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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-Q



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|x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ---------------------------------------------------------------------------------------

For the quarterly period ended September 30, 2006



| ̈ | TRANSITION REPORT PURSUANT TO SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | -----------------------------------------------------------------------------------------

Commission file number 0-21406.



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Brookstone, Inc.

(Exact name of
registrant as specified in its charter)



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|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|Delaware                                                       |  | 06-1182895                          
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification No.)

One Innovation Way, Merrimack, NH 03054

(address of principal executive offices, zip code)

603-880-9500

(Registrants telephone number, including area code)



(Former name, former address and former fiscal year, if changed since last
report)



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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 ̈No  x

Indicate by check mark whether the Registrant is a large accelerated
filer, an accelerated filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act.

(Check one):    Large accelerated filer ̈Accelerated
filer ̈Non-accelerated filer  x

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes ̈No  x

Indicate the number of shares outstanding of each of the issuers classes of common stock, as of the latest practicable date. At November 10, 2006, the number of shares outstanding of the Registrants
common stock, par value $.01 per share, was 1.



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##### Table of Contents

Brookstone, Inc.

Index to Form 10-Q



|                                            |  |                                                                                       |  |   
|------------------------------------------- |  | ------------------------------------------------------------------------------------- |  | --
|                                            |  | Page No.                                                                             
|Part I:
Financial Information - (unaudited) |  |                                                                                      
|                                            |  |                                                                                      
|Item 1.                                     |  | Consolidated Balance Sheets                                                           |  | 3 
|                                            |  | Consolidated Statements of Operations                                                 |  | 4 
|                                            |  | Consolidated Statements of Cash Flows                                                 |  | 6 
|                                            |  | Notes to Consolidated Financial Statements                                            |  | 7 
|                                            |  |                                                                                      
|Item 2.                                     |  | Managements Discussion and Analysis of Financial Condition and Results of Operations |  | 27
|                                            |  |                                                                                      
|Item 3.                                     |  | Quantitative and Qualitative Disclosures about Market Risk                            |  | 33
|                                            |  |                                                                                      
|Item 4.                                     |  | Controls and Procedures                                                               |  | 33
|                                            | 
|Part II:
Other Information                  |  |                                                                                      
|                                            |  |                                                                                      
|Item 1.                                     |  | Legal Proceedings                                                                     |  | 34
|                                            |  |                                                                                      
|Item 1A.                                    |  | Risk Factors                                                                          |  | 34
|                                            |  |                                                                                      
|Item 2.                                     |  | Unregistered Sales of Equity Securities and Use of Proceeds                           |  | 41
|                                            |  |                                                                                      
|Item 3.                                     |  | Defaults Upon Senior Securities                                                       |  | 41
|                                            |  |                                                                                      
|Item 4.                                     |  | Submission of Matters to a Vote of Security Holders                                   |  | 41
|                                            |  |                                                                                      
|Item 5.                                     |  | Other Information                                                                     |  | 41
|                                            |  |                                                                                      
|Item 6.                                     |  | Exhibits                                                                              |  | 42
|                                            |  |                                                                                      
|Signatures                                  |  |                                                                                       |  | 43
|                                            |  |                                                                                      
|Exhibit Index                               |  |                                                                                       |  | 44



2



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##### Table of Contents

PART I

FINANCIAL INFORMATION

ITEM 1.Financial Statements

BROOKSTONE, INC.

CONSOLIDATED BALANCE SHEETS

(In
thousands, except share data)



|                                                                                         |  |                    |         |   |                   |   |                  |  |   |         |  
|---------------------------------------------------------------------------------------- |  | ------------------ | ------- | - | ----------------- | - | ---------------- |  | - | ------- | -
|                                                                                         |  | Successor          |        
|                                                                                         |  | September 30, 2006 |         |   | December 31, 2005 |   | October 29, 2005 | 
|                                                                                         |  | (Unaudited)        |         |   |                   |   | (Unaudited)      | 
|Assets                                                                                   |  |                    |         |   |                   |   |                  |  |   |         |  
|                                                                                         |  |                    |        
|Current assets:                                                                          |  |                    |         |   |                   |   |                  |  |   |         |  
|Cash and cash equivalents                                                                |  | $                  | 1,189   |   |                   | $ | 76,326           |  | $ | 1,547   |  
|Receivables, net                                                                         |  |                    | 11,783  |   |                   |   | 10,906           |  |   | 7,215   |  
|Merchandise inventories                                                                  |  |                    | 95,898  |   |                   |   | 75,716           |  |   | 114,856 |  
|Deferred income taxes, net                                                               |  |                    | 20,896  |   |                   |   | 4,947            |  |   | 26,956  |  
|Prepaid expenses                                                                         |  |                    | 9,054   |   |                   |   | 9,117            |  |   | 6,220   |  
|                                                                                         |  |                    |         |   |                   |   |                  |  |   |         |  
|Total current assets                                                                     |  |                    | 138,820 |   |                   |   | 177,012          |  |   | 156,794 |  
|                                                                                         |  |                    |        
|Property, plant and equipment, net                                                       |  |                    | 73,051  |   |                   |   | 76,328           |  |   | 76,260  |  
|Intangible assets, net                                                                   |  |                    | 131,583 |   |                   |   | 132,271          |  |   | 132,424 |  
|Goodwill                                                                                 |  |                    | 190,942 |   |                   |   | 192,453          |  |   | 192,453 |  
|Other assets                                                                             |  |                    | 19,570  |   |                   |   | 19,363           |  |   | 26,293  |  
|                                                                                         |  |                    |         |   |                   |   |                  |  |   |         |  
|Total assets                                                                             |  | $                  | 553,966 |   |                   | $ | 597,427          |  | $ | 584,224 |  
|                                                                                         |  |                    |         |   |                   |   |                  |  |   |         |  
|Liabilities and Shareholders Equity                                                     |  |                    |         |   |                   |   |                  |  |   |         |  
|                                                                                         |  |                    |        
|Current liabilities:                                                                     |  |                    |         |   |                   |   |                  |  |   |         |  
|Short term borrowings                                                                    |  | $                  |        |   |                   | $ |                 |  | $ | 11,150  |  
|Accounts payable                                                                         |  |                    | 26,891  |   |                   |   | 22,012           |  |   | 39,601  |  
|Other current liabilities                                                                |  |                    | 42,070  |   |                   |   | 54,714           |  |   | 32,449  |  
|                                                                                         |  |                    |         |   |                   |   |                  |  |   |         |  
|Total current liabilities                                                                |  |                    | 68,961  |   |                   |   | 76,726           |  |   | 83,200  |  
|                                                                                         |  |                    |        
|Other long-term liabilities                                                              |  |                    | 19,637  |   |                   |   | 18,962           |  |   | 16,973  |  
|Long-term debt                                                                           |  |                    | 190,402 |   |                   |   | 190,849          |  |   | 190,948 |  
|Deferred income taxes                                                                    |  |                    | 43,869  |   |                   |   | 43,392           |  |   | 49,435  |  
|                                                                                         |  |                    |        
|Commitments and contingencies (Note 6)                                                   |  |                    |        |   |                   |   |                 |  |   |        |  
|                                                                                         |  |                    |        
|Other party interests in consolidated entities                                           |  |                    | 1,397   |   |                   |   | 1,176            |  |   | 1,028   |  
|                                                                                         |  |                    |        
|Shareholders equity:                                                                    |  |                    |         |   |                   |   |                  |  |   |         |  
|Common stock  $0.01 par value 1,000 shares Authorized, one share issued and outstanding |  |                    |        |   |                   |   |                 |  |   |        |  
|Additional paid-in capital                                                               |  |                    | 245,028 |   |                   |   | 249,145          |  |   | 249,145 |  
|Accumulated other comprehensive income                                                   |  |                    | 152     |   |                   |   | 143              |  |   |         |  
|Retained (deficit) earnings                                                              |  |                    | (15,480 | ) |                   |   | 17,034           |  |   | (6,505  | )
|                                                                                         |  |                    |         |   |                   |   |                  |  |   |         |  
|Total shareholders equity                                                               |  |                    | 229,700 |   |                   |   | 266,322          |  |   | 242,640 |  
|                                                                                         |  |                    |         |   |                   |   |                  |  |   |         |  
|Total liabilities and shareholders equity                                               |  | $                  | 553,966 |   |                   | $ | 597,427          |  | $ | 584,224 |  
|                                                                                         |  |                    |         |   |                   |   |                  |  |   |         |  

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



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BROOKSTONE, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands)

(Unaudited)



|                                                                                                     |  |                                         |         |   |                                                   |   |             |   |  |                                                 |  |   |        |  
|---------------------------------------------------------------------------------------------------- |  | --------------------------------------- | ------- | - | ------------------------------------------------- | - | ----------- | - |  | ----------------------------------------------- |  | - | ------ | -
|                                                                                                     |  | Successor                               |         |   |                                                   |   | Predecessor |  
|                                                                                                     |  | Thirteen weeks ended September 30, 2006 |         |   | Period fromOctober 4, 2005throughOctober 29, 2005 |   |             |   |  | Period fromJuly 31, 2005through October 3, 2005 | 
|Net sales                                                                                            |  | $                                       | 87,773  |   |                                                   | $ | 24,937      |   |  |                                                 |  | $ | 51,783 |  
|Cost of sales                                                                                        |  |                                         | 66,516  |   |                                                   |   | 20,193      |   |  |                                                 |  |   | 39,219 |  
|                                                                                                     |  |                                         |         |   |                                                   |   |             |   |  |                                                 |  |   |        |  
|Gross profit                                                                                         |  |                                         | 21,257  |   |                                                   |   | 4,744       |   |  |                                                 |  |   | 12,564 |  
|Selling, general and administrative expenses                                                         |  |                                         | 30,712  |   |                                                   |   | 10,776      |   |  |                                                 |  |   | 20,881 |  
|                                                                                                     |  |                                         |         |   |                                                   |   |             |   |  |                                                 |  |   |        |  
|Loss from continuing operations                                                                      |  |                                         | (9,455  | ) |                                                   |   | (6,032      | ) |  |                                                 |  |   | (8,317 | )
|Interest expense, net                                                                                |  |                                         | 6,394   |   |                                                   |   | 4,026       |   |  |                                                 |  |   | 128    |  
|                                                                                                     |  |                                         |         |   |                                                   |   |             |   |  |                                                 |  |   |        |  
|Loss before income taxes, other party interests in consolidated entities and discontinued operations |  |                                         | (15,849 | ) |                                                   |   | (10,058     | ) |  |                                                 |  |   | (8,445 | )
|Other party interests in consolidated entities                                                       |  |                                         | 302     |   |                                                   |   | 65          |   |  |                                                 |  |   | 181    |  
|                                                                                                     |  |                                         |         |   |                                                   |   |             |   |  |                                                 |  |   |        |  
|Loss before income taxes and discontinued operations                                                 |  |                                         | (16,151 | ) |                                                   |   | (10,123     | ) |  |                                                 |  |   | (8,626 | )
|Income tax benefit                                                                                   |  |                                         | (5,925  | ) |                                                   |   | (3,447      | ) |  |                                                 |  |   | (2,417 | )
|                                                                                                     |  |                                         |         |   |                                                   |   |             |   |  |                                                 |  |   |        |  
|Loss from continuing operations                                                                      |  |                                         | (10,226 | ) |                                                   |   | (6,676      | ) |  |                                                 |  |   | (6,209 | )
|Income (loss) from discontinued operations, net of income tax benefit of ($37), ($458) and ($808)    |  |                                         | (62     | ) |                                                   |   | 171         |   |  |                                                 |  |   | (1,864 | )
|                                                                                                     |  |                                         |         |   |                                                   |   |             |   |  |                                                 |  |   |        |  
|Net loss                                                                                             |  | $                                       | (10,288 | ) |                                                   | $ | (6,505      | ) |  |                                                 |  | $ | (8,073 | )
|                                                                                                     |  |                                         |         |   |                                                   |   |             |   |  |                                                 |  |   |        |  

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



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BROOKSTONE, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands)

(Unaudited)



|                                                                                                      |  |                                           |         |   |                                                   |   |             |   |  |                                                    |  |   |         |  
|----------------------------------------------------------------------------------------------------- |  | ----------------------------------------- | ------- | - | ------------------------------------------------- | - | ----------- | - |  | -------------------------------------------------- |  | - | ------- | -
|                                                                                                      |  | Successor                                 |         |   |                                                   |   | Predecessor |  
|                                                                                                      |  | Thirty-nine weeksended September 30, 2006 |         |   | Period fromOctober 4, 2005throughOctober 29, 2005 |   |             |   |  | Period fromJanuary 30, 2005through October 3, 2005 | 
|Net sales                                                                                             |  | $                                         | 255,804 |   |                                                   | $ | 24,937      |   |  |                                                    |  | $ | 216,091 |  
|Cost of sales                                                                                         |  |                                           | 193,867 |   |                                                   |   | 20,193      |   |  |                                                    |  |   | 159,872 |  
|                                                                                                      |  |                                           |         |   |                                                   |   |             |   |  |                                                    |  |   |         |  
|Gross profit                                                                                          |  |                                           | 61,937  |   |                                                   |   | 4,744       |   |  |                                                    |  |   | 56,219  |  
|Selling, general and administrative expenses                                                          |  |                                           | 92,189  |   |                                                   |   | 10,776      |   |  |                                                    |  |   | 78,361  |  
|                                                                                                      |  |                                           |         |   |                                                   |   |             |   |  |                                                    |  |   |         |  
|Loss from continuing operations                                                                       |  |                                           | (30,252 | ) |                                                   |   | (6,032      | ) |  |                                                    |  |   | (22,142 | )
|Interest expense, net                                                                                 |  |                                           | 18,370  |   |                                                   |   | 4,026       |   |  |                                                    |  |   | 25      |  
|                                                                                                      |  |                                           |         |   |                                                   |   |             |   |  |                                                    |  |   |         |  
|Loss before income taxes, other party interests in consolidated entities and discontinued operations  |  |                                           | (48,622 | ) |                                                   |   | (10,058     | ) |  |                                                    |  |   | (22,167 | )
|Other party interests in consolidated entities                                                        |  |                                           | 950     |   |                                                   |   | 65          |   |  |                                                    |  |   | 687     |  
|                                                                                                      |  |                                           |         |   |                                                   |   |             |   |  |                                                    |  |   |         |  
|Loss before income taxes and discontinued operations                                                  |  |                                           | (49,572 | ) |                                                   |   | (10,123     | ) |  |                                                    |  |   | (22,854 | )
|Income tax benefit                                                                                    |  |                                           | (17,438 | ) |                                                   |   | (3,447      | ) |  |                                                    |  |   | (7,887  | )
|                                                                                                      |  |                                           |         |   |                                                   |   |             |   |  |                                                    |  |   |         |  
|Loss from continuing operations                                                                       |  |                                           | (32,134 | ) |                                                   |   | (6,676      | ) |  |                                                    |  |   | (14,967 | )
|Income (loss) from discontinued operations, net of income tax benefit of ($210), ($458), and $(3,250) |  |                                           | (380    | ) |                                                   |   | 171         |   |  |                                                    |  |   | (5,634  | )
|                                                                                                      |  |                                           |         |   |                                                   |   |             |   |  |                                                    |  |   |         |  
|Net loss                                                                                              |  | $                                         | (32,514 | ) |                                                   | $ | (6,505      | ) |  |                                                    |  | $ | (20,601 | )
|                                                                                                      |  |                                           |         |   |                                                   |   |             |   |  |                                                    |  |   |         |  

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



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BROOKSTONE, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)



|                                                                             |  |                                           |         |   |                                                   |   |             |   |  |                                                    |  |   |         |  
|---------------------------------------------------------------------------- |  | ----------------------------------------- | ------- | - | ------------------------------------------------- | - | ----------- | - |  | -------------------------------------------------- |  | - | ------- | -
|                                                                             |  | Successor                                 |         |   |                                                   |   | Predecessor |  
|                                                                             |  | Thirty-nine weeksended September 30, 2006 |         |   | Period fromOctober 4, 2005throughOctober 29, 2005 |   |             |   |  | Period fromJanuary 30, 2005through October 3, 2005 | 
|Cash flows from operating activities:                                        |  |                                           |         |   |                                                   |   |             |   |  |                                                    |  |   |         |  
|Net loss                                                                     |  | $                                         | (32,514 | ) |                                                   | $ | (6,505      | ) |  |                                                    |  | $ | (20,601 | )
|Adjustments to reconcile net loss to net cash used for operating activities: |  |                                           |         |   |                                                   |   |             |   |  |                                                    |  |   |         |  
|Depreciation and amortization                                                |  |                                           | 10,734  |   |                                                   |   | 1,041       |   |  |                                                    |  |   | 9,269   |  
|Amortization of debt issuance costs                                          |  |                                           | 1,696   |   |                                                   |   |            |   |  |                                                    |  |   | 185     |  
|Amortization of inventory write-up                                           |  |                                           |        |   |                                                   |   | 7,195       |   |  |                                                    |  |   |        |  
|Amortization of revaluation of lease                                         |  |                                           | (153    | ) |                                                   |   | 17          |   |  |                                                    |  |   |        |  
|Amortization of debt discount                                                |  |                                           | 231     |   |                                                   |   | 26          |   |  |                                                    |  |   |        |  
|Impairment charge                                                            |  |                                           |        |   |                                                   |   |            |   |  |                                                    |  |   | 5,280   |  
|Gain on cash flow hedge                                                      |  |                                           | 24      |   |                                                   |   |            |   |  |                                                    |  |   |        |  
|Stock based compensation expense                                             |  |                                           | 834     |   |                                                   |   |            |   |  |                                                    |  |   | 979     |  
|Other party interests in consolidated entities                               |  |                                           | 950     |   |                                                   |   | 65          |   |  |                                                    |  |   | 687     |  
|Deferred income taxes, net                                                   |  |                                           | (16,990 | ) |                                                   |   | (3,894      | ) |  |                                                    |  |   | (11,477 | )
|Related tax benefits on exercise of stock options                            |  |                                           |        |   |                                                   |   |            |   |  |                                                    |  |   | 182     |  
|Increase in other assets                                                     |  |                                           | (2,144  | ) |                                                   |   | (786        | ) |  |                                                    |  |   | (4,552  | )
|Increase in other long-term liabilities                                      |  |                                           | 1,419   |   |                                                   |   | 48          |   |  |                                                    |  |   | 340     |  
|Changes in working capital:                                                  |  |                                           |         |   |                                                   |   |             |   |  |                                                    |  |   |         |  
|Accounts receivable, net                                                     |  |                                           | (877    | ) |                                                   |   | 180         |   |  |                                                    |  |   | 2,470   |  
|Merchandise inventories                                                      |  |                                           | (20,182 | ) |                                                   |   | (22,349     | ) |  |                                                    |  |   | (16,922 | )
|Prepaid expenses                                                             |  |                                           | 63      |   |                                                   |   | 362         |   |  |                                                    |  |   | (722    | )
|Accounts payable                                                             |  |                                           | 4,879   |   |                                                   |   | 17,311      |   |  |                                                    |  |   | 4,888   |  
|Other current liabilities                                                    |  |                                           | (13,286 | ) |                                                   |   | 2,390       |   |  |                                                    |  |   | (16,441 | )
|                                                                             |  |                                           |         |   |                                                   |   |             |   |  |                                                    |  |   |         |  
|Net cash used for operating activities                                       |  |                                           | (65,316 | ) |                                                   |   | (4,899      | ) |  |                                                    |  |   | (46,435 | )
|Cash flows
from investing activities:                                        |  |                                           |         |   |                                                   |   |             |   |  |                                                    |  |   |         |  
|Expenditures for property and equipment                                      |  |                                           | (6,769  | ) |                                                   |   | (3,673      | ) |  |                                                    |  |   | (8,468  | )
|Acquisition costs of predecessor company                                     |  |                                           |        |   |                                                   |   | (433,268    | ) |  |                                                    |  |   |        |  
|Transaction Costs                                                            |  |                                           |        |   |                                                   |   | (15,496     | ) |  |                                                    |  |   |        |  
|                                                                             |  |                                           |         |   |                                                   |   |             |   |  |                                                    |  |   |         |  
|Net cash used for investing activities                                       |  |                                           | (6,769  | ) |                                                   |   | (452,437    | ) |  |                                                    |  |   | (8,468  | )
|Cash flows from financing activities:                                        |  |                                           |         |   |                                                   |   |             |   |  |                                                    |  |   |         |  
|Borrowings from revolving credit facility                                    |  |                                           |        |   |                                                   |   | 11,150      |   |  |                                                    |  |   |        |  
|Payments on bridge loan                                                      |  |                                           |         |   |                                                   |   | (1,850      | ) |  |                                                    |  |   |         |  
|Payment of debt issuance costs                                               |  |                                           |        |   |                                                   |   | (13,122     | ) |  |                                                    |  |   |        |  
|Cash payments related to debt financing                                      |  |                                           | (349    | ) |                                                   |   |            |   |  |                                                    |  |   |        |  
|Proceeds from loan                                                           |  |                                           |        |   |                                                   |   |            |   |  |                                                    |  |   |        |  
|Payments on long-term debt                                                   |  |                                           | (679    | ) |                                                   |   | (9          | ) |  |                                                    |  |   | (669    | )
|Issuance of debt                                                             |  |                                           |        |   |                                                   |   | 182,841     |   |  |                                                    |  |   |        |  
|Repurchase of equity interest                                                |  |                                           | (1,520  | ) |                                                   |   |            |   |  |                                                    |  |   |        |  
|Capital contributions                                                        |  |                                           | 225     |   |                                                   |   | 249,145     |   |  |                                                    |  |   |        |  
|Cash distributions to joint venture partners                                 |  |                                           | (729    | ) |                                                   |   | (6          | ) |  |                                                    |  |   | (824    | )
|Proceeds from exercise of stock options and employee stock purchase plan     |  |                                           |        |   |                                                   |   |            |   |  |                                                    |  |   | 925     |  
|                                                                             |  |                                           |         |   |                                                   |   |             |   |  |                                                    |  |   |         |  
|Net cash provided by (used for) financing activities                         |  |                                           | (3,052  | ) |                                                   |   | 428,149     |   |  |                                                    |  |   | (568    | )
|                                                                             |  |                                           |         |   |                                                   |   |             |   |  |                                                    |  |   |         |  
|Net decrease in cash and cash equivalents                                    |  |                                           | (75,137 | ) |                                                   |   | (29,187     | ) |  |                                                    |  |   | (55,471 | )
|Cash and cash equivalents at beginning of period                             |  |                                           | 76,326  |   |                                                   |   | 30,734      |   |  |                                                    |  |   | 86,205  |  
|                                                                             |  |                                           |         |   |                                                   |   |             |   |  |                                                    |  |   |         |  
|Cash and cash equivalents at end of period                                   |  | $                                         | 1,189   |   |                                                   | $ | 1,547       |   |  |                                                    |  | $ | 30,734  |  
|                                                                             |  |                                           |         |   |                                                   |   |             |   |  |                                                    |  |   |         |  

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



6



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##### Table of Contents

BROOKSTONE, INC.

