AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 24, 2002

REGISTRATION NO. 333-86746
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------

AMENDMENT NO. 3

FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------------
KIRKLAND'S, INC.
(Exact name of Registrant as specified in its charter)

<Table>

TENNESSEE 5719 62-1287151
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of incorporation or organization) Classification Code Number) Identification No.)
</Table>

---------------------

805 N. PARKWAY
JACKSON, TENNESSEE 38305
(731) 668-2444
(Address, including zip code, and telephone number,
including area code, of Registrant's principal executive offices)

---------------------

ROBERT E. ALDERSON
PRESIDENT AND CHIEF EXECUTIVE OFFICER
805 N. PARKWAY
JACKSON, TENNESSEE 38305
(731) 668-2444
(Name, address, including zip code, and telephone
number, including area code, or agent for service)

---------------------

COPIES TO:

<Table>

BARRY M. ABELSON, ESQ. VALERIE FORD JACOB, ESQ.
ROBERT A. FRIEDEL, ESQ. FRIED, FRANK, HARRIS, SHRIVER & JACOBSON
PEPPER HAMILTON LLP ONE NEW YORK PLAZA
3000 TWO LOGAN SQUARE NEW YORK, NY 10004
18TH AND ARCH STREETS (212) 859-8000
PHILADELPHIA, PA 19103-2799
(215) 981-4000
</Table>

---------------------

APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.

---------------------

If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]

If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act of 1933, please check the
following box and list the Securities Act registration statement number of the
earlier effective registration statement for the same offering. [ ]

If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act of 1933, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]

If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]

If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]

----------------------

THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SECTION 8(a), MAY
DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------

THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.

SUBJECT TO COMPLETION

PRELIMINARY PROSPECTUS DATED JUNE 24, 2002

PROSPECTUS

7,000,000 SHARES

(KIRKLAND'S, INC. LOGO)

COMMON STOCK

----------------------

This is Kirkland's, Inc.'s initial public offering. We are selling
6,174,000 shares and the selling shareholders are selling 826,000 shares. The
underwriters are offering all of the shares in the U.S. and Canada.

We expect the initial public offering price to be between $17.00 and
$19.00 per share. Prior to this offering, there has been no recent public market
for our common stock. Our common stock has been approved for listing on the
Nasdaq National Market under the symbol "KIRK."

INVESTING IN THE COMMON STOCK INVOLVES RISKS THAT ARE DESCRIBED IN THE
"RISK FACTORS" SECTION BEGINNING ON PAGE 9 OF THIS PROSPECTUS.
----------------------

<Table>
<Caption>
PER SHARE TOTAL
--------- -----

Public offering price....................................... $ $
Underwriting discount....................................... $ $
Proceeds, before expenses, to Kirkland's, Inc............... $ $
Proceeds, before expenses, to the selling shareholders...... $ $
</Table>

Approximately $49.4 million of Kirkland's net proceeds from this offering
will be used to repurchase stock held by our affiliates and pay associated
accrued dividends and interest. See the "Use of Proceeds" section beginning on
page 19 of this prospectus.

The underwriters may also purchase up to an additional 1,050,000 shares
from the selling shareholders at the initial public offering price, less the
underwriting discount, within 30 days from the date of this prospectus to cover
overallotments.

Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.

The shares will be ready for delivery on or about , 2002.

----------------------

MERRILL LYNCH & CO.
CIBC WORLD MARKETS
SUNTRUST ROBINSON HUMPHREY
U.S. BANCORP PIPER JAFFRAY

----------------------

The date of this prospectus is , 2002.

[Map of states where Kirkland's stores are located, and photographs
depicting scenes inside typical Kirkland's stores.]

TABLE OF CONTENTS

<Table>
<Caption>
PAGE
----

Prospectus Summary.......................................... 1
Risk Factors................................................ 9
Disclosure Regarding Forward-Looking Statements............. 18
About This Prospectus....................................... 18
Use of Proceeds............................................. 19
Dividend Policy............................................. 20
Dilution.................................................... 21
Capitalization.............................................. 23
Selected Consolidated Financial Data........................ 24
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 28
Business.................................................... 42
Management.................................................. 55
Related Party Transactions.................................. 67
Principal and Selling Shareholders.......................... 73
Description of Capital Stock................................ 77
Shares Eligible for Future Sale............................. 82
United States Tax Consequences to Non-United States
Holders................................................... 84
Underwriting................................................ 88
Legal Matters............................................... 91
Experts..................................................... 91
Where You Can Find More Information......................... 92
Index to Financial Statements............................... F-1
Unaudited Pro Forma Consolidated Condensed Financial
Statements................................................ P-1
</Table>

----------------------

You should rely only on the information contained in this prospectus. We
have not, and the underwriters have not, authorized any other person to provide
you with different information. If anyone provides you with different or
inconsistent information, you should not rely on it. We are not, and the
underwriters are not, making an offer to sell these securities in any
jurisdiction where the offer and sale is not permitted. You should assume that
the information appearing in this prospectus is accurate only as of the date on
the front cover of this prospectus. Our business, financial condition, results
of operations and prospects may have changed since that date.

PROSPECTUS SUMMARY

The following summary highlights information contained elsewhere in this
prospectus. We urge you to read this entire prospectus carefully, including the
"risk factors" section. In this prospectus, "Kirkland's," "we," "our" and "us"
refer to Kirkland's, Inc. and its subsidiaries, unless the context requires
otherwise. On January 1, 2001, we changed our fiscal reporting year from a
calendar year to a 52/53-week basis ending on the Saturday closest to January
31. As used herein, the term "fiscal 2001" refers to the 52 weeks ended February
2, 2002 and any reference to any fiscal year prior to fiscal 2001 refers to the
12 months ended December 31 of that fiscal year. Adjusted EBITDA is defined in
"Summary Consolidated Financial and Other Data."

KIRKLAND'S

We are a leading specialty retailer of home decor in the United States,
operating 236 stores in 28 states. Our stores present a broad selection of
distinctive merchandise, including framed art, mirrors, candles, lamps, picture
frames, accent rugs, garden accessories and artificial floral products. Our
stores also offer an extensive assortment of holiday merchandise, as well as
items carried throughout the year suitable for giving as gifts. In addition, we
use innovative design and packaging to market home decor items as gifts. We
provide our predominantly female customers an engaging shopping experience
characterized by a diverse, ever-changing merchandise selection at surprisingly
attractive prices. Our stores offer a unique combination of style and value that
has led to our emergence as a leader in home decor and has enabled us to develop
a strong customer franchise. As a result, we have achieved substantial growth
over the last five fiscal years. Since the beginning of 1997, our net sales have
grown at a compounded annual growth rate of 19%. For the fiscal year ended
February 2, 2002, we recorded net sales of $307.2 million. For the fiscal
quarter ended May 4, 2002, we recorded net sales of $66.2 million, an 18%
increase from the fiscal quarter ended May 5, 2001.

Kirkland's was co-founded in 1966 by our current Chairman, Carl Kirkland.
We opened our first store in Jackson, Tennessee and have grown steadily
thereafter. Although originally focused in enclosed malls in the Southeast, we
have expanded beyond that region and also have begun to open stores in selected
non-mall venues. Currently, over 40% of our stores are located outside the
Southeast, including 60 of the 100 new stores opened since the beginning of
fiscal 1997. We currently operate in major metropolitan markets like Houston,
Texas and Atlanta, Georgia, middle markets such as Birmingham, Alabama and
Buffalo, New York and smaller markets such as Appleton, Wisconsin and Panama
City, Florida.

As we more than doubled our store base from 104 stores at the end of
fiscal 1995 to 226 stores at the end of fiscal 1999, we realized the need to
strengthen our infrastructure and enhance several aspects of our operations in
order to execute a rapid national expansion. Beginning in late 1999, we
undertook a series of initiatives that enabled us to make faster and smarter
inventory buying and distribution decisions, to manage the flow of merchandise
to our stores more efficiently and to improve overall financial performance.
These initiatives included:

COMPLETING KEY INVESTMENTS IN INFORMATION TECHNOLOGY. Since late 1999,
we have invested $6.5 million in several key information systems projects that
provide our decision makers with better tools to increase sales, improve
operational efficiency, control and distribute inventory and monitor critical
performance indicators on a daily basis.

DEVELOPING A MORE SCALABLE DISTRIBUTION INFRASTRUCTURE. In March 2001,
we consolidated our central distribution operations into one
303,000-square-foot, leased facility in Jackson, Tennessee, which allowed us to
increase our dollar volume of centrally distributed merchandise by 25% from
fiscal 2000 to fiscal 2001. In May 2002, we expanded our central distribution
operations through the lease of a 168,000-square-foot warehouse near our other
distribution facility. These modern facilities, together with other improvements
to our supply chain, have helped us to keep our stores stocked with fresh
merchandise and to reduce significantly the cost of managing inventories at the
store level.

STRENGTHENING EXECUTIVE MANAGEMENT. Since the second half of 1999, we
have added six senior managers, including key hires in merchandising, store
operations and information technology. These additions, along with several other
key hires and promotions, have broadened the abilities of our management team
and have provided leadership to key areas of our business. We believe our
management team has valuable experience both from Kirkland's and from other
national retailers.

IMPROVING STORE-LEVEL OPERATING PERFORMANCE. In January 2001, we
instituted a plan to improve net sales, increase cash flow and return our stores
to higher levels of profitability. The cornerstone of this plan was to reduce
store-level inventories and improve inventory turnover. We also intensified our
efforts to control and lower store operating expenses and close under-performing
stores.

We believe the convergence of these operational initiatives led to the
significant improvement in our fiscal 2001 operating results as compared to
fiscal 2000. For fiscal 2001, our comparable store net sales increased 13.3%
over the 53-week period ended February 3, 2001. Net cash provided by operating
activities increased to $37.5 million as compared to $1.3 million in fiscal
2000, and inventory turnover in fiscal 2001 increased to 3.48x as compared to
2.45x in fiscal 2000. As evidenced by the improvement in our operating results,
we believe these initiatives have positioned us to expand our proven retail
concept and strengthen our position as a leading specialty retailer of home
decor in the United States.

KEY OPERATING STRENGTHS

Our goal is to be the leading specialty retailer of home decor in each of
our markets. We believe the following elements of our business strategy
differentiate us from our competitors and position us for profitable growth:

ITEM-FOCUSED MERCHANDISING. While our stores contain items covering a
broad range of complementary product categories, we emphasize key items within
our targeted categories rather than merchandising complete product
classifications. Although we do not attempt to be a fashion leader, our
experienced buyers work closely with our vendors to identify and develop stylish
merchandise reflecting the latest trends. We estimate that over 60% of our
merchandise is designed or packaged exclusively for Kirkland's, which
distinguishes us in the marketplace and enhances our margins.

EVER-CHANGING MERCHANDISE MIX. We believe our ever-changing merchandise
mix of over 5,000 stock keeping units, or "SKUs," creates an exciting "treasure
hunt" environment, encouraging strong customer loyalty and frequent return
visits to our stores. The merchandise in our stores typically is traditionally
styled for broad market appeal, yet it reflects an understanding of our
customer's desire for newness and freshness.

STIMULATING VISUAL PRESENTATION. Our stores have a distinctive,
"interior design" look that helps customers visualize the merchandise in their
own homes and inspires decorating and gift-giving ideas. Using multiple
merchandise arrangements to simulate home settings, we group complementary
merchandise creatively throughout the store, rather than displaying products
strictly by category or product type. We believe this cross-category
merchandising strategy encourages customers to browse for longer periods of
time, promoting add-on sales.

STRONG VALUE PROPOSITION. Our customers regularly experience the
satisfaction of paying noticeably less for items similar or identical to those
sold by other retail stores or through catalogs. This strategy of providing a
unique combination of style and value is an important element in making
Kirkland's a destination store. While we carry items in our stores that sell for
several hundred dollars, most items sell for under $50 and are perceived by our
customers as affordable luxuries.

FLEXIBLE APPROACH TO REAL ESTATE. Our stores operate successfully across
a wide spectrum of different regions, market sizes and real estate venues. The
flexibility of our concept enables us to select the most promising real estate
opportunities that meet requisite economic and demographic criteria within our
target markets.

GROWTH STRATEGY

Key elements of our growth strategy are outlined below:

OPENING NEW STORES USING OUR PROVEN STORE MODEL. Over the past six
years, we have more than doubled our store base, principally through new store
openings. We intend to continue opening new stores both in existing and new
markets. We believe there are currently more than 800 additional locations in
the United States that could support a Kirkland's store. Although our rate of
expansion will depend on the continued availability of adequate capital, we
expect to open approximately 15 new stores during fiscal 2002, two of which have
been opened through May 4, 2002, and approximately 35 new stores during fiscal
2003.

We believe our proven store model produces strong store-level cash flow
and provides an attractive store-level return on investment. In fiscal 2001, our
average store generated net sales of approximately $1.3 million and store-level
EBITDA of approximately $227,000, or 17.4% of net sales. The average first full
year cash return on investment for the 93 stores opened from 1997 through 2000
was approximately 47%.

INCREASING STORE PRODUCTIVITY. We plan to increase our sales per square
foot and store profitability by leveraging our recent investments in information
systems and central distribution, which together contributed to our 18.5%
increase in net sales and our 16.5% increase in average net sales per square
foot in fiscal 2001. We also believe that our store productivity will benefit
from our strong customer franchise, our continuing efforts to enhance the
Kirkland's brand, and favorable consumer and demographic trends.

----------------------

The future success of our operating and growth strategies is subject to
risks. See "Risk Factors" and other information included in this prospectus for
a discussion of factors you should carefully consider before deciding to invest
in shares of the common stock.

We are incorporated in Tennessee, our principal executive offices are
located at 805 N. Parkway, Jackson, Tennessee 38305, and our telephone number is
(731) 668-2444. Our Internet web site address is www.kirklands.com. The
information contained or incorporated in our web site is not a part of this
prospectus.

THE OFFERING

Common stock offered:
By us.......................... 6,174,000 shares

By the selling shareholders.... 826,000 shares

Total....................... 7,000,000 shares

Shares outstanding after the
offering......................... 17,327,967 shares

Use of proceeds.................. We estimate that our net proceeds from this
offering will be approximately $101.7
million. We intend to use these net
proceeds principally to:

- repay all of our outstanding subordinated
debt; and

- purchase a portion of the outstanding
shares of Class A Preferred Stock, Class
B Preferred Stock, Class C Preferred
Stock, Class D Preferred Stock and common
stock.

We will not receive any proceeds from the
sale of shares of common stock by the
selling shareholders. See "Use of
Proceeds."

Risk factors..................... See "Risk Factors" and other information
included in this prospectus for a
discussion of factors you should carefully
consider before deciding to invest in
shares of the common stock.

Nasdaq National Market symbol.... "KIRK"

The number of shares outstanding after the offering is based on an
assumed initial public offering price of $18.00 per share (the midpoint of the
range on the front cover of this prospectus). The number of shares of common
stock to be issued to existing shareholders upon conversion of their preferred
stock will be determined by reference to the actual initial public offering
price. See "Related Party Transactions - Pre-Offering Transactions." The number
of shares outstanding after the offering excludes an aggregate of 3,724,947
shares of common stock reserved for issuance under outstanding stock options and
under our 1996 Executive Incentive and Non-Qualified Stock Option Plan, 2002
Equity Incentive Plan and Employee Stock Purchase Plan. Options to purchase
724,947 shares of common stock will be outstanding upon completion of this
offering, of which options to purchase 219,106 shares will be exercisable upon
completion of this offering.

Unless the context otherwise requires, all information in this prospectus
(i) gives retroactive effect to a 54.9827-for-one stock split of the common
stock which will occur immediately prior to the completion of this offering, and
(ii) assumes that this offering is consummated at an initial public offering
price of $18.00 per share on July 2, 2002. See "Use of Proceeds" and "Related
Party Transactions - Pre-Offering Transactions."

PRE-OFFERING TRANSACTIONS

The following transactions will occur immediately prior to the completion
of this offering: (i) a 54.9827-for-one stock split of the common stock, (ii) an
amendment and restatement of our charter, which will provide for an authorized
capitalization of 100 million shares of common stock and 10 million shares of
preferred stock, (iii) the exercise of all of our outstanding warrants to
purchase 2,096,160 shares of common stock at an exercise price of $0.01 per
share, (iv) the repurchase of shares of common stock and/or Class A, Class B,
Class C and Class D Preferred Stock from certain of our shareholders (assuming
an initial public offering price of $18.00, an aggregate of 589,799 shares of
common stock, 3,000,741 shares of Class A Preferred Stock, 348,347 shares of
Class B Preferred Stock, 300,468 shares of Class C Preferred Stock and 14,235
shares of Class D Preferred Stock will be repurchased at an aggregate price of
$80.4 million), (v) the exchange of $7.9 million of the aggregate stated value
of 258,425 shares of Class C Preferred Stock for 472,939 shares of common stock
(assuming an initial public offering price of $18.00) and (vi) the conversion in
accordance with our charter of the stated value and accrued dividends of the
shares of our Class A, Class B and Class D Preferred Stock not repurchased by us
as described in (iv) above into shares of common stock. The number of shares of
common stock to be issued upon conversion of the Class A, Class B and Class D
Preferred Stock will equal the aggregate stated value plus accrued dividends on
the preferred stock to be converted, divided by the actual initial public
offering price. Assuming an initial public offering price of $18.00 and a
consummation of this offering on July 2, 2002, 1,511,968 shares of common stock
will be issued to existing shareholders upon conversion of their Class A, Class
B and Class D Preferred Stock not repurchased by us. All of these transactions
are herein collectively referred to as the "Pre-Offering Transactions." See "Use
of Proceeds" and "Related Party Transactions - Pre-Offering Transactions."

SUMMARY CONSOLIDATED FINANCIAL AND OTHER DATA

The following summary consolidated financial data for the fiscal years
ended December 31, 1997, 1998, 1999 and 2000 and for the fiscal year ended
February 2, 2002 presented below under the captions "Statement of Operations
Data" and "Other Financial Data" have been derived from our audited consolidated
financial statements for those periods. The following summary consolidated
financial data for the fiscal years ended December 31, 1997, 1998, 1999 and
2000, the fiscal year ended February 2, 2002 and the quarters ended May 5, 2001
and May 4, 2002 presented below under the caption "Store Data" have been derived
from internal records of our operations. The following summary consolidated
financial data for the quarter ended May 5, 2001 and as of and for the quarter
ended May 4, 2002 presented below under the captions "Statement of Operations
Data," "Other Financial Data" and "Balance Sheet Data" have been derived from
our unaudited consolidated financial statements, which, in our opinion, include
all adjustments (consisting of normal recurring accruals) considered necessary
for a fair presentation of the information set forth therein. You should read
the information set forth below in conjunction with other sections of this
prospectus, including "Selected Consolidated Financial Data," "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
our consolidated financial statements and related notes.

<Table>
<Caption>
QUARTER ENDED
YEAR ENDED DECEMBER 31, YEAR ENDED ---------------------
----------------------------------------- FEBRUARY 2, MAY 5, MAY 4,
1997 1998 1999 2000 2002(1) 2001 2002
-------- -------- -------- -------- ----------- -------- ----------
(IN THOUSANDS, EXCEPT SHARE, PER SHARE,
STORE AND PERCENTAGE DATA)

STATEMENT OF OPERATIONS
DATA:
Net sales................... $153,584 $192,250 $236,622 $259,240 $ 307,213 $ 55,961 $ 66,184
Gross profit................ 56,706 70,386 82,518 87,014 107,150 15,514 22,208
Depreciation and
amortization.............. 3,141 4,401 5,969 6,522 6,370 1,372 1,653
Non-cash stock compensation
charge(2)................. -- -- -- -- 1,220 -- 812
Operating income (loss)..... 17,749 20,181 18,655 13,070 27,567 (1,512) 2,579
Interest expense:
Senior, subordinated and
other notes payable..... 7,990 9,254 10,232 11,221 9,759 2,607 1,486
Class C Preferred Stock... 1,800 1,541 1,647 1,850 2,007 499 544
Amortization of debt issue
costs................... 1,001 1,009 1,307 1,305 1,308 252 366
Accretion of common stock
warrants(3)............. 389 -- -- -- 11,315 -- --
Net income (loss)........... 3,922 6,427 4,059 (1,315) 1,783 (2,725) 143
PRO FORMA DATA:
Pro forma as adjusted net
income(4)................. $ 12,229 $ 1,141
----------- ----------
Pro forma as adjusted
diluted earnings per
common share(4)........... $ 0.70 $ 0.06
=========== ==========
Pro forma as adjusted shares
outstanding(4)............ 17,554,991 17,992,968
=========== ==========
</Table>

OTHER FINANCIAL DATA:
Gross profit margin(5)....... 36.9% 36.6% 34.9% 33.6% 34.9% 27.7% 33.6%
Adjusted EBITDA(6)........... $ 20,890 $ 24,582 $ 24,624 $ 19,592 $ 35,157 (140) 5,044
Net cash provided by (used
in) operating activities... $ 8,669 $ 4,326 $ 12,945 $ 1,336 $ 37,510 (11,834) (3,680)
Net cash (used in) investing
activities................. (5,479) (14,669) (10,825) (5,981) (4,724) (1,406) (1,785)
Net cash (used in) provided
by financing activities.... (3,537) 13,658 (3,370) 19,855 (29,949) (954) (1,175)
STORE DATA:
Comparable store net sales
increase(7)................ 5.2% 1.0% 3.7% 0.6% 13.3% 3.9% 18.0%
Number of stores at the end
of period(8)............... 138 198 226 240 234 235 236
Average net sales per store
(in thousands)(9).......... $ 1,178 $ 1,169 $ 1,111 $ 1,112 $ 1,307
Average gross square footage
per store(10).............. 4,186 4,409 4,396 4,486 4,528
Average net sales per square
foot(9)(10)................ $ 281 $ 265 $ 253 $ 248 $ 289
</Table>

<Table>
<Caption>
AS OF MAY 4, 2002
-------------------------------------------
PRO FORMA
ACTUAL PRO FORMA(11) AS ADJUSTED(12)
--------- ------------- ---------------
(IN THOUSANDS)

BALANCE SHEET DATA:
Cash and cash equivalents................................... $ 23,111 $ 5,398 $ 5,398
Working capital(13)......................................... 8,689 20,225 20,329
Total assets................................................ 91,091 73,378 73,378
Total debt, including mandatorily redeemable preferred stock
(Class C)................................................. 74,250 68,073 30,000
Redeemable convertible preferred stock (Class A, Class B,
and Class D)(14).......................................... 86,605 86,605 --
Common stock................................................ 229 229 229
Additional paid-in capital.................................. 7,644 7,644 137,796
Accumulated (deficit) equity(15)............................ (112,181) (112,181) (117,551)
</Table>

- ------------------------------

(1) Effective January 1, 2001, we changed our fiscal reporting year from a
calendar year to a 52/53-week basis ending on the Saturday closest to
January 31. Our 2001 fiscal year began on February 4, 2001 and ended on
February 2, 2002.

(2) Reflects non-cash stock compensation charges related to certain stock
options.

(3) Reflects the accretion to fair value of detachable put warrants to purchase
common stock, issued by us in connection with our issuance of subordinated
debt. The put rights associated with these warrants were terminated as of
January 1, 1998, were restored as of December 31, 1999, and were terminated
again as of February 3, 2002.

(4) Assumes the following transactions were effected as of February 4, 2001:
(i) the Pre-Offering Transactions, (ii) the termination of the put rights
associated with the put warrants discussed in note (3) above, (iii) the
refinancing of our former senior credit facility with our new senior credit
facility, as discussed in "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Liquidity and Capital
Resources" and (iv) the sale by us of 6,174,000 shares in this offering at
an assumed initial public offering price of $18.00 per share and the
application of the estimated net proceeds from the sale after deducting
estimated offering

expenses and underwriting discounts and commissions. Pro forma as adjusted
net income and pro forma as adjusted earnings per common share exclude (i)
the $2.0 million non-cash stock compensation charge related to the July
2001 grant of an option to a consultant that would occur upon consummation
of this offering and (ii) the $0.6 million interest charge that would
result from the inducement associated with the exchange of certain Class C
Preferred Stock for common stock as part of the Pre-Offering Transactions.

(5) Defined as gross profit as a percentage of net sales. Gross profit
represents net sales less cost of product sold, freight, store occupancy
and central distribution expenses.

(6) The term Adjusted EBITDA as used herein represents operating income before
depreciation and amortization expense and non-cash stock compensation
charges related to certain outstanding stock options. While Adjusted EBITDA
should not be considered in isolation or as a substitute for net income,
cash flow from operations or any other measure of income or cash flow that
is prepared in accordance with generally accepted accounting principles or
as a measure of a company's profitability or liquidity, Adjusted EBITDA has
been presented because we believe it is commonly used in this or a similar
format by investors to analyze and compare operating performance as well as
to provide additional information with respect to our ability to meet our
future debt service, capital expenditure and working capital requirements.
Adjusted EBITDA may differ in method of calculation from similarly titled
measures used by other companies. This information should be read in
conjunction with our consolidated statements of cash flows contained in our
consolidated financial statements and notes thereto included elsewhere in
this prospectus.

(7) We include new stores in comparable store net sales calculations after the
store has been in operation one full fiscal year. We exclude from
comparable store net sales calculations each store that was expanded,
remodeled or relocated during the applicable period. Each expanded,
remodeled or relocated store is returned to the comparable store base after
it has been excluded from the comparable store base for one full fiscal
year. The comparable store net sales increase for fiscal 2001 reflects the
increase in comparable store net sales for the 52-week period ended
February 2, 2002 compared to the 53-week period ended February 3, 2001. The
comparable store net sales increase for the quarter ended May 4, 2002
reflects the increase in comparable store net sales for the quarter ended
May 4, 2002 compared to the quarter ended May 5, 2001.

(8) Our store count excludes our warehouse outlet store located adjacent to our
central distribution facilities in Jackson, Tennessee.

(9) Calculated using net sales of all stores open at both the beginning and the
end of the period.

(10) Calculated using 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.

(11) Assumes the refinancing of our former senior credit facility with our new
senior credit facility was effected as of May 4, 2002, as discussed in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources."

(12) Gives effect to the refinancing described in note (11) as well as (i) the
Pre-Offering Transactions and (ii) the sale by us of 6,174,000 shares in
this offering at an assumed initial public offering price of $18.00 per
share and the application of the estimated net proceeds from the sale after
deducting estimated offering expenses and underwriting discounts and
commissions.

(13) Defined as current assets excluding cash and cash equivalents, less current
liabilities excluding current maturities of long-term debt.

(14) As of May 4, 2002, the liquidation value of our Class A, Class B and Class
D Preferred Stock including $28.0 million of accrued dividends, was $89.4
million. The book value of this preferred stock has been adjusted from the
liquidation value in connection with the reduction of the dividend rate on
the Class A Preferred Stock, Class D Preferred Stock and a portion of our
Class B Preferred Stock. See Note 6 of the Notes to our consolidated
financial statements.

(15) In connection with our 1996 recapitalization, distributions of cash and
securities to our pre-recapitalization shareholders were recorded as
reductions in retained earnings, creating an accumulated deficit balance of
$116 million at June 13, 1996. See "Related Party
Transactions - Recapitalization."

RISK FACTORS

You should consider carefully the risks and uncertainties described below
and other information included in this prospectus before you decide to buy our
common stock. If any of the risks described below occur, our business, financial
condition or results of operations could be adversely affected in a material
way. This could cause the value of our common stock to decline, perhaps
significantly, and you may lose all or part of your investment.

RISKS RELATED TO OUR BUSINESS

IF WE ARE UNABLE TO PROFITABLY OPEN AND OPERATE NEW STORES AND MAINTAIN THE
PROFITABILITY OF OUR EXISTING STORES, WE MAY NOT BE ABLE TO ADEQUATELY IMPLEMENT
OUR GROWTH STRATEGY RESULTING IN A DECREASE IN NET SALES AND NET INCOME.

One of our strategies is to open new stores by focusing on both existing
markets and by targeting new geographic markets. We have opened 100 new stores
since the beginning of fiscal 1997. We intend to open approximately 15 new
stores in fiscal 2002 and approximately 35 new stores in fiscal 2003, and our
future operating results will depend to a substantial extent upon our ability to
open and operate new stores successfully. To date we have signed leases for five
new stores in fiscal 2002, two of which have already opened, and we have
identified sites for three new stores that we intend to open in fiscal 2003. We
also have an ongoing expansion, remodeling and relocation program, and intend to
expand, remodel or relocate four stores in fiscal 2002.

There can be no assurance that we will be able to open, expand, remodel
and relocate stores at this rate, or at all. Our ability to open new stores and
to expand, remodel and relocate existing stores depends on a number of factors,
including our ability to:

- obtain adequate capital resources for leasehold improvements, fixtures
and inventory on acceptable terms, or at all;

- locate and obtain favorable store sites and negotiate acceptable lease
terms;

- construct or refurbish store sites;

- obtain and distribute adequate product supplies to our stores;

- maintain adequate warehousing and distribution capability at acceptable
costs;

- hire, train and retain skilled managers and personnel; and

- continue to upgrade our information and other operating systems to
control the anticipated growth and expanded operations.

The rate of our expansion will also depend on the availability of
adequate capital, which in turn will depend in large part on cash flow generated
by our business and the availability of equity and debt capital. There can be no
assurance that we will be able to obtain equity or debt capital on acceptable
terms or at all. Moreover, our new senior credit facility contains provisions
that restrict the amount of debt we may incur in the future. In addition, the
cost of opening, expanding, remodeling and relocating new or existing stores may
increase in the future compared to historical costs. The increased cost could be
material. If we are not successful in obtaining sufficient capital, we may be
unable to open additional stores or expand, remodel and relocate existing stores
as planned, which may adversely affect our growth strategy resulting in a
decrease in net sales. As a result, there can be no assurances that we will be
able to achieve our current plans for the opening of new stores and the
expansion, remodeling or relocation of existing stores.

There also can be no assurance that our existing stores will maintain
their current levels of sales and profitability or that new stores will generate
sales levels necessary to achieve store-level profitability, much less
profitability comparable to that of existing stores. New stores that we open in
our existing

markets may draw customers from our existing stores and may have lower sales
growth relative to stores opened in new markets. New stores also may face
greater competition and have lower anticipated sales volumes relative to
previously opened stores during their comparable years of operations. New stores
opened in new markets, where we are less familiar with the target customer and
less well known, may face different or additional risks and increased costs
compared to stores operated in existing markets. Also, stores opened in non-mall
locations may require greater marketing costs in order to attract customer
traffic. These factors, together with increased pre-opening expenses at our new
stores, may reduce our average store contribution and operating margins. If we
are unable to profitably open and operate new stores and maintain the
profitability of our existing stores, our net income could suffer.

The success of our growth plan will be dependent on our ability to
promote and/or recruit enough qualified district managers, store managers and
sales associates to support the expected growth in the number of our stores, and
the time and effort required to train and supervise a large number of new
managers and associates may divert resources from our existing stores and
adversely affect our operating and financial performance. Our operating expenses
would also increase as a result of any increase in the minimum wage or other
factors that would require increases in the compensation paid to our employees.

THE AGREEMENT GOVERNING OUR DEBT PLACES CERTAIN REPORTING AND CONSENT
REQUIREMENTS ON US WHICH MAY AFFECT OUR ABILITY TO OPERATE OUR BUSINESS IN
ACCORD WITH OUR BUSINESS AND GROWTH STRATEGY.

We entered into a new senior credit facility in May 2002. Our new senior
credit facility contains a number of covenants requiring us to report to our
lender or to obtain our lender's consent in connection with certain activities
we may wish to pursue in the operation of our business. These requirements may
affect our ability to operate our business and consummate our business and
growth strategy, and may limit our ability to take advantage of potential
business opportunities as they arise. These requirements affect our ability to,
among other things:

- 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.

The new credit facility has two financial covenants. One covenant
requires us to maintain cash flow, net of capital expenditures, at levels
varying between $17.2 million and $26.7 million each fiscal quarter based upon
our projections taking into account the seasonality of our business. The other
covenant requires us to keep our senior debt within a specified ratio of our
cash flow ranging from 1.0:1.0 to 1.8:1.0 each fiscal quarter based upon our
projections taking into account the seasonality of our business and our
anticipated utilization of the revolving credit facility. Any failure to comply
with these or other covenants would allow the lenders to accelerate repayment of
their debt, prohibit further borrowing under the revolving portion of the credit
facility, declare an event of default, take possession of their collateral or
take other actions available to a secured senior creditor.

If compliance with our debt obligations materially hinders our ability to
operate our business and adapt to changing industry conditions, we may lose
market share, our revenue may decline and our operating results may suffer. This
could have a material adverse effect on the market value and marketability of
our common stock.

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.

Our success depends on our ability to anticipate and respond to changing
merchandise trends and consumer demands in a timely manner. If we fail to
identify and respond to emerging trends, consumer acceptance of the merchandise
in our stores and our image with our customers may be harmed, which could
materially adversely affect our net sales. Additionally, if we misjudge market
trends, we may significantly overstock unpopular products and be forced to take
significant inventory markdowns, which would have a negative impact on our gross
profit and cash flow. Conversely, shortages of items that prove popular could
reduce our net sales. In addition, a major shift in consumer demand away from
home decor could also have a material adverse effect on our business, results of
operations and financial condition.

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.

We purchase our products from approximately 200 vendors with which we
have no long-term purchase commitments or exclusive contracts. None of our
vendors supplied more than 12% of our merchandise purchases during the 12 months
ended May 4, 2002. Historically, we have retained our vendors and we have
generally not experienced difficulty in obtaining desired merchandise from
vendors on acceptable terms. However, our arrangements with these vendors do not
guarantee the availability of merchandise, establish guaranteed prices or
provide for the continuation of particular pricing practices. Our current
vendors may not continue to sell products to us on current terms or at all, and
we may not be able to establish relationships with new vendors to ensure
delivery of products in a timely manner or on terms acceptable to us.

