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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

For the fiscal year ended February 1, 2003

For the transition period from              to              .

Commission File Number 0-21406

BROOKSTONE, INC.

(Exact name of registrant as specified in its charter)

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

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

Title of each class

None

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

Common Stock, par value $.001

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes x    No ¨

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

form 10-K.    x

At August 3, 2002, the aggregate market value of common stock held by non-affiliates of the Registrant was $102,175,164 based on the closing price ($12.00 per share) for the common stock as reported on The NASDAQ Stock Market on August 3, 2002.

The number of shares outstanding of the registrant’s Common Stock, $.001 par value, as of April 11, 2003 was 8,557,346 shares.

Documents Incorporated By Reference

Portions of the registrant’s Proxy Statement for its 2003 Annual Meeting of Stockholders are incorporated by reference in Part III hereof.

Table of Exhibits appears on Page 69.

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BROOKSTONE, INC.

2002 FORM 10-K ANNUAL REPORT

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PART I

ITEM 1.    Business

Brookstone, Inc. (the “Company”) is a nationwide specialty retailer whose strategy is to develop unique, proprietary branded products and offer them to customers via multiple distribution channels including retail stores, catalogs, and the Internet. The Company’s retail portfolio includes three brands: Brookstone, Gardeners Eden, and Hard-to-Find-Tools. The Brookstone brand features an assortment of consumer products functional in purpose, distinctive in quality and design and not widely available from other retailers. Brookstone’s merchandise includes lawn and garden, health and fitness, home and office and travel and auto products. Hard-to-Find-Tools features solutions for home owners primarily focused on home improvement and the indoor and outdoor home environment. Gardeners Eden is a garden inspired lifestyle brand which features garden themed home accessories, live plants, and outdoor furniture. The Company offers approximately 2,500 active stock-keeping units (“SKUs”) for Brookstone and Hard-to-Find-Tools, and approximately the same amount for Gardeners Eden at any given time. The Company sells its products through 258 full-year stores (including 26 airport based stores, three outlet stores and two Gardeners Eden stores) in 39 states, the District of Columbia and Puerto Rico. In addition to these full-year stores, Brookstone operates temporary stores and kiosks during the winter holiday season; there were a total of 64 such stores operating during the 2002 holiday season. The Company also operates a direct marketing business, which is comprised of three catalog titles (Hard-To-Find-Tools,Brookstone Catalog, and Gardeners Eden), an interactive Internet site, www.Brookstone.com, and sales to corporate customers. For a further description of the Company’s business segments, see Management’s Discussion and Analysis of Financial Condition and Results of Operations and Note 6 of the Notes to Consolidated Financial Statements on page 44.

The Company was incorporated in Delaware in 1986. The Company is a holding company, the principle assets of which is the capital stock of Brookstone Company, Inc. and Gardeners Eden Company, Inc., both New Hampshire corporations that, along with their direct and indirect subsidiaries, operate the Company’s business. As used in this report, unless the context otherwise requires, the term “Company” refers collectively to Brookstone, Inc. and its operating subsidiaries. The Company’s executive offices are located at 17 Riverside Street, Nashua, New Hampshire 03062 and its telephone number is (603) 880-9500.

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Retail Store Business

Brookstone Brand

Merchandising and Marketing

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

The following lists Brookstone’s four current product worlds and 23 current product categories:

The Company believes that the uniqueness, high quality construction, innovation and design of its products are apparent to its customers. For example, Brookstone offers a BBQ tool set as part of its Brookstone Heritage collection, which is ergonomically designed, and made of high strength, stainless steel and beautiful rosewood. This design and construction are intended to convey the message that this tool set will tend to outlast and be easier to work with than competing BBQ tools in a similar price range. In 2002 the Company introduced the Wafer-Thin CD System, a Brookstone-designed and engineered stereo and CD player that incorporates cutting-edge flat-panel speaker technology in a compelling design and at an approachable price. Due to the unique nature of its products, Brookstone has obtained both functional and design patents on its products. Information on the features and benefits of products is further conveyed through display cards and attentive customer service.

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

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Brookstone prices its products to be affordable to the typical mall shopper. The majority of Brookstone’s products are priced at less than $40.00, although the items in its stores are priced in a range from $5.00 to approximately $3,200.00. Brookstone closely monitors gross profit dollar contribution by SKU and adjusts merchandise displays accordingly.

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

The Brookstone Store.    Brookstone believes its retail stores are distinctive in appearance and in the shopping experience they provide. Brookstone emphasizes the visual aspects of its merchandise presentation and the creation of a sense of “theater” in its stores. Recognizing the functional nature of many of its products, Brookstone strives to present its merchandise in a manner that will spark the interest of shoppers and encourage them to pick up sample products. At least one sample of each product is displayed with an information card highlighting the features and benefits of the product in an easy-to-read format. Special signs and displays give prominence to selected products which Brookstone believes will have particular appeal to shoppers. In Fiscal 2002, the Company conceived, refined and tested a new store design to better showcase the Company’s products. This new store design features more flexible fixtures, improved marketing and enhanced product displays and will begin its national roll out in Fiscal 2003.

Seasonal Stores.    Brookstone’s seasonal stores are typically open during the winter holiday selling season. These include both kiosks positioned in common areas of shopping malls and other retail sites and temporary stores set up within vacant retail in-line space. These locations are designed to carry a limited line of Brookstone’s most popular, gift-oriented merchandise. The typical Brookstone kiosk is a temporary structure of approximately 160 square feet, which can carry approximately 120 SKUs. The typical temporary store has approximately 1,500 square feet and is designed to carry up to 300 SKUs. Both kiosks and temporary stores are built with reusable, portable and modular materials.

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

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In addition to its stores and catalogs, Brookstone markets its brand and products to consumers via an aggressive public relations program aimed at the news media. Throughout 2002, key Brookstone products appeared prominently in a variety of national publications, including The New York Times, The Wall Street Journal, Time and Newsweek magazines and USA Today, as well as on some of the country’s top television shows, including NBC Today, NBC Nightly News and The Oprah Winfrey Show.

Product Sourcing

Brookstone continually seeks to develop, identify and introduce new products that meet its quality and profitability standards. Brookstone employs a staff of specialized merchandise directors who actively participate in the design process for many new products. These directors also travel worldwide visiting trade shows, manufacturers and inventors in search of new products for Brookstone’s stores, Internet site and catalogs. The Company has product development sourcing agents in Hong Kong, Taiwan, France, Korea and Mainland China. These agents provide the Company with important venues for developing relationships with manufacturers and allow the Company to monitor and maintain quality standards throughout the development and manufacturing process.

Brookstone Labs, the Company’s internal product design and development facility, in cooperation with the merchandise directors, provides design and engineering support for innovative Brookstone-branded products.

For quality assurance, the Company employs a staff to review and evaluate its products. Once a product has been approved, Brookstone begins negotiations with the product’s vendor to secure a source of supply. When determining which products to introduce, the Company takes into account the probable cost of the product relative to what the Company believes the product’s appropriate selling price will be, as well as whether the product has the potential to be available through mass merchant channels, thereby diluting the sense of uniqueness which Brookstone seeks to convey to its customers. While the time between the approval of a new product and its introduction in the stores varies widely, the typical period is between two and four months. For products designed by the Company, the period from conception of the idea to introduction in the stores can be significantly longer.

As a result of Brookstone’s product development infrastructure, the percentage of Brookstone branded products in Brookstone stores has risen from 14% in 1996 to over 65% in 2002.