Notes to Consolidated Financial Statements



|1. | Basis of Presentation
|-- | ---------------------

The accompanying unaudited
consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America. In the opinion of Brookstone, Inc. (we, us or the Company), these
financial statements contain all adjustments (consisting of only normal recurring adjustments, except as specifically disclosed) necessary to present fairly the financial position, the results of operations, and the cash flows for the periods
reported. The financial statements contained in this quarterly report include the estimated effects of purchase accounting related to the transaction described in Note 3 below. Certain information and footnote disclosures normally included in annual
financial statements presented in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted, for purposes of the interim financial statements. It is suggested that the accompanying
unaudited consolidated financial statements be read in conjunction with the annual financial statements and notes thereto which may be found in the Companys Fiscal 2005 annual report on Form 10-K, as posted on the Companys website at
www.brookstone.com.

In November 2005, the Company changed its fiscal year end from the Saturday nearest the last day in January to
the Saturday nearest the last day in December. Results of operations for the third quarter of Fiscal 2006 are for the successor period of July 2 through September 30, 2006 and the results of operations for the third quarter of Fiscal 2005
are for the predecessor period of July 31, 2005 through October 3, 2005 and the successor period of October 4, 2005 to October 29, 2005. Our presentations through the fourth quarter of 2006 will compare the new quarter end
results with the historical results from the old quarter ends.

We did not recast our interim financial statements for Fiscal 2005 because
it was not cost justifiable or practicable to compile such information.

The results of the thirty-nine week period ended September 30,
2006 are not necessarily indicative of the results for the full fiscal year. The Companys business, like the business of retailers in general, is subject to seasonal influences. Historically, the Companys fourth fiscal quarter, which
includes the winter holiday selling season, has produced a disproportionate amount of the Companys net sales and substantially all of its income from operations. The Company expects that its business will continue to be subject to such
seasonal influences.

Certain amounts in the financial statements of the prior period have been reclassified for comparative purposes.



|2. | Discontinued Operations
|-- | -----------------------

On June 29, 2005, the
Company announced its decision to sell its Gardeners Eden business and has reclassified those operations as discontinued operations in the consolidated statements of operations in accordance with the provisions of Statement of Financial Accounting
Standards (SFAS) No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets.



|3. | The Transaction
|-- | ---------------

On April 15, 2005, certain entities
formed by OSIM, J.W. Childs Associates, L.P. and certain of its affiliates, or JWC, and Temasek Capital (Private) Limited, or Temasek Capital, collectively, our Sponsors, entered into a merger agreement to acquire the Company and its subsidiaries.
The merger agreement was amended as of July 15, 2005 to reduce the aggregate purchase price to approximately $433.3 million and the merger was consummated on October 4, 2005. Concurrently with the consummation of the transactions
contemplated by the merger agreement, our Sponsors made an investment in OSIM Brookstone Holdings, L.P., or OBH LP, of approximately $240.0 million in cash, which investment has been evidenced by the issuance of common and preferred equity to OBH
LP. In addition, certain members of our management invested approximately $9.1 million in the common equity of OBH LP, consisting of the reinvestment by them of a portion of the merger consideration they received in respect of their Brookstone, Inc.
stock options and/or the investment of personal funds. In addition, certain members of our management received profit-sharing interests in OBH LP upon the closing of the merger and have been awarded profit-sharing interests in OBH LP under a newly
established management equity incentive program. Concurrently with the consummation of the transactions contemplated by



7



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##### Table of Contents

the merger agreement, we also entered into a new senior secured credit facility and consummated an
unregistered offering of $185.0 million aggregate principal amount of 12.00% second lien senior secured notes due 2012. Upon consummation of the transactions on October 4, 2005, we became an indirect, wholly owned subsidiary of OBH LP.

The acquisition was accounted for under the purchase method of accounting and in accordance with SFAS No. 141, Business
Combinations. The Company allocated the purchase price to the tangible and identifiable intangible assets and liabilities. Each was recorded at their respective fair values. The excess of cost over the fair value of the identifiable assets and
liabilities was recorded to goodwill.

The following summarizes the opening balance sheet of Brookstone, Inc., which includes the
preliminary application of purchase adjustments to record the acquisition of assets and liabilities at fair value at the acquisition date. The Company adjusted certain contingent liabilities in the Companys Fiscal 2006 third quarter and
anticipates finalizing these adjustments in the Companys Fiscal 2006 fourth quarter.



|                                                                 |  |                |        
|---------------------------------------------------------------- |  | -------------- | -------
|                                                                 |  | (In thousands)
|Total purchase price                                             |  | $              | 448,764
|                                                                 | 
|Cash and cash equivalents                                        |  |                | 30,734 
|Receivables, net                                                 |  |                | 7,383  
|Merchandise inventories                                          |  |                | 99,702 
|Prepaid expense                                                  |  |                | 6,582  
|Property and equipment, net                                      |  |                | 73,568 
|Intangible assets, net                                           |  |                | 132,500
|Other assets                                                     |  |                | 9,429  
|                                                                 |  |                |        
|Total assets acquired                                            |  | $              | 359,898
|                                                                 |  |                |        
|Liabilities:                                                     |  |                |        
|Current Liabilities:                                             |  |                |        
|Accounts payable                                                 |  | $              | 22,138 
|Other current liabilities                                        |  |                | 27,044 
|Other long term liabilities                                      |  |                | 17,423 
|Long term debt                                                   |  |                | 8,090  
|Deferred income tax, net                                         |  |                | 26,418 
|Other party interest in consolidated entities                    |  |                | 963    
|                                                                 |  |                |        
|Total liabilities assumed                                        |  |                | 102,076
|                                                                 |  |                |        
|Net Assets Acquired                                              |  |                | 257,822
|                                                                 |  |                |        
|Excess purchase price over the fair value of net assets acquired |  | $              | 190,942
|                                                                 |  |                |        

The goodwill represented above reflects a $1.5 million reduction over the prior year due to a
refinement of certain estimates recorded in the preliminary purchase price allocation.



8



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##### Table of Contents

|4. | Comprehensive Income (Loss)
|-- | ---------------------------

Other comprehensive income
(loss) consists of the Companys unrealized gain (loss) on its cash flow hedge related to the Companys debt. Total comprehensive income (loss) for the thirteen and thirty-nine week periods ended September 30, 2006 and
October 29, 2005 are presented below (in thousands):



|                                                                      |  |                    |         |   |                                    |   |        |   |  |                                    |  |   |         |  
|--------------------------------------------------------------------- |  | ------------------ | ------- | - | ---------------------------------- | - | ------ | - |  | ---------------------------------- |  | - | ------- | -
|Thirteen-weeks                                                        |  |                    |         |   |                                    |   |        |   |  |                                    |  |   |         |  
|                                                                      |  | Successor          |         |   | Successor                          |   |        |   |  | Predecessor                        | 
|                                                                      |  | September 30, 2006 |         |   | October 4, 2005 toOctober 29, 2005 |   |        |   |  | July 31, 2005 toOctober 3, 2005    | 
|Net loss                                                              |  | $                  | (10,288 | ) |                                    | $ | (6,505 | ) |  |                                    |  | $ | (8,073  | )
|Other
comprehensive income:                                           |  |                    |        |   |                                    |   |       |   |  |                                    |  |   |        |  
|Unrealized gain on cash flow hedge (net of income tax benefit of $24) |  |                    | (39     | ) |                                    |   |       |   |  |                                    |  |   |        |  
|                                                                      |  |                    |         |   |                                    |   |        |   |  |                                    |  |   |         |  
|Total comprehensive loss                                              |  | $                  | (10,327 | ) |                                    | $ | (6,505 | ) |  |                                    |  | $ | (8,073  | )
|                                                                      |  |                    |         |   |                                    |   |        |   |  |                                    |  |   |         |  
|                                                                      |  |                   
|Thirty-nine weeks                                                     |  |                    |         |   |                                    |   |       
|                                                                      |  | Successor          |         |   | Successor                          |   |        |   |  | Predecessor                        | 
|                                                                      |  | September 30, 2006 |         |   | October 4, 2005 toOctober 29, 2005 |   |        |   |  | January 30, 2005 toOctober 3, 2005 | 
|Net loss                                                              |  | $                  | (32,514 | ) |                                    | $ | (6,505 | ) |  |                                    |  | $ | (20,601 | )
|Other
comprehensive income:                                           |  |                    |         |   |                                    |   |        |   |  |                                    |  |   |         |  
|Unrealized gain on cash flow hedge (net of income tax benefit of $13) |  |                    | 10      |   |                                    |   |       |   |  |                                    |  |   |        |  
|                                                                      |  |                    |         |   |                                    |   |        |   |  |                                    |  |   |         |  
|Total comprehensive loss                                              |  | $                  | (32,504 | ) |                                    | $ | (6,505 | ) |  |                                    |  | $ | (20,601 | )
|                                                                      |  |                    |         |   |                                    |   |        |   |  |                                    |  |   |         |  



|5. | Shareholders Equity
|-- | -------------------

In June 2006, the Company entered
into a Separation Agreement with Mr. Michael F. Anthony former President and Chief Executive Officer of the Company. Under the terms of the agreement, the parent company of Brookstone, Inc., OBH LP exercised its right to repurchase
Mr. Anthonys limited partnership interests in OBH LP for $4.6 million. Payment is in three equal installments with the first in June 2006 and then on January 2, 2007 and July 2, 2007. Brookstone Inc. has paid the first $1.5
million installment in June 2006 and plans to pay the remaining disbursements. The total amount has been reflected as a reduction of capital. The remaining $3.1 million has been included in other current liabilities in the accompanying
balance sheet as of September 30, 2006.

During the Companys 2006 third fiscal quarter, the Company entered into a Separation
Agreement with Mr. Alexander M. Winiecki former Executive Vice President, Store Operations of the Company. Under the terms of the agreement, the parent company of Brookstone, Inc., OBH LP exercised its right to repurchase
Mr. Winieckis limited partnership interests in OBH LP for $0.6 million. Payment is in two equal installments on January 2, 2007 and July 2, 2007. Brookstone Inc. intends to pay for such repurchases. The $0.6 million has been
included in other current liabilities in the accompanying balance sheet as of September 30, 2006 and has been reflected as a reduction of capital.



9



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##### Table of Contents

Stock-Based Compensation - In December 2004, the Financial Accounting Standards Board
(FASB) issued SFAS No. 123(R), which requires the measurement of all share-based payments to employees, including grants of employee stock options, using a fair-value-based method and the recording of such expense in the
Companys consolidated statement of operations. The accounting provisions of SFAS No. 123R are effective for fiscal years beginning after June 15, 2005. The Company adopted SFAS No. 123R effective January 1, 2006 under the
modified prospective method of adoption whereby earnings for prior periods will not be restated as though stock-based compensation has been expensed, rather than the modified retrospective method of adoption, which would
entail restatement of previously published earnings.

Prior to January 1, 2006 the Company and the predecessor company accounted for
stock based compensation awards under the intrinsic value method of APB 25. The Company disclosed the fair value of its stock options under the provisions of Statement of Financial Accounting Standards No. 123, Accounting for Stock Based
Compensation (SFAS 123).

The predecessor company had stock option plans in effect that provided for the issuance of
non-qualified and incentive stock options. Stock options were historically granted at or above the market price at the date of the grant. The predecessor company also issued restricted and deferred stock awards under its stock option plans. The
value of the restricted and deferred shares in excess of cost was charged to income ratably over the period during which the awards vested. The unearned compensation related to these awards was included as a component of shareholders equity.
Stock based compensation charged to earnings for the period from January 30, 2005 through October 3, 2005 was $979 thousand. All outstanding stock based awards granted by the predecessor were purchased and retired in the October 3,
2006 transaction discussed in note 3.

Certain members of the Companys management hold Class B limited partnership interests in OBH
LP. These interests vest either ratably over five years or require certain financial returns be met. Management has determined that these awards should be accounted for under push down accounting. The awards were deemed to have a zero intrinsic
value at the time of grant. Under APB 25, no compensation was recorded for the period October 3, 2006 through October 29, 2006. Under FSAS 123R, the Company estimated the fair value of these awards on the date of grant using Black-Scholes
option-pricing model. The total compensation expense is recognized on a straightline basis over the five-year vesting period. The performance-based awards will be recognized at the time in which the financial returns are met. During the thirteen and
thirty-nine week periods ended September 30, 2006 the Company recognized a related compensation charge of $333 thousand and $834 thousand classified in Selling, General and Administrative Expenses. The related income tax benefit was $122
thousand and $293 thousand, respectively. As of September 30, 2006, unrecognized compensation related to the time vested awards was $5.4 million. The Black-Scholes calculation generated a per share fair value of $8.07 using the following
assumptions:



|                                |  |           |  
|------------------------------- |  | --------- | -
|                                |  | Successor |  
|Expected stock price volatility |  | 53.0      | %
|Risk-free interest rate         |  | 4.2       | %
|Expected life of options        |  | 5 years   |  
|Dividend yield                  |  |          |  



10



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##### Table of Contents

The following table details the pro forma net income effect had compensation expense for the stock based
award granted by the Company and predecessor been recognized using the fair value method.



|                                                                                                                       |  |                                               |        |   |  |  |                                                |   |        |                                                   |  |   |         |  
|---------------------------------------------------------------------------------------------------------------------- |  | --------------------------------------------- | ------ | - |  |  | ---------------------------------------------- | - | ------ | ------------------------------------------------- |  | - | ------- | -
|                                                                                                                       |  | Successor                                     |        |   |  |  | Predecessor                                    |   |        | Predecessor                                       | 
|                                                                                                                       |  | Period October 4, 2005throughOctober 29, 2005 |        |   |  |  | Period fromJuly 30, 2005throughOctober 3, 2005 |   |        | Period fromJanuary 30, 2005throughOctober 3, 2005 | 
|Net loss  as reported                                                                                                 |  | $                                             | (6,505 | ) |  |  |                                                | $ | (8,073 | )                                                 |  | $ | (20,601 | )
|Add: Stock
based employee compensation expense included in reported net income, net of related tax effects             |  |                                               |       |   |  |  |                                                |   | 157    |                                                   |  |   | 638     |  
|Deduct: Stock-based employee compensation expense determined under fair value based method, net of related tax
effects |  |                                               | (69    | ) |  |  |                                                |   | 54     |                                                   |  |   | (701    | )
|                                                                                                                       |  |                                               |        |   |  |  |                                                |   |        |                                                   |  |   |         |  
|Net loss - pro forma                                                                                                   |  | $                                             | (6,574 | ) |  |  |                                                | $ | (7,862 | )                                                 |  | $ | (20,664 | )
|                                                                                                                       |  |                                               |        |   |  |  |                                                |   |        |                                                   |  |   |         |  

The above pro forma stock-based compensation was calculated using the Black-Scholes model. The assumptions used by
the Successor Company were the same as those discussed above. The assumptions used by the predecessor company were disclosed in the Companys Form S-4.



|6. | Contingencies
|-- | -------------

On September 15, 2004, a putative
class action was commenced against us in the California Superior Court in Los Angeles County. The complaint, as amended, alleges, among other things, that we engaged in unfair business practices under Californias Unfair Competition Laws in
connection with the manufacture and sale of certain air purifiers. On May 4, 2006, the Superior Court issued a decision certifying that the action may be brought on a class-wide basis. A trial is scheduled for March 5, 2007. We believe
this lawsuit is without merit and intend to defend ourselves vigorously if the matter cannot otherwise be resolved.

On June 23, 2005,
we were served with a lawsuit in the United States District Court for the Southern District of Alabama (Southern Division) as a class action on behalf of all consumers who purchased a certain air purifier from us alleging, among other things, that
such products were not suitable for the purposes for which they were intended. The lawsuit seeks unspecified damages. After the plaintiffs motion for class certification and our opposition to the motion were filed with the court, the parties
engaged in settlement negotiations with the assistance of a professional mediator. On October 18, 2006, the parties reported to the court that they had settled the plaintiffs claims against us. The amounts we would be required to pay
under the settlement, which is still subject to final approval by the court, have been recorded as an adjustment to the successor companys opening Balance Sheet. There is no finding or admission of fault by us as part of the settlement.

We are also involved in various legal proceedings incidental to the conduct of our business. We do not believe that any of these legal
proceedings will have a material adverse effect on our financial condition, results of operations, or cash flows.



|7. | Segment Information
|-- | -------------------

Business conducted by the Company is
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 two catalog titles (Hard-to-Find Toolsand Brookstone Catalog), the Internet site www.Brookstone.com and sales to corporate customers. Direct marketing product
distribution is conducted through the Companys direct marketing customer sales and contact center, through its distribution facility located in Mexico, Missouri and by its vendors. Both segments of the Company sell similar products, although
not all Company products are fully available within both segments.



11



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##### Table of Contents

All costs directly attributable to the direct marketing segment are so charged while all remaining
operating costs are charged to the retail segment. The Companys management does not review assets by segment and it is impracticable for the Company to report revenues by product or similar group products.

The tables below disclose segment net sales and pre-tax loss for the thirteen and thirty-nine week periods ended September 30, 2006 and
October 29, 2005 (in thousands).



|                    |  |                                               |         |   |                                    |   |             |   |  |                                 |  |   |        |  
|------------------- |  | --------------------------------------------- | ------- | - | ---------------------------------- | - | ----------- | - |  | ------------------------------- |  | - | ------ | -
|                    |  | Net Sales                                     |        
|                    |  | Successor                                     |         |   |                                    |   | Predecessor |  
|                    |  | Thirteen weeksSeptember 30, 2006              |         |   | October 4, 2005 toOctober 29, 2005 |   |             |   |  | July 31, 2005 toOctober 3, 2005 | 
|Reportable segment: |  |                                               |         |   |                                    |   |             |   |  |                                 |  |   |        |  
|Retail              |  | $                                             | 72,295  |   |                                    | $ | 18,762      |   |  |                                 |  | $ | 44,021 |  
|Direct Marketing    |  |                                               | 15,478  |   |                                    |   | 6,175       |   |  |                                 |  |   | 7,762  |  
|Reconciling
items:  |  |                                               |         |   |                                    |   |             |   |  |                                 |  |   |        |  
|Interest expense    |  |                                               |        |   |                                    |   |            |   |  |                                 |  |   |       |  
|Interest income     |  |                                               |        |   |                                    |   |            |   |  |                                 |  |   |       |  
|                    |  |                                               |         |   |                                    |   |             |   |  |                                 |  |   |        |  
|Consolidated:       |  | $                                             | 87,773  |   |                                    | $ | 24,937      |   |  |                                 |  | $ | 51,783 |  
|                    |  |                                               |         |   |                                    |   |             |   |  |                                 |  |   |        |  
|                    | 
|                    |  | Loss Before Taxes and Discontinued Operations |        
|                    |  | Successor                                     |         |   |                                    |   | Predecessor |  
|                    |  | Thirteen weeksSeptember 30, 2006              |         |   | October 4, 2005 toOctober 29, 2005 |   |             |   |  | July 31, 2005 toOctober 3, 2005 | 
|Reportable segment: |  |                                               |         |   |                                    |   |             |   |  |                                 |  |   |        |  
|Retail              |  | $                                             | (11,112 | ) |                                    | $ | (6,842      | ) |  |                                 |  | $ | (9,232 | )
|Direct Marketing    |  |                                               | 1,355   |   |                                    |   | 745         |   |  |                                 |  |   | 734    |  
|Reconciling
items:  |  |                                               |         |   |                                    |   |             |   |  |                                 |  |   |        |  
|Interest expense    |  |                                               | (6,646  | ) |                                    |   | (4,273      | ) |  |                                 |  |   | (142   | )
|Interest income     |  |                                               | 252     |   |                                    |   | 247         |   |  |                                 |  |   | 14     |  
|                    |  |                                               |         |   |                                    |   |             |   |  |                                 |  |   |        |  
|Consolidated:       |  | $                                             | (16,151 | ) |                                    | $ | (10,123     | ) |  |                                 |  | $ | (8,626 | )
|                    |  |                                               |         |   |                                    |   |             |   |  |                                 |  |   |        |  



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|                    |  |                                               |         |   |                                    |   |             |   |  |                                    |  |   |         |  
|------------------- |  | --------------------------------------------- | ------- | - | ---------------------------------- | - | ----------- | - |  | ---------------------------------- |  | - | ------- | -
|                    |  | Net Sales                                     |        
|                    |  | Successor                                     |         |   |                                    |   | Predecessor |  
|                    |  | Thirty-nine weeksSeptember 30, 2006           |         |   | October 4, 2005 toOctober 29, 2005 |   |             |   |  | January 30, 2005 toOctober 3, 2005 | 
|Reportable segment: |  |                                               |         |   |                                    |   |             |   |  |                                    |  |   |         |  
|Retail              |  | $                                             | 210,844 |   |                                    | $ | 18,762      |   |  |                                    |  | $ | 184,312 |  
|Direct Marketing    |  |                                               | 44,960  |   |                                    |   | 6,175       |   |  |                                    |  |   | 31,779  |  
|Reconciling
items:  |  |                                               |         |   |                                    |   |             |   |  |                                    |  |   |         |  
|Interest expense    |  |                                               |        |   |                                    |   |            |   |  |                                    |  |   |        |  
|Interest income     |  |                                               |        |   |                                    |   |            |   |  |                                    |  |   |        |  
|                    |  |                                               |         |   |                                    |   |             |   |  |                                    |  |   |         |  
|Consolidated:       |  | $                                             | 255,804 |   |                                    | $ | 24,937      |   |  |                                    |  | $ | 216,091 |  
|                    |  |                                               |         |   |                                    |   |             |   |  |                                    |  |   |         |  
|                    | 
|                    |  | Loss Before Taxes and Discontinued Operations |        
|                    |  | Successor                                     |         |   |                                    |   | Predecessor |  
|                    |  | Thirty-nine weeksSeptember 30, 2006           |         |   | October 4, 2005 toOctober 29, 2005 |   |             |   |  | January 30, 2005 toOctober 3, 2005 | 
|Reportable segment: |  |                                               |         |   |                                    |   |             |   |  |                                    |  |   |         |  
|Retail              |  | $                                             | (34,478 | ) |                                    | $ | (6,842      | ) |  |                                    |  | $ | (24,993 | )
|Direct Marketing    |  |                                               | 3,276   |   |                                    |   | 745         |   |  |                                    |  |   | 2,164   |  
|Reconciling
items:  |  |                                               |         |   |                                    |   |             |   |  |                                    |  |   |         |  
|Interest expense    |  |                                               | (19,616 | ) |                                    |   | (4,273      | ) |  |                                    |  |   | (978    | )
|Interest income     |  |                                               | 1,246   |   |                                    |   | 247         |   |  |                                    |  |   | 953     |  
|                    |  |                                               |         |   |                                    |   |             |   |  |                                    |  |   |         |  
|Consolidated:       |  | $                                             | (49,572 | ) |                                    | $ | (10,123     | ) |  |                                    |  | $ | (22,854 | )
|                    |  |                                               |         |   |                                    |   |             |   |  |                                    |  |   |         |  



|8. | Joint Ventures
|-- | --------------

Two airport stores in Dallas Fort Worth,
two airport stores in Las Vegas, two airport stores in Chicago and four airport stores in Atlanta operate under separate joint venture arrangements with respect to each city. The Company has a 65% ownership interest in the Dallas Fort Worth venture,
an 80% ownership interest in the Las Vegas venture, a 70% ownership interest in the Chicago venture and a 49% ownership interest in the Atlanta venture. The Dallas Fort Worth, Las Vegas and Chicago ventures have been consolidated since inception
(Fiscal 2005 for the Dallas Fort Worth venture, Fiscal 2003 for the Las Vegas venture and Fiscal 2001 for the Chicago venture) based on the Companys ownership of the majority voting interests. Prior to Fiscal 2004, other party interests,
consisting of the Chicago and Las Vegas partners interests, were included in Selling, General and Administrative Expenses due to immateriality.