We may not be able to acquire desired merchandise in sufficient
quantities on terms acceptable to us in the future. Also, our business would be
adversely affected if there were delays in product shipments to us due to
freight difficulties, strikes or other difficulties at our principal transport
providers or otherwise. We have from time to time experienced delays of this
nature. We are also dependent on vendors for assuring the quality of merchandise
supplied to us. Our inability to acquire suitable merchandise in the future or
the loss of one or more of our vendors and our failure to replace any one or
more of them may harm our relationship with our customers resulting in a loss of
net sales.

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.

Many of our vendors are importers of merchandise manufactured in the Far
East and India. While we believe that buying from vendors instead of directly
from manufacturers reduces or eliminates the risks involved with relying on
products manufactured abroad, our vendors are subject to those risks, and we
remain subject to those risks to the extent that their effects are passed
through to us by our vendors or cause disruptions in supply. These risks include
changes in import duties, quotas, loss of "most favored nation" ("MFN") trading
status with the United States for a particular foreign country, work stoppages,
delays in shipments, freight cost increases, economic uncertainties (including
inflation, foreign government regulations and political unrest) and trade
restrictions (including the United States imposing antidumping or countervailing
duty orders, safeguards, remedies or compensation and retaliation due to illegal
foreign trade practices). If any of these or other factors were to cause a
disruption of trade from the countries in which the suppliers of our vendors are
located, our inventory levels may be reduced or the cost of our products may
increase.

We currently purchase a majority of our merchandise from importers of
goods manufactured in China. China has been granted permanent normal trade
relations by the United States effective January 1, 2002, based on its entry
into the World Trade Organization ("WTO"), and now enjoys MFN trading status.
China's recent entry into the WTO potentially stabilizes the trading
relationship between it and the

United States, but the possibility of trade disputes concerning merchandise
currently imported from China continues to create risks. These risks could
result in sanctions against China, and the imposition of new duties on certain
imports from China, including products supplied to us. Any significant increase
in duties or any other increase in the cost of the products imported for us from
China could result in an increase in the cost of our products to our customers
which may correspondingly cause a decrease in net sales, or could cause a
reduction in our gross profit.

Historically, instability in the political and economic environments of
the countries in which our vendors obtain our products has not had a material
adverse effect on our operations. However, we cannot predict the effect that
future changes in economic or political conditions in such foreign countries may
have on our operations. Although we believe that we could access alternative
sources in the event of disruptions or delays in supply due to economic or
political conditions in foreign countries on our vendors, such disruptions or
delays may adversely affect our results of operations unless and until
alternative supply arrangements could be made. In addition, merchandise
purchased from alternative sources may be of lesser quality or more expensive
than the merchandise we currently purchase abroad.

Countries from which our vendors obtain these products may, from time to
time, impose new or adjust prevailing quotas or other restrictions on exported
products, and the United States may impose new duties, quotas and other
restrictions on imported products. This could disrupt the supply of such
products to us and adversely affect our operations. The United States Congress
periodically considers other restrictions on the importation of products
obtained for us by vendors. The cost of such products may increase for us if
applicable duties are raised, or import quotas with respect to such products are
imposed or made more restrictive.

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

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.

An important part of our efforts to achieve efficiencies, cost reductions
and net sales growth is the continued identification and implementation of
improvements to our planning, logistical and distribution infrastructure and our
supply chain, including merchandise ordering, transportation and receipt
processing. We also need to ensure that our distribution infrastructure and
supply chain keep pace with our anticipated growth and increased number of
stores. In particular, we may need to expand our existing infrastructure to the
extent we open new stores in regions of the United States where we presently do
not have stores. The cost of this enhanced infrastructure could be significant.
In addition, a significant portion of the distribution to our stores is
coordinated through our distribution facilities in Jackson, Tennessee. Any
significant disruption in the operations of these facilities would have a
material adverse effect on our ability to maintain proper inventory levels in
our stores which could result in a loss of net sales and net income.

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.

The retail market is highly competitive. We compete against a diverse
group of retailers, including specialty stores, department stores, discount
stores and catalog retailers, which carry merchandise in one or more categories
also carried by us. Our product offerings also compete with a variety of
national, regional and local retailers, including such specialty retailers as
Bed, Bath & Beyond, Cost Plus, Linens 'n Things, Michaels Stores, Pier 1 Imports
and Williams-Sonoma. We also compete with these and other retailers for suitable
retail locations, suppliers, qualified employees and management personnel. One
or more of our competitors are present in substantially all of the malls in
which we have stores. Many of our competitors are larger and have significantly
greater financial, marketing and other resources than we do. This

competition could result in the reduction of our prices and a loss of our market
share. Our sales are also impacted by store liquidations of our competitors. We
believe that our stores compete primarily on the basis of merchandise quality
and selection, price, visual appeal of the merchandise and the store and
convenience of location. There can be no assurance that we will continue to be
able to compete successfully against existing or future competition. Our
expansion into the markets served by our competitors, and the entry of new
competitors or expansion of existing competitors into our markets, may have a
material adverse effect on our market share and could result in a reduction in
our prices in order for us to remain competitive.

OUR BUSINESS IS HIGHLY SEASONAL AND OUR FOURTH QUARTER CONTRIBUTES A
DISPROPORTIONATE AMOUNT OF OUR OPERATING INCOME AND NET INCOME, 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 have experienced, and expect to continue to experience, substantial
seasonal fluctuations in our net sales and operating results, which are typical
of many mall-based specialty retailers and common to most retailers generally.
Due to the importance of the fall selling season, which includes Thanksgiving
and Christmas, the last quarter of our fiscal year has historically contributed,
and is expected to continue to contribute, a disproportionate amount of our
operating income and net income for the entire fiscal year. We expect this
pattern to continue during the current fiscal year and anticipate that in
subsequent fiscal years the last quarter of our fiscal year will continue to
contribute disproportionately to our operating results. Any factors negatively
affecting us during the last quarter of our fiscal year, including unfavorable
economic conditions, could have a material adverse effect on our financial
condition and results of operations, reducing our 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.

Our quarterly results of operations may also fluctuate significantly
based upon such factors as the timing of new store openings, pre-opening
expenses associated with new stores, the relative proportion of new stores to
mature stores, net sales contributed by new stores, increases or decreases in
comparable store net sales, adverse weather conditions, shifts in the timing of
holidays, the timing and level of markdowns, changes in fuel and other shipping
costs, changes in our product mix and actions taken by our competitors.

A PROLONGED ECONOMIC DOWNTURN COULD RESULT IN REDUCED NET SALES AND
PROFITABILITY.

Our net sales are also subject to a number of factors relating to
consumer spending, including general economic conditions affecting disposable
consumer income such as unemployment rates, business conditions, interest rates,
levels of consumer confidence, energy prices, mortgage rates, the level of
consumer debt and taxation. A weak retail environment could also adversely
affect our net sales. Purchases of home decor items may decline during
recessionary periods or a prolonged recession may have a material adverse effect
on our business, financial condition and results of operations. In addition,
economic downturns during the last quarter of our fiscal year could adversely
affect us to a greater extent than if such downturns occurred at other times of
the year. There is also no assurance that consumers will continue to focus on
their homes or on home-oriented products or that trends in favor of "cocooning"
and new home purchases will continue.

OUR COMPARABLE STORE NET SALES FLUCTUATE DUE TO A VARIETY OF FACTORS AND MAY NOT
BE A MEANINGFUL INDICATOR OF FUTURE PERFORMANCE.

Numerous factors affect our comparable store net sales results, including
among others, weather conditions, retail trends, the retail sales environment,
economic conditions, the impact of competition and our ability to execute our
business strategy efficiently. Our comparable store net sales results have
experienced fluctuations in the past. Our comparable store net sales increased
3.7% in fiscal 1999 over fiscal 1998, increased 0.6% in fiscal 2000 over fiscal
1999 and increased 13.3% in fiscal 2001 over the
13

53-week period ended February 3, 2001. In addition, we anticipate that opening
new stores in existing markets may result in decreases in comparable store net
sales for existing stores in such markets. Past comparable store net sales
results may not be indicative of future results. Our comparable store net sales
may not increase from quarter to quarter and may decline. As a result, the
unpredictability of our comparable store net sales may cause our revenues and
operating results to vary quarter to quarter, and an unanticipated decline in
revenues or comparable store net sales may cause the price of our common stock
to fluctuate significantly.

REDUCED CONSUMER SPENDING IN THE SOUTHEASTERN PART OF THE UNITED STATES WHERE A
MAJORITY OF OUR STORES ARE CONCENTRATED COULD REDUCE OUR NET SALES.

Approximately 55% of our stores are located in the southeastern region of
the United States. Consequently, economic conditions, weather conditions,
demographic and population changes and other factors specific to this region may
have a greater impact on our results of operations than on the operations of our
more geographically diversified competitors. In addition, changes in regional
factors that reduce the appeal of our stores and merchandise to local consumers
could reduce our net sales.

WE ARE HIGHLY DEPENDENT ON CUSTOMER TRAFFIC IN MALLS, AND ANY REDUCTION IN THE
OVERALL LEVEL OF MALL TRAFFIC COULD REDUCE OUR NET SALES AND INCREASE OUR SALES
AND MARKETING EXPENSES.

Substantially all of our existing stores are located in enclosed malls.
As a result, we largely rely on the ability of mall anchor tenants and other
tenants to generate customer traffic in the vicinity of our stores.
Historically, we have not relied on extensive media advertising and promotion in
order to attract customers to our stores. Our future operating results will also
depend on many other factors that are beyond our control, including the overall
level of mall traffic and general economic conditions affecting consumer
confidence and spending. Any significant reduction in the overall level of mall
traffic could reduce our net sales.

OUR HARDWARE AND SOFTWARE SYSTEMS ARE VULNERABLE TO DAMAGE THAT COULD HARM OUR
BUSINESS.

We rely upon our existing management information systems for operating
and monitoring all major aspects of our business, including sales, warehousing,
distribution, purchasing, inventory control, merchandise planning and
replenishment, as well as various financial functions. These systems and our
operations are vulnerable to damage or interruption from:

- 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.

Any disruption in the operation of our management information systems,
the loss of employees knowledgeable about such systems or our failure to
continue to effectively modify such systems could interrupt our operations or
interfere with our ability to monitor inventory, which could result in reduced
net sales and affect our operations and financial performance. We also need to
ensure that our systems are consistently adequate to handle our anticipated
store growth and are upgraded as necessary to meet our needs. The cost of any
such system upgrades or enhancements would be significant.

WE DEPEND ON KEY PERSONNEL, AND IF WE LOSE THE SERVICES OF ANY OF OUR PRINCIPAL
EXECUTIVE OFFICERS, INCLUDING CARL KIRKLAND, OUR CHAIRMAN, AND ROBERT E.
ALDERSON, OUR CHIEF EXECUTIVE OFFICER, WE MAY NOT BE ABLE TO RUN OUR BUSINESS
EFFECTIVELY.

We have benefited substantially from the leadership and performance of
our senior management, especially Carl Kirkland, our Chairman, and Robert E.
Alderson, our President and Chief Executive Officer. Our success will depend on
our ability to retain our current management and to attract and retain
14

qualified personnel in the future. Competition for senior management personnel
is intense and there can be no assurances that we will be able to retain our
personnel. Although we maintain key man insurance in the amount of $3 million on
each of Messrs. Kirkland and Alderson, the loss of the services of either of
these individuals for any reason could have a material adverse effect on our
business, financial condition and results of operations. In addition, the loss
of certain of our other principal executive officers could affect our ability to
run our business effectively. We have recently entered into new employment
agreements with Mr. Kirkland and Mr. Alderson and other members of senior
management. The employment agreements with Messrs. Kirkland and Alderson expire
in June 2006 and continue on successive one-year renewal terms unless terminated
by either party. The loss of a member of senior management would require the
remaining executive officers to divert immediate and substantial attention to
seeking a replacement.

TERRORISM AND THE UNCERTAINTY OF WAR MAY HAVE A MATERIAL ADVERSE EFFECT ON OUR
OPERATING RESULTS.

Terrorist attacks and other acts of violence or war may affect the market
on which our common stock will trade, the markets in which we operate, our
operations and profitability and your investment. The potential near-term and
long-term effects any terrorist or other attacks on the United States or U.S.
businesses may have for our customers, the market for our common stock, the
demand for merchandise sold by our stores and the U.S. economy are uncertain.
The consequences of any terrorist attacks, or any armed conflicts which may
result, are unpredictable, and we may not be able to foresee events that could
have an adverse effect on our business or your investment.

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.

Our charter authorizes the issuance of "blank check" preferred stock with
such designations, rights and preferences as may be determined from time to time
by our Board of Directors. Accordingly, the Board of Directors is empowered,
without shareholder approval, to issue preferred stock with dividend,
liquidation, conversion, voting or other rights that could materially adversely
affect the voting power or other rights of the holders of our common stock
(including purchasers in this offering). Holders of the common stock will not
have preemptive rights to subscribe for a pro rata portion of any capital stock
which may be issued by us. In the event of issuance, such preferred stock could
be utilized, under certain circumstances, as a method of discouraging, delaying
or preventing a change in control of Kirkland's. Although we have no present
intention to issue any new shares of preferred stock, we may do so in the
future.

Our charter and bylaws contain certain corporate governance provisions
that may make it more difficult to challenge management, may deter and inhibit
unsolicited changes in control of Kirkland's and may have the effect of
depriving our shareholders of an opportunity to receive a premium over the
prevailing market price of our common stock in the event of an attempted hostile
takeover. First, the charter provides for a classified Board of Directors, with
directors (after the expiration of the terms of the initial classified board of
directors in 2003, 2004 and 2005) serving three year terms from the year of
their respective elections and being subject to removal only for cause and upon
the vote of 80% of the voting power of all outstanding capital stock entitled to
vote (the "Voting Power"). Second, our charter and bylaws do not generally
permit shareholders to call, or require that the Board of Directors call, a
special meeting. The charter and bylaws also limit the business permitted to be
conducted at any such special meeting. In addition, Tennessee law permits action
to be taken by the shareholders by written consent only if the action is
consented to by holders of the number of shares required to authorize
shareholder action and if all shareholders entitled to vote are parties to the
written consent. Third, the bylaws establish an advance notice procedure for
shareholders to nominate candidates for election as directors or to bring other
business before meetings of the shareholders. Only those shareholder nominees
who are nominated in accordance with this procedure will be eligible for
election as directors of Kirkland's, and only such shareholder proposals may be
considered at a meeting of shareholders as have been presented to Kirkland's in
accordance with the procedure. Finally, the charter provides that the amendment
or repeal of any of the foregoing provisions of the charter mentioned previously
in this paragraph requires the affirmative vote of

at least 80% of the Voting Power. In addition, the bylaws provide that the
amendment or repeal by shareholders of any bylaws made by our Board of Directors
requires the affirmative vote of at least 80% of the Voting Power.

Furthermore, Kirkland's is subject to certain provisions of Tennessee
law, including certain Tennessee corporate takeover acts that are, or may be,
applicable to us. These acts include the Investor Protection Act, the Business
Combination Act and the Tennessee Greenmail Act, and these acts seek to limit
the parameters in which certain business combinations and share exchanges occur.
The charter, bylaws and Tennessee law provisions may have an anti-takeover
effect, including possibly discouraging takeover attempts that might result in a
premium over the market price for our common stock. See "Description of Capital
Stock - Anti-Takeover Effect of Charter and Bylaw Provisions and Tennessee
Laws."

RISKS ASSOCIATED WITH THIS OFFERING

WE WILL INCUR NON-CASH CHARGES IN PERIODS AFTER THIS OFFERING IS COMPLETED.

We will incur non-cash charges in the second quarter of fiscal 2002, the
quarter in which this offering is expected to be completed. These charges
include a $2.0 million non-cash stock compensation charge related to the July
2001 grant of an option to a consultant to purchase shares of common stock;
$600,000 of interest expense in connection with the inducement associated with
the exchange of certain Class C Preferred Stock for common stock as a part of
the Pre-Offering Transactions, and a $70,000 non-cash stock compensation charge
related to the November 2001 grant of stock options to certain of our management
employees. As a result of these charges and the fact that they are being
incurred in the second fiscal quarter, in which we have historically realized
net losses, we expect to incur a net loss for the quarter in which this offering
is completed.

We will continue to incur a $70,000 non-cash stock compensation charge
related to the November 2001 grant of stock options each quarter through the
third quarter of fiscal 2004. The recognition of these quarterly charges will
result in a reduction of our net income or an increase in our net loss for each
quarter through the third quarter of fiscal 2004.

AN ACTIVE PUBLIC MARKET FOR OUR COMMON STOCK MAY NOT DEVELOP OR BE SUSTAINED,
AND THE MARKET PRICE OF OUR COMMON STOCK MAY FALL BELOW THE INITIAL PUBLIC
OFFERING PRICE.

Prior to this offering, you could not buy or sell our common stock
publicly. An active public market for our common stock may not develop or be
sustained after this offering, and the market price might fall below the initial
public offering price. The initial public offering price may bear no
relationship to, and may be higher than, the price at which our common stock
will trade upon completion of this offering. The initial public offering price
will be determined by negotiations between us and the representatives of the
underwriters based on factors that may not be indicative of future performance.

THE MARKET PRICE FOR OUR COMMON STOCK MIGHT BE VOLATILE AND COULD RESULT IN A
DECLINE IN THE VALUE OF YOUR INVESTMENT.

Following this offering, the price at which our common stock will trade
may be volatile. The market price of our common stock could be subject to
significant fluctuations in response to our operating results, general trends in
prospects for the retail industry, announcements by our competitors, analyst
recommendations, our ability to meet or exceed analysts' or investors'
expectations, the condition of the financial markets and other factors. In
addition, the stock market in recent years has experienced extreme price and
volume fluctuations that often have been unrelated or disproportionate to the
operating performance of companies. These fluctuations, as well as general
economic and market conditions, may adversely affect the market price of our
common stock notwithstanding our actual operating performance.

FUTURE SALES OF SHARES OF OUR COMMON STOCK IN THE PUBLIC MARKET, OR THE
PERCEPTION THAT SUCH SALES MAY OCCUR, MAY DEPRESS OUR STOCK PRICE AND MAKE IT
DIFFICULT FOR YOU TO RECOVER THE FULL VALUE OF YOUR INVESTMENT IN OUR SHARES.

If our existing shareholders sell substantial amounts of our common stock
in the public market following this offering or if there is a perception that
these sales may occur, the market price of our common stock could decline. Upon
completion of this offering we will have outstanding approximately 17.8 million
shares of common stock. Of these shares, only the shares of common stock (plus
any of the shares purchased pursuant to the exercise of the underwriters'
overallotment option) sold in this offering will be freely tradable, without
restriction, in the public market.

After the lockup agreements pertaining to this offering expire 180 days
from the date of this prospectus, unless waived, approximately 10.8 million
additional shares will be eligible for sale in the public market at various
times, subject to volume limitations under Rule 144 of the Securities Act of
1933, as amended (the "Securities Act"). Holders of substantially all of such
shares of common stock have the right to require us to register the shares for
sale under the Securities Act in certain circumstances and also have the right
to include those shares in a registration initiated by us. If we are required to
include the shares of common stock of these shareholders pursuant to these
registration rights in a registration initiated by us, sales made by such
shareholders may adversely affect the price of the common stock and our ability
to raise needed capital. In addition, if these shareholders exercise their
demand registration rights and cause a large number of shares to be registered
and sold in the public market or demand that we register their shares on a shelf
registration statement, such sales or shelf registration may have an adverse
effect on the market price of the common stock.

Following this offering, we also intend to file registration statements
with the Securities and Exchange Commission covering 3,724,947 shares of common
stock issued or reserved for issuance under outstanding stock options and under
our 1996 Executive Incentive and Non-Qualified Stock Option Plan, 2002 Equity
Incentive Plan and Employee Stock Purchase Plan. Upon effectiveness of such
registration statements, any shares subsequently issued under such plans will be
eligible for sale in the public market, except to the extent that they are
restricted by the lock-up agreements referred to above and subject to compliance
with Rule 144 in the case of our affiliates. Sales of a large number of shares
of common stock issued under these plans in the public market may have an
adverse effect on the market price of the common stock. For more information
regarding the sale of shares subsequently issued under such plans and the
permissible sale of common stock by existing shareholders after the closing of
this offering, see "Shares Eligible for Future Sale."

CONCENTRATION OF OWNERSHIP AMONG OUR EXISTING DIRECTORS, EXECUTIVE OFFICERS, AND
SHAREHOLDERS MAY PREVENT NEW INVESTORS FROM INFLUENCING SIGNIFICANT CORPORATE
DECISIONS.

Upon completion of this offering, our current directors, executive
officers, existing shareholders and their affiliates will, in the aggregate,
beneficially own approximately 59.6% of our outstanding common stock, assuming
no exercise of the underwriters' overallotment option. As a result, these
shareholders will be able to exercise a controlling influence over matters
requiring shareholder approval, including the election of directors and approval
of significant corporate transactions, and will have significant control over
our management and policies. These shareholders may support proposals and
actions with which you may disagree or which are not in your interests.

YOU WILL INCUR IMMEDIATE AND SUBSTANTIAL DILUTION AS A RESULT OF THIS OFFERING.

The initial public offering price is substantially higher than the book
value per share of the common stock. As a result, purchasers in this offering
will experience immediate and substantial dilution of $16.91 per share in the
tangible book value of the common stock from the initial public offering price.
In addition, to the extent that currently outstanding options to purchase common
stock are exercised, there will be further dilution. See "Dilution."

DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS

This prospectus contains forward-looking statements relating to future
events or our future financial performance. Such statements may relate to, but
are not limited to, expectations of future operating results or financial
performance, capital expenditures, construction or expansion of facilities
(including new stores), plans for growth and future operations, or financing, as
well as assumptions relating to the foregoing. Forward-looking statements are
inherently subject to risks and uncertainties, some of which cannot be predicted
or quantified. Such risks include, but are not limited to, the matters discussed
in the foregoing paragraphs under "Risk Factors." Future events and actual
results could differ materially from those set forth in, contemplated by or
underlying the forward-looking statements. Except as required by applicable law,
including the securities laws of the United States, and the rules and
regulations of the Securities and Exchange Commission, we do not plan to
publicly update or revise any forward-looking statements after we distribute
this prospectus, whether as a result of any new information, future events or
otherwise.

ABOUT THIS PROSPECTUS

Market data used throughout this prospectus is based on the good faith
estimates of management, which estimates are based upon their review of internal
surveys, independent industry publications and other publicly available
information. Although we believe that these sources are reliable, we do not
guarantee the accuracy or completeness of this information, and we have not
independently verified this information.

The Kirkland's logo, the Kirkland Collection(R) and Cedar Creek(R)
private label brand are registered trademarks and/or service marks of
Kirkland's. We also claim common law trademark rights in Briar Patch(TM),
Kirkland's Outlet(TM), Kirkland's Home(TM) and other marks. We are exploring the
possibility of federal registration of several of these marks. All other
trademarks or service marks appearing in this prospectus are trademarks or
service marks of the companies that utilize them.

USE OF PROCEEDS

We estimate that our net proceeds from the sale of the 6,174,000 shares
of common stock offered by us will be approximately $101.7 million, at an
assumed initial public offering price of $18.00, after deducting underwriting
discounts and commissions and estimated offering expenses. We will not receive
any proceeds from the sale of shares by the selling shareholders.

We expect to use the net proceeds to us from this offering as follows:

- $20.3 million to repay all of our outstanding subordinated debt,
including accrued and unpaid interest;

- $11.6 million to redeem $9.2 million of aggregate stated value of
mandatorily redeemable Class C Preferred Stock and $2.4 million of
amounts classified as interest associated with the Class C Preferred
Stock ($3.0 million of these proceeds will be paid to our affiliates);

- $68.8 million to redeem $63.4 million of aggregate stated value and
accrued and unpaid dividends of Class A Preferred Stock, Class B
Preferred Stock and Class D Preferred Stock and 589,799 shares of
common stock ($46.4 million of these proceeds will be paid to our
affiliates); and

- $1.0 million for working capital and general corporate purposes.

Our subordinated debt consists of $20.0 million subordinated notes
bearing interest at 12.5% per year and maturing on June 30, 2003. By their
terms, the subordinated notes are required to be repaid in full with the
proceeds of this offering.

We issued our Class C Preferred Stock to affiliates in connection with
our 1996 recapitalization and the Class C Preferred Stock has an aggregate
stated value of $17.1 million at May 4, 2002. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "Related Party
Transactions - Recapitalization." We accrue an annual amount equal to 9% of the
outstanding stated value of the Class C Preferred Stock, which has been
reflected as interest expense in our consolidated financial statements. As of
May 4, 2002, the aggregate unpaid accrual with respect to the Class C Preferred
Stock amounted to $7.7 million. A portion of the proceeds from our new credit
facility was used to repay $5.7 million of the aggregate unpaid accrual with
respect to the Class C Preferred Stock. The Class C Preferred Stock is required
to be redeemed with the proceeds of this offering. Of the outstanding shares of
Class C Preferred Stock, a total 258,425 shares are not being redeemed but are
being exchanged for 472,939 shares of common stock (assuming an initial public
offering price of $18.00 per share). These shares of common stock are being sold
in this offering.

We issued our Class A Preferred Stock, Class B Preferred Stock and Class
D Preferred Stock in connection with various financings between 1996 and 2000.
At May 4, 2002, the outstanding Class A, B and D Preferred Stock had an
aggregate liquidation value of $89.4 million, including $28.0 million of accrued
dividends. The Class A, B and D Preferred Stock currently accrue cumulative
dividends at a rate of 10% per year compounded quarterly. All outstanding shares
of Class A, B and D Preferred Stock that are not being redeemed with proceeds of
this offering will be converted into common stock immediately prior to the
completion of this offering. See "Prospectus Summary - Pre-Offering
Transactions," "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Related Party Transactions - Pre-Offering
Transactions."

DIVIDEND POLICY

We intend to retain all future earnings to finance the continued growth
and development of our business, and do not, therefore, anticipate paying any
cash dividends on our common stock in the foreseeable future. In addition, our
new senior credit facility restricts the payment of cash dividends. No dividends
have been paid on our common stock subsequent to 1995. Future cash dividends, if
any, will be determined by our Board of Directors, and will be based upon our
earnings, capital requirements, financial condition, debt covenants and other
factors deemed relevant by our Board of Directors.

DILUTION

If you invest in our common stock, your interest will be diluted to the
extent of the difference between the initial public offering price per share of
our common stock and the pro forma as adjusted net tangible book value per share
of our common stock after this offering.

Our pro forma net negative tangible book value as of May 4, 2002, after
giving effect to the Pre-Offering Transactions, was $70.8 million, or $6.35 per
share of outstanding common stock. Pro forma net negative tangible book value
per share is determined by dividing our pro forma net negative tangible book
value (total tangible assets less total liabilities) by the number of shares of
common stock outstanding on a pro forma basis, giving effect to the Pre-Offering
Transactions.

Without taking into effect any changes in pro forma net negative tangible
book value after May 4, 2002, other than to give effect to the sale by us of the
6,174,000 shares of common stock offered by us in this offering and the
application of the estimated net proceeds from the sale (after deducting
estimated offering expenses and the underwriting discounts and commissions), our
as adjusted pro forma net tangible book value as of May 4, 2002 would have been
$18.9 million, or $1.09 per share.

This represents an immediate increase in pro forma net tangible book
value of $7.12 per share to existing shareholders and an immediate dilution of
$16.91 per share to purchasers of common stock in this offering. The following
table illustrates this per share dilution:

<Table>

Assumed initial public offering price per share........... $18.00
Net negative tangible book value per share at May 4,
2002................................................. $(13.83)
Adjustment for Pre-Offering Transactions................ 7.48
-------
Pro forma net negative tangible book value per share
before the Offering.................................. (6.35)
Increase attributable to new shareholders............... 7.44
-------
Adjusted pro forma net tangible book value per share
after the offering................................... 1.09
------
Dilution per share to new shareholders.................... $16.91
======
</Table>

The following table sets forth, on a pro forma basis as of May 4, 2002,
giving effect to the Pre-Offering Transactions, the number of shares of common
stock purchased from us, the total consideration paid to us, the average price
per share paid by existing shareholders, and the average price per share to be
paid by purchasers of common stock in this offering:

<Table>
<Caption>
SHARES PURCHASED TOTAL CONSIDERATION
-------------------- ---------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ------- ------------ ------- -------------

Existing
shareholders(1)....... 11,148,359 64.4% $ 35,132,423 24.0% $ 3.15
New investors........... 6,174,000 35.6 111,132,000 76.0 $18.00
---------- ----- ------------ -----
Total.............. 17,322,359 100.0% $146,264,423 100.0%
========== ===== ============ =====
</Table>

- ------------------------------

(1) With respect to our executive officers, directors and greater-than-10%
shareholders, and assuming the exercise of all outstanding stock options,
the number of shares of common stock purchased from us, the total
consideration paid to us, and the average price per share paid by such
persons, are as follows:

<Table>
<Caption>
SHARES PURCHASED TOTAL CONSIDERATION
-------------------- -------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ------- ---------- ------- -------------

Affiliated shareholders..... 10,153,028 58.6% 34,727,172 23.7% $3.42
</Table>

Except as otherwise indicated, the foregoing tables do not include (i)
724,947 shares of common stock issuable upon exercise of options that will be
outstanding upon completion of this offering at exercise prices ranging from
$0.01 to $1.73 per share, of which 219,106 shares are subject to options which
will be exercisable upon completion of this offering, and (ii) 3,724,947 shares
of common stock reserved for future issuance under outstanding stock options and
under our 1996 Executive Incentive and Non-Qualified Stock Option Plan, 2002
Equity Incentive Plan and Employee Stock Purchase Plan. See "Management -
Employee Benefit Plans."

CAPITALIZATION

The following table describes our capitalization as of May 4, 2002. Our
capitalization is presented:

- on an actual basis;

- on a pro forma basis to give effect to the refinancing of our former
senior credit facility with our new senior credit facility, as
discussed in "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Liquidity and Capital Resources;"
and

- on a pro forma as adjusted basis to give effect to (i) the refinancing
discussed in the preceding paragraph, (ii) the Pre-Offering
Transactions and (iii) the sale by us of 6,174,000 shares in this
offering at an assumed initial offering price of $18.00 per share and
the application of the estimated net proceeds from the sale (after
deducting estimated offering expenses and underwriting discounts and
commissions).

This presentation should be read in conjunction with our consolidated
financial statements and related notes appearing elsewhere in this prospectus.

<Table>
<Caption>
AS OF MAY 4, 2002
-----------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
--------- --------- -----------
(IN THOUSANDS)

Cash and cash equivalents................... $ 23,111 $ 5,398 $ 5,398
========= ========= =========
Long-term debt, including current portion:
Former senior credit facility(1).......... 38,299 -- --
New senior credit facility(2)............. -- 31,000 30,000
Subordinated debt(3)...................... 24,688 19,951 --
Mandatorily redeemable preferred stock
(Class C)(4)........................... 24,863 19,186 --
--------- --------- ---------
Total long-term debt, including current
portion................................... 87,850 70,137 30,000
--------- --------- ---------
Redeemable convertible preferred stock
(Class A, Class B and Class D)(5)......... 86,605 86,605 --
Shareholders' equity (deficit):
Common stock, at stated value: 27,491,350
shares authorized, 7,657,111 shares
issued and outstanding, actual;
27,491,350 shares authorized, 7,657,111
shares issued and outstanding, pro
forma; and 100,000,000 shares
authorized, 17,322,359 shares issued
and outstanding, pro forma as
adjusted(6)............................ 229 229 229
Additional paid-in capital.................. 7,644 7,644 137,796
Loan to shareholder......................... (217) (217) (217)
Accumulated deficit......................... (112,181) (112,181) (117,551)
--------- --------- ---------
Total shareholders' equity (deficit)........ (104,525) (104,525) 20,257
--------- --------- ---------
Total capitalization........................ $ 69,930 $ 52,217 $ 50,257
========= ========= =========
</Table>

- ------------------------------

(1) Includes $1.1 million in the aggregate of accrued and unpaid interest on our
former senior term loan as of May 4, 2002.

(2) Consists of a $15 million term loan and a revolving credit facility.

(3) Includes $4.7 million in the aggregate of accrued and unpaid interest on our
subordinated debt as of May 4, 2002.

(4) Includes $7.7 million in the aggregate of accrued and unpaid interest on our
Class C Preferred Stock as of May 4, 2002.

(5) Includes $28.0 million in the aggregate of accrued and unpaid dividends on
our Class A Preferred Stock, Class B Preferred Stock and Class D Preferred
Stock. As of May 4, 2002, the liquidation value of our Class A, Class B and
Class D Preferred Stock including $28.0 million of accrued dividends, was
$89.4 million. The book value of this preferred stock has been adjusted from
the liquidation value in connection with the reduction of the dividend rate
on the Class A Preferred Stock, Class D Preferred Stock and a portion of our
Class B Preferred Stock. See Note 6 of the Notes to our consolidated
financial statements.

(6) Excludes approximately 1,164,918 shares of common stock reserved for
issuance upon the exercise of options outstanding at May 4, 2002 (730,555
shares upon completion of this offering) at exercise prices ranging from
$0.01 to $1.73 per share, of which 224,714 shares were subject to options
which will be exercisable upon completion of this offering.

