<PAGE>
 
                      SECURITIES AND EXCHANGE COMMISSION
                            WASHINGTON, D.C. 20549
                                   FORM 10-Q



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

                 For the quarterly period ended August 1, 1998
                                                --------------

                                       OR

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

     For the transition period from                  to 
                                    -----------------   ------------------


     Commission file number             0-21406                            
                            ---------------------------------------------- 



                                Brookstone, Inc.                           
     --------------------------------------------------------------------- 
            (Exact name of registrant as specified in its charter)



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



                    17 Riverside Street, Nashua, NH  03062
                    --------------------------------------
               (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)



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

Yes [X]   No [ ]    


               APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
                  PROCEEDINGS DURING THE PRECEDING FIVE YEARS
                                        

Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.

Yes [ ]   No [ ]    


                     APPLICABLE ONLY TO CORPORATE ISSUERS:

Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: 8,017,167 shares of common
                                                ----------                 
stock as of  September 4, 1998.
             ------------------
<PAGE>
 
                               BROOKSTONE, INC.
                                        
                              INDEX TO FORM 10-Q
                                        


Part I:  Financial Information                                          Page No.
         ---------------------                                          --------

Item 1:  
          Consolidated Balance Sheet
          as of August 1, 1998, January 31, 1998, and August 2, 1997          3

          Consolidated Statement of Operations for the thirteen and 
          twenty-six weeks ended August 1, 1998 and August 2, 1997            4

          Consolidated Statement of Cash Flows for the twenty-six 
          weeks ended August 1, 1998 and August 2, 1997                       5

          Notes to Consolidated Financial Statements                          6


Item 2:
          Management's Discussion and Analysis of Financial
          Condition and Results of Operations                                7-8


Part II:  Other Information
          -----------------

Item 1:  
          Legal Proceedings                                                   9

Item 2:
          Change in Securities                                                9

Item 3:
          Defaults by the Company upon its Senior Securities                  9

Item 4:
          Submission of Matters to a Vote of Security Holders                 9

Item 5:
          Other Information                                                   9

Item 6:

          Exhibits and Reports on Form 8-K                                   10

Signatures                                                                   11

                                       2
<PAGE>
 
                                BROOKSTONE, INC.
                           CONSOLIDATED BALANCE SHEET
                       (IN THOUSANDS, EXCEPT SHARE DATA)
                                        
<TABLE>
<CAPTION>
                                                 (Unaudited)                                   (Unaudited)
                                                August 1, 1998        January 31, 1998       August 2, 1997
                                                --------------        ----------------       --------------
<S>                                             <C>                   <C>                    <C> 
    Assets
    ------

Current Assets:               
  Cash and cash equivalents                       $   2,510                $ 16,906             $ 1,617
  Receivables, net                                    6,115                   5,532               3,683
  Merchandise inventories                            39,927                  37,285              29,489
  Deferred income taxes                               6,491                   2,805               3,847
  Other current assets                                5,144                     955               4,811
                                                  ---------                --------             -------
    Total current assets                             60,187                  63,483              43,447
                                                  ---------                --------             -------
Deferred income taxes                                 2,916                   2,916               1,845
Property and equipment, net                          37,770                  37,854              32,986
Other assets                                            665                   1,065                 127
                                                  ---------                --------             -------
                                                  $ 101,538                $105,318             $78,405
                                                  =========                ========             =======
                              
Liabilities and Shareholders' Equity              
------------------------------------

Current liabilities:
Short term borrowings                             $   8,860                $      -             $   760
Accounts payable                                     11,820                  14,440               7,882
Other current liabilities                            10,696                  16,602               7,997
                                                  ---------                --------             -------
    Total current liabilities                        31,376                  31,042              16,639

Other long term liabilities                           9,861                   9,812               9,174
Long term obligation under capital lease              2,652                   2,698               2,742