Under the requirements of the FASBs Interpretation No. 46(R) (FIN 46(R)), variable interest entities are required to be consolidated if the total equity investment at risk is not sufficient to
permit the entity to finance its activities without financial support or the equity investors lack certain specified characteristics of a controlling financial interest. The Company reviewed the requirements of FIN 46(R) and determined that the
Atlanta joint venture qualifies as a Variable Interest Entity (VIE) as of its inception date in Fiscal 2001 and that the Company is the primary beneficiary of the VIE.



|9. | Post-Retirement Pension and Medical Benefit Plans
|-- | -------------------------------------------------

The
Company contributed more than the minimum required amount for the past year to the pension plan. The Company is required to contribute approximately $100,000 in Fiscal 2006. In addition, in Fiscal 2006, the Company intends to contribute
approximately $650,000 to maintain a funded status that is more than the minimal required level under ERISA.



13



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##### Table of Contents

The components of net periodic pension cost were as follows:



|                                   |  |                                           |          |   |                                    |   |             |   |  |                                    |  |   |          |  
|---------------------------------- |  | ----------------------------------------- | -------- | - | ---------------------------------- | - | ----------- | - |  | ---------------------------------- |  | - | -------- | -
|                                   |  | Successor                                 |          |   |                                    |   | Predecessor |  
|                                   |  | Thirteen WeeksEnded September 30, 2006    |          |   | October 4, 2005 toOctober 29, 2005 |   |             |   |  | July 31, 2005 toOctober 3, 2005    | 
|Service cost                       |  | $                                         | 31,000   |   |                                    | $ | 9,000       |   |  |                                    |  | $ | 21,000   |  
|Interest cost                      |  |                                           | 78,000   |   |                                    |   | 22,200      |   |  |                                    |  |   | 51,000   |  
|Expected return on plan assets     |  |                                           | (77,000  | ) |                                    |   | (21,700     | ) |  |                                    |  |   | (51,000  | )
|Amortization of prior service cost |  |                                           |         |   |                                    |   |            |   |  |                                    |  |   |         |  
|Recognized net actuarial loss      |  |                                           |         |   |                                    |   |             |   |  |                                    |  |   | 22,000   |  
|                                   |  |                                           |          |   |                                    |   |             |   |  |                                    |  |   |          |  
|Net periodic benefit cost          |  | $                                         | 32,000   |   |                                    | $ | 9,500       |   |  |                                    |  | $ | 41,000   |  
|                                   |  |                                           |          |   |                                    |   |             |   |  |                                    |  |   |          |  
|                                   |  |                                           |         
|                                   |  | Successor                                 |          |   |                                    |   | Predecessor |  
|                                   |  | Thirty-Nine WeeksEnded September 30, 2005 |          |   | October 4, 2005 toOctober 29, 2005 |   |             |   |  | January 30, 2005 toOctober 3, 2005 | 
|Service cost                       |  | $                                         | 93,000   |   |                                    | $ | 9,000       |   |  |                                    |  | $ | 83,000   |  
|Interest cost                      |  |                                           | 234,000  |   |                                    |   | 22,200      |   |  |                                    |  |   | 205,000  |  
|Expected return on plan assets     |  |                                           | (231,000 | ) |                                    |   | (21,700     | ) |  |                                    |  |   | (201,000 | )
|Amortization of prior service cost |  |                                           |         |   |                                    |   |            |   |  |                                    |  |   |         |  
|Recognized net actuarial loss      |  |                                           |          |   |                                    |   |             |   |  |                                    |  |   | 82,000   |  
|                                   |  |                                           |          |   |                                    |   |             |   |  |                                    |  |   |          |  
|Net periodic benefit cost          |  | $                                         | 96,000   |   |                                    | $ | 9,500       |   |  |                                    |  | $ | 169,000  |  
|                                   |  |                                           |          |   |                                    |   |             |   |  |                                    |  |   |          |  

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



|                                   |                                           |           |                                    |  |   |             |                                    |  |  |   |         |  
|---------------------------------- | ----------------------------------------- | --------- | ---------------------------------- |  | - | ----------- | ---------------------------------- |  |  | - | ------- | -
|                                   |                                           | Successor |                                    |  |   | Predecessor |                                   
|                                   | Thirteen WeeksEnded September 30, 2005    |           | October 4, 2005 toOctober 29, 2005 |  |   |             | July 31, 2005 toOctober 3, 2005    | 
|Service cost                       |                                           | $         | 4,000                              |  | $ | 1,400       |                                    |  |  | $ | 1,000   |  
|Interest cost                      |                                           |           | 15,000                             |  |   | 4,900       |                                    |  |  |   | 4,000   |  
|Amortization of prior service cost |                                           |           |                                    |  |   |             |                                    |  |  |   | (10,000 | )
|Recognized net actuarial gain      |                                           |           |                                    |  |   |             |                                    |  |  |   | (11,000 | )
|                                   |                                           |           |                                    |  |   |             |                                    |  |  |   |         |  
|Net periodic benefit cost          |                                           | $         | 19,000                             |  | $ | 6,300       |                                    |  |  | $ | (16,000 | )
|                                   |                                           |           |                                    |  |   |             |                                    |  |  |   |         |  
|                                   |                                           |           |                                   
|                                   |                                           | Successor |                                    |  |   | Predecessor |                                   
|                                   | Thirty-Nine WeeksEnded September 30, 2005 |           | October 4, 2005 toOctober 29, 2005 |  |   |             | January 30, 2005 toOctober 3, 2005 | 
|Service cost                       |                                           | $         | 12,000                             |  | $ | 1,400       |                                    |  |  | $ | 11,000  |  
|Interest cost                      |                                           |           | 45,000                             |  |   | 4,900       |                                    |  |  |   | 38,000  |  
|Amortization of prior service cost |                                           |           |                                    |  |   |             |                                    |  |  |   | (40,000 | )
|Recognized net actuarial gain      |                                           |           |                                    |  |   |             |                                    |  |  |   | (13,000 | )
|                                   |                                           |           |                                    |  |   |             |                                    |  |  |   |         |  
|Net periodic benefit cost          |                                           | $         | 57,000                             |  | $ | 6,300       |                                    |  |  | $ | (4,000  | )
|                                   |                                           |           |                                    |  |   |             |                                    |  |  |   |         |  



|10. | Debt
|--- | ----

In connection with the transaction, the Company
issued $185.0 million aggregate principle amount of 12.0% Second Lien Senior Secured Notes due October 15, 2012. These notes bear interest at 12% per annum payable in semi-annual installments on April and October of each year commencing
April 15, 2006.

In addition, the senior secured credit facility entered into by the Company concurrently with the closing of the



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transactions provides for loans in an aggregate amount of up to $100.0 million (subject to a borrowing
base limitation) and includes a letter of credit subfacility, a swingline subfacility and a stretch loan subfacility providing for increased advance rates on the borrowing base assets.

Lastly, the Company has a real estate loan on its headquarters facility and has a capital lease obligation on its Mexico, Missouri distribution center.

As of December 31, 2005 and September 30, 2006, the Company was in compliance with all related debt covenants.



|11. | Recent Accounting Pronouncements
|--- | --------------------------------

In June 2006, the FASB
issued FASB Interpretation No. (FIN) 48, Accounting for Uncertainty in Income Taxes  An Interpretation of FASB Statement No. 109, which prescribes a recognition threshold and measurement attribute for the financial
statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 will be effective for fiscal years beginning after December 15, 2006. The Company has not yet completed its evaluation of the impact
of adoption on the Companys financial position or results of operations.

In September 2006, the FASB issued SFAS No. 158,
Employers Accounting for Defined Benefit Pension and Other Postretirement Plans(an amendment of FASB Statements No. 87, 88, 106, and 132R). SFAS 158 requires an employer to recognize the funded status of its defined benefit
pension and postretirement plans on its statement of financial position and to recognize as a component of other comprehensive income, net of taxes, the gains or losses and prior service credits that arise during the period but are not recognized as
components of net periodic benefit costs. Upon initial adoption, SFAS 158 requires the recognition of previously unrecognized actuarial gains and losses, prior service costs or credits and net transition amounts within Accumulated other
comprehensive income, net of tax. The provisions of SFAS 158 are effective for fiscal years ending after June 15, 2007. The Company has not yet completed its evaluation of the impact of adoption on the Companys financial position or
results of operations.

In September 2006, the FASB issued SFAS No. 157 Fair Value Measurements. SFAS 157 provides guidance for,
among other things, the definition of fair value and the methods used to measure fair value. The provisions of SFAS 157 are effective for fiscal years beginning after November 15, 2007. The Company has not yet completed its evaluation of the
impact of adoption on the Companys financial position or results of operations.



|12. | Condensed Consolidating Financial Information
|--- | ---------------------------------------------

The
following condensed consolidating financial information presents (1) Brookstone, Inc., the parent and a guarantor of the 12% Second Lien Senior Secured notes due 2012 (the notes), (2) Brookstone Company, Inc., the issuer of the
notes, (3) Brookstone, Inc.s guarantor subsidiaries of the notes (all of which are wholly-owned subsidiaries of Brookstone, Inc.) and (4) Brookstone, Inc.s non-guarantor, non-wholly owned subsidiaries. Separate financial
statements of the parent and guarantor subsidiaries are not presented because they are jointly, severally, fully and unconditionally liable under the guarantees. The investments in subsidiaries are accounted for under the equity basis of accounting.

Included in other expenses are revenues and expenses from management and royalty agreements among Brookstone, Inc. and its subsidiaries,
which are eliminated in consolidation.

Financial information for the predecessor periods, prior to the issuance of the notes, present
Brookstone, Inc., Brookstone Company, Inc. and its subsidiaries as if the guarantor agreements existed during such periods.



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Brookstone, Inc.

Successor Condensed Consolidating Balance Sheet

October 29, 2005

(In thousands)

(Unaudited)



|                                               |  |        |         |        |   |         |                        |  |   |                            |   |              |   |       |              |   |          |   |  |   |        
|---------------------------------------------- |  | ------ | ------- | ------ | - | ------- | ---------------------- |  | - | -------------------------- | - | ------------ | - | ----- | ------------ | - | -------- | - |  | - | -------
|                                               |  | Parent |         | Issuer |   |         | Guarantor Subsidiaries |  |   | Non-Guarantor Subsidiaries |   | Eliminations |   |       | Consolidated
|Assets                                         |  |        |         |        |   |         |                        |  |   |                            |   |              |   |       |              |   |          |   |  |   |        
|Current assets:                                |  |        |         |        |   |         |                        |  |   |                            |   |              |   |       |              |   |          |   |  |   |        
|Cash and cash equivalents                      |  | $      |        |        | $ | 1,321   |                        |  | $ | 221                        |   |              | $ | 5     |              | $ |         |   |  | $ | 1,547  
|Receivables, net                               |  |        |        |        |   | 3,101   |                        |  |   | 2,344                      |   |              |   | 1,770 |              |   |         |   |  |   | 7,215  
|Merchandise inventories                        |  |        |        |        |   | 32,999  |                        |  |   | 82,721                     |   |              |   | 164   |              |   | (1,028   | ) |  |   | 114,856
|Deferred income taxes, net                     |  |        |        |        |   | (6,118  | )                      |  |   | 33,074                     |   |              |   |      |              |   |         |   |  |   | 26,956 
|Prepaid expenses                               |  |        |        |        |   | 833     |                        |  |   | 5,387                      |   |              |   |      |              |   |         |   |  |   | 6,220  
|                                               |  |        |         |        |   |         |                        |  |   |                            |   |              |   |       |              |   |          |   |  |   |        
|Total current assets                           |  |        |        |        |   | 32,136  |                        |  |   | 123,747                    |   |              |   | 1,939 |              |   | (1,028   | ) |  |   | 156,794
|                                               |  |        |         |        |   |        
|Property, plant and equipment, net             |  |        |        |        |   | 18,973  |                        |  |   | 56,290                     |   |              |   | 997   |              |   |         |   |  |   | 76,260 
|Intangible assets, net                         |  |        |        |        |   | 132,424 |                        |  |   |                           |   |              |   |      |              |   |         |   |  |   | 132,424
|Goodwill                                       |  |        |        |        |   | 192,453 |                        |  |   |                           |   |              |   |      |              |   |         |   |  |   | 192,453
|Other assets                                   |  |        | 242,640 |        |   | 182,885 |                        |  |   | (367                       | ) |              |   |      |              |   | (398,865 | ) |  |   | 26,293 
|                                               |  |        |         |        |   |         |                        |  |   |                            |   |              |   |       |              |   |          |   |  |   |        
|Total assets                                   |  | $      | 242,640 |        | $ | 558,871 |                        |  | $ | 179,670                    |   |              | $ | 2,936 |              | $ | (399,893 | ) |  | $ | 584,224
|                                               |  |        |         |        |   |         |                        |  |   |                            |   |              |   |       |              |   |          |   |  |   |        
|Current liabilities:                           |  |        |         |        |   |         |                        |  |   |                            |   |              |   |       |              |   |          |   |  |   |        
|Short-term borrowings                          |  |        |        |        |   | 11,150  |                        |  |   |                           |   |              |   |      |              |   |         |   |  |   | 11,150 
|Accounts payable                               |  |        |        |        |   | 36,289  |                        |  |   | 3,312                      |   |              |   |      |              |   |         |   |  |   | 39,601 
|Other current liabilities                      |  |        |        |        |   | 23,185  |                        |  |   | 9,264                      |   |              |   |      |              |   |         |   |  |   | 32,449 
|                                               |  |        |         |        |   |         |                        |  |   |                            |   |              |   |       |              |   |          |   |  |   |        
|Total current liabilities                      |  |        |        |        |   | 70,624  |                        |  |   | 12,576                     |   |              |   |      |              |   |         |   |  |   | 83,200 
|                                               |  |        |         |        |   |        
|Other long-term liabilities                    |  |        |        |        |   | 7,029   |                        |  |   | 127,055                    |   |              |   |      |              |   | (117,111 | ) |  |   | 16,973 
|Long-term debt                                 |  |        |        |        |   | 189,133 |                        |  |   | 1,815                      |   |              |   |      |              |   |         |   |  |   | 190,948
|Long term tax liability                        |  |        |        |        |   | 49,445  |                        |  |   | (10                        | ) |              |   |      |              |   |         |   |  |   | 49,435 
|Other party interests in consolidated entities |  |        |        |        |   |        |                        |  |   |                           |   |              |   |       |              |   | 1,028    |   |  |   | 1,028  
|Total shareholders equity                     |  |        | 242,640 |        |   | 242,640 |                        |  |   | 38,234                     |   |              |   | 2,936 |              |   | (283,810 | ) |  |   | 242,640
|                                               |  |        |         |        |   |         |                        |  |   |                            |   |              |   |       |              |   |          |   |  |   |        
|Total liabilities and shareholders equity     |  | $      | 242,640 |        | $ | 558,871 |                        |  | $ | 179,670                    |   |              | $ | 2,936 |              | $ | (399,893 | ) |  | $ | 584,224
|                                               |  |        |         |        |   |         |                        |  |   |                            |   |              |   |       |              |   |          |   |  |   |        



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Brookstone, Inc.

Successor Condensed Consolidating Balance Sheet

September 30, 2006

(In thousands)

(Unaudited)



|                                               |  |        |         |        |   |         |                        |  |   |                            |   |              |   |       |              |   |          |   |  |   |        
|---------------------------------------------- |  | ------ | ------- | ------ | - | ------- | ---------------------- |  | - | -------------------------- | - | ------------ | - | ----- | ------------ | - | -------- | - |  | - | -------
|                                               |  | Parent |         | Issuer |   |         | Guarantor Subsidiaries |  |   | Non-Guarantor Subsidiaries |   | Eliminations |   |       | Consolidated
|Assets                                         |  |        |         |        |   |         |                        |  |   |                            |   |              |   |       |              |   |          |   |  |   |        
|Current assets:                                |  |        |         |        |   |         |                        |  |   |                            |   |              |   |       |              |   |          |   |  |   |        
|Cash and cash equivalents                      |  | $      |        |        | $ | 923     |                        |  | $ | 260                        |   |              | $ | 6     |              | $ |         |   |  | $ | 1,189  
|Receivables, net                               |  |        |        |        |   | 3,734   |                        |  |   | 5,530                      |   |              |   | 2,764 |              |   | (245     | ) |  |   | 11,783 
|Merchandise inventories                        |  |        |        |        |   | 27,947  |                        |  |   | 67,746                     |   |              |   | 205   |              |   |         |   |  |   | 95,898 
|Deferred income taxes, net                     |  |        |        |        |   | (9,847  | )                      |  |   | 30,743                     |   |              |   |      |              |   |         |   |  |   | 20,896 
|Prepaid expenses                               |  |        |        |        |   | 1,772   |                        |  |   | 7,282                      |   |              |   |      |              |   |         |   |  |   | 9,054  
|                                               |  |        |         |        |   |         |                        |  |   |                            |   |              |   |       |              |   |          |   |  |   |        
|Total current assets                           |  |        |        |        |   | 24,529  |                        |  |   | 111,561                    |   |              |   | 2,975 |              |   | (245     | ) |  |   | 138,820
|                                               |  |        |         |        |   |        
|Property, plant and equipment, net             |  |        |        |        |   | 18,648  |                        |  |   | 53,128                     |   |              |   | 1,275 |              |   |         |   |  |   | 73,051 
|Intangible assets, net                         |  |        |        |        |   | 131,583 |                        |  |   |                           |   |              |   |      |              |   |         |   |  |   | 131,583
|Goodwill                                       |  |        |        |        |   | 190,942 |                        |  |   |                           |   |              |   |      |              |   |         |   |  |   | 190,942
|Other assets                                   |  |        | 229,700 |        |   | 165,111 |                        |  |   | (6,653                     | ) |              |   |      |              |   | (368,588 | ) |  |   | 19,570 
|                                               |  |        |         |        |   |         |                        |  |   |                            |   |              |   |       |              |   |          |   |  |   |        
|Total assets                                   |  | $      | 229,700 |        | $ | 530,813 |                        |  | $ | 158,036                    |   |              | $ | 4,250 |              | $ | (368,833 | ) |  | $ | 553,966
|                                               |  |        |         |        |   |         |                        |  |   |                            |   |              |   |       |              |   |          |   |  |   |        
|Current liabilities:                           |  |        |         |        |   |         |                        |  |   |                            |   |              |   |       |              |   |          |   |  |   |        
|Accounts payable                               |  |        |        |        |   | 26,891  |                        |  |   |                           |   |              |   |      |              |   |          |   |  |   | 26,891 
|Other current liabilities                      |  |        |        |        |   | 33,141  |                        |  |   | 8,928                      |   |              |   | 245   |              |   | (244     | ) |  |   | 42,070 
|                                               |  |        |         |        |   |         |                        |  |   |                            |   |              |   |       |              |   |          |   |  |   |        
|Total current liabilities                      |  |        |        |        |   | 60,032  |                        |  |   | 8,928                      |   |              |   | 245   |              |   | (244     | ) |  |   | 68,961 
|                                               |  |        |         |        |   |        
|Other long-term liabilities                    |  |        |        |        |   | 8,352   |                        |  |   | 103,073                    |   |              |   |      |              |   | (91,788  | ) |  |   | 19,637 
|Long-term debt                                 |  |        |        |        |   | 188,683 |                        |  |   | 1,719                      |   |              |   |      |              |   |         |   |  |   | 190,402
|Long term tax liability                        |  |        |        |        |   | 44,046  |                        |  |   | (177                       | ) |              |   |      |              |   |         |   |  |   | 43,869 
|Other party interests in consolidated entities |  |        |        |        |   |        |                        |  |   |                           |   |              |   |      |              |   | 1,397    |   |  |   | 1,397  
|Total shareholders equity                     |  |        | 229,700 |        |   | 229,700 |                        |  |   | 44,493                     |   |              |   | 4,005 |              |   | (278,198 | ) |  |   | 229,700
|                                               |  |        |         |        |   |         |                        |  |   |                            |   |              |   |       |              |   |          |   |  |   |        
|Total liabilities and shareholders equity     |  | $      | 229,700 |        | $ | 530,813 |                        |  | $ | 158,036                    |   |              | $ | 4,250 |              | $ | (368,833 | ) |  | $ | 553,966
|                                               |  |        |         |        |   |         |                        |  |   |                            |   |              |   |       |              |   |          |   |  |   |        



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Brookstone, Inc.