SELECTED CONSOLIDATED FINANCIAL DATA

The selected "Statement of Operations Data" and the "Other Financial
Data" for the fiscal years ended December 31, 1999 and December 31, 2000, the
34-day period ended February 3, 2001 and the fiscal year ended February 2, 2002
and the selected "Balance Sheet Data" as of December 31, 2000 and February 2,
2002 have been derived from our audited consolidated financial statements
included elsewhere in this prospectus. The selected "Balance Sheet Data" as of
December 31, 1997, 1998 and 1999 and the selected "Statement of Operations Data"
and the "Other Financial Data" for the years ended December 31, 1997 and 1998
have been derived from our audited consolidated financial statements not
included in this prospectus. The "Store Data" for all periods presented below
have been derived from internal records of our operations. The selected
"Statement of Operations Data" and "Other Financial Data" for the quarters ended
May 5, 2001 and May 4, 2002 and the selected "Balance Sheet Data" as of May 4,
2002 have been derived from our unaudited consolidated financial statements,
which, in our opinion, include all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation of the information set
forth therein. The selected consolidated financial data should be read in
conjunction with our consolidated financial statements and notes thereto, and
with "Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere in this prospectus.

<Table>
<Caption>
34-DAY QUARTER ENDED
YEAR ENDED DECEMBER 31, PERIOD ENDED YEAR ENDED ---------------------
---------------------------------------------- FEBRUARY 3, FEBRUARY 2, MAY 5, MAY 4,
1997 1998 1999 2000 2001(1) 2002(2) 2001 2002
--------- ---------- --------- --------- ------------ ----------- --------- ---------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

STATEMENT OF OPERATIONS
DATA:
Net sales................... $ 153,584 $ 192,250 $ 236,622 $ 259,240 $ 23,875 $307,213 $ 55,961 $ 66,184
Cost of sales(3)............ 96,878 121,864 154,104 172,226 18,990 200,063 40,447 43,976
--------- ---------- --------- --------- --------- -------- --------- ---------
Gross profit................ 56,706 70,386 82,518 87,014 4,885 107,150 15,514 22,208
Operating expenses:
Other operating
expenses................ 35,816 45,804 57,894 67,422 7,388 71,993 15,654 17,164
Depreciation and
amortization............ 3,141 4,401 5,969 6,522 517 6,370 1,372 1,653
Non-cash stock
compensation
charge(4)............... -- -- -- -- -- 1,220 -- 812
--------- ---------- --------- --------- --------- -------- --------- ---------
Operating income (loss)..... 17,749 20,181 18,655 13,070 (3,020) 27,567 (1,512) 2,579
Interest expense:
Senior, subordinated and
other notes payable..... 7,990 9,254 10,232 11,221 1,043 9,759 2,607 1,486
Class C Preferred Stock... 1,800 1,541 1,647 1,850 154 2,007 499 544
Amortization of debt issue
costs................... 1,001 1,009 1,307 1,305 84 1,308 252 366
Accretion of common stock
warrants(5)............. 389 -- -- -- -- 11,315 -- --
Interest income............. (80) (113) (27) (1) -- (278) -- (67)
Offering and financing
costs(6).................. -- -- 852 782 -- -- -- --
Other expense (income),
net....................... (90) (157) (222) (199) (26) (109) (30) 7
Income tax provision
(benefit)................. 2,817 2,220 807 (573) (1,619) 1,782 (2,115) 100
--------- ---------- --------- --------- --------- -------- --------- ---------
Net income (loss)........... 3,922 6,427 4,059 (1,315) (2,656) 1,783 (2,725) 143
Accretion of redeemable
preferred stock and
dividends accrued(7)...... (3,755) (3,832) (5,053) (6,555) (778) (6,439) (1,931) (1,311)
--------- ---------- --------- --------- --------- -------- --------- ---------
Net income (loss) allocable
to common stock........... $ 167 $ 2,595 $ (994) $ (7,870) $ (3,434) $ (4,656) $ (4,656) $ (1,168)
========= ========== ========= ========= ========= ======== ========= =========
Income (loss) per common
share
Basic..................... $ 0.03 $ 0.51 $ (0.20) $ (1.30) $ (0.46) $ (0.62) $ (0.62) $ (0.16)
Diluted................... $ 0.02 $ 0.16 $ (0.20) $ (1.30) $ (0.46) $ (0.62) $ (0.62) $ (0.16)
Weighted average number of
common shares outstanding
Basic..................... 5,498,270 5,072,264 5,063,938 6,052,715 7,518,939 7,521,093 7,518,939 7,532,964
Diluted................... 6,793,058 16,071,718 5,063,938 6,052,715 7,518,939 7,521,093 7,518,939 7,532,964
</Table>

<Table>
<Caption>
QUARTER ENDED
YEAR ENDED DECEMBER 31, YEAR ENDED ---------------------
------------------------------------------------- FEBRUARY 2, MAY 5, MAY 4,
1997 1998 1999 2000 2002(2) 2001 2002
---------- ---------- ---------- ---------- ----------- -------- ----------
(IN THOUSANDS, EXCEPT SHARE AND PERCENTAGE DATA)

PRO FORMA DATA:
Pro forma as adjusted net
income(8)...................... $ 12,229 $ 1,141
---------- ----------
Pro forma as adjusted diluted
earnings per common share(8)... $ 0.70 $ 0.06
========== ==========
Pro forma as adjusted shares
outstanding(8)................. 17,554,991 17,992,968
========== ==========
OTHER FINANCIAL DATA:
Gross profit margin.............. 36.9% 36.6% 34.9% 33.6% 34.9% 27.7% 33.6%
Adjusted EBITDA(9)............... $ 20,890 $ 24,582 $ 24,624 $ 19,592 $ 35,157 (140) 5,044
Net cash provided by (used in)
operating activities........... $ 8,669 $ 4,326 $ 12,945 $ 1,336 $ 37,510 (11,834) (3,680)
Net cash (used in) investing
activities..................... (5,479) (14,669) (10,825) (5,981) (4,724) (1,406) (1,785)
Net cash (used in) provided by
financing activities........... (3,537) 13,658 (3,370) 19,855 (29,949) (954) (1,175)
STORE DATA:
Comparable store net sales
increase(10)................... 5.2% 1.0% 3.7% 0.6% 13.3% 3.9% 18.0%
Number of stores at the end of
period(11)..................... 138 198 226 240 234 235 236
Average net sales per store (in
thousands)(12)................. $ 1,178 $ 1,169 $ 1,111 $ 1,112 $ 1,307
Average gross square footage per
store(13)...................... 4,186 4,409 4,396 4,486 4,528
Average net sales per square
foot(12)(13)................... $ 281 $ 265 $ 253 $ 248 $ 289
</Table>

<Table>
<Caption>
AS OF DECEMBER 31, AS OF AS OF
--------------------------------------------- FEBRUARY 2, MAY 4,
1997 1998 1999 2000 2002(2) 2002
--------- --------- --------- --------- ----------- ---------
(IN THOUSANDS)

BALANCE SHEET DATA:
Cash and cash equivalents................... $ 10,881 $ 14,196 $ 12,946 $ 28,156 $ 29,751 $ 23,111
Working capital(14)......................... 9,332 14,368 11,716 18,717 1,010 8,689
Total assets................................ 49,884 82,474 92,600 113,382 97,050 91,091
Total debt, including mandatorily redeemable
preferred stock (Class C)................. 88,597 106,241 103,466 104,360 75,239 74,250
Common stock warrants....................... 879 -- -- -- 11,315 --
Redeemable convertible preferred stock
(Class A, Class B and Class D)(15)........ 50,591 50,418 55,471 81,909 85,294 86,605
Common stock................................ 210 229 229 229 229 229
Additional paid-in capital.................. 2,293 -- -- -- -- 7,644
Accumulated deficit(16)..................... (104,991) (99,224) (100,218) (108,088) (112,324) (112,181)
</Table>

- ------------------------------

(1) Effective January 1, 2001, we changed our fiscal reporting year from a
calendar year to a 52/53-week basis ending on the Saturday closest to
January 31 resulting in a 34-day stub period as presented. At the beginning
of 2001, we instituted a plan to improve net sales, increase cash flow and
return our stores to higher levels of profitability. The cornerstone of our
plan was a strategy to reduce store-level inventories during January and
February 2001. This strategy necessitated significant markdown activity
that resulted in a reduced gross margin for January and February 2001.
However, markdowns were offset by increased net sales, and, as a result, we
believe our operating loss for the 34-day period ended February 3, 2001 of
$3.0 million was substantially consistent with our operating loss for the
31-day period ended January 31, 2000 of $2.5 million. For the period from
February 1, 2000 through February 3, 2001, our net sales were $266.3
million, our gross profit was $87.9 million and our operating income was
$12.6 million. This approximately 53-week period is derived from our
internal records and was not audited or reviewed by our auditors.

(2) Effective January 1, 2001, we changed our fiscal reporting year from a
calendar year to a 52/53-week basis ending on the Saturday closest to
January 31. Our 2001 fiscal year began on February 4, 2001 and ended on
February 2, 2002.

(3) Cost of sales includes cost of product sold, freight, store occupancy and
central distribution costs.

(4) Reflects non-cash stock compensation charges related to certain stock
options.

(5) Reflects the accretion to the fair value of detachable put warrants to
purchase common stock, issued by us in connection with our issuance of
subordinated debt. The put rights associated with these warrants were
terminated as of January 1, 1998, were restored as of December 31, 1999 and
were terminated again as of February 3, 2002.

(6) Represents the write down of certain costs associated with a withdrawn
equity offering in fiscal 1999 and an unsuccessful refinancing effort in
fiscal 2000.

(7) Reflects the accretion of the Class A Preferred Stock, Class B Preferred
Stock and Class D Preferred Stock to its redemption value and the accrual
of dividends on such preferred stock.

(8) Assumes the following transactions were effected as of February 4, 2001:
(i) the Pre-Offering Transactions, (ii) the termination of the put rights
associated with the put warrants discussed in note (5) above, (iii) the
refinancing of our former senior credit facility with our new senior credit
facility, as discussed in "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Liquidity and Capital
Resources" and (iv) the sale by us of 6,174,000 shares in this offering at
an assumed initial public offering price of $18.00 per share and the
application of the estimated net proceeds from the sale after deducting
estimated offering expenses and underwriting discounts and commissions. Pro
forma as adjusted net income and pro forma as adjusted earnings per common
share exclude (i) the $2.0 million non-cash stock compensation charge
related to the July 2001 grant of an option to a consultant that would
occur upon consummation of this offering, and (ii) the $0.6 million
interest charge that would result from the inducement associated with the
exchange of certain Class C Preferred Stock for common stock as part of the
Pre-Offering Transactions.

(9) The term Adjusted EBITDA as used herein represents operating income before
depreciation and amortization expense and non-cash stock compensation
charges related to certain outstanding stock options. While Adjusted EBITDA
should not be considered in isolation or as a substitute for net income,
cash flow from operations or any other measure of income or cash flow that
is prepared in accordance with generally accepted accounting principles or
as a measure of a company's profitability or liquidity, Adjusted EBITDA has
been presented because we believe it is commonly used in this or a similar
format by

investors to analyze and compare operating performance as well as to
provide additional information with respect to our ability to meet our
future debt service, capital expenditure and working capital requirements.
Adjusted EBITDA may differ in method of calculation from similarly titled
measures used by other companies. This information should be read in
conjunction with our consolidated statements of cash flows contained in our
consolidated financial statements and notes thereto included elsewhere in
this prospectus.

(10) We include new stores in comparable store net sales calculations after the
store has been in operation one full fiscal year. We exclude from
comparable store net sales calculations each store that was expanded,
remodeled or relocated during the applicable period. Each expanded,
remodeled or relocated store is returned to the comparable store base after
it has been excluded from the comparable store base for one full fiscal
year. The comparable store net sales increase for fiscal 2001 reflects the
increase in comparable store net sales for the 52-week period ended
February 2, 2002 compared to the 53-week period ended February 3, 2001. The
comparable store net sales increase for the quarter ended May 4, 2002
reflects the increase in comparable store net sales for the quarter ended
May 4, 2002 compared to the quarter ended May 5, 2001.

(11) Our store count excludes our warehouse outlet store located adjacent to our
central distribution facilities in Jackson, Tennessee.

(12) Calculated using net sales of all stores open at both the beginning and the
end of the period.

(13) Calculated using 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.

(14) Defined as current assets excluding cash and cash equivalents, less current
liabilities excluding current maturities of long-term debt and revolving
line of credit.

(15) As of May 4, 2002, the liquidation value of our Class A, Class B and Class
D Preferred Stock including $28.0 million of accrued dividends, was $89.4
million. The book value of this preferred stock has been adjusted from the
liquidation value in connection with the reduction of the dividend rate on
the Class A Preferred Stock, Class D Preferred Stock and a portion of our
Class B Preferred Stock. See Note 6 of the Notes to our consolidated
financial statements.

(16) In connection with our 1996 recapitalization, distributions of cash and
securities to our pre-recapitalization shareholders were recorded as
reductions in retained earnings, creating an accumulated deficit balance of
$116 million at June 13, 1996. See "Related Party
Transactions - Recapitalization."

MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

A number of the matters and subject areas discussed in "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Business" and elsewhere in this prospectus are not limited to historical or
current facts and deal with potential future circumstances and developments, and
are accordingly "forward-looking statements." You are cautioned that such
forward-looking statements, which may be identified by words such as
"anticipate," "believe," "expect," "estimate," "intend," "plan" and similar
expressions, are only predictions and that actual events or results may differ
materially.

OVERVIEW

We are a leading specialty retailer of home decor in the United States,
operating 236 stores in 28 states. Our stores present a broad selection of
distinctive merchandise, including framed art, mirrors, candles, lamps, picture
frames, accent rugs, garden accessories and artificial floral products. Our
stores also offer an extensive assortment of holiday merchandise, as well as
items carried throughout the year suitable for giving as gifts. As a result of
our emergence as a leader in home decor and our development of a strong customer
franchise, we have achieved substantial growth over the last five fiscal years.
Since the beginning of 1997, our net sales have grown at a compounded annual
growth rate of 19%. For the fiscal year ended February 2, 2002, we recorded net
sales of $307.2 million, Adjusted EBITDA of $35.2 million and net income of $1.8
million. For the fiscal quarter ended May 4, 2002, we recorded net sales of
$66.2 million, Adjusted EBITDA of $5.0 million and net income of $143,000.

Kirkland's was co-founded in 1966 by our current Chairman, Carl Kirkland.
In 1996, we completed a recapitalization through which Advent International
Group (through affiliated entities) became the largest beneficial owner of our
equity. The 1996 recapitalization permitted the then-existing shareholders,
consisting of Carl Kirkland, Robert E. Alderson, our current President and Chief
Executive Officer, and two other shareholders, to realize a portion of the value
of their interest in Kirkland's.

- Completing Key Investments in Information Technology.

- Developing a More Scalable Distribution Infrastructure.

- Strengthening Executive Management.

- Improving Store-Level Operating Performance.

RESULTS OF OPERATIONS

On January 1, 2001, we elected to change our fiscal reporting year from a
calendar year basis to a 52/53-week year ending on the Saturday closest to
January 31. Consequently, the results of operations table and discussion below
compare the 52 weeks ended February 2, 2002 and the twelve months ended

December 31, 2000. The results for the 34-day "stub period" ended February 3,
2001 are included separately in our consolidated financial statements.

In January 2001, we implemented a plan to improve net sales, increase
cash flow and return our stores to higher levels of productivity. The
cornerstone of our plan was a strategy to reduce store-level inventories during
January and February 2001. This strategy necessitated significant markdown
activity that resulted in a reduced gross margin for January and February 2001.
However, markdowns were offset by increased net sales, and, as a result, we
believe our operating loss for the 34-day period ended February 3, 2001 of $3.0
million was substantially consistent with our operating loss for the 31-day
period ended January 31, 2000 of $2.5 million. For the period from February 1,
2000 through February 3, 2001, our net sales were $266.3 million, our gross
profit was $87.9 million and our operating income was $12.6 million. This
approximately 53-week period is derived from our internal records and was not
audited or reviewed by our auditors.

The table below sets forth selected results of our operations expressed
as a percentage of net sales for the periods indicated.

<Table>
<Caption>
FISCAL YEAR ENDED QUARTER ENDED
----------------------------------------- ---------------
DECEMBER 31, DECEMBER 31, FEBRUARY 2, MAY 5, MAY 4,
1999 2000 2002(1) 2001 2002
------------ ------------ ----------- ------ ------

Net sales........................... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales(2).................... 65.1 66.4 65.1 72.3 66.4
----- ----- ----- ----- -----
Gross profit........................ 34.9 33.6 34.9 27.7 33.6
Operating expenses:
Other operating expenses.......... 24.5 26.0 23.4 27.9 26.0
Depreciation and amortization..... 2.5 2.5 2.1 2.5 2.5
Non-cash stock compensation
charge.......................... -- -- 0.4 -- 1.2
----- ----- ----- ----- -----
Operating income.................... 7.9 5.1 9.0 (2.7) 3.9
Interest expense:
Senior, subordinated and other
notes payable................... 4.3 4.3 3.2 4.7 2.2
Class C Preferred Stock........... 0.7 0.7 0.7 0.9 0.8
Amortization of debt issue
costs........................... 0.6 0.5 0.4 0.4 0.6
Accretion of common stock
warrants........................ -- 3.7 -- --
Interest income..................... (0.0) (0.0) (0.1) -- (0.1)
Offering and financing costs(3)..... 0.4 0.3 -- -- --
Other expense (income), net......... (0.1) (0.0) (0.0) (0.0) 0.0
----- ----- ----- ----- -----
Income (loss) before income taxes... 2.0 (0.7) 1.1 (8.7) 0.4
Income tax provision (benefit)...... 0.3 (0.2) 0.5 (3.8) 0.2
----- ----- ----- ----- -----
Net income (loss)................... 1.7% (0.5)% 0.6% (4.9) 0.2
===== ===== ===== ===== =====
</Table>

- ------------------------------

(1) Effective January 1, 2001, we changed our fiscal year from a calendar year
basis to a 52/53-week year ending on the Saturday closest to January 31.
Accordingly, the fiscal year ended February 2, 2002 encompasses the 52-week
period beginning on February 4, 2001 and ending on February 2, 2002.

(2) Cost of sales includes cost of product sold, freight, store occupancy and
central distribution costs.

(3) During the year ended December 31, 2000, we recorded an impairment of
deferred financing costs that were connected with a refinancing effort that
was not consummated. Additionally, during the year ended December 31, 1999,
we indefinitely postponed plans for an initial public offering that resulted
in the impairment of previously deferred offering costs.

FISCAL QUARTER ENDED MAY 4, 2002 COMPARED TO FISCAL QUARTER ENDED MAY 5, 2001

Net Sales. Net sales increased by 18.3% to $66.2 million for the first
quarter of fiscal 2002 from $56.0 million for the first quarter of fiscal 2001.
The net sales increase for the quarter was primarily the result of an increase
in comparable store net sales of 18.0%. Also, the addition of two new stores
during the first quarter combined with the impact of the five new stores added
during fiscal 2001 offset by the closure of 11 stores since the end of fiscal
2000 contributed to the overall sales increase. The increase in comparable store
net sales accounted for approximately $9.6 million of the total net sales
increase, or 94.1%, and the net changes in the store base accounted for
approximately $0.6 million, or 5.9%, of the total net sales increase. Our first
quarter net sales performance resulted from an improved inventory position and
fresher merchandise mix as compared to the prior year period. The increase in
comparable store net sales was primarily the result of increased average retail
unit prices as compared to the prior year quarter. Additionally, but to a lesser
extent, we experienced increases in unit volume and customer traffic in
comparison to the prior period.

Gross Profit. Gross profit, defined as net sales less the cost of sales
including cost of product sold, freight, store occupancy and central
distribution costs, increased $6.7 million, or 43.2%, to $22.2 million for the
quarter from $15.5 million for the prior year period. Gross profit expressed as
a percentage of net sales increased to 33.6% for the quarter from 27.7% for the
prior year period. The increase in gross profit as a percentage of net sales was
largely the result of lower product cost of net sales, including freight
expenses, as a percentage of net sales. This decline in product cost of sales
was the result of the fresher merchandise mix during the quarter in comparison
to the prior year period during which significant markdowns were taken in order
to reduce inventory levels. The leveraging of store occupancy and central
distribution costs through higher net sales also contributed to the improvement
in gross profit percentage.

Other Operating Expenses. Other operating expenses, including both store
and corporate costs, were $17.2 million, or 26.0% of net sales, for the quarter
as compared to $15.7 million, or 27.9% of net sales, for the prior year period.
The decline in these operating expenses as a percentage of net sales was
primarily the result of strong net sales that leveraged the fixed component of
operating expenses. Additionally, we have continued to control expenses
associated with our stores' use of local storage facilities and related truck
rentals. During the quarter, we were able to save $0.4 million in these areas as
compared to the prior year period.

Non-Cash Stock Compensation Charge. During the quarter, we incurred
non-cash stock compensation charges related to certain outstanding stock options
of $0.8 million, or 1.2% of net sales. No such charge was incurred in the prior
year period.

Depreciation and Amortization. Depreciation and amortization expense was
$1.7 million, or 2.5% of net sales, for the quarter as compared to $1.4 million,
or 2.5% of net sales, for the prior year period. The dollar increase was due
primarily to capital investments in information technology made during fiscal
2001, including the implementation of a new merchandise management system in
April 2001.

Interest Expense. Interest expense on senior, subordinated and other
notes payable was $1.5 million, or 2.2% of net sales, for the quarter as
compared to $2.6 million, or 4.7% of net sales, for the prior year period. The
decrease was the result of improved operating cash flow which resulted in lower
average debt balances during the quarter combined with lower interest rates as
compared to the prior year. Interest expense associated with mandatorily
redeemable Class C Preferred Stock was $0.5 million, or 0.8% of net sales, for
the quarter as compared to $0.5 million, or 0.9% of net sales, for the prior
year period. Interest expense related to the amortization of debt issue costs
was $0.4 million, or 0.6% of net sales, for the quarter as compared to $0.3
million, or 0.4% of net sales, for the prior year period.

Income Taxes. Income tax expense was $100,000, or 41.0% of pre-tax
income, for the quarter as compared to a benefit of $2.1 million, or 43.7% of
pre-tax loss, for the prior year period.

Net Income. As a result of the foregoing, net income was $143,000, or
0.2% of net sales, for the quarter compared to a net loss of $2.7 million, or
(4.9)% of net sales, for the prior year period.

FISCAL YEAR ENDED FEBRUARY 2, 2002 COMPARED TO FISCAL YEAR ENDED DECEMBER 31,
2000

Net Sales. Net sales increased by 18.5% to $307.2 million for fiscal
2001 from $259.2 million for fiscal 2000. The net sales increase in fiscal 2001
resulted primarily from an increase in comparable store net sales. Also, the
addition of five new stores in fiscal 2001 and the full year impact of the 17
new stores added in fiscal 2000 offset by the closure of 11 stores after fiscal
2000 and three stores in fiscal 2000 contributed to the overall net sales
increase. The increase in comparable store net sales accounted for approximately
$37.2 million of the total net sales increase, or 77.5%, and the net increase in
the store base over the last two fiscal years accounted for approximately $10.8
million, or 22.5%, of the total net sales increase. One of our key operating
initiatives during 2001 was a concerted effort to reduce inventory levels and
SKU counts to offer a better, sharper array of merchandise without changing the
core categories of merchandise that we offer. Much of this inventory reduction
was accomplished from January through April 2001 through markdowns and
promotional activities. As a result of this effort, merchandise flow improved
during the balance of the year, allowing our customers to experience a steady
flow of fresh product. In addition, the installation of a fully integrated
retail information management system at our home office in April 2001
significantly increased our ability to maintain a fresh merchandise mix and
appropriate inventory levels in our stores. The comparable store net sales
increase was primarily the result of increased unit sales and customer traffic,
although we did experience favorable trends in our average retail price per item
sold.

Gross Profit. Gross profit increased $20.1 million, or 23.1%, to $107.1
million for fiscal 2001 from $87.0 million for fiscal 2000. Gross profit
expressed as a percentage of net sales increased to 34.9% for fiscal 2001, from
33.6% for fiscal 2000. The increase in gross profit as a percentage of net sales
resulted primarily from the leveraging of store occupancy costs through higher
net sales. Additionally, as a result of our aggressive inventory reduction in
the first quarter of fiscal 2001, product cost of sales, including freight
expenses, declined as a percentage of net sales particularly in the second half
of fiscal 2001, due to the strong sell-through and fresher merchandise mix.
These factors were partially offset by an increase in central distribution costs
as a percentage of net sales as we leased additional distribution center space
and increased staffing levels during fiscal 2001.

Other Operating Expenses. Other operating expenses, including both store
and corporate costs, were $72.0 million, or 23.4% of net sales, for fiscal 2001
as compared to $67.4 million, or 26.0% of net sales, for fiscal 2000. The
decline in these operating expenses as a percentage of net sales was primarily
the result of strong net sales that leveraged the fixed component of operating
expenses. The percentage decrease in operating expenses also benefited from
several expense control initiatives at the store and corporate levels. Two of
the most significant initiatives were directly related to our fiscal 2001 plan
to improve store-level operating performance. First, we initiated a concerted
effort to restrain growth in store payroll expense. By operating stores with
lower inventory levels and improving merchandise distribution and allocation, we
were able to reduce store payroll expense to 12.2% of net sales for fiscal 2001
as compared to 13.6% of net sales for fiscal 2000. This improvement is partially
the result of our completion of a planned reduction in the number of store
assistant manager positions. Second, we were able to save over $1 million by
reducing our stores' use of local storage facilities and related truck rentals.
During fiscal 2002, we will seek to further reduce the costs associated with
these local storage facilities as we continue to increase the volume of our
centrally distributed merchandise.

Non-Cash Stock Compensation Charge. In fiscal 2001, we incurred a
non-cash stock compensation charge related to certain outstanding stock options
of $1.2 million, or 0.4% of net sales. No such charge was incurred in fiscal
2000. See Note 8 of the notes to our consolidated financial statements.

Depreciation and Amortization. Depreciation and amortization expense was
$6.4 million, or 2.1% of net sales, for fiscal 2001 as compared to $6.5 million,
or 2.5% of net sales, for fiscal 2000. The decline as a percentage of net sales
was the result of the strong sales performance as well as a decline in capital
expenditures over the last two fiscal years in relation to previous fiscal
years.

Interest Expense. Interest expense on senior, subordinated and other
notes payable was $9.8 million, or 3.2% of net sales, for fiscal 2001 as
compared to $11.2 million, or 4.3% of net sales, for fiscal 2000. The decrease
was the result of significantly improved operating cash flow which led to lower
average debt balances

in fiscal 2001 in comparison to fiscal 2000 combined with lower interest rates.
Interest expense associated with the mandatorily redeemable Class C Preferred
Stock was $2.0 million, or 0.7% of net sales, for fiscal 2001 as compared to
$1.9 million, or 0.7% of net sales, for fiscal 2000. Amortization of debt issue
costs was $1.3 million, or 0.4% of net sales, for fiscal 2001 as compared to
$1.3 million, or 0.5% of net sales, for fiscal 2000. The accretion of common
stock warrants of $11.3 million, or 3.7% of net sales, reflects the accretion to
fair value of detachable put warrants issued by us in connection with our
issuance of subordinated debt in 1996. No such charge was recorded in fiscal
2000.

Income Taxes. Income tax expense was $1.8 million, or 50.0% of pre-tax
income, for fiscal 2001 as compared to a benefit of $0.6 million, or 30.3% of
pre-tax loss, for fiscal 2000. The increase in the effective tax rate for fiscal
2001 is primarily the result of non-deductible compensation charges associated
with certain employee stock options.

Net Income. As a result of the foregoing, net income was $1.8 million,
or 0.6% of net sales, for fiscal 2001 compared to a net loss of $1.3 million, or
0.5% of net sales for fiscal 2000.

FISCAL YEAR ENDED DECEMBER 31, 2000 COMPARED TO FISCAL YEAR ENDED DECEMBER 31,
1999

Net Sales. Net sales increased by 9.6% to $259.2 million for fiscal 2000
from $236.6 million for fiscal 1999. The net sales increase in fiscal 2000
resulted primarily from the addition of 17 new stores in fiscal 2000 and the
full year impact of the 29 new stores added in fiscal 1999 offset by the closure
of three stores in fiscal 2000 and one store in fiscal 1999. Comparable store
net sales increased 0.6% in fiscal 2000. The increase in comparable store net
sales accounted for $1.1 million, or 4.9%, of the increase in net sales and the
net increase in the number of stores over the last two fiscal years accounted
for $21.5 million, or 95.1% of the increase. During the first two quarters of
fiscal 2000, comparable store net sales increased 7.7% due to successful
promotions in select categories. Comparable store net sales decreased 3.9% for
the last two quarters of fiscal 2000 and were down 5.4% in the fourth quarter of
fiscal 2000. We believe that many factors contributed to the weak second half
net sales performance including supply chain inefficiencies, an overall
lackluster retail holiday season and a build-up of inventory at the store level
as holiday sales did not materialize.

Gross Profit. Gross profit increased $4.5 million, or 5.5%, to $87.0
million for fiscal 2000 from $82.5 million for fiscal 1999. Gross profit
expressed as a percentage of net sales decreased to 33.6% for fiscal 2000, from
34.9% for fiscal 1999. The decline in gross profit as a percentage of net sales
was primarily the result of increases in store occupancy and central
distribution costs outpacing the relatively small comparable store net sales
growth experienced in fiscal 2000. Expense increases in central distribution
resulting from additional throughput volume contributed to the decline in gross
profit as a percentage of net sales. Additionally, product cost of sales,
including freight expenses, increased as a percentage of net sales due to fourth
quarter markdowns taken in an effort to generate sales momentum.

Operating Expenses. Operating expenses were $67.4 million, or 26.0% of
net sales, for fiscal 2000 as compared to $57.9 million, or 24.5% of net sales,
for fiscal 1999. The increase as a percentage of net sales was primarily the
result of increases in store payroll and occupancy costs outpacing the modest
increase in comparable store net sales. Store payroll expense increased to 13.6%
of net sales for fiscal 2000 as compared to 12.8% of net sales for fiscal 1999.
The increase in store payroll expense was primarily the result of an increase in
the average compensation for store managers along with an increase in the
average hourly wage. We also experienced increases in certain corporate
operating expenses, including payroll expense in information technology and
store operations management.

Depreciation and Amortization. Depreciation and amortization expense was
$6.5 million, or 2.5% of net sales, for fiscal 2000 as compared to $6.0 million,
or 2.5% of net sales, for fiscal 1999. The dollar increase in depreciation
expense was the result of relatively high capital expenditures in the years
prior to fiscal 2000.

Interest Expense. Interest expense on senior, subordinated and other
notes payable was $11.2 million, or 4.3% of net sales, for fiscal 2000 as
compared to $10.2 million, or 4.3% of net sales, for fiscal 1999. The increase
was the result of higher average debt balances in comparison to the prior year

combined with higher interest rates. Interest expense associated with the
mandatorily redeemable Class C Preferred Stock was $1.9 million, or 0.7% of net
sales, for fiscal 2000 as compared to $1.6 million, or 0.7% of net sales, for
fiscal 1999. Amortization of debt issue costs was $1.3 million, or 0.5% of net
sales, for fiscal 2000 as compared to $1.3 million, or 0.6% of net sales, for
fiscal 1999.

Income Taxes. For fiscal 2000, we recorded an income tax benefit in the
amount of $0.6 million, or 30.3% of pre-tax loss, as compared to an expense of
$0.8 million, or 16.6% of pre-tax income, for fiscal 1999. In fiscal 1999, we
received a tax benefit from surtax exemptions that lowered the statutory rate by
21.2% of pre-tax income. As a result of our December 31, 1999 reorganization
(see "Certain Transactions - Reorganization"), this benefit was not available to
us in fiscal 2000, nor will it be available to us in the future due to our
consolidated corporate structure.

Net Income. As a result of the foregoing, we recorded a net loss of $1.3
million, or 0.5%, of net sales for fiscal 2000, as compared to net income of
$4.1 million or 1.7% of net sales for fiscal 1999.

LIQUIDITY AND CAPITAL RESOURCES

Most of our capital requirements relate to new store openings, existing
store expansions, remodelings or relocations, seasonal working capital and
payment of interest on our outstanding indebtedness. Our working capital
requirements are primarily for merchandise inventories, which typically reach
their peak by the end of the third quarter of each fiscal year. Historically, we
have funded our store openings, expansions, remodelings and relocations and met
our working capital requirements from internally generated funds, borrowings
under our credit facilities and proceeds from the sale of equity securities.

During fiscal 1999, 2000 and 2001, net cash provided by operating
activities was $12.9 million, $1.3 million and $37.5 million, respectively.
During the quarter ended May 4, 2002, net cash of $3.7 million was used in
operating activities. All of our revenues are realized at the point-of-sale in
our stores. Thus, our net sales are essentially on a cash basis. The cash flow
from operating our stores is a significant source of liquidity. This operating
cash flow is used primarily to purchase inventory, make interest payments on our
indebtedness and pay income taxes.

During fiscal 1999, 2000 and 2001 and the quarter ended May 4, 2002, net
cash used in investing activities was $10.8 million, $6.0 million, $4.7 million
and $1.8 million, respectively. We use cash in investing activities to build new
stores and expand, remodel or relocate existing stores. Furthermore, net cash
used in investing activities includes purchases of information technology assets
and equipment for our distribution facilities and corporate headquarters. During
fiscal 1999, 2000 and 2001 and the quarter ended May 4, 2002, we opened 29, 17,
five and two new stores, respectively, and expanded or remodeled 14, four, two
and two stores, respectively.

We expect to open approximately 15 new stores during fiscal 2002, two of
which were opened prior to the date of this prospectus. Capital expenditures,
including leasehold improvements and furniture and fixtures, for the five new
stores opened during fiscal 2001 averaged approximately $148,000 (net of
landlord allowances), and initial gross inventory requirements (which were
partially financed by trade credit) averaged approximately $142,000 per store.
Opening inventory requirements at new stores vary significantly depending upon
the time of year when the store is opened, expected sales volume and store size.
We also intend to expand or remodel four stores in fiscal 2002 and perform minor
refurbishments on several other stores. The cost of remodeling two stores in
fiscal 2001 was approximately $153,000 per store.

