##### Table of Contents





UNITED STATES SECURITIES AND
    EXCHANGE COMMISSION
 Washington, D.C.
    20549
      Form 10-K
  (Mark One)þ

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)  OF THE
    SECURITIES AND EXCHANGE ACT OF 1934For the fiscal year ended
    February 2, 2008oro

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIES AND EXCHANGE ACT OF 1934For the transition period
    from          to   Commission file number
    000-49885
      Kirklands, Inc.
 (Exact name of registrant as
    specified in its charter)
  Tennessee

62-1287151(State or other jurisdiction
    of
    incorporation or organization)

(I.R.S. Employer
    Identification No.)431 Smith Lane, Jackson, Tennessee(Address of principal
    executive offices)

38301(Zip
    Code)   Registrants telephone number, including area code:
 (615) 872-4995
  Securities registered pursuant to Section 12(b) of the
    Act:
  Title of each class

Name of Each Exchange on Which RegisteredCommon Stock, no par value per share

The NASDAQ Stock Market LLC   Securities registered pursuant to Section 12(g) of the
    Act:
 (None)
  o þ
  o þ
    þ o
  Regulation S-K Form 10-K Form 10-K. o
    Large accelerated filer
    o

Accelerated filer
    o

Non-accelerated
    filer o
    (Do not check if a smaller reporting company)

Smaller reporting
    company þ   Rule 12b-2 o þ
      DOCUMENTS
    INCORPORATED BY REFERENCE
  Form 10-K.




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##### 





TABLE OF
    CONTENTS
  FORM 10-K
  
  PageForward-Looking StatementsPART IItem 1.

Business


3Item 1A.

Risk Factors


12Item 2.

Properties


17Item 3.

Legal Proceedings


19Item 4.

Submission of Matters to a Vote of Security
    Holders


20PART IIItem 5.

Market for Registrants Common Equity and
    Related Shareholder Matters


20Item 6.

Selected Financial Data (Not Applicable)Item 7.

Managements Discussion and Analysis of
    Financial Condition and Results of Operations


20Item 8.

Financial Statements and Supplementary Data


31Item 9.

Changes in and Disagreements with Accountants on
    Accounting and Financial Disclosure


31Item 9A.

Controls and Procedures


31Item 9B.

Other Information


32PART IIIItem 10.

Directors and Executive Officers of the
    Registrant


33Item 11.

Executive Compensation


33Item 12.

Security Ownership of Certain Beneficial Owners
    and Management


33Item 13.

Certain Relationships and Related Transactions


33Item 14.

Principal Accounting Fees and Services


33PART IVItem 15.

Exhibits, Financial Statements, Schedules and
    Reports on
    Form 8-K


34Report of Independent Registered Public
    Accounting Firm


35Consolidated Balance Sheets as of
    February 2, 2008, and February 3, 2007


36Consolidated Statements of Operations for the
    52 weeks ended February 2, 2008 and the 53 weeks
    ended February 3, 2007


37Consolidated Statements of Changes in
    Shareholders Equity for the 52 weeks ended
    February 2, 2008, and for the 53 weeks ended
    February 3, 2007


38Consolidated Statements of Cash Flows for the
    52 weeks ended February 2, 2008, and for the
    53 weeks ended February 3, 2007


39Notes to Consolidated Financial Statements


40Exhibits


52Signatures


54Index of Exhibits Filed with this Annual
    Report on
    Form 10-KEx-10.11 Compensation Policy for Non-Employee DirectorsEX-23.1 CONSENT OF ERNST & YOUNG LLPEX-31.1 SECTION 302 CERTIFICATION OF THE CEOEX-31.2 SECTION 302 CERTIFICATION OF THE CFOEX-32.1 SECTION 906 CERTIFICATION OF THE CEOEX-32.2 SECTION 906 CERTIFICATION OF THE CFO   1




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FORWARD-LOOKING
    STATEMENTS  Form 10-K Form 10-K, Form 10-K
  Form 10-K
  Form 10-K
 2




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PART I  Item 1.
    Business  General
    off-mall
  Business
    Strategy
    Item-focused merchandising.
  Ever-changing merchandise mix.
  Stimulating visual presentation.
  Strong value proposition.
 3




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Broad market appeal.
  Store
    Development Strategy
        Merchandising
  Merchandising strategy.
   4




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make-up
    Product assortment.
    % of Net SalesMerchandise Category

Fiscal 2007


Fiscal 2006


Fiscal 2005Wall Décor (including framed art, mirrors, metal and other
    wall ornaments)


31
%


29
%


29
%Decorative Accessories


13



12



10Candles


11



11



10Accent Furniture


8



8



6Holiday


8



7



8Lamps


6



8



10Textiles


6



8



9Garden


5



5



6Gifts


5



2



4Other (including housewares, picture frames and other
    miscellaneous items)


4



5



4Floral


3



5



4Total


100
%


100
%


100
%  5




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Value to customer.
  Store
    Operations
  General.
  Formats.
  Visual merchandising.
    Personnel recruitment and training. and/or
 6




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Compensation and incentives.
  Real
    Estate
  Strategy.
  Site selection.
   7




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Fiscal


Fiscal


Fiscal


Fiscal


Fiscal2007


2006


2005


2004


2003MallStores open at beginning of period


168



210



241



245



231Store openings






1







10



25Store closings


(47
)


(43
)


(31
)


(14
)


(11
)Stores open at end of period


121



168



210



241



245Off-MallStores open at beginning of period


181



137



79



35



18Store openings


35



48



59



44



17Store closings


(2
)


(4
)


(1
)