Store Operation and Training

The Company employs regional managers, district managers and assistant district managers to supervise the Company’s stores. Staffing of a typical store includes a store manager, an assistant store manager, a second assistant store manger, and approximately 10 to 15 full and part-time sales associates, depending upon the time of year. Store associates are trained to inform and assist customers in the features, benefits and operation of the Company’s

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merchandise. Store associates receive weekly product updates from the Company’s headquarters, which highlight both new and other selected products. The Company has developed incentive compensation programs for its retail store management team which reward individual and store performance based on profitability.

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

Expansion Strategy

The Company operates 256 Brookstone stores in 39 states, the District of Columbia and Puerto Rico. Brookstone’s stores are primarily located in high traffic regional malls, as well as in central retail districts and multi-use specialty projects, such as Copley Square in Boston, The Forum Shops in Las Vegas and Rockefeller Center and West 57^th Street in New York City. Brookstone’s stores also include airport stores in terminals throughout the country.

Brookstone locates its stores in areas which are destinations for large numbers of shoppers and which reinforce the Company’s quality image. To assess potential new mall locations, Brookstone applies a stringent set of financial as well as other criteria to determine the overall acceptability of a mall and the optimal locations within it. Non-mall locations are selected based on the level and nature of retail activity in the area. Brookstone believes that its distinctive store and innovative merchandise provide a unique shopping experience, which makes it a desirable tenant to regional mall developers and other prospective landlords. The Company’s new Brookstone stores average approximately 3,500 square feet, approximately 2,800 of which is selling space. Airport stores range from approximately 600 to 1,200 square feet in size and typically carry a limited assortment of Brookstone’s products.

Brookstone’s store expansion strategy is to open stores in existing markets where it can build on its name recognition and achieve certain operating economies of scale, and in new markets where management believes it can successfully transport Brookstone’s unique positioning and strategy. The Company opened 12 Brookstone stores in Fiscal 2002, including six airport stores; 25 stores in Fiscal 2001, including seven airport stores; 14 stores in Fiscal 2000, including two airport stores; 15 stores in Fiscal 1999, one of which was an airport store; and 24 stores in Fiscal 1998, seven of which were airport stores. The Company plans to open approximately 15 to 20 new Brookstone stores in Fiscal 2003, including up to nine airport locations. Brookstone continually monitors individual store profitability and will consider closing any stores that do not meet its performance criteria. Brookstone closed two stores in Fiscal 2002, two stores in Fiscal 2001, two stores in Fiscal 2000, no stores in Fiscal 1999, and five stores in Fiscal 1998. In Fiscal 2003, the Company anticipates closing a nominal number of stores.

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In Fiscal 2002, the Company conceived, refined and tested a new store design to better showcase the Company’s most compelling and innovative products. This new store design features more flexible fixtures, improved marketing and enhanced product displays and will begin its national roll out in Fiscal 2003.

Brookstone operated 64 seasonal stores (27 kiosks and 37 temporary in-line) during the 2002 winter holiday season. During the 2001 winter holiday selling season, Brookstone operated 67 seasonal stores (35 kiosks and 32 temporary in-line); 60 seasonal stores (31 kiosks and 29 temporary in-line) during the 2000 winter holiday selling season; 71 seasonal stores (44 kiosk and 27 temporary in-line) during the 1999 winter holiday season; 95 seasonal stores (52 kiosk and 43 temporary in-line) during the 1998 winter holiday season and 50 temporary in-line seasonal stores during the 1998 summer season. Brookstone plans to operate approximately 65 seasonal stores during the 2003 winter holiday selling season based on the availability of acceptable sites. Use of seasonal stores also provides the Company the ability to test retail sites during the period of the year when customer traffic and sales prospects are greatest. In certain cases, seasonal stores may be operated at a mall where there is a Brookstone retail store. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Outlook: Important Factors and Uncertainties” (found on pages 30-34 of this document).

Gardeners Eden Brand

The Company purchased the Gardeners Eden brand in May of 1999. At the time, Gardeners Eden was a catalog only business. The Company believes that a Gardeners Eden retail store concept contains much promise, and in Fiscal 2001 the Company opened its first two Gardeners Eden stores, signifying the launch of its new retail store concept tied to its Gardeners Eden catalog title.

The Gardeners Eden product assortment features garden inspired products for the home that emphasize the natural components of the earth. The products feature excellent craftsmanship and quality, and help fulfill home and garden decorating and gift giving needs. Key product categories include outdoor furniture, live plants, indoor and outdoor decorative accessories and tabletop. The store will feature approximately 2,500 SKUs and a wide range of price points. Currently, the majority of products are sourced domestically and through Europe.

The stores contain approximately 4,000–5,000 sq. ft. of interior selling space coupled with exterior selling space of approximately 1,500 sq. ft. The stores design is meant to reflect nature; when the customer enters they smell the aroma of live plants. The stores also feature natural lighting through extensive use of skylights.

The Company employs dedicated Gardeners Eden merchants, planners and store personnel, but, to as great an extent as possible, leverages the Company’s support infrastructure.

The Company anticipates opening up to two additional Gardeners Eden locations in Fiscal 2003.

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Direct Marketing Business

The Company was founded in 1965 as a mail order marketer of hard-to-find tools. In Fiscal 2002, the direct marketing business accounted for approximately 17% of the Company’s net sales as compared to 18% of the Company’s net sales in both Fiscal 2001 and Fiscal 2000. The direct marketing business is comprised of three catalog titles (Hard-To-Find-Tools, Brookstone Catalog and Gardeners Eden), an interactive Internet site, www.Brookstone.com <http://www.Brookstone.com>, and sales to corporate customers. In Fiscal 2002, the Company mailed a total of approximately 30.9 million catalogs, with 30 separate mail dates.

The Hard-To-Find-Tools catalog features a broad assortment of approximately 1,500 products, set forth in what the Company believes to be an informative and convenient format. Whereas most of the products sold through the Company’s stores are sold as gifts, most of the products sold through the Hard-To-Find-Tools catalog are primarily sold directly to the end-user. Approximately 90% of the products in the Hard -To-Find-Tools catalog are not available in the Company’s stores.

The Company also produces the Brookstone Catalog, which offers a selection of merchandise generally available in the Company’s retail stores. The Brookstone Catalog is usually distributed before Father’s Day and Christmas, the Company’s two busiest selling seasons and in Fiscal 2002, the Company added an additional post-holiday mailing. The Brookstone Catalog is mailed to persons with demographic profiles similar to those of buyers in the Company’s stores.

In May of 1999, the Company acquired the Gardeners Eden catalog from Williams-Sonoma, Inc. The core product categories of the catalog are; Plants, Furniture & Accessories, Plant Containers & Accessories, Wreath & Dried Arrangements, Garden Tools, Indoor and Outdoor Decorative, Entry, Tabletop and Personal Care. Product assortment within these categories ranges from fine teak furniture to live plants.

Brookstone has operated an interactive Internet site since 1996 featuring an offering of products from catalogs and retail stores. During the third quarter of Fiscal 2001, the Company brought on-line version 6.0 of the web site. This website offers the Company’s widest selection of product, featuring both products from the Brookstone and Hard-to-Find-Tools catalogs and its Brookstone retail stores. This site is the Company’s most sophisticated to date, with faster response and improved navigation. Features incorporated in this release include a sophisticated gift finder, enhanced product search, membership with address books, enhanced product images, multimedia for special products, enhanced cross-selling by SKU and Lifestyle presentations for purchasing complementary products. Customer service enhancements include real time inventory availability, order history inquiry and on-line order tracking. In Fiscal 2003, the Company anticipates launching a full commerce website for its Gardeners Eden brand.