Our total planned capital expenditures for fiscal 2002 are $8.5 million.
In addition to providing for new stores, together with expanded, relocated and
remodeled stores, these planned capital expenditures include $0.6 million for
equipment in our distribution facilities and $2.4 million for various
investments in information technology assets.

Our principal indebtedness during the past three fiscal years consisted
of (i) our former senior credit facility, which included a term loan of $57
million and a $20 million revolver, (ii) $20 million of senior subordinated
notes due in June 2003, (iii) a $5 million subordinated note payable to our
Chairman

and (iv) our mandatorily redeemable Class C Preferred Stock, with a stated value
of $17.1 million as of February 2, 2002, originally issued in connection with
our 1996 recapitalization. See "Related Party Transactions - Recapitalization."

During fiscal 1999, cash of $3.4 million was used in financing
activities. During fiscal 1999, we made $5.8 million of principal payments on
our long-term debt and repaid $7 million under our revolving line of credit. In
addition, in July 1999 we borrowed an additional $7.5 million, including $3.4
million from certain of our shareholders and $4.1 million from our former senior
lenders. The $4.1 million was collateralized with cash and letters of credit
supplied by certain of our warrantholders and shareholders. Our securityholders
who participated in this loan financing received warrants to purchase 871,311
shares of our common stock as consideration. During fiscal 1999 we also incurred
$2.5 million in additional long-term borrowings.

In fiscal 2000, financing activities contributed cash of $19.9 million.
During fiscal 2000, we drew $20.0 million under our former revolving line of
credit and received $7.4 million of net proceeds (net of $0.1 million of
transaction expenses) from an equity investment by certain of our warrantholders
and shareholders. We also repaid the $5 million note due to our Chairman through
his conversion of the principal portion of the loan into additional equity. In
addition, the $7.5 million of borrowings from July 1999 was repaid as our
lenders drew on the $4.1 million of cash collateral posted by certain
warrantholders and shareholders, in consideration of which we issued additional
equity to these securityholders, and other shareholders converted $3.4 million
of these borrowings into additional equity. See "Related Party
Transactions - 2000 Equity Transaction."

In fiscal 2001, $29.9 million was used in financing activities. In fiscal
2001, the principal uses of cash in financing activities were repayments on our
former senior credit facility consisting of $20.0 million on the line of credit
and $9.2 million on the term loan principal. See "Related Party Transactions"
for a description of various financing transactions from 1996 through 2000
involving related parties.

Due to our failure to comply with three financial covenants in our old
principal credit agreement during fiscal 2000, namely the total debt to EBITDA
ratio, the interest coverage ratio and the fixed charge coverage ratio, our
former senior lenders prevented us from continuing to pay current cash interest
to our subordinated lenders. During the third quarter of 2000, our former senior
lenders notified us that they had transferred our credit facility to their
"special assets" or workout division. We subsequently entered into negotiations
with our former senior lenders and our existing subordinated lenders to amend
our agreements with those respective lenders. Pursuant to these negotiations, in
June 2001 we entered into amended credit agreements with these lenders and these
lenders waived the events of default under their respective facilities. With
respect to the former senior credit facility, the maturity date remained June
30, 2002 and the covenants were made less restrictive and we were permitted to
pay a portion, but not all, of the accrued interest under our subordinated loan
agreement. With respect to the subordinated loan agreement, the maturity date
remained June 30, 2003 and the interest rate was increased from 12.5% to 15%
effective January 1, 2001 and 15.5% effective January 1, 2002 until such time as
all accrued interest was paid. We also reduced the dividend rate on our Class A
and Class D Preferred Stock and most of our Class B Preferred Stock from 10% to
4% until all accrued interest on the subordinated loan was paid. Between June
2001 and the termination of our former senior credit facility, we complied with
all covenants in our former senior credit agreement and subordinated loan
agreement. We repaid all indebtedness under our former senior credit facility in
May 2002 with proceeds from our new senior credit facility. At that time we paid
all accrued interest on our subordinated loan agreement, as a result of which
the rate of interest on the subordinated loan agreement was restored to 12.5%
and the dividend rate on the classes of our preferred stock that had been
reduced was restored to 10%. We are currently in compliance with our senior and
subordinated lending agreements.

In May 2002, we entered into a new, three-year senior secured credit
facility that includes a $45 million revolving credit facility ($30 million for
the first six months of each calendar year) and a $15 million term loan. The
revolving credit facility bears interest at a floating rate equal to the prime
rate or LIBOR plus 2.25%, at our election. Borrowings under the new revolving
credit facility are subject to

certain customary conditions. The new senior credit facility contains certain
customary events of default, including a material adverse change in our
business, our failure to pay principal and/or interest under the new senior
credit facility, our failure to comply with certain covenants under the new
senior credit facility or under our other financing agreements (subject to
applicable cure periods) our making any false or misleading representation or
warranty to our lenders, bankruptcy or insolvency events with respect to us or
our subsidiaries, final judgments against us or our subsidiaries in an amount
exceeding $500,000 in the aggregate which are not paid or discharged within 30
days after being entered, our failure to redeem our preferred stock as part of
this offering, any event of default under any of our financing agreements,
equity documents or subordinated debt documents and our loss of agreements with
major credit card companies. The term loan bears interest at the prime rate plus
7.25%. Borrowings under our new senior credit facility are collateralized by
substantially all of our assets and real estate and guaranteed by all of our
subsidiaries. The maximum availability under the revolving credit facility is
limited by a borrowing base which consists of a percentage of eligible inventory
less reserves. Our new lender may from time to time reduce the lending formula
with respect to the eligible inventory to the extent our lender determines that
the liquidation value of the eligible inventory has decreased. Our lender also
from time to time may decrease the borrowing base by adding reserves with
respect to matters such as inventory shrinkage. The revolving credit facility
terminates in May 2005. The term loan must be repaid in twelve consecutive
quarterly installments payable in the last day of each calendar quarter
commencing June 30, 2002, each installment to be in the amount of $562,500, with
the entire unpaid balance of the term loan due on the last day of the term. We
used the proceeds of the term loan, together with a total of approximately $33.6
million of a combination of available cash and borrowings under the revolving
credit facility, (1) to repay all indebtedness (including accrued interest
outstanding) outstanding under our former senior secured credit facility under
which $38.3 million was outstanding at May 4, 2002, (2) to pay all accrued and
unpaid interest on our subordinated debt, of which there was $4.7 million as of
May 4, 2002 and (3) to pay $5.7 million of accrued interest on the Class C
Preferred Stock, of which there was $7.7 million accrued and unpaid as of May 4,
2002. As a result, the interest rate on the subordinated notes was reduced from
15.5% to 12.5% and the dividend rate on the Class A, Class B and Class D
Preferred Stock was increased from 4% to 10%. As of June 20, 2002, $14.0 million
was outstanding under the revolving credit facility and $6.8 million was
available for borrowing.

We issued Class A Preferred Stock, Class B Preferred Stock and Class C
Preferred Stock in June 1996 and December 1999 and Class D Preferred Stock in
August 2000. As of May 4, 2002, the liquidation value, including accrued
dividends, on our Class A Preferred Stock, Class B Preferred Stock and Class D
Preferred Stock was $49.4 million, $17.4 million and $22.6 million,
respectively. Dividends accrue at an annual rate of 10% for the Class A
Preferred Stock, Class B Preferred Stock and the Class D Preferred Stock.
Dividends on the Class A Preferred Stock, Class B Preferred Stock and Class D
Preferred Stock have accrued and have not been paid. The Class A Preferred
Stock, Class B Preferred Stock and Class D Preferred Stock are redeemable at our
option after the earliest to occur of June 12, 2004 or the closing of a
liquidity event (which includes this offering). The Class A Preferred Stock,
Class B Preferred Stock and Class D Preferred Stock are redeemable at the option
of the holders after June 12, 2004. At the option of 60% of the holders, all of
the outstanding Class A Preferred Stock, Class B Preferred Stock and Class D
Preferred Stock, other than any shares being redeemed at our option, will
automatically convert into common stock upon the occurrence of this offering at
a rate equal to the liquidation value of the preferred stock plus accrued
dividends, divided by the initial public offering price. The Class C Preferred
Stock is mandatorily redeemable at the earliest to occur of June 12, 2004 or the
closing of a liquidity event (including this offering). The Class C Preferred
Stock has no conversion privileges. The liquidation value of the Class C
Preferred Stock, including accrued amounts classified as interest, was $24.8
million at May 4, 2002. Amounts classified as interest associated with the Class
C Preferred Stock accrue at 9% annually on the outstanding balance of the Class
C Preferred Stock, compounded semi-annually. The payments representing such
accruals after 1997 had not been made as a result of subordination provisions
under our former senior credit facility. In May 2002, in connection with the
refinancing of our former senior credit facility, $5.7 million of the unpaid
accruals were paid to the holders of the Class C Preferred Stock.

The following table summarizes our material contractual obligations,
including both on- and off-balance sheet arrangements in effect at February 2,
2002, except for long-term borrowings which have been reported and classified in
accordance with the terms of our new senior credit facility that closed in May
2002, and as adjusted to give effect to the sale by us of 6,174,000 shares of
common stock in this offering at an assumed initial public offering price of
$18.00 per share and the application of the net proceeds from the sale (after
deducting estimated offering expenses and underwriting discounts and
commissions):

<Table>
<Caption>
CONTRACTUAL OBLIGATIONS FISCAL 2002 FISCAL 2003 FISCAL 2004 THEREAFTER TOTAL AS ADJUSTED
- ----------------------- ----------- ----------- ----------- ---------- ------ -----------
(IN MILLIONS)

Lease financing:
Operating lease obligations (store
leases)......................... $21.7 $20.2 $ 19.6 $66.1 $127.6 $127.6
Operating lease obligations
(other)......................... 0.7 0.4 0.2 -- 1.3 1.3
Employment and consulting
contracts(a)...................... 0.7 2.4 0.7 1.0 4.8 4.8
Long-term borrowings:
Senior credit facility(b)......... 1.1 2.2 2.2 9.5 15.0 15.0
Subordinated debt(c).............. -- 23.8 -- -- 23.8 --
Class C preferred stock(c)........ -- -- 18.6 -- 18.6 --
Redeemable convertible preferred
stock:
Class D preferred stock(d)........ -- -- 22.4 -- 22.4 --
Class A preferred stock(d)........ -- -- 48.9 -- 48.9 --
Class B preferred stock(d)........ -- -- 17.2 -- 17.2 --
----- ----- ------ ----- ------ ------
Total obligations............. $24.2 $49.0 $129.8 $76.6 $279.6 $148.7
===== ===== ====== ===== ====== ======
</Table>

- ------------------------------

(a) Includes employment agreements with members of our senior management team
entered into in June 2002.

(b) This refers to our new senior credit facility entered into in May 2002
(excludes $39.5 million which was outstanding under our former senior credit
facility as of February 2, 2002).

(c) Gives effect to the repayment of accrued and unpaid interest in May 2002
with the proceeds of our new senior credit facility.

(d) Represents liquidation value of preferred stock, including accrued and
unpaid dividends.

Our new senior credit facility and existing subordinated loan agreements
contain provisions that could result in changes in the presented terms of the
agreements or the acceleration of maturity. Circumstances that could lead to
such changes in terms or acceleration include, but are not limited to, a
material adverse change in our business or an event of default under the
applicable loan agreement. The new senior credit facility has two financial
covenants. One covenant requires us to maintain EBITDA, net of capital
expenditures, at levels varying between $26.7 million and $17.2 million each
fiscal quarter based upon our projections taking into account the seasonality of
our business. The other financial covenant requires us to keep our senior debt
within a specified ratio of our EBITDA ranging from 1.0:1.0 to 1.8:1.0 each
fiscal quarter based upon our projections taking into account the seasonality of
our business and our anticipated utilization of the revolving credit facility.
The subordinated loan agreement contains certain customary events of default,
similar to those in the new senior credit facility. The amended subordinated
loan agreement includes the same financial covenants as the new senior credit
facility, but requires less restrictive levels of measurement. Any failure to
comply with these or other covenants would allow the lenders to accelerate
repayment of their debt, prohibit further borrowing under the revolving portion
of the new senior credit facility, declare an event of default, take possession
of their collateral or take other actions available to the senior and
subordinated lenders. As of May 4, 2002, we were in compliance with all
covenants under our senior and subordinated credit facilities.

We believe that net cash provided by operations and availability under
our new senior credit facility, together with the anticipated proceeds from this
offering, will be adequate to carry out our fiscal 2002 growth plans in full and
fund our planned capital expenditures, interest payments and working capital

requirements for at least the next 12 months. To the extent we seek to
accelerate our growth plans, and with respect to periods beyond fiscal 2002, we
may need to raise additional capital either through the issuance of debt or
equity securities or through additional credit facilities. We cannot assure you
that such capital would be available on acceptable terms or at all.

NON-CASH CHARGES IN PERIODS AFTER THIS OFFERING IS COMPLETED

We will incur the following non-cash charges in the following periods
after this offering is completed (assuming an initial public offering price of
$18.00 per share):

- A $2.0 million non-cash stock compensation charge related to the July
2001 grant of an option to a consultant to purchase shares of common
stock. This charge will be recognized in the second quarter of fiscal
2002;

- A $0.6 million charge to interest expense in connection with the
inducement associated with the exchange of certain Class C Preferred
Stock for common stock as part of the Pre-Offering Transactions. This
charge will be recognized in the second quarter of fiscal 2002; and

- A $0.7 million non-cash stock compensation charge related to the
November 2001 grant of stock options to certain of our management
employees. This charge is being recognized at the rate of $70,000 per
quarter through the third quarter of fiscal 2004.

SEASONALITY AND QUARTERLY FLUCTUATIONS

We have historically experienced and expect to continue to experience
substantial seasonal fluctuations in our net sales and operating income. We
believe this is the general pattern typical of our segment of the retail
industry and, as a result, expect that this pattern will continue in the future.
Our quarterly results of operations may also fluctuate significantly as a result
of a variety of other factors, including the timing of new store openings, net
sales contributed by new stores, shifts in the timing of certain holidays and
competition. Consequently, comparisons between quarters are not necessarily
meaningful and the results for any quarter are not necessarily indicative of
future results.

Our strongest sales period is the winter holiday season. We generally
realize a disproportionate amount of our net sales and a substantial majority of
our operating and net income during the fourth quarter of our fiscal year. In
anticipation of the increased sales activity during the fourth quarter of our
fiscal year, we purchase large amounts of inventory and hire temporary staffing
help for our stores. Our operating performance could suffer if net sales were
below seasonal norms during the fourth quarter of our fiscal year. Our net
sales, operating income and net income are typically weakest in the first
quarter of our fiscal year. We expect this trend to continue.

The following table sets forth certain unaudited financial and operating
data for Kirkland's in each fiscal quarter during fiscal 2000 and fiscal 2001.
The unaudited quarterly information includes all normal recurring adjustments
that we consider necessary for a fair presentation of the information shown.

<Table>
<Caption>
FISCAL QUARTER ENDED(1)
--------------------------------------------------------------------------------------------
MAR. 31, JUNE 30, SEP. 30, DEC. 31, MAY 5, AUG. 4, NOV. 3, FEB. 2, MAY 4,
2000 2000 2000 2000 2001 2001 2001 2002 2002
-------- -------- -------- -------- ------- ------- ------- -------- -------
(IN THOUSANDS, EXCEPT STORE AND PERCENTAGE DATA)

Net sales................. $ 50,094 $53,869 $55,291 $99,986 $55,961 $63,614 $66,822 $120,816 66,184
Gross profit.............. 14,949 16,475 16,560 39,030 15,514 20,545 22,093 48,998 22,208
Operating income (loss)... (2,682) (835) (1,299) 17,886 (1,512) 2,572 2,941 23,566 2,581
Net income (loss)......... (3,560) (2,796) (3,020) 8,061 (2,725) (732) (1,040) 6,280 143
Income (loss) per common
share
Basic................... $ (0.97) $ (0.83) $ (0.73) $ 0.81 $ (0.62) $ (0.34) $ (0.26) $ 0.60 $ (0.16)
Diluted................. $ (0.97) $ (0.83) $ (0.73) $ 0.81 $ (0.62) $ (0.34) $ (0.26) $ 0.56 $ (0.16)
Adjusted EBITDA(2)........ (1,051) 796 372 19,475 (140) 4,295 4,764 26,238 5,044
Net cash from operating
activities.............. (23,239) (3,556) (4,956) 33,087 (11,834) 3,146 1,869 44,329 (3,680)
Net cash (used in)
investing activities.... (1,596) (1,411) (1,107) (1,867) (1,406) (772) (709) (1,837) (1,785)
Net cash (used in)
provided by financing
activities.............. 18,969 (1,066) 5,880 (3,928) (954) (7,986) 1,969 (22,978) (1,175)
Stores open at end of
period.................. 226 231 233 240 235 233 234 234 236
Comparable store net sales
increase
(decrease)(3)........... 6.4% 9.0% (1.1)% (5.4)% 3.9% 11.9% 22.9% 13.9% 18.0%
</Table>

<Table>
<Caption>
FISCAL QUARTER ENDED(1)
-----------------------------------------------------------------------------------------
MAR. 31, JUNE 30, SEP. 30, DEC. 31, MAY 5, AUG. 4, NOV. 3, FEB. 2, MAY 4,
2000 2000 2000 2000 2001 2001 2001 2002 2002
-------- -------- -------- -------- ------ ------- ------- ------- ------

As a percentage of net sales:
Net sales......................... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Gross profit...................... 29.8 30.6 30.0 39.0 27.7 32.3 33.1 40.6 33.6
Operating income (loss)........... (5.3) (1.6) (2.3) 17.9 (2.7) 4.0 4.4 19.5 3.9
Net income (loss)................. (7.1) (5.2) (5.5) 8.1 (4.9) (1.2) (1.6) 5.2 0.2
</Table>

- ------------------------------

(1) Effective January 1, 2001, we changed our fiscal reporting year to a 52-53
week basis ending on the Saturday closest to January 31. Previously, we had
reported our results on a calendar year basis. Consequently, the quarterly
data for fiscal 2000 were prepared according to the calendar year. The
quarterly results for fiscal 2001 were prepared using the 52-53 week basis.
The financial and operating data for the 34-day period ended February 3,
2001 is not presented as this period is not included in any of our fiscal
quarters.

(2) The term Adjusted EBITDA as used herein represents operating income before
depreciation and amortization expense and non-cash stock compensation
charges related to certain outstanding stock options. While Adjusted EBITDA
should not be considered in isolation or as a substitute for net income,
cash flow from operations or any other measure of income or cash flow that
is prepared in accordance with generally accepted accounting principles or
as a measure of a company's profitability or liquidity, Adjusted EBITDA has
been presented because we believe it is commonly used in this or a similar
format by investors to analyze and compare operating performance as well as
to provide additional information with respect to our ability to meet our
future debt service, capital expenditure and working capital requirements.
Adjusted EBITDA may differ in method of calculation from similarly titled
measures used by other companies. This information should be read in
conjunction with our consolidated statement of cash flows contained in our
consolidated financial statements and notes thereto included elsewhere in
this prospectus.

(3) We include new stores in comparable store net sales calculations after the
store has been in operation one full fiscal year. We exclude from comparable
store net sales calculations each store that was expanded, remodeled or
relocated during the applicable period. Each expanded, remodeled or
relocated store is returned to the comparable store base after it has been
excluded from the comparable store base for one full fiscal year. The
comparable store net sales calculations for the fiscal 2001 quarters and the
quarter ended May 4, 2002 reflect the results of comparing our net sales for
each such quarter to the corresponding quarter in the prior year, where the
prior year quarters are measured on a 4-5-4-week basis.

INFLATION

We do not believe that our operating results have been materially
affected by inflation during the preceding three fiscal years. There can be no
assurance, however, that our operating results will not be adversely affected by
inflation in the future.

CRITICAL ACCOUNTING POLICIES

Our critical accounting policies are discussed in the notes to our
consolidated financial statements. Certain judgments and estimates utilized in
implementing these accounting policies are likewise discussed in each of the
notes to our consolidated financial statements. The following discussion
aggregates the various critical accounting policies addressed throughout the
financial statements, the judgments and uncertainties affecting the application
of these policies and the likelihood that materially different amounts would be
reported under varying conditions and assumptions.

Revenue Recognition - Net sales and the related gross profit are recorded
at the time our customers provide a satisfactory form of payment and take
ownership of the merchandise. There are minimal accounting judgments and
uncertainties affecting the application of this policy. We estimate the amount
of merchandise that will be returned for a refund and reduce net sales and gross
profit by that amount. Given that the vast majority of returns occur within a
matter of days of the selling transaction, the risk of us realizing a materially
different amount for net sales and gross profit than reported in the
consolidated financial statements is minimal.

Cost of Sales and Inventory Valuation - Our inventory is stated at the
lower of cost or market with cost determined using the average cost method with
average cost approximating current cost. We estimate the amount of shrinkage
that has occurred through theft or damage and adjust that to actual at the time
of our physical inventory counts which occur near our fiscal year-end. We also
evaluate the cost of our inventory in relation to the estimated sales price
giving consideration to markdowns that will occur prior to or at the point of
sale. This evaluation is performed to ensure that we do not carry inventory at a
value in excess of the amount we expect to realize upon the sale of the
merchandise. We believe we have the appropriate merchandising valuation and
pricing controls in place to minimize the risk that our inventory values would
be materially misstated.

Depreciation and Recoverability of Long-Lived Assets - Approximately 27%
of our assets at May 4, 2002 represent investments in property and equipment and
goodwill. Determining appropriate depreciable lives and reasonable assumptions
in evaluating the carrying value of capital assets requires judgments and
estimates.

- 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 depreciated over 5
to 7 years. Leasehold improvements are amortized over the shorter of
the useful lives of the asset or the lease term. Our average lease term
is 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.

- Recoverability of the carrying value of store assets is assessed
annually and upon the occurrence of certain events or changes in
circumstances such as store closings or upcoming lease renewals. The
assessment requires judgment and estimates for future store generated
cash flows. The review includes a comparison of the carrying value of
the store assets to the future cash flows expected to be generated by
the store. The underlying estimates for cash flows include estimates

for future net sales, gross profit, and store expense increases and
decreases. During fiscal 2001 and fiscal 2000, we recorded impairments
of $82,000 and $103,000, respectively. To the extent our estimates for
net sales, gross profit and store expenses are not realized, future
assessments of recoverability could result in additional impairment
charges.

Insurance Reserves - Workers' compensation, general liability and
employee medical insurance programs are partially self-insured. It is our policy
to record a self-insurance liability using estimates of claims incurred but not
yet reported or paid, based on historical claims experience and trends. Actual
results can vary from estimates for many reasons, including, among others,
inflation rates, claim settlement patterns, litigation trends and legal
interpretations. We monitor our claims experience in light of these factors and
revise our estimates of insurance reserves accordingly. The level of our
insurance reserves may increase or decrease as a result of these changing
circumstances or trends.

Offering and Financing Costs - In previous years, we have incurred costs
related to refinancing efforts and an offering of our common stock. Costs
incurred related to financing activities are typically capitalized and amortized
over the life of the debt. Costs incurred related to common stock offerings are
deducted from the proceeds of the successful offering. Occasionally, the
anticipated financing activity or stock offering is not consummated. When that
occurs, we expense the costs related to such activities that had been previously
deferred in anticipation of the transaction.

Stock Options and Warrants - Certain of our stock options require us to
record a non-cash stock compensation charge in our financial statements. The
amount of the charge is determined based upon the fair value of our common
stock. Other options have been granted to employees with an exercise price that
is equal to or greater than the fair value of our common stock on the date of
grant. Stock options, which have been granted to non-employees in exchange for
services, must be valued using an option-pricing model. Stock warrants have been
issued in connection with several of our debt issuances and in some cases the
warrants contain a feature allowing the holder to put the warrant to us for fair
value. In each of these cases, the fair value of our common stock is a
significant element of determining the value of the stock option or warrant, or
the amount of the non-cash stock compensation charge to be recorded for our
stock option awards or for non-employee stock option grants. Since our common
stock is not traded on a stock exchange, the market value of our stock is not
easily determinable. To determine the value of our common stock we first
consider the amount paid to us for our common stock in a recent transaction for
the sale of our common stock. Absent a recent sale of our common stock, we
obtain a valuation from an independent appraiser. In each case, the
determination of the fair value of our common stock requires judgment and the
valuation has a direct impact on our financial statements. We believe that
reasonable methods and assumptions have been used for determining the fair value
of our common stock.

IMPACT OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

In June 2001, the Financial Accounting Standards Board issued SFAS No.
141, "Business Combinations" and SFAS No. 142, "Goodwill and Other Intangible
Assets", effective for fiscal years beginning after December 15, 2001. SFAS 141
requires that the purchase method of accounting be used for all business
combinations initiated after June 30, 2001. Under SFAS 142, goodwill (and
intangible assets deemed to have indefinite lives) will no longer be amortized
but will be subject to annual impairment tests. Other intangible assets will
continue to be amortized over their useful lives. As of February 2, 2002, we had
goodwill, net of accumulated amortization, in the amount of $1.4 million
recorded on our balance sheet. For fiscal 2001, we recorded $83,000 in
amortization expense on our consolidated statements of operations. We applied
the new rules of accounting for goodwill and other intangible assets beginning
in the first quarter of fiscal 2002. We ceased amortization of goodwill in
accordance with SFAS 142 and performed a test for impairment as of the date of
adoption and will test again during fiscal 2002 in the month we expect to
perform our annual testing in future years. We will test for impairment on an
annual basis or more frequently when events and circumstances indicate that an
impairment may have occurred. The application of SFAS 141 and SFAS 142 did not
have a significant impact on our financial condition or results of operations.

In August 2001, the Financial Accounting Standards Board issued SFAS No.
144, "Accounting for the Impairment or Disposal of Long-Lived Assets," which
addresses financial accounting and reporting for the impairment or disposal of
long-lived assets and supersedes SFAS No. 121, "Accounting for the Impairment or
Disposal of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," and
the accounting and reporting provisions of Accounting Principles Board (APB)
Opinion No. 30, "Reporting the Results of Operations" for a disposal of a
segment of a business. SFAS 144 is effective for fiscal years beginning December
15, 2001. Adoption of this standard did not have a significant impact on our
financial condition or results of operations.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market risks related to our operations result primarily from changes in
short-term London Interbank Offered Rates, or LIBOR, as our new senior credit
facility utilizes short-term LIBOR contracts. LIBOR contracts are fixed rate
instruments for a period of between one and six months, at our discretion. From
time to time, we enter into one or more LIBOR contracts. These LIBOR contracts
vary in length and interest rate, such that adverse changes in short-term
interest rates could affect our overall borrowing rate when contracts are
renewed.

As of May 4, 2002, we had no borrowings outstanding under our former line
of credit facility. As of May 4, 2002, we had one LIBOR contract outstanding for
$37.2 million for our entire former term loan facility. Based on this debt level
for the former term loan facility, a hypothetical 10% increase in LIBOR from the
applicable rate at May 4, 2002 would have increased net interest expense by
approximately $75,000 on an annual basis, and likewise would have decreased both
net income and cash flows for that annual period by a corresponding amount. We
cannot predict market fluctuations in interest rates and their impact on debt,
nor can there be any assurance that long-term fixed-rate debt will be available
at favorable rates, if at all. Consequently, our future results may differ
materially from estimated results due to adverse changes in interest rates or
debt availability.

We did not have any material foreign exchange or other significant market
risk as of May 4, 2002.

BUSINESS

GENERAL

We are a leading specialty retailer of home decor in the United States,
operating 236 stores in 28 states. Our stores present a broad selection of
distinctive merchandise, including framed art, mirrors, candles, lamps, picture
frames, accent rugs, garden accessories and artificial floral products. Our
stores also offer an extensive assortment of holiday merchandise, as well as
items carried throughout the year suitable for giving as gifts. In addition, we
use innovative design and packaging to market home decor items as gifts. We
provide our predominantly female customers an engaging shopping experience
characterized by a diverse, ever-changing merchandise selection at surprisingly
attractive prices. Our stores offer a unique combination of style and value that
has led to our emergence as a leader in home decor and has enabled us to develop
a strong customer franchise. As a result, we have achieved substantial growth
over the last five fiscal years. Since the beginning of 1997, our net sales have
grown at a compounded annual growth rate of 19%. For the fiscal year ended
February 2, 2002, we recorded net sales of $307.2 million, Adjusted EBITDA of
$35.2 million and net income of $1.8 million. For the fiscal quarter ended May
4, 2002, we recorded net sales of $66.2 million, Adjusted EBITDA of $5.0 million
and net income of $143,000.

CORPORATE HISTORY AND RECENT INITIATIVES

Kirkland's was co-founded in 1966 by our current Chairman, Carl Kirkland.
Although originally focused in enclosed malls in the Southeast, we have grown
beyond that region and also have begun to open stores in selected non-mall
venues. We accelerated our expansion in fiscal 1995, more than doubling our
store base from 104 stores at the end of fiscal 1995 to 226 stores at the
beginning of fiscal 2000. We also expanded our geography during this period by
opening 66 stores outside our core Southeastern base. We operate in major
metropolitan markets such as Houston, Texas and Atlanta, Georgia, middle markets
such as Birmingham, Alabama and Buffalo, New York and smaller markets such as
Appleton, Wisconsin and Panama City, Florida.

Beginning in late 1999, we undertook a series of initiatives with the
goals of strengthening our infrastructure and enhancing several aspects of our
operations in order to position ourselves for profitable growth. These measures
have enabled us to make faster and smarter inventory buying and distribution
decisions, to manage the flow of merchandise to our stores more efficiently and
to improve overall financial performance. These initiatives included:

Completing Key Investments in Information Technology. Since late 1999,
we have invested $6.5 million in several key information systems projects that
provide our decision makers with better tools to increase sales, improve
operational efficiency, control and distribute inventory and monitor critical
performance indicators on a daily basis. We installed new, state-of-the-art POS
software and servers in all of our stores in November 1999. In April 2001, we
installed an integrated retail management system at our home office. This system
provides greatly enhanced functionality to our merchandise buyers and planners.
For example, although our buyers have had access to basic daily sales data for
many years, our new retail management system produces much more detailed
information via our nightly polling process. This information includes daily
sales, inventory and gross margin analyzed by merchandise category,
classification or SKU for every store. Finally, in March 2002, we completed the
installation of new cash registers in approximately two-thirds of our stores.

Developing a More Scalable Distribution Infrastructure. Prior to 2000,
we distributed our products primarily through direct shipments from our vendors
to each of our individual stores. As our store base grew, we decided to develop
a more scalable central distribution strategy. In March 2001, we consolidated
our central distribution operations into one 303,000-square-foot, leased
facility in Jackson, Tennessee, which allowed us to increase our dollar volume
of centrally distributed merchandise by 25% from fiscal 2000 to fiscal 2001. In
May 2002, we expanded our central distribution operations through the lease of a
168,000-square-foot warehouse near our other distribution facility. We plan to
continue

expanding our proportion of centrally distributed merchandise, from 62% of total
inventory purchases in fiscal 2001 to as much as 90% by fiscal 2005.

Our modern central distribution facilities, together with other
improvements to our supply chain, have helped us to keep our stores stocked with
fresh merchandise and to reduce significantly the cost of managing inventories
at the store level. We believe our distribution facilities, which we have the
option to expand, provide us with adequate distribution capacity at least until
fiscal 2004.

Strengthening Executive Management. Since the second half of 1999, we
have added six senior managers, including key hires in merchandising, store
operations and information technology. These additions, along with several other
key hires and promotions, have broadened the abilities of our management team
and have provided leadership to key areas of our business. In addition, in March
2001 we elevated Robert E. Alderson, a 16-year Kirkland's veteran and previously
our Chief Operating Officer, to the position of Chief Executive Officer. Carl
Kirkland, our co-founder and author of the Kirkland's concept, serves as
Chairman of the Board and is a strategic advisor to our Merchandising team. We
believe our management team has valuable experience both from Kirkland's and
from other national retailers.

Improving Store-Level Operating Performance. In January 2001, we
instituted a plan to improve net sales, increase cash flow and return our stores
to higher levels of profitability. Key components of the plan included:

- Reducing Store-Level Inventories. We aggressively marked down
inventory in January and February 2001 resulting in a significant
reduction in store-level inventory. These reduced inventory levels, in
conjunction with our central distribution and systems investments,
facilitated the flow of fresh inventory to our stores. As a result,
store management has been able to spend more of their time focusing on
our customers and the appearance of the store and less time on the
management of inventory in the stockroom and local storage facilities.

- Controlling and Reducing Store Operating Expenses. We intensified our
efforts to control and reduce store operating expenses. In particular,
significant savings were achieved by slowing the growth of store
payroll expenses and reducing the costs associated with local storage
facilities and related truck rentals.

- Closing Under-Performing Stores. We closely reviewed our store base
and, as a result, we closed 11 stores after fiscal 2000. Of our stores
that were open during all of fiscal 2001, only nine did not generate
positive store-level EBITDA.

We believe the convergence of these operational initiatives led to the
significant improvement in our fiscal 2001 operating results as compared to
fiscal 2000. Financial highlights included:

- A 13.3% increase in comparable store net sales over the 53-week period
ended February 3, 2001.

- An 18% reduction in average inventory per store from $214,000 to
$176,000 and an increase in average inventory turnover to 3.48x from
2.45x.

- A 79% increase in Adjusted EBITDA to $35.2 million.

- An increase in net income to $1.8 million from net loss of $7.9
million.

- An increase in net cash provided by operating activities to $37.5
million from $1.3 million.

As evidenced by the improvement in our operating results, we believe
these initiatives have positioned us to expand our proven retail concept and
strengthen our position as a leading specialty retailer of home decor in the
United States.