Stores open at end of period


214



181



137



79



35TotalStores open at beginning of period


349



347



320



280



249Store openings


35



49



59



54



42Store closings


(49
)


(47
)


(32
)


(14
)


(11
)Stores open at end of period


335



349



347



320



280   Buying
    and Inventory Management
  Merchandise sourcing and product
    development.
  U.S.-based
  Planning and allocation.
   8




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Distribution
    and Logistics
          Internet
  brick-and-mortar Form 10-K.
  Information
    Systems
  look-up
 9




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Marketing
  e-mail
    Trademarks
    ® ® ® ® ® ® tm
  Competition
   10




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Employees
    Availability
    of SEC Reports
  Form 10-K, Form 10-Q Form 8-K 1-800-SEC-0330. http://www.sec.gov. Form 10-K, Form 10-Q Form 8-K http://www.kirklands.com,
  Executive
    Officers of Kirklands
    Robert E. Alderson,
  W. Michael Madden,
 11




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Item 1A.
    Risk
    Factors  Investing in our common stock involves risk. You should
    carefully consider the following risks, as well as the other
    information contained in this
    10-K,
    including our consolidated financial statements and the related
    notes, before investing in our common stock.
  If We
    Are Unable to Successfully Execute Our Turnaround Strategy, Our
    Results of Operations Will Not Improve.
      A
    Prolonged Economic Downturn Could Result in Reduced Net Sales
    and Profitability.
    We May
    Not Be Able to Successfully Anticipate Consumer Trends and Our
    Failure to Do So May Lead to Loss of Consumer Acceptance of Our
    Products Resulting in Reduced Net Sales.
    The
    Market Price for Our Common Stock Might Be Volatile and Could
    Result in a Decline in the Value of Your
    Investment.
   12




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Our
    Comparable Store Net Sales Fluctuate Due to a Variety of
    Factors.
    We
    Face an Extremely Competitive Specialty Retail Business Market,
    and Such Competition Could Result in a Reduction of Our Prices
    and a Loss of Our Market Share.
    We
    Depend on a Number of Vendors to Supply Our Merchandise, and Any
    Delay in Merchandise Deliveries from Certain Vendors May Lead to
    a Decline in Inventory Which Could Result in a Loss of Net
    Sales.
     13




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We Are
    Dependent on Foreign Imports for a Significant Portion of Our
    Merchandise, and Any Changes in the Trading Relations and
    Conditions Between the United States and the Relevant Foreign
    Countries May Lead to a Decline in Inventory Resulting in a
    Decline in Net Sales, or an Increase in the Cost of Sales
    Resulting in Reduced Gross Profit.
          Our
    Success Is Highly Dependent on Our Planning and Control
    Processes and Our Supply Chain, and Any Disruption in or Failure
    to Continue to Improve These Processes May Result in a Loss of
    Net Sales and Net Income.
     14




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Our
    Business Is Highly Seasonal and Our Fourth Quarter Contributes a
    Disproportionate Amount of Our Net Sales, Net Income and Cash
    Flow, and Any Factors Negatively Impacting Us During Our Fourth
    Quarter Could Reduce Our Net Sales, Net Income and Cash Flow,
    Leaving Us with Excess Inventory and Making It More Difficult
    for Us to Finance Our Capital Requirements.
    We May
    Experience Significant Variations in Our Quarterly
    Results.
    The
    Agreement Governing Our Debt Places Certain Reporting and
    Consent Requirements on Us Which May Affect Our Ability to
    Operate Our Business in Accordance with Our Business
    Strategy.
    
    incur additional indebtedness;
    create liens;
    pay dividends or make other distributions;
    make investments;
    sell assets;
    enter into transactions with affiliates;
    repurchase capital stock; and
    enter into certain mergers and consolidations.     15




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We Are
    Highly Dependent on Customer Traffic in Malls and Shopping
    Centers, and Any Reduction in the Overall Level of Traffic Could
    Reduce Our Net Sales and Increase Our Sales and Marketing
    Expenses.
    Our
    Hardware and Software Systems Are Vulnerable to Damage that
    Could Harm Our Business.
    
    fire, flood and other natural disasters;
    power loss, computer systems failures, internet and
    telecommunications or data network failure, operator negligence,
    improper operation by or supervision of employees, physical and
    electronic loss of data or security breaches, misappropriation
    and similar events; and
    computer viruses.    We
    Depend on Key Personnel, and if We Lose the Services of Any
    Member of Our Senior Management Team, We May Not Be Able to Run
    Our Business Effectively.
    Our
    Charter and Bylaw Provisions and Certain Provisions of Tennessee
    Law May Make It Difficult in Some Respects to Cause a Change in
    Control of Kirklands and Replace Incumbent
    Management.
   16




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Concentration
    of Ownership among Our Existing Directors, Executive Officers,
    and Their Affiliates May Prevent New Investors from Influencing
    Significant Corporate Decisions.
    Item 2.
    Properties  10-year
   17




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15-year
 18




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##### Table of Contents



Alabama


18Arizona


12Arkansas


7California


10Colorado


2Connecticut


2Delaware


1Florida


46Georgia


19Illinois


7Indiana


7Iowa


1Kansas


2Kentucky


8Louisiana


11Maryland


5Massachusetts


2Michigan


3Minnesota


4Mississippi


11Missouri


6Nebraska


3Nevada


3New Jersey


3New York


7North Carolina


20Ohio


7Oklahoma


5Pennsylvania


10South Carolina


8Tennessee


15Texas


53Utah


1Virginia


13Wisconsin


3Total


335   Item 3.
    Legal
    Proceedings   19




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Item 4.
    Submission
    of Matters to a Vote of Security Holders   PART II  Item 5.
    Market
    for Registrants Common Equity and Related Shareholder
    Matters    Fiscal 2007


