payable based on store sales.

     At January 29, 2000, the minimum future rentals on non-cancelable operating
leases are as follows:

<TABLE>
<CAPTION>
Fiscal Year

<S>                                          <C>
2000                                                        $ 23,768,000
2001                                                          22,889,000
2002                                                          22,332,000
2003                                                          21,207,000
2004                                                          20,357,000
Thereafter                                                    76,108,000
                                                            ------------
                                                            $186,661,000
                                                            ============
</TABLE>

     Rent expense was approximately $24.9 million, $22.7 million and $19.6
million for the years ended January 29, 2000, January 30, 1999 and January 31,
1998, respectively, including contingent rent expenses of approximately
$200,000, $310,000 and $253,000, respectively.  This rent expense, along with
other costs of occupancy are included in cost of sales in the consolidated
statement of income.

Litigation

     The Company is involved in various legal proceedings arising in the normal
course of business.  Management believes that the resolution of these matters
will not have a material effect on the consolidated financial statements.

                                                                              51
<PAGE>

                                                                    EXHIBIT 23.1

                       CONSENT OF INDEPENDENT ACCOUNTANTS



We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 (No. 33-88174) of Brookstone, Inc. of our report dated
March 21, 2000 relating to the financial statements and financial statement
schedules, which appears in this Form 10-K.



PricewaterhouseCoopers LLP
Boston, Massachusetts
April 27, 2000

52
<PAGE>

CONSOLIDATED FINANCIAL STATEMENT SCHEDULES.

Schedule II    Valuation and Qualifying Accounts and Reserves

<TABLE>
<CAPTION>
                          Year ended January 29, 2000
------------------------------------------------------------------------------------------------------
                                 Beginning       Charged to costs                            Ending
        Description               Balance          and expenses        Deductions            Balance

<S>                           <C>               <C>                 <C>               <C>
Allowance for doubtful
 accounts                           $  176,000            $211,000         $(62,000)       $  325,000
                                    ----------            --------         --------        ----------
Inventory reserve                   $2,378,000            $683,000         $      0        $3,061,000
                                    ----------            --------         --------        ----------

<CAPTION>
                          Year ended January 30, 1999
------------------------------------------------------------------------------------------------------
                                 Beginning       Charged to costs                      Ending Balance
        Description               Balance          and expenses        Deductions

<S>                           <C>               <C>                 <C>                <C>

Allowance for doubtful
 accounts                           $  324,000            $ 86,000         $(234,000)       $  176,000
                                    ----------            --------         ---------        ----------
Inventory reserve                   $1,926,000            $452,000         $       0        $2,378,000
                                    ----------            --------         ---------        ----------

<CAPTION>
                           Year ended January 31,1998
------------------------------------------------------------------------------------------------------
                                 Beginning       Charged to costs                     Ending Balance
        Description               Balance          and expenses        Deductions

<S>                           <C>               <C>                 <C>               <C>
Allowance for doubtful
 accounts                           $  222,000            $114,000        $ (12,000)       $  324,000
                                    ----------            --------        ---------        ----------

Inventory reserve                   $1,543,000            $713,000        $(330,000)       $1,926,000
                                    ----------            --------        ---------        ----------
------------------------------------------------------------------------------------------------------
</TABLE>


     All other schedules of which provision is made in the applicable regulation
of the Securities and Exchange Commission have been omitted because the
information is disclosed in the Consolidated Financial Statements or because
such schedules are not required or are not applicable.


                                                                              53
<PAGE>

3.  EXHIBITS.

EXHIBIT NO.          DESCRIPTION


3.1                 Restated Certificate of Incorporation, (filed with the
                    Securities and Exchange Commission as Exhibit 3.1 to the
                    Registrant's Registration Statement on Form S-1 (File No.
                    33-47123), and incorporated herein by reference).

3.2                 Amended and restated by-laws (filed with the Securities and
                    Exchange Commission as Exhibit 3.2 to the Registrant's
                    Registration Statement on Form S-1 (File No. 33-47123), and
                    incorporated herein by reference).

4.1                 Specimen Certificate Representing the Common Stock (filed
                    with the Securities and Exchange Commission as Exhibit 3.1
                    to the Registrant's Registration Statement on Form S-1 (File
                    No. 33-47123), and incorporated herein by reference).