KEY OPERATING STRENGTHS

Item-Focused Merchandising. While our stores contain items covering a
broad range of complementary product categories, we emphasize key items within
our targeted categories rather than merchandising complete product
classifications. Although we do not attempt to be a fashion leader, our
experienced buyers work closely with our vendors to identify and develop stylish
merchandise reflecting the latest trends. We take a disciplined approach to
test-marketing products and monitoring individual item sales, which enables us
to identify and quickly reorder appropriate items in order to maximize sales of
popular products. We also evaluate market trends and merchandise sales data to
help us develop additional products to be made by our vendors and marketed in
our stores, frequently on an exclusive basis. In most cases, this exclusive
merchandise is the result of our buying team's experience in interpreting market
and merchandise trends in a way that appeals to our customer. We estimate that
over 60% of our merchandise is designed or packaged exclusively for Kirkland's,
which distinguishes us in the marketplace and enhances our margins.

Ever-Changing Merchandise Mix. We believe our ever-changing merchandise
mix of over 5,000 SKUs creates an exciting "treasure hunt" environment,
encouraging strong customer loyalty and frequent return visits to our stores.
The merchandise in our stores is typically traditionally styled for broad market
appeal, yet it reflects an understanding of our customer's desire for newness
and freshness. Our information systems permit close tracking of individual item
sales, enabling us to react quickly to both fast-selling and slow-moving items.
Accordingly, we actively change our merchandise throughout the year in response
to market trends, sales results, and changes in seasons. We also strategically
increase selling space devoted to gifts and seasonal merchandise in advance of
holidays.

Stimulating Visual Presentation. Our stores have a distinctive,
"interior design" look that helps customers visualize the merchandise in their
own homes and inspires decorating and gift-giving ideas. Using multiple
merchandise arrangements to simulate home settings, we group complementary
merchandise creatively throughout the store, rather than displaying products
strictly by category or product type. We believe this cross-category
merchandising strategy encourages customers to browse for longer periods of
time, promoting add-on sales.

Strong Value Proposition. Our customers regularly experience the
satisfaction of paying noticeably less for items similar or identical to those
sold by other retail stores or through catalogs. This strategy of providing a
unique combination of style and value is an important element in making
Kirkland's a destination store. While we carry items in our stores that sell for
several hundred dollars, most items sell for under $50 and are perceived by our
customers as affordable luxuries. Our longstanding relationships with vendors
and our ability to place large orders of a single item enhances our ability to
attain favorable product pricing from vendors.

Flexible Approach to Real Estate. Our stores operate successfully across
a wide spectrum of different regions, market sizes and real estate venues. We
operate our stores in 28 states, and over 40% of our stores are located outside
the Southeast. We operate successfully in major metropolitan markets such as
Houston, Texas and Atlanta, Georgia, middle markets such as Birmingham, Alabama
and Buffalo, New York and smaller markets such as Appleton, Wisconsin and Panama
City, Florida. In addition, although our stores are predominantly located in
enclosed malls, we also operate successfully in non-mall venues, including
selected outlet centers and strip centers. The flexibility of our concept
enables us to select the most promising real estate opportunities that meet
requisite economic and demographic criteria within our target markets.

GROWTH STRATEGY

Our growth strategy is to continue to build on our position as a leading
specialty retailer of home decor in the United States by:

Opening New Stores Using our Proven Store Model. Over the past six
years, we have more than doubled our store base, principally through new store
openings. We intend to continue opening new stores both in existing and new
markets. We anticipate our growth will include mall and non-mall locations in
major metropolitan markets, middle markets and in selected smaller communities.
We believe there are currently more than 800 additional locations in the United
States that could support a Kirkland's store. Assuming the continued
availability of adequate capital, we expect to open approximately 15 new stores
during fiscal 2002 and approximately 35 new stores during fiscal 2003. As of the
date of this prospectus, we have opened two new stores in fiscal 2002.

Our proven store model produces strong store-level cash flow and provides
an attractive store-level return on investment. In fiscal 2001, our average
store generated net sales of approximately $1.3 million and store-level Adjusted
EBITDA of approximately $227,000, or 17.4% of net sales. These results were
relatively consistent across a wide spectrum of different market sizes and real
estate venues. Our stores typically generate positive store-level EBITDA in
their first full year of operation. From 1997 to 2000, we opened 93 new stores
and all but six produced positive store-level Adjusted EBITDA in their first
full fiscal year. The average first full year cash return on investment of these
stores was approximately 47%. For the stores we opened in fiscal 2000, our first
year cash return on investment was significantly higher than the four-year
average, which we believe is due largely to the improvements in management,
systems and distribution instituted since late 1999.

Increasing Store Productivity. We plan to increase our sales per square
foot and store profitability by leveraging our recent investments in information
systems and central distribution, which together contributed to our 18.5%
increase in net sales and our 15.1% increase in average net sales per square
foot in fiscal 2001. In fiscal 2001, we installed an advanced merchandise
management system, relocated our central distribution operations to a more
modern facility and increased the volume of centrally distributed merchandise.

Furthermore, we believe that the sales productivity of our stores will
benefit from our strong existing customer franchise and our continuing efforts
to enhance the Kirkland's brand. Our distinctive and often proprietary
merchandise offering, together with carefully coordinated in-store marketing,
visual presentation and product packaging, enables us to establish a distinct
brand identity and to solidify our bond with customers, further enhancing our
store-level productivity. We also believe our comparable store sales will
continue to benefit from the discretionary income available to consumers in
their prime earning years as well as other consumer and demographic trends
favoring home-oriented purchases.

INDUSTRY OVERVIEW

We compete in the U.S. home accessories and gifts market, which
encompasses such varied product groups as candles, framed art, table top
decoration, wall decor, figurines, decorative pillows, accent rugs and holiday
merchandise. According to industry research, sales in the U.S. retail market for
decorative home accessories and gifts were approximately $55 billion in 2000.
Within this market, we estimate that sales in the principal product categories
carried by our stores were approximately $29 billion in 2000. We believe that
the industry will continue to benefit from the following characteristics and
trends:

Highly Fragmented Industry. The market for home furnishings is highly
fragmented with no single company holding a dominant market position. The market
includes numerous smaller specialty retailers, as well as department stores,
larger mass merchandisers and home furnishings stores, with department stores
commanding a decreasing percentage of the home furnishings industry compared to
specialty retailers.

Favorable Demographic Trends. The U.S. Census Bureau reports that the
percentage of the U.S. population represented by people between the ages of 40
and 64 was approximately 30.9% at July 1, 2001

and is expected to increase to approximately 32.7% by 2005. We believe that our
industry will benefit as individuals in this group become homeowners (and second
home-owners) and reach their peak earnings potential. New and existing single
family home sales have been steadily increasing since 1995 and reached a record
6.15 million homes in 2001.

Increased Lifestyle Focus on Home and Family. The "cocooning" trend
continues to have a significant impact on our market. More consumers have been
retreating to their homes to spend more time with family and friends, new
home-related magazines have seen increased circulation and television
programming related to the home has been increasing.

Value-Focused Retailing. We believe that consumers are increasingly
seeking retailers who offer value. For example, between 1995 and 2000, retail
sales in discount department stores grew at a compounded annual rate of 8.9%
compared to 2.1% for conventional department store chains, according to the U.S.
Census Bureau. We believe that this consumer-driven emphasis on value should
continue to positively impact our growth opportunity.

MERCHANDISING

Merchandising Strategy. Our merchandising strategy is to (i) offer
distinctive, and often exclusive, high quality home decor at affordable prices,
(ii) maintain a breadth of product categories, (iii) provide a carefully edited
selection of key items within targeted categories, rather than merchandising
complete product classifications, (iv) emphasize new and fresh merchandise by
continually updating our merchandise mix and (v) present merchandise in a
visually appealing manner to create an inviting atmosphere which inspires
decorating and gift-giving ideas. We believe that this strategy creates a
shopping experience that appeals to shoppers, both style-conscious and
price-conscious. Although we do not attempt to be a fashion leader, we identify
and capitalize on existing or emerging trends when identifying or developing
merchandise for sale.

Our information systems permit close tracking of individual item sales,
which enables us to react quickly to market trends and best sellers. As a
result, we minimize the accumulation of slow-moving inventory and resulting
markdowns. Regional differences in home decor are addressed by tailoring
inventories to geographic considerations and store net sales results.

We continuously introduce new and often exclusive products to our
merchandise assortment in order to (i) maintain customer interest due to the
freshness of our product selections, encouraging frequent return visits to our
stores, (ii) enhance our reputation as a leader in identifying or developing
high quality, fashionable products and (iii) allow merchandise which has peaked
in sales to be quickly discontinued and replaced by new items. In addition, we
strategically increase selling space devoted to gifts and holiday merchandise
during the third and fourth quarters of the calendar year. Our flexible store
design and layout allow for selling space changes as needed to capitalize on
selling trends.

While our stores generally carry over 5,000 SKUs, we are constantly
monitoring the sell-through on each item and are typically reordering
approximately 2,500 active SKUs at any point in time. The make-up of our active
SKUs is likewise constantly changing based on changes in selling trends. New and
different SKUs are introduced to our stores on a weekly or more frequent basis,
and a substantial portion of the inventory carried in our stores is replaced
with new SKUs every few months.

We purchase merchandise from approximately 200 vendors, and our buying
team works closely with many of these vendors to differentiate Kirkland's
merchandise from that of our competitors. We estimate that over 60% of our
merchandise assortment is designed or packaged exclusively for Kirkland's,
generally based on our buyers' experience in modifying certain merchandise
characteristics or interpreting market trends into a product and price point
that will appeal to our customer. For products that are not manufactured
specifically for Kirkland's, we may create custom packaging as a way to
differentiate our merchandise offering and reinforce our brand names. Exclusive
or proprietary products distinguish us from our competition, enhance the value
of our merchandise, and improve our net sales and gross margin. We market a
substantial portion of our exclusive or custom-packaged merchandise assortment
under the Cedar

Creek private label brand and other proprietary names. Our strategy is to
continue to grow our exclusive and proprietary products and custom-packaged
products within our merchandise mix.

Product Assortment. Our major merchandise categories include wall decor
(framed art and mirrors), lamps, candles and various holders, photo frames,
textiles, garden accessories, floral products and decorative accessories. Our
stores also offer an extensive assortment of holiday merchandise, as well as
items carried throughout the year suitable for giving as gifts. Consistent with
our item-focused strategy, a vital part of the product mix is a variety of home
decor and other assorted merchandise that does not necessarily fit into a
specific product category. Decorative accessories consist of such varied
products as sconces, vases, and clocks. Other merchandise includes accent
furniture, novelty items and housewares. Throughout the year and especially in
the fourth quarter of the calendar year, our buying team uses its experience in
home decor to develop products that are as appropriate for gift-giving as they
are for personal purchase. Innovative product design and packaging are important
elements of this effort.

The following table presents the percentage of fiscal 2001 net sales
contributed by our major merchandise categories:

<Table>
<Caption>
PERCENTAGE OF
FISCAL 2001
MERCHANDISE CATEGORY NET SALES
- -------------------- -------------

Wall Decor (including framed art and
mirrors)............................... 24%
Holiday.................................. 11
Lamps.................................... 11
Decorative Accessories................... 10
Garden................................... 10
Candles.................................. 9
Floral................................... 5
Frames................................... 5
Other.................................... 15
---
Total............................... 100%
===
</Table>

Value to Customer. Through our distinctive merchandising, together with
carefully coordinated in-store marketing, visual presentation and product
packaging, we continually strive to increase the perceived value of our products
to our customers. Our shoppers regularly experience the satisfaction of paying
noticeably less for items similar or identical to those sold by other retail
stores or through catalogs. Our stores typically have two semi-annual clearance
events, one in January and one in July. We also run category promotions
periodically throughout the year. We believe our value-oriented pricing
strategy, coupled with an adherence to high quality standards, is an important
element in establishing our distinct brand identity and solidifying our
connection with our customers.

STORE OPERATIONS

General. We currently operate 236 stores in 28 states, all of which are
open seven days a week. In addition to corporate management, five Regional
Managers and 27 District Managers (who generally have responsibility for eight
to ten stores within a geographic district) manage store operations. A Store
Manager and one or two Assistant Store Managers manage individual stores. The
Store Manager is responsible for the day-to-day operation of the store,
including sales, merchandise display and control, personnel functions, and store
security. A typical store has one full-time sales associate, one full-time stock
person and six to 12 part-time sales associates, depending on the season.
Additional part-time sales associates are typically hired to assist with
increased traffic and sales volume in the fourth quarter of the calendar year.

Format. The prototype Kirkland's store is between 4,200 and 4,800 square
feet, of which approximately 70% typically represents selling space. Merchandise
is generally displayed according to

display guidelines and directives given to each store from the Visual
Merchandising team with input from Merchandising and Store Operations personnel.
This procedure ensures uniform display standards throughout the chain. Using
multiple types of fixtures, we group complementary merchandise creatively
throughout the store, rather than displaying products strictly by category or
product type.

Visual Merchandising. Because of the nature of our merchandise and our
focus on identifying and developing best-selling items, we believe adherence to
our visual merchandising standards is an important responsibility of our store
and field supervisory management. We emphasize visual merchandising in our
training efforts and our dedicated team of visual merchants provides valuable
leadership and support to this aspect of Store Operations. The Visual
Merchandising team provides Store Managers with recommended display directives
such as photographs and drawings, weekly placement guides and display manuals.
In addition, each Store Manager has some flexibility to creatively highlight
those products that are expected to have the greatest appeal to local shoppers.
The Visual Merchandising team also assists Regional Managers and District
Managers in opening new stores. We believe effective and consistent visual
merchandising enhances a store's ability to reach its full sales potential.

Personnel Recruitment and Training. We believe our continued success is
dependent in part on our ability to attract, retain and motivate quality
employees. In particular, the success of our expansion program depends on our
ability to promote and/or recruit qualified District and Store Managers and
maintain quality sales associates. To date, the majority of our District
Managers previously have been Kirkland's Store Managers. A nine-week training
program is provided for new District Managers. Store Managers and Assistant
Managers, many of whom begin their Kirkland's career as sales associates,
currently complete a formal training program before taking responsibility for a
store. This training program includes five to 10 days in a designated "training
store," working directly with a qualified Store Manager. District Managers are
primarily responsible for recruiting new Store Managers. Store Managers are
responsible for the hiring and training of new sales associates, assisted where
appropriate by a full-time recruiter. We constantly look for motivated and
talented people to promote from within Kirkland's, in addition to recruiting
from outside Kirkland's.

Compensation and Incentives. We compensate our Regional, District and
Store Managers with a base salary plus a quarterly performance bonus based on
store sales and store-level profit contribution. Sales associates are
compensated on an hourly basis. In addition, we regularly run a variety of
contests that reward associates for outstanding sales achievement.

BRIAR PATCH

In July 1998, we acquired The Briar Patch Management Corporation, a
specialty retailer of home accessories and gifts based in Savannah, Georgia.
Briar Patch operated 35 stores in six southeastern states primarily in markets
that were smaller than Kirkland's markets. We applied our merchandising
expertise, management, operational disciplines and financial resources to
improve the performance of these stores. Under our management, the average net
sales per Briar Patch store increased 34% to $1.1 million for fiscal 2001 from
approximately $800,000 in the first 12 full months that we owned the stores
(August 1998 through July 1999). Furthermore, the store-level EBITDA margin and
sales per square foot of the Briar Patch stores in fiscal 2001 was approximately
the same as the store-level EBITDA margin and sales per square foot of the other
Kirkland's stores.

We currently operate the Briar Patch stores under the name "Briar Patch
by Kirkland's." These stores are operated and merchandised in the same fashion
as our stores operated under the "Kirkland's" name. As these stores are
remodeled or relocated, we intend to change the name of these stores to
"Kirkland's." As of the date of this prospectus, five of the 35 stores acquired
from Briar Patch have been remodeled or relocated and are now operating under
the "Kirkland's" name, and two of the 35 stores have been closed.

REAL ESTATE

Strategy. Our real estate strategy is to identify retail properties that
are convenient and attractive to our target female customer. The flexibility and
broad appeal of our stores and our merchandise allows us to operate successfully
in major metropolitan markets such as Houston, Texas and Atlanta, Georgia,
middle markets such as Birmingham, Alabama and Buffalo, New York and smaller
markets such as Appleton, Wisconsin and Panama City, Florida.

Site Selection. We locate our stores in enclosed malls or non-mall
venues which are destinations for large numbers of shoppers and which reinforce
our quality image and brand. To assess potential new locations, we review
financial and demographic criteria and analyze the quality of tenants and
competitive factors, square footage availability, frontage space and other
relevant criteria to determine the overall acceptability of a property and the
optimal locations within it.

Until recent years, we preferred to locate stores in regional or
super-regional malls with a history of high sales per square foot and multiple
national department stores as anchors, and generally we sought approximate store
frontage of 35 to 40 feet on average. Today, we operate 217 of our 236 stores in
enclosed malls, but our flexible store format has allowed us to successfully
operate stores in a variety of venues including outlet centers, "lifestyle"
strip centers and community strip centers.

We believe we are a desirable tenant to developers because of our long
and successful operating history, sales productivity, ability to attract
customers and our strong position in the home decor category. The following
table provides a history of our store openings and closings since the beginning
of fiscal 1997.

<Table>
<Caption>
FISCAL FISCAL FISCAL FISCAL FISCAL QUARTER ENDED
1997 1998 1999 2000 2001(1) MAY 4, 2002
------ ------ ------ ------ ------- -------------

Stores open at beginning of
period................... 120 138 198 226 240 234
New stores opened(2)....... 20 27 29 17 5 2
Briar Patch stores
acquired................. -- 35 -- -- -- --
Stores closed.............. (2) (2) (1) (3) (11) --
----- ----- ----- ----- ----- -----
Stores open at end of
period................... 138 198 226 240 234 236
Average gross square
footage per store(3)..... 4,186 4,409 4,396 4,486 4,528 4,525
</Table>

- ------------------------------

(1) Also includes the period beginning on January 1, 2001 and ending on February
3, 2001.

(2) Excludes our warehouse outlet store located adjacent to our central
distribution facilities in Jackson, Tennessee.

(3) Calculated using 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.

PURCHASING AND INVENTORY MANAGEMENT

Merchandise Sourcing and Product Development. Our merchandise team
purchases inventory on a centralized basis to take advantage of our technology
and our consolidated buying power and to closely control the merchandise mix in
our stores. Our buying team selects all of our products, negotiates with all of
our vendors and works closely with our planning and allocation team to optimize
store-level merchandise mix by category, classification and item. The seven
members of our buying team have an average of 14 years of retail experience, and
four of the seven have tenure with Kirkland's ranging from eight to 33 years. We
believe this level of experience gives us a competitive advantage in
understanding our customer and identifying or developing merchandise suitable to
her tastes and budget. We estimate that over 60% of our merchandise assortment
is designed or packaged exclusively for Kirkland's, generally based on our
buyers' experience in modifying certain merchandise characteristics or
interpreting market trends into a product and price point that will appeal to
our customer. The amount of exclusively designed or packaged merchandise
continues to grow annually. Non-exclusive merchandise is often boxed or packaged
exclusively for Kirkland's utilizing Kirkland's proprietary brands.

We purchase merchandise from approximately 200 vendors. Approximately 75%
of our total purchases are from importers of merchandise manufactured primarily
in the Far East and India, with the balance purchased from domestic
manufacturers and wholesalers. For our purchases of merchandise manufactured
abroad, we believe buying from importers or U.S.-based representatives of
foreign manufacturers rather than directly from foreign manufacturers enables us
to maximize flexibility and minimize product liability and credit risks.
Further, we believe our executive management and buyers are more effective by
focusing on managing the retail business and allowing importers to handle the
procurement and shipment of foreign-manufactured merchandise for our stores. For
certain categories and items, the strategic use of domestic manufacturers and
wholesalers enables us to reduce the lead times between ordering products and
offering them in our stores.

Planning and Allocation. Our merchandise planning and allocation team
works closely with our buying team, field management and store personnel to meet
the requirements of individual stores for appropriate merchandise in sufficient
quantities. This team also manages inventory levels, allocates merchandise to
stores and replenishes inventory based upon information generated by our
management information systems. Our inventory control systems monitor current
inventory levels at each store and for our operations as a whole. If necessary,
we can shift slow-moving inventory to other stores for sell-through prior to
instituting corporate-wide markdowns. We also continually monitor recent selling
history within each store by category, classification and item to properly
allocate further purchases to maximize sales and gross margin.

Each of our stores is internally classified for merchandising purposes
based on certain criteria including store sales, size, location and historical
performance. Although all of our stores carry similar merchandise, the variety
and depth of products in a given store may vary depending on the store's rank
and classification. Inventory purchases and allocation are also tailored based
on regional or demographic differences between stores.

In April 2001, we installed a state-of-the-art merchandise management
system improving the efficiency of our planning and allocation process. This
system provides our buyers and planners with daily information on sales, gross
margin and inventory by category, classification and item. This information is
available for each store, permitting our planners to assess merchandise trends
and manage inventory levels and flow at the individual store level.

DISTRIBUTION

Prior to fiscal 2000, we distributed our products primarily through
direct shipments from our vendors to each of our individual stores. Inventory
backstock was held both in the store's stockroom and in local storage facilities
managed by each Store Manager. We maintained a modest central distribution
capability in Jackson, Tennessee through a collection of low-cost warehouses to
process certain merchandise shipments and to hold inventory for new store
openings. As our store base grew, this legacy distribution system became
cumbersome and inefficient, and we recognized the need to develop a more
scalable central distribution strategy to permit greater inventory control and
to reduce freight costs.

During fiscal 2000, we began working with Kurt Salmon & Associates, a
leading supply chain consulting firm, to improve our distribution practices and
to formulate a long-term distribution strategy. In March 2001, we consolidated
our central distribution operations into one modern, 303,000-square-foot
facility in Jackson, Tennessee, which allowed us to increase our dollar volume
of centrally distributed merchandise by 25% from fiscal 2000 to fiscal 2001. In
fiscal 2001, we distributed approximately 62% of our merchandise purchases
centrally while the remaining 38% of our purchases were shipped directly from
vendors to our stores. In May 2002, we expanded our central distribution
capacity through our lease of a 168,000-square-foot warehouse in close proximity
to our original 303,000-square-foot central distribution facility in Jackson,
Tennessee. We have the option to expand both of our distribution facilities, and
also have an option to purchase an additional 22-acre tract of land adjacent to
these facilities.

Central distribution offers a number of important benefits. In addition
to allowing us to reduce freight costs and to manage the flow of merchandise to
our stores more efficiently, central distribution

allows us to increase the percentage of our purchases that are pre-ticketed by
vendors (approximately 90% as of April 2002). Increased use of central
distribution has enabled us to significantly reduce the use of costly local
storage facilities, which our stores traditionally have used to store surplus
inventory, and has also resulted in reduced truck rental costs. Our overall
distribution expense decreased as a percentage of net sales from 6.5% in fiscal
2000 to 5.7% in fiscal 2001.

We will seek to expand our proportion of centrally distributed
merchandise to 90% by fiscal 2005, which we believe will facilitate further
reductions in our use of local storage facilities during fiscal 2002 and fiscal
2003. We believe that our combined distribution facilities provide us with
adequate distribution capacity at least until fiscal 2004. As we continue to
capitalize on the benefits of central distribution, we will continue to take
advantage of the benefits that direct shipment capability offers, such as
maximizing sales during the late fall season.

E-COMMERCE

We believe the Internet offers opportunities to complement our
"brick-and-mortar" stores and to increase our retail commerce and consumer brand
awareness of our products. We maintain a web site at www.kirklands.com, which
provides our customers with a resource to locate a store, preview our
merchandise and purchase products online. We sell a modest amount of merchandise
through our web site and we have a small customer service department to handle
e-mail and phone inquiries from our store and e-commerce customers. The
information contained or incorporated in our web site is not a part of this
prospectus.

MANAGEMENT INFORMATION SYSTEMS

We have invested significant resources developing an information systems
infrastructure to support our business. These investments included $6.5 million
of software and hardware replacements or upgrades since late 1999. Recent
projects included new point-of-sale (POS) software and servers in all stores
(fiscal 1999), integrated retail management software at our home office (fiscal
2001) and an upgrade of POS hardware in approximately two-thirds of our stores
(fiscal 2001/fiscal 2002). We believe these newly enhanced systems provide our
key decision makers, both in stores and at our home office, with the timely
information needed to drive our sales and profitability.

Our store information systems include a server in each store that runs
our automated POS application on multiple POS registers. The server provides
managers with convenient access to detailed sales and inventory information for
the store. Our POS registers provide price look-up (all merchandise is
bar-coded), time and attendance and automated check and credit card processing.
Through automated nightly two-way electronic communication with each store, we
upload SKU-level sales, gross margin information and payroll hours to our home
office system and download new merchandise pricing, price changes for existing
merchandise, purchase orders and system maintenance tasks to the store server.
Based upon the evaluation of information obtained through daily polling, our
planning and allocation team implements merchandising decisions regarding
inventory levels, reorders, price changes and allocation of merchandise to our
stores.

The core of our home office information system is the integrated GERS
retail management software installed in April 2001. This system integrates all
merchandising and financial applications, including category, classification and
SKU inventory tracking, purchase order management, automated ticket making,
general ledger, sales audit, accounts payable and fixed asset management. Our
distribution center also uses certain elements of the GERS software package. We
utilize a Lawson Software package for our payroll and human resource functions.

MARKETING

Our marketing efforts emphasize in-store signage, store and window
banners and displays and other techniques to attract customers and provide an
exciting shopping experience. Historically, we have not engaged in extensive
media advertising because we believe that we have benefited from our strategic

locations in high-traffic shopping malls and valuable "word-of-mouth"
advertising by our customers. Many shopping mall leases historically required
some advertising, although an industry shift to "media funds" has largely been
implemented, whereby a retailer contributes at agreed levels to the shopping
mall's advertising fund based on the square footage of the store. We supplement
our in-store marketing efforts with periodic local newspaper advertisements to
promote specific events in our stores, including our semi-annual clearance
events.

TRADEMARKS

All of our stores operate under the name "Kirkland's" other than 28
stores which operate under the name "Briar Patch by Kirkland's." We acquired
these stores in 1998. As these stores are remodeled or relocated, we intend to
change the name of these stores to the "Kirkland's" name.

We registered our "Kirkland's" logo with the United States Patent and
Trademark Office on the Principal Register. In addition, we hold several
trademark registrations in connection with our Cedar Creek private label brand
as well as a registration of "the Kirkland Collection." We believe the
"Kirkland's" logo, "the Kirkland Collection" and the Cedar Creek private label
brand have become important components in our merchandising and marketing
strategy. We also claim common law trademark rights in Briar Patch, Kirkland's
Outlet, Kirkland's Home and other marks. We are exploring the possibility of
federal registration of several of these marks. We are not aware of any claims
of infringement or other challenges to our right to use our marks in the United
States.

COMPETITION

The retail market for home decor is highly competitive. Accordingly, we
compete with a variety of specialty stores, department stores, discount stores
and catalog retailers that carry merchandise in one or more categories also
carried by our stores. Our product offerings also compete with a variety of
national, regional and local retailers, including such specialty retailers as
Bed, Bath & Beyond, Cost Plus, Linens 'n Things, Michaels Stores, Pier 1 Imports
and Williams-Sonoma. We believe that the principal competitive factors
influencing our business are merchandise quality and selection, price, visual
appeal of the merchandise and the store and the convenience of location.
Although we face competition from a broad range of retailers, we believe that
few competitors focus exclusively on home decor, primarily in a mall
environment. Specialty retailers tend to have higher prices and a narrower
assortment of products than our stores. Department stores typically have higher
prices than our stores for similar merchandise. Wholesale clubs may have lower
prices than our stores, but the product assortment is generally considerably
more limited.

The number of companies offering a selection of home decor products that
overlaps generally with our product assortment has increased over the last five
years. However, we believe that our stores still occupy a distinct niche in the
marketplace: traditionally styled merchandise, reflective of current market
trends typically offered at a discount to catalog and department store prices.
We believe we compete effectively with other retailers due to our experience in
identifying a broad collection of distinctive merchandise, pricing it to be
attractive to the target Kirkland's customer and presenting it in a visually
appealing manner.

In addition to competing for customers, we compete with other retailers
for suitable store locations and qualified management personnel. Many of our
competitors are larger and have substantially greater financial, marketing and
other resources than we do. See "Risk 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."

PROPERTIES

We lease all of our store locations and expect to continue our policy of
leasing rather than owning. Our leases typically provide for 10-year terms, many
with the ability for Kirkland's (or the landlord) to terminate the lease in the
middle of the term if sales at the leased premises do not reach a certain annual

level. The leases typically provide for payment of percentage rent (i.e., a
percentage of sales in excess of a specified level) and the rate of increase in
key ancillary charges is generally capped.

As current leases expire, we believe we will be able either to obtain
lease renewals if desired for present store locations or to obtain leases for
equivalent or better locations in the same general area. To date, we have not
experienced unusual difficulty in either renewing leases for existing locations
or securing leases for suitable locations for new stores. A majority of our
store leases contain provisions permitting the landlord to terminate the lease
upon a change in control of Kirkland's.

We own our corporate headquarters in Jackson, Tennessee, which currently
consists of approximately 40,000 square feet of office space. We lease two
central distribution facilities, consisting of a combined 471,000-square-feet,
also located in Jackson, Tennessee.

The following table indicates the states and cities where our stores are
located and the number of stores within each state:

ALABAMA(14)
Auburn
Birmingham
Decatur
Dothan
Florence
Gadsden
Hoover
Huntsville
Mobile
Montgomery(2)
Oxford
Prattville
Tuscaloosa

ARKANSAS(3)
Fayetteville
Little Rock
North Little Rock

FLORIDA(31)
Altamonte Springs
Boynton Beach
Bradenton
Brandon
Clearwater
Coral Springs
Daytona Beach
Destin
Ft. Myers
Gainesville
Jacksonville(2)
Lake Wales
Mary Esther
Naples
Ocoee
Orange Park
Oviedo
Panama City
Pembroke Pines
Pensacola
Sanford
Sarasota
Sebring
St. Petersburg
Sunrise
Tallahassee
Tampa(3)
Vero Beach

GEORGIA(21)
Albany
Alpharetta
Athens
Atlanta(2)
Augusta
Buford
Columbus
Commerce
Douglasville
Duluth
Kennesaw
Lithonia
Macon(2)
Morrow
Peachtree City
Rome
Savannah(2)
Valdosta

ILLINOIS(6)
Aurora
Bloomington
Fairview Heights
Gurnee
Moline
Orland Park

INDIANA(7)
Evansville
Ft. Wayne
Greenwood
Indianapolis
Lafayette
Mishawaka
Terre Haute

IOWA(4)
Cedar Rapids
Coralville
Davenport
West Des Moines

KANSAS(4)
Leawood
Overland Park
Topeka
Wichita

KENTUCKY(7)
Bowling Green
Florence
Lexington
Louisville(2)
Owensboro
Paducah

LOUISIANA(10)
Baton Rouge(2)
Gretna
Houma
Kenner
Lafayette
Lake Charles
Monroe
Shreveport
Slidell

MARYLAND(5)
Baltimore
Frederick
Glen Burnie
Hanover
Waldorf

MICHIGAN(3)
Auburn Hills
Grandville
Okemos

MISSISSIPPI(10)
Biloxi
Columbus
Flowood
Greenville
Hattiesburg
Jackson
McComb
Meridian
Ridgeland
Tupelo

MISSOURI(3)
Joplin
Springfield
St. Louis

NEBRASKA(1)
Lincoln

NEW JERSEY(1)
Elizabeth

NEW MEXICO(2)
Albuquerque(2)

NEW YORK(2)
Buffalo
West Nyack

NORTH CAROLINA(16)
Asheville
Cary
Charlotte
Concord
Durham(2)
Fayetteville
Greensboro(2)
Hickory
High Point
Pineville
Raleigh
Rocky Mt.
Wilmington
Winston-Salem

OHIO(10)
Akron
Beaver Creek
Canton
Cincinnati(2)
Dublin
Niles
Parma
St. Clairsville
Youngstown

OKLAHOMA(2)
Oklahoma City
Tulsa

PENNSYLVANIA(6)
Altoona
Camp Hill
Erie
Exton
Lancaster
Pittsburgh

SOUTH CAROLINA(11)
Anderson
Bluffton
Charleston(2)
Columbia(3)
Florence
Greenville
Myrtle Beach
Spartanburg

TENNESSEE(14)
Chattanooga
Clarksville
Franklin
Goodlettsville
Jackson
Johnson City
Knoxville(2)
Memphis(3)
Nashville(2)
Sevierville

TEXAS(27)
Amarillo
Arlington
Austin
Cedar Park
Corpus Christi
El Paso
Friendswood
Frisco
Grapevine
Houston(4)
Humble
Hurst
Katy
Lubbock
McAllen
Mesquite
Midland
Plano
San Antonio
San Marcos
Sugar Land
The Woodlands
Tyler
Waco

VIRGINIA(11)
Charlottesville
Chesapeake
Colonial Heights
Dulles
Glen Allen
Lynchburg
Newport News
Norfolk
Richmond
Roanoke
Winchester

WEST VIRGINIA(3)
Barboursville
Bridgeport
Charleston

WISCONSIN(2)
Appleton
Eau Claire

EMPLOYEES

We employed approximately 1,600 full-time and approximately 2,200
part-time employees at December 1, 2001. Of these, approximately 200 were
corporate and warehouse center personnel and 3,600 were store employees. The
number of part-time employees fluctuates with seasonal needs. None of our
employees is covered by a collective bargaining agreement. We believe our
employee relations are good.

LEGAL PROCEEDINGS

We are involved in various routine legal proceedings incidental to the
conduct of our business. We believe any resulting liability from existing legal
proceedings, individually or in the aggregate, will not have a material adverse
effect on our operations or financial condition.