Fiscal 2006High


Low


High


LowFirst Quarter

$
5.68


$
4.50


$
7.74


$
4.95Second Quarter

$
5.24


$
2.20


$
6.88


$
5.05Third Quarter

$
2.13


$
0.95


$
5.25


$
4.18Fourth Quarter

$
1.11


$
0.58


$
5.64


$
4.40   Dividend
    Policy
   Item 7.  Managements
    Discussion and Analysis of Financial Condition and Results of
    Operations  Form 10-K. Form 10-K
    Introduction
     20




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Overview
    of Key Financial Measures
         21




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Fiscal Year2007


2006Net sales growth(1)


(10.7
)%


6.8
%Comparable store sales growth(2)


(13.3
)%


(6.6
)%Average net sales per store (in thousands)(3)

$
1,126


$
1,272Average net sales per square foot(4)

$
202


$
247Merchandise margins as a percentage of net sales(5)


48.4
%


50.1
%Gross profit as a percentage of net sales


28.7
%


31.7
%Compensation and benefits as a percentage of net sales


18.5
%


17.5
%Other operating expenses as a percentage of net sales


10.7
%


10.1
%Inventory yield(6)


226.0
%


275.0
%Return on assets (ROA)(7)


(21.4
)%


(0.1
)%     (1)
    
    Fiscal 2006 results reflect a 53-week retail calendar, while
    fiscal 2007 reflects a 52-week retail calendar.(2)
    
    Fiscal 2007 and fiscal 2006 comparable store sales are adjusted
    for the additional week included in the retail calendar for
    fiscal 2006. Comparable store sales are calculated by including
    new stores on the first day of the month following the 13th full
    fiscal month of sales.(3)
    
    Calculated using net sales of all stores open at both the
    beginning and the end of the period indicated.(4)
    
    Calculated using the gross square footage of all stores open at
    both the beginning and the end of the period. Gross square
    footage includes the storage, receiving and office space that
    generally occupies approximately 30% of total store space.(5)
    
    Merchandise margin is calculated as net sales minus product cost
    of sales, excluding outbound freight, store occupancy, and
    central distribution costs.(6)
    
    Inventory yield is defined as gross profit including gift
    certificate and gift card breakage divided by average inventory
    for each of the preceding four quarters.(7)
    
    Return on assets equals net income including gift certificate
    and gift card breakage divided by total assets.  Strategic
    Areas of Emphasis
       22




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As of


As ofFebruary 2,


February 3,2008


2007Mall


Off-Mall


Total


Mall


Off-Mall


TotalNumber of Stores


121



214



335



168



181



349Square footage


581,930



1,345,891



1,990,167



809,337



1,095,425



1,904,762Average square footage per store


4,809



6,289



5,941



4,817



6,052



5,458   For the Fiscal Year EndedFor the Fiscal Year Ended February 2, 2008


February 3, 2007Mall


Off-Mall


Total


Mall


Off-Mall


TotalAverage net sales per store (in thousands)(1)

$
994


$
1,216


$
1,126


$
1,180


$
1,388


$
1,272Average net sales per square
    foot(1)(2)

$
211


$
200


$
204


$
250


$
245


$
247     (1)
    
    Calculated using net sales of all stores open at both the
    beginning and the end of the period indicated.(2)
    
    The decrease in net sales per square foot from fiscal 2007 to
    2006 was due primarily to the comparable store sales decrease
    coupled with a higher average square footage per store in fiscal
    2007.       23




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##### Table of Contents



Fiscal
    2007 Compared to Fiscal 2006
  Results of operations.
  Fiscal 2007


Fiscal 2006


Change$


%


$


%


$


%Net sales

$
395,929



99.8
%

$
443,248



99.2
%

$
(47,319
)


(10.7
)%Gift certificate and gift card breakage revenue


772



0.2
%


3,580



0.8
%


(2,808
)


(78.4
)%Total revenue


396,701



100.0
%


446,828



100.0
%


(50,127
)


(11.2
)%Cost of sales


283,040



71.3
%


306,469



68.6
%


(23,429
)


(7.6
)%Gross profit


113,661



28.7
%


140,359



31.4
%


(26,698
)


(19.0
)%Operating expenses:Compensation and benefits


73,392



18.5
%


77,465



17.3
%


(4,073
)


(5.3
)%Other operating expenses


42,363



10.7
%


44,800



10.0
%


(2,437
)


(5.4
)%Impairment charge


3,453



0.9
%


688



0.2
%


2,765



401.9
%Depreciation and amortization


20,391



5.1
%


18,084



4.0
%


2,307



12.8
%Operating income (loss)


(25,938
)


(6.5
)%


(678
)


0.2
%


(25,260
)


(3,725.7
)%Interest (income) expense, net


440



0.1
%


(14
)


0.0
%


454



3,242.9
%Other income, net


(112
)


0.0
%


(507
)


(0.1
)%


395



77.9
%Income (loss) before income taxes


(26,266
)


(6.6
)%


(157
)


0.0
%


(26,109
)


(16,629.9
)%Income tax provision (benefit)


(360
)


(0.1
)%


(17
)


0.0
%


(343
)


(2,017.6
)%Net income (loss)

$
(25,906
)


(6.5
)%

$
(140
)


0.0
%

$
(25,766
)


(18,404.3
)%   Net sales.
  Gift certificate and gift card breakage
    revenue.
 24




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Gross profit.
  Compensation and benefits.
  Other operating expenses.
  Impairment charge.
 25




