##### Table of Contents

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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 April 30, 2005



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



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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  x    No ̈



Indicate by check mark whether the Registrant is an accelerated filer (as defined in Exchange Act Rule
12b-2).    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: 20,419,015 shares of common stock as of
May 25, 2005.



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##### Table of Contents

BROOKSTONE, INC.



Index to Form 10-Q



|           |  |                                                                                                  |  |         
|---------- |  | ------------------------------------------------------------------------------------------------ |  | --------
|           |  |                                                                                                  |  | Page No.
|Part I:    |  | Financial Information                                                                            |  |         
|           |  |                                                                                                 
|Item 1.    |  | Consolidated Balance Sheet as of April 30, 2005, January 29, 2005 and May 1, 2004                |  | 3       
|           |  |                                                                                                 
|           |  | Consolidated Statement of Operations for the thirteen weeks ended April 30, 2005 and May 1, 2004 |  | 4       
|           |  |                                                                                                 
|           |  | Consolidated Statement of Cash Flows for the thirteen weeks ended April 30, 2005 and May 1, 2004 |  | 5       
|           |  |                                                                                                 
|           |  | Notes to Consolidated Financial Statements                                                       |  | 6       
|           |  |                                                                                                 
|Item 2.    |  | Managements Discussion and Analysis of Financial Condition and Results of Operations            |  | 12      
|           |  |                                                                                                 
|Item 3.    |  | Quantitative and Qualitative Disclosures about Market Risk                                       |  | 15      
|           |  |                                                                                                 
|Item 4.    |  | Controls and Procedures                                                                          |  | 16      
|           |  |                                                                                                 
|Part II:   |  | Other Information                                                                                |  |         
|           |  |                                                                                                 
|Item 1.    |  | Legal Proceedings                                                                                |  | 17      
|           |  |                                                                                                 
|Item 2.    |  | Unregistered Sales of Equity Securities and Use of Proceeds                                      |  | 17      
|           |  |                                                                                                 
|Item 3.    |  | Defaults Upon Senior Securities                                                                  |  | 17      
|           |  |                                                                                                 
|Item 4.    |  | Submission of Matters to a Vote of Security Holders                                              |  | 17      
|           |  |                                                                                                 
|Item 5.    |  | Other Information                                                                                |  | 17      
|           |  |                                                                                                 
|Item 6.    |  | Exhibits                                                                                         |  | 17      
|           | 
|Signatures |  | 18                                                                                              



|         |  |                                                                                                                                                                                                                        
|-------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibits |  |                                                                                                                                                                                                                        
|31.1     |  | Certification of Principal Executive Officer required by Rule 13a-14(a) or Rule 15d-14(a) of The Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002 (filed herewith)
|         | 
|31.2     |  | Certification of Principal Financial Officer required by Rule 13a-14(a) or Rule 15d-14(a) of The Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002 (filed herewith)
|         | 
|32.1     |  | Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith)                                                     
|         | 
|32.2     |  | Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith)                                                     



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##### Table of Contents

PART I

FINANCIAL INFORMATION



ITEM 1.Financial Statements



BROOKSTONE, INC.

CONSOLIDATED BALANCE SHEET

(In thousands, except share data)

(Unaudited)