Commitments and contingencies

Shareholders' Equity:
Preferred stock, $0.001 par value: 
  Authorized - 2,000,000 shares; issued and
  outstanding - 0 shares at August 1, 1998,
  January 31, 1998 and August 2, 1997
Common stock, $0.001 par value
  Authorized 50,000,000 shares; issued and 
  outstanding - 7,994,067 at August 1, 1998.
  7,871,384 shares at January 31, 1998 and 
  7,819,134 shares at August 2, 1997                      8                       8                   8
Additional paid-in capital                           47,899                  47,124              46,788
Retained earnings                                     9,789                  14,681               3,101
Treasury stock, at cost - 3,616 shares at 
  August 1, 1998, January 31, 1998 and
  August 2, 1997                                        (47)                    (47)                (47)
                                                  ---------                --------             -------
    Total Shareholders' Equity                       57,649                  61,766              49,850
                                                  ---------                --------             -------
                                                   $101,538                $105,318             $78,405
                                                  =========                ========             =======
</TABLE> 

                                       3
<PAGE>
 
                                BROOKSTONE, INC.

                      CONSOLIDATED STATEMENT OF OPERATIONS
                     (IN THOUSANDS, EXCEPT PER SHARE DATA)
                                  (Unaudited)
<TABLE> 
<CAPTION> 
                                                      Thirteen Weeks Ended                 Twenty-six Weeks Ended
                                                ----------------------------------  ----------------------------------
                                                August 1, 1998     August 2, 1997    August 1, 1998    August 2, 1997
                                                ----------------  ----------------  ----------------  ----------------
<S>                                             <C>               <C>               <C>               <C> 
Net sales                                          $ 53,756          $ 44,848           $ 91,675          $ 77,985
Cost of sales                                        36,453            30,297             65,485            55,245
                                                   --------          --------           --------           -------
Gross profit                                         17,303            14,551             26,190            22,740

Selling, general and administrative 
  expenses                                           17,622            15,105             33,568            29,416
                                                   --------          --------           --------           -------
  Loss from operations                                 (319)             (554)            (7,378)           (6,676)

Interest expense, net                                   464               202                694               306
                                                   --------          --------           --------           -------
  Loss before taxes                                    (783)             (756)            (8,072)           (6,982)
  Income tax benefit                                   (308)             (298)            (3,180)           (2,751)
                                                   --------          --------           --------           -------
Net loss                                           $   (475)         $   (458)          $ (4,892)          $(4,231)
                                                   --------          --------           --------           -------
Net loss per share-basic/diluted                   $  (0.06)         $  (0.06)          $  (0.62)          $ (0.54)

Weighted average shares outstanding-
  basic/diluted                                       7,984             7,780              7,945             7,781
                                                   ========          ========           ========           ======= 
 
</TABLE>

                                       4
<PAGE>
 
                                BROOKSTONE, INC.

                      CONSOLIDATED STATEMENT OF CASH FLOWS
                                 (IN THOUSANDS)
                                  (Unaudited)
<TABLE>
<CAPTION>
                                                                Twenty-Six  Weeks Ended
                                                        --------------------------------------
                                                        August 1, 1998          August 2, 1997
                                                        --------------          --------------
<S>                                                     <C>                     <C>
Cash flows from operating activities:
Net loss                                                  $ (4,892)               $ (4,231)

Adjustments to reconcile net loss to net cash used by
  operating activities:

  Depreciation and amortization                              3,700                   3,032
  Amortization of deferred financing                            69
  Deferred income taxes                                     (3,686)                 (2,821)
  Decrease in other assets                                     400                     607
  Decrease in other long term liabilities                       49                     251

Changes in working capital:
  Accounts receivable, net                                    (583)                  1,765
  Merchandise inventories                                   (2,642)                  1,777
  Other current assets                                      (4,258)                 (1,858)
  Accounts payable                                          (2,620)                   (734)
  Other current liabilities                                 (5,906)                 (4,988)
                                                          --------                --------

Net cash used by operating activities                     $(20,369)               $ (7,200)

                                                          --------                --------
Cash flows from investing activities:
  Expenditures for property and equipment                   (3,616)                 (2,607)
                                                          --------                --------

Net cash used for investing activities                      (3,616)                 (2,607)
                                                          --------                --------

Cash flows from financing activities:
  Borrowings from revolving credit                           8,860                     760
  Payments for capitalized lease                               (46)                    (38)
  Proceeds from exercise of stock options 
   and related tax benefits                                    775                     126
                                                          --------                --------