MANAGEMENT

DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES

Our directors, executive officers and key employees and their respective
ages as of June 21, 2002, are as follows:

<Table>
<Caption>
NAME AGE POSITION
---- --- --------

DIRECTORS AND EXECUTIVE
OFFICERS:
Carl Kirkland(a)............. 61 Chairman of the Board
Robert E. Alderson........... 55 President, Chief Executive Officer and Director
Reynolds C. Faulkner......... 38 Executive Vice President, Chief Financial
Officer and Director
H.R. Harvey.................. 45 Senior Vice President of Merchandising
C. Edmond Wise, Jr........... 51 Senior Vice President of Store Operations
Alexander S. McGrath......... 40 Director
David M. Mussafer(a)......... 39 Director
R. Wilson Orr, III(a,b)...... 39 Director
John P. Oswald(b)............ 42 Director
Murray Spain(b).............. 58 Director
KEY EMPLOYEES:
Chris T. LaFont.............. 41 Vice President of Merchandising - Product
Development
Grey W. Satterfield.......... 39 Vice President of Merchandising - Planning
Toni F. Warren............... 46 Vice President of Merchandising - Replenishment
James W. Harris.............. 55 Vice President of Operations and Personnel
Deborah A. McDonald.......... 35 Vice President of Visual Merchandising
Connie L. Scoggins........... 47 Vice President of Finance and Treasurer/
Controller
Lowell E. Pugh, II........... 45 Vice President and General Counsel
</Table>

- ------------------------------

(a) Member of Compensation Committee

(b) Member of Audit Committee

DIRECTORS AND EXECUTIVE OFFICERS

Carl Kirkland has been Chairman of the Board since June 1996. Mr.
Kirkland co-founded Kirkland's in 1966 and served as Chief Executive Officer
from 1966 through March 2001 and President from 1966 through November 1997. He
has over 30 years of experience in the retail industry. Mr. Kirkland also serves
on the board of directors of Hibbett Sporting Goods, Inc.

Robert E. Alderson has been a Director of Kirkland's since September
1986, President of Kirkland's since November 1997 and Chief Executive Officer of
Kirkland's since March 2001. He served as Chief Operating Officer of Kirkland's
from November 1997 through March 2001 and as Senior Vice President of Kirkland's
since joining in 1986 through November 1997. He also served as Chief
Administrative Officer of Kirkland's from 1986 to 1997. Prior to joining
Kirkland's, he was a senior partner at the law firm of Menzies, Rainey, Kizer &
Alderson.

Reynolds C. Faulkner has been a Director of Kirkland's since September
1996 and joined Kirkland's as Senior Vice President and Chief Financial Officer
in February 1998. He was promoted to Executive Vice President in February 2002.
Prior to joining Kirkland's, from July 1989 to January 1998,

Mr. Faulkner was an investment banker in the corporate finance department of The
Robinson-Humphrey Company, LLC, most recently serving as a Managing Director and
head of the retail practice group. In this capacity, Mr. Faulkner was involved
in numerous public and private financings and mergers and acquisitions of
companies in the retail industry.

H.R. Harvey has been Senior Vice President of Merchandising since joining
Kirkland's in June 2001. Prior to joining Kirkland's, Mr. Harvey was Vice
President of Merchandising at Homeplace of America from July 2000 to June 2001
and Senior Vice President of Merchandising at Saks Incorporated from February
1996 to July 2000. Prior to that, he was with Federated Department Stores for
over 16 years, most recently as Merchandising Vice President.

C. Edmond Wise, Jr. has been Senior Vice President of Store Operations
since joining Kirkland's in December 2000. Prior to joining Kirkland's, Mr. Wise
was a Director of Retail Operations for Payless ShoeSource from October 1998 to
November 2000. Prior to that, Mr. Wise had 26 years of retail operations
experience, including eight years with Edison Brothers Stores from October 1990
to October 1998.

Alexander S. McGrath has been a director of Kirkland's since June 1996.
Mr. McGrath is currently a general partner of Capital Resource Partners II,
L.P., a mezzanine and private equity investment firm which is the general
partner of Capital Resource Lenders II, L.P., a warrantholder of and
subordinated lender to Kirkland's. He joined Capital Resource Lenders in 1988 as
an associate, and has been a general partner of Capital Resource Partners II,
L.P. since 1993. Prior to that, he was an associate at Investments Orange Nassau
Inc., a private equity investment firm. See "Principal and Selling
Shareholders."

David M. Mussafer has been a Director of Kirkland's since June 1996. Mr.
Mussafer is currently a Managing Director of Advent International Corporation
and is responsible for Advent's North American private equity operations. Advent
is a private equity investment firm which beneficially owns common stock of
Kirkland's. Mr. Mussafer joined Advent in 1991 and has been a principal of the
firm since 1993. Prior to joining Advent, Mr. Mussafer worked in corporate
lending at Chemical Bank from 1985 to 1988. See "Principal and Selling
Shareholders."

R. Wilson Orr, III has been a Director of Kirkland's since June 1996.
Since 1993, Mr. Orr has been a principal of SSM Corporation, a private equity
investment firm and an affiliate of SSM Venture Partners, L.P. He joined SSM
Corporation in 1988 as a Vice President and partner. From 1984 to 1988, he
worked in corporate lending at Chemical Bank. See "Principal and Selling
Shareholders."

John P. Oswald has been a Director of Kirkland's since June 1996. Since
1994, Mr. Oswald has been a partner of the Capital Trust Group, a private equity
investment firm and an affiliate of CT/ Kirkland Equity Partners, L.P. Mr.
Oswald is a beneficial owner of Capital Trust Investments, Ltd., a warrantholder
of and subordinated lender to Kirkland's. He is also President and Chief
Executive Officer of Bridge East Capital, a private equity investment
partnership, which is an affiliate of the Capital Trust Group. Prior to joining
Capital Trust Group he was a partner with the law firm of Lord, Day & Lord from
1986 to 1994 and an associate with Arthur Andersen LLP from 1984 to 1986. See
"Principal and Selling Shareholders."

Murray Spain has been a Director of Kirkland's since September 2001. In
September 2000, Mr. Spain co-founded World Wide Basics, an importer of general
merchandise, and has served as its President since inception. Prior to this, he
was the co-founder of Dollar Express, Inc. and acted as Dollar Express's
President and Chief Operating Officer from its inception in 1961 until May 2000,
when Dollar Express merged with Dollar Tree Stores, Inc. At that time, Dollar
Express was a chain of 126 retail stores in 5 states. Mr. Spain was not working
from May to September 2000.

KEY EMPLOYEES

Chris T. LaFont has been Vice President of Merchandising since September
1997. Mr. LaFont is responsible for all merchandise buying decisions for
Kirkland's. From 1988 to September 1997, he served

as Vice President of Visual Merchandising for Kirkland's. Mr. LaFont started his
career with Kirkland's in 1981 as a management trainee.

Grey W. Satterfield has been Vice President of Merchandising since
joining Kirkland's in January 2000. Mr. Satterfield is responsible for
merchandise planning and inventory management efforts, including receipt flow
management and the maintenance of all open-to-buy reports. Prior to joining
Kirkland's, Mr. Satterfield was with Saks Incorporated from October 1996 to
December 1999, most recently as Vice President of Product Development. Prior to
that, Mr. Satterfield had nine years of buying experience with the Macy's and
Federated Stores organizations.

Toni F. Warren has been Vice President of Merchandising since January
2000. Ms. Warren is responsible for merchandise allocation and replenishment.
Ms. Warren has been with Kirkland's for over 30 years and her experience
includes 16 years in store operations and 14 years in purchasing, allocation and
merchandise information systems.

James W. Harris has been Vice President of Operations and Personnel since
1987. Mr. Harris is responsible for store personnel recruitment and training as
well as general store operations. Prior to joining Kirkland's, Mr. Harris was
with Goldsmith's, a division of Federated Department Stores, from 1972 to 1987,
where he held various positions in store operations.

Deborah A. McDonald has been Vice President of Visual Merchandising since
August 2000 and has been with Kirkland's since 1984. She has served as Store
Manager, Corporate Specialist and most recently as Director of Visual
Merchandising. Ms. McDonald is responsible for creation and implementation of
all visual merchandising plans for new and existing stores.

Connie L. Scoggins has been Vice President of Finance since January 2000.
Ms. Scoggins has been with Kirkland's since 1986 serving as Treasurer and
Controller. Prior to joining Kirkland's, Ms. Scoggins was employed by Owens
Corning Fiberglas where she held various positions in accounting and finance.

Lowell E. Pugh, II, has been a Vice President since January 2000. He has
also served as Secretary since November 1997. Mr. Pugh joined Kirkland's in
August 1996 and has served since that time as Assistant Vice President and
General Counsel. Prior to that Mr. Pugh served as General Counsel to United
Foods, Inc., and prior to that he was a partner with Johnson & Gibbs, a Dallas,
Texas law firm.

CLASSIFIED BOARD OF DIRECTORS

Upon completion of this offering, our Board of Directors will be divided
into three classes of directors, each containing, as nearly as possible, an
equal number of directors. Directors within each class are elected to serve
three-year terms and approximately one-third of the directors sit for election
at each annual meeting of our shareholders. The terms of Messrs. McGrath, Orr
and Oswald will expire in 2003, the terms of Messrs. Faulkner and Spain will
expire in 2004 and the terms of Messrs. Kirkland, Alderson and Mussafer will
expire in 2005. A classified board of directors may have the effect of deterring
or delaying any attempt by any person or group to obtain control of us by a
proxy contest since such third party would be required to have its nominees
elected at two separate annual meetings of the Board of Directors in order to
elect a majority of the members of the Board of Directors. Directors who are
elected to fill a vacancy (including vacancies created by an increase in the
number of directors) must be confirmed by the shareholders at the next annual
meeting of shareholders whether or not such director's term expires at such
annual meeting. See "Risk Factors - 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."

DIRECTOR COMPENSATION

To date, directors who are affiliated with us or any of our shareholders
have not received separate compensation for their services in that capacity. In
the future, we intend to compensate our non-employee

directors. The amount of such compensation has not been determined but will be
consistent with amounts paid by comparable public companies.

COMMITTEES OF THE BOARD

The audit committee of the Board of Directors is composed of Messrs. Orr,
Oswald and Spain. The principal functions of the audit committee include:

- making recommendations to the Board of Directors regarding the
selection of our independent public accountants to audit annually our
books and records;

- reviewing the proposed scope of each audit;

- meeting periodically with the independent public accountants and our
Chief Financial Officer to review matters relating to our financial
statements, our accounting principles and our system of internal
accounting controls; and

- reporting its recommendations as to the approval of our financial
statements to the Board of Directors.

The compensation committee of the Board of Directors is composed of
Messrs. Kirkland, Mussafer and Orr. The compensation committee is responsible
for establishing the salaries of our executive officers, incentives and other
forms of compensation and for administering our employee benefit plans.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

Other than Carl Kirkland, the members of the compensation committee of
the Board of Directors, Messrs. Mussafer and Orr, have not at any time served as
officers or employees of Kirkland's, but are affiliated with entities that
participated in our 1996 recapitalization, in subsequent equity financings and
in the Pre-Offering Transactions. We rent aircraft for business travel from a
company owned by Carl Kirkland. We spent $23,000 for the rental of aircraft from
this company in fiscal 2001, $92,000 in fiscal 2000 and $63,000 in fiscal 1999.
See "Related Party Transactions." None of our executive officers presently
serves, or in the past has served, on the board of directors or compensation
committee of any other entity that has an executive officer who is serving, or
who in the past has served, as a member of our Board of Directors or our
compensation committee.

EXECUTIVE COMPENSATION

The following table sets forth certain compensation information with
respect to our Chief Executive Officer and our other executive officers whose
salary and bonus exceeded $100,000 for our fiscal year ended February 2, 2002
(the "Named Executive Officers"):

SUMMARY COMPENSATION TABLE

<Table>
<Caption>
LONG TERM
COMPENSATION
------------
AWARDS
ANNUAL COMPENSATION ------------
------------------------------------------------------- SECURITIES ALL OTHER
OTHER ANNUAL UNDERLYING COMPENSATION
NAME AND PRINCIPAL POSITION FISCAL YEAR SALARY($) BONUS($) COMPENSATION($)(4) OPTIONS(#) ($)(5)
- --------------------------- ----------- --------- -------- ------------------ ------------ ------------

Carl Kirkland............. 2001 103,125 -- -- -- 867
Chairman of the Board(1)
Robert E. Alderson........ 2001 275,000 40,000 -- 137,457 867
President and Chief
Executive Officer(2)
Reynolds C. Faulkner...... 2001 226,250 40,000 -- 54,983 867
Executive Vice President
and Chief Financial
Officer
H.R. Harvey............... 2001 140,625 30,000 -- 30,240 --
Senior Vice President of
Merchandising(3)
C. Edmond Wise, Jr........ 2001 176,250 30,000 37,855 30,240 --
Senior Vice President of
Store Operations
</Table>

- ------------------------------

(1) Mr. Kirkland also served as our Chief Executive Officer until March 2001.

(2) Mr. Alderson became our Chief Executive Officer in March 2001. Mr. Alderson
also served as our Chief Operating Officer until March 2001.

(3) Mr. Harvey became our Senior Vice President of Merchandising in June 2001.

(4) Amounts for Mr. Wise consists of $30,655 in relocation expenses and $7,200
in automobile allowance.

(5) Represents amounts contributed under our 401(k) plan for the benefit of
Messrs. Kirkland, Alderson and Faulkner.

STOCK OPTIONS GRANTED TO CERTAIN EXECUTIVE OFFICERS DURING FISCAL YEAR 2001

The following table sets forth certain information regarding options for
the purchase of common stock that were awarded to our Named Executive Officers
during the fiscal year ended February 2, 2002:

OPTION GRANTS IN FISCAL 2001

<Table>
<Caption>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
PERCENT OF ANNUAL RATES OF STOCK
NUMBER OF TOTAL PRICE
SECURITIES OPTIONS APPRECIATION FOR
UNDERLYING GRANTED EXERCISE OR OPTION TERM($)(2)
OPTIONS TO EMPLOYEES BASE PRICE EXPIRATION ---------------------
NAME GRANTED(#)(1) IN FISCAL 2001 ($/SH) DATE 5% 10%
- ---- ------------- -------------- ----------- ---------- --------- ---------

Carl Kirkland............ -- -- -- -- -- --
Robert E. Alderson....... 137,457 27% $1.29 11/27/2011 $111,515 $282,602
Reynolds C. Faulkner..... 54,983 11% $1.29 11/27/2011 $ 44,606 $113,041
H.R. Harvey.............. 30,240 6% $1.29 11/27/2011 $ 24,533 $ 62,171
C. Edmond Wise, Jr....... 30,240 6% $1.29 11/27/2011 $ 24,533 $ 62,171
</Table>

- ------------------------------

(1) These options will become exercisable as to 33% of such shares on the first
anniversary of the option grant date and will thereafter become exercisable
as to an additional 8.33% at the end of each of our following eight fiscal
quarters.

(2) These amounts represent assumed rates of appreciation in the price of our
common stock during the terms of the options in accordance with rates
specified in applicable federal securities regulations. Actual gains, if
any, on stock option exercises will depend on the future price of our common
stock and overall stock market conditions. There is no representation that
the rates of appreciation reflected in this table will be achieved.

STOCK OPTIONS EXERCISED BY CERTAIN EXECUTIVE OFFICERS DURING FISCAL 2001 AND
YEAR-END OPTION VALUES.

The following table sets forth certain information regarding options for
the purchase of common stock that were held by our Named Executive Officers
during the fiscal year ended February 2, 2002. None of the Named Executive
Officers exercised stock options during the fiscal year ended February 2, 2002.

AGGREGATED OPTION EXERCISES IN FISCAL YEAR ENDED
FEBRUARY 2, 2002 AND YEAR-END OPTION VALUES

<Table>
<Caption>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
OPTIONS AT OPTIONS AT
SHARES FEBRUARY 2, 2002(#) FEBRUARY 2, 2002($)
ACQUIRED ON VALUE --------------------------- -------------------------------
NAME EXERCISE(#) REALIZED($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE (1)
- ---- ----------- ----------- ----------- ------------- ----------- -----------------

Carl Kirkland(2)....... -- -- 0 217,182 0 2,403,776
Robert E.
Alderson(2).......... -- -- 0 354,639 0 3,749,480
Reynolds C. Faulkner... -- -- 125,526(3) 54,983 1,173,668 538,284
H.R. Harvey............ -- -- 0 30,240 0 296,050
C. Edmond Wise, Jr..... -- -- 0 30,240 0 296,050
</Table>

- ------------------------------

(1) There was no public trading market for our common stock as of February 2,
2002. Accordingly, these values have been calculated based on our board of
directors' determination of the fair market values of the underlying shares
as of February 2, 2002 of $11.08 per share, less the applicable exercise
price per share, multiplied by the underlying shares.

(2) Upon completion of this offering, the options held by each of Messrs.
Kirkland and Alderson to purchase 217,182 shares of common stock, with a
value of $2,403,776 as of February 2, 2002, will automatically terminate.

(3) These options were exercised in May 2002.

EMPLOYEE BENEFIT PLANS

1996 EXECUTIVE INCENTIVE AND NON-QUALIFIED STOCK OPTION PLAN

We maintain the Kirkland's, Inc. 1996 Executive Incentive and
Non-Qualified Stock Option Plan (as amended, the "1996 Plan"). We believe the
1996 Plan promotes our long-term growth and profitability by providing key
employees with incentives to improve shareholder value and to contribute to our
growth and financial success. Moreover, we believe the 1996 Plan helps us
attract, retain and reward quality employees.

The Board of Directors or a committee of the Board of Directors
administers the 1996 Plan. Under the terms of the 1996 Plan, the committee will
be composed of three directors. The Board of Directors or the committee
interprets the 1996 Plan, selects option recipients and determines the number of
shares subject to each option and establishes the price, vesting and other terms
of each option. While there are no predetermined performance formulas or
measures or other specific criteria used to determine recipients of options
under the 1996 Plan, grants are based generally upon consideration of the
grantee's position and responsibilities, the nature of services provided, the
value of the services to us, the present and potential contribution of the
grantee to our success, the anticipated number of years of service remaining and
other factors which the Board of Directors or the committee deems relevant.

Participation in the 1996 Plan is limited to our employees or any of our
subsidiaries' employees. Awards under the 1996 Plan may be in the form of
incentive stock options or non-qualified stock options.

In the event of any stock split, reverse stock split, stock dividend,
recapitalization, reclassification or other similar event, appropriate
proportional adjustments may be made to the number of shares reserved

for issuance under the 1996 Plan and the number, kind and price of shares
covered by outstanding options. Stock options may not be exercised more than 10
years after the date of grant. Shares subject to forfeited, cancelled or expired
stock options become available for grant again under the 1996 Plan. Stock
options grants under the 1996 Plan are not transferable by the participants,
except upon death.

The exercise price of an incentive stock option must be not less than the
fair market value of the common stock on the date the option is granted.
Although the 1996 Plan permits the exercise price of a non-qualified stock
option to be less than the fair market value of the common stock on the date the
option is granted, the exercise price of all non-qualified stock options granted
under the 1996 Plan to date have been equal to the fair market value of the
common stock on the date of grant. The exercise price of stock options granted
under the 1996 Plan may be paid in cash or by tender of previously acquired
shares of our common stock.

As of the date of this prospectus, options to purchase 621,140 shares of
common stock are outstanding under the 1996 Plan at exercise prices ranging from
$1.29 to $1.73 per share, and no additional options may be granted under the
1996 Plan. Of these options, 115,299 have vested as of the date of the
prospectus. No additional shares of common stock are available for issuance in
connection with future grants under the 1996 Plan.

2002 EQUITY INCENTIVE PLAN

We have adopted the Kirkland's, Inc. 2002 Equity Incentive Plan (the
"Incentive Plan"), which will become effective upon completion of this offering.
The Incentive Plan provides for the award of restricted shares of common stock,
and incentive stock options, non-qualified stock options and stock appreciation
rights with respect to shares of common stock, to our employees, directors,
consultants and other individuals who perform services for us.

The maximum number of shares of common stock with respect to which awards
may be made under the Incentive Plan is 2,500,000. No Participant will receive
an award of stock options or stock appreciation rights under the Incentive Plan
with respect to more than 500,000 shares of common stock in any calendar year.
In the event of any stock split, reverse stock split, stock dividend,
recapitalization, reclassification or other similar event, adjustments may be
made at the Board of Directors' discretion to the number of shares reserved for
issuance under the Incentive Plan, to the limit on the number of shares that may
be subject to stock options or stock appreciation rights granted to a single
person in any calendar year and to the number, kind and price of shares covered
by outstanding awards. Shares subject to forfeited, cancelled or expired awards
become available for grant again under the Incentive Plan. In addition, shares
surrendered in payment of any exercise price or in satisfaction of any
withholding obligation arising in connection with an award granted under the
Incentive Plan become available for grant again under the Incentive Plan.

The Board of Directors or the compensation committee of the Board of
Directors administers the Incentive Plan. Under the terms of the Incentive Plan,
the compensation committee must consist of two or more directors. The Board of
Directors or the compensation committee interprets the Incentive Plan, selects
award recipients, determines the number of shares subject to each award and
establishes the price, vesting and other terms of each award. While there are no
predetermined performance formulas or measures or other specific criteria used
to determine recipients of awards under the Incentive Plan, awards are based
generally upon consideration of the grantee's position and responsibilities, the
nature of services provided, the value of the services to us, the present and
potential contribution of the grantee to our success, the anticipated number of
years of service remaining and other factors which the Board of Directors or the
compensation committee deems relevant.

The Incentive Plan has no specified term, although incentive stock
options will not be granted more than 10 years after the adoption of the
Incentive Plan.

Stock Options. The Incentive Plan permits the grant of incentive stock
options to our employees and the employees of our subsidiaries. The Incentive
Plan also provides for the grant of non-qualified stock

options to our employees, directors, and consultants and other individuals who
perform services for us (as well as to employees, directors, consultants and
service providers of our subsidiaries). The exercise price of any incentive
stock options granted under the Incentive Plan may not be less than 100% of the
fair market value of our common stock on the date of grant. There is no
restriction applicable to the exercise price of non-qualified options granted
under the Incentive Plan. Options granted under the Incentive Plan may be
exercised for cash or in exchange for shares of common stock owned by the option
holder for more than six months having a fair market value on the date of
exercise equal to the option exercise price.

Under the Incentive Plan, each option is exercisable at such time and to
such extent as specified in the pertinent option agreement between the option
recipient and us. However, no award shall be exercisable with respect to any
shares of common stock later than 10 years after the date of such award. Unless
otherwise specified by the Board of Directors or the compensation committee with
respect to a particular option, all options are non-transferable, except upon
death.

Upon or in anticipation of a change of control in Kirkland's, the Board
of Directors or the compensation committee may: (i) cause outstanding options to
become immediately exercisable, (ii) provide for the cancellation of options in
exchange for comparable options to purchase shares in a successor corporation or
(iii) provide for the cancellation of options in exchange for a cash and/or
other substitute consideration.

Stock Appreciation Rights. The Incentive Plan also provides for the
grant of stock appreciation rights, either alone or in tandem with a stock
option. A stock appreciation right entitles its holder to a cash payment of the
excess of the fair market value of our common stock on the date of exercise,
over the fair market value of our common stock on the date of grant. No stock
appreciation right issued under the Incentive Plan will have a term of more than
10 years.

Upon or in anticipation of a change of control in Kirkland's, the Board
of Directors or the compensation committee may: (i) cause outstanding stock
appreciation rights to become immediately exercisable or (ii) provide for the
cancellation of stock appreciation rights in exchange for a cash and/or other
substitute consideration.

Restricted Stock. Restricted stock consists of shares of our common
stock issued to an employee that will be forfeited to us if certain vesting
conditions established by the Board of Directors or the compensation committee
at the time of grant (such as a specified period of continued employment or the
fulfillment of specified individual or corporate performance goals) are not met.
Restricted stock may be sold under the Incentive Plan (at its full value or at a
discount) or may be granted solely in consideration for services.

Upon or in anticipation of an event of a change of control in Kirkland's,
the Board of Directors or the compensation committee may: (i) cause restrictions
on shares of restricted stock to lapse, (ii) cancel restricted stock in exchange
for shares of restricted stock of a successor corporation or (iii) redeem
restricted stock for cash or other substitute consideration.

EMPLOYEE STOCK PURCHASE PLAN

We have adopted an Employee Stock Purchase Plan (the "Stock Purchase
Plan"), which will become effective upon completion of this offering. The Stock
Purchase Plan will allow substantially all of our full-time employees who have
been employees for 12 consecutive months, subject to certain limitations, to
purchase shares of our common stock at a discount from the prevailing market
price at the time of purchase. These shares are either issued by us from our
authorized and unissued common stock or purchased by us on the open market. Any
employee owning (or having a right to acquire) five percent or more of our
voting power or value will not be eligible to participate in the Stock Purchase
Plan. 500,000 shares of our common stock will be available for purchase under
the Stock Purchase Plan (subject to adjustment in the event of a stock dividend,
split, reverse split or distribution, or other similar change in our common
stock). Any future increase in the number of shares of our common stock subject
to the Stock Purchase Plan will require shareholder approval.

An eligible employee will be eligible to participate in offerings under
the Stock Purchase Plan. Offerings under the Stock Purchase Plan will begin upon
the completion of this offering and on each subsequent February 1st and August
1st. Each offering will be 24 months long (except for the first offering, which
will begin upon completion of this offering and will end on July 31, 2004), so
that offerings under the Stock Purchase Plan will overlap. Each offering will
include four six-month purchase periods, ending on each July 31st and January
31st (except for the first offering, which will have five purchase periods, the
first of which will begin upon completion of this offering and end on July 31,
2002).

Once enrolled in a specific offering, an eligible employee will be able
to specify an amount (not greater than 15% of pay) to be withheld from his or
her paycheck and credited to a bookkeeping account established for him or her
(the "Participation Account"). Amounts in the Participation Account will be
applied to the purchase of shares of our common stock on the last day of each
purchase period. The price of such shares will be equal to 85% of the lesser of:
(i) the price of our shares on the last day of the purchase period and (ii) the
price of our shares on the first day of the offering (or, for purposes of the
first offering, the initial public offering price).

No employee may purchase more than $25,000 worth of common stock
(determined based on the price on the first day of the offering) in any calendar
year under the Stock Purchase Plan (and any other employee stock purchase plans
later established by us or our subsidiaries), with amounts not used in any one
year transferable to the following year. In addition, no employee may purchase
more than 25,000 shares of our common stock under the Stock Purchase Plan in any
purchase period.

Once enrolled in a specific offering, that offering will continue to
apply to an eligible employee until he or she withdraws from the offering or
terminates from employment, unless the price of our common stock is lower at the
end of any purchase period than at the start of the offering. If the price of
our common stock is lower at the end of any purchase period than at the start of
the offering, then, after the completion of that purchase period, each eligible
employee's participation in that offering will terminate and those employees
will be enrolled automatically in the offering beginning immediately after that
purchase period.

Only whole shares of common stock may be purchased under the Stock
Purchase Plan. Amounts withheld from an employee's paycheck and that are
insufficient to purchase a whole share of common stock will remain credited to
the employee's Participation Account. A participating employee may change the
rate of his or her payroll withholding under the Stock Purchase Plan from time
to time, and may cease participation in any offering altogether by requesting a
withdrawal of his or her Participation Account. However, once an employee has
withdrawn from an offering, he or she may not resume participation in the Stock
Purchase Plan until the start of the next offering. Upon termination of an
employee's employment, all amounts credited to his or her Participation Account
will be returned to him or her (without interest).

If we merge or consolidate with another company, if we sell substantially
all our assets, or if we liquidate or dissolve, the end of the then-current
purchase period will be accelerated and shares will be purchased under the Stock
Purchase Plan immediately before the merger, consolidation, asset sale,
liquidation or dissolution (unless the Stock Purchase Plan is assumed by a
successor entity).

The compensation committee of the Board of Directors will administer the
Stock Purchase Plan. The Board of Directors may amend or terminate the Stock
Purchase Plan. The Stock Purchase Plan is intended to comply with the
requirements of Section 423 of the Internal Revenue of 1986, as amended (the
"Code"). The Board of Directors may terminate the Plan at any time.

401(K) PLAN

We maintain the Kirkland's, Inc. Retirement Plan ("401(k) Plan") for the
benefit of our eligible employees. The 401(k) Plan is intended to be qualified
under Code section 401(a) and consists of a 401(k) component, a 401(m) matching
component and a profit-sharing component. Employees eligible to

participate in the 401(k) Plan are those employees who have completed at least
one year of service and attained the age of 21.

Under the 401(k) component, participants may elect to defer up to the
maximum permitted by the Code per year to the 401(k) Plan. Under the 401(m)
matching component, we may match each participant's elective deferrals, up to 6%
of compensation. Currently, we match 50% of each participant's elective
deferrals. Under the profit-sharing component, we may make additional
contributions in amounts to be determined by us in our sole discretion. Our
profit-sharing contributions are allocated among eligible participants in
proportion to each participant's compensation.

Matching contributions and profit-sharing contributions vest ratably over
six years, or earlier upon attainment of the appropriate retirement age, upon
retirement for disability, upon death, or upon termination of the 401(k) Plan.
All assets of the 401(k) Plan are currently invested, subject to
participant-directed elections, in annuity contracts underwritten by ING Aetna
Financial Services.

Payment of 401(k) Plan benefits are made in cash in the form of a single
lump sum, periodic installments or an annuity. Distribution of a participant's
vested interest generally occurs upon termination of employment (including by
reason of retirement, death or disability).

SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN

Following the completion of this offering, we intend to adopt a
non-qualified deferred compensation plan known as a supplemental executive
retirement plan ("SERP"). Only a select group of highly compensated management
employees chosen by the Board of Directors will be eligible to participate in
the SERP. Pursuant to the SERP, participants will be entitled to elect, in
advance, to reduce salary or bonus income and have that reduction credited to an
account under the SERP. To the extent all or a portion of the participant's
deferral relates to amounts that could have been contributed to the 401(k) Plan,
but for the application of certain legal restrictions, we will also credit a
matching contribution amount to the SERP equal to what would have been
contributed to the 401(k) Plan, in the absence of those restrictions.

EMPLOYMENT AGREEMENTS

CARL KIRKLAND AND ROBERT E. ALDERSON

In June 2002, we entered into new employment agreements with Carl
Kirkland and Robert Alderson to replace the former agreements we had entered
into with them in connection with our 1996 recapitalization, which were
scheduled to expire on June 12, 2002. Under their new employment agreements,
which expire in June 2006, subject to automatic successive one-year extensions
if not terminated, Mr. Kirkland's current salary is $150,000 and Mr. Alderson's
current salary is $300,000. In addition, as agreed in connection with our 1996
recapitalization, Mr. Kirkland and Mr. Alderson are entitled to receive a
special bonus of $712,500 and $149,500, respectively, per year until an initial
public offering or other specified liquidity event occurs. A portion of the
proceeds of this offering will be used to pay all accrued and unpaid special
bonus amounts (including special bonus amounts accrued and unpaid under their
former employment agreements), after which no further special bonus amounts will
be paid.

The new employment agreements with Messrs. Kirkland and Alderson also
provide that each of them is eligible to receive an annual bonus beginning with
the fiscal year ended December 31, 2002. Both Messrs. Kirkland and Alderson are
eligible to receive an annual bonus of up to 100 percent of their annual salary.
For both Mr. Kirkland and Mr. Alderson, the amount of the annual bonus is at the
discretion of the compensation committee of the Board of Directors and is based
on the achievement of specified personal performance goals and/or specified
corporate performance goals, as determined by the compensation committee of the
Board of Directors.

In addition, under the new employment agreements, if Mr. Kirkland is
terminated by us without cause and/or terminates his employment with us for
specified reasons, he is entitled to a lump sum severance payment equal to the
discounted present value of 24 months' salary or, at the discretion of the

Board of Directors, the payment of monthly severance payments equal to 1/12th
his annual salary for 24 months, as well as continued health benefits and use of
his office space until the earlier of attainment of age 72 or death. If Mr.
Alderson is terminated by us without cause and/or terminates his employment with
us for specified reasons, he is entitled to a lump sum severance payment equal
to the discounted present value of 24 months' salary or, at the discretion of
the Board of Directors, the payment of monthly severance payments equal to
1/12th his annual salary for 24 months, as well as continued health benefits for
24 months.

Each of Messrs. Kirkland and Alderson received an option currently
representing the right to purchase 217,182 shares of common stock at a per share
exercise price of $0.01 in connection with our 1996 recapitalization. The
vesting of these options requires that the investors in our 1996
recapitalization achieve a specified internal rate of return on their invested
funds upon an initial public offering or sale of Kirkland's. Because this
offering will not result in the specified internal rate of return, these options
will automatically terminate upon completion of this offering.

Mr. Alderson received an option to purchase 137,457 shares of common
stock at a per share exercise price of $1.29 in November 2001. The option will
become exercisable as to 33% of the shares covered by the option in November
2002 and will thereafter become exercisable as to an additional 8.33% of such
shares at the end of each of our following eight fiscal quarters.

Each of the employment agreements described above also contains
non-competition provisions prohibiting the executive from competing against us
during the term of the employment agreement and for three years thereafter
without our prior written consent. Messrs. Kirkland and Alderson are also
entitled to certain additional benefits (beyond those generally available to our
employees) including an automobile allowance and additional life insurance.

REYNOLDS C. FAULKNER

In June 2002, we entered into a new employment agreement with Reynolds C.
Faulkner to replace the former agreement we had entered into with him in
February 1998, which was scheduled to expire on June 12, 2002. Mr. Faulkner
currently serves as our Executive Vice President and Chief Financial Officer.
Mr. Faulkner currently receives an annual salary of $250,000. Under his new
employment agreement which expires in May 2006, subject to automatic successive
one-year extensions, if not terminated, if Mr. Faulkner's employment is
terminated by us without cause or by Mr. Faulkner under specified circumstances,
Mr. Faulkner is entitled to receive a lump sum severance payment equal to the
discounted present value of 18 months' salary, or, at the discretion of the
Board of Directors, the payment of monthly severance payments equal to 1/12th of
his annual salary for 18 months, as well as continued health benefits for 18
months.