|                                                                                                                                                                                                                                                                                      |  |                |         |   |                  |   |         |             |  |   |         |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -------------- | ------- | - | ---------------- | - | ------- | ----------- |  | - | ------- | -
|                                                                                                                                                                                                                                                                                      |  | April 30, 2005 |         |   | January 29, 2005 |   |         | May 1, 2004 | 
|Assets                                                                                                                                                                                                                                                                                |  |                |         |   |                  |   |         |             |  |   |         |  
|                                                                                                                                                                                                                                                                                      |  |                |        
|Current assets:                                                                                                                                                                                                                                                                       |  |                |         |   |                  |   |         |             |  |   |         |  
|Cash and cash equivalents                                                                                                                                                                                                                                                             |  | $              | 49,257  |   |                  | $ | 86,205  |             |  | $ | 37,409  |  
|Receivables, net                                                                                                                                                                                                                                                                      |  |                | 9,348   |   |                  |   | 9,859   |             |  |   | 7,505   |  
|Merchandise inventories                                                                                                                                                                                                                                                               |  |                | 81,162  |   |                  |   | 75,585  |             |  |   | 69,978  |  
|Deferred income taxes, net                                                                                                                                                                                                                                                            |  |                | 8,314   |   |                  |   | 3,917   |             |  |   | 7,778   |  
|Prepaid expenses                                                                                                                                                                                                                                                                      |  |                | 6,953   |   |                  |   | 6,045   |             |  |   | 7,485   |  
|                                                                                                                                                                                                                                                                                      |  |                |         |   |                  |   |         |             |  |   |         |  
|Total current assets                                                                                                                                                                                                                                                                  |  |                | 155,034 |   |                  |   | 181,611 |             |  |   | 130,155 |  
|                                                                                                                                                                                                                                                                                      |  |                |        
|Deferred income taxes, net                                                                                                                                                                                                                                                            |  |                | 5,240   |   |                  |   | 5,256   |             |  |   | 4,738   |  
|Property and equipment, net                                                                                                                                                                                                                                                           |  |                | 73,214  |   |                  |   | 74,019  |             |  |   | 58,058  |  
|Intangible assets, net                                                                                                                                                                                                                                                                |  |                | 3,785   |   |                  |   | 3,853   |             |  |   | 4,056   |  
|Other assets                                                                                                                                                                                                                                                                          |  |                | 2,853   |   |                  |   | 1,741   |             |  |   | 4,237   |  
|                                                                                                                                                                                                                                                                                      |  |                |         |   |                  |   |         |             |  |   |         |  
|Total assets                                                                                                                                                                                                                                                                          |  | $              | 240,126 |   |                  | $ | 266,480 |             |  | $ | 201,244 |  
|                                                                                                                                                                                                                                                                                      |  |                |         |   |                  |   |         |             |  |   |         |  
|Liabilities and Shareholders Equity                                                                                                                                                                                                                                                  |  |                |         |   |                  |   |         |             |  |   |         |  
|                                                                                                                                                                                                                                                                                      |  |                |        
|Current liabilities:                                                                                                                                                                                                                                                                  |  |                |         |   |                  |   |         |             |  |   |         |  
|Accounts payable                                                                                                                                                                                                                                                                      |  | $              | 13,972  |   |                  | $ | 17,402  |             |  | $ | 15,249  |  
|Other current liabilities                                                                                                                                                                                                                                                             |  |                | 29,576  |   |                  |   | 46,500  |             |  |   | 26,684  |  
|                                                                                                                                                                                                                                                                                      |  |                |         |   |                  |   |         |             |  |   |         |  
|Total current liabilities                                                                                                                                                                                                                                                             |  |                | 43,548  |   |                  |   | 63,902  |             |  |   | 41,933  |  
|                                                                                                                                                                                                                                                                                      |  |                |        
|Long-term debt                                                                                                                                                                                                                                                                        |  |                | 8,534   |   |                  |   | 8,760   |             |  |   | 1,975   |  
|Other long-term liabilities                                                                                                                                                                                                                                                           |  |                | 22,396  |   |                  |   | 22,432  |             |  |   | 15,581  |  
|                                                                                                                                                                                                                                                                                      |  |                |        
|Commitments and contingencies                                                                                                                                                                                                                                                         |  |                |         |   |                  |   |         |             |  |   |         |  
|                                                                                                                                                                                                                                                                                      |  |                |        
|Other party interests in consolidated entities                                                                                                                                                                                                                                        |  |                | 1,349   |   |                  |   | 1,100   |             |  |   | 1,068   |  
|                                                                                                                                                                                                                                                                                      |  |                |        
|Shareholders equity:                                                                                                                                                                                                                                                                 |  |                |         |   |                  |   |         |             |  |   |         |  
|Preferred stock, $0.001 par value: Authorized - 2,000,000 shares; issued and outstanding - 0 shares at April 30, 2005, January 29, 2005 and
May 1, 2004                                                                                                                               |  |                | ---     |   |                  |   | ---     |             |  |   | ---     |  
|Common stock, $0.001 par value:                                                                                                                                                                                                                                                       |  |                |         |   |                  |   |         |             |  |   |         |  
|Authorized 50,000,000 shares; issued  20,399,389 shares at April 30, 2005, 20,373,423 shares at January 29, 2005 and 20,048,982 shares
at May 1, 2004; outstanding  20,391,253 shares at April 30, 2005, 20,365,287 shares at January 29, 2005 and 20,040,846 shares at May 1, 2004 |  |                | 20      |   |                  |   | 20      |             |  |   | 20      |  
|Additional paid-in capital                                                                                                                                                                                                                                                            |  |                | 66,095  |   |                  |   | 64,916  |             |  |   | 59,406  |  
|Unearned stock compensation                                                                                                                                                                                                                                                           |  |                | (2,233  | ) |                  |   | (1,821  | )           |  |   | (214    | )
|Accumulated other comprehensive loss                                                                                                                                                                                                                                                  |  |                | (1,276  | ) |                  |   | (1,301  | )           |  |   | (991    | )
|Retained earnings                                                                                                                                                                                                                                                                     |  |                | 101,740 |   |                  |   | 108,519 |             |  |   | 82,513  |  
|Treasury stock, at cost - 8,136 shares at April 30, 2005, January 29, 2005 and May 1, 2004                                                                                                                                                                                            |  |                | (47     | ) |                  |   | (47     | )           |  |   | (47     | )
|                                                                                                                                                                                                                                                                                      |  |                |         |   |                  |   |         |             |  |   |         |  
|Total shareholders equity                                                                                                                                                                                                                                                            |  |                | 164,299 |   |                  |   | 170,286 |             |  |   | 140,687 |  
|                                                                                                                                                                                                                                                                                      |  |                |         |   |                  |   |         |             |  |   |         |  
|Total liabilities and shareholders equity                                                                                                                                                                                                                                            |  | $              | 240,126 |   |                  | $ | 266,480 |             |  | $ | 201,244 |  
|                                                                                                                                                                                                                                                                                      |  |                |         |   |                  |   |         |             |  |   |         |  



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



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BROOKSTONE, INC.

CONSOLIDATED STATEMENT OF OPERATIONS

(In thousands, except per share data)

(Unaudited)



|                                                                     |  |                      |         |   |             |   |        |  
|-------------------------------------------------------------------- |  | -------------------- | ------- | - | ----------- | - | ------ | -
|                                                                     |  | Thirteen-weeks Ended |        
|                                                                     |  | April 30, 2005       |         |   | May 1, 2004 |  
|Net sales                                                            |  | $                    | 80,284  |   |             | $ | 77,451 |  
|Cost of sales                                                        |  |                      | 57,253  |   |             |   | 54,364 |  
|                                                                     |  |                      |         |   |             |   |        |  
|Gross profit                                                         |  |                      | 23,031  |   |             |   | 23,087 |  
|Selling, general and administrative expenses                         |  |                      | 33,865  |   |             |   | 30,240 |  
|                                                                     |  |                      |         |   |             |   |        |  
|Loss from operations                                                 |  |                      | (10,834 | ) |             |   | (7,153 | )
|Interest (income) expense, net                                       |  |                      | (16     | ) |             |   | 236    |  
|                                                                     |  |                      |         |   |             |   |        |  
|Loss before taxes and other party interests in consolidated entities |  |                      | (10,818 | ) |             |   | (7,389 | )
|Other party interests in consolidated entities                       |  |                      | 259     |   |             |   | 162    |  
|                                                                     |  |                      |         |   |             |   |        |  
|Loss before taxes                                                    |  |                      | (11,077 | ) |             |   | (7,551 | )
|Income tax benefit                                                   |  |                      | (4,298  | ) |             |   | (2,907 | )
|                                                                     |  |                      |         |   |             |   |        |  
|Net loss                                                             |  | $                    | (6,779  | ) |             | $ | (4,644 | )
|                                                                     |  |                      |         |   |             |   |        |  
|Basic and diluted loss per share:                                    |  |                      |         |   |             |   |        |  
|Net loss                                                             |  | $                    | (0.33   | ) |             | $ | (0.23  | )
|                                                                     |  |                      |         |   |             |   |        |  
|Weighted average shares outstanding basic and diluted                |  |                      | 20,363  |   |             |   | 20,020 |  
|                                                                     |  |                      |         |   |             |   |        |  



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



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BROOKSTONE, INC.