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Merchandising, Marketing and Product Sourcing

Brookstone employs a merchandising team that is dedicated exclusively to identifying products for the Company’s Hard-To-Find-Tools catalog. The approval process for new Hard-To-Find-Tools products is similar to the approval process for new products in the Company’s stores. A dedicated staff selects products for the Brookstone Catalog and Internet from the product assortment available in the Company’s stores, plus catalog and Internet-exclusive products in existing categories. A merchandising team is dedicated to the selection of products for the Gardeners Eden catalog. Products for all catalogs are chosen based on their previous or estimated direct marketing order productivity. The Company also employs a marketing staff responsible for list selection, management of marketing offers and tests of catalog activity.

Distribution and Management Information Systems

The Company operates a single 181,000 square foot distribution facility located in Mexico, Missouri. Nearly all of the Company’s inventory is received and distributed through this facility, which supports both the retail store and direct marketing distribution systems. The Company maintains an inventory of products in the distribution center in order to ensure a sufficient supply for sale to customers. Distributions to stores are made, at a minimum, on a weekly basis predominantly via UPS. Distributions to direct marketing customers are made daily, predominantly via UPS and Airborne. The facility also houses the Company’s direct marketing customer sales and contact center. The Company utilizes an outside customer sales and contact center to handle overflow order calls and to provide coverage during off-peak hours. In addition to this facility, the Company leases up to 270,000 square feet in Mexico, Missouri to handle its distribution support functions. Overflow from the direct marketing business may also be handled by a third party distribution center which primarily handles Internet order fulfillment.

Efficient and effective logistics management is a primary focus for the Company throughout the supply chain. The Company uses distribution control software and a sales and inventory management system. These systems, along with the store-based point-of-sale system and our direct marketing management system, provide daily tracking of item activity and availability to the Company’s inventory allocation and distribution teams. Additionally, the Company uses a sales forecasting and a distribution requirements planning client-server based system. This system generates weekly sales forecasts by SKU by selling location to determine replenishment requirements and recommends optimal inventory purchases to the merchandise procurement team.

After a comprehensive review of the Company’s anticipated distribution requirements for the next five years, management has decided to physically expand its current distribution center in Mexico, Missouri by an incremental 213,000 square feet of high bay, high density space. This additional space will replace up to approximately 270,000 square feet of un-racked space. This un-racked space is covered under several short-term leases and temporary seasonal rental arrangements. Phase I of this expansion was initiated in Fiscal 2001 through the enhancement of the warehouse management system to increase the efficiency of receiving and shipping goods. Phase II will consist of the physical expansion of the distribution center to occur in Fiscal 2003. The

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Company also anticipates completing Phase III of the expansion in Fiscal 2004. During Phase III, the Company will replace its current material handling system inside the distribution center with a state-of-the-art materials handling system to further enhance productivity by increasing automation and reducing the amount of physical handling of product.

Vendors

The Company currently conducts business with approximately 900 vendors, of which approximately 300 are located overseas. In Fiscal 2002, no single vendor supplied products representing more than 18.2% of net sales, with the 10 largest vendors representing approximately 37% of net sales. Although the Company’s sales are not dependent on any single vendor, the Company’s operating results could be adversely affected if any of its 10 largest vendors were unable to continue to fill the Company’s orders for such vendor’s products or failed to fill those orders in a timely way.

Seasonality

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

The seasonal nature of the Company’s business increased in Fiscal 2002 and is expected to continue to increase in Fiscal 2003 as the Company opens additional retail stores and continues its program to operate a significant number of small, temporary locations during the winter holiday selling season. In Fiscal 2002, most of the Company’s new stores were opened in the second half of the fiscal year.

Competition

Competition is highly intense among specialty retailers, traditional department stores and mass-merchant discount stores in regional shopping malls and other high-traffic retail locations. The Company competes for customers principally on the basis of product assortment, convenience, customer service, price and the attractiveness of its stores. The Company also competes against other retailers for suitable real estate locations and qualified management personnel. Because of the highly seasonal nature of the Company’s business, competitive factors are most important during the winter holiday selling season.

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

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

Employees

As of April 5, 2003, The Company had 1,345 regular full-time associates, of which 734 were salaried and 611 were hourly. As of such date, the Company also employed an additional 1,430 part-time and 217 temporary associates. The Company regularly supplements its workforce with temporary workers, especially in the fourth quarter of each year to service increased customer traffic during the peak winter holiday selling season. The Company believes that the success of its business depends, in part, on its ability to attract and retain qualified personnel. None of the Company’s employees are represented by labor unions, and the Company believes its employee relations are excellent.

Trademarks

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

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ITEM 2.    Properties

The Company leases all of its retail stores. New retail store leases have an average initial term of 10 years. As of February 1, 2003, the unexpired terms under the Company’s then existing store leases averaged just under six years. Store leases may permit the Company to terminate the lease after approximately five years if the store does not achieve specified levels of sales. In most leases, the Company pays a minimum fixed rent plus a contingent rent based upon net sales of the store in excess of a certain threshold amount. The Company does not believe the termination of any particular lease would have a material adverse effect on the Company. The following chart describes the number of store leases that will expire in the periods indicated:

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

The Company operates a single 181,000 square foot distribution facility located in Mexico, Missouri under a capital lease obligation (see Note 7 of the Notes to Consolidated Financial Statements) that extends over 20 years at prime plus 1% per annum. The interest rate is adjusted annually on November 1.

After a comprehensive review of the Company’s anticipated distribution requirements for the next five years, management has decided to physically expand its current distribution center in Mexico, Missouri by an incremental 213,000 square feet of high bay, high density space in Fiscal 2003. At February 1, 2003, the Company leased approximately 40,000 square feet in Mexico, Missouri on a lease expiring May 31, 2003 and another 114,000 square feet under a lease that expires in November 2003. The Company anticipates renewing the leases on these spaces until the distribution center expansion is complete.

The Company leases a building with approximately 51,000 square feet in Nashua, New Hampshire to house its corporate headquarters. The lease expires May 31, 2004, with two five-year renewal options. The Company is presently evaluating its future space requirements. Its final decision to renew its current lease or relocate will depend significantly on these requirements and the costs associated with these alternatives.

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ITEM 3.    Legal Proceedings

In March of 2002, the Company was served with a lawsuit brought in California superior court in Los Angeles 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 seeks damages including overtime pay, restitution and attorneys fees. The Company has filed an answer denying the allegations and opposing class certification. At the present time, no class has been certified, nor has there been any determination regarding exempt classification or the extent to which overtime pay may or may not be owed. While the Company continues to vigorously defend the allegations brought against it, it has entered into settlement negotiations with legal counsel for the plaintiffs and may choose to settle this matter.

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

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

No matters were submitted to a vote of security holders of the Company during the fourth quarter of Fiscal 2002.

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ITEM 4A.    Executive Officers of the Registrant

The executive officers of the Company are as follows:

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

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

ALEXANDER M. WINIECKI was appointed Executive Vice President, Store Operations in May 2000. He was Senior Vice President, Store Operations of the Company from March 1994 until May 2000, having previously served as Vice President, Store Operations of the Company beginning in October 1990. Mr. Winiecki was Executive Vice President of Decor Corporation, a retailer of framed fine art prints and posters, from November 1989 until September 1990. He was Vice President, Administration of Claire’s Boutiques, Inc., a

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chain of women’s costume jewelry and accessory specialty stores, from November 1986 until October 1989. From February 1985 until November 1986, Mr. Winiecki was a Regional Vice President of The Ben Franklin Stores, a chain of craft and variety stores, which was a division of Household Merchandising Inc. He was a Regional Manager of The Gap Stores, Inc., a specialty retailer of apparel, from May 1978 until January 1985.