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Depreciation and amortization.
  Interest expense, net.
  Other income, net.
  Income tax benefit.
    Net income (loss).
  Liquidity
    and Capital Resources
    Cash flows from operating activities.
  Cash flows from investing activities.
 26




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Cash flows from financing activities.
  Revolving credit facility. 60-day 60-day
      Off-Balance
    Sheet Arrangements
   27




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Seasonality
    and Quarterly Results
        Fiscal 2007 Quarter EndedMay 5,


August 4,


November 3,


February 2,2007


2007


2007


2008Total revenue

$
82,314


$
87,359


$
88,743


$
138,285Gross profit


22,231



23,811



24,763



42,856Operating income (loss)(1)


(12,698
)


(9,799
)


(8,631
)


5,190Net income (loss)(2)


(7,499
)


(9,246
)


(10,650
)


1,489Earnings (loss) per share:Basic


(0.38
)


(0.47
)


(0.55
)


0.08Diluted


(0.38
)


(0.47
)


(0.55
)


0.08Stores open at end of period


338



347



354



335Comparable store net sales decrease


(18.8
)%


(10.5
)%


(12.1
)%


(12.6
)%   Fiscal 2006 Quarter EndedApril 30,


July 29,


October 28,


February 3,2006


2006


2006


2007Total revenue(3)

$
92,605


$
90,958


$
95,802


$
167,463Gross profit(4)


27,842



21,876



28,808



61,833Operating income (loss)(5)


(5,288
)


(10,042
)


(5,028
)


19,680Net income (loss)


(3,025
)


(5,574
)


(2,933
)


11,392Earnings (loss) per share:Basic


(0.16
)


(0.29
)


(0.15
)


0.59Diluted


(0.16
)


(0.29
)


(0.15
)


0.58Stores open at end of period


338



342



356



349Comparable store net sales decrease


(5.1
)%


(9.0
)%


(6.7
)%


(6.1
)%     (1)
    
    During the third quarter of fiscal 2007, we incurred a charge
    totaling approximately $965,000, or $0.04 per share, related to
    separation costs associated with a restructuring of corporate
    personnel. During the first, second and fourth quarters of
    fiscal 2007, we incurred non-cash charges related to the
    impairment of fixed assets related to certain underperforming
    stores in the pre-tax amount of approximately $273,000,
    $540,000, and $1,259,000, respectively. During the fourth
    quarter of fiscal 2007, we incurred a goodwill impairment charge
    of approximately $1.4 million, or $0.07 per share. 28




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##### Table of Contents



(2)
    
    The income tax benefit was 1.4% of the loss before income taxes
    for fiscal 2007 as compared to a benefit of 10.8% of the loss
    before income taxes for the prior year period. The tax rate for
    fiscal 2007 is the result of our ability to carry-back fiscal
    2007s losses to the two previous tax years resulting in a
    benefit of approximately $2.9 million. During the first
    quarter of fiscal 2007 we recorded an adjustment of
    approximately $353,000, or $0.02 per diluted share, to correct
    the prior year income tax provision for deferred tax liabilities
    related to fixed assets. Also included in fiscal 2007s
    income tax benefit is an adjustment made in the second quarter
    to record a valuation allowance against our net deferred tax
    assets of approximately $2.8 million, or $0.14 per diluted
    share. During Q3, the Company recorded income tax expense of
    $1.8 million despite a pretax loss during the quarter of
    $8.8 million as a result of increasing our expected pretax
    loss for the year compared to what had been estimated in
    previous quarters determination of the effective tax rate
    which reduced the income tax benefit for the quarter
    $3.7 million. This continued in Q4 as our results were
    again lower than expected resulting in a change in the estimate
    of our effective tax rate for the year which increased income
    tax expense for the quarter $2.9 million.(3)
    
    Total revenue includes the initial revenue recognized on
    unredeemed gift certificates and gift cards of $3.6 million
    in the fourth quarter of fiscal 2006 pursuant to the
    Companys use of the Redemption Recognition Method.
    There was no revenue recognized on unredeemed gift certificates
    or gift card balances prior to fiscal 2006.(4)
    
    During the second quarter of fiscal 2006, we experienced an
    increased level of markdown activity which resulted in a lower
    gross profit when compared to the first and third quarter of the
    fiscal year.(5)
    
    During the fourth quarter of fiscal 2006, the Company recorded a
    change in estimate of $1.4 million related to the breakage
    of discount certificates issued to its private label credit card
    customers, which has been recorded as an increase in other
    operating expenses, resulting in an increase in net loss of
    $0.04 per diluted share.  Inflation
    Recent
    Accounting Pronouncements
      Critical
    Accounting Policies and Estimates
   29




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##### Table of Contents



Cost of sales (excluding depreciation and amortization) and
    inventory valuation
  Impairments 
    Depreciation
  
    We utilize the straight-line method of depreciation and a
    variety of depreciable lives. Land is not depreciated. Buildings
    are depreciated over 40 years. Furniture, fixtures and
    equipment are generally depreciated over 5 years. Computer
    software and equipment is depreciated over 3-5 years.
    Leasehold improvements are amortized over the shorter of the
    useful lives of the assets or the original non-cancelable lease
    term. Our lease terms typically range from 5 to 10 years.
    To the extent we replace or dispose of fixtures or equipment
    prior to the end of its assigned depreciable life, we could
    realize a loss or gain on the disposition. To the extent our
    assets are used beyond their assigned depreciable life, no
    depreciation expense is being realized. We reassess the
    depreciable lives in an effort to reduce the risk of significant
    losses or gains arising from either the disposition of our
    assets or the utilization of assets with no depreciation charges.  Insurance reserves
 30