CONSOLIDATED STATEMENT OF CASH FLOWS

(In thousands)

(Unaudited)



|                                                                             |  |                      |         |   |             |   |         |  
|---------------------------------------------------------------------------- |  | -------------------- | ------- | - | ----------- | - | ------- | -
|                                                                             |  | Thirteen-weeks Ended |        
|                                                                             |  | April 30, 2005       |         |   | May 1, 2004 |  
|Cash flows from operating activities:                                        |  |                      |         |   |             |   |         |  
|Net loss                                                                     |  | $                    | (6,779  | ) |             | $ | (4,644  | )
|                                                                             |  |                     
|Adjustments to reconcile net loss to net cash used for operating activities: |  |                      |         |   |             |   |         |  
|                                                                             |  |                     
|Depreciation and amortization                                                |  |                      | 3,525   |   |             |   | 3,235   |  
|Amortization of debt issuance costs                                          |  |                      | 46      |   |             |   | 46      |  
|Stock based compensation expense                                             |  |                      | 512     |   |             |   | 22      |  
|Other party interests in consolidated entities                               |  |                      | 259     |   |             |   | 162     |  
|Deferred income taxes, net                                                   |  |                      | (4,397  | ) |             |   | (2,979  | )
|Related tax benefits on exercise of stock options                            |  |                      | 99      |   |             |   | 72      |  
|Increase in other assets                                                     |  |                      | (1,158  | ) |             |   | (2,427  | )
|Increase (decrease) in other long-term liabilities                           |  |                      | 5       |   |             |   | (95     | )
|                                                                             |  |                     
|Changes in working capital:                                                  |  |                      |         |   |             |   |         |  
|Accounts receivable, net                                                     |  |                      | 501     |   |             |   | 103     |  
|Merchandise inventories                                                      |  |                      | (5,577  | ) |             |   | (3,102  | )
|Prepaid expenses                                                             |  |                      | (908    | ) |             |   | (1,268  | )
|Accounts payable                                                             |  |                      | (3,430  | ) |             |   | (510    | )
|Other current liabilities                                                    |  |                      | (16,924 | ) |             |   | (13,971 | )
|                                                                             |  |                      |         |   |             |   |         |  
|Net cash used for operating activities                                       |  |                      | (34,226 | ) |             |   | (25,356 | )
|                                                                             |  |                     
|Cash flows from investing activities:                                        |  |                      |         |   |             |   |         |  
|Expenditures for property and equipment                                      |  |                      | (2,652  | ) |             |   | (6,865  | )
|                                                                             |  |                      |         |   |             |   |         |  
|Net cash used for investing activities                                       |  |                      | (2,652  | ) |             |   | (6,865  | )
|                                                                             |  |                     
|Cash flows from financing activities:                                        |  |                      |         |   |             |   |         |  
|Payments on long-term debt                                                   |  |                      | (226    | ) |             |   | (28     | )
|Cash distributions to joint venture parties                                  |  |                      |        |   |             |   | (193    | )
|Proceeds from exercise of stock options                                      |  |                      | 156     |   |             |   | 113     |  
|                                                                             |  |                      |         |   |             |   |         |  
|Net cash used for financing activities                                       |  |                      | (70     | ) |             |   | (108    | )
|                                                                             |  |                      |         |   |             |   |         |  
|Net decrease in cash and cash equivalents                                    |  |                      | (36,948 | ) |             |   | (32,329 | )
|                                                                             |  |                     
|Cash and cash equivalents at beginning of period                             |  |                      | 86,205  |   |             |   | 69,738  |  
|                                                                             |  |                      |         |   |             |   |         |  
|Cash and cash equivalents at end of period                                   |  | $                    | 49,257  |   |             | $ | 37,409  |  
|                                                                             |  |                      |         |   |             |   |         |  



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



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BROOKSTONE, INC.

Notes to Consolidated Financial Statements



|1. | 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, Brookstone or the Company), these financial statements contain all adjustments (consisting of only normal recurring adjustments) necessary to present fairly the financial position,
the results of operations, and the cash flows for the periods reported. Certain information and footnote disclosures normally included in financial statements presented in accordance with accounting principles generally accepted in the United States
of America have been condensed or omitted. 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 2004 annual report on Form 10-K.
|-- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|2. | The results of the thirteen-week period ended April 30, 2005 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.
|-- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|3. | Certain amounts in the financial statements of the prior periods have been reclassified for comparative purposes.
|-- | -----------------------------------------------------------------------------------------------------------------



|4. | Consolidated balance sheet details:
|-- | -----------------------------------



|                                           |  |                |            |                  |   |             |  |   |           
|------------------------------------------ |  | -------------- | ---------- | ---------------- | - | ----------- |  | - | ----------
|                                           |  | April 30, 2005 |            | January 29, 2005 |   | May 1, 2004
|Other Current Liabilities:                 |  |                |            |                  |   |             |  |   |           
|Merchandise credits and gift certificates  |  | $              | 11,698,000 |                  | $ | 11,711,000  |  | $ | 10,188,000
|Accrued employee compensation and benefits |  |                | 3,808,000  |                  |   | 9,092,000   |  |   | 3,303,000 
|Rent payable                               |  |                | 1,232,000  |                  |   | 1,243,000   |  |   | 1,196,000 
|Income taxes payable                       |  |                | 5,000      |                  |   | 11,018,000  |  |   | 80,000    
|Sales Returns Reserve                      |  |                | 3,171,000  |                  |   | 3,532,000   |  |   | 3,145,000 
|Current portion of capital lease and debt  |  |                | 905,000    |                  |   | 905,000     |  |   | 166,000   
|Accrued expenses                           |  |                | 8,757,000  |                  |   | 8,999,000   |  |   | 8,606,000 
|                                           |  |                |            |                  |   |             |  |   |           
|                                           |  | $              | 29,576,000 |                  | $ | 46,500,000  |  | $ | 26,684,000
|                                           |  |                |            |                  |   |             |  |   |           
|Other Long-term Liabilities:               |  |                |            |                  |   |             |  |   |           
|Straight-line rent liability               |  | $              | 9,704,000  |                  | $ | 9,709,000   |  | $ | 7,264,000 
|Employee benefit obligations               |  |                | 4,739,000  |                  |   | 4,572,000   |  |   | 3,907,000 
|Deferred credits from landlords, net       |  |                | 6,348,000  |                  |   | 6,496,000   |  |   | 2,613,000 
|Other long term liabilities                |  |                | 1,605,000  |                  |   | 1,655,000   |  |   | 1,797,000 
|                                           |  |                |            |                  |   |             |  |   |           
|                                           |  | $              | 22,396,000 |                  | $ | 22,432,000  |  | $ | 15,581,000
|                                           |  |                |            |                  |   |             |  |   |           