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

KATHLEEN A. STAAB was appointed Vice President of Gardeners Eden in April 2002 after having worked as a consultant for various retailers since 1998. From 1991 to 1997, Ms. Staab was Vice President, General Merchandise Manager at Talbot’s. Previous to her positions at Talbot’s, Ms. Staab held managerial positions at Jordan Marsh Company and R. H. Macy and Company.

GREGORY B. SWEENEY was appointed Vice President and General Manager of the Direct Marketing segment in February 2001. From June 1998 to January 2001, Mr. Sweeney served as Vice President of Database Marketing at Office Depot, the world’s largest office supply company. From 1981 to 1998, Mr. Sweeney was with L. L. Bean, a national specialty mail order company, where he held various positions including Director of Strategic Planning and Vice President of Customer Loyalty Marketing.

M. RUFUS WOODARD, JR. was appointed Vice President of Merchandising in January 2002. From April 2001 until his recent appointment, Mr. Woodard was Operational Vice President, General Merchandise Manager. In 1998, Mr. Woodard was appointed to Divisional Merchandise Manager and held that position until 2001. Mr. Woodard joined the Company in 1993 as Buyer and managed numerous product categories from 1993 to 1998. Prior to joining the Company, Mr. Woodard held senior buying positions at Jordan Marsh /Abraham & Strauss and Miller and Rhoads.

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

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PART II

ITEM 5.    Market for Registrant’s Common Equity and Related Stockholders’ Matters.

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

Common Stock:

As of April 11, 2003, there were 8,557,346 shares of common stock, $.001 par value per share, outstanding and held of record by 137 stockholders. The Company has never paid a cash dividend and currently plans to retain any earnings for use in the operations of the business. For restrictions on payment of dividends, see Note 7 of the Notes to Consolidated Financial Statements.

Equity Compensation Plan Information

The above table summarizes the Company’s Equity Compensation Plans. At February 1, 2003, the Company had no equity compensation plans that were not approved by security holders.

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ITEM 6.    Selected Financial Data

Brookstone, Inc.

Selected Financial Data

(In thousands, except operating and per share data)

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In the fourth quarter of Fiscal 2000, the Company changed its income statement classification of shipping and handling fees and costs in accordance with EITF 00-10, “Shipping and Handling Fees and Costs” (“EITF 00-10”). As a result of this adoption of EITF 00-10, the Company now reflects shipping and handling fees billed to customers as revenue while the related shipping and handling costs are included in cost of goods sold. Prior to the adoption of EITF 00-10 such fees and costs were netted in selling, general and administrative expenses. Shipping and handling fees and costs for all prior periods presented have been reclassified to conform to the new income statement presentation.

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ITEM 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Critical Accounting Estimates

Preparation of the Company’s financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The Company reviews its estimates on an ongoing basis and makes judgments about the carrying value of assets and liabilities based on a number of factors. These factors include historical experience, guidance provided by outside experts and assumptions made by management that are believed to be reasonable under the circumstances. The most significant areas involving management’s judgments and estimates are described below.

Revenue Recognition.    The Company recognizes revenue from sales of merchandise at the time of customer receipt. For its direct to customer segment, the Company recognizes the revenue from these sales on the third business day after shipment as a result of delivery time. Revenue is recognized net of estimated merchandise returns and allowances.

Inventory Reserves.    The Company maintains information about its merchandise performance at the item level. This level of detail enables the management team to assess the viability of each item and to estimate the Company’s ability to sell through each item. The Company recognizes the write-down of slow moving or obsolete inventory in cost of sales when the write-down is probable and estimable. Management’s estimates can be affected by many factors, some of which are outside the Company’s control, which include but are not limited to, consumer buying trends and general economic conditions.

The Company takes a physical inventory at least twice a year at its retail store locations and distribution center. The second of these inventories is conducted near the end of the fiscal year. The Company maintains a reserve for inventory shrinkage for the periods between physical inventories. Management establishes this reserve based on historical results of previous physical inventories, shrinkage trends or other judgments that Management believes to be reasonable under the circumstances.

Deferred tax assets.    The carrying value of the Company’s net deferred tax assets assumes that the Company will be able to generate sufficient future taxable income in certain tax jurisdictions, based on estimates and assumptions. If these estimates and related assumptions change in the future, the Company may be required to record a valuation allowance against its deferred tax assets resulting in income tax expense in the Company’s consolidated statement of operations. Management evaluates the realizability of the deferred tax assets and assesses the need for valuation allowances periodically.

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Valuation of Long-Lived Assets.    The Company reviews long-lived assets for impairment at least annually or whenever events or changes in business circumstances indicate that the carrying amount of the assets may not be fully recoverable or that the useful lives of these assets are no longer appropriate. Each impairment test is based on a comparison of the undiscounted net cash flows of individual stores, and consolidated net cash flows for long-lived assets not identifiable to individual stores, to the recorded value of the asset. Significant judgments are made in projecting future cash flows and are based on a number of factors, including the maturity of the store, historical experience, recent trends and general economic assumptions. If impairment is indicated, the asset is written down to its estimated fair value on a discounted cash flow basis. While the Company believes that its estimates of future cash flows are reasonable, different assumptions regarding such cash flows could materially affect the Company’s evaluations.

Pension and Other Post-Retirement Benefit Plans.    The Company sponsors defined benefit pension and other post-retirement benefit plans. Major assumptions used in the accounting for these employee benefit plans include the discount rate, expected return on plan assets, rate of increase in employee compensation levels and health care cost increase projections. Assumptions are determined based on Company data and appropriate market indicators, and are evaluated each year as of the plans’ measurement date. A change in any of these assumptions would have an effect on net periodic pension and post-retirement benefit costs reported in the Consolidated Financial Statements.

Deferred Catalog Costs.    The Company accounts for the costs associated with the production and distribution of its catalogs over the life of the catalog which is estimated to be six months. These costs are amortized over the life of the catalog based on the estimated sales curve over this time frame.

Workers’ Compensation Insurance.    The Company retains risk with respect to workers’ compensation claims up to a maximum of $150,000 per claim and $1,015,000 on aggregate claims during the policy year. The provision for estimated workers’ compensation claims includes estimates of the ultimate costs for both reported claims and claims incurred but not reported. These estimates incorporate the Company’s past experience as well as other considerations.

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Results of Operations

The following table sets forth certain financial data of the Company expressed as a percentage of net sales for Fiscal 2002, Fiscal 2001 and Fiscal 2000.

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Fifty-two weeks ended February 1, 2003 versus February 2, 2002

Net sales for Fiscal 2002 increased by $23.0 million, or 6.5% to $375.9 million as compared to $352.9 million in Fiscal 2001. In Fiscal 2002, retail sales increased $20.9 million or 7.2% and the direct to customer channel increased $2.1 million or 3.3% on reduced catalog circulation of 14.7%. Driving these increases were strong sales performances and successful new product introductions in audio, wine, stationery, kitchen, personal accessories and travel categories. Of the retail sales increase, same store sales represented $9.1 million, 27 stores (18 full line, seven airport and two Gardeners Eden stores) opened for the full year in Fiscal 2002 but only a portion of Fiscal 2001 represented $6.1 million and 12 new stores (six full line and six airport stores) opened in Fiscal 2002 represented $4.7 million. To a lesser extent, seasonal store operations generated an increase in sales of $0.6 million and increased revenue from customers for shipping and handling contributed $0.4 million in increased sales.