Net cash provided by financing activities                    9,589                     848
                                                          --------                --------

Net decrease in cash and cash equivalents                  (14,396)                 (8,959)

Cash and cash equivalents at beginning of period            16,906                  10,576
                                                          --------                --------
Cash and cash equivalents at end of period                $  2,510                $  1,617
                                                          ========                ========
</TABLE>

                                       5
<PAGE>
 
                                BROOKSTONE, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                        


1.  The results of the twenty-six week period ended August 1, 1998 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 Christmas selling season, has produced a disproportionate
    amount of the Company's net sales and generally all of its income from
    operations. The Company expects that its business will continue to be
    subject to such seasonal influences.


2.  The accompanying unaudited consolidated financial statements have been
    prepared in accordance with generally accepted accounting principles and
    practices consistently applied. In the opinion of the Company, these
    financial statements contain all adjustments (consisting of only normal
    recurring adjustments) necessary to present fairly the financial position
    and the results of operations for the periods reported. Certain information
    and footnote disclosures normally included in financial statements presented
    in accordance with generally accepted accounting principles have been
    condensed or omitted. It is suggested that the accompanying consolidated
    financial statements be read in conjunction with the annual financial
    statements and notes thereto which may be found in the Company's 1997 annual
    report.


3.  The exercise of stock options which have been granted under the Company's
    stock option plans gives rise to compensation which is includable in the
    taxable income of the optionees and deductible by the Company for tax
    purposes upon exercise. Such compensation reflects an increase in the fair
    market value of the Company's common stock subsequent to the date of grant.
    For financial reporting purposes, the tax effect of this deduction is
    accounted for as a credit to additional paid-in capital rather than as a
    reduction of income tax expense. Such exercises resulted in a tax benefit to
    the Company of approximately $505,000 for the twenty-six week period ended
    August 1, 1998.


4.  Under the Company's 1997 Employee Stock Purchase Plan, the Company granted a
    six-month employee stock purchase option commencing on November 4, 1997 and
    concluding on May 4, 1998. Under this option, each participating associate
    was able to contribute not less than 2% and not more than 10% of
    compensation, not to exceed a maximum contribution of $2,000, over the six-
    month option period. At the end of the option period, a total of 17,102
    shares were accordingly issued to each participating associate at a purchase
    price of 85% of the fair market value of the Company's common stock, $0.001
    par value, on either the first day of the program (November 4, 1997) or the
    last day (May 4, 1998), whichever was lower. The purchase price as of
    November 4, 1997 was used; this purchase price, discounted at 15%, equaled
    $10.4125 per share.

                                       6
<PAGE>
 
                                BROOKSTONE, INC.

                    MANAGEMENT'S DISCUSSION AND ANALYSIS OF
               FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR
       THE THIRTEEN WEEK AND TWENTY-SIX WEEK PERIODS ENDED AUGUST 1, 1998
                                        

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

For the thirteen week and twenty-six week periods ended August 1, 1998, net
sales increased 19.9% and 17.6% respectively over the comparable periods last
year.  Comparable store sales for the thirteen week and twenty-six week periods
increased 5.8% and 6.4% respectively.  The sales increase reflects the results
of opening 13 new stores in Fiscal 1997 subsequent to the second quarter of
Fiscal 1997 and nine new stores during Fiscal 1998, offset by the closing of
four stores during Fiscal 1998.  The total number of Brookstone stores open at
the end of the twenty-six week period ended August 1, 1998 was 182 versus 164 at
the end of the comparable period in Fiscal 1997.  In addition, the Company
operated a total of 50 summer seasonal stores at some time during the twenty-six
week period ended August 1, 1998, 40 of which remained open at the end of the
Fiscal 1998 second quarter; 13 seasonal locations were open for the comparable
period last year.  Mail order sales experienced a sales decrease of 1% over the
comparable twenty-six week period last year.

Gross Profit as a percentage of net sales was 32.2% and 28.6% respectively for
the thirteen week and twenty-six week periods ended August 1, 1998, versus 32.4%
and 29.2% respectively for the comparable periods last year. This decrease is
primarily due to increasing occupancy costs attributable to the new stores
opened subsequent to the second quarter of Fiscal 1997, combined with occupancy
costs associated with the operation of the summer seasonal locations.