10.1                Amended and Restated Stockholders Agreement dated as of
                    August 22, 1991, among the Company and its stockholders
                    party thereto and named therein (filed with the Securities
                    and Exchange Commission as Exhibit 10.1 to the Registrant's
                    Registration Statement on Form S-1 (File No. 33-47123), and
                    incorporated herein by reference).

10.2                1991 Stock Purchase and Option Plan, as amended (filed with
                    the Securities and Exchange Commission as Exhibit 4.1 to the
                    Registrant's Registration Statement on Form S-8 (File No.
                    33-63470), and incorporated herein by reference).

10.3                Stock Option Agreement dated as of August 22, 1991, between
                    the Company and Merwin F. Kaminstein, including amendment
                    dated February 29, 1992, (filed with the Securities and
                    Exchange Commission as Exhibit 10.4 to the Registrant's
                    Registration Statement on Form S-1 (File No. 33-47123), and
                    incorporated herein by reference).

10.5                Stock Option Agreement dated as of August 22, 1991, between
                    the Company and Alexander M. Winiecki (filed with the
                    Securities and Exchange Commission as Exhibit 10.7 to the
                    Registrant's Registration Statement on Form S-1 (File No.
                    33-47123), and incorporated herein by reference).

10.6                Stock Option Agreement dated as of August 22, 1991, between
                    the Company and Jo-Ann B. Karalus (filed with the Securities
                    and Exchange Commission as Exhibit 10.9 to the Registrant's
                    Registration Statement on Form S-1 (File No. 33-47123), and
                    incorporated herein by reference).

54
<PAGE>

EXHIBIT NO.          DESCRIPTION


10.7                Stock Option Agreement dated as of October 11, 1991, between
                    the Company and Mone Anathan, III (filed with the Securities
                    and Exchange Commission as Exhibit 10.10 to the Registrant's
                    Registration Statement on Form S-1 (File No. 33-47123), and
                    incorporated herein by reference).

10.8                1992 Equity Incentive Plan, as amended and restated (filed
                    with the Securities and Exchange Commission as Exhibit A to
                    the Registrant's 1999 Proxy Statement, and incorporated
                    herein by reference).

10.9                1992 Stock Purchase Plan, as amended (filed with the
                    Securities and Exchange Commission as Exhibit 4.3 to the
                    Registrant's Registration Statement on Form S-8 (File No.
                    33-63740), and incorporated herein by reference).

10.10               1992 Management Incentive Bonus Plan (filed with the
                    Securities and Exchange Commission as Exhibit 10.12 to the
                    Registrant's Form 10-K for Fiscal 1993, and incorporated
                    herein by reference).

10.11               1992 Profit Sharing Plan (filed with the Securities and
                    Exchange Commission as Exhibit 10.14 to the Registrant's
                    Registration Statement on Form S-1 (File No. 33-47123), and
                    incorporated herein by reference).

10.12               Form of the Company's Pension Plan (filed with the
                    Securities and Exchange Commission as Exhibit 10.15 to the
                    Registrant's Registration Statement on Form S-1 (File No.
                    33-47123), and incorporated herein by reference).

10.13               Amendment No. 1 dated as of February 25, 1994, to Kaminstein
                    Agreement (filed with the Securities and Exchange Commission
                    as Exhibit 10.15.1 to the Registrant's Registration
                    Statement on Form S-1 (File No. 33-75728), and incorporated
                    herein by reference).

10.14               Employment Agreement dated April 2, 1991, between the
                    Company and Alexander M. Winiecki (filed with the Securities
                    and Exchange Commission as Exhibit 10.18 to the Registrant's
                    Registration Statement on Form S-1 (File No. 33-47123), and
                    incorporated herein by reference).

10.15               Severance Agreement dated March 15, 1991, between the
                    Company and Jo-Ann B. Karalus (filed with the Securities and
                    Exchange Commission as Exhibit 10.21 to the Registrant's
                    Registration Statement on Form S-1 (File No. 33-47123), and
                    incorporated herein by reference).

                                                                              55
<PAGE>

EXHIBIT NO.          DESCRIPTION

10.16               Employment Agreement dated September 30, 1994, between the
                    Company and Michael F. Anthony (filed with the Securities
                    and Exchange Commission as Exhibit 10.17 to the Registrant's
                    Form 10-K for the year ended January 28, 1995, and
                    incorporated herein by reference).