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|5. | Accumulated other comprehensive loss consists of the Companys minimum pension liability and its unrealized gain on cash flow hedge related to the Companys debt. Total
comprehensive loss for the thirteen-week periods ended April 30, 2005 and May 1, 2004 are presented below (in thousands):
|-- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|                                                                         |  |                |        |   |             |   |        |  
|------------------------------------------------------------------------ |  | -------------- | ------ | - | ----------- | - | ------ | -
|                                                                         |  | April 30, 2005 |        |   | May 1, 2004 |  
|Net loss                                                                 |  | $              | (6,779 | ) |             | $ | (4,644 | )
|                                                                         |  |               
|Other comprehensive loss:                                                |  |                |        |   |             |   |        |  
|Unrealized gain on cash flow hedge (net of tax of $16 at April 30, 2005) |  |                | 25     |   |             |   |       |  
|                                                                         |  |                |        |   |             |   |        |  
|Total comprehensive loss                                                 |  | $              | (6,754 | ) |             | $ | (4,644 | )
|                                                                         |  |                |        |   |             |   |        |  



|6. | Stock-Based Compensation
|-- | ------------------------



The Company has stock option plans in effect that provide for the issuance of non-qualified and incentive stock options. Statement of Financial Accounting
Standards No. 123 (SFAS No. 123), Accounting for Stock-Based Compensation,as amended by Statement of Accounting Standards No. 148 (SFAS 148), permits the Company to follow the measurement provisions of APB
Opinion No. 25 (APB No. 25), Accounting for Stock Issued to Employees. Stock options have historically been granted at or above the market price on the date of the grant. The Company also issues restricted and deferred
stock awards under its stock option plans. To date, restricted and deferred stock awards have been issued at no cost to the recipient of the award. Restricted stock has restrictions that lapse over four years from the date of grant or as specified
in the award. Deferred stock has restrictions regarding vesting time tables and may have additional Company performance criteria requirements. The value of the restricted and deferred shares in excess of cost is charged to income ratably over the
period during which these awards vest. The unearned compensation related to these awards is included as a component of shareholders equity. No stock option awards were granted during the first quarter of the fiscal year ending January 28, 2006
(Fiscal 2005). Had compensation cost for the Companys stock-based incentive compensation plans been determined based on the fair value at the grant dates of awards under those plans, consistent with the methodology prescribed by
SFAS No. 123, as amended by SFAS No. 148, the Companys net loss and related loss per share for the quarters ended April 30, 2005 and May 1, 2004 would have been increased to the pro forma amounts indicated below (in thousands, except per share
data):



|                                                                                                                       |  |                      |        |   |             |   |        |  
|---------------------------------------------------------------------------------------------------------------------- |  | -------------------- | ------ | - | ----------- | - | ------ | -
|                                                                                                                       |  | Thirteen-weeks Ended |       
|                                                                                                                       |  | April 30, 2005       |        |   | May 1, 2004 |  
|Net loss - as reported                                                                                                 |  | $                    | (6,779 | ) |             | $ | (4,644 | )
|                                                                                                                       |  |                     
|Deduct: Stock-based employee compensation expense determined under fair value based method, net of related tax effects |  |                      | (468   | ) |             |   | (177   | )
|Add: Stock based employee compensation expense included in reported net income, net of related tax effects             |  |                      | 313    |   |             |   | 13     |  
|                                                                                                                       |  |                      |        |   |             |   |        |  
|Net loss - pro forma                                                                                                   |  | $                    | (6,934 | ) |             | $ | (4,808 | )
|                                                                                                                       |  |                      |        |   |             |   |        |  
|Loss per share  basic and diluted                                                                                     |  |                      |        |   |             |   |        |  
|As reported                                                                                                            |  | $                    | (0.33  | ) |             | $ | (0.23  | )
|Pro forma                                                                                                              |  | $                    | (0.34  | ) |             | $ | (0.24  | )



On April 29, 2005, the
six-month option period for the Employee Stock Purchase Plan (ESPP), which began on November 1, 2004, closed. On May 3, 2005 the Company issued 23,625 shares under its 2000 ESPP related to this option period.



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|7. | The exercise of stock options 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. Such exercises resulted in a tax benefit of approximately $99,000 and $72,000 for the thirteen-week periods ended April 30, 2005 and May 1, 2004, respectively which are reflected
in the Companys operating cash flow.
|-- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|8. | In March of 2002, the Company was served with a lawsuit brought in California Superior Court in Los Angeles County as a class action on behalf of current and former managers and
assistant managers of the Companys California stores, alleging that they were improperly classified as exempt employees. The lawsuit sought damages including overtime pay, restitution and attorneys fees. On August 15, 2003, a settlement
agreement was finalized with a maximum payment by the Company of $1.5 million for this matter which is included in other current liabilities.
|-- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



On May 5, 2004, the California Superior Court, County of Los Angeles granted final approval to the parties settlement agreement and ordered that
distributions be made pursuant to the agreement. However, on or about July 6, 2004, a class member who objected to the final approval of the settlement filed an appeal of the Superior Courts May 5, 2004 order. The objecting class member filed
her opening appellate brief on or about May 2, 2005. Brookstone has requested an extension of time to file its opening appellate brief, and anticipates that its opening brief will be due on or about July 15, 2005. At this time, a hearing on the
appeal has not yet been scheduled. Unless the parties agree to alternative arrangements, settlement funds will not be distributed until the appeal is resolved.



|9. | 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 three catalog titles (Hard-to-Find Tools,Brookstone Catalog and
Gardeners Eden), the Internet sites www.Brookstone.com and www.Gardenerseden.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 the Companys vendors. Both segments of the Company sell similar products, although not all Company products are fully available within both segments.
|-- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



All costs directly attributable to the direct
marketing segment are 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 to group
similar products.



The tables below disclose segment net sales
and pre-tax loss for the thirteen-week periods ended April 30, 2005 and May 1, 2004 (in thousands).



|                    |                |           |             |                       |                |        |  |             |         |   |  |   |        |  
|------------------- | -------------- | --------- | ----------- | --------------------- | -------------- | ------ |  | ----------- | ------- | - |  | - | ------ | -
|Thirteen-weeks:     |                | Net Sales |             | Pre-tax Income (Loss) |               
|                    | April 30, 2005 |           | May 1, 2004 |                       | April 30, 2005 |        |  | May 1, 2004 |        
|Reportable segment: |                |           |             |                       |                |        |  |             |         |   |  |   |        |  
|Retail              |                | $         | 67,048      |                       | $              | 65,665 |  | $           | (11,329 | ) |  | $ | (6,920 | )
|Direct Marketing    |                |           | 13,236      |                       |                | 11,786 |  |             | 236     |   |  |   | (395   | )
|                    |                |           |             |                      
|Reconciling items:  |                |           |             |                       |                |        |  |             |         |   |  |   |        |  
|Interest expense    |                |           |            |                       |                |       |  |             | (445    | ) |  |   | (394   | )
|Interest income     |                |           |            |                       |                |       |  |             | 461     |   |  |   | 158    |  
|                    |                |           |             |                       |                |        |  |             |         |   |  |   |        |  
|Consolidated:       |                | $         | 80,284      |                       | $              | 77,451 |  | $           | (11,077 | ) |  | $ | (7,551 | )
|                    |                |           |             |                       |                |        |  |             |         |   |  |   |        |  