Successor Condensed Consolidating Balance Sheet

December 31, 2005

(In thousands)

(Unaudited)



|                                               |  |        |         |        |   |                        |  |   |                            |   |              |   |       |              |   |          |   |  |   |        
|---------------------------------------------- |  | ------ | ------- | ------ | - | ---------------------- |  | - | -------------------------- | - | ------------ | - | ----- | ------------ | - | -------- | - |  | - | -------
|                                               |  | Parent |         | Issuer |   | Guarantor Subsidiaries |  |   | Non-Guarantor Subsidiaries |   | Eliminations |   |       | Consolidated
|Assets                                         |  |        |         |        |   |                        |  |   |                            |   |              |   |       |              |   |          |   |  |   |        
|Current assets:                                |  |        |         |        |   |                        |  |   |                            |   |              |   |       |              |   |          |   |  |   |        
|Cash and cash equivalents                      |  | $      |        |        | $ | 75,926                 |  | $ | 394                        |   |              | $ | 6     |              | $ |         |   |  | $ | 76,326 
|Receivables, net                               |  |        |        |        |   | 3,242                  |  |   | 6,014                      |   |              |   | 1,895 |              |   | (245     | ) |  |   | 10,906 
|Merchandise inventories                        |  |        |        |        |   | 3,817                  |  |   | 71,733                     |   |              |   | 152   |              |   | 14       |   |  |   | 75,716 
|Deferred income taxes, net                     |  |        |        |        |   | 1,119                  |  |   | 3,828                      |   |              |   |      |              |   |         |   |  |   | 4,947  
|Prepaid expenses                               |  |        |        |        |   | 4,235                  |  |   | 4,882                      |   |              |   |      |              |   |         |   |  |   | 9,117  
|                                               |  |        |         |        |   |                        |  |   |                            |   |              |   |       |              |   |          |   |  |   |        
|Total current assets                           |  |        |        |        |   | 88,339                 |  |   | 86,851                     |   |              |   | 2,053 |              |   | (231     | ) |  |   | 177,012
|                                               |  |        |         |        |   |                       
|Property, plant and equipment, net             |  |        |        |        |   | 19,211                 |  |   | 55,494                     |   |              |   | 1,623 |              |   |         |   |  |   | 76,328 
|Intangible assets, net                         |  |        |        |        |   | 132,271                |  |   |                           |   |              |   |      |              |   |         |   |  |   | 132,271
|Goodwill                                       |  |        |        |        |   | 192,453                |  |   |                           |   |              |   |      |              |   |         |   |  |   | 192,453
|Other assets                                   |  |        | 266,322 |        |   | 131,332                |  |   | 55,824                     |   |              |   |      |              |   | (434,115 | ) |  |   | 19,363 
|                                               |  |        |         |        |   |                        |  |   |                            |   |              |   |       |              |   |          |   |  |   |        
|Total assets                                   |  | $      | 266,322 |        | $ | 563,606                |  | $ | 198,169                    |   |              | $ | 3,676 |              | $ | (434,346 | ) |  | $ | 597,427
|                                               |  |        |         |        |   |                        |  |   |                            |   |              |   |       |              |   |          |   |  |   |        
|Liabilities and Shareholders Equity           |  |        |         |        |   |                        |  |   |                            |   |              |   |       |              |   |          |   |  |   |        
|Current liabilities:                           |  |        |         |        |   |                        |  |   |                            |   |              |   |       |              |   |          |   |  |   |        
|Accounts payable                               |  | $      |        |        | $ | 22,012                 |  | $ |                           |   |              | $ |      |              | $ |         |   |  | $ | 22,012 
|Other current liabilities                      |  |        |        |        |   | 32,828                 |  |   | 21,887                     |   |              |   | 244   |              |   | (245     | ) |  |   | 54,714 
|                                               |  |        |         |        |   |                        |  |   |                            |   |              |   |       |              |   |          |   |  |   |        
|Total current liabilities                      |  |        |        |        |   | 54,840                 |  |   | 21,887                     |   |              |   | 244   |              |   | (245     | ) |  |   | 76,726 
|                                               |  |        |         |        |   |                       
|Other long-term liabilities                    |  |        |        |        |   | 7,259                  |  |   | 109,838                    |   |              |   |      |              |   | (98,135  | ) |  |   | 18,962 
|Long-term debt                                 |  |        |        |        |   | 189,051                |  |   | 1,798                      |   |              |   |      |              |   |         |   |  |   | 190,849
|Long-term tax liability                        |  |        |        |        |   | 46,134                 |  |   | (2,742                     | ) |              |   |      |              |   |         |   |  |   | 43,392 
|Other party interests in consolidated entities |  |        |        |        |   |                       |  |   |                           |   |              |   |      |              |   | 1,176    |   |  |   | 1,176  
|Total shareholders equity                     |  |        | 266,322 |        |   | 266,322                |  |   | 67,388                     |   |              |   | 3,432 |              |   | (337,142 | ) |  |   | 266,322
|                                               |  |        |         |        |   |                        |  |   |                            |   |              |   |       |              |   |          |   |  |   |        
|Total liabilities and shareholders equity     |  | $      | 266,322 |        | $ | 563,606                |  | $ | 198,169                    |   |              | $ | 3,676 |              | $ | (434,346 | ) |  | $ | 597,427
|                                               |  |        |         |        |   |                        |  |   |                            |   |              |   |       |              |   |          |   |  |   |        



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Brookstone, Inc.

Successor Condensed Consolidating Statement of Operations

For the Successor period October 4, 2005
through October 29, 2005

(Unaudited)



|                                                                                                       |  |        |        |   |        |   |        |                        |  |   |                            |   |              |   |     |              |   |        |   |  |   |         |  
|------------------------------------------------------------------------------------------------------ |  | ------ | ------ | - | ------ | - | ------ | ---------------------- |  | - | -------------------------- | - | ------------ | - | --- | ------------ | - | ------ | - |  | - | ------- | -
|                                                                                                       |  | Parent |        |   | Issuer |   |        | Guarantor Subsidiaries |  |   | Non-Guarantor Subsidiaries |   | Eliminations |   |     | Consolidated |  
|Net sales                                                                                              |  | $      |       |   |        | $ | 3,363  |                        |  | $ | 21,925                     |   |              | $ | 825 |              | $ | (1,176 | ) |  | $ | 24,937  |  
|Cost of sales                                                                                          |  |        |       |   |        |   | 1,387  |                        |  |   | 19,557                     |   |              |   | 425 |              |   | (1,176 | ) |  |   | 20,193  |  
|                                                                                                       |  |        |        |   |        |   |        |                        |  |   |                            |   |              |   |     |              |   |        |   |  |   |         |  
|Gross profit                                                                                           |  |        |       |   |        |   | 1,976  |                        |  |   | 2,368                      |   |              |   | 400 |              |   |       |   |  |   | 4,744   |  
|Selling, general and administrative expenses                                                           |  |        |       |   |        |   | (145   | )                      |  |   | 10,696                     |   |              |   | 225 |              |   |       |   |  |   | 10,776  |  
|Other expenses (income)                                                                                |  |        |       |   |        |   | (2,125 | )                      |  |   | 2,125                      |   |              |   |    |              |   |       |   |  |   |        |  
|                                                                                                       |  |        |        |   |        |   |        |                        |  |   |                            |   |              |   |     |              |   |        |   |  |   |         |  
|Income (loss) from continuing operations                                                               |  |        |       |   |        |   | 4,246  |                        |  |   | (10,453                    | ) |              |   | 175 |              |   |       |   |  |   | (6,032  | )
|Interest expense, net                                                                                  |  |        |       |   |        |   | 4,038  |                        |  |   | (13                        | ) |              |   | 1   |              |   |       |   |  |   | 4,026   |  
|                                                                                                       |  |        |        |   |        |   |        |                        |  |   |                            |   |              |   |     |              |   |        |   |  |   |         |  
|Income (loss) before taxes, other party interests in consolidated entities and discontinued operations |  |        |       |   |        |   | 208    |                        |  |   | (10,440                    | ) |              |   | 174 |              |   |       |   |  |   | (10,058 | )
|Other party interests in consolidated entities                                                         |  |        |       |   |        |   |       |                        |  |   |                           |   |              |   |    |              |   | 65     |   |  |   | 65      |  
|                                                                                                       |  |        |        |   |        |   |        |                        |  |   |                            |   |              |   |     |              |   |        |   |  |   |         |  
|Income (loss) before taxes and discontinued operations                                                 |  |        |       |   |        |   | 208    |                        |  |   | (10,440                    | ) |              |   | 174 |              |   | (65    | ) |  |   | (10,123 | )
|Income tax benefit                                                                                     |  |        |       |   |        |   | (28    | )                      |  |   | (3,419                     | ) |              |   |    |              |   |       |   |  |   | (3,447  | )
|                                                                                                       |  |        |        |   |        |   |        |                        |  |   |                            |   |              |   |     |              |   |        |   |  |   |         |  
|Income (loss) from continuing operations before equity income                                          |  |        |       |   |        |   | 236    |                        |  |   | (7,021                     | ) |              |   | 174 |              |   | (65    | ) |  |   | (6,676  | )
|Equity income in subsidiaries, net of tax                                                              |  |        | (6,505 | ) |        |   | (6,741 | )                      |  |   | 109                        |   |              |   |    |              |   | 13,137 |   |  |   |        |  
|                                                                                                       |  |        |        |   |        |   |        |                        |  |   |                            |   |              |   |     |              |   |        |   |  |   |         |  
|Income (loss) from continuing operations                                                               |  |        | (6,505 | ) |        |   | (6,505 | )                      |  |   | (6,912                     | ) |              |   | 174 |              |   | 13,072 |   |  |   | (6,676  | )
|Loss on discontinued operations, net of tax                                                            |  |        |       |   |        |   |       |                        |  |   | 171                        |   |              |   |    |              |   |       |   |  |   | 171     |  
|                                                                                                       |  |        |        |   |        |   |        |                        |  |   |                            |   |              |   |     |              |   |        |   |  |   |         |  
|Net income (loss)                                                                                      |  | $      | (6,505 | ) |        | $ | (6,505 | )                      |  | $ | (6,741                     | ) |              | $ | 174 |              | $ | 13,072 |   |  | $ | (6,505  | )
|                                                                                                       |  |        |        |   |        |   |        |                        |  |   |                            |   |              |   |     |              |   |        |   |  |   |         |  



19



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##### Table of Contents

Brookstone, Inc.

Condensed Consolidating Statement of Operations

For the Predecessor period January 30, 2005 through
October 3, 2005

(Unaudited)



|                                                                                                       |  |        |         |   |        |   |         |                        |  |   |                            |   |              |   |       |              |   |        |   |  |   |         |  
|------------------------------------------------------------------------------------------------------ |  | ------ | ------- | - | ------ | - | ------- | ---------------------- |  | - | -------------------------- | - | ------------ | - | ----- | ------------ | - | ------ | - |  | - | ------- | -
|                                                                                                       |  | Parent |         |   | Issuer |   |         | Guarantor Subsidiaries |  |   | Non-Guarantor Subsidiaries |   | Eliminations |   |       | Consolidated |  
|Net sales                                                                                              |  | $      |        |   |        | $ | 30,897  |                        |  | $ | 177,366                    |   |              | $ | 7,349 |              | $ | 479    |   |  | $ | 216,091 |  
|Cost of sales                                                                                          |  |        |        |   |        |   | 34,861  |                        |  |   | 120,813                    |   |              |   | 3,719 |              |   | 479    |   |  |   | 159,872 |  
|                                                                                                       |  |        |         |   |        |   |         |                        |  |   |                            |   |              |   |       |              |   |        |   |  |   |         |  
|Gross profit                                                                                           |  |        |        |   |        |   | (3,964  | )                      |  |   | 56,553                     |   |              |   | 3,630 |              |   |       |   |  |   | 56,219  |  
|Selling, general and administrative expenses                                                           |  |        |        |   |        |   | 8,501   |                        |  |   | 67,989                     |   |              |   | 1,871 |              |   |       |   |  |   | 78,361  |  
|Other expenses (income)                                                                                |  |        |        |   |        |   | (13,182 | )                      |  |   | 13,182                     |   |              |   |      |              |   |       |   |  |   |        |  
|                                                                                                       |  |        |         |   |        |   |         |                        |  |   |                            |   |              |   |       |              |   |        |   |  |   |         |  
|Income (loss) from continuing operations                                                               |  |        |        |   |        |   | 717     |                        |  |   | (24,618                    | ) |              |   | 1,759 |              |   |       |   |  |   | (22,142 | )
|Interest expense, net                                                                                  |  |        |        |   |        |   | (357    | )                      |  |   | 375                        |   |              |   | 7     |              |   |       |   |  |   | 25      |  
|                                                                                                       |  |        |         |   |        |   |         |                        |  |   |                            |   |              |   |       |              |   |        |   |  |   |         |  
|Income (loss) before taxes, other party interests in consolidated entities and discontinued operations |  |        |        |   |        |   | 1,074   |                        |  |   | (24,993                    | ) |              |   | 1,752 |              |   |       |   |  |   | (22,167 | )
|Other party interests in consolidated entities                                                         |  |        |        |   |        |   |        |                        |  |   |                           |   |              |   |      |              |   | 687    |   |  |   | 687     |  
|                                                                                                       |  |        |         |   |        |   |         |                        |  |   |                            |   |              |   |       |              |   |        |   |  |   |         |  
|Income (loss) before taxes and discontinued operations                                                 |  |        |        |   |        |   | 1,074   |                        |  |   | (24,993                    | ) |              |   | 1,752 |              |   | (687   | ) |  |   | (22,854 | )
|Income tax benefit                                                                                     |  |        |        |   |        |   | 606     |                        |  |   | (8,493                     | ) |              |   |      |              |   |       |   |  |   | (7,887  | )
|                                                                                                       |  |        |         |   |        |   |         |                        |  |   |                            |   |              |   |       |              |   |        |   |  |   |         |  
|Income (loss) from continuing operations before equity income                                          |  |        |        |   |        |   | 468     |                        |  |   | (16,500                    | ) |              |   | 1,752 |              |   | (687   | ) |  |   | (14,967 | )
|Equity income in subsidiaries, net of tax                                                              |  |        | (20,601 | ) |        |   | (21,069 | )                      |  |   | 1,065                      |   |              |   |      |              |   | 40,605 |   |  |   |        |  
|                                                                                                       |  |        |         |   |        |   |         |                        |  |   |                            |   |              |   |       |              |   |        |   |  |   |         |  
|Income (loss) from continuing operations                                                               |  |        | (20,601 | ) |        |   | (20,601 | )                      |  |   | (15,435                    | ) |              |   | 1,752 |              |   | 39,918 |   |  |   | (14,967 | )
|Loss on discontinued operations, net of tax                                                            |  |        |        |   |        |   |        |                        |  |   | (5,634                     | ) |              |   |      |              |   |       |   |  |   | (5,634  | )
|                                                                                                       |  |        |         |   |        |   |         |                        |  |   |                            |   |              |   |       |              |   |        |   |  |   |         |  
|Net income (loss)                                                                                      |  | $      | (20,601 | ) |        | $ | (20,601 | )                      |  | $ | (21,069                    | ) |              | $ | 1,752 |              | $ | 39,918 |   |  | $ | (20,601 | )
|                                                                                                       |  |        |         |   |        |   |         |                        |  |   |                            |   |              |   |       |              |   |        |   |  |   |         |  



20



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##### Table of Contents

Brookstone, Inc.

Condensed Consolidating Statement of Operations

For the Predecessor period July 30, 2005 through
October 3, 2005

(In thousands)



|                                                                                                       |  |        |        |   |        |   |        |                        |  |   |                            |   |              |   |       |              |   |        |   |  |   |        |  
|------------------------------------------------------------------------------------------------------ |  | ------ | ------ | - | ------ | - | ------ | ---------------------- |  | - | -------------------------- | - | ------------ | - | ----- | ------------ | - | ------ | - |  | - | ------ | -
|                                                                                                       |  | Parent |        |   | Issuer |   |        | Guarantor Subsidiaries |  |   | Non-Guarantor Subsidiaries |   | Eliminations |   |       | Consolidated |  
|Net sales                                                                                              |  | $      |       |   |        | $ | 7,117  |                        |  | $ | 38,982                     |   |              | $ | 1,819 |              | $ | 3,865  |   |  | $ | 51,783 |  
|Cost of sales                                                                                          |  |        |       |   |        |   | 12,735 |                        |  |   | 21,741                     |   |              |   | 878   |              |   | 3,865  |   |  |   | 39,219 |  
|                                                                                                       |  |        |        |   |        |   |        |                        |  |   |                            |   |              |   |       |              |   |        |   |  |   |        |  
|Gross profit                                                                                           |  |        |       |   |        |   | (5,618 | )                      |  |   | 17,242                     |   |              |   | 941   |              |   |       |   |  |   | 12,565 |  
|Selling, general and administrative expenses                                                           |  |        |       |   |        |   | (5,675 | )                      |  |   | 26,070                     |   |              |   | 486   |              |   |       |   |  |   | 20,881 |  
|Other expenses (income)                                                                                |  |        |       |   |        |   | (2,762 | )                      |  |   | 2,762                      |   |              |   |      |              |   |       |   |  |   |       |  
|                                                                                                       |  |        |        |   |        |   |        |                        |  |   |                            |   |              |   |       |              |   |        |   |  |   |        |  
|Income (loss) from continuing operations                                                               |  |        |       |   |        |   | 2,819  |                        |  |   | (11,590                    | ) |              |   | 455   |              |   |       |   |  |   | (8,316 | )
|Interest expense, net                                                                                  |  |        |       |   |        |   | (30    | )                      |  |   | 156                        |   |              |   | 2     |              |   |       |   |  |   | 128    |  
|                                                                                                       |  |        |        |   |        |   |        |                        |  |   |                            |   |              |   |       |              |   |        |   |  |   |        |  
|Income (loss) before taxes, other party interests in consolidated entities and discontinued operations |  |        |       |   |        |   | 2,847  |                        |  |   | (11,746                    | ) |              |   | 453   |              |   |       |   |  |   | (8,446 | )
|Other party interests in consolidated entities                                                         |  |        |       |   |        |   |       |                        |  |   |                           |   |              |   |      |              |   | 181    |   |  |   | 181    |  
|                                                                                                       |  |        |        |   |        |   |        |                        |  |   |                            |   |              |   |       |              |   |        |   |  |   |        |  
|Income (loss) before taxes and discontinued operations                                                 |  |        |       |   |        |   | 2,847  |                        |  |   | (11,746                    | ) |              |   | 453   |              |   | (181   | ) |  |   | (8,627 | )
|Income tax benefit                                                                                     |  |        |       |   |        |   | 1,344  |                        |  |   | (3,761                     | ) |              |   |      |              |   |       |   |  |   | (2,417 | )
|                                                                                                       |  |        |        |   |        |   |        |                        |  |   |                            |   |              |   |       |              |   |        |   |  |   |        |  
|Income (loss) from continuing operations before equity income                                          |  |        |       |   |        |   | 1,503  |                        |  |   | (7,985                     | ) |              |   | 453   |              |   | (181   | ) |  |   | (6,210 | )
|Equity income in subsidiaries, net of tax                                                              |  |        | (8,073 | ) |        |   | (9,578 | )                      |  |   | 272                        |   |              |   |      |              |   | 17,379 |   |  |   |       |  
|                                                                                                       |  |        |        |   |        |   |        |                        |  |   |                            |   |              |   |       |              |   |        |   |  |   |        |  
|Income (loss) from continuing operations                                                               |  |        | (8,073 | ) |        |   | (8,073 | )                      |  |   | (7,713                     | ) |              |   | 453   |              |   | 17,196 |   |  |   | (6,210 | )
|Income (loss) on discontinued operations, net of tax benefit                                           |  |        |       |   |        |   |       |                        |  |   | (1,864                     | ) |              |   |      |              |   |       |   |  |   | (1,864 | )
|                                                                                                       |  |        |        |   |        |   |        |                        |  |   |                            |   |              |   |       |              |   |        |   |  |   |        |  
|Net income (loss)                                                                                      |  | $      | (8,073 | ) |        | $ | (8,073 | )                      |  | $ | (9,576                     | ) |              | $ | 453   |              | $ | 17,196 |   |  | $ | (8,073 | )
|                                                                                                       |  |        |        |   |        |   |        |                        |  |   |                            |   |              |   |       |              |   |        |   |  |   |        |  



21



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##### Table of Contents

Brookstone, Inc.