In the direct to customer segment, net sales, excluding income from shipping and handling, increased $1.6 million. This increase is comprised of $6.2 million in the Brookstone Brand (Hard-to-Find-Tools, Brookstone Catalog, Internet and and Corporate sales ), offset by a $4.6 million decrease in the Gardeners Eden Brand. Additionally, increased revenues of $0.5 million were generated from customers for shipping and handling.

Gross profit as a percentage of net sales increased 120 basis points to 37.5% in Fiscal 2002 compared to 36.3% in Fiscal 2001. In Fiscal 2002, net material costs decreased 140 basis points primarily as a result of improved initial margins and reduced markdowns. Order postage expense decreased 10 basis points in Fiscal 2002. Partially offsetting the reduced material costs and order postage expense, was an increase of 30 basis points in occupancy costs resulting from the additional stores open in Fiscal 2002.

Selling, general and administrative expenses as a percent of net sales decreased 140 basis points to 32.2% in Fiscal 2002 as compared to 33.6% in Fiscal 2001. Reduced catalog costs represented a decrease of 160 basis points principally as a result of the Company’s decreased catalog circulation in the direct to customer channel. The decrease in catalog costs was partially offset by a net increase of 20 basis points in costs expended to support the base business.

As of June 11, 2002, the Board of Directors approved an amendment to the eligibility requirement of the Retiree Health Plan (“The Plan”). This amendment restricts regular full time associates from continuing to accrue points towards eligibility if those associates have not accumulated a minimum of 10 years of services as of December 31, 2002. As a result, during the second quarter, the Company recorded a gain on curtailment of $642 thousand, which is stated separately on the Consolidated Statement of Income.

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Net interest expense as a percent of net sales remained flat at 0.3% in both Fiscal 2002 and Fiscal 2001. The slight increase in net interest expense of $240 thousand in Fiscal 2002 resulted principally from reduced interest income associated with reduced interest rates in Fiscal 2002 on cash balances and investments. Additionally interest expense increased slightly principally related to increased interest rates in the revolving credit agreement effective in Fiscal 2002.

In Fiscal 2002, the Company recorded an income tax provision of $7.4 million, or 2.0% of net sales, as compared to $3.3 million, or 0.9% of net sales in Fiscal 2001. The increase in income tax provision resulted primarily from the increase in pre-tax income in Fiscal 2002.

Despite an overall bleak retail landscape in Fiscal 2002, the retail channel reported a strong performance in Fiscal 2002 as evidenced by an increase in pre-tax income of $3.9 million or 36.9% over Fiscal 2001. The direct to customer segment was restored to profitability in Fiscal 2002. This return to profitability was achieved by reducing unproductive catalog circulation. This resulted in pre-tax income increasing $6.8 million to $4.9 million.

As a result of the foregoing, the Company reported net income of $12.0 million or $1.40 per diluted share in Fiscal 2002, an increase in excess 122% per diluted share. Net income was 3.2% of net sales in Fiscal 2002 compared to 1.5% of net sales in Fiscal 2001.

Fifty-two weeks ended February 2, 2002 versus Fifty-three weeks ended February 3, 2001

Net sales for Fiscal 2001 decreased by $11.6 million, or 3.2% to $352.9 million as compared to $364.5 million in Fiscal 2000. In Fiscal 2001, retail sales decreased $8.9 million, or 3.0% and direct marketing sales decreased $2.7 million, or 4.0% on a circulation decrease of 12.0%. Both retail and direct marketing decreases were primarily attributable to reduced sales since the tragic events on September 11^th which severely disrupted consumer shopping patterns. Of the retail store sales decreases, same store sales accounted for approximately $25.7 million of the decrease. This retail store decrease was offset by net sales increases of $13.9 million related to the 27 new stores (18 full line, seven airport and two Gardeners Eden stores) opened in Fiscal 2001 and by an increase of $2.2 million attributable to additional sales from the operation of 14 stores (12 full line and two airport stores) for the full year in Fiscal 2001 that were only open for a portion of Fiscal 2000. Additionally, seasonal store operations accounted for approximately $0.4 million in increased net sales and increased revenue generated from customers for shipping and handling of approximately $0.3 million. The decrease in direct marketing net sales resulted primarily from decreases across all catalog titles amounting to approximately $6.1 million, partially offset by increases in Internet net sales of approximately $1.9 million and increased revenue generated from customers for shipping and handling of approximately $1.5 million.

Gross profit as a percentage of net sales decreased 2.0% to 36.3% in Fiscal 2001 compared to 38.3% in Fiscal 2000. The decrease is primarily due to increased occupancy costs (230 basis points) as a result of the additional stores open in Fiscal 2001 and reduced same store sales, offset by improved product margins.

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Selling, general and administrative (“SG&A”) expenses increased $4.4 million to $118.6 million in Fiscal 2001 from $114.2 million in Fiscal 2000. As a percent of net sales, SG&A increased to 33.6% in Fiscal 2001 from 31.3% in Fiscal 2000. This $4.4 million increase includes $4.6 million related to operating expenses associated with new stores opened in Fiscal 2001 and stores open for the full year in Fiscal 2001 that were only open for a partial year in Fiscal 2000. The increase in SG&A also includes $1.2 million associated with marketing costs for the direct marketing segment. These increases were offset by decreases in SG&A of $1.4 million associated with decreases in costs expended to support the base business.

Income from operations was $9.7 million, or 2.7% of net sales, in Fiscal 2001 compared to $25.4 million, or 7.0% of net sales in Fiscal 2000.

Net interest expense increased to $1.0 million, or 0.3% of net sales in Fiscal 2001 from $0.6 million, or 0.2% of net sales in Fiscal 2000. The net increase was primarily the result of lower interest income earned in Fiscal 2001 as compared with Fiscal 2000. Interest income, which offsets interest expense, was lower in Fiscal 2001 as a result of lower average cash balances earning lower interest rates in Fiscal 2001.

In Fiscal 2001, the Company recorded an income tax provision of $3.3 million, or 0.9% of net sales, as compared to $9.5 million, or 2.6% of net sales in Fiscal 2000. This decrease in income tax provision resulted from the decrease in pre-tax income in Fiscal 2001.

As a result of the foregoing factors, net income decreased to $5.3 million in Fiscal 2001 versus $14.9 million in Fiscal 2000. Net income was 1.5% of net sales in Fiscal 2001 as compared to 4.1% in Fiscal 2000. Earnings per share on a diluted basis decreased to $0.63 in Fiscal 2001 as compared to $1.76 in Fiscal 2000 (after reflecting the reduction of a cumulative effect of accounting change of $0.04 in Fiscal 2000).

Seasonality

The seasonal nature of the Company’s business increased in Fiscal 2002 and is expected to continue to increase in Fiscal 2003 as the Company opens additional retail stores and continues its program to operate a significant number of small, temporary locations during the winter holiday selling season. In Fiscal 2002, most of the Company’s new stores were opened in the second half of the fiscal year.