Selling, general and administrative expenses as a percentage of net sales were
32.8% and 36.6% respectively for the thirteen week and twenty-six week periods
ended August 1, 1998 versus 33.7% and 37.7% respectively for the comparable
periods last year.  This decrease in percentage is primarily due to reduced
costs related to catalog production.

Net interest expense for the thirteen week and twenty-six week periods ended
August 1, 1998, was $464,000 and $694,000 respectively compared to $202,000 and
$306,000 during the comparable periods last year.  This increase is related to
increased borrowings under the revolving credit agreement relating to higher
inventory levels during the first and second quarters of Fiscal 1998 compared
with the first and second quarters of Fiscal 1997.

As a result of the foregoing, the Company reported a net loss of $475,000 or
$0.06 per basic/diluted share for the thirteen week period ended August 1, 1998,
as compared to a net loss of $458,000 or $0.06 per basic/diluted share for the
comparable period last year.  For the twenty-six week period ended August 1,
1998, the Company reported a net loss of  $4,892,000 or $0.62 per basic/diluted
share as compared to a net loss of  $4,231,00 or $0.54 per basic/diluted share
for the comparable period last year.


Financial Condition
-------------------

For the twenty-six week period ended August 1, 1998, net cash used by operating
activities totaled $20.4 million, primarily as a result of the net loss,
purchase of inventory and payment of income taxes.  Cash used for investment
activities during the twenty-six week period of Fiscal 1998, representing the
purchase of property and equipment, amounted to $3.6 million.  Cash from
financing activities during the twenty-six week period of Fiscal 1998 amounted
to $9.6 million, acquired primarily through borrowings under the Company's
revolving credit agreement.

For the twenty-six week period of Fiscal 1997, net cash used by operating
activities totaled $7.2 million, primarily as a result of the net loss and
payment of income taxes.  Cash used for investment activities during the twenty-
six week period of Fiscal 1997, representing the purchase of property and
equipment, amounted to $2.6 million.  Cash provided by financing activities
during the twenty-six week period of Fiscal 1997 amounted to $0.8 million,
acquired primarily through borrowings under the Company's previous revolving
credit agreement.

                                       7
<PAGE>
 
Merchandise inventories were $39.9 million at August 1, 1998 compared to $37.3
million at January 31, 1998.  The increase in inventory was primarily to support
the new stores opened or scheduled to open during Fiscal 1998, including retail
and airport locations in addition to the Company's summer seasonal store
program.  The accounts payable balance was $11.8 million at August 1, 1998 as
compared to $14.4 million at January 31, 1998.

For the twenty-six week period ended August 1, 1998, the Company's capital
expenditures were principally related to the remodeling of four retail locations
and the opening of nine new stores, including six airport locations.  The
Company anticipates opening approximately 20 new stores net of closings 
(including up to 7 airport locations) and remodeling approximately 10 - 12
stores during Fiscal 1998.

The Company maintains a revolving credit agreement to finance inventory
purchases, which historically peak in the third quarter in anticipation of the
holiday selling season.  At August 1, 1998, the Company had $8.9 million in
outstanding borrowings under its revolving credit agreement as compared to
outstanding borrowings of $0.8 million at August 2, 1997.  These borrowings were
utilized to finance the Company's working capital, primarily in support of
retail store sales increases and also in support of the summer seasonal program.

The Company believes that available borrowings, cash on hand and anticipated
cash generated from operations will be sufficient to finance planned retail
store openings / remodelings and other capital requirements throughout Fiscal
1998.


Year 2000 Software Compliance
-----------------------------

The Company relies on software for the efficient operation of many of its
important functions, including inventory purchasing, shipping and receiving,
logistics, inventory forecasting and replenishment, payroll and human resources
recordkeeping, mail order operations, point-of-purchase transaction recording
and financial reporting. The Company has begun the process of implementing new
shipping, receiving and logistics software (which is year 2000 compliant), and
expects this software to be fully implemented in early 1999. With the exception
of software mentioned in the previous sentence, each of the software products
involved in the Company's significant operations has been represented to be 
year 2000 compliant, or has been upgraded to versions that have been
represented to be year 2000 compliant, by their respective manufacturers. In
addition, the Company has received representations from its primary bank and
credit card processors that the software they operate to faciliate services
provided to the Company is year 2000 compliant. The total cost to the Company
for the software upgrades described in this paragraph is expected to be
approximately $300,000.