Successor Condensed Consolidating Statement of Operations

For the thirteen-weeks ended September 30,
2006

(In thousands)

(Unaudited)



|                                                                                                       |  |        |         |   |        |   |         |                        |  |   |                            |   |              |   |       |              |   |        |   |  |   |         |  
|------------------------------------------------------------------------------------------------------ |  | ------ | ------- | - | ------ | - | ------- | ---------------------- |  | - | -------------------------- | - | ------------ | - | ----- | ------------ | - | ------ | - |  | - | ------- | -
|                                                                                                       |  | Parent |         |   | Issuer |   |         | Guarantor Subsidiaries |  |   | Non-Guarantor Subsidiaries |   | Eliminations |   |       | Consolidated |  
|Net sales                                                                                              |  | $      |        |   |        | $ | 12,088  |                        |  | $ | 72,022                     |   |              | $ | 3,824 |              | $ | (161   | ) |  | $ | 87,773  |  
|Cost of sales                                                                                          |  |        |        |   |        |   | 9,877   |                        |  |   | 54,807                     |   |              |   | 1,993 |              |   | (161   | ) |  |   | 66,516  |  
|                                                                                                       |  |        |         |   |        |   |         |                        |  |   |                            |   |              |   |       |              |   |        |   |  |   |         |  
|Gross profit                                                                                           |  |        |        |   |        |   | 2,211   |                        |  |   | 17,215                     |   |              |   | 1,831 |              |   |       |   |  |   | 21,257  |  
|Selling, general and administrative expenses                                                           |  |        |        |   |        |   | 6,335   |                        |  |   | 23,366                     |   |              |   | 1,011 |              |   |       |   |  |   | 30,712  |  
|Other expenses (income)                                                                                |  |        |        |   |        |   | (4,731  | )                      |  |   | 4,731                      |   |              |   |      |              |   |       |   |  |   |        |  
|                                                                                                       |  |        |         |   |        |   |         |                        |  |   |                            |   |              |   |       |              |   |        |   |  |   |         |  
|Income (loss) from continuing operations                                                               |  |        |        |   |        |   | 607     |                        |  |   | (10,882                    | ) |              |   | 820   |              |   |       |   |  |   | (9,455  | )
|Interest expense, net                                                                                  |  |        |        |   |        |   | 6,254   |                        |  |   | 137                        |   |              |   | 3     |              |   |       |   |  |   | 6,394   |  
|                                                                                                       |  |        |         |   |        |   |         |                        |  |   |                            |   |              |   |       |              |   |        |   |  |   |         |  
|Income (loss) before taxes, other party interests in consolidated entities and discontinued operations |  |        |        |   |        |   | (5,647  | )                      |  |   | (11,019                    | ) |              |   | 817   |              |   |       |   |  |   | (15,849 | )
|Other party interests in consolidated entities                                                         |  |        |        |   |        |   |        |                        |  |   |                           |   |              |   |      |              |   | 302    |   |  |   | 302     |  
|                                                                                                       |  |        |         |   |        |   |         |                        |  |   |                            |   |              |   |       |              |   |        |   |  |   |         |  
|Income (loss) before taxes and discontinued operations                                                 |  |        |        |   |        |   | (5,647  | )                      |  |   | (11,019                    | ) |              |   | 817   |              |   | (302   | ) |  |   | (16,151 | )
|Income tax provision                                                                                   |  |        |        |   |        |   | (2,028  | )                      |  |   | (3,897                     | ) |              |   |      |              |   |       |   |  |   | (5,925  | )
|                                                                                                       |  |        |         |   |        |   |         |                        |  |   |                            |   |              |   |       |              |   |        |   |  |   |         |  
|Income (loss) from continuing operations before equity income                                          |  |        |        |   |        |   | (3,619  | )                      |  |   | (7,122                     | ) |              |   | 817   |              |   | (302   | ) |  |   | (10,226 | )
|Equity income in subsidiaries, net of tax                                                              |  |        | (10,288 | ) |        |   | (6,669  | )                      |  |   | 515                        |   |              |   |      |              |   | 16,442 |   |  |   |        |  
|                                                                                                       |  |        |         |   |        |   |         |                        |  |   |                            |   |              |   |       |              |   |        |   |  |   |         |  
|Income (loss) from continuing operations                                                               |  |        | (10,288 | ) |        |   | (10,288 | )                      |  |   | (6,607                     | ) |              |   | 817   |              |   | 16,140 |   |  |   | (10,226 | )
|Income (loss) on discontinued operations, net of tax benefit                                           |  |        |        |   |        |   |        |                        |  |   | (62                        | ) |              |   |      |              |   |       |   |  |   | (62     | )
|                                                                                                       |  |        |         |   |        |   |         |                        |  |   |                            |   |              |   |       |              |   |        |   |  |   |         |  
|Net income (loss)                                                                                      |  | $      | (10,288 | ) |        | $ | (10,288 | )                      |  | $ | (6,669                     | ) |              | $ | 817   |              | $ | 16,140 |   |  | $ | (10,288 | )
|                                                                                                       |  |        |         |   |        |   |         |                        |  |   |                            |   |              |   |       |              |   |        |   |  |   |         |  



22



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##### Table of Contents

Brookstone, Inc.

Successor Condensed Consolidating Statement of Operations

For the thirty-nine weeks ended September 30,
2006

(In thousands)

(Unaudited)



|                                                                                                       |  |        |         |   |        |   |         |                        |  |   |                            |   |              |   |        |              |   |        |   |  |   |         |  
|------------------------------------------------------------------------------------------------------ |  | ------ | ------- | - | ------ | - | ------- | ---------------------- |  | - | -------------------------- | - | ------------ | - | ------ | ------------ | - | ------ | - |  | - | ------- | -
|                                                                                                       |  | Parent |         |   | Issuer |   |         | Guarantor Subsidiaries |  |   | Non-Guarantor Subsidiaries |   | Eliminations |   |        | Consolidated |  
|Net sales                                                                                              |  | $      |        |   |        | $ | 34,914  |                        |  | $ | 209,550                    |   |              | $ | 11,033 |              | $ | 307    |   |  | $ | 255,804 |  
|Cost of sales                                                                                          |  |        |        |   |        |   | 25,509  |                        |  |   | 162,446                    |   |              |   | 5,605  |              |   | 307    |   |  |   | 193,867 |  
|                                                                                                       |  |        |         |   |        |   |         |                        |  |   |                            |   |              |   |        |              |   |        |   |  |   |         |  
|Gross profit                                                                                           |  |        |        |   |        |   | 9,405   |                        |  |   | 47,104                     |   |              |   | 5,428  |              |   |       |   |  |   | 61,937  |  
|Selling, general and administrative expenses                                                           |  |        |        |   |        |   | 17,808  |                        |  |   | 71,470                     |   |              |   | 2,911  |              |   |       |   |  |   | 92,189  |  
|Other expenses (income)                                                                                |  |        |        |   |        |   | (12,865 | )                      |  |   | 12,865                     |   |              |   |       |              |   |       |   |  |   |        |  
|                                                                                                       |  |        |         |   |        |   |         |                        |  |   |                            |   |              |   |        |              |   |        |   |  |   |         |  
|Income (loss) from continuing operations                                                               |  |        |        |   |        |   | 4,462   |                        |  |   | (37,231                    | ) |              |   | 2,517  |              |   |       |   |  |   | (30,252 | )
|Interest expense, net                                                                                  |  |        |        |   |        |   | 17,986  |                        |  |   | 376                        |   |              |   | 8      |              |   |       |   |  |   | 18,370  |  
|                                                                                                       |  |        |         |   |        |   |         |                        |  |   |                            |   |              |   |        |              |   |        |   |  |   |         |  
|Income (loss) before taxes, other party interests in consolidated entities and discontinued operations |  |        |        |   |        |   | (13,524 | )                      |  |   | (37,607                    | ) |              |   | 2,509  |              |   |       |   |  |   | (48,622 | )
|Other party interests in consolidated entities                                                         |  |        |        |   |        |   |        |                        |  |   |                           |   |              |   |       |              |   | 950    |   |  |   | 950     |  
|                                                                                                       |  |        |         |   |        |   |         |                        |  |   |                            |   |              |   |        |              |   |        |   |  |   |         |  
|Income (loss) before taxes and discontinued operations                                                 |  |        |        |   |        |   | (13,524 | )                      |  |   | (37,607                    | ) |              |   | 2,509  |              |   | (950   | ) |  |   | (49,572 | )
|Income tax provision                                                                                   |  |        |        |   |        |   | (4,740  | )                      |  |   | (12,698                    | ) |              |   |       |              |   |       |   |  |   | (17,438 | )
|                                                                                                       |  |        |         |   |        |   |         |                        |  |   |                            |   |              |   |        |              |   |        |   |  |   |         |  
|Income (loss) from continuing operations before equity income                                          |  |        |        |   |        |   | (8,784  | )                      |  |   | (24,909                    | ) |              |   | 2,509  |              |   | (950   | ) |  |   | (32,134 | )
|Equity income in subsidiaries, net of tax                                                              |  |        | (32,514 | ) |        |   | (23,730 | )                      |  |   | 1,559                      |   |              |   |       |              |   | 54,685 |   |  |   |        |  
|                                                                                                       |  |        |         |   |        |   |         |                        |  |   |                            |   |              |   |        |              |   |        |   |  |   |         |  
|Income (loss) from continuing operations                                                               |  |        | (32,514 | ) |        |   | (32,514 | )                      |  |   | (23,350                    | ) |              |   | 2,509  |              |   | 53,735 |   |  |   | (32,134 | )
|Income (loss) on discontinued operations, net of tax benefit                                           |  |        |        |   |        |   |        |                        |  |   | (380                       | ) |              |   |       |              |   |       |   |  |   | (380    | )
|                                                                                                       |  |        |         |   |        |   |         |                        |  |   |                            |   |              |   |        |              |   |        |   |  |   |         |  
|Net income (loss)                                                                                      |  | $      | (32,514 | ) |        | $ | (32,514 | )                      |  | $ | (23,730                    | ) |              | $ | 2,509  |              | $ | 53,735 |   |  | $ | (32,514 | )
|                                                                                                       |  |        |         |   |        |   |         |                        |  |   |                            |   |              |   |        |              |   |        |   |  |   |         |  



23



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##### Table of Contents

Brookstone, Inc.

Condensed Consolidating Statement of Cash Flows

For the Predecessor period January 30, 2005 through
October 3, 2005

(In thousands)



|                                                                                                   |  |        |         |   |        |   |         |                        |  |   |                            |   |  |              |        |   |              |   |         |   |  |   |         |  
|-------------------------------------------------------------------------------------------------- |  | ------ | ------- | - | ------ | - | ------- | ---------------------- |  | - | -------------------------- | - |  | ------------ | ------ | - | ------------ | - | ------- | - |  | - | ------- | -
|                                                                                                   |  | Parent |         |   | Issuer |   |         | Guarantor Subsidiaries |  |   | Non-Guarantor Subsidiaries |   |  | Eliminations |        |   | Consolidated |  
|Cash flows from operating activities:                                                              |  |        |         |   |        |   |         |                        |  |   |                            |   |  |              |        |   |              |   |         |   |  |   |         |  
|Net income (loss)                                                                                  |  | $      | (20,601 | ) |        | $ | (20,601 | )                      |  | $ | (21,069                    | ) |  | $            | 1,752  |   |              | $ | 39,918  |   |  | $ | (20,601 | )
|                                                                                                   |  |        |         |   |        |  
|Adjustments to reconcile net income (loss) to net cash (used for) provided by operating activities |  |        |         |   |        |   |         |                        |  |   |                            |   |  |              |        |   |              |   |         |   |  |   |         |  
|Depreciation and amortization                                                                      |  |        |        |   |        |   | 1,897   |                        |  |   | 7,158                      |   |  |              | 214    |   |              |   |        |   |  |   | 9,269   |  
|Amortization of debt issuance costs                                                                |  |        |        |   |        |   | 185     |                        |  |   |                           |   |  |              |       |   |              |   |        |   |  |   | 185     |  
|Stock-based compensation expense                                                                   |  |        |        |   |        |   | 979     |                        |  |   |                           |   |  |              |       |   |              |   |        |   |  |   | 979     |  
|Impairment charge                                                                                  |  |        |        |   |        |   |        |                        |  |   | 5,280                      |   |  |              |       |   |              |   |        |   |  |   | 5,280   |  
|Other party interests in consolidated entities                                                     |  |        |        |   |        |   |        |                        |  |   |                           |   |  |              |       |   |              |   | 687     |   |  |   | 687     |  
|Deferred income taxes                                                                              |  |        |        |   |        |   | (36     | )                      |  |   | (11,441                    | ) |  |              |       |   |              |   |        |   |  |   | (11,477 | )
|Related tax benefits on exercise of stock options                                                  |  |        |        |   |        |   | 182     |                        |  |   |                           |   |  |              |       |   |              |   |        |   |  |   | 182     |  
|Equity income in subsidiary                                                                        |  |        | 20,601  |   |        |   | 21,069  |                        |  |   | (1,065                     | ) |  |              |       |   |              |   | (40,605 | ) |  |   |        |  
|Decrease (increase) in other assets                                                                |  |        |        |   |        |   | (40,072 | )                      |  |   | 15,332                     |   |  |              |       |   |              |   | 20,188  |   |  |   | (4,552  | )
|(Decrease) increase in other long-term liabilities                                                 |  |        |        |   |        |   | 570     |                        |  |   | 18,707                     |   |  |              |       |   |              |   | (18,937 | ) |  |   | 340     |  
|Changes in working capital:                                                                        |  |        |         |   |        |   |         |                        |  |   |                            |   |  |              |        |   |              |   |         |   |  |   |         |  
|Accounts receivable, net                                                                           |  |        |        |   |        |   | 713     |                        |  |   | 1,565                      |   |  |              | 199    |   |              |   | (7      | ) |  |   | 2,470   |  
|Merchandise inventories                                                                            |  |        |        |   |        |   | (8,252  | )                      |  |   | (7,423                     | ) |  |              | 3      |   |              |   | (1,250  | ) |  |   | (16,922 | )
|Prepaid expenses                                                                                   |  |        |        |   |        |   | (214    | )                      |  |   | (508                       | ) |  |              |       |   |              |   |        |   |  |   | (722    | )
|Accounts payable                                                                                   |  |        |        |   |        |   | 4,888   |                        |  |   |                           |   |  |              |       |   |              |   |        |   |  |   | 4,888   |  
|Other current liabilities                                                                          |  |        |        |   |        |   | (15,228 | )                      |  |   | (1,213                     | ) |  |              | (6     | ) |              |   | 6       |   |  |   | (16,441 | )
|                                                                                                   |  |        |         |   |        |   |         |                        |  |   |                            |   |  |              |        |   |              |   |         |   |  |   |         |  
|Net cash provided by (used for) operating activities                                               |  |        |        |   |        |   | (53,920 | )                      |  |   | 5,323                      |   |  |              | 2,162  |   |              |   |        |   |  |   | (46,435 | )
|                                                                                                   |  |        |         |   |        |  
|Expenditures for property, plant and equipment                                                     |  |        |        |   |        |   | (1,641  | )                      |  |   | (6,852                     | ) |  |              | 25     |   |              |   |        |   |  |   | (8,468  | )
|                                                                                                   |  |        |         |   |        |   |         |                        |  |   |                            |   |  |              |        |   |              |   |         |   |  |   |         |  
|Net cash (used for) provided by investing activities                                               |  |        |        |   |        |   | (1,641  | )                      |  |   | (6,852                     | ) |  |              | 25     |   |              |   |        |   |  |   | (8,468  | )
|                                                                                                   |  |        |         |   |        |  
|Payments on long-term debt                                                                         |  |        |        |   |        |   | (600    | )                      |  |   | (69                        | ) |  |              |       |   |              |   |        |   |  |   | (669    | )
|Capital distributions to joint venture partners                                                    |  |        |        |   |        |   |        |                        |  |   | 1,337                      |   |  |              | (2,161 | ) |              |   |        |   |  |   | (824    | )
|Capital contributions from joint venture partners                                                  |  |        |        |   |        |   |        |                        |  |   | 23                         |   |  |              | (23    | ) |              |   |        |   |  |   |        |  
|Proceeds from exercise of stock options                                                            |  |        |        |   |        |   | 925     |                        |  |   |                           |   |  |              |       |   |              |   |        |   |  |   | 925     |  
|                                                                                                   |  |        |         |   |        |   |         |                        |  |   |                            |   |  |              |        |   |              |   |         |   |  |   |         |  
|Net cash provided by (used for) financing activities                                               |  |        |        |   |        |   | 325     |                        |  |   | 1,291                      |   |  |              | (2,184 | ) |              |   |        |   |  |   | (568    | )
|                                                                                                   |  |        |         |   |        |   |         |                        |  |   |                            |   |  |              |        |   |              |   |         |   |  |   |         |  
|Net increase in cash and cash equivalents                                                          |  |        |        |   |        |   | (55,236 | )                      |  |   | (238                       | ) |  |              | 3      |   |              |   |        |   |  |   | (55,471 | )
|Cash and cash equivalents at beginning of period                                                   |  |        |        |   |        |   | 85,917  |                        |  |   | 284                        |   |  |              | 4      |   |              |   |        |   |  |   | 86,205  |  
|                                                                                                   |  |        |         |   |        |   |         |                        |  |   |                            |   |  |              |        |   |              |   |         |   |  |   |         |  
|Cash and cash equivalents at end of period                                                         |  | $      |        |   |        | $ | 30,681  |                        |  | $ | 46                         |   |  | $            | 7      |   |              | $ |        |   |  | $ | 30,734  |  
|                                                                                                   |  |        |         |   |        |   |         |                        |  |   |                            |   |  |              |        |   |              |   |         |   |  |   |         |  



24



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##### Table of Contents

Brookstone, Inc.

Condensed Consolidating Statement of Cash Flows

For the Successor period October 4, 2005 through
October 29, 2005

(In thousands)



|                                                                                                   |  |        |        |   |        |   |          |                        |  |   |                            |   |  |              |        |   |              |   |         |   |  |   |          |  
|-------------------------------------------------------------------------------------------------- |  | ------ | ------ | - | ------ | - | -------- | ---------------------- |  | - | -------------------------- | - |  | ------------ | ------ | - | ------------ | - | ------- | - |  | - | -------- | -
|                                                                                                   |  | Parent |        |   | Issuer |   |          | Guarantor Subsidiaries |  |   | Non-Guarantor Subsidiaries |   |  | Eliminations |        |   | Consolidated |  
|Cash flows from operating activities:                                                              |  |        |        |   |        |   |          |                        |  |   |                            |   |  |              |        |   |              |   |         |   |  |   |          |  
|Net income (loss)                                                                                  |  | $      | (6,505 | ) |        | $ | (6,505   | )                      |  | $ | (6,741                     | ) |  | $            | 174    |   |              | $ | 13,072  |   |  | $ | (6,505   | )
|                                                                                                   |  |        |        |   |        |  
|Adjustments to reconcile net income (loss) to net cash (used for) provided by operating activities |  |        |        |   |        |   |          |                        |  |   |                            |   |  |              |        |   |              |   |         |   |  |   |          |  
|Depreciation and amortization                                                                      |  |        |       |   |        |   | 256      |                        |  |   | 758                        |   |  |              | 27     |   |              |   |        |   |  |   | 1,041    |  
|Amortization of debt discount                                                                      |  |        |       |   |        |   | 26       |                        |  |   |                           |   |  |              |       |   |              |   |        |   |  |   | 26       |  
|Amortization of revaluation of leases                                                              |  |        |       |   |        |   | 17       |                        |  |   |                           |   |  |              |       |   |              |   |        |   |  |   | 17       |  
|Amortization of inventory fair value adjustment                                                    |  |        |       |   |        |   | 7,195    |                        |  |   |                           |   |  |              |       |   |              |   |        |   |  |   | 7,195    |  
|Impairment charge                                                                                  |  |        |       |   |        |   |         |                        |  |   |                           |   |  |              |       |   |              |   |        |   |  |   |         |  
|Other party interests in consolidated entities                                                     |  |        |       |   |        |   |         |                        |  |   |                           |   |  |              |       |   |              |   | 65      |   |  |   | 65       |  
|Deferred income taxes                                                                              |  |        |       |   |        |   | 11,888   |                        |  |   | (15,782                    | ) |  |              |       |   |              |   |        |   |  |   | (3,894   | )
|Related tax benefits on exercise of stock options                                                  |  |        |       |   |        |   |         |                        |  |   |                           |   |  |              |       |   |              |   |        |   |  |   |         |  
|Equity income in subsidiary                                                                        |  |        | 6,505  |   |        |   | 6,740    |                        |  |   | (109                       | ) |  |              |       |   |              |   | (13,136 | ) |  |   |         |  
|Decrease (increase) in other assets                                                                |  |        |       |   |        |   | (28,542  | )                      |  |   | 2,051                      |   |  |              | (2,186 | ) |              |   | 27,891  |   |  |   | (786     | )
|(Decrease) increase in other long-term liabilities                                                 |  |        |       |   |        |   | (4,110   | )                      |  |   | 32,256                     |   |  |              |       |   |              |   | (28,098 | ) |  |   | 48       |  
|Changes in working capital:                                                                        |  |        |        |   |        |   |          |                        |  |   |                            |   |  |              |        |   |              |   |         |   |  |   |          |  
|Accounts receivable, net                                                                           |  |        |       |   |        |   | (576     | )                      |  |   | 924                        |   |  |              | (175   | ) |              |   | 7       |   |  |   | 180      |  
|Merchandise inventories                                                                            |  |        |       |   |        |   | (12,852  | )                      |  |   | (10,499                    | ) |  |              | (26    | ) |              |   | 1,028   |   |  |   | (22,349  | )
|Prepaid expenses                                                                                   |  |        |       |   |        |   | 841      |                        |  |   | (479                       | ) |  |              |       |   |              |   |        |   |  |   | 362      |  
|Accounts payable                                                                                   |  |        |       |   |        |   | 13,999   |                        |  |   | 3,312                      |   |  |              |       |   |              |   |        |   |  |   | 17,311   |  
|Other current liabilities                                                                          |  |        |       |   |        |   | 2,521    |                        |  |   | (131                       | ) |  |              | (1     | ) |              |   | 1       |   |  |   | 2,390    |  
|                                                                                                   |  |        |        |   |        |   |          |                        |  |   |                            |   |  |              |        |   |              |   |         |   |  |   |          |  
|Net cash provided by (used for) operating activities                                               |  |        |       |   |        |   | (9,102   | )                      |  |   | 5,560                      |   |  |              | (2,187 | ) |              |   | 830     |   |  |   | (4,899   | )
|                                                                                                   |  |        |        |   |        |  
|Expenditures for property, plant and equipment                                                     |  |        |       |   |        |   | 342      |                        |  |   | (4,016                     | ) |  |              | 1      |   |              |   |        |   |  |   | (3,673   | )
|Acquisition cost, net $11,396 proceeds of unexercised options                                      |  |        |       |   |        |   | (433,268 | )                      |  |   |                           |   |  |              |       |   |              |   |        |   |  |   | (433,268 | )
|Transaction cost                                                                                   |  |        |       |   |        |   | (15,496  | )                      |  |   |                           |   |  |              |       |   |              |   |        |   |  |   | (15,496  | )
|                                                                                                   |  |        |        |   |        |   |          |                        |  |   |                            |   |  |              |        |   |              |   |         |   |  |   |          |  
|Net cash used for investing activities                                                             |  |        |       |   |        |   | (448,422 | )                      |  |   | (4,016                     | ) |  |              | 1      |   |              |   |        |   |  |   | (452,437 | )
|                                                                                                   |  |        |        |   |        |  
|Borrowings from revolving credit                                                                   |  |        |       |   |        |   | 11,150   |                        |  |   |                           |   |  |              |       |   |              |   |        |   |  |   | 11,150   |  
|Payment of debt issuance costs                                                                     |  |        |       |   |        |   | (13,122  | )                      |  |   |                           |   |  |              |       |   |              |   |        |   |  |   | (13,122  | )
|Payments on bridge loan                                                                            |  |        |       |   |        |   | (1,850   | )                      |  |   |                           |   |  |              |       |   |              |   |        |   |  |   | (1,850   | )
|Payments on long-term debt                                                                         |  |        |       |   |        |   |         |                        |  |   | (9                         | ) |  |              |       |   |              |   |        |   |  |   | (9       | )
|Issuance of long-term debt, net                                                                    |  |        |       |   |        |   | 182,841  |                        |  |   |                           |   |  |              |       |   |              |   |        |   |  |   | 182,841  |  
|Capital contribution                                                                               |  |        |       |   |        |   | 249,145  |                        |  |   |                           |   |  |              |       |   |              |   |        |   |  |   | 249,145  |  
|Capital distributions to joint venture partners                                                    |  |        |       |   |        |   |         |                        |  |   | (1,360                     | ) |  |              | 2,184  |   |              |   | (830    | ) |  |   | (6       | )
|                                                                                                   |  |        |        |   |        |   |          |                        |  |   |                            |   |  |              |        |   |              |   |         |   |  |   |          |  
|Net cash provided by (used for) financing activities                                               |  |        |       |   |        |   | 428,164  |                        |  |   | (1,369                     | ) |  |              | 2,184  |   |              |   | (830    | ) |  |   | 428,149  |  
|Net increase in cash and cash equivalents                                                          |  |        |       |   |        |   | (29,360  | )                      |  |   | 175                        |   |  |              | (2     | ) |              |   |        |   |  |   | (29,187  | )
|Cash and cash equivalents at beginning of period                                                   |  |        |       |   |        |   | 30,681   |                        |  |   | 46                         |   |  |              | 7      |   |              |   |        |   |  |   | 30,734   |  
|                                                                                                   |  |        |        |   |        |   |          |                        |  |   |                            |   |  |              |        |   |              |   |         |   |  |   |          |  
|Cash and cash equivalents at end of period                                                         |  | $      |       |   |        | $ | 1,321    |                        |  | $ | 221                        |   |  | $            | 5      |   |              | $ |        |   |  | $ | 1,547    |  
|                                                                                                   |  |        |        |   |        |   |          |                        |  |   |                            |   |  |              |        |   |              |   |         |   |  |   |          |  



25



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##### Table of Contents

Brookstone, Inc.