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|10. | Basic and diluted earnings per share (EPS) were calculated for the thirteen-week periods ended April 30, 2005 and May 1, 2004 as follows (in thousands, except per share data):
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|                                                     |  |                      |        |   |             |   |        |  
|---------------------------------------------------- |  | -------------------- | ------ | - | ----------- | - | ------ | -
|                                                     |  | Thirteen-weeks Ended |       
|                                                     |  | April 30, 2005       |        |   | May 1, 2004 |  
|Net loss                                             |  | $                    | (6,779 | ) |             | $ | (4,644 | )
|                                                     |  |                      |        |   |             |   |        |  
|Weighted average number of common shares outstanding |  |                      | 20,363 |   |             |   | 20,020 |  
|                                                     |  |                     
|Effect of dilutive securities:Stock options          |  |                      |       |   |             |   |       |  
|                                                     |  |                      |        |   |             |   |        |  
|Weighted average number of common shares as adjusted |  |                      | 20,363 |   |             |   | 20,020 |  
|                                                     |  |                      |        |   |             |   |        |  
|Net loss per share  basic and diluted               |  | $                    | (0.33  | ) |             | $ | (0.23  | )
|                                                     |  |                      |        |   |             |   |        |  



For the thirteen-week
periods ended April 30, 2005 and May 1, 2004, antidilutive shares of 708,216 and 769,891, respectively, were excluded from the computations of diluted earnings per share.



|11. | Joint Ventures
|--- | --------------



Two airport stores in Las Vegas, two airport stores in Chicago and four airport stores in Atlanta operate under three separate joint venture arrangements
with respect to each city. The Company has 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 Las Vegas and Chicago ventures have been
consolidated since inception (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.



Under the requirements of 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.



As primary beneficiary, the Company consolidated this entity effective for
the first fiscal quarter of 2004 which is the Companys first interim or annual reporting period ending after March 15, 2004 as required by this interpretation. In connection with the consolidation, assets of $718,000 (including property, plant
and equipment and accounts receivable) were acquired and liabilities of $718,000 (including other party interests and accounts payable) were assumed.



At April 30, 2005, $390,000 of the Atlanta joint venture assets, $708,000 in other party interests and no liabilities are reflected in the Companys
balance sheet. Additionally, as a result of the Atlanta joint venture consolidation, the Companys revenues increased by $1.4 million, cost of sales increased by $684,000, selling and general administrative expenses increased by $375,000, and
other party interests in consolidated entities increased by $176,000 for the quarter ended April 30, 2005. The consolidation had no impact on the Companys consolidated net loss for the quarter ended April 30, 2005.



At May 1, 2004, $636,000 of the Atlanta joint venture assets, $603,000 in
other party interests and no liabilities were reflected in the Companys balance sheet. Additionally, as a result of the Atlanta joint venture consolidation, the Companys revenues increased by $1.0 million, cost of sales increased
$519,000, selling and general administrative expenses increased by $304,000 and other party interests in consolidated entities increased $103,000 for the quarter ended May 1, 2004. The consolidation had no impact on the Companys consolidated
net loss for the quarter ended May 1, 2004.



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|12. | Post-Retirement Pension and Medical Benefit Plans
|--- | -------------------------------------------------



The Company contributed more than the minimum required amount for the past year to the pension plan. As a result, there is no required contribution during
Fiscal 2005 but it is the intent of the Company to contribute approximately $600,000 to maintain a funded status that is more than the minimal required level under ERISA. The Company made no payments during the first fiscal quarter of Fiscal 2005.



The components of net periodic pension cost were as follows:



|                                   |  |                |         |   |             |   |         |  
|---------------------------------- |  | -------------- | ------- | - | ----------- | - | ------- | -
|                                   |  | April 30, 2005 |         |   | May 1, 2004 |  
|Service cost                       |  | $              | 31,000  |   |             | $ | 31,000  |  
|Interest cost                      |  |                | 77,000  |   |             |   | 78,000  |  
|Expected return on plan assets     |  |                | (75,000 | ) |             |   | (71,000 | )
|Amortization of prior service cost |  |                |        |   |             |   |        |  
|Recognized net actuarial loss      |  |                | 31,000  |   |             |   | 25,000  |  
|                                   |  |                |         |   |             |   |         |  
|Net periodic benefit cost          |  | $              | 64,000  |   |             | $ | 63,000  |  
|                                   |  |                |         |   |             |   |         |  



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



|                                   |  |                |         |   |             |   |         |  
|---------------------------------- |  | -------------- | ------- | - | ----------- | - | ------- | -
|                                   |  | April 30, 2005 |         |   | May 1, 2004 |  
|Service cost                       |  | $              | 5,000   |   |             | $ | 4,000   |  
|Interest cost                      |  |                | 17,000  |   |             |   | 16,000  |  
|Amortization of prior service cost |  |                | (15,000 | ) |             |   | (15,000 | )
|Recognized net actuarial gain      |  |                | (1,000  | ) |             |   | (4,000  | )
|                                   |  |                |         |   |             |   |         |  
|Net periodic benefit cost          |  | $              | 6,000   |   |             | $ | 1,000   |  
|                                   |  |                |         |   |             |   |         |  



|13. | Recent Accounting Pronouncements
|--- | --------------------------------



In November 2004, the FASB issued SFAS No. 151, Inventory CostsAn Amendment of ARB No. 43, Chapter 4 (SFAS 151). SFAS 151
amends the guidance in ARB No. 43, Chapter 4, Inventory Pricing, to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material (spoilage). Among other provisions, the new rule
requires that items such as idle facility expense, excessive spoilage, double freight and rehandling costs be recognized as current-period charges regardless of whether they meet the criterion of so abnormal as stated in ARB No. 43.
Additionally, SFAS 151 requires that the allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. SFAS 151 is effective for fiscal years beginning after June 15, 2005 and is
required to be adopted by the Company in the first quarter of Fiscal 2006, beginning on January 29, 2006. The Company is currently assessing the impact that this adoption will have on its consolidated financial statements.