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Income taxes
  Stock options and warrants
      Item 8.
    Financial
    Statements and Supplementary Data  Form 10-K.
  Form 10-K.
  Item 9.
    Changes
    in and Disagreements with Accountants on Accounting and
    Financial Disclosure    Item 9A.
    Controls
    and Procedures  Evaluation
    of Disclosure Controls and Procedures
   31




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Managements
    Report on Internal Control Over Financial Reporting
  Rule 13a-15(f). Internal
    Control  Integrated Framework
    Changes
    in Internal Control Over Financial Reporting
    Item 9B.
    Other
    Information   32




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PART III  Item 10.
    Directors,
    Executive Officers, and Corporate Governance  Form 10-K,
    Item 11.
    Executive
    Compensation    Item 12.
    Security
    Ownership of Certain Beneficial Owners and Management and
    Related Shareholder Matters    Equity
    Compensation Plan Information
  (c)Number of securities(a)


(b)


remaining available forNumber of securities to


Weighted-average


future issuance underbe issued upon exercise


exercise price of


equity compensation plansof outstanding options,


Outstanding options,


(excluding securitiesPlan category

warrants and rights


warrants and rights


reflected in column (a))Equity compensation plans approved by security holders


838,570


$
8.00



2,098,114Equity compensation plans not approved by security holders


NA



NA



NATotal


838,570


$
8.00



2,098,114   Item 13.
    Certain
    Relationships and Related Transactions, and Director
    Independence      Item 14.
    Principal
    Accounting Fees and Services   33




---



##### Table of Contents



PART IV  Item 15.
    Exhibits,
    Financial Statements, and Reports on
    Form 8-K  Financial Statements
  Form 10-K.
  Report of Independent Registered Public Accounting Firm

35Consolidated Balance Sheets as of February 2, 2008 and
    February 3, 2007

36Consolidated Statements of Operations for the 52 Weeks Ended
    February 2, 2008 and the 53 Weeks Ended February 3,
    2007

37Consolidated Statements of Shareholders Equity for the 52
    Weeks Ended February 2, 2008 and the 53 Weeks Ended
    February 3 2007

38Consolidated Statements of Cash Flows for the 52 Weeks Ended
    February 2, 2008 and the 53 Weeks Ended February 3,
    2007

39Notes to Consolidated Financial Statements

40  34




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##### Table of Contents



REPORT OF
    INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM                35




---



##### Table of Contents



KIRKLANDS,
    INC.
 CONSOLIDATED
    BALANCE SHEETS  February 2, 2008


February 3, 2007(In thousands, except share data)ASSETSCurrent assets:Cash and cash equivalents

$
5,820


$
25,358Inventories, net


41,246



44,790Income tax receivable


2,900



Prepaid expenses and other current assets


7,968



5,399Deferred income taxes






2,673Total current assets


57,934



78,220Property and equipment, net


63,002



71,314Other assets


1,196



1,932Total assets

$
122,132


$
151,466LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Accounts payable

$
15,786


$
20,572Income taxes payable






996Accrued expenses


25,566



25,796Total current liabilities


41,352



47,364Deferred income taxes






1,713Deferred rent


34,460



31,693Other liabilities


3,750



2,714Total liabilities


79,562



83,484Commitments and contingencies (Note 8)






Shareholders equity:Preferred stock, no par value, 10,000,000 shares
    authorized; no shares issued or outstanding at February 2,
    2008, and February 3, 2007






Common stock, no par value, 100,000,000 shares authorized;
    19,585,093 and 19,627,065 shares issued and outstanding at
    February 2, 2008, and February 3, 2007, respectively


141,334



140,761Accumulated deficit


(98,764
)


(72,779
)Total shareholders equity


42,570



67,982Total liabilities and shareholders equity

$
122,132


$
151,466    36




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##### Table of Contents



KIRKLANDS,
    INC.
 CONSOLIDATED
    STATEMENTS OF OPERATIONS  Year EndedFebruary 2,


February 3,2008


2007(52 Weeks)


(53 Weeks)(In thousands, except per share data)Net sales

$
395,929


$
443,248Gift certificate and gift card breakage revenue


772



3,580Total revenue


396,701



446,828Cost of sales (exclusive of depreciation and amortization as
    shown below)


283,040



306,469Gross profit


113,661



140,359Operating expenses:Compensation and benefits


73,392



77,465Other operating expenses


42,363



44,800Impairment charge


3,453



688Depreciation and amortization


20,391



18,084Total operating expenses


139,599



141,037Operating loss


(25,938
)


(678
)Interest expense


644



278Interest income


(204
)


(292
)Other income, net


(112
)


(507
)Loss before income taxes


(26,266
)


(157
)Income tax benefit


(360
)


(17
)Net loss

$
(25,906
)

$
(140
)Loss per share:Basic

$
(1.33
)

$
(0.01
)Diluted

$
(1.33
)

$
(0.01
)Weighted average shares for basic loss per share


19,516



19,433Effect of dilutive stock equivalents






Adjusted weighted average shares for diluted loss per share


19,516



19,433    37




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##### Table of Contents



KIRKLANDS,
    INC.
 CONSOLIDATED
    STATEMENTS OF SHAREHOLDERS EQUITY  TotalCommon Stock


Accumulated


ShareholdersShares


Amount


Deficit


Equity(In thousands, except share data)Balance at January 28, 2006


19,343,643


$
139,047


$
(72,639
)

$
66,408Exercise of stock options and employee stock purchases


133,422



781







781Tax benefit from exercise of stock options






1







1Restricted stock issued


150,000











Stock compensation expense






932







932Net loss










(140
)


(140
)Balance at February 3, 2007


19,627,065


$
140,761


$
(72,779
)