Successor Condensed Consolidating Statement of Cash Flows

For the thirty-nine weeks ended September 30,
2006

(In thousands)

(Unaudited)



|                                                                                     |  |        |         |   |        |   |         |                        |  |   |                            |   |  |              |        |   |              |   |         |   |  |   |         |  
|------------------------------------------------------------------------------------ |  | ------ | ------- | - | ------ | - | ------- | ---------------------- |  | - | -------------------------- | - |  | ------------ | ------ | - | ------------ | - | ------- | - |  | - | ------- | -
|                                                                                     |  | Parent |         |   | Issuer |   |         | Guarantor Subsidiaries |  |   | Non-Guarantor Subsidiaries |   |  | Eliminations |        |   | Consolidated |  
|Cash flows from operating activities:                                                |  |        |         |   |        |   |         |                        |  |   |                            |   |  |              |        |   |              |   |         |   |  |   |         |  
|Net income (loss)                                                                    |  | $      | (32,514 | ) |        | $ | (32,514 | )                      |  | $ | (23,730                    | ) |  | $            | 2,509  |   |              | $ | 53,735  |   |  | $ | (32,514 | )
|                                                                                     |  |        |         |   |        |  
|Adjustments to reconcile net income (loss) to net cash used for operating activities |  |        |         |   |        |   |         |                        |  |   |                            |   |  |              |        |   |              |   |         |   |  |   |         |  
|Depreciation and amortization                                                        |  |        |        |   |        |   | 2,680   |                        |  |   | 7,708                      |   |  |              | 346    |   |              |   |        |   |  |   | 10,734  |  
|Amortization of revaluation of leases                                                |  |        |        |   |        |   |        |                        |  |   | (153                       | ) |  |              |       |   |              |   |        |   |  |   | (153    | )
|Amortization of debt discount                                                        |  |        |        |   |        |   | 231     |                        |  |   |                           |   |  |              |       |   |              |   |        |   |  |   | 231     |  
|Amortization of debt issuance cost                                                   |  |        |        |   |        |   | 1,696   |                        |  |   |                           |   |  |              |       |   |              |   |        |   |  |   | 1,696   |  
|Stock-based compensation expense                                                     |  |        |        |   |        |   | 834     |                        |  |   |                           |   |  |              |       |   |              |   |        |   |  |   | 834     |  
|Gain on Cash Flow Hedge                                                              |  |        |         |   |        |   | 24      |                        |  |   |                            |   |  |              |        |   |              |   |         |   |  |   | 24      |  
|Other party interests in consolidated entities                                       |  |        |        |   |        |   |        |                        |  |   |                           |   |  |              |       |   |              |   | 950     |   |  |   | 950     |  
|Deferred income taxes                                                                |  |        |        |   |        |   | 7,360   |                        |  |   | (24,350                    | ) |  |              |       |   |              |   |        |   |  |   | (16,990 | )
|Equity income in subsidiary                                                          |  |        | 32,514  |   |        |   | 23,730  |                        |  |   | (1,559                     | ) |  |              |       |   |              |   | (54,685 | ) |  |   |        |  
|Decrease (increase) in other assets                                                  |  |        |        |   |        |   | (58,858 | )                      |  |   | 64,280                     |   |  |              | (1,205 | ) |              |   | (6,361  | ) |  |   | (2,144  | )
|(Decrease) increase in other long-term liabilities                                   |  |        |        |   |        |   | 1,093   |                        |  |   | (6,021                     | ) |  |              |       |   |              |   | 6,347   |   |  |   | 1,419   |  
|Changes in working capital:                                                          |  |        |         |   |        |   |         |                        |  |   |                            |   |  |              |        |   |              |   |         |   |  |   |         |  
|Accounts receivable, net                                                             |  |        |        |   |        |   | (492    | )                      |  |   | 484                        |   |  |              | (869   | ) |              |   |        |   |  |   | (877    | )
|Merchandise inventories                                                              |  |        |        |   |        |   | (24,130 | )                      |  |   | 3,987                      |   |  |              | (53    | ) |              |   | 14      |   |  |   | (20,182 | )
|Prepaid expenses                                                                     |  |        |        |   |        |   | 2,463   |                        |  |   | (2,400                     | ) |  |              |       |   |              |   |        |   |  |   | 63      |  
|Accounts payable                                                                     |  |        |        |   |        |   | 4,879   |                        |  |   |                           |   |  |              |       |   |              |   |        |   |  |   | 4,879   |  
|Other current liabilities                                                            |  |        |        |   |        |   | (328    | )                      |  |   | (12,959                    | ) |  |              | 1      |   |              |   |        |   |  |   | (13,286 | )
|                                                                                     |  |        |         |   |        |   |         |                        |  |   |                            |   |  |              |        |   |              |   |         |   |  |   |         |  
|Net cash provided by (used for) operating activities                                 |  |        |        |   |        |   | (71,332 | )                      |  |   | 5,287                      |   |  |              | 729    |   |              |   |        |   |  |   | (65,316 | )
|Cash flows from investing activities:                                                |  |        |         |   |        |   |         |                        |  |   |                            |   |  |              |        |   |              |   |         |   |  |   |         |  
|Expenditures for property, plant and equipment                                       |  |        |        |   |        |   | (1,427  | )                      |  |   | (5,342                     | ) |  |              |       |   |              |   |        |   |  |   | (6,769  | )
|                                                                                     |  |        |         |   |        |   |         |                        |  |   |                            |   |  |              |        |   |              |   |         |   |  |   |         |  
|Net cash used for investing activities                                               |  |        |        |   |        |   | (1,427  | )                      |  |   | (5,342                     | ) |  |              |       |   |              |   |        |   |  |   | (6,769  | )
|Cash flows from financing activities:                                                |  |        |         |   |        |   |         |                        |  |   |                            |   |  |              |        |   |              |   |         |   |  |   |         |  
|Cash payment related to debt financing                                               |  |        |        |   |        |   | (349    | )                      |  |   |                           |   |  |              |       |   |              |   |        |   |  |   | (349    | )
|Payments on long-term debt                                                           |  |        |        |   |        |   | (600    | )                      |  |   | (79                        | ) |  |              |       |   |              |   |        |   |  |   | (679    | )
|Stock Purchase                                                                       |  |        |        |   |        |   | (1,520  | )                      |  |   |                           |   |  |              |       |   |              |   |        |   |  |   | (1,520  | )
|Capital contribution                                                                 |  |        |        |   |        |   | 225     |                        |  |   |                           |   |  |              |       |   |              |   |        |   |  |   | 225     |  
|Cash distributions to joint venture partners                                         |  |        |        |   |        |   |        |                        |  |   |                           |   |  |              | (729   | ) |              |   |        |   |  |   | (729    | )
|                                                                                     |  |        |         |   |        |   |         |                        |  |   |                            |   |  |              |        |   |              |   |         |   |  |   |         |  
|Net cash provided by (used for) financing activities                                 |  |        |        |   |        |   | (2,244  | )                      |  |   | (79                        | ) |  |              | (729   | ) |              |   |        |   |  |   | (3,052  | )
|                                                                                     |  |        |         |   |        |   |         |                        |  |   |                            |   |  |              |        |   |              |   |         |   |  |   |         |  
|Net increase in cash and cash equivalents                                            |  |        |        |   |        |   | (75,003 | )                      |  |   | (134                       | ) |  |              |       |   |              |   |        |   |  |   | (75,137 | )
|Cash and cash equivalents at beginning of period                                     |  |        |        |   |        |   | 75,926  |                        |  |   | 394                        |   |  |              | 6      |   |              |   |        |   |  |   | 76,326  |  
|                                                                                     |  |        |         |   |        |   |         |                        |  |   |                            |   |  |              |        |   |              |   |         |   |  |   |         |  
|Cash and cash equivalents at end of period                                           |  | $      |        |   |        | $ | 923     |                        |  | $ | 260                        |   |  | $            | 6      |   |              | $ |        |   |  | $ | 1,189   |  
|                                                                                     |  |        |         |   |        |   |         |                        |  |   |                            |   |  |              |        |   |              |   |         |   |  |   |         |  



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##### Table of Contents

ITEM 2.Managements Discussion and Analysis of Financial Condition and Results of Operations

Introduction

Founded in 1965, we are a leading nationwide specialty retailer and product development
company. Our strategy is to develop unique, innovative, Brookstone-branded products and offer them to customers via our proprietary distribution channels, which consist of our retail stores, our internet website and our catalogs. Our products are
intended to make some aspect of our customers life easier, better, more enjoyable or more fun, qualities that we believe make our products particularly well suited for gift giving. Our portfolio is composed of the Brookstone and Hard-to-Find
Tools brands. The Brookstone brand includes products in four main categories: home and office, travel and auto, outdoor living and health and fitness, and it consists of approximately 950 stock-keeping units, or SKUs. Approximately half of
Brookstone products are priced at $40.00 or less, although items in our stores range in price from less than $5.00 to approximately $4,300.00. The Hard-to-Find Tools brand, which operates primarily through catalogs and the internet, features
products that offer innovative solutions to common problems and tasks around the home and garden.

Acquisition

Brookstone, Inc. was acquired on October 4, 2005 through a merger transaction with Brookstone Acquisition Corp., a Delaware
corporation formed by OSIM International Ltd and affiliates of J.W. Childs Equity Partners III, L.P. and Temasek Capital (Private) Limited (collectively, the Sponsors). The acquisition was accomplished through the merger of Brookstone
Acquisition Corp. with and into Brookstone, Inc., with Brookstone, Inc. as the surviving corporation of the merger (the Transaction) pursuant to an Agreement and Plan of Merger, dated as of April 15, 2005, and amended as of
July 15, 2005, among the Company, Brookstone Holdings Corp. and Brookstone Acquisition Corp. As a result of the Transaction, the Company became a privately held wholly owned subsidiary of OSIM Brookstone Holdings, L.P., the general partner of
which is OSIM Brookstone Holdings, Inc.

Sale of Gardeners Eden

On June 29, 2005, the Company announced its plans to sell its Gardeners Eden business, which consisted of five Gardeners Eden stores, one catalog
title, Gardeners Eden and its internet site www.Gardenerseden.com. As a result, in the second quarter of Fiscal 2005, the Company began reflecting the results of operations from the Gardeners Eden business as a discontinued operation. For the
thirteen-week periods ended September 30, 2006 and October 29, 2005, Gardeners Eden operations resulted in a net loss of $62 thousand (net of tax benefit of $37 thousand) and $1.7 million (net of tax benefit of $1.3 million), respectively.
For the thirty-nine week periods ended September 30, 2006 and October 29, 2005, Gardeners Eden operations resulted in a net loss of $380 thousand (net of tax benefit of $210 thousand) and $5.5 million (net of tax benefit of $3.7 million),
respectively. The following Managements Discussion and Analysis of Results of Operations exclude the discontinued operations of Gardeners Eden.

Change in Fiscal Year

In November 2005, the Company changed its fiscal year end from the Saturday nearest the last day in
January to the Saturday nearest the last day in December. As a result of the change, the third quarter Fiscal 2006 results are for the thirteen-week period from July 2, 2006 through September 30, 2006 as compared to the third quarter
Fiscal 2005 results for the thirteen-week period from July 31, 2005 through October 29, 2005 and for the thirty-nine week period of January 1, 2006 through September 30, 2006 compared to January 30, 2005 through
October 29, 2005.

We did not recast our interim financial statements for Fiscal 2005 because it was not cost justifiable or
practicable to compile such information.

Overview

Net sales for the thirteen-week period ended September 30, 2006 were $87.8 million, an increase of 14.4% compared to the third fiscal quarter of 2005
which ended October 29, 2005. When compared to the same thirteen-week period in 2005 (July 3, 2005 through October 1, 2005), total sales increased 17.2% and same store sales increased 6.0%. The Company experienced increased performance in
the Kitchen, Stationary, Audio, Comfort,



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##### Table of Contents

Personal Care and Massage categories offset by decreases in the Bedding, Automotive, Backyard and Lighting categories
When compared to the same thirty-nine week period in 2005 (January 2, 2005 to October 1, 2005) total sales increased 5.5% and same store sales increased 2.5%. While the Company introduces new and updated products in many of its categories as
part of its merchandising strategy, there can be no assurance that any such products in these categories will achieve the popularity of existing products or sell at planned levels, which failure could continue to affect our results. In addition,
there can be no guarantee that existing products will sell at historical or planned levels, which failure could affect our results.

The Company has
provided below a statistical summary of its operating results. The table is presented on a combined basis, in which predecessor (January 30, 2005 through October 3, 2005) and successor (October 4, 2005 through October 29, 2005) Company are
reviewed as one. We have incorporated information into the discussion below because we believe it will assist the reader in understanding the Companys results of operation on a comparative basis and in recognizing underlying trends.



|                                                                                                 |  |                      |       |    |                         |   |       |                   |  |   |                 |    |  |   |       |   
|------------------------------------------------------------------------------------------------ |  | -------------------- | ----- | -- | ----------------------- | - | ----- | ----------------- |  | - | --------------- | -- |  | - | ----- | --
|                                                                                                 |  | Thirteen Weeks Ended |       |    | Thirty-Nine Weeks Ended |  
|                                                                                                 |  | September 30,2006    |       |    | October 29,2005         |   |       | September 30,2006 |  |   | October 29,2005 |   
|Revenues, net                                                                                    |  |                      |       |    |                         |   |       |                   |  |   |                 |    |  |   |       |   
|Retail segment                                                                                   |  |                      | 82.4  | %  |                         |   | 81.8  | %                 |  |   | 82.4            | %  |  |   | 84.3  | % 
|Direct segment                                                                                   |  |                      | 17.6  | %  |                         |   | 18.2  | %                 |  |   | 17.6            | %  |  |   | 15.7  | % 
|                                                                                                 |  |                      |       |    |                         |   |       |                   |  |   |                 |    |  |   |       |   
|Total revenues                                                                                   |  |                      | 100.0 | %  |                         |   | 100.0 | %                 |  |   | 100.0           | %  |  |   | 100.0 | % 
|Cost and expenses:                                                                               |  |                      |       |    |                         |   |       |                   |  |   |                 |    |  |   |       |   
|Cost of sales                                                                                    |  |                      | 75.8  | %  |                         |   | 77.4  | %                 |  |   | 75.8            | %  |  |   | 74.7  | % 
|Selling, general and administrative expenses                                                     |  |                      | 35.0  | %  |                         |   | 41.3  | %                 |  |   | 36.0            | %  |  |   | 37.0  | % 
|                                                                                                 |  |                      |       |    |                         |   |       |                   |  |   |                 |    |  |   |       |   
|Loss from continuing operations                                                                  |  |                      | (10.8 | )% |                         |   | (18.7 | )%                |  |   | (11.8           | )% |  |   | (11.7 | )%
|Interest expense, net                                                                            |  |                      | 7.3   | %  |                         |   | 5.4   | %                 |  |   | 7.2             | %  |  |   | 1.7   | % 
|                                                                                                 |  |                      |       |    |                         |   |       |                   |  |   |                 |    |  |   |       |   
|Loss before taxes and other party interests in consolidated entities and discontinued operations |  |                      | (18.1 | )% |                         |   | (24.1 | )%                |  |   | (19.0           | )% |  |   | (13.4 | )%
|Other party interests in consolidated entities                                                   |  |                      | 0.3   | %  |                         |   | 0.3   | %                 |  |   | 0.4             | %  |  |   | 0.3   | % 
|                                                                                                 |  |                      |       |    |                         |   |       |                   |  |   |                 |    |  |   |       |   
|Loss before taxes and discontinued operations                                                    |  |                      | (18.4 | )% |                         |   | (24.4 | )%                |  |   | (19.4           | )% |  |   | (13.7 | )%
|Income tax benefit                                                                               |  |                      | (6.8  | )% |                         |   | (7.6  | )%                |  |   | (6.8            | )% |  |   | (4.7  | )%
|Loss on discontinued operations, net of tax                                                      |  |                      | (0.1  | )% |                         |   | (2.2  | )%                |  |   | (0.1            | )% |  |   | (2.2  | )%
|                                                                                                 |  |                      |       |    |                         |   |       |                   |  |   |                 |    |  |   |       |   
|Net loss                                                                                         |  | $                    | (11.7 | )% |                         | $ | (19.0 | )%                |  | $ | (12.7           | )% |  | $ | (11.2 | )%
|                                                                                                 |  |                      |       |    |                         |   |       |                   |  |   |                 |    |  |   |       |   



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Results of Operations

The following Managements Discussion and Analysis of Results of Operations is presented on a combined basis, in which Predecessor and Successor Company are reviewed as one. We have prepared our discussion of the
results of operations by comparing the thirteen and thirty-nine week periods ended September 30, 2006 to the combined Successor and Predecessor results for the thirteen and thirty-nine week periods ended October 29, 2005 as presented
below.

Brookstone, Inc.

Combined Consolidated Statement of Operations

($ in thousands)