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

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Liquidity and Capital Resources

During Fiscal 2002, the Company generated a total of $23.4 million of cash including $22.3 million from operations and $1.1 million from the exercise of stock options. In addition, the Company’s working capital decreased approximately $8.7 million principally due to the increase in other current liabilities, primarily due to increased income taxes payable due to higher pre-tax income in Fiscal 2002 and increased compensation payable in 2002 as a result of Fiscal 2002’s improved financial performance. The Company utilized cash of $6.1 million to fund capital expenditures. The capital expenditures included $4.2 million for new stores, $1.7 million for remodeling and maintenance in existing stores and $0.2 million for other improvements. The Company’s cash position increased $25.2 million from the end of the prior fiscal year, to $54.1 million.

During Fiscal 2001, the Company generated a total of $18.4 million of cash including $18.2 million from operations and $0.2 million from the exercise of stock options and the purchase of stock under the Employee Stock Purchase Plan. In addition, the Company’s working capital increased approximately $10.9 million principally from the timing of payment of accounts payable and other current liabilities. The Company utilized cash of $13.8 million to fund capital expenditures. The capital expenditures included approximately $7.0 million for new stores, approximately $4.0 million for remodeling and maintenance in existing stores, $2.5 million for information systems developments and $0.3 million for distribution center and infrastructure improvements. At the end of Fiscal 2001, the Company’s cash position decreased to $28.9 million, a $6.5 million decrease from the end of the prior fiscal year.

The Company’s primary short-term liquidity needs consist of financing seasonal merchandise inventory build-ups. The Company’s primary sources of financing for such needs are from operations, borrowings under its revolving credit facility and trade credit. The Company typically has no borrowings under the revolving credit facility from January through August, however borrowings typically increase from September through November to finance purchases of merchandise inventory in advance of the winter holiday selling season. The Company generally repays all outstanding borrowings under its revolving credit facility prior to Christmas and relies on cash from operations obtained during the winter holiday selling season until it begins to borrow again under its revolving credit facility the following fiscal year. At February 1, 2003 and February 2, 2002, the Company had no outstanding borrowings under its revolving credit facility, although certain letters of credit in an aggregate amount of approximately $8.1 million and $10.8 million were outstanding, respectively. During Fiscal 2002 and 2001, the Company’s borrowings peaked at $15.0 million and $40.0 million under the revolving credit facility, respectively. Additionally, the maximum amount outstanding during Fiscal 2002 and 2001 still would have allowed the Company to borrow an additional $38.4 million and $19.0 million, respectively under the Borrowing Base calculation as defined in the revolving credit facility.

The Company’s revolving credit facility provides for borrowings of up to $80 million for letters of credit and working capital as long as the Company meets a borrowing base test equal to 50% of the amount of eligible inventory and outstanding documentary letters of credit (increasing to 65% June through July and to 75% August through November). Amounts available for borrowings are reduced by the aggregate amount of outstanding

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letters of credit, which may not exceed $50 million, and borrowings. The facility requires the Company to have no borrowings (excluding letters of credit) outstanding for at least 30 consecutive days during the period of December 15, 2002 to April 30, 2003. Thereafter, during the December 15^th to April 30^th time frame, the Company must have no more than $10 million in borrowings (excluding letters of credit) outstanding for 30 consecutive days. Borrowings under the facility bear interest that is dependent on the level of the Company’s fixed charge coverage ratio. Depending on the calculated ratio of the Company’s fixed charge coverage, there are four different levels that have different fees and different margin rates on the applicable borrowings. Under the facility, the interest rates on the facility, at the Company’s option, were either: the agent bank’s base lending rate plus 0.75%, 0.50%, or 0.25%, or the Eurodollar rate for the applicable period plus 2.25%, 2.00%, 1.75% or 1.50%. In addition, the Company is obligated to pay a fee of 0.75%, 0.625%, or 0.50% on the unused portion of the commitment, 1.125%, 1.00%, 0.875%, or 0.75% on the documentary letters of credit and 2.375%, 2.125%, 1.875% or 1.625% on the standby letters of credit. Amounts due under the facility are secured by the personal property of the Company, tangible or intangible including all stock of Brookstone, Inc.’s subsidiaries, but excluding real property, machinery and equipment encumbered on February 21, 2002, and general intangibles. The security interest in the facility is subject to collateral release conditions dependent upon four consecutive quarters fixed charge coverage ratio of 1.40 to 1.00 and consolidated EBITDA for the four quarters then ended of at least $34.5 million. At the Lender’s option, all positive cash balances held by the Lender’s banks may be applied to the outstanding balance of the revolving line of credit. The facility contains a number of restrictive covenants, including limitations on incurring additional indebtedness, granting liens, selling assets, engaging in mergers and other similar transactions, engaging in new business lines and making capital expenditures. In addition, the facility prohibits the payment of cash dividends on common stock and requires that the Company maintain certain financial ratios, including tests pertaining to consolidated net worth, fixed charge coverage and cash flow leverage. This facility has a term that expires February 21, 2005, although it contains an option to extend for one additional year. For all four quarters of Fiscal 2002, the Company was in compliance with these covenants.

Lower market interest rates and plan asset returns have resulted in declines in pension plan asset performance and funded status. The discount rate used for the calculation of plan liabilities at year end was lowered to 6.5% reflecting current economic conditions. The expected long-term rate of return for fiscal year 2003 will be 8% versus the fiscal year 2002 rate of 9%. The 2003 rate was developed by examining historical return rates based on plans’ asset allocation and other factors. As a result, pension expense in 2003 is expected to be negatively impacted. See Note 9 to the Consolidated Financial Statements for further discussion.

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

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The following table (in thousands) summarizes the Company’s contractual and other commercial obligations as of February 1, 2003 and the effect such obligations are expected to have on its liquidity and cash flows in future periods.

The Company believes its cash balances, funds to be generated by future operations, and borrowing capacity will be sufficient to finance the majority of its normal capital requirements during Fiscal 2003. Additionally, in Fiscal 2003, the Company plans to finance the expansion of its distribution center.

The amount of cash generated from operations is dependent upon many factors including but not limited to the ability of the Company to achieve its business plan and general economic and retail industry conditions in the United States, during the upcoming year. Borrowing under the Company’s Amended Credit Agreement may also be limited by the following factors:

Fiscal 2003 Store Openings and Capital Expenditure Expectations

The following discussion includes certain forward-looking statements of management’s expectations for store growth and related capital expenditures. These statements should be read in light of the considerations presented under the caption Outlook: Important Factors and Uncertainties (found on pages 30—34 of this document).

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The Company expects to add approximately 15 to 20 new Brookstone stores, including up to nine airport locations and up to two Gardeners Eden retail stores, in Fiscal 2003. The Company anticipates the cost of opening a new Brookstone store (based on the new store design), including leasehold improvements (net of landlord allowances), furniture and fixtures, and pre-opening expenses, to average approximately $375,000 and a Gardeners Eden store to average approximately $600,000. In addition, the Company expects a new Brookstone store to require $150,000 and a Gardeners Eden new store to require $200,000 of working capital per store. The Company anticipates the cost of opening airport stores, including leasehold improvements, furniture and fixtures, and pre-opening expenses, to average approximately $250,000, and expects airport stores to require $100,000 of working capital per store. The Company expects to identify between 10 and 15 stores for remodeling, and update and maintain other stores, during Fiscal 2003, incurring capital expenditures of approximately $7.1 million. The Company plans to operate approximately 65 seasonal stores during the Fiscal 2003 winter holiday season subject to the availability of acceptable sites.