In December 2004, the FASB issued FASB Staff Position, or FSP, No. 109-1,
Application of FASB Statement No. 109, Accounting for Income Taxes, to the Tax Deduction on Qualified Production Activities Provided by the American Jobs Creation Act of 2004 (AJCA). FSP No. 109-1 states that the impact of
the tax deduction on qualified production activities provided by the AJCA should be accounted for as a special deduction rather than a statutory rate reduction. We are currently in the process of evaluating whether or not, and to what extent, if
any, this provision may benefit us as well as the financial impact of this provision, if any.



In December 2004, the FASB issued Staff Position (FSP) No. 109-2, Accounting and Disclosure Guidance for the Foreign Earnings Repatriation Provision within the American Jobs Creation Act of
2004 (FSP No. 109-2). FSP No. 109-2 provides guidance under SFAS No. 109, Accounting for Income Taxes, with respect to recording the potential impact of the repatriation provisions of the American Jobs Creation Act of
2004 (the Jobs Act) on enterprises income tax expense and deferred tax liability. FSP No. 109-2 states that an enterprise is allowed time beyond the financial reporting period of enactment to evaluate the effect of the Jobs Act on
its plan for reinvestment or repatriation of foreign earnings for purposes of applying SFAS No. 109. The Company has evaluated FSP No. 109-2 and has determined that the provisions of this section of the Jobs Act do not have a material impact on the
financial statements.



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##### Table of Contents

In December 2004, the FASB issued SFAS No. 123 (R), Share-Based Payment (SFAS
123(R)), which revises SFAS No. 123, Accounting for Stock-Based Compensation, (SFAS 123). SFAS 123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the
financial statements based on their fair values. The pro forma disclosures previously permitted under SFAS 123 no longer will be an alternative to financial statement recognition. The Company is evaluating the requirements of SFAS 123(R) and the
impact of the adoption on its consolidated financial statements. The Company is required to adopt SFAS 123(R) in the first quarter of Fiscal 2006.



During March 2005, the Securities Exchange Commission issued Staff Accounting Bulletin (SAB) No. 107, guidance on SFAS No. 123(R). SAB No. 107
was issued to assist preparers by simplifying some of the implementation challenges of SFAS 123(R) while enhancing the information that investors receive. The Company will consider the guidance provided by SAB No.107 as it implements SFAS 123(R).



|14. | Agreement and Plan of Merger
|--- | ----------------------------



On April 15, 2005, Brookstone entered into an Agreement and Plan of Merger (the Merger Agreement) with Brookstone Holdings Corp., a Delaware
corporation (Parent), and Brookstone Acquisition Corp., a Delaware corporation and wholly-owned subsidiary of Parent (Acquisition). OSIM International Ltd, J.W. Childs Associates, L.P. and Temasek Capital (Private) Limited
have agreed to provide equity financing to Parent in connection with the transactions contemplated by the Merger Agreement. Under the terms of the Merger Agreement, Acquisition will be merged (the Merger) with and into Brookstone, with
Brookstone continuing as the surviving corporation and a subsidiary of Parent. At the effective time of the Merger, each outstanding share of common stock, par value $.001 per share, of Brookstone (the Common Stock) will be cancelled and
converted into the right to receive $20.50 in cash, without interest. At the effective time of the Merger, each option identified as outstanding will be cancelled and converted into the right to receive in cash, without interest, the product of (a)
the excess, if any, of $20.50 over the exercise price per share of Common Stock for such option and (b) the number of shares of Common Stock then subject to such option. At the effective time of the Merger, each deferred stock award and restricted
stock award identified as outstanding will be cancelled and converted into the right to receive in cash, without interest, the product of (a) the excess, if any, of $20.50 over the unpaid price per share of Common Stock, if any, for such award and
(b) the number of shares of Common Stock then subject to such award. Completion of the Merger is subject to several conditions, including approval of the Merger by Brookstones stockholders, expiration or termination of applicable waiting
periods under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, the availability of the proceeds of debt financing to Parent, and other customary closing conditions. The companies expect to close the transaction during Brookstones
second or third quarter of Fiscal 2005.



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



Results of Operations



For the thirteen-week period ended April 30, 2005, net sales increased $2.8 million, or 3.7%, over the comparable period
last year. Net retail sales for the thirteen-week period increased approximately $1.4 million, or 2.1%, to $67.0 million as compared to $65.7 million for the same period last year. An increase of $3.9 million in net retail sales was generated
primarily from the opening of 18 new stores (partially offset by one store closing) subsequent to the first quarter of Fiscal 2004, however, this increase was offset by the first quarter decrease in same store sales of approximately $2.5 million, or
3.9%. The decrease in same store sales was driven by decreased performances in the Personal Care, Home Comfort and Games categories which were partially offset by increases in Travel and Auto. The Company considers retail stores that have been open
for the entire prior fiscal year and expected to be open for the entire current fiscal year same stores. Retail locations that were remodeled or relocated are not removed from this calculation. The total number of stores open on April
30, 2005 was 293 versus 276 on May 1, 2004.



Direct marketing
sales for the thirteen-week period ended April 30, 2005 increased $1.5 million to $13.2 million versus the comparable period last year of $11.8 million. The Brookstone brand (Hard-to-Find Tools, Brookstone Catalog,Internet and Corporate
Sales) generated $1.2 million of this increase driven primarily by a 36% increase in catalog circulation while the Gardeners Eden brand was flat to last year on a 12% decrease in catalog circulation. Revenues from customers for shipping and handling
generated $0.3 million of the increase in direct marketing net sales.



For the thirteen-week period ended April 30, 2005, gross profit as a percentage of net sales decreased 1.1% to 28.7% versus 29.8% for the comparable period last year as a result of an increase of 1.1% in occupancy costs and an increase of
0.2% in order postage expense (costs associated with the delivery of products to customers). An improvement in product margins of 0.2% partially offset these increases. All categories were negatively impacted in Fiscal 2005 as a result of the same
store sales decrease, however, occupancy costs also rose due to the additional stores opened during the first quarter of Fiscal 2005.



For the thirteen-week period ended April 30, 2005, selling, general and administrative expenses as a percentage of net sales increased 3.2% to 42.2% versus 39.0% for the
comparable period last year. Contributing to the increase were increases in payroll costs of 1.6% primarily related to new stores opened since the first quarter of Fiscal 2004 and compensation expense in Fiscal 2005 on deferred and restricted stock
issued subsequent to the first quarter of Fiscal 2004. Additionally, the Company experienced increased professional services of 0.5% and increased advertising costs of 1.0%. The increase in professional fees related primarily to continued compliance
work for Sarbanes-Oxley and the increase in advertising was driven primarily by increased catalog circulation. These increases also reflect the negative impact caused by the decrease in same store sales.