|                                                                                                 |  |                                       |         |   |                                   |   |         |                               |  |   |                                                       |   |  |                                          |         |   |                                  |   |         |                                  |  |   |                                                            |   |  |   |         |   |  |   |         |  
|------------------------------------------------------------------------------------------------ |  | ------------------------------------- | ------- | - | --------------------------------- | - | ------- | ----------------------------- |  | - | ----------------------------------------------------- | - |  | ---------------------------------------- | ------- | - | -------------------------------- | - | ------- | -------------------------------- |  | - | ---------------------------------------------------------- | - |  | - | ------- | - |  | - | ------- | -
|                                                                                                 |  | Successor                             |         |   | Successor                         |   |         | Predecessor                   |  |   |                                                       |   |  | Successor                                |         |   | Successor                        |   |         | Predecessor                      |  |   |                                                            |  
|                                                                                                 |  | Thirteen Weeks EndedSeptember 30,2006 |         |   | October 4, 2005 toOctober 29,2005 |   |         | July 31,2005 toOctober 3,2005 |  |   | Thirteen WeeksCombinedJuly 31, 2005 toOctober 29,2005 |   |  | Thirty-nine Weeks EndedSeptember 30,2006 |         |   | October 4,2005 toOctober 29,2005 |   |         | January 30,2005 toOctober 3,2005 |  |   | Thirty-nine WeeksCombinedJanuary 30,2005 toOctober 29,2005 |  
|Revenues, net                                                                                    |  |                                       |         |   |                                   |   |         |                               |  |   |                                                       |   |  |                                          |         |   |                                  |   |         |                                  |  |   |                                                            |   |  |   |         |   |  |   |         |  
|Retail segment                                                                                   |  | $                                     | 72,295  |   |                                   | $ | 18,762  |                               |  | $ | 44,021                                                |   |  | $                                        | 62,783  |   |                                  | $ | 210,844 |                                  |  | $ | 18,762                                                     |   |  | $ | 184,312 |   |  | $ | 203,074 |  
|Direct segment                                                                                   |  |                                       | 15,478  |   |                                   |   | 6,175   |                               |  |   | 7,762                                                 |   |  |                                          | 13,937  |   |                                  |   | 44,960  |                                  |  |   | 6,175                                                      |   |  |   | 31,779  |   |  |   | 37,954  |  
|                                                                                                 |  |                                       |         |   |                                   |   |         |                               |  |   |                                                       |   |  |                                          |         |   |                                  |   |         |                                  |  |   |                                                            |   |  |   |         |   |  |   |         |  
|Total revenues                                                                                   |  |                                       | 87,773  |   |                                   |   | 24,937  |                               |  |   | 51,783                                                |   |  |                                          | 76,720  |   |                                  |   | 255,804 |                                  |  |   | 24,937                                                     |   |  |   | 216,091 |   |  |   | 241,028 |  
|                                                                                                 |  |                                       |         |   |                                   |   |         |                              
|Cost and expenses:                                                                               |  |                                       |         |   |                                   |   |         |                               |  |   |                                                       |   |  |                                          |         |   |                                  |   |         |                                  |  |   |                                                            |   |  |   |         |   |  |   |         |  
|Cost of sales                                                                                    |  |                                       | 66,516  |   |                                   |   | 20,193  |                               |  |   | 39,219                                                |   |  |                                          | 59,412  |   |                                  |   | 193,867 |                                  |  |   | 20,193                                                     |   |  |   | 159,872 |   |  |   | 180,065 |  
|Selling, general and administrative expenses                                                     |  |                                       | 30,712  |   |                                   |   | 10,776  |                               |  |   | 20,881                                                |   |  |                                          | 31,657  |   |                                  |   | 92,189  |                                  |  |   | 10,776                                                     |   |  |   | 78,361  |   |  |   | 89,137  |  
|                                                                                                 |  |                                       |         |   |                                   |   |         |                               |  |   |                                                       |   |  |                                          |         |   |                                  |   |         |                                  |  |   |                                                            |   |  |   |         |   |  |   |         |  
|Loss from continuing operations                                                                  |  |                                       | (9,455  | ) |                                   |   | (6,032  | )                             |  |   | (8,317                                                | ) |  |                                          | (14,349 | ) |                                  |   | (30,252 | )                                |  |   | (6,032                                                     | ) |  |   | (22,142 | ) |  |   | (28,174 | )
|                                                                                                 |  |                                       |         |   |                                   |   |         |                              
|Interest expense, net                                                                            |  |                                       | 6,394   |   |                                   |   | 4,026   |                               |  |   | 128                                                   |   |  |                                          | 4,154   |   |                                  |   | 18,370  |                                  |  |   | 4,026                                                      |   |  |   | 25      |   |  |   | 4,051   |  
|                                                                                                 |  |                                       |         |   |                                   |   |         |                               |  |   |                                                       |   |  |                                          |         |   |                                  |   |         |                                  |  |   |                                                            |   |  |   |         |   |  |   |         |  
|Loss before taxes and other party interests in consolidated entities and discontinued operations |  |                                       | (15,849 | ) |                                   |   | (10,058 | )                             |  |   | (8,445                                                | ) |  |                                          | (18,503 | ) |                                  |   | (48,622 | )                                |  |   | (10,058                                                    | ) |  |   | (22,167 | ) |  |   | (32,225 | )
|Other party interests in consolidated entities                                                   |  |                                       | 302     |   |                                   |   | 65      |                               |  |   | 181                                                   |   |  |                                          | 246     |   |                                  |   | 950     |                                  |  |   | 65                                                         |   |  |   | 687     |   |  |   | 752     |  
|                                                                                                 |  |                                       |         |   |                                   |   |         |                               |  |   |                                                       |   |  |                                          |         |   |                                  |   |         |                                  |  |   |                                                            |   |  |   |         |   |  |   |         |  
|Loss before taxes and discontinued operations                                                    |  |                                       | (16,151 | ) |                                   |   | (10,123 | )                             |  |   | (8,626                                                | ) |  |                                          | (18,749 | ) |                                  |   | (49,572 | )                                |  |   | (10,123                                                    | ) |  |   | (22,854 | ) |  |   | (32,977 | )
|                                                                                                 |  |                                       |         |   |                                   |   |         |                              
|Income tax benefit                                                                               |  |                                       | (5,925  | ) |                                   |   | (3,447  | )                             |  |   | (2,417                                                | ) |  |                                          | (5,864  | ) |                                  |   | (17,438 | )                                |  |   | (3,447                                                     | ) |  |   | (7,887  | ) |  |   | (11,334 | )
|Loss on discontinued operations, net of tax                                                      |  |                                       | (62     | ) |                                   |   | 171     |                               |  |   | (1,864                                                | ) |  |                                          | (1,693  | ) |                                  |   | (380    | )                                |  |   | 171                                                        |   |  |   | (5,634  | ) |  |   | (5,463  | )
|                                                                                                 |  |                                       |         |   |                                   |   |         |                               |  |   |                                                       |   |  |                                          |         |   |                                  |   |         |                                  |  |   |                                                            |   |  |   |         |   |  |   |         |  
|Net loss                                                                                         |  | $                                     | (10,288 | ) |                                   | $ | (6,505  | )                             |  | $ | (8,073                                                | ) |  | $                                        | (14,578 | ) |                                  | $ | (32,514 | )                                |  | $ | (6,505                                                     | ) |  | $ | (20,601 | ) |  | $ | (27,106 | )
|                                                                                                 |  |                                       |         |   |                                   |   |         |                               |  |   |                                                       |   |  |                                          |         |   |                                  |   |         |                                  |  |   |                                                            |   |  |   |         |   |  |   |         |  



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##### Table of Contents

For the thirteen-week period ended September 30, 2006, net sales increased 14.4%, as compared to the
third fiscal quarter of 2005 which ended October 29, 2005. Net sales in the retail segment for the thirteen-week period, increased $9.5 million or 15.1% to $72.3 million as compared to $62.8 million for the third quarter last year. The change
was primarily comprised of an increase in same store sales ($6.2 million) versus the third quarter in 2005 which was driven by increases in the Kitchen, Stationary, Audio, Comfort, Personal Care and Massage categories offset by decreases in the
Bedding, Automotive, Backyard and Lighting categories as well as from increased revenues generated from the opening of 16 new stores ($4.4 million) and decreased revenue resulting from seven store closings ($1.0 million) subsequent to the third
quarter of Fiscal 2005. In addition, revenue during the thirteen-week period ended September 30, 2006 was impacted by decreased revenue from customers for shipping and handling ($100 thousand). For the thirty-nine week period ended
September 30, 2006, net sales in the retail segment increased 3.8%, or $7.8 million, to $210.8 million as compared to the thirty-nine week period ended October 29, 2005. This change was comprised of a decrease in same store sales of $1.4
million and a decrease in revenues ($300 thousand) from customers for shipping and handling. Offsetting these decreases were additional revenues from the opening of 16 new stores ($12.0 million) (partially offset by seven store closings ($2.5
million) subsequent to the third quarter of Fiscal 2005). The total number of Brookstone stores open on September 30, 2006 was 307 versus 298 on October 29, 2005.

For the thirteen-week period ended September 30, 2006 direct marketing sales increased 11.1% to $15.5 million as compared to the third quarter of
Fiscal 2005, primarily driven by increased internet sales and sales to corporate customers. Offsetting this increase is a decrease of $300 thousand generated from revenues from customers for shipping and handling. For the thirty-nine week period
ended September 30, 2006 direct marketing sales increased 18.5% to $45.0 million as compared to the thirty-nine week period of fiscal 2005.

For the thirteen-week period ended September 30, 2006, gross profit as a percentage of net sales increased 1.6% to 24.2% versus 22.6% for the third quarter of Fiscal 2005. This increase is a result of a decrease in occupancy costs of
1.8%, a decrease of 0.3% in order postage expense (costs associated with the delivery of products to customers) offset by a decrease in product margins of 0.5%. For the thirty-nine week period ended September 30, 2006, gross profit as a
percentage of net sales decreased 1.1% to 24.2% versus 25.3% for the thirty-nine week period in Fiscal 2005. This decrease is comprised of an increase in occupancy costs of 0.4%, a decrease of 0.1% in order postage expense (costs associated with the
delivery of products to customers) and a decrease in product margins of 0.8%. Occupancy costs as a percentage of net sales decreased in the third quarter and increased for the thirty-nine week period of Fiscal 2006 primarily as a result of the same
store sales increase and decrease. The decreases in product margins for the quarter and year-to-date resulted primarily from increased markdowns.

For the thirteen-week period ended September 30, 2006, selling, general and administrative expenses as a percentage of net sales decreased 6.3% to 35.0% versus 41.3% for the third quarter of Fiscal 2005 primarily as a result of
decreased payroll costs as a percentage of sales of 1.6% and decreased advertising as a percentage of sales of 3.3%. For the thirty-nine week period ended September 30, 2006, selling, general and administrative expenses as a percentage of net
sales decreased 1.0% as compared to the thirty-nine week period ended October 29, 2005. This decrease is comprised principally of a decrease in advertising (0.5%) expenses.

Net interest expense for the thirteen-week period ended September 30, 2006 was $6.4 million, compared to net interest expense of $4.2 million for
the third quarter of Fiscal 2005. For the thirty-nine week period ended September 30, 2006 net interest expense was $18.4 million as compared to net interest expense of $4 million for the thirty-nine week period in Fiscal 2005. The increase
resulted primarily from interest expense associated with the issuance of the senior secured 12% notes in October 2005.

In the third
quarter of Fiscal 2006, the Company recorded an income tax benefit on continuing operations of $5.9 million, or 6.8% of net sales, as compared to an income tax benefit on continuing operations of $5.9 million, or 7.6% of net sales, in the third
quarter of Fiscal 2005. For the thirty-nine week period the Company recorded an income tax benefit on continuing operations of $17.4 million or 6.8% of net sales in Fiscal 2006 compared to an income tax benefit on continuing operations of $11.3
million in Fiscal 2005. For the third quarter of Fiscal 2006, the tax rate on continuing operations was 36.7% of loss before income taxes based upon calculation of the discrete tax rate for the thirty-nine week period ended September 30, 2006.
For the third quarter in Fiscal 2005, the tax rate on continuing operations was 31.3% of loss before income taxes, based on the discrete method for the predecessor period and the effective annualized effective tax rate for the successor period. For
the thirty-nine week period the tax rate on continuing operations was 35.2% and 34.4% in Fiscal 2006 and Fiscal 2005, respectively, based upon the



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methodologies described for the quarters. The increase in the effective tax rate for the current period from the prior
year is related to the impact on the third quarter resulting from the use of the discrete period method for estimating taxes for the thirty-nine weeks, as well as permanent tax differences.

Two airport stores in Dallas Fort Worth, two airport stores in Las Vegas, two airport stores in Chicago and four airport stores in Atlanta operate under
separate joint venture arrangements with respect to each city. The Company has a 65% ownership interest in the Dallas Fort Worth venture, an 80% ownership interest in the Las Vegas venture, a 70% ownership interest in the Chicago venture and a 49%
ownership interest in the Atlanta venture. Other Party Interests in Consolidated Entities represents the ownership interests in the net income for these joint ventures belonging to the Companys joint venture partners (the 35% ownership in the
Dallas Fort Worth venture, the 20% ownership interest in the Las Vegas venture, the 30% ownership interest in the Chicago venture and the 51% ownership interest in the Atlanta venture). For the thirteen-weeks ended September 30, 2006 and
October 29, 2005, other party interests in consolidated entities totaled $302 thousand and $246 thousand, respectively. For the thirty-nine week periods other party interests in consolidated entities totaled $950 thousand and $752 thousand,
respectively.

As a result of the foregoing, for the thirteen-week and thirty-nine week periods ended September 30, 2006 the Company
reported a loss from continuing operations of $10.2 million and $32.1 million, respectively, as compared to a loss from continuing operations of $12.9 and $21.6 million for the thirteen-week and thirty-nine week periods ended October 29, 2005,
respectively. After discontinued operations, for the thirteen-week and thirty-nine week periods ended September 30, 2006 the Company reported a loss of $10.3 million and $32.5 million, respectively, as compared to a loss of $14.6 and $27.1
million for the thirteen-week and thirty-nine week periods ended October 29, 2005, respectively

Financial
Condition, Liquidity and Capital Resources

Cash flows for the thirty-nine week period ended September 30, 2006

For the thirty-nine week period ended September 30, 2006, the Companys cash position decreased $76.3 million to $1.2 million. Cash used for
operations totaled $65.3 million primarily as a result of payment of merchandise purchases to support the Fiscal 2005 holiday selling season, the Companys net loss from operations, and a decrease in other current liabilities resulting
primarily from the payment of sales taxes.

Cash of $6.8 million was utilized to fund capital expenditures in the thirty-nine week period
ended September 30, 2006 primarily related to the opening of nine new Brookstone stores, the remodeling of six Brookstone stores and construction related to stores anticipated to open or be remodeled in the fiscal year. In Fiscal 2006, the
Company anticipates opening approximately 15 new Brookstone stores and remodeling approximately six locations.

Net cash used for financing
activities totaled approximately $3.1 million in the thirty-nine week period ended September 30, 2006 reflecting a capital distribution to our parent company ($1.5 million), payments on long-term debt ($679 thousand) and distributions to joint
venture partners ($729 thousand).

Cash flows for the thirty-nine week period ended October 29, 2005

For the thirty-nine week period ended October 29, 2005, the Companys cash position decreased $84.7 million to $1.5 million. Cash used for
operations totaled $51.3 million primarily as a result of merchandise purchases to support the holiday selling season, the Companys net loss from operations and a decrease in other current liabilities resulting primarily from the payment of
income taxes ($11.4 million) and the payment of accrued incentive compensation ($5.4 million). An increase in accounts payable of $22.2 million consistent with the increase in inventory purchases partially offset these uses of cash.

Cash provided by financing activities was $427.6 million primarily reflecting the capital contributions and debt required to complete the Transaction
(see Note 3 to the accompanying Consolidated Financial Statements).

The Company used cash of $460.9 million primarily to complete the
acquisition and to fund capital expenditures ($12.1 million) during Fiscal 2005.



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Other Balance Sheet Changes

Receivables increased 8.0% to $11.8 million at September 30, 2006 as compared to $10.9 million at December 31, 2005 primarily as a result of the
increased sales to corporate customers. Merchandise inventories increased to $95.9 million at September 30, 2006 as compared to $75.7 million at December 31, 2005 in preparation for the holiday selling season. Deferred income taxes
increased $15.9 million as a result of the Companys recording an income tax benefit related to the loss before taxes incurred by the Company.

The Company maintains an asset based lending agreement that provides up to a maximum of $100 million to finance inventory purchases, which historically peaks in the third quarter in anticipation of the winter holiday selling season. At
September 30, 2006 and December 31, 2005, the Company had no cash borrowings outstanding under this senior secured credit facility. The Company had no outstanding cash borrowings under its previous revolving credit agreement (which was
terminated upon the closing of the transaction) at October 4, 2005.

Cash flows for the remainder of Fiscal 2006

The Company believes that cash on hand, anticipated cash generated from operations and available borrowings will be sufficient to finance its remaining
cash expenditures and capital requirements in Fiscal 2006. In Fiscal 2006, the Company anticipates funding a maximum of $650,000 for its obligation under its defined pension plan.

Critical Accounting Estimates

The preparation of the Companys consolidated financial statements in accordance with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenue and expense during the reporting periods.
Managements Discussion and Analysis of Financial Condition and Results of Operations and Note 2 of the Notes to Consolidated Financial Statements in the Companys Annual Report on Form 10-K for the year ended December 31, 2005
describe the significant accounting policies and critical accounting estimates used in the preparation of the consolidated financial statements. A complete excerpt of Note 2 has been filed as Exhibit (99.2) to this report. The Companys
management is required to make judgments and estimates about the effect of matters that are inherently uncertain. Actual results could differ from managements estimates. There have been no significant changes in the Companys critical
accounting estimates during the quarter ended September 30, 2006.

Outlook: Important Factors and Uncertainties

Statements in this quarterly report which are not historical facts, including statements about the Companys confidence or
expectations, earnings, anticipated operations of its e-commerce sites and those of third-party service providers, and other statements about the Companys operational outlook are forward-looking statements within the meaning of the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995 (Reform Act) and are subject to risks and uncertainties that could cause actual results to differ materially from those set forth in such forward-looking statements. Such
risks and uncertainties include, without limitation, risks of changing market conditions in the overall economy and the retail industry, consumer demand, the effectiveness of e-commerce technology and marketing efforts, availability of products,
availability of adequate transportation of such products, and other factors detailed from time to time in the Companys annual and other reports filed with the Securities and Exchange Commission. Words such as estimate,
project, plan, believe, feel, anticipate, assume, may, will, should and similar words and phrases may identify forward-looking statements.
Statements about a sale of its Gardeners Eden business constitute forward-looking statements. Any statements in this release made in connection with the merger are not forward-looking statements within the meaning of the safe harbor provisions of
the Reform Act. The Company may not be able to complete a sale on acceptable terms because of a number of factors, including failure to reach agreement with a purchaser.Readers are cautioned not to place undue reliance on these
forward-looking statements, which speak only as of the date thereof. The Company undertakes no obligations to publicly release any revisions to these forward-looking statements or reflect events or circumstances after the date hereof.



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ITEM 3.Quantitative and Qualitative Disclosures about Market Risk.

The
Companys primary market risk is its interest rate risk. The Company does not engage in trading activities and its foreign currency risk and commodity price risk is immaterial.

The Companys interest rate exposure is most sensitive to fluctuations in interest rates in the United States, which impact interest paid on its
debt. A 10% change in the weighted average interest rate on the Companys variable rate debt would be immaterial to the Companys consolidated financial positions, results of operations and cash flows.

The Companys Fiscal 2005 annual report on Form 10-K posted on the Companys website at www.brookstone.com also contains information
about market risks under Item 7A. Quantitative and Qualitative Disclosures About Market Risk. A complete excerpt of Item 7A of such report has been filed as Exhibit 99.1 to this report. There have been no material changes in our
exposure to market risks during the thirteen-weeks ended September 30, 2006.

ITEM 4.Controls and Procedures.

The Company carried out an evaluation, under the
supervision and with the participation of the Companys Disclosure Committee and the Companys management, including the Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the design and operation of the
Companys disclosure controls and procedures as of September 30, 2006 pursuant to Exchange Act Rule 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934. Based upon that evaluation, the Chief Executive Officer and the Chief
Financial Officer concluded that the Companys disclosure controls and procedures are effective. There have not been any changes in the Companys internal controls over financial reporting that have occurred during the last fiscal quarter
that have materially affected, or are reasonably likely to materially affect, the Companys internal controls over financial reporting.



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PART II

OTHER INFORMATION

ITEM 1.Legal Proceedings.

On September 15, 2004, a putative class action was
commenced against us in the California Superior Court in Los Angeles County. The complaint, as amended, alleges, among other things, that we engaged in unfair business practices under Californias Unfair Competition Laws in connection with the
manufacture and sale of certain air purifiers. On May 4, 2006, the Superior Court issued a decision certifying that the action may be brought on a class-wide basis. A trial is scheduled for March 5, 2007. We believe this lawsuit is without
merit and intend to defend ourselves vigorously if the matter cannot otherwise be resolved.

On June 23, 2005, we were served with a
lawsuit in the United States District Court for the Southern District of Alabama (Southern Division) as a class action on behalf of all consumers who purchased a certain air purifier from us alleging, among other things, that such products were not
suitable for the purposes for which they were intended. The lawsuit seeks unspecified damages. After the plaintiffs motion for class certification and our opposition to the motion were filed with the court, the parties engaged in settlement
negotiations with the assistance of a professional mediator. On October 18, 2006, the parties reported to the court that they had settled the plaintiffs claims against us. The amounts we would be required to pay under the settlement,
which is still subject to final approval by the court, have been recorded as an adjustment to the successor companys opening Balance Sheet. There is no finding or admission of fault by us as part of the settlement.

We are also involved in various legal proceedings incidental to the conduct of our business. We do not believe that any of these legal proceedings will
have a material adverse effect on our financial condition, results of operations, or cash flows.

ITEM 1A.Risk Factors

You should carefully consider the following risks regarding our
Company. These and other risks could materially and adversely affect our business, results of operations or financial condition. You should also refer to the other information contained or incorporated by reference in this report.

Our results of operations are highly dependent on our sales during the winter holiday season and the Fathers Day selling season.

A high percentage of our annual sales and substantially all of our annual income from operations have historically been attributable to the winter holiday
selling season. In addition, our sales in our 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. Like many retailers, we must make merchandising and
inventory decisions for the winter holiday selling season and the Fathers Day selling season well in advance of actual sales. Accordingly, unfavorable economic conditions, weather conditions and/or deviations from projected demand for products
during these seasons could have a material adverse effect on our results of operations for the entire fiscal year. While we have implemented certain measures to improve our results during periods outside of the winter holiday selling season and the
Fathers Day selling season, such as the opening of stores in airports, we expect that our annual results of operations will remain dependent on our performance during the winter holiday selling season, and to a lesser extent, on our
performance during the Fathers Day selling season.

Our ability to introduce innovative merchandise and updated products may impact our sales
and profitability.

Successful implementation of our merchandising strategy depends on our 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. We expect that the popularity of a product or group of related products of the types we typically
offer will be limited in time due to the continual changing nature of consumer preferences. In addition, if our products or substitutes for such products become widely available from other retailers (including mass-retailers, department stores or
discount retailers), demand for these products from us may decline or we may be required to reduce our retail prices. If a competitor of our Company were to offer for sale new and innovative



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products that we did not offer for sale, customer demand for our goods could decline. A decline in the demand for, or a
reduction in the retail prices of, our important existing products can cause declines in our sales and profitability if we are unable to introduce in a timely fashion new or replacement products of similar sales levels and profitability. Even with
innovative merchandising, there remains a risk that the products will not sell at planned levels.

Changes in consumer preferences could adversely
affect our business.

Our business in general is subject to changing consumer and industry trends, demands and preferences. Our
continued success depends largely on the introduction and acceptance by our customers of new product lines and improvements to existing product lines that respond to such trends, demands and preferences. Trends within the industry change often and
our failure to anticipate, identify or react to changes in these trends could lead to, among other things, rejection of a new product line and reduced demand and price reductions for our products, and could materially adversely affect us. In
addition, we may not have sufficient resources to make necessary investments or we may be unable to make the advances necessary to develop new products or improve our existing products to maintain our market position.

We are exposed to product liability claims and intellectual property infringement claims.

Although we seek to maintain quality standards at a high level, our products may have defects that could result in high rates of return, recalls or
product liability claims. Such returns, recalls or claims could adversely affect profitability. Third parties may assert claims for patent or trademark infringement, or violation of other proprietary rights. If successful, such claims could result
in the inability to sell a particular product or, in the case of a settlement or royalty, adversely impact the profitability of the product and could have a material adverse effect on our results of operations. Such claims could entail significant
legal expenses even if they are ultimately resolved in our favor.

Our ability to protect our proprietary technology is uncertain and our inability
to protect these rights could impair our competitive advantage and cause us to incur substantial expense to enforce our rights.

We
actively pursue and protect, domestically and internationally, our corporate trademarks and other intellectual property rights to ensure that the quality of our brands and the value of our proprietary rights are maintained. We seek patents to
establish and protect our proprietary rights relating to the technologies and products we have developed, are in the process of developing, or that we may develop in the future. We have taken and will continue, in the future, to take steps to
broaden and enhance our patent protection for our proprietary products.

We cannot assure you that a third party will not infringe upon or
design around any patent issued or licensed to us, or that these patents will otherwise be commercially viable. Litigation to establish the validity of patents, to defend against patent infringement claims of others and to assert patent infringement
claims against others can be expensive and time-consuming even if the outcome is favorable to us. If the outcome is unfavorable to us, we may be required to pay damages, stop production and sales of infringing products or be subject to increased
competition from similar products. We have taken and may, in the future, take steps to enhance our patent protection, but we cannot assure you that these steps will be successful or that, if unsuccessful, our patent protection will be adequate.