$
67,982Cumulative effect of change in accounting principal










(79
)


(79
)Exercise of stock options and employee stock purchases


108,028



171







171Tax benefit from exercise of stock options






15







15Restricted stock forfeited


(150,000
)Stock compensation expense






387







387Net loss










(25,906
)


(25,906
)Balance at February 2, 2008


19,585,093


$
141,334


$
(98,764
)

$
42,570    38




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##### Table of Contents



KIRKLANDS,
    INC.
 CONSOLIDATED
    STATEMENTS OF CASH FLOWS  Year EndedFebruary 2,


February 3,2008


2007(52 Weeks)


(53 Weeks)(In thousands)Cash flows from operating activities:Net loss

$
(25,906
)

$
(140
)Adjustments to reconcile net loss to net cash provided by (used
    in) operating activities:Depreciation of property and equipment


20,391



18,084Amortization of tenant allowance


(6,790
)


(6,753
)Amortization of debt issue costs


22



20Impairment of long-lived assets and goodwill


3,453



688Cumulative effect of change in accounting principle


(79
)


Stock compensation expense


387



932Loss on disposal of property and equipment


611



1,449Deferred income taxes


960



(856
)Changes in assets and liabilities:Inventories


3,544



4,390Prepaid expenses and other current assets


(2,569
)


1,430Other assets


(206
)


(290
)Accounts payable


(4,786
)


(3,659
)Income taxes receivable/payable


(3,881
)


173Accrued expenses and other noncurrent liabilities


9,970



14,015Net cash provided by (used in) operating activities


(4,879
)


29,483Cash flows from investing activities:Proceeds from sale of property and equipment


73



61Capital expenditures


(14,835
)


(19,505
)Net cash used in investing activities


(14,762
)


(19,444
)Cash flows from financing activities:Borrowings on revolving line of credit


253,684



182,435Repayments on revolving line of credit


(253,684
)


(182,435
)Exercise of stock options and employee stock purchases


171



351Debt issue costs


(68
)


Net cash provided by financing activities


103



351Cash and cash equivalents:Net increase (decrease)

$
(19,538
)

$
10,390Beginning of the year


25,358



14,968End of the year

$
5,820


$
25,358Supplemental cash flow information:Interest paid

$
501


$
238Income taxes paid

$
2,460


$
664    39




---



##### Table of Contents



KIRKLANDS,
    INC.
 NOTES TO
    CONSOLIDATED FINANCIAL STATEMENTS  Note 1 
    Description
    of Business and Significant Accounting Policies        Fiscal year
  Cash equivalents
  Cost of sales and inventory valuation
  Vendor allowances  No. 02-16, (EITF 02-16), EITF 02-16
  Prepaid expenses and other current assets
 40




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##### Table of Contents



KIRKLANDS, INC.
  NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Property and equipment
  Impairment of long-lived assets 
    Goodwill Goodwill
    and Other Intangible Assets
  Insurance reserves
  Customer loyalty program
 41




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##### Table of Contents



KIRKLANDS, INC.
  NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Deferred rent
    Revenue recognition
    Compensation and benefits multi-unit
 42




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##### Table of Contents



KIRKLANDS, INC.
  NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Stock options and warrants
    Other operating expenses
  Preopening expenses
  Advertising expenses
  Other income, net
  Income Taxes
    Sales and Use Taxes
 43




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##### Table of Contents



KIRKLANDS, INC.
  NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Use of estimates
  Fair value of financial instruments
  Earnings per share
  Comprehensive income
  Operating segments
  Recent accounting pronouncements
   44




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##### Table of Contents



KIRKLANDS, INC.
  NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Note 2 
    Property
    and Equipment    February 2,


February 3,2008


2007Land

$
402


$
402Buildings


3,481



3,481Equipment


27,001



33,407Furniture and fixtures


45,016



47,912Leasehold improvements


61,644



60,155Projects in progress


419



399137,963



145,756Less: accumulated depreciation


74,961



74,442$
63,002


$
71,314   Note 3 
    Accrued
    Expenses    February 2,


February 3,2008


2007Salaries and wages

$
3,643


$
3,641Gift certificates and store credits


6,480



6,735Sales taxes


2,143



2,668Deferred rent


8,989



7,269Other


4,311



5,483$
25,566


$
25,796   Note 4 
    Income
    Taxes    52 Weeks


53 WeeksEnded


EndedFebruary 2,


February 3,2008


2007Current:Federal

$
(1,898
)

$
784State


578



55Deferred:Federal


(6,118
)


(756
)State


(1,090
)


(100
)Valuation allowance


8,168



Income tax benefit

$
(360
)

$
(17
)  45




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##### Table of Contents



KIRKLANDS, INC.
  NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    52 Weeks


53 WeeksEnded


EndedFebruary 2,


February 3,2008


2007Tax at federal statutory rate

$
(9,193
)

$
(55
)State income taxes (net of federal benefit)


(512
)


28Goodwill impairment


483



Change in valuation allowance


8,168



Other permanent items


694



10Income tax benefit

$
(360
)

$
(17
)         February 2,


February 3,2008


2007Deferred tax assets:Net operating loss carry forwards

$
4,273


$
101Accruals


2,583



2,625Inventory valuation


376



333Deferred rent and other


4,693



3,845Total gross deferred tax assets


11,925



6,904Less: Valuation allowance


(8,168
)


Total net deferred tax assets


3,757



6,904Deferred tax liabilities:Depreciation


(3,476
)


(5,659
)Prepaid assets


(281
)


(285
)Net deferred tax (liability)


(3,757
)


(5,944
)Total net deferred taxes

$



$
960    46




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##### Table of Contents



KIRKLANDS, INC.
  NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
      Balance at February 4, 2007