Net interest income for the thirteen-week period ended April 30, 2005 was
$16,000, compared to net interest expense of $236,000 for the comparable period last year. Interest income was $461,000 for the first quarter of Fiscal 2005 as compared to $158,000 for the same period last year as a result of better interest rates
earned on the Companys improved cash position in Fiscal 2005. Interest expense increased to $445,000 for the first quarter of Fiscal 2005 compared to $394,000 for the same period last year primarily as a result of the Companys interest
on the loan for its corporate headquarters which was not in existence in the first quarter of Fiscal 2004.



In the first quarter of Fiscal 2005, the Company recorded an income tax benefit of $4.3 million, or 5.4% of net sales, as compared to $2.9 million, or
3.8% of net sales, in the first quarter of Fiscal 2004 primarily as a result of the increase in pre-tax loss in Fiscal 2005. The tax rate in the first quarter of Fiscal 2005 was 38.8% based upon the Companys anticipated full-year tax rate. The
Fiscal 2005 tax rate may be adjusted for discrete items as they occur, particularly in the third and fourth fiscal quarters of Fiscal 2005. In the first quarter of Fiscal 2004, the tax rate was 38.5%.



Two airport locations in Las Vegas, two airport locations in Chicago, and
four airport locations in Atlanta operate under three separate joint venture arrangements with respect to each city. The Company has 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 ownership interests in the net income for these joint ventures for the first quarter of Fiscal 2005 and Fiscal 2004 belonging to the Companys joint venture partners (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) comprise the balances of $259,000 and $162,000, respectively, in other party interests in consolidated entities on the
consolidated statement of operations.



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As a result of the foregoing, the Company reported a net loss of $6.8 million, or $0.33 per basic and
diluted share for the thirteen-week period ended April 30, 2005, as compared to a net loss of $4.6 million, or $0.23 per basic and diluted share, for the comparable period last year.



Financial Condition



Cash flows for the quarter ended April 30, 2005



For the thirteen-week period ended April 30, 2005, the Companys cash position decreased $36.9 million to $49.3
million. Cash used for operations totaled $34.2 million primarily as a result of the Companys net loss from operations, a decrease in other current liabilities resulting primarily from the payment of income taxes ($11.0 million) and the
payment of accrued incentive compensation ($5.4 million) and an increase in merchandise inventories.



Cash used for financing activities totaled approximately $70,000 in the first quarter of Fiscal 2005 as a result of the Companys payments on
long-term debt of $226,000 which was only partially offset by proceeds of $156,000 from the exercise of stock options.



Cash of $2.7 million was utilized to fund capital expenditures in the first quarter of Fiscal 2005 primarily related to the opening of one new store, the
remodeling of one store and construction related to stores anticipated to open or be remodeled in the second fiscal quarter. In Fiscal 2005, the Company anticipates opening approximately 20 new Brookstone stores and remodeling approximately 12
locations.



Cash flows for the quarter ended May 1, 2004



For the thirteen-week period ended May 1, 2004, the
Companys cash position decreased $32.3 million to $37.4 million. Cash used for operations totaled $25.4 million primarily as a result of the Companys net loss from operations and a decrease in other current liabilities resulting
primarily from the payment of income taxes ($9.0 million) and the payment of accrued incentive compensation ($6.3 million).



Cash used for financing activities totaled approximately $108,000 in the first quarter of Fiscal 2004 primarily as a result of the Companys cash
distributions to joint venture parties and to a lesser extent, payments on long-term debt. These payments were only partially offset by proceeds of $113,000 from the exercise of stock options.



Cash of $6.9 million was utilized to fund capital expenditures in the first
quarter of Fiscal 2004 primarily related to construction of the new headquarters building, the expansion of the distribution center (Phase III - the replacement of the material handling system), the opening of three Brookstone stores, the remodeling
of three Brookstone stores and construction related to stores anticipated to open in the second fiscal quarter of Fiscal 2004.



Other Balance Sheet Details



Merchandise inventories increased 7.4% to $81.2 million at April 30, 2005 compared to $75.6 million at January 29, 2005, but rose approximately 16.0% when
compared to the quarter ended May 1, 2004. The higher merchandise inventory balance at the end of the first quarter of Fiscal 2005 resulted from additional purchases made to support retail store growth since the first quarter of Fiscal 2004, as well
as the sales shortfall experienced in the first quarter of Fiscal 2005.



Prepaid expenses increased 15.0% to $7.0 million from $6.0 million at January 29, 2005 primarily as a result of the timing of insurance payments and the prepayment of software maintenance costs. Other assets increased $1.1 million to $2.9
million at April 30, 2005 as compared to $1.7 million at January 29, 2005, but decreased $1.4 million when compared to the balance of $4.2 million at May 1, 2004. The increase from January 29, 2005 is primarily as a result of costs incurred to
produce catalogs to be mailed in the second quarter of Fiscal 2005, while the decrease from the same period of the prior year resulted primarily from the timing of catalog mailings.



The Company maintains a revolving credit facility to finance inventory purchases, which historically peak in the third
quarter in anticipation of the winter holiday selling season. At April 30, 2005, January 29, 2005 and May 1, 2004, the Company had no borrowings outstanding under its revolving credit agreement.



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Cash flow projection for the remainder of Fiscal 2005



The Company believes that cash on hand, anticipated cash generated from
operations and available borrowings will be sufficient to finance its remaining capital requirements in Fiscal 2005. In Fiscal 2005, the Company anticipates funding approximately $600,000 for its obligation under its defined pension plan.



Agreement and Plan of Merger



On April 15, 2005, Brookstone entered into an Agreement and
Plan of Merger (the Merger Agreement) with Brookstone Holdings Corp., a Delaware corporation (Parent), and Brookstone Acquisition Corp., a Delaware corporation and wholly-owned subsidiary of Parent (Acquisition).
OSIM International Ltd, J.W. Childs Associates, L.P. and Temasek Capital (Private) Limited have agreed to provide equity financing to Parent in connection with the transactions contemplated by the Merger Agreement. Under the terms of the Merger
Agreement, Acquisition will be merged (the Merger) with and into Brookstone, with Brookstone continuing as the surviving corporation and a subsidiary of Parent. At the effective time of the Merger, each outstanding share of common stock,
par value $.001 per share, of Brookstone (the Common Stock) will be cancelled and converted into the right to receive $20.50 in cash, without interest. At the effective time of the Merger, each option identified as outstanding will be
cancelled and converted into the right to receive in cash, without interest, the product of (a) the excess, if any, of $20.50 over the exercise price per share of Common Stock for such option and (b) the number of shares of Common Stock then subject
to such option. At the effective time of the Merger, each deferred stock award and restricted stock award identified as outstanding will be cancelled and converted into the right to receive in cash, without interest, the product of (a) the excess,
if any, of $20.50 over the unpaid price per share of Common Stock, if any, for such award and (b) the number of shares of Common Stock then subject to such award. Completion of the Merger is subject to several conditions, including approval of the
Merger by Brookstones stockholders, expiration or termination of applicable waiting periods under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, the availability of the proceeds of debt financing to Parent, and other customary
closing conditions. The companies expect to close the transaction during Brookstones second or third quarter of Fiscal 2005.