We also rely upon trade secrets, know-how, continuing technological innovations and licensing opportunities to develop and maintain our
competitive position. We attempt to protect our proprietary technology in large part by confidentiality agreements with our employees, consultants and other contractors. We cannot assure you, however, that these agreements will not be breached, that
we will have adequate remedies for any breach or that competitors will not know of or independently discover our trade secrets.

Existing or future
governmental regulations and legal uncertainties, including those relating to consumer protection, could have a material impact on our business or results from operations.

Our Company and its operations are subject to numerous laws, regulations and governmental policies and procedures on the international, federal, state and
local levels, including, but not limited to, laws, regulations, policies, procedures, rulings, interpretations, or other governmental or quasi-governmental practices, regarding corporate governance, commerce, customs, international trade, labor and
employment, importation tax, securities, accounting, and other laws and regulations which are, or are found to be, applicable to us. Changes to this legal and regulatory framework, or to any individual law or regulation, or governmental policy or
procedure to which we are now, or are determined to be in the future, subject, could have a material impact on our business or results from operations.



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In addition, we are subject to federal, state, local and foreign consumer protection laws and
regulations, including laws prohibiting unfair and deceptive trade practices. The violation of these laws may give rise to private rights of action, including class action lawsuits. If any of these claims are successful, it could materially
adversely affect our business. In addition, any amendments to these regulations may force us to change certain aspects of our business which may materially adversely affect our results of operations.

The success of our business is dependent on our ability to open new stores and temporary locations.

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

If our leases terminate or are not renewed upon expiration, we could be required to make significant
capital expenditures to relocate our retail stores.

All of our retail stores are leased. There can be no assurance that upon
termination or expiration of these leases we will be able to renew them on acceptable terms or at all. If we are unable to renew such leases, we could be required to make significant capital expenditures to relocate our retail stores.

We operate in a very competitive business environment.

The U.S. retail industry is highly competitive. We compete against large international and national players, as well as many regional competitors. Some of our principal competitors may be less highly leveraged than we are and have greater
financial, marketing and distribution resources than we do. Accordingly, these competitors may be better able to withstand changes in conditions within the industries in which we operate, and may have significantly greater operating and financial
flexibility than we do. These competitors could increase their market share and cause us to lose business from our customers.

As a result
of this competitive environment, we face and will continue to face pressure on sales prices of our products from competitors. As a result of these pricing pressures, we may in the future experience reductions in our profit margins, revenues or
sales. In addition, we will need to invest continuously in customer service and support, marketing and our sales force. We cannot assure you that we will be able to maintain or increase either current market share of our products or our price and
operating margins successfully in the future.

Our business will suffer if certain key officers or employees discontinue employment with us or if we
are unable to recruit and retain highly skilled personnel.

The success of our business is materially dependent upon the skills,
experience and efforts of our key officers and employees. The loss of key personnel could have a material adverse effect on our business, operating results or financial condition. Our business also depends on our ability to continue to recruit,
train and retain skilled employees, particularly highly-skilled and motivated, full-time and temporary associates with appropriate retail experience to work in management and in our stores and temporary locations. 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. The market for these resources is highly competitive. The loss of the services of any key personnel, or our
inability to hire new personnel with the requisite skills, could impair our ability to develop new products or enhance existing products, sell products to our customers or manage our business effectively.

Our business may be negatively impacted by poor economic conditions.

Our business has been and may in the future be impacted by economic conditions that tend to reduce the level of discretionary consumer spending. These conditions include high interest rates, inflation, unemployment,
stock market uncertainty and low consumer confidence.



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Computer systems or telephone services failures could have a material adverse effect on us.

Our success is dependent upon our computer hardware and software systems and our telecommunications systems. The internet portion of the direct marketing
segment relies heavily on the proper operation of these systems, as well as on the continued operation of the external components of the internet, to market goods and to receive and process orders. The retail segment utilizes point of sale computers
located in the stores. Our headquarters and distribution center rely on a wide variety of applications to carry on the business. These systems are subject to damage from natural disasters, power failures, hardware and software failures, security
breaches, network failures, computer viruses and operator negligence. Should one of these systems fail or be inadequate to support future growth, our results could be materially and adversely impacted. We are also dependent on certain vendors of our
key information systems. Should these vendors experience financial difficulties, the support of these key systems could be negatively impacted.

Disruptions at our distribution center, including potential labor disputes and work stoppages, could significantly increase our distribution costs and therefore adversely affect our financial performance.

We conduct the majority of our distribution operations and a significant portion of our direct marketing processing functions from our facility in Mexico,
Missouri. A disruption in operations at the distribution center may significantly increase our distribution costs and prevent goods from flowing to stores and customers. We use third-party carriers for our product shipments. The distribution of
products is vulnerable to disruption from employee strikes and labor unrest, in particular, potential strikes by UPS employees and/or longshoremen, which could increase costs and impede or restrict the supply of goods.

The success of our direct marketing operations are dependent on various factors, including the receipt of adequate customer response to mailings and rising paper
and postal rates.

The success of our catalog operation hinges on the achievement of adequate response rates to mailings,
merchandising and catalog presentation that appeal to mail order customers and the expansion of the potential customer base in a cost-effective manner. Lack of consumer response to particular catalog mailings could increase the costs and decrease
the profitability of the direct marketing segment. Significant costs relative to paper, postage and inventory are associated with the direct marketing segment. Rising paper and postal rates can negatively impact the business and the failure to
accurately predict consumer response or to achieve the optimum cost-effective level of catalog circulation could adversely affect revenues and growth of the business. In addition, terrorism perpetrated via the U.S. mail or threats thereof could have
a material adverse impact on our catalog business.

Because we depend on a core group of significant vendors, our operating results may be adversely
affected by the loss of these key vendors or if these key vendors are unable to continue to fill our orders for their products.

Because we strive to sell only unique merchandise, adequate substitutes for certain key products may not be widely available in the marketplace. There can be no assurance that vendor manufacturing or distribution problems, or the loss of
our exclusive rights to distribute important products, would not have a material adverse effect on our performance. In Fiscal 2005, we had one vendor who supplied products representing approximately 16% of net sales, with our 10 largest vendors
representing approximately 41% of net sales. Our operating results could be adversely affected if any of our 10 largest vendors were unable to continue to fill our orders for such vendors products or failed to fill those orders in a timely
way.

Our dependence on foreign vendors subjects us to possible delays in receipt of merchandise and to the risks involved in foreign operations.

We are purchasing a substantial portion of our merchandise from foreign vendors, including, but not limited to, Asia. Although we
expect this strategy to increase profit margins for these products, our reliance on such vendors subjects us to associated legal, social, political and economic risks, including, but not limited to, import, licensing and trade restrictions. In
particular, economic relations between the United States and China have historically had a potential for volatility, the recurrence of which could have a material adverse impact on our operations and results. There is increasing political pressure
on China to permit the exchange rate of its currency, the Chinese Yuan (CNY), to float against the U.S. Dollar (USD). Although substantially all of our supply contracts in China are denominated in USD, our suppliers
could attempt to renegotiate these contracts and increase costs to us if the



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CNY/USD exchange rate were to change. We are also subject to the risk that the manufacturers abroad who ultimately
manufacture our products may employ labor practices that are not consistent with acceptable practices in the United States. In any such event, we could be hurt by negative publicity with respect to those practices and, in some cases, face liability
for those practices.

Additionally, we are highly dependent upon steamship lines and air cargo companies to transport this merchandise from
overseas to the United States and as such, we remain vulnerable to equipment shortages and labor stoppage, as well as terror alerts and acts of terrorism, both at the ports and countries of origins and in the United States. In such a situation, we
could face inventory shortages in certain products, increased transportation costs and increased interest expense as a result of moving inventory receipts forward.

The expansion of our business into international markets would expose us to certain risks.

We intend to expand the
Brookstone concept into Asia and other international markets. We cannot assure you that we will maintain significant operations internationally or that any such operations will be successful. Any international operations we establish will be subject
to risks similar to those affecting our existing operations in the United States in addition to a number of other risks, including:



| |  |  | political and economic instability in foreign markets;
| | - |  | ------------------------------------------------------



| |  |  | inconsistent product regulation by foreign agencies or governments;
| | - |  | -------------------------------------------------------------------



| |  |  | imposition of product tariffs and burdens;
| | - |  | ------------------------------------------



| |  |  | cost of complying with a wide variety of international and U.S. export laws and regulatory requirements;
| | - |  | --------------------------------------------------------------------------------------------------------



| |  |  | foreign currency fluctuations;
| | - |  | ------------------------------



| |  |  | difficulty in enforcing intellectual property rights; and
| | - |  | ---------------------------------------------------------



| |  |  | language and other cultural barriers.
| | - |  | -------------------------------------

We currently do
not plan to acquire political risk insurance in the countries in which we will conduct business. While we will carefully consider the risks in countries where we are evaluating investment opportunities, we cannot assure you that we will not be
materially adversely affected as a result of such risks.

Interruptions in deliveries of raw materials and/or increased prices for raw materials used
in our products could adversely affect our profitability, margins and revenues.

The raw materials used to manufacture the products
we sell and our distribution and labor costs are subject to availability constraints and price volatility, which could result in increased costs. The raw materials used to manufacture the products we sell are subject to availability constraints and
price volatility caused by high demand for such products and their components, currency fluctuations, factory capacity, competition for suppliers and factories, weather, supply conditions, government regulations, economic climate and other
unpredictable factors. In addition, our transportation and labor costs are subject to price volatility caused by the price of oil, supply of labor, governmental regulations, economic climate, currency fluctuations and other unpredictable factors.
Increases in demand for, or the price of, raw materials, distribution services and labor could have a material adverse effect on our business, financial condition and results of operations. Since we rely significantly on foreign sources of raw
materials and production, we are at risk from a variety of factors that could leave us with inadequate or excess inventories, resulting in decreased profits or losses.

Increases in petroleum prices may increase our transportation and shipping costs and the costs of certain of our products, which could lead to a decrease in sales.

In recent years, increases in petroleum prices have resulted in increased transportation and shipping costs for our Company. Further increases in
petroleum prices such as those recently experienced as a result of Hurricane Katrina, or failure of such prices to decline, could continue to increase our costs for transportation and shipping and also could cause increases in the cost of goods that
are manufactured from plastics and other petroleum-based products. In addition, increased petroleum prices may lead to increased airfares, which could cause a decrease in sales.



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Fluctuating exchange rates could adversely affect our profitability and revenues.

We conduct a substantial part of our business in the U.S., and therefore our profitability and revenues may be adversely affected by fluctuating exchange
rates. We are subject to currency exchange rate risk to the extent that our costs are denominated in currencies other than those in which we earn revenues. We cannot assure you that currency exchange rate fluctuations will not adversely affect our
results of operations and financial condition.

Government regulation and other uncertainties relating to the internet and online commerce could
negatively impact our internet business.

As a greater proportion of our sales are made via the internet, and as we begin to look
more to that channel to increase overall sales, we will become increasingly subject to the uncertainties inherent in the developing area of e-commerce. Such uncertainties include, but are not limited to, the extent to which our customers will adopt
the internet as their method of purchase, the effect that government regulation of the internet (or lack thereof) will have on the internet as a medium of commerce, as well as the reliability, stability and security of the internet and World Wide
Web.

Health epidemics, terror alerts, terrorist attacks and other acts of violence or war may adversely affect our sales.

The United States Federal Government terror alerts have a negative effect on retail sales as they cause a disruption of consumer shopping patterns. Our
stores are located predominantly in large public areas such as malls and airports, which experience a significant decrease in traffic during periods of high alert. Our stores are dependent on pedestrian traffic for sales volume. Terror alerts and
acts of terrorism that affect such traffic could have a materially adverse impact on sales. Terror alerts related to acts of terrorism perpetrated via the U.S. mail could also have a material adverse impact on our catalog business.

A significant portion of our sales is generated at our airport store locations. Additionally, we market a wide range of products attractive to the
traveling public. A decrease in traffic due to war, terrorism, health epidemics, cost increases to the consumer, or the consolidation of the airline industry caused by merger and bankruptcy and the consequent reduction of flights and available
destinations could negatively affect the volume of business at our airport store locations and could depress the sales of travel-related merchandise.

The outbreak of unexpected disease threats such as severe acute respiratory syndrome (SARS), influenza, avian flu, and insect-borne diseases such as encephalitis and the West Nile virus could negatively impact our
sales. Travel restrictions to certain parts of the world could impair our activities with some of our vendors that could result in product shortages and could slow new product development. Additionally, any reduction in travel could depress sales at
our airport locations and reduce sales of our travel-related merchandise. Fear of contagion could cause a drop in traffic at all of our store locations with a consequent drop in sales.

Extreme weather conditions may negatively impact our business, financial condition and results of operations.

Extreme weather conditions in regions in which we source our products or the areas in which our stores are located could have a material adverse effect on our business, financial condition and results of operations.
Major international catastrophes such as tsunamis, hurricanes and earthquakes could adversely affect our business in a number of ways, including but not limited to, store closures, reduced sales, performance delays, product shortages and increased
costs, all of which are beyond our control and cannot be anticipated. For example, Hurricane Katrina forced us to close five of our stores. Also, heavy snowfall or other extreme weather conditions over a prolonged period might make it difficult for
our customers to travel to our stores. Our business is also susceptible to unseasonable weather conditions. For example, extended periods of unseasonably warm temperatures during the winter season or cool weather during the summer season could
render a portion of our inventory incompatible with those unseasonable conditions. These prolonged unseasonable weather conditions could adversely affect our business, financial condition and results of operations.

Our Sponsors interests may conflict with the interests of other security holders of the Company.

The Sponsors and their affiliates and designees indirectly collectively beneficially own approximately 93.5% of our outstanding voting securities. As a
result, our Sponsors are collectively in a position to control all



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matters affecting us, including decisions regarding extraordinary business transactions, fundamental corporate
transactions, appointment of members to our management, election of directors and our corporate and management policies.

The interests of
our Sponsors could conflict with the interests of other security holders of the Company. For example, if we encounter financial difficulties or are unable to pay our debts as they mature, the interests of our Sponsors might conflict with the
interests of other security holders of the Company. Our Sponsors may also have an interest in pursuing acquisitions, divestitures, financings or other transactions, including dividend payments to the holders of our equity that, in their judgment,
could enhance their equity investments, even though such transactions might involve risks to other security holders of the Company.

Our substantial
indebtedness could adversely affect our financial health.

We currently have a significant amount of indebtedness. As of
September 30, 2006, we had total indebtedness of $190.6 million (of which $183.0 million consisted of the senior secured notes, net of discount on the notes of $2.0 million, and the balance consisted of other debt).

Our substantial indebtedness could have important consequences to our investors. For example, it could:



| |  |  | make it more difficult for us to satisfy our obligations with respect to the senior secured notes;
| | - |  | --------------------------------------------------------------------------------------------------



| |  |  | increase our vulnerability to general adverse economic and industry conditions;
| | - |  | -------------------------------------------------------------------------------



| |  |  | require us to dedicate a substantial portion of our cash flow from operations to payments on our indebtedness, thereby reducing the availability of our cash flow to fund working
capital, capital expenditures, research and development efforts and other general corporate purposes;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate;
| | - |  | --------------------------------------------------------------------------------------------------------------------



| |  |  | place us at a competitive disadvantage compared to our competitors that have less debt; and
| | - |  | -------------------------------------------------------------------------------------------



| |  |  | limit our ability to borrow additional funds.
| | - |  | ---------------------------------------------

In
addition, the indenture for the senior secured notes and our new senior secured credit facility contain financial and other restrictive covenants that limit our ability to engage in activities that may be in our long-term best interests. Our failure
to comply with those covenants could result in an event of default which, if not cured or waived, could result in the acceleration of all of our debts.

To service our indebtedness, we will require a significant amount of cash. Our ability to generate cash depends on many factors beyond our control.

Our ability to make payments on and to refinance our indebtedness and to fund planned capital expenditures and research and development efforts will depend on our ability to generate cash in the future. This, to a
certain extent, is subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond our control.



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Based on our current level of operations and anticipated cost savings and operating improvements, we
believe our cash flow from operations, available cash and available borrowings under our new senior secured credit facility, will be adequate to meet our future liquidity needs at least until the maturity date of our new senior secured credit
facility.

We cannot assure you, however, that our business will generate sufficient cash flow from operations, that currently anticipated
cost savings and operating improvements will be realized on schedule or that future borrowings will be available to us under our new senior secured credit facility in an amount sufficient to enable us to pay our indebtedness, or to fund our other
liquidity needs. We may need to refinance all or a portion of our indebtedness on or before maturity. We cannot assure you that we will be able to refinance any of our indebtedness, including our new senior secured credit facility and the senior
secured notes, on commercially reasonable terms or at all.

We are not required to evaluate our internal controls over financial reporting under
Section 404 of the Sarbanes-Oxley Act of 2002, which may lead to our investors losing confidence in our reported financial information.

As a result of becoming a privately held company upon the consummation of the Transaction, we are not subject to the requirements of Section 404 of the Sarbanes-Oxley Act of 2002. Section 404 requires management of a reporting
company to annually review, assess and disclose the effectiveness of a companys internal controls over financial reporting and to obtain a report by the reporting companys independent auditors addressing such assessments. To the extent
that we do make the assessments and disclosures as to our internal controls over financial reporting provided for by Section 404 of the Sarbanes-Oxley Act of 2002, investors may lose confidence in the accuracy of our reported financial
information, which may negatively impact the trading price of the senior secured notes.

ITEM 2.Unregistered Sales of Equity Securities and Use of Proceeds.

None.

ITEM 3.Defaults Upon Senior Securities.

None.

ITEM 4.Submission of Matters to a Vote of Security Holders.

None.

ITEM 5.Other Information.

During the Companys third quarter of Fiscal 2006,
Mr. Alexander M. Winiecki resigned from his position as the Executive Vice President, Store Operations, of the Company.

Upon his resignation
from the Company, Mr. Winiecki and the Company entered into a Separation Agreement, which Separation Agreement was amended and restated as of November [14], 2006. Under the terms of the Separation Agreement, Mr. Winiecki will receive his
base salary for a period of ten months commencing on July 12, 2006 and his Company-sponsored medical and dental benefits will be continued until October 2008. In addition, as further described in Note 5 to the Consolidated Financial Statements
filed on this Form 10-Q, OBH LP has exercised its right to repurchase all of the equity held by Mr. Winiecki in OBH LP and OSIM Brookstone Holdings, Inc. for Mr. Winieckis cost price in such equity, payable in two equal installments.

In accordance with the terms of the Separation Agreement, the employment agreement between the Company and Mr. Winiecki, dated October 4, 2005,
was terminated, with the exception of certain restrictive covenants, including covenants regarding non-competition, non-solicitation and non-disparagement. Except as provided in the Separation Agreement, all rights of Mr. Winiecki maintained
under the employment agreement following his termination of employment, including his rights to receive his base salary, bonus and benefits, were terminated pursuant to the terms of the Separation Agreement.

The preceding description is summary in nature and does not purport to be complete. A complete copy of the Amended and Restated Separation Agreement is attached hereto
as Exhibit 10.1.



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ITEM 6.Exhibits.



|     |  |                                                                                                                                                                                                                     
|---- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.1 |  | Amended and Restated Separation Agreement and General Release, among Alex M. Winiecki and Brookstone, Inc. (filed herewith).                                                                                        
|     | 
|31.1 |  | Certification of Principal Executive Officer in the Form Provided by Rule 15d-14 of the Securities Exchange Act of 1934 (filed herewith)                                                                            
|     | 
|31.2 |  | Certification of Principal Financial Officer in the Form Provided by Rule 15d-14 of the Securities Exchange Act of 1934 (filed herewith)                                                                            
|     | 
|32.1 |  | Certification of Chief Executive Officer in the Form Provided by Section 1350, Chapter 63 of Title 18, United States Code, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(furnished herewith)
|     | 
|32.2 |  | Certification of Chief Financial Officer in the Form Provided by Section 1350, Chapter 63 of Title 18, United States Code, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(furnished herewith)
|     | 
|99.1 |  | Excerpt of Item 7A from the Companys Fiscal 2005 Annual Report (filed herewith)                                                                                                                                    
|     | 
|99.2 |  | Excerpt of Note 2 of the Notes to Consolidated Financial Statements from the Companys Fiscal 2005 Annual Report (filed herewith)                                                                                   



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Signatures

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



|                  |  |  |  |                                                      
|----------------- |  |  |  | -----------------------------------------------------
|                  |  |  |  | Brookstone, Inc.                                     
|                  |  |  |  | (Registrant)                                         
|                  |  | 
|                  |  |  |  | /s/ Philip W. Roizin                                 
|November 14, 2006 |  |  |  | (Signature)                                          
|                  |  |  |  | Philip W. Roizin                                     
|                  |  |  |  | Executive Vice President Finance and Administration, 
|                  |  |  |  | Treasurer and Secretary                              
|                  |  |  |  | (Principal Financial Officer                         
|                  |  |  |  | and duly authorized to sign on behalf of the Company)



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Exhibit Index



|               |  |                                                                                                                                                                                                                     
|-------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit Number |  | Exhibit                                                                                                                                                                                                             
|10.1           |  | Amended and Restated Separation Agreement and General Release, among Alex M. Winiecki and Brookstone, Inc. (filed herewith).                                                                                        
|               | 
|31.1           |  | Certification of Principal Executive Officer in the Form Provided by Rule 15d-14 of the Securities Exchange Act of 1934 (filed herewith)                                                                            
|               | 
|31.2           |  | Certification of Principal Financial Officer in the Form Provided by Rule 15d-14 of the Securities Exchange Act of 1934 (filed herewith)                                                                            
|               | 
|32.1           |  | Certification of Chief Executive Officer in the Form Provided by Section 1350, Chapter 63 of Title 18, United States Code, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(furnished herewith)
|               | 
|32.2           |  | Certification of Chief Financial Officer in the Form Provided by Section 1350, Chapter 63 of Title 18, United States Code, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(furnished herewith)
|               | 
|99.1           |  | Excerpt of Item 7A from the Companys Fiscal 2005 Annual Report (filed herewith)                                                                                                                                    
|               | 
|99.2           |  | Excerpt of Note 2 of the Notes to Consolidated Financial Statements from the Companys Fiscal 2005 Annual Report (filed herewith)                                                                                   



44