$
198Additions based on tax positions related to the current year


Additions for tax positions of prior years


492Reductions for tax positions of prior years


Settlements


Lapse of the Statute of Limitations


Balance at February 2, 2008

$
690     Note 5 
    Senior
    Credit Facility  60-day 60-day
 47




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##### Table of Contents



KIRKLANDS, INC.
  NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
      Note 6 
    Long-Term
    Leases      Note 7 
    Employee
    Benefit Plans  Stock options
   48




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##### Table of Contents



KIRKLANDS, INC.
  NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Options OutstandingWeighted AverageRemaining





Options ExercisableNumber


Contractual


Weighted Average


Number


Weighted AverageRange of Exercise Prices

of Shares


Life (In Years)


Exercise Price


of Shares


Exercise Price$1.29


182,737



3.8


$
1.29



182,737


$
1.29$4.25 - $10.90


513,333



7.8


$
8.31



427,494


$
8.82$11.05 - $18.55


142,500



5.9


$
15.47



142,500


$
15.47Total


838,570



6.6


$
8.00



752,731


$
8.25       WeightedNumber of


AverageOptions


Exercise PriceBalance at January 28, 2006


1,116,195


$
8.55Options granted


380,000


$
6.37Options exercised


(78,369
)

$
1.30Options forfeited


(466,687
)

$
9.35Balance at February 3, 2007


951,139


$
7.88Options granted


70,000


$
4.54Options exercised


(15,112
)

$
1.72Options forfeited


(167,457
)

$
6.46Balance at February 2, 2008


838,570


$
8.00Options Exercisable As of:February 2, 2008


752,731


$
8.25February 3, 2007


591,118


$
8.13      49




---



##### Table of Contents



KIRKLANDS, INC.
  NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    2007


2006Expected price volatility


0.44



0.43Risk-free interest rate


4.7
%


5.0
%Expected life


5.5 years



5.9 yearsForfeiture rate


5
%


5
%Dividend yield


0
%


0
%   Expected Price Volatility 
  Risk-Free Interest Rate 
  Expected Lives 
  Forfeiture Rate 
  Dividend Yield 
    Restricted Stock 
  Employee Stock Purchase Plan
 50




---



##### Table of Contents



KIRKLANDS, INC.
  NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    401(k) Savings Plan 
  Deferred Compensation Plan
  Post-employment benefits
  Note 8 
    Commitments
    and Contingencies     51




---



##### Table of Contents



Exhibits:
 (b) Exhibits.  Form 10-K.
  ExhibitNumber



Description3
.1*



Amended and Restated Charter of Kirklands, Inc.
    (Exhibit 3.1 to our Annual Report on
    Form 10-K
    for the year ended February 1, 2003) (the 2002
    Form 10-K)3
.2*



Amended and Restated Bylaws of Kirklands, Inc.
    (Exhibit 3.2 to our Current Report on
    Form 8-K
    dated March 31, 2006)4
.1*



Form of Specimen Stock Certificate (Exhibit 4.1 to
    Amendment No. 1 to our registration statement on
    Form S-1
    filed on June 5, 2002, Registration
    No. 333-86746
    (Amendment No. 1 to 2002
    Form S-1))10
.1*



Loan and Security Agreement, dated as of October 4, 2004,
    by and among Kirklands, Inc., Kirklands Stores, Inc.
    and kirklands.com, inc., Fleet Retail Group, Inc., as Agent, and
    the Financial Institutions Party Thereto From Time to Time as
    Lenders (Exhibit 10.1 to our Current Report on
    Form 8-K
    dated October 8, 2004)10
.2*



Amended and Restated Registration Rights Agreement dated as of
    April 15, 2002, by and among Kirkland Holdings L.L.C.,
    Kirklands, Inc., SSM Venture Partners, L.P., Joseph R.
    Hyde III, Johnston C. Adams, Jr., John H. Pontius, CT/Kirkland
    Equity Partners, L.P., R-H Capital Partners, L.P., TCW/Kirkland
    Equity Partners, L.P., Capital Resource Lenders II, L.P., Allied
    Capital Corporation, The Marlborough Capital Investment Fund,
    L.P., Capital Trust Investments, Ltd., Global Private
    Equity II Limited Partnership, Advent Direct Investment
    Program Limited Partnership, Advent Partners Limited
    Partnership, Carl Kirkland, Robert E. Kirkland, Robert E.
    Alderson, The Amy Katherine Alderson Trust, The Allison Leigh
    Alderson Trust, The Carl T. Kirkland Grantor Retained Annuity
    Trust 2001-1
    and Steven Collins (Exhibit 10.2 to Amendment No. 1 to
    2002
    Form S-1)10
.3+*



Employment Agreement by and between Kirklands and Robert
    E. Alderson dated June 1, 2002, (Exhibit No. 10.6
    to Amendment No. 1 to 2002
    Form S-1)10
.4+*



Amendment to Employment Agreement by and between
    Kirklands, Inc. and Robert E. Alderson dated
    March 31, 2004 (Exhibit 10.2 to our Quarterly Report
    on
    Form 10-Q
    for the quarter ended May 1, 2004)10
.5+*



1996 Executive Incentive and Non-Qualified Stock Option Plan, as
    amended through April 17, 2002 (Exhibit 10.10 to our
    registration statement on
    Form S-1
    filed on April 23, 2002, Registration
    No. 333-86746
    (the 2002
    Form S-1))10
.6+*