After a comprehensive review of the Company’s anticipated distribution requirements for the next five years, management has decided to physically expand its current distribution center in Mexico, Missouri by an incremental 213,000 square feet of high bay, high density space. This additional space will replace up to approximately 270,000 square feet of un-racked space. This un-racked space is covered under several short-term leases and temporary seasonal rental arrangements. Phase I of this expansion was initiated in Fiscal 2001 through the enhancement of the warehouse management system to increase the efficiency of receiving and shipping goods. Phase II will consist of the physical expansion of the distribution center to occur in Fiscal 2003. The Company also anticipates completing Phase III of the expansion in Fiscal 2004. During Phase III, the Company will replace its current material handling system inside the distribution center with a state-of-the-art materials handling system to further enhance productivity by increasing automation and reducing the amount of physical handling of product.

The Company anticipates expending approximately $7.0 million on the Phase II expansion and plans on financing this expansion. These costs are expected to be partially offset by rent savings on leased space and production efficiencies. In addition to the capital expenditures listed above, the Company anticipates making capital expenditures of approximately $1.6 million in Fiscal 2003, primarily to enhance the Company’s management information and other support systems.

In Fiscal 2003, the Company expects to open most of its new stores in the second half of the year. The Company’s retail operations are not generally profitable until the fourth quarter of each fiscal year.

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Outlook: Important Factors and Uncertainties

The Private Securities Litigation Reform Act of 1995 (the “Act”) provides a “safe harbor” for forward-looking statements to encourage companies to provide prospective information about themselves without fear of litigation so long as the forward-looking information is accompanied by meaningful cautionary statements identifying important factors that could cause actual results to differ materially from those set forth in the forward-looking statement. Statements in this 2002 Annual Report on Form 10-K which are not historical facts, including statements about the Company’s or management’s confidence or expectations, seasonality of the Company’s future sales and earnings, plans for opening new stores and other retail locations, introduction of new or updated products, opportunities for sales growth or cost reductions and other statements about the Company’s operational outlook, are forward-looking statements subject to risks and uncertainties that could cause actual results to vary materially. The following are important factors, among others, that should be considered in evaluating these forward-looking statements, as well as in evaluating the Company’s business prospects generally:

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

Dependence on Innovative Merchandising.    Successful implementation of the Company’s merchandising strategy depends on its ability to introduce in a timely manner new or updated products which are affordable, functional in purpose, distinctive in quality and design and not widely available from other retailers. If the Company’s products or substitutes for such products become widely available from other retailers (especially department stores or discount retailers), demand for these products from the Company may decline or the Company may be required to reduce their retail prices. A decline in the demand for, or a reduction in the retail prices of, the Company’s important existing products can cause declines in the Company’s sales and profitability if the Company is unable to introduce in a timely fashion new or replacement products of similar sales levels and profitability. Even with innovative merchandising, there remains a risk that the products will not sell at planned levels.

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Product Risks.    Although the Company seeks to maintain quality standards at a high level, its products may have defects that could result in high rates of return, recalls or product liability claims. Such returns, recalls or claims could adversely affect profitability. Third parties may assert claims for patent or trademark infringement, or violation of other proprietary rights. If successful, such claims could result in the inability to sell a particular product or, in the case of a settlement or royalty, adversely impact the profitability of the product. Such claims could entail significant legal expenses even if they are ultimately determined to be meritless.

Gardeners Eden Stores.    The Gardeners Eden stores represent an initiative by the Company to develop a new store model focused on a market that is different from that of the traditional Brookstone store, and to help decrease the concentration of sales in the winter holiday season by generating more sales in the spring and summer. The success of this new model could vary based on a wide variety of factors including the selection of optimum locations, innovative merchandising, increasing profitability, accurate prediction of customer response in a new market, and the overall condition of the economy.

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

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

Retention of Qualified Employees.    The Company’s success depends upon its ability to attract and retain highly skilled and motivated, full-time and temporary associates with appropriate retail experience to work in management and in its stores and temporary locations. Further, because of the limited time periods during which temporary locations are open each year, the availability of suitable associates for such locations is limited.

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

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Terrorism.    The Federal Government terror alerts have a negative effect on retail sales as they cause a disruption of consumer shopping patterns. The Company’s stores are located predominantly in large public areas such as malls and airports, which experience a significant decrease in traffic during periods of high alert. The Company’s stores are dependent on pedestrian traffic for sales volume. Terror alerts and acts of terrorism that affect such traffic could have an adverse impact on sales.

Poor Economic Conditions.    The Company’s business has in the past and may be impacted by economic conditions that tend to reduce the level of discretionary consumer spending. These conditions include high interest rates, inflation, unemployment, stock market uncertainty, and low consumer confidence.

Information and Communications Infrastructure.    The success of the Company is dependent upon its computer hardware and software systems, and its telecommunications systems. The Internet portion of the direct marketing business relies heavily on the proper operation of these systems, as well as on the continued operation of the external components of the Internet, to market goods and to receive and process orders. The retail business utilizes point of sale computers located in the stores. The Company’s headquarters and distribution center rely on a wide variety of applications to carry on the business. These systems are subject to damage from natural disasters, power failures, hardware and software failures, security breaches, network failures, computer viruses and operator negligence. The Company is also dependent on certain vendors of its key information systems. Should these vendors experience financial difficulties, the support of these key systems could be negatively impacted.

Centralized Distribution.    The Company conducts all of its distribution operations and a significant portion of its direct marketing processing functions from multiple facilities in Mexico, Missouri and through a third party distribution center for its Internet operation. A disruption in operations at the distribution center or its third party distributor may significantly increase the Company’s distribution costs and prevent goods from flowing to stores and customers. The Company utilizes third party carriers for its product shipments. The distribution of products is vulnerable to disruption from employee strikes and labor unrest, in particular, potential strikes by UPS employees and/or longshoremen, which could increase costs and impede or restrict the supply of goods.

Direct Marketing.    The success of the Company’s catalog operation hinges on the achievement of adequate response rates to mailings, merchandising and catalog presentation that appeal to mail order customers, and the expansion of the potential customer base in a cost effective manner. Lack of consumer response to particular catalog mailings could increase the costs and decrease the profitability of the direct marketing business. Significant costs relative to paper, postage and inventory are associated with the direct marketing business. Rising paper and postal rates can negatively impact the business and the failure to accurately predict consumer response or to achieve the optimum cost-effective level of catalog circulation could adversely affect revenues and growth of the business.

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Dependence on Key Vendors.    Because the Company strives to sell only unique merchandise, adequate substitutes for certain key products may not be widely available in the marketplace. Because of this, there can be no assurance that vendor manufacturing or distribution problems, or the loss of the Company’s exclusive rights to distribute important products, would not have a material adverse effect on the Company’s performance. In Fiscal 2002, the Company had one vendor who supplied products representing approximately 18.2% of net sales, with the 10 largest vendors representing approximately 37% of net sales. The Company’s operating results could be adversely affected if any of its 10 largest vendors were unable to continue to fill the Company’s orders for such vendor’s products or failed to fill those orders in a timely way.

Foreign Vendors.    The Company is purchasing an increasing portion of its merchandise from foreign vendors. Although management expects this strategy to increase profit margins for these products, the Company’s reliance on such vendors subjects the Company to associated legal, social, political and economic risks, including import, licensing and trade restrictions. In addition, the Company is highly dependent upon steamship lines and air cargo companies to transport this merchandise from overseas to the United States and as such, the Company remains vulnerable to equipment shortages and labor stoppage. In such a situation, the Company could face inventory shortages in certain products, increased transportation costs and increased interest expense as a result of moving inventory receipts forward.