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 January 29, 2005 describe the significant accounting policies and critical accounting estimates used in the preparation of the consolidated financial statements. 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
April 30, 2005.



Recent Accounting
Pronouncements



In November 2004, the FASB issued SFAS No.
151, Inventory CostsAn Amendment of ARB No. 43, Chapter 4 (SFAS 151). SFAS 151 amends the guidance in ARB No. 43, Chapter 4, Inventory Pricing, to clarify the accounting for abnormal amounts of idle facility
expense, freight, handling costs, and wasted material (spoilage). Among other provisions, the new rule requires that items such as idle facility expense, excessive spoilage, double freight and re-handling costs be recognized as current-period
charges regardless of whether they meet the criterion of so abnormal as stated in ARB No. 43. Additionally, SFAS 151 requires that the allocation of fixed production overheads to the costs of conversion be based on the normal capacity of
the production facilities. SFAS 151 is effective for fiscal years beginning after June 15, 2005 and is required to be adopted by the Company in the first quarter of Fiscal 2006, beginning on January 29, 2006. The Company is currently assessing the
impact that this adoption will have on its consolidated financial statements.



In December 2004, the FASB issued FASB Staff Position, or FSP, No. 109-1, Application of FASB Statement No. 109, Accounting for Income Taxes, to the Tax Deduction on Qualified Production Activities
Provided by the American Jobs Creation Act of 2004 (AJCA). FSP No. 109-1 states that the impact of the tax deduction on qualified production activities provided by the AJCA should be accounted for as a special deduction rather than a
statutory rate reduction. We are currently in the process of evaluating whether or not, and to what extent, if any, this provision may benefit us as well as the financial impact of this provision, if any.



14



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In December 2004, the FASB issued Staff Position (FSP) No. 109-2, Accounting and
Disclosure Guidance for the Foreign Earnings Repatriation Provision within the American Jobs Creation Act of 2004 (FSP No. 109-2). FSP No. 109-2 provides guidance under SFAS No. 109, Accounting for Income Taxes, with
respect to recording the potential impact of the repatriation provisions of the American Jobs Creation Act of 2004 (the Jobs Act) on enterprises income tax expense and deferred tax liability. FSP No. 109-2 states that an enterprise
is allowed time beyond the financial reporting period of enactment to evaluate the effect of the Jobs Act on its plan for reinvestment or repatriation of foreign earnings for purposes of applying SFAS No. 109. The Company has evaluated FSP No. 109-2
and has determined that the provisions of this section of the Jobs Act do not have a material impact on the financial statements.



In December 2004, the FASB issued SFAS No. 123 (R), Share-Based Payment (SFAS 123(R)), which revises SFAS No. 123,
Accounting for Stock-Based Compensation, (SFAS 123). SFAS 123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements based on their fair
values. The pro forma disclosures previously permitted under SFAS 123 no longer will be an alternative to financial statement recognition. The Company is evaluating the requirements of SFAS 123(R) and the impact of the adoption on its consolidated
financial statements. The Company is required to adopt SFAS 123(R) in the first quarter of Fiscal 2006.



During March 2005, the Securities Exchange Commission issued Staff Accounting Bulletin (SAB) No. 107, guidance on SFAS No. 123(R). SAB No. 107
was issued to assist preparers by simplifying some of the implementation challenges of SFAS 123(R) while enhancing the information that investors receive. The Company will consider the guidance provided by SAB No.107 as it implements SFAS 123(R).



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 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 (SEC). Words such as estimate, project, plan, believe, feel, anticipate, assume, may, will, should and
similar words and phrases may identify forward-looking statements. 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.



Statements about the expected timing, completion and effects of the proposed Merger also constitute forward-looking statements. The Company may not be
able to complete the proposed Merger on the terms described herein or other acceptable terms or at all because of a number of factors, including the failure to obtain shareholder approval, the failure of financing or the failure to satisfy the other
closing conditions. These factors, and other factors that may affect the business or financial results of the Company are described in the Companys filings with the SEC.



ITEM 3.Quantitative and Qualitative Disclosures about Market Risk.



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 or cash flows.



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##### Table of Contents

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 April 30, 2005 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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##### Table of Contents

PART II



OTHER INFORMATION



ITEM 1.Legal Proceedings.



In March of 2002, the Company was served with a lawsuit brought in California Superior Court in Los Angeles County as a class action on behalf of current
and former managers and assistant managers of the Companys California stores, alleging that they were improperly classified as exempt employees. The lawsuit sought damages including overtime pay, restitution and attorneys fees. On August
15, 2003, a settlement agreement was finalized with a maximum payment by the Company of $1.5 million for this matter which is included in other current liabilities.



On May 5, 2004, the California Superior Court, County of Los Angeles granted final approval to the parties settlement
agreement and ordered that distributions be made pursuant to the agreement. However, on or about July 6, 2004, a class member who objected to the final approval of the settlement filed an appeal of the Superior Courts May 5, 2004 order. The
objecting class member filed her opening appellate brief on or about May 2, 2005. Brookstone has requested an extension of time to file its opening appellate brief, and anticipates that its opening brief will be due on or about July 15, 2005. At
this time, a hearing on the appeal has not yet been scheduled. Unless the parties agree to alternative arrangements, settlement funds will not be distributed until the appeal is resolved.



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



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.



None.



ITEM 6.Exhibits.



|     |  |                                                                                                                                                                                                                        
|---- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|31.1 |  | Certification of Principal Executive Officer required by Rule 13a-14(a) or Rule 15d-14(a) of The Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002 (filed herewith)
|     | 
|31.2 |  | Certification of Principal Financial Officer required by Rule 13a-14(a) or Rule 15d-14(a) of The Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002 (filed herewith)
|     | 
|32.1 |  | Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith)                                                     
|     | 
|32.2 |  | Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith)                                                     



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##### Table of Contents

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                                
|June 9, 2005 |  | (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)



18