The new employment agreement provides that Mr. Faulkner is eligible to
receive an annual bonus of up to 100 percent of his annual salary. The amount of
the annual bonus is at the discretion of the Compensation Committee of the Board
of Directors and is based on the achievement of specified personal performance
goals and/or specified corporate performance goals, as determined by the
Compensation Committee of the Board of Directors. In addition, Mr. Faulkner will
receive a bonus of up to $25,000 on the first anniversary of the effective date
of the new employment agreement, a bonus of up to $60,000 on the second
anniversary of such effective date and a bonus of $60,000 on the third
anniversary of such effective date, contingent upon his continued employment
with us. The bonus amount will be determined by the Compensation Committee of
the Board of Directors.

On February 2, 1998, Mr. Faulkner received a fully vested option for
125,526 shares of our common stock under the 1996 Plan, which was exercised by
Mr. Faulkner in May 2002 at a per share exercise price of $1.73. Mr. Faulkner
received an option to purchase 54,983 shares of common stock at a per share
exercise price of $1.29 in November 2001. The option will become exercisable as
to 33% of the shares covered by the option in November 2002 and will thereafter
become exercisable as to an additional 8.33% of such shares at the end of each
of our following eight fiscal quarters.

Mr. Faulkner's employment agreement also contains a non-competition
provision prohibiting him from competing against us during the term of the
employment agreement and for three years thereafter without our prior written
consent. Mr. Faulkner is also entitled to certain additional benefits (beyond
those generally available to our employees) including an automobile allowance
and additional life insurance.

C. EDMOND WISE, JR. AND H.R. HARVEY

In December 2000, we entered into an employment agreement with C. Edmond
Wise, Jr. Under the terms of that agreement, Mr. Wise serves as our Senior Vice
President of Store Operations. Mr. Wise currently receives an annual salary of
$190,000, and will be eligible to receive an annual bonus dependent upon the
achievement of budgeted Adjusted EBITDA and other financial performance
criteria. In addition, Mr. Wise received a signing bonus of $20,000. The term of
Mr. Wise's agreement extends until termination by either party at any time with
or without cause.

In June 2001, we entered into an employment agreement with H.R. Harvey.
Under the terms of that agreement, Mr. Harvey serves as our Senior Vice
President of Merchandising at an annual salary of $225,000, and will be eligible
to receive an annual bonus dependent upon the achievement of budgeted Adjusted
EBITDA and other financial performance criteria. In addition, Mr. Harvey
received a signing bonus of $20,000. The term of Mr. Harvey's agreement extends
until termination by either party at any time with or without cause.

The employment agreements for Mr. Wise and Mr. Harvey also contain
non-competition provisions prohibiting the executive from being, for a period of
two years following termination, connected with management or control of any
business similar to ours involving national or regional chain retail operations
specializing in or having a substantial inventory mix involving home decor.
These non-competition provisions do not restrict the ability of these executives
from working in management positions for department stores.

RELATED PARTY TRANSACTIONS

RECAPITALIZATION

On June 12, 1996, we completed a recapitalization whereby Advent
International Group (through affiliated entities (the "Advent Funds")) became
the largest beneficial owner of our equity. The 1996 recapitalization permitted
certain founding and management shareholders, consisting of Carl Kirkland,
Robert E. Alderson and two other shareholders (collectively, the "Principal
Shareholders"), to realize a portion of the value of their interest in
Kirkland's.

In connection with our 1996 recapitalization:

- The Advent Funds together with other investors purchased a majority of
our common stock and all of our Class A Preferred Stock;

- We redeemed a portion of our common stock held by the Principal
Shareholders and all of our common stock held by all of our other
shareholders; and

- We reclassified certain shares of our common stock held by the
Principal Shareholders into shares of our Class B Preferred Stock and
our Class C Preferred Stock.

Concurrent with the consummation of our 1996 recapitalization, we issued
an aggregate of $20 million of subordinated notes to a group of institutional
lenders. As of May 4, 2002, the aggregate balance of such subordinated notes,
including accrued and unpaid interest, was $24.7 million. In May 2002 we repaid
$4.7 million of accrued interest with proceeds of our new senior credit
facility. These notes mature in June 2003 and will be redeemed with a portion of
the proceeds of this offering. We also issued to these institutional lenders
warrants to purchase 919,421 shares of our common stock at an exercise price of
$0.01 per share.

The lender of $9.9 million of the outstanding subordinated debt is a
mezzanine and private equity firm with which a member of our Board of Directors,
Alexander S. McGrath, is affiliated. In fiscal 2001, interest in the amount of
$1.5 million was paid to or accrued in favor of the lender affiliated with Mr.
McGrath. In connection with the issuance of the subordinated note to the lender
affiliated with Mr. McGrath, we issued warrants to purchase 367,779 shares of
common stock. These and other warrants held by such lender will be exercised at
a price per share of $0.01 immediately prior to the completion of this offering.

The lender of $2.2 million of the outstanding subordinated debt is a
private equity investment firm with which another member of our Board of
Directors, John P. Oswald, is affiliated. In fiscal 2001, interest in the amount
of $0.3 million was paid to or accrued in favor of the lender affiliated with
Mr. Oswald. In May 2002, $0.4 million of accrued but unpaid interest was paid to
this lender. In connection with the issuance of the subordinated note to the
lender affiliated with Mr. Oswald, we issued 82,749 warrants to purchase common
stock. These and other warrants held by such lender will be exercised at a price
per share of $0.01 immediately prior to the completion of this offering.

LOANS INVOLVING OFFICERS

On October 15, 1998, we borrowed $5 million from Carl Kirkland, our
current Chairman, pursuant to an unsecured promissory note that was subordinated
to all of our senior indebtedness. The note was originally due as soon as we
would have sufficient cash following the pay down of our former senior revolving
line of credit, and originally bore interest at the same rate as our former
senior revolving line of credit. The note contained a provision whereby, if the
note was not repaid in full by May 1, 1999, the interest rate would increase to
the former senior revolving line of credit rate plus 2.0%. The note was amended
and restated on July 7, 1999 to change the maturity date to June 30, 2001 and
the timing of the interest payments. The note was again amended and restated on
December 31, 1999 to change the maturity date to June 30, 2003, to fix the
interest rate at 12.5% and to provide that, in the event the note was not repaid
in full on or before June 30, 2000, Carl Kirkland would receive warrants to
purchase

175,945 shares of our common stock at a per share purchase price of $0.01. In
August 2000, the loan was discharged through our issuance to Mr. Kirkland of
610,913 shares of common stock, 11,111 shares of Class D Preferred Stock and
warrants to purchase 76,371 shares of common stock at a per share purchase price
of $0.01. At that time, Mr. Kirkland received cash for the balance of the
interest due under the note. At that time, Mr. Kirkland also purchased
additional securities for cash. See "- 2000 Equity Transaction." In connection
with this transaction, Mr. Kirkland agreed to forego receipt of the warrants to
purchase 175,945 shares provided for under the note.

In May 2002, we loaned $217,000 to Reynolds Faulkner, our Executive Vice
President and Chief Financial Officer. The note bears interest at the rate of
4.75% per year which is payable over the term of the note. The note matures in
May 2005 and is due and payable in full at that time. The loan is collateralized
by marketable securities having a value of no less than the principal amount of
the loan together with 125,526 shares of our common stock owned by Mr. Faulkner.
The security agreement between us and Mr. Faulkner requires Mr. Faulkner to
supply additional collateral at any time the value of existing collateral falls
below 125% of the then principal amount of the loan. In addition, at the request
of Mr. Faulkner, we may lend up to an additional $500,000 principal amount under
the note in April 2003. Any additional principal amount would be subject to the
same interest rate, principal repayment and collateral provisions as the
original principal amount. The loan was approved by our board of directors and
audit committee.

1999 DEBT/EQUITY TRANSACTION

On July 7, 1999, we borrowed an aggregate of $7.5 million, of which $3.4
million was borrowed from the Advent Funds and $4.1 million was borrowed from
our former senior lenders. The $4.1 million borrowed from our former senior
lenders was collateralized by cash and letters of credit supplied by certain of
our warrantholders and shareholders. In connection with this transaction, we
issued warrants to purchase 871,311 shares of common stock to certain of our
warrantholders and shareholders as consideration for their loan (in the case of
the Advent Funds) or for posting cash or a letter of credit as collateral to
secure the loan from the senior lenders. In connection with this borrowing, the
following securityholders who are or were affiliated with members of our Board
of Directors or who are or were holders of at least five percent of our common
stock received the following number of warrants to purchase shares of common
stock at a price per share of $0.01:

<Table>
<Caption>
DOLLAR AMOUNT OF
LOAN OR COLLATERAL
SHAREHOLDER WARRANTS PROVIDED
- ----------- -------- ------------------

Carl Kirkland........................................ 70,763 $ 608,940
Robert E. Kirkland................................... 70,763 $ 608,940
Global Private Equity II Limited Partnership......... 276,013 $2,375,373
Advent Direct Investment Program Limited
Partnership........................................ 107,711 $ 926,992
Advent Partners Limited Partnership.................. 9,897 $ 85,642
CT/Kirkland Equity Partners, L.P..................... 79,615 $ 685,434
SSM/Kirkland Equity Partners, L.P.................... 95,560 $ 822,485
Capital Resource Lenders II, L.P..................... 59,876 $ 515,580
Capital Trust Investments, Ltd....................... 13,471 $ 115,975
</Table>

REORGANIZATION

Prior to December 31, 1999, we operated our stores through separate
corporations (ranging as high as 206 corporations) under common ownership and
through a wholly-owned subsidiary. On December 31, 1999, we reorganized by
merging each of the separate corporations that operated our stores and a
wholly-owned subsidiary into a newly formed subsidiary of Kirkland's. In
conjunction with the reorganization, we issued 11,326 additional shares of our
common stock, 2,939,230 additional shares of our Class A Preferred Stock,
1,019,535 additional shares of our Class B Preferred Stock and 541,771

additional shares of our Class C Preferred Stock to all of our then-existing
shareholders in the same proportion as their ownership interests in each such
class prior to the merger.

2000 EQUITY TRANSACTION

On August 8, 2000, we issued $20 million of our Class D Preferred Stock
and common stock to certain of our warrantholders and shareholders. In this
transaction, (1) we received $7.5 million in cash, including $3.8 million from
the Advent Funds and $3.7 million from Carl Kirkland, and issued 916,397 shares
of common stock and 16,667 shares of Class D Preferred Stock, (2) Carl
Kirkland's $5 million note originally issued on October 15, 1998 was cancelled
and we issued to him 610,913 shares of common stock and 11,111 shares of Class D
Preferred Stock and (3) the $7.5 million loan from July 7, 1999 was repaid
through our former senior lenders drawing on the $4.1 million of cash collateral
posted by certain of our warrantholders and shareholders in exchange for our
issuance of equity to these securityholders and the Advent Funds converting
their $3.4 million loan into newly issued securities. In these transactions, we
issued 2,443,706 shares of common stock and 44,445 shares of Class D Preferred
Stock to our securityholders at a purchase price of $0.01 per share for the
common stock and $449.99 per share for the Class D Preferred Stock. In
consideration for the purchase of these shares, we also issued warrants to
purchase 305,429 shares of common stock at a price per share of $0.01. The
following table lists the number of shares of common stock, shares of Class D
Preferred Stock and warrants issued to securityholders who are or were
affiliated with members of our Board of Directors or who are or were holders of
at least five percent of our common stock:

<Table>
<Caption>
COMMON CLASS D PURCHASE
SECURITYHOLDER STOCK PREFERRED STOCK WARRANTS PRICE PAID
- -------------- --------- --------------- -------- -----------

Carl Kirkland(1)...................... 1,137,372 20,686 142,185 $9,308,940
Robert E. Kirkland.................... 74,392 1,353 9,292 $ 608,940
Global Private Equity II Limited
Partnership ........................ 742,817 13,510 92,811 $6,079,317
Advent Direct Investment Program
Limited Partnership................. 113,265 2,060 14,131 $1,023,048
Advent Partners Limited Partnership... 22,158 403 2,804 $ 85,642
CT/Kirkland Equity Partners, L.P. .... 97,924 1,781 12,261 $ 801,409
SSM/Kirkland Equity Partners, L.P. ... 100,508 1,828 12,536 $ 822,485
Capital Resource Lenders II, L.P. .... 63,010 1,146 7,862 $ 515,580
</Table>

- ------------------------------

(1) $5 million of the purchase price for Carl Kirkland was paid through the
cancellation of $5 million of subordinated indebtedness owed by Kirkland's
to Mr. Kirkland. See "- Loans Involving Officers."

2001 DIVIDEND AGREEMENT

In connection with the June 2001 amendment to our senior subordinated
notes, we amended our charter in order to reduce the dividend rate on our Class
A Preferred Stock and Class D Preferred Stock from 10% to 4% until accrued and
unpaid interest on our subordinated debt was paid. We also agreed to use our
best efforts to obtain the necessary shareholder consent to amend the charter to
similarly reduce the dividend on our Class B Preferred Stock. Although we could
not get the requisite shareholder consent, in October 2001 we entered into a
Dividend Rate Agreement with Carl Kirkland and Robert E. Alderson in which these
two shareholders agreed to reduce the dividend on their Class B Preferred Stock
to 4%. As a result of the payment of accrued interest on our subordinated debt
in connection with the May 2002 refinancing of our senior credit facility, the
dividend rate on all of our outstanding Class A Preferred Stock, Class B
Preferred Stock and Class D Preferred Stock was restored to 10%.

PRE-OFFERING TRANSACTIONS

Preferred Stock. As of the date of this prospectus, we have four classes
of preferred stock. The Class A Preferred Stock, the Class B Preferred Stock and
the Class D Preferred Stock currently accrue

dividends at 10% per year compounded quarterly. Amounts classified as interest
associated with the Class C Preferred Stock currently accrue at a rate of 9% per
year, compounded semi-annually. No dividends have been paid on the Class A
Preferred Stock, the Class B Preferred Stock or the Class D Preferred Stock. In
connection with the completion of this offering, the Class A Preferred Stock,
the Class B Preferred Stock and the Class D Preferred Stock that is not
repurchased by us will be converted into common stock, and the Class C Preferred
Stock will be either repurchased by us or exchanged for common stock. The Advent
Funds and certain other shareholders currently own all of the Class A Preferred
Stock. Carl Kirkland, Robert E. Alderson and Robert E. Kirkland own all of the
Class B Preferred Stock and Class C Preferred Stock. Carl Kirkland, Robert E.
Kirkland, the Advent Funds, certain other shareholders and certain of our
subordinated lenders own the Class D Preferred Stock.

Stock Repurchase Agreement. In May 2002, we entered into a stock
repurchase agreement with the holders of our preferred stock (other than Carl
Kirkland). This agreement governs our repurchase of shares of our capital stock
from these preferred shareholders with a portion of the proceeds from this
offering. The purchase price for each share of Class A Preferred Stock, Class B
Preferred Stock and Class D Preferred Stock will be equal to 93% of the sum of
the stated value of such share plus all dividends with respect to such share
accrued and unpaid through the completion of this offering. The purchase price
for each share of Class C Preferred Stock will be equal to the stated value of
each such share. As of May 4, 2002, the stated value plus accrued dividends per
share for the Class A Preferred Stock and Class D Preferred Stock was $16.64 and
$515.16, respectively. The stated value plus accrued dividends per share for the
Class B Preferred Stock held by Carl Kirkland and Robert E. Alderson was $16.60
and the stated value plus accrued dividends per share for the Class B Preferred
Stock held by Robert E. Kirkland was $17.50. The purchase price for each share
of common stock will be an amount equal to 93% of the initial public offering
price of this offering.

The following table lists the number of shares of Class A Preferred
Stock, Class B Preferred Stock, Class C Preferred Stock and Class D Preferred
Stock and common stock to be purchased by us from securityholders who are
affiliated with members of our Board of Directors or who are holders of at least
five percent of our common stock, as well as the purchase price to be paid for
such shares, assuming an initial public offering price of $18.00.

<Table>
<Caption>
CLASS A CLASS B CLASS C CLASS D
PREFERRED PREFERRED PREFERRED PREFERRED COMMON PURCHASE
SECURITYHOLDER STOCK STOCK STOCK STOCK STOCK PRICE
- -------------- --------- --------- --------- --------- ------- -----------

Robert E. Alderson............. -- 602 54,218 -- -- $ 1,900,341
Robert E. Kirkland............. -- 347,745 246,250 1,353 589,799 $24,770,394
Global Private Equity II
Limited Partnership.......... 1,355,238 -- -- 9,457 -- $25,501,345
Advent Direct Investment
Program Limited
Partnership.................. 528,740 -- -- 214 -- $ 8,284,245
Advent Partners Limited
Partnership.................. 48,724 -- -- 251 -- $ 874,142
CT/Kirkland Equity Partners,
L.P. ........................ 390,992 -- -- 599 -- $ 6,337,051
SSM Venture Partners, L.P. .... 312,808 -- -- 127 -- $ 4,901,336
Capital Resource Lenders II,
L.P. ........................ -- -- -- 1,146 -- $ 549,046
</Table>

Carl Kirkland Exchange Agreement. In May 2002, Carl Kirkland, our
current Chairman, entered into an agreement with us under which he agreed to
exchange all of his outstanding shares of Class C Preferred Stock, having an
aggregate stated value of $7.9 million, into shares of our common stock prior to
the completion of this offering. The number of shares of common stock to be
issued to Mr. Kirkland equals the stated value of the shares of Class C
Preferred Stock divided by 93% of the initial offering price in this offering.
Assuming an initial offering price of $18.00 per share, the number of shares of
common stock to be issued to Mr. Kirkland will be 472,939. All of the shares of
common stock Mr. Kirkland is acquiring under the exchange agreement are being
sold in this offering. In addition, we will pay Mr. Kirkland accrued and unpaid
amounts classified as interest associated with the Class C Preferred Stock held
by Mr. Kirkland, totaling $1.1 million. See "Principal and Selling
Shareholders."

Robert E. Kirkland Redemption Agreement. In June 2002, we entered into
an agreement with Robert E. Kirkland, a cousin of our chairman and one of our
significant shareholders. Under this agreement, we agreed to repurchase all of
our stock owned by Mr. Kirkland upon completion of this offering in accordance
with the stock repurchase agreement discussed above. We also agreed to pay all
accrued fees under Mr. Kirkland's consulting agreement through the completion of
this offering, estimated at $1,044,818. Assuming an initial public offering
price of $18.00 per share, we will pay $24.8 million for all of Mr. Kirkland's
stock and his accrued consulting fees.

In exchange for our agreement to redeem all of Mr. Kirkland's capital
stock and warrants in us, Mr. Kirkland has agreed to a standstill agreement
under which he will not do, or encourage anyone else to do, any of the
following:

- acquire or seek to acquire assets, business, securities or options to
acquire ownership of us;

- make or participate in a solicitation of proxies to vote our stock;

- form, join or participate in a voting group with respect to our stock;

- arrange or participate in a financing to purchase our stock;

- seek to propose any merger, restructuring or similar transaction with
us or otherwise seek to influence or control us;

- seek to negotiate or influence terms of employment of our employees or
any collective bargaining agreement; or

- disparage us or any of our officers, directors, shareholders or
employees.

Conversion of Preferred Stock. Pursuant to the terms of our charter,
immediately prior to completion of this offering and as a part of the
Pre-Offering Transactions, any shares of our Class A, Class B and Class D
Preferred Stock not repurchased pursuant to the stock repurchase agreement will
be converted into shares of common stock. The preferred stock will convert into
common stock at a rate equal to the aggregate stated value of the preferred
stock plus accrued dividends, divided by the initial public offering price. At
an assumed initial public offering price of $18.00 per share, we will issue
1,528,276 shares of common stock upon conversion of our preferred stock.

Warrants. Immediately prior to the completion of this offering, our
warrantholders will exercise all outstanding warrants to purchase 2,096,160
shares of common stock at a nominal exercise price.

Charter Amendment and Stock Split. In order to implement the above
transactions, we will affect a 54.9827-for-one stock split of our common stock
prior to the consummation of this offering and we will amend and restate our
charter to provide for an authorized capitalization of 100,000,000 shares of
common stock and 10,000,000 shares of preferred stock.

SHAREHOLDERS AGREEMENT

We have entered into a shareholders agreement with our shareholders.
Pursuant to this agreement, certain seats on our Board of Directors have
historically been reserved for nominees of certain shareholders. We have agreed
to take all necessary actions to cause the Board of Directors to be comprised
of, subject to certain conditions, (1) two representatives nominated by Advent
International Group and (2) one nominee of each of Capital Trust Investments,
Ltd., Carl Kirkland, Robert E. Alderson, SSM Venture Partners, L.P. and Capital
Resource Lenders II, L.P. The agreement will terminate upon consummation of this
offering.

CONSULTING AGREEMENT

In connection with our 1996 recapitalization, we entered into a
consulting agreement with Robert E. Kirkland. Under the provisions of the
consulting agreement, Mr. Kirkland provides consulting services and advice
regarding purchasing and marketing of merchandise, leasing, store selection,
operations, internal management and other matters. The agreement provides for an
annual consulting fee of $679,000

and a term expiring in June 2003. The consulting agreement automatically
terminates upon the occurrence of certain events, including our sale, a change
of control or an initial public offering. Accordingly, Mr. Kirkland's consulting
agreement will automatically terminate upon the completion of this offering. We
do not intend to renew the consulting arrangement with Mr. Kirkland following
this offering.

INVENTORY PURCHASES FROM SIGNIFICANT SHAREHOLDER

We purchase inventory from a wholesaler previously owned by Robert E.
Kirkland. See "Principal and Selling Shareholders." These purchases aggregated
approximately $332,000 during fiscal 2001, $128,000 during fiscal 2000 and
$237,000 during fiscal 1999. There were no purchases of inventory from this
wholesaler during the quarter ended May 4, 2002.

INVENTORY PURCHASES FROM A FORMER AFFILIATE

In past years we purchased inventory from a manufacturer of which Advent
International Group was a significant shareholder until November 1999. These
purchases aggregated approximately $5,000 during fiscal 2000 and $292,000 during
fiscal 1999. We purchased no inventory from such manufacturer in fiscal 2001 and
no longer purchase inventory from them. Advent International Group, which
(through the Advent Funds) is one of our principal shareholders, used to be a
significant shareholder of such manufacturer. Two of our directors, David M.
Mussafer and John P. Oswald, were members of the Board of Directors of such
manufacturer until November 1999. Mr. Mussafer and Mr. Oswald are also
affiliated with certain of our principal shareholders. See "Principal and
Selling Shareholders."

CHARTER OF AIRPLANES

We rent aircraft for business travel from a company owned by Carl
Kirkland. We spent $23,000 for the rental of aircraft from this company in
fiscal 2001, $92,000 in fiscal 2000 and $63,000 in fiscal 1999. There were no
such travel expenses incurred during the quarter ended May 4, 2002.

RELATIONSHIP WITH SUNTRUST ROBINSON HUMPHREY

SunTrust Robinson Humphrey, a division of SunTrust Capital Markets, Inc.,
is one of the underwriters in this offering and it or its predecessor firm, The
Robinson-Humphrey Company, LLC, has from time to time provided us investment
banking services, including services rendered in connection with our 1996
recapitalization, and may continue to provide such services in the future.

We consider the terms of our transactions described in the preceding four
paragraphs to be at arms length and reasonably equivalent to terms we could
obtain through negotiations with an unaffiliated third party under similar
economic conditions.

PRINCIPAL AND SELLING SHAREHOLDERS

The following table sets forth certain information regarding the
beneficial ownership of our common stock at May 31, 2002 (assuming that the
Pre-Offering Transactions had occurred) by (i) each director and Named Executive
Officer, (ii) each person known by us to beneficially own more than 5% of our
common stock, (iii) each selling shareholder and (iv) all directors and
executive officers as a group, both before and after giving effect to the sale
of common stock in this offering. The number and percentage of shares
outstanding after the offering assumes that the price per share of common stock
sold in this offering is $18.00 per share and that 17,327,967 shares will be
outstanding following the offering.

<Table>
<Caption>
SHARES BENEFICIALLY OWNED
NUMBER OF SHARES AFTER THE OFFERING
BENEFICIALLY OWNED SHARES TO BE SOLD --------------------------
NAME PRIOR TO THE OFFERING IN THE OFFERING NUMBER PERCENTAGE
- ---- --------------------- ----------------- ----------- ------------

Carl Kirkland(1)....................... 1,598,697 472,939 1,125,758 6.5%
c/o Kirkland's, Inc.
805 N. Parkway
Jackson, TN 38305
The Carl T. Kirkland Grantor Retained
Annuity Trust 2001-1(2).............. 1,572,725 -- 1,572,725 9.1%
Robert E. Alderson(3).................. 645,393 -- 645,393 3.7%
c/o Kirkland's, Inc.
805 N. Parkway
Jackson, TN 38305
The Allison Leigh Alderson Trust(4).... 55,093 -- 55,093 *
The Amy Katherine Alderson Trust(5).... 55,093 -- 55,093 *
Reynolds C. Faulkner................... 125,526 -- 125,526 *
H.R. Harvey............................ -- -- -- *
C. Edmond Wise, Jr..................... -- -- -- *
David M. Mussafer(6)................... 3,976,826 -- 3,976,826 23.0%
c/o Advent International Corporation
75 State Street
Boston, MA 02109
R. Wilson Orr, III(7).................. 562,375 -- 562,375 3.2%
c/o SSM Venture Partners, L.P.
845 Crossover Lane, Suite 140
Memphis, TN 38117
John P. Oswald(8)...................... 809,856 28,331 781,525 4.5%
c/o CT/Kirkland Equity Partners, L.P.
757 Fifth Avenue, 22nd Floor
New York, NY 10017
Alexander S. McGrath(9)................ 498,524 149,116 349,408 2.0%
Murray Spain........................... -- -- -- *
Advent International
Group(10)(11)(12).................... 3,976,826 -- 3,976,826 23.0%
75 State Street
Boston, MA 02109
Capital Trust Investments, Ltd.(13).... 82,748 28,331 54,417 *
CT/Kirkland Equity Partners,
L.P.(14)............................. 727,108 -- 727,108 4.2%
757 Fifth Avenue, 22nd Floor
New York, NY 10017
R-H Capital Partners, L.P.(15)......... 263,325 -- 263,325 1.5%
SSM Venture Partners, L.P.(16)......... 562,375 -- 562,375 3.2%
845 Crossover Lane, Suite 140
Memphis, TN 38117
Crescent/Mach I Partners, L.P.(17)..... 87,612 -- 87,612 *
</Table>

The Marlborough Capital Investment
Fund, L.P.(18)....................... 199,200 56,318 142,882 *
Robert E. Kirkland(19)................. -- -- -- *
760 Sanders Chapel Road
Union City, TN 38261
Capital Resource Lenders II,
L.P.(20)............................. 498,524 149,116 349,408 2.0%
Allied Capital Corporation(21)......... 398,841 119,296 279,545 1.6%
Joseph R. Hyde, III(22)................ 265,365 -- 265,365 1.5%
All executive officers and directors as
a group (10 persons)(23)............. 8,217,197 650,386 7,566,811 43.7%
</Table>

- ------------------------------

* Represents less than 1% of the outstanding shares of common stock.

(1) Includes 212,945 shares of common stock issuable upon the exercise of
warrants, 912,813 shares of common stock to be issued upon conversion of
Class B Preferred Stock and Class D Preferred Stock and 472,939 shares of
common stock to be issued upon exchange of Class C Preferred Stock. None of
the shares subject to the underwriters' overallotment option are being
offered by Mr. Kirkland.

(2) Robert E. Alderson is the trustee of the trust, and as a result, he may be
deemed to beneficially own the shares held by the trust. Mr. Alderson
disclaims beneficial ownership of these shares. None of the shares subject
to the underwriters' overallotment option are being offered by the trust.

(3) Includes 325,168 shares of common stock and 320,225 shares of common stock
to be issued upon conversion of Class B Preferred Stock. Excludes 602
shares of Class B Preferred Stock being repurchased by us as part of the
Pre-Offering Transactions. None of the shares subject to the underwriters'
overallotment option are being offered by Mr. Alderson.

(4) Allison Leigh Alderson is the daughter Robert E. Alderson. Carl Kirkland is
the trustee of the trust, and as a result, he may be deemed to beneficially
own the shares held by the trust. Mr. Kirkland disclaims beneficial
ownership of these shares. If the underwriters' overallotment option is
exercised in full, 27,778 of the shares owned by the trust will be sold, as
a result of which the trust will own 27,315 shares of common stock, or 0.2%
of the common stock then outstanding, following this offering.

(5) Amy Katherine Alderson is the daughter Robert E. Alderson. Carl Kirkland is
the trustee of the trust, and as a result, he may be deemed to beneficially
own the shares held by the trust. Mr. Kirkland disclaims beneficial
ownership of these shares. If the underwriters' overallotment option is
exercised in full, 27,778 of the shares owned by the trust will be sold, as
a result of which the trust will own 27,315 shares of common stock, or 0.2%
of the common stock then outstanding, following this offering.

(6) In its capacity as the manager of funds affiliated with Advent
International Group, Advent International Corporation exercises sole voting
and investment power with respect to the 3,300,282 shares of common stock,
503,361 shares of common stock issuable upon the exercise of warrants and
173,184 shares of common stock issuable upon the conversion of Class D
Preferred Stock beneficially owned by the Advent Funds and, accordingly,
Advent International Group may be deemed to beneficially own such shares.
As a result, Mr. Mussafer, one of our directors and a Managing Director of
Advent International Corporation, may be deemed to beneficially own these
shares. Such beneficial ownership excludes 1,932,702 shares of Class A
Preferred Stock and 9,922 shares of Class D Preferred Stock owned by the
Advent Funds, which shares are being repurchased by us as part of the
Pre-Offering Transactions. If the underwriters' overallotment option is
exercised in full, 173,184 of the shares which may be deemed to be
beneficially owned by Advent International Group will be sold, as a result
of which Mr. Mussafer may be deemed to beneficially own 3,803,642 shares of
common stock, or 22.0% of the common stock then outstanding, following this
offering. Mr. Mussafer disclaims beneficial ownership of all shares held by
the Advent Funds other than the 8,137 shares that are indirectly
beneficially owned by Mr. Mussafer.

(7) Mr. Orr may be deemed to beneficially own 459,051 shares of common stock,
72,082 shares of common stock issuable upon the exercise of warrants and
31,242 shares of common stock issuable upon conversion of Class D Preferred
Stock held by SSM Venture Partners, L.P. Such beneficial ownership excludes
312,808 shares of Class A Preferred Stock and 127 shares of Class D
Preferred Stock beneficially owned by SSM Venture Partners, L.P., which
shares are being repurchased by us as part of the Pre-Offering
Transactions. Mr. Orr, one of our

directors, is a partner of SSM Corporation which is an affiliate of SSM
Venture Partners, L.P. None of the shares subject to the underwriters'
overallotment option are being offered by SSM Venture Partners, L.P.

(8) Mr. Oswald may be deemed to beneficially own 82,748 shares of common stock
issuable upon the exercise of warrants held by Capital Trust Investments,
Ltd., 587,930 shares of common stock, 105,346 shares of common stock
issuable upon the exercise of warrants and 33,832 shares of common stock
issuable upon conversion of Class D Preferred Stock held by CT/Kirkland
Equity Partners, L.P. Such beneficial ownership excludes 390,992 shares of
Class A Preferred Stock and 599 shares of Class D Preferred Stock
beneficially owned by CT/Kirkland Equity Partners, L.P., which shares are
being repurchased by us as part of the Pre-Offering Transactions. Mr.
Oswald, one of our directors, is a partner of CT Capital International
which is an affiliate of Capital Trust Investments, Ltd. and CT/Kirkland
Equity Partners, L.P. If the underwriters' overallotment option is
exercised in full, 313,578 of the shares owned by CT/Kirkland Equity
Partners, L.P. will be sold and 23,468 of the shares owned by Capital Trust
Investments, Ltd. will be sold, as a result of which Mr. Oswald may be
deemed to beneficially own 444,479 shares of common stock, or 2.6% of the
common stock then outstanding, following this offering.

(9) Mr. McGrath may be deemed to beneficially own 63,010 shares of common stock
and 435,514 shares of common stock issuable upon the exercise of warrants
held by Capital Resource Lenders II, L.P. Mr. McGrath, one of our
directors, is a general partner of Capital Resource Partners II, L.P., the
general partner of Capital Resource Lenders II, L.P. Such beneficial
ownership excludes 1,146 shares of Class D Preferred Stock owned by Capital
Resource Lenders II, L.P., which shares are being repurchased by us as part
of the Pre-Offering Transactions. If the underwriters' overallotment option
is exercised in full, 150,688 of the shares owned by Capital Resource
Lenders II, L.P. will be sold, as a result of which Mr. McGrath may be
deemed to beneficially own 198,720 shares of common stock, or 1.1% of the
common stock then outstanding, following this offering.

(10) Includes 2,441,177 shares of common stock, 116,004 shares of common stock
issuable upon conversion of Class D Preferred Stock and 368,820 shares of
common stock issuable upon the exercise of warrants held by Global Private
Equity Group II Limited Partnership. Excludes 1,355,238 shares of Class A
Preferred Stock and 9,457 shares of Class D Preferred Stock being
repurchased by us as part of the Pre-Offering Transactions. David Mussafer,
one of our directors, is an affiliate of Global Private Equity II Limited
Partnership. See Note 6. If the underwriters' overallotment option is
exercised in full, 116,004 of the shares beneficially owned by Global
Private Equity II Limited Partnership will be sold, as a result of which it
will beneficially own 2,809,997 shares of common stock, or 16.2% of the
common stock then outstanding, following this offering.