2002 Equity Incentive Plan (Exhibit 10.11 to Amendment
    No. 1 to 2002
    Form S-1)10
.7*



Employee Stock Purchase Plan (Exhibit 10.12 to Amendment
    No. 4 to our registration statement on
    Form S-1
    filed on July 10, 2002, Registration
    No. 333-86746)10
.8+*



Form of Non-Qualified Stock Option Award Agreement for Director
    Grants (Exhibit 10.1 to our Quarterly Report on
    Form 10-Q
    for the quarter ended October 30, 2004 (October 2004
    Form 10-Q))10
.9+*



Form of Incentive Stock Option Agreement (Exhibit 10.2 to
    the October 2004
    Form 10-Q)10
.10+*



Executive Non-Qualified Excess Plan (Exhibit 10.19 to our
    Annual Report on
    Form 10-K
    for the year ended January 29, 2005)10
.11+



Compensation Policy for Non-employee Directors10
.12*



First Amendment to Kirklands, Inc. 2002 Equity Incentive
    Plan effective March 17, 2006 (Exhibit 99.2 to our
    Current Report on
    Form 8-K
    dated March 22, 2006 (the March 22, 2006
    Form 8-K))10
.13*



Letter Agreement by and between Kirklands and Cathy David
    dated March 20, 2006 (Exhibit 99.3 to the
    March 22, 2006
    Form 8-K)10
.14*



Restrictive Covenant Agreement by and between Kirklands
    and Cathy David dated March 20, 2006 (Exhibit 99.4 to
    the March 22, 2006
    Form 8-K)10
.15*



Restrictive Stock Agreement by and between Kirklands and
    Cathy David dated March 22, 2006 (Exhibit 99.5 to the
    March 22, 2006
    Form 8-K) 52




---



##### Table of Contents



ExhibitNumber



Description10
.16*



Restricted Stock Unit Agreement by and between Kirklands
    and Cathy David dated March 22, 2006 (Exhibit 99.6 to
    the March 2006
    Form 8-K)10
.17+*



Severance Rights Agreement by and between Kirklands and
    Robert E. Alderson dated May 30, 2006 (Exhibit 10.1 to
    our Quarterly Report on
    Form 10-Q
    for the quarter ended July 29, 2006)10
.18*



Office Lease Agreement dated March 1, 2007 by and between
    Kirklands and Two Rivers Corporate Centre, L.P.
    (Exhibit 10.1 to our Current Report on
    Form 8-K
    dated March 1, 2007)10
.19*



First Amendment to Loan and Security Agreement dated as of
    August 6, 2007, by and among Kirklands, Inc.,
    Kirklands Stores, Inc. and kirklands.com, inc., Fleet
    Retail Group, Inc., as Agent, and the Financial Institutions
    Party Thereto From Time to Time as Lenders (Exhibit 10.1 to
    our Current Report on
    Form 8-K
    dated August 10, 2007)10
.20+*



Severance Rights Agreement by and between Kirklands and W.
    Michael Madden dated April 11, 2008 (Exhibit 99.1 to
    our
    Form 8-K/A
    dated April 14, 2008)21
.1*



Subsidiaries of Kirklands (Exhibit 21 to the 2002
    Form S-1)23
.1



Consent of Ernst & Young LLP31
.1



Certification of the President and Chief Executive Officer
    Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.31
.2



Certification of the Senior Vice President and Chief Financial
    Officer Pursuant to Section 302 of the Sarbanes-Oxley Act
    of 2002.32
.1



Certification of the President and Chief Executive Officer
    Pursuant to 18 U.S.C. Section 1350, as Adopted
    Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.32
.2



Certification of the Senior Vice President and Chief Financial
    Officer Pursuant to 18 U.S.C. Section 1350, as Adopted
    Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.     *
    
    Incorporated by reference.+
    
    Management contract or compensatory plan or arrangement. 53




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##### Table of Contents



SIGNATURES    Kirklands, Inc.
  By:
    /s/  Robert
    E. Alderson   President and Chief Executive Officer
      Signature

Title

Date/s/  Robert
    E. AldersonRobert
    E. Alderson

President and Chief Executive Officer, and Director (Principal
    Executive Officer)

April 25, 2008/s/  W.
    Michael MaddenW.
    Michael Madden

Senior Vice President and Chief Financial Officer (Principal
    Financial Officer)

April 25, 2008/s/  Carl
    KirklandCarl
    Kirkland

Director

April 25, 2008/s/  Steven
    J. CollinsSteven
    J. Collins

Director

April 25, 2008/s/  David
    M. MussaferDavid
    M. Mussafer

Director

April 25, 2008/s/  Gabriel
    GomezGabriel
    Gomez

Director

April 25, 2008/s/  R.
    Wilson Orr, IIIR.
    Wilson Orr, III

Director

April 25, 2008/s/  Ralph
    T. ParksRalph
    T. Parks

Director

April 25, 2008/s/  Murray
    M. SpainMurray
    M. Spain

Director

April 25, 2008  54




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##### Table of Contents



KIRKLANDS,
    INC.
 INDEX OF
    EXHIBITS FILED WITH THIS ANNUAL REPORT ON
    10-K  ExhibitNumber

Description10
.11

Compensation Policy for Non-Employee Directors23
.1

Consent of Ernst & Young  LLP.31
.1

Certification of the President and Chief Executive Officer
    Pursuant to Rule 13a-14(a) or Rule 15d-14(a)31
.2

Certification of the Senior Vice President and Chief Financial
    Officer Pursuant to Rule 13a-14(a) or
    Rule 15d-14(a)32
.1

Certification of the President and Chief Executive Officer
    Pursuant to 18 U.S.C. Section 135032
.2

Certification of the Senior Vice President and Chief Financial
    Officer Pursuant to 18 U.S.C. Section 1350