Although no single vendor supplied products representing more than 9% of the 
Company's net sales in 1997, there can be no assurance that the Company's 
operating results would not be adversely affected if any of its 10 largest 
vendors were unable to fill the Company's orders. The Company is currently 
exploring year 2000 readiness of each of its significant vendors and is 
considering other sources for similar products in the event that such vendors 
are unable to meet the Company's needs. Because the products sold by the Company
are often unique in the marketplace, however, there can be no assurance 
that adequate substitute products will be available. See "Outlook: Important 
Factors and Uncertainties -- Dependence on Innovative Merchandising" on page 11 
of its 1997 Annual Report on Form 10-K. The Company currently uses neither 
electronic data interchange ("EDI") technology, nor advance shipping 
notification ("ASN") technology with its vendors. 

The Company believes that it has established appropriate measures to minimize 
the risk of disruption to its business as it approaches the year 2000. This 
belief is a forward-looking statement and is premised, in part, on 
representations provided to the Company by third-party sources, the accuracy of 
which are in many cases difficult or impossible for the Company to validate. If 
any such representation relating to a software product relied upon for a 
significant business function ultimately proves inaccurate, the Company could 
incur material remediation expenses and/or lost sales. 

                                       8
<PAGE>
 
                                    PART II

                                        
                               OTHER INFORMATION
                                        

                                        
Item 1:    LEGAL PROCEEDINGS
           -----------------

           The Company is involved in various legal proceedings arising in the
           normal course of business. The Company believes that the resolution
           of these matters will not have a material effect on the Company's
           financial condition or results of operations.



Item 2:    CHANGES IN SECURITIES
           ---------------------

           None


Item 3:    DEFAULT UPON SENIOR SECURITIES
           ------------------------------

           None


Item 4:    SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
           ---------------------------------------------------

           A)  The 1998 Annual Meeting of Stockholders of the Company was held
               on June 16, 1998.

           B)  The following persons were elected directors at the 1998 Annual
               Meeting for a one-year term expiring at the 1999 Annual Meeting
               of Stockholders.
<TABLE>
<CAPTION>
                                           For     Withheld
                                        ---------  --------
              <S>                      <C>        <C>
               Merwin F. Kaminstein    7,670,970     3,452
               Michael F. Anthony      7,670,981     3,441
               Mone Anathan, III       7,667,981     6,441
               Adam Kirsch             7,402,342   272,080
               Michael L. Glazer       7,670,981     3,441
               Robert F. White         7,670,981     3,441
</TABLE>

           C)  The appointment of Price Waterhouse LLP as the independent
               accountants to examine the financial statements of the Company
               and its subsidiaries for the fiscal year ended January 30, 1999
               was ratified.

               For                         Against                     Abstain
               ----                        --------                    --------
            7,663,976                       7,101                       3,345


Item 5:    OTHER INFORMATION
           -----------------

           None

                                       9
<PAGE>
 
Item 6:    EXHIBITS AND REPORTS ON FORM 8-K
           --------------------------------

           A)  Exhibits

               11 - Computation of Net Loss Per Share


           B)  Reports on Form 8-K

               No reports on Form 8-K were filed during the period for which
               this report is filed.

                                       10
<PAGE>
 
 
                                  Signatures
                                  ----------



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


                            Brookstone, Inc.
                            ----------------
                            (Registrant)



                             /s/  Philip W. Roizin
                            ------------------------------------------------
September 14, 1998          (Signature)



                            Philip W. Roizin
                            Executive Vice President Finance and Administration,
                            Treasurer and Secretary
                            (Principal Financial Officer
                            and duly authorized to sign on behalf of registrant)



                                                                                



                                                                                
                                                                                



                                                                                


                                        



                                        

                                       11