10.18               Lease Agreement dated as of March 26, 1993, between the City
                    of Mexico, Missouri, as lessor, and BCI, as lessee (filed
                    with the Securities and Exchange Commission as Exhibit 10.23
                    to the Registrant's Registration Statement on Form S-1 (File
                    No. 33-75728), and incorporated herein by reference).

10.19               Option Agreement dated as of March 26, 1993, between the
                    City of Mexico, Missouri and BCI (filed with the Securities
                    and Exchange Commission as Exhibit 10.24 to the Registrant's
                    Registration Statement on Form S-1 (File No. 33-75728), and
                    incorporated herein by reference).

10.20               Loan Agreement dated as of March 26, 1993, among BCI, the
                    City of Mexico, Missouri, The Industrial Development
                    Authority of Mexico, Missouri and First National Bank (filed
                    with the Securities and Exchange Commission as Exhibit 10.24
                    to the Registrant's Registration Statement on Form S-1 (File
                    No. 33-75728), and incorporated herein by reference).

10.22               1996 Directors Stock Option Plan (filed with the Securities
                    and Exchange Commission as Exhibit A to the Registrant's
                    1996 Proxy Statement, and incorporated herein by reference).

10.23               Employment Agreement dated November 3, 1996, between the
                    Company and Philip W. Roizin (filed with the Securities and
                    Exchange Commission as Exhibit 10.25 to the Registrant's
                    Form 10-Q for the quarter ended November 2, 1996, and
                    incorporated herein by reference).

10.24               Revolving Credit Agreement dated September 22, 1997, among
                    the Company, Brookstone Company, Inc. ("BCI") and Brookstone
                    Stores, Inc. and BankBoston N.A. as agent for the lenders
                    (files with the Securities and Exchange Commission s Exhibit
                    10.25 to the Registrant's Form 10-Q for the quarter ended
                    November 1, 1997 and incorporated herein by reference.)

10.25               Amended and Restated Revolving Credit Agreement dated May
                    11, 1999, among the Company, Brookstone Company, Inc.
                    ("BCI") and Brookstone Stores, Inc., Brookstone Acquisitions
                    Sub, Inc. and BankBoston N.A. as agent for the lenders
                    (filed herewith).

56
<PAGE>

EXHIBIT NO          DESCRIPTION

10.26               1999 Equity Incentive Plan (filed with the Securities and
                    Exchange Commission as Exhibit A to the Registrant's 1999
                    Proxy Statement, and incorporated herein by reference).

10.27               Employment Agreement dated January 17, 2000, between the
                    Company and Kenneth J. Mesnik (filed herewith).


                                                                              57
<PAGE>

EXHIBIT NO          DESCRIPTION

13                  The 1999 Annual Report to Stockholders of the Company,
                    except for those portions thereof which are incorporated in
                    this Form 10-K, shall be furnished for the information of
                    the Commission and shall not be deemed "filed".

21                  List of Subsidiaries (filed herewith)

23.1                Consent of PricewaterhouseCoopers LLP which is reflected
                    on P. 52 (filed herewith).

27                  Financial Data Schedule (filed herewith).

14(b)  Reports on Form 8-K

The Company did not file any reports on Form 8-K during the quarter ended
January 29, 2000.

58
<PAGE>

                                   SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized, on April 28, 2000.

                                         Brookstone, Inc.

                                By: /s/ Philip W. Roizin
                                    --------------------
                                        Philip W. Roizin
                                        Chief Financial Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities, each on April 28, 2000.

<TABLE>
<CAPTION>

          Signature        Title

<S>                        <C>
/s/ Michael  F. Anthony    Chairman, President and Chief Executive Officer
-----------------------    Director
  Michael F. Anthony       (Principal Executive Officer)



/s/ Philip W. Roizin       Executive Vice President, Finance & Administration
-----------------------    (Principal Financial and Accounting Officer)
  Philip W. Roizin


/s/ Mone Anathan, III      Director
----------------------
  Mone Anathan, III


/s/ Adam Kirsch            Director
------------------------
  Adam Kirsch


/s/ Michael L. Glazer      Director
---------------------
   Michael L. Glazer


/s/ Robert F. White        Director
------------------------
  Robert F. White

</TABLE>

                                                                              59