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

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

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

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Health Epidemics.    The outbreak of unexpected disease threats such as severe acute respiratory syndrome (SARS), influenza, and insect-borne diseases such as encephalitis and the West Nile virus could negatively impact the Company’s sales. Travel restrictions to certain parts of the world could impair the Company’s activities with some of its vendors that could result in product shortages and could slow new product development. Additionally, any reduction in travel could depress sales at the Company’s airport locations and reduce sales of its travel-related merchandise. Curtailment of outdoor activities in response to the threat of insect-borne illnesses could shrink sales of the Company’s recreational, garden, and outdoor products. Fear of contagion could cause a drop in traffic at all of its store locations with a consequent drop in sales.

Recent Accounting Pronouncements

In April 2002, the Financial Accounting Standards Board (“FASB”) issued Statement No. 145 (“SFAS 145”), “Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections,” was issued. This statement provides guidance on the classification of gains and losses from the extinguishments of debt and the accounting for certain specified lease transactions. The Company does not expect the provisions of SFAS 145 to have a material impact, if any, on the Company’s consolidated financial statements.

In June 2002, the FASB issued Statement No. 146 (“SFAS 146”), “Accounting for Costs Associated with Exit or Disposal Activities.” This statement addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies EITF Statement No. 94-3 (“EITF 94-3”), “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring).” SFAS 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred. EITF 94-3 allowed for an exit cost liability to be recognized at the date of an entity’s commitment to an exit plan. SFAS 146 also requires that liabilities recorded in connection with exit plans be initially measured at fair value. The provisions of SFAS 146 are effective for exit or disposal activities that are initiated after December 31, 2002. The Company has evaluated the provisions of SFAS 146 and determined that this standard had no material effect on our consolidated financial statements.

In November 2002, the FASB issued Interpretation No. 45 (“FIN 45”), “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others, an interpretation of FASB Statements No. 5, 57, and 107 and rescission of FASB Interpretation No. 34.” FIN 45 elaborates on the existing disclosure requirements for most guarantees, including loan guarantees. It also clarifies that at the time a company issues a guarantee, the company must recognize an initial liability for the fair value, or market value, of the obligations it assumes under that guarantee and must disclose that information in its interim and annual financial statements. FIN 45 is effective on a prospective basis for guarantees issued or modified after December 31, 2002, irrespective of the guarantor’s fiscal year-end. The disclosure requirements in FIN 45 are effective for financial statements of interim or annual periods ending after December 15, 2002. We have adopted the disclosure provisions of FIN 45 and determined that this interpretation had no material effect on our

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accompanying consolidated financial statements. Guarantees entered into prior to December 31, 2002 have been disclosed and future guarantees will be recorded at fair value.

In December 2002, the Financial Accounting Standards Board (“FASB”) issued Statement No. 148 (“SFAS 148”), “Accounting for Stock-Based Compensation -Transition and Disclosure-an amendment of FASB Statement No. 123.” SFAS 148 amends FASB issued Statement No. 123 (“SFAS 123”), “Accounting for Stock-Based Compensation,” to provide alternative methods of transition for an entity that voluntarily adopts the accounting provisions of SFAS 123. SFAS 148 amends the disclosure requirements of SFAS 123 to require prominent disclosure in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The provisions of SFAS 148 are effective for fiscal years ending after December 15, 2002. We have elected to continue to account for our stock option plans under Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” as well as to provide disclosure of stock-based compensation as outlined in SFAS 123 as amended by SFAS 148. We have adopted the disclosure provisions of SFAS 148 and determined that this standard had no material effect on our accompanying consolidated financial statements.

In January 2003, the FASB issued Interpretation No. 46 (“FIN 46”), “Consolidation of Variable Interest Entities, an interpretation of ARB No. 51.” The primary objectives of FIN 46 are to provide guidance on the identification of, and financial reporting for, entities for which control is achieved through means other than through voting rights; such entities are known as variable-interest entities (VIEs). FIN 46 is effective for VIEs which are created after January 31, 2003 and for all VIEs for the first fiscal year or interim period beginning after June 15, 2003. The Company has evaluated the provisions of FIN 46 and has appropriately disclosed the required information (see Note 4 of the Notes to Consolidated Financial Statements).

In February 2003, the Emerging Issues Task Force (“EITF”) addressed EITF Statement No. 02-16 (“EITF 02-16”), “Accounting by a Reseller for Cash Consideration Received From a Vendor.” EITF 02-16 provides accounting guidance on how a reseller should characterize consideration given by a vendor and when to recognize and how to measure that consideration in its income statement. We have evaluated the provisions of EITF 02-16 and determined that this statement will not have a material effect on our consolidated financial statements.

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ITEM 7A.    Quantitative and Qualitative Disclosures about Market Risk

The Company’s exposure to interest rate fluctuations is minimal due to the Company’s use of short-term borrowings and cash flows to fund operations and capital improvements rather than long-term borrowings. The Company does not currently use derivative financial instruments and management does not foresee or expect any significant changes in its current management strategy.

ITEM 8.    Financial Statements and Supplementary Data.

The financial statements, together with the report thereon of PricewaterhouseCoopers LLP, dated March 18, 2003, and supplementary data appear on pages 38 through 68 of this document.

ITEM 9.    Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.

None.

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PART III

ITEM 10.    Directors and Executive Officers of the Registrant.

Information in response to this item with respect to directors of the Company may be found in the sections entitled “Election of Directors” and “Section 16(a) Beneficial Ownership Reporting Compliance” of the Company’s definitive Proxy Statement for the Company’s 2002 Annual Meeting of Stockholders (the “Proxy Statement”), and such information is incorporated herein by reference.

Information in response to this item with respect to executive officers of the Company appears in Item 4A entitled “Executive Officers of the Registrant” on pages 15 through 16 of this report, and such information is incorporated herein by reference.

ITEM 11.    Executive Compensation.

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

ITEM 12.    Security Ownership of Certain Beneficial Owners and Management.

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

ITEM 13.    Certain Relationships and Related Transactions.

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

ITEM 14.    Controls and Procedures

Within the 90 days prior to the date of filing date of this report, 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 pursuant to Exchange Act Rule 13a-14. Based upon that evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective in timely alerting them to material information relating to the Company (including its consolidated subsidiaries) required to be included in the Company’s periodic SEC filings. Subsequent to the date of that evaluation, there have been no significant changes in the Company’s internal controls or in other factors that could significantly affect internal controls, nor were any corrective actions required with regard to significant deficiencies and material weaknesses.

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PART IV.

ITEM 15.    Exhibits, Financial Statement Schedules and Reports on Form 8-K.

1.    Financial Statements

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

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Report of Independent Accountants

To the Board of Directors and

Shareholders of Brookstone, Inc.

In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of Brookstone, Inc. and its subsidiaries at February 1, 2003 and February 2, 2002, and the results of their operations and their cash flows for each of the three years in the period ended February 1, 2003, in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the accompanying index presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedule are the responsibility of the Company’s management; our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits on these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

/s/ PricewaterhouseCoopers LLP

PRICEWATERHOUSECOOPERS LLP

Boston, Massachusetts

March 18, 2003

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BROOKSTONE, INC.

CONSOLIDATED BALANCE SHEET

(In thousands, except share data)

See Notes to Consolidated Financial Statements

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BROOKSTONE, INC.

CONSOLIDATED STATEMENT OF INCOME

(In thousands, except per share data)

See Notes to Consolidated Financial Statements

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BROOKSTONE, INC.

CONSOLIDATED STATEMENT OF CASH FLOWS

(In thousands)