(11) Includes 775,861 shares of common stock, 52,826 shares of common stock
issuable upon conversion of Class D Preferred Stock and 121,840 shares of
common stock issuable upon the exercise of warrants held by Advent Direct
Investment Program Limited Partnership. Excludes 528,740 shares of Class A
Preferred Stock and 214 shares of Class D Preferred Stock being repurchased
by us as part of the Pre-Offering Transactions. David Mussafer, one of our
directors, is an affiliate of Advent Direct Investment Program Limited
Partnership. See Note 6. If the underwriters' overallotment option is
exercised in full, 52,826 of the shares beneficially owned by Advent Direct
Investment Program Limited Partnership will be sold, as a result of which
it will beneficially own 897,701 shares of common stock, or 5.2% of the
common stock then outstanding, following this offering.

(12) Includes 83,243 shares of common stock, 4,354 shares of common stock
issuable upon conversion of Class D Preferred Stock and 12,701 shares of
common stock issuable upon the exercise of warrants held by Advent Partners
Limited Partnership. Excludes 48,724 shares of Class A Preferred Stock and
251 shares of Class D Preferred Stock being repurchased by us as part of
the Pre-Offering Transactions. David Mussafer, one of our directors, is an
affiliate of Advent Partners Limited Partnership. See Note 6. If the
underwriters' overallotment option is exercised in full, 4,354 of the
shares beneficially owned by Advent Partners Limited Partnership will be
sold, as a result of which it will beneficially own 95,945 shares of common
stock, or 0.6% of the common stock then outstanding, following this
offering.

(13) Consists of 82,748 shares of common stock issuable upon the exercise of
warrants. John Oswald, one of our directors, is an affiliate of Capital
Trust Investments, Ltd. See Note 8. If the underwriters' overallotment
option is exercised in full, 23,468 of the shares owned by Capital Trust
Investments, Ltd. will be sold, as a result of which it will own 30,949
shares of common stock, or 0.2% of the common stock then outstanding.

(14) Includes 587,930 shares of common stock, 33,832 shares of common stock
issuable upon conversion of Class D Preferred Stock and 105,346 shares of
common stock issuable upon the exercise of warrants. Excludes 390,992
shares of Class A Preferred Stock and 599 shares of Class D Preferred Stock
being repurchased by us as part of the Pre-Offering Transactions. John
Oswald, one of our directors, is an affiliate of CT/Kirkland Equity
Partners, L.P. See Note 8. If the underwriters' overallotment option is
exercised in full, 313,578 of the shares

beneficially owned by CT/Kirkland Equity Partners, L.P. will be sold, as a
result of which it will beneficially own 413,530 shares of common stock, or
2.4% of the common stock then outstanding, following this offering.

(15) Includes 214,927 shares of common stock, 14,639 shares of common stock
issuable upon conversion of Class D Preferred Stock and 33,759 shares of
common stock issuable upon the exercise of warrants. Excludes 146,472
shares of Class A Preferred Stock and 60 shares of Class D Preferred Stock
being repurchased by us as part of the Pre-Offering Transactions. If the
underwriters' overallotment option is exercised in full, 113,564 of the
shares beneficially owned by R-H Capital Partners, L.P. will be sold, as a
result of which it will beneficially own 149,761 shares of common stock, or
0.9% of the common stock then outstanding, following this offering.

(16) Includes 459,051 shares of common stock, 31,242 shares of common stock
issuable upon conversion of Class D Preferred Stock and 72,082 shares of
common stock issuable upon the exercise of warrants. Excludes 312,808
shares of Class A Preferred Stock and 127 shares of Class D Preferred Stock
being repurchased by us as part of the Pre-Offering Transactions. R. Wilson
Orr III, one of our directors, is an affiliate of SSM Venture Partners,
L.P. See Note 7. None of the shares subject to the underwriters'
overallotment option are being offered by SSM Venture Partners, L.P.

(17) Includes 71,533 shares of common stock, 4,863 shares of common stock
issuable upon conversion of Class D Preferred Stock and 11,216 shares of
common stock issuable upon the exercise of warrants. Excludes 48,724 shares
of Class A Preferred Stock and 20 shares of Class D Preferred Stock being
repurchased by us as part of the Pre-Offering Transactions. If the
underwriters' overallotment option is exercised in full, 37,784 of the
shares beneficially owned by Crescent/Mach I Partners, L.P. will be sold,
as a result of which it will beneficially own 49,828 shares of common
stock, or 0.3% of the common stock then outstanding, following this
offering.

(18) Consists of 24,522 shares of common stock and 174,678 shares of common
stock issuable upon the exercise of warrants. Excludes 19,550 shares of
Class A Preferred Stock being repurchased by us as part of the Pre-Offering
Transactions. If the underwriters' overallotment option is exercised in
full, 61,620 of the shares owned by The Marlborough Capital Investment
Fund, L.P. will be sold, as a result of which it will own 81,262 shares of
common stock, or 0.5% of the common stock then outstanding, following this
offering.

(19) Excludes 347,745 shares of Class B Preferred Stock and 1,353 shares of
Class D Preferred Stock owned by Mr. Kirkland, which shares are being
repurchased by us as part of the Pre-Offering Transactions. Also excludes
589,799 shares of common stock held by Mr. Kirkland as Trustee for the
benefit of Mr. Kirkland, which shares are being repurchased by us as part
of the Pre-Offering Transactions.

(20) Includes 63,010 shares of common stock and 435,514 shares of common stock
issuable upon the exercise of warrants. Excludes 1,146 shares of Class D
Preferred Stock being repurchased by us as part of the Pre-Offering
Transactions. Alexander McGrath, one of our directors, is an affiliate of
Capital Resource Lenders II, L.P. See Note 9. If the underwriters'
overallotment option is exercised in full, 150,688 of the shares owned by
Capital Resource Lenders II, L.P. will be sold, as a result of which it
will own 198,720 shares of common stock, or 1.1% of the common stock then
outstanding, following this offering.

(21) Includes 50,419 shares of common stock and 348,422 shares of common stock
issuable upon the exercise of warrants. Excludes 917 shares of Class D
Preferred Stock being repurchased by us as part of the Pre-Offering
Transactions. If the underwriters' overallotment option is exercised in
full, 120,559 of the shares owned by Allied Capital Corporation will be
sold, as a result of which it will own 158,986 shares of common stock, or
0.9% of the common stock then outstanding, following this offering.

(22) Includes 216,192 shares of common stock, 14,259 shares of common stock
issuable upon conversion of Class D Preferred Stock and 34,914 shares of
common stock issuable upon the exercise of warrants. Excludes 146,622
shares of Class A Preferred Stock and 92 shares of Class D Preferred Stock
being repurchased by us as part of the Pre-Offering Transactions. None of
the shares subject to the underwriters' overallotment option are being
offered by Mr. Hyde.

(23) Includes 4,860,967 shares of common stock, 1,411,996 shares of common stock
issuable upon the exercise of warrants, 1,471,296 shares of common stock
issuable upon the conversion of Class A Preferred Stock, Class B Preferred
Stock and Class D Preferred Stock, and 472,939 shares of common stock to be
issued upon exchange of Class C Preferred Stock beneficially owned in the
aggregate by our executive officers and our directors. Excludes 2,636,502
shares of Class A Preferred Stock, 602 shares of Class B Preferred Stock
and 11,794 shares of Class D Preferred Stock beneficially owned in the
aggregate by our executive officers and our directors, which shares are
being repurchased by us as part of the Pre-Offering Transactions. If the
underwriters' overallotment option is exercised in full, 660,918 of the
shares subject thereto beneficially owned by our directors and our
executive officers will be sold, as a result of which they will
beneficially own 6,905,893 shares of common stock, or 39.9% of the common
stock then outstanding, following this offering.

DESCRIPTION OF CAPITAL STOCK

GENERAL

Upon completion of this offering, our authorized capital stock will
consist of 100,000,000 shares of common stock, no par value, and 10,000,000
shares of preferred stock, no par value. Upon completion of this offering, there
will be no preferred stock outstanding, as all of the outstanding preferred
stock will be converted into shares of common stock or will be redeemed with a
portion of the net proceeds of this offering. See "Use of Proceeds" and "Related
Party Transactions - Pre-Offering Transactions."

Upon the completion of this offering, there will be 17,327,967 shares of
common stock issued and outstanding and 3,724,947 shares of common stock
reserved for issuance under outstanding stock options and under our employee
benefits plans, including 724,947 shares issuable upon the exercise of options
that will be outstanding upon the completion of this offering. As of the date of
this prospectus, we have 7,662,719 shares of common stock, warrants to purchase
2,096,160 shares of common stock, 3,007,630 shares of Class A Preferred Stock,
1,043,235 shares of Class B Preferred Stock, 558,893 shares of Class C Preferred
Stock and 44,445 shares of Class D Preferred Stock issued and outstanding.
Pursuant to the Pre-Offering Transactions which will take place immediately
prior to completion of this offering, all outstanding shares of common stock
will be split on a 54.9827-for-one basis. In addition, a portion of the
outstanding shares of common stock, Class A Preferred Stock, Class B Preferred
Stock, Class C Preferred Stock and Class D Preferred Stock will be repurchased
by us with proceeds from this offering. All remaining Class A, Class B and Class
D Preferred Stock will be converted into 1,511,968 shares of common stock. All
of our outstanding warrants will be exercised for common stock. All of the
outstanding shares of the Class C Preferred Stock not repurchased by us will be
exchanged for common stock immediately prior to completion of this offering or
repurchased with a portion of our net proceeds of this offering. See "Use of
Proceeds" and "Related Party Transactions - Pre-Offering Transactions."

COMMON STOCK

The holders of common stock are entitled to one vote for each share held
of record on each matter submitted to a vote of shareholders. All holders of
common stock are entitled to share equally in dividends declared on our common
stock. See "Dividend Policy." Stock dividends may be paid on common stock,
whether or not there are shares of preferred stock outstanding. In the event of
any voluntary or involuntary liquidation, dissolution or winding up of
Kirkland's, after payment has been made to the holders of shares of preferred
stock, if any, for the full amount to which they are entitled, the holders of
the shares of common stock are entitled to share equally in the assets available
for distribution.

We and the selling shareholders are selling common stock in this
offering. All currently outstanding shares of common stock are, and upon
issuance, the shares of common stock being sold by us in this offering will be,
duly authorized, validly issued, fully paid and non-assessable.

The rights, preferences and privileges of holders of common stock are
subject to, and may be adversely affected by, the rights of the holders of
shares of any series of preferred stock that we may designate and issue in the
future. See "Risk Factors - 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."

PREFERRED STOCK

Pursuant to our amended and restated charter to be filed prior to the
completion of this offering, the Board of Directors will be authorized, without
further action by the shareholders, to issue up to 10,000,000 shares of
preferred stock in one or more series or classes and to establish the
designations, preferences, qualifications, privileges, limitations,
restrictions, options, conversion rights and other special or relative rights of
any series of preferred stock so issued. The issuance of shares of preferred
stock could adversely affect the voting power and other rights of holders of
common stock. Because the Board of Directors without shareholder action may fix
the terms of the preferred stock, the preferred stock could be
77

issued quickly with terms designed to defeat a proposed takeover of Kirkland's,
or to make the removal of our management more difficult. The authority to issue
preferred stock or rights to purchase preferred stock could be used to
discourage a change in control of Kirkland's. Our management is not aware of any
such threatened transaction to obtain control of Kirkland's, and the Board of
Directors has no current plans to designate and issue any shares of preferred
stock.

WARRANTS

There are currently an aggregate of 2,096,160 warrants to purchase shares
of common stock outstanding. All of these warrants are currently exercisable and
their exercise price is $0.01 per share, subject to certain anti-dilution
adjustment provisions. Prior to the consummation of this offering, all of our
warrantholders will exercise all of their warrants. This offering will not
trigger any of the anti-dilution adjustment provisions in the warrants. "See
Related Party Transactions - Pre-Offering Transactions."

LIMITATION OF DIRECTORS' LIABILITY

The charter provides that none of our directors will be personally liable
to us or any of our shareholders for monetary damages for breach of any
fiduciary duty except for liability arising from (i) any breach of a director's
duty of loyalty to us or our shareholders, (ii) any acts or omissions not in
good faith or which involve intentional misconduct or a knowing violation of law
or (iii) any unlawful distributions. We believe this provision will assist us in
securing and maintaining the services of qualified non-employee directors.

REGISTRATION RIGHTS

Pursuant to a registration rights agreement, by and among us and our
shareholders, the holders of 10,322,359 shares of our common stock will be
entitled to register these shares under the Securities Act.

Under the registration rights agreement, holders may demand that we file
a registration statement under the Securities Act covering some or all of the
holders' registrable securities. The registration rights agreement limits the
number of demand registrations that we are required to make on behalf of the
holders, and also requires a minimum anticipated price to the public of $5
million. In an underwritten offering, the managing underwriter has the right,
subject to specified conditions, to limit the number of registrable securities
if it is believed such registrations will exceed the number that can be sold at
the desired price. In such a case, mezzanine warrantholders have priority in
registration over other holders of registrable securities.

In addition, holders have "piggyback" registration rights. If we propose
to register any of our equity securities under the Securities Act other than
pursuant to demand registration rights noted above or specified excluded
registrations, holders may require us to include all or a portion of their
registrable securities in the registration and in any related underwriting. In
an underwritten offering, the managing underwriter, if any, has the right,
subject to specified conditions, to limit the number of registrable securities.
Additionally, such piggyback registrations are subject to delay or termination
of the registration. All shareholders with registration rights have waived their
rights with respect to this offering.

The holders also have unlimited rights to require us to register their
shares on Form S-3 once we are eligible to use such form.

In general, we will bear all fees, costs and expenses of registrations,
other than underwriting discounts and commissions.

ANTI-TAKEOVER EFFECT OF CHARTER AND BYLAW PROVISIONS AND TENNESSEE LAWS

Our charter and bylaws as well as Tennessee law contain various
provisions intended to (i) promote stability of our shareholder base and (ii)
render more difficult certain unsolicited or hostile attempts to take us over
which could disrupt us, divert the attention of our directors, officers and

employees and adversely affect the independence and integrity of our business. A
summary of these provisions of the charter, bylaws and Tennessee law is set
forth below.

Classified Board; Removal of Directors. Pursuant to the charter, our
Board of Directors may consist of between three and 15 members, as determined
from time to time by the Board of Directors. The directors will be divided into
three classes, each class to consist as nearly as possible of one-third of the
directors. Directors elected by shareholders at an annual meeting of
shareholders will be elected by a plurality of all votes cast at such annual
meeting. Initially, the terms of office of the three classes of directors will
expire, respectively, at the annual meeting of shareholders in 2003, 2004 and
2005. After the expiration of the terms of the initial classified Board of
Directors, the terms of the successors of each of the three classes of directors
will expire three years from the year of their respective election.

The charter provides that except as otherwise provided for or fixed by or
pursuant to an amendment to the charter setting forth the rights of the holders
of any class or series of preferred stock, newly created directorships resulting
from any increase in the number of directors and any vacancies on our Board of
Directors resulting from death, resignation, disqualification, removal or other
cause will be filled by the affirmative vote of a majority of the remaining
directors then in office, even though less than a quorum of the Board of
Directors, or by a sole remaining director. Any director elected in accordance
with the preceding sentence will hold office until the next annual meeting of
shareholders and until such director's successor is elected and qualified. At
such next annual meeting, the shareholders shall elect a director to serve the
remaining term of the newly created or vacated directorship and until such
director's successor shall have been duly elected and qualified. No decrease in
the number of directors constituting our Board of Directors will shorten the
term of any incumbent director. Subject to the rights of holders of any
preferred stock, any director may be removed from office only for cause and only
after a finding of cause by a majority of the Board of Directors (excluding the
director subject to removal) followed by the affirmative vote of the holders of
at least 80% of the voting power of all of our outstanding capital stock
entitled to vote generally in the election of directors, voting together as a
single class.

These provisions of the charter preclude a third party from removing
incumbent directors and simultaneously gaining control of our Board of Directors
by filling the vacancies created by removal with its own nominees. Under the
classified board provisions described above, it would take at least two
elections of directors for any individual or group to gain control of our Board
of Directors. Accordingly, these provisions could discourage a third party from
initiating a proxy contest, making a tender offer or otherwise attempting to
gain control of Kirkland's.

Special Shareholders' Meetings and Right to Act by Written Consent. The
charter and the bylaws provide that a special meeting of shareholders may be
called only by our Chairman or our President or upon a resolution adopted by a
majority of the entire Board of Directors. Shareholders are not generally
permitted to call, or to require that the Board of Directors call, a special
meeting of shareholders pursuant to the terms of the charter. Moreover, the
business permitted to be conducted at any special meeting of shareholders is
limited to the business brought before the meeting pursuant to the notice of the
meeting given by Kirkland's. Tennessee law provides that shareholders may act by
written consent if all shareholders entitled to vote are parties to the written
consent. The affirmative vote of the number of shares necessary to authorize
shareholder action, evidenced by such written consent, constitutes the act of
the shareholders.

Procedures for Shareholder Nominations and Proposals. The bylaws
establish an advance notice procedure for shareholders to nominate candidates
for election as directors and to propose any new business at any annual meeting.
Only persons nominated in accordance with our shareholder notice procedure are
eligible to serve as directors, and only business brought before the annual
meeting in accordance with our shareholder notice procedure may be conducted at
the annual meeting. Under the shareholder notice procedure, notice of
shareholder nominations and proposals for new business at the annual meeting
must be delivered to our Secretary, subject to certain exceptions, not in less
than 60 days nor more than 90 days prior to the first anniversary of the
previous year's annual meeting; provided, however that in the event the date of
the annual meeting is more than 30 days before or more than

60 days after such anniversary date, notice by the shareholder must be received
not earlier than the 90th day prior to the annual meeting and not later than the
60th day prior to the annual meeting or the 15th day following public
announcement of such meeting. For nominations and proposals for any special
meetings, the bylaws require notice not more than 90 days nor less than 60 days
before the special meeting, or the 15th day following the day on which public
announcement is first made of the special meeting and of the nominees proposed
by the Board of Directors to be elected at such meeting. The bylaws provide that
notice to our Secretary with respect to any shareholder nomination or proposal
must include certain information regarding the nominee, the proposal and the
shareholder nominating a director or proposing business. According to the
bylaws, the Chairman has the power to determine whether a shareholder nomination
or proposal was brought in accordance with our shareholder notice procedure.

By requiring advance notice of nominations by shareholders, our
shareholder notice procedure affords the Board of Directors an opportunity to
consider the qualifications of the proposed nominees and, to the extent deemed
necessary or desirable by the Board of Directors, to inform shareholders about
such qualifications. By requiring advance notice of other proposed business, our
shareholder notice procedure provides a more orderly procedure for conducting
annual meetings of shareholders and, to the extent deemed necessary or desirable
by the Board of Directors, provides the Board of Directors with an opportunity
to inform shareholders, prior to such meetings, of the Board of Directors'
position regarding action to be taken with respect to such business, so that
shareholders can better decide whether to attend such a meeting or to grant a
proxy regarding the disposition of any such business.

Although the bylaws do not give the Board of Directors any power to
approve or disapprove shareholder nominations for the election of directors or
proposals for action, the Chairman has the power to determine compliance with
our shareholder notice procedure. The bylaws also may have the effect of
precluding a contest for the election of directors or the consideration of
shareholder proposals if the proper procedures are not followed, and of
discouraging or deterring a third party from conducting a solicitation of
proxies to elect its own slate of directors or to approve its own proposal,
without regard to whether consideration of such nominees or proposals might be
harmful or beneficial to Kirkland's and its shareholders.

Amendment of Kirkland's Charter and Bylaws. The charter provides that,
unless previously approved by the Board of Directors, the affirmative vote of at
least 80% of all of our outstanding capital stock entitled to vote generally in
the election of directors ("Voting Power"), voting together as a single class,
would be required to (i) amend or repeal the provisions of the charter with
respect to the election of directors and the right to call a special
shareholders' meeting, (ii) adopt any provision inconsistent with such
provisions and (iii) amend or repeal the provisions of the charter with respect
to amendments to the charter or the bylaws. With the previous approval of the
Board of Directors, a majority of the Voting Power is required to amend these
charter provisions. In addition, the bylaws provide that the amendment or repeal
by shareholders of any bylaws made by the Board of Directors would require the
affirmative vote of at least 80% of all of our outstanding capital stock
entitled to vote generally in the election of directors, voting together as a
single class.

Tennessee Corporate Takeover Acts. Tennessee has enacted several
corporate takeover acts for the purpose of protecting its substantial interest
in domestic corporations conducting a significant amount of business within the
state.

Business Combination Act. Tennessee's Business Combination Act provides
that a party (such party is called an "interested shareholder") owning 10% or
more of the stock in a "resident domestic corporation" (which we are) cannot
engage in a business combination with the resident domestic corporation unless
the combination (i) takes place at least five years after the interested
shareholder first acquired 10% or more of the resident domestic corporation, and
(ii) either (A) is approved by at least two-thirds of the non-interested voting
shares of the resident domestic corporation or (B) satisfies certain fairness
conditions specified in the Business Combination Act.

These provisions apply unless one of two events occurs. A business
combination with an entity can proceed without delay when approved by the target
corporation's board of directors before that entity

becomes an interested shareholder, or the resident domestic corporation may
enact a charter amendment or bylaw to remove itself entirely from the Business
Combination Act. This charter amendment or bylaw must be approved by a majority
of the shareholders who have held shares for more than one year prior to the
vote. It may not take effect for at least two years after the vote. We have not
adopted a charter or bylaw amendment removing us from coverage under the
Business Combination Act.

The Business Combination Act further provides an exemption from liability
for officers and directors of resident domestic corporations who do not approve
proposed business combinations or charter amendments and bylaws removing their
corporations from the Business Combination Act's coverage as long as the
officers and directors act in "good faith belief" that the proposed business
combination would adversely affect their corporation's employees, customers,
suppliers or the communities in which their corporation operates and such
factors are permitted to be considered by the board of directors under the
applicable charter.

Investor Protection Act. Tennessee's Investor Protection Act ("Investor
Protection Act") applies to tender offers directed at corporations (called
"offeree companies") that have "substantial assets" in Tennessee and that are
either incorporated in or have a principal office in Tennessee. We satisfy both
of these requirements. The Investor Protection Act requires an offeror making a
tender offer for an offeree company to file with the Commissioner of Commerce
and Insurance (the "Commissioner") a registration statement. When the offeror
intends to gain control of the offeree company, the registration statement must
indicate any plans the offeror has for the offeree. The Commissioner may require
additional information material concerning the takeover offer and may call for
hearings. The Investor Protection Act does not apply to an offer that the
offeree company's board of directors recommends to shareholders.

In addition to requiring the offeror to file a registration statement
with the Commissioner, the Investor Protection Act requires the offeror and the
offeree company to deliver to the Commissioner all solicitation materials used
in connection with the tender offer. The Investor Protection Act prohibits
"fraudulent, deceptive, or manipulative acts or practices" by either side, and
gives the Commissioner standing to apply for equitable relief to the Chancery
Court of Davidson County, Tennessee, or to any other chancery court having
jurisdiction whenever it appears to the Commissioner that the offeror, the
offeree company or any of its respective affiliates has engaged in or is about
to engage in a violation of the Investor Protection Act. Upon proper showing,
the chancery court may grant injunctive relief. The Investor Protection Act
further provides civil and criminal penalties for violations.

Greenmail Act. The Tennessee Greenmail Act ("Greenmail Act") applies to
any corporation chartered under the laws of Tennessee that has a class of voting
stock registered or traded on a national securities exchange or registered with
the Securities and Exchange Commission pursuant to Section 12(g) of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"). The Greenmail
Act provides that it is unlawful for any corporation or subsidiary to purchase,
either directly or indirectly, any of its shares at a price above the market
value, as defined in the Greenmail Act, from any person who holds more than 3%
of the class of the securities purchased if such person has held such shares for
less than two years, unless either the purchase is first approved by the
affirmative vote of a majority of the outstanding shares of each class of voting
stock or the corporation makes an offer of at least equal value per share to all
holders of shares of such class.

TRANSFER AGENT AND REGISTRAR

The transfer agent and registrar for the common stock is StockTrans, Inc.

SHARES ELIGIBLE FOR FUTURE SALE

Prior to this offering, there has been no public market for our
securities. No predictions can be made of the effect, if any, that the sale or
availability for sale of shares of additional common stock will have on the
market price of the common stock. Nevertheless, sales of a substantial number of
such shares by existing shareholders or by shareholders purchasing in this
offering or the perception that such sales may occur could have an adverse
effect on the market price of the common stock.

SALE OF RESTRICTED SHARES

Upon completion of this offering, we will have 17,327,967 shares of
common stock outstanding. Of these shares, the 7,000,000 shares of common stock
offered in this offering will be freely tradeable without restriction or further
registration, except for shares purchased by our "affiliates" or our
"underwriters" (as those terms are defined under the Securities Act), which will
become eligible for sale in the public market subject to compliance with Rule
144 under the Securities Act. The remaining 10,327,967 outstanding shares of
common stock (9,277,967 shares if the underwriters' overallotment option is
exercised in full) will be restricted securities (the "Restricted Shares") and
may not be sold unless they are registered under the Securities Act or are sold
pursuant to an exemption from registration, such as the exemption provided by
Rule 144 under the Securities Act. All of the Restricted Shares will be subject
to the 180-day "lock-up" agreements described below. Upon expiration of the
lock-up agreements, 1,078,245 of the Restricted Shares will be eligible for sale
immediately in the public market without restriction pursuant to Rule 144(k),
and the remaining 9,249,722 Restricted Shares will be eligible for sale, subject
to compliance with the volume limitations and manner of sale requirements of
Rule 144. Holders of substantially all of these Restricted Shares have the right
to require us to register the shares for sale under the Securities Act in
certain circumstances and have the right to include those shares in a Kirkland's
initiated registration. See "Description of Capital Stock - Registration
Rights."

RULE 144

In general, Rule 144 allows a person who has beneficially owned
Restricted Shares for at least one year, including persons who may be deemed our
affiliates, to sell, within any three-month period, up to the number of
Restricted Shares that does not exceed the greater of:

- 1% of the then outstanding shares of common stock and

- our average weekly trading volume during the four calendar weeks
preceding the date on which notice of the sale is filed with the
Securities and Exchange Commission.

A person who is not deemed to have been our affiliate at any time during
the three months preceding a sale and who has beneficially owned his or her
Restricted Shares for at least two years would be entitled to sell such
Restricted Shares without regard to the volume limitations described above and
certain other conditions of Rule 144.

LOCK-UP AGREEMENTS

We and our executive officers, directors and all of the holders of our
common stock before this offering (who will hold, in the aggregate, 59.6% of our
common stock after this offering) have agreed, except in limited circumstances,
not to sell or transfer any shares of our common stock for 180 days after the
date of this prospectus without first obtaining the written consent of Merrill
Lynch. See "Underwriting - No Sales of Similar Securities."

RULE 701

Under Rule 701, any of our employees, officers or directors or
consultants who purchased shares pursuant to a written compensatory plan or
contract, including our 1996 Executive Incentive and Non-Qualified Stock Option
Plan and our 2002 Equity Incentive Plan, who is not our affiliate, is entitled
to sell such shares without having to comply with the public information,
holding period, volume limitation or

notice provisions of Rule 144 commencing 90 days after the date of effectiveness
(the "Effective Date") of the registration statement of which this prospectus is
a part. In addition, under Rule 701, any of our affiliates who purchased shares
pursuant to a written compensatory plan or contract is entitled to sell such
shares without having to comply with the Rule 144 holding period restrictions
commencing 90 days after the Effective Date, subject to the "lock-up" agreements
described above.

OPTION GRANTS/S-8 REGISTRATION STATEMENT

The 219,106 shares underlying certain options which will be exercisable
upon completion of this offering will also, upon exercise of the options, become
eligible for sale subject to the applicable "lock-up" agreements, as described
above, and compliance with Rule 144. An additional 505,841 shares underlying
options which will become exercisable periodically beginning in November 2002
will become eligible for sale subject to compliance with Rule 144. In addition,
we may issue up to 3,000,000 additional shares of common stock pursuant to our
2002 Equity Incentive Plan and our Employee Stock Purchase Plan. See
"Management - Employee Benefit Plans." We intend to file one or more
registration statements under the Securities Act to register common stock to be
issued pursuant to these plans, which would allow the shares issued thereunder
to be freely tradeable without restriction or further registration, except for
shares purchased by our "affiliates" or our "underwriters."

UNITED STATES TAX CONSEQUENCES TO NON-UNITED STATES HOLDERS

The following is a general discussion of the material United States
federal income and estate tax consequences of the acquisition, ownership and
disposition of our common stock by a non-U.S. holder. As used in this
discussion, the term "non-U.S. holder" means a beneficial owner of our common
stock that is not, for United States federal income tax purposes:

- an individual who is a citizen or resident of the United States;

- a corporation or partnership (or entity classified as a corporation or
partnership for such purposes) created or organized in or under the
laws of the United States or of any political subdivision of the United
States;

- an estate whose income is includible in gross income for U.S. federal
income tax purposes regardless of its source; or

- a trust, if a U.S. court is able to exercise primary supervision over
the administration of the trust and one or more U.S. persons have
authority to control all substantial decisions of the trust or if the
trust has a valid election in effect under applicable U.S. Treasury
regulations to be treated as a "United States person" for such
purposes.

This discussion does not consider:

- U.S. state and local or non-U.S. tax consequences;

- specific facts and circumstances that may be relevant to a particular
non-U.S. holder's tax position, including, if the non-U.S. holder is a
partnership or trust that the United States federal income tax
consequences of holding and disposing of our common stock may be
affected by certain determinations made at the partner or beneficiary
level;

- the United States federal income tax consequences for the shareholders,
partners or beneficiaries of a non-U.S. holder;

- special United States federal income tax rules that may apply to
particular non-U.S. holders, such as financial institutions, insurance
companies, tax-exempt organizations, U.S. expatriates, broker-dealers,
and traders in securities; and

- special United States federal income tax rules that may apply to a
non-U.S. holder that holds our common stock as part of a "straddle,"
"hedge," "conversion transaction," "synthetic security" or other
integrated investment.

The following discussion is based on provisions of the U.S. Internal
Revenue Code of 1986, as amended, applicable U.S. Treasury regulations and
administrative and judicial interpretations, all as in effect on the date of
this prospectus, and all of which are subject to change, retroactively or
prospectively. The following summary assumes that a non-U.S. holder holds our
common stock as a capital asset. Each non-U.S. holder should consult a tax
advisor regarding the United States federal, state, local and non-U.S. income
and other tax consequences of acquiring, holding and disposing of shares of our
common stock.

DIVIDENDS

We do not anticipate paying cash dividends on our common stock in the
foreseeable future. See "Dividend Policy." In the event, however, that we pay
dividends on our common stock, we will have to withhold a United States federal
withholding tax at a rate of 30%, or a lower rate under an applicable income tax
treaty, from the gross amount of the dividends paid to a non-U.S. holder.
Non-U.S. holders should consult their own tax advisors regarding their
entitlement to benefits under a relevant income tax treaty.

Dividends that are effectively connected with a non-U.S. holder's conduct
of a trade or business in the United States and, if an income tax treaty
applies, that are attributable to a permanent establishment in the United
States, will be taxed on a net income basis at the regular graduated rates and
in the manner applicable to United States persons. In that case, we will not
have to withhold U.S. federal withholding tax if the non-U.S. holder complies
with applicable certification and disclosure requirements. In addition, a
"branch profits tax" may be imposed at a 30% rate, or a lower rate under an
applicable income tax treaty, on dividends received by a foreign corporation
that are effectively connected with the conduct of a trade or business in the
United States.

In order to claim the benefit of an applicable income tax treaty to
either reduce the withholding tax, or eliminate it because the dividend is
attributable to a US permanent establishment, a non-U.S. holder will be required
to satisfy applicable certification and other requirements. However,

- in the case of our common stock held by a foreign partnership, the
certification requirement will generally be applied to the partners of
the partnership and the partnership will be required to provide us
certain information;

- if you hold our common stock through an intermediary (as defined in the
Treasury regulations, the certification requirement may be applied to
you, and not to the intermediary, and the intermediary may be obligated
to provide us certain information;

- in the case of our common stock held by a foreign trust, the
certification requirement will generally be applied to the trust or the
beneficial owners of the trust depending on whether the trust is a
"foreign complex trust," "foreign simple trust," or "foreign grantor
trust" as defined in the applicable U.S. Treasury regulations; and

- look-through rules will apply for tiered partnerships, foreign simple
trusts and foreign grantor trusts.

A non-U.S. holder that is a foreign partnership or a foreign trust is
urged to consult its own tax advisor regarding its status under these U.S.
Treasury regulations and the certification requirements applicable to it.

If we withhold tax on dividends at 30%, but you are a non-U.S. holder
that is eligible for a reduced rate of U.S. federal withholding tax under an
income tax treaty, you may obtain a refund or credit of any excess amounts
withheld by filing an appropriate claim for a refund with the U.S. Internal
Revenue Service.

GAIN ON DISPOSITION OF COMMON STOCK

A non-U.S. holder generally will not be taxed on gain recognized on a
disposition of our common stock unless:

- the gain is effectively connected with the non-U.S. holder's conduct of
a trade or business in the United States and, if an income tax treaty
applies, is attributable to a permanent establishment maintained by the
non-U.S. holder in the United States; in these cases, the gain will be
taxed on a net income basis at the regular graduated rates and in the
manner applicable to United States persons (unless an applicable income
tax treaty provides otherwise) and, if the non-U.S. holder is a foreign
corporation, the "branch profits tax" described above may also apply;

- the non-U.S. holder is an individual who holds our common stock as a
capital asset, is present in the United States for more than 182 days
in the taxable year of the disposition and meets other requirements; or

- we are or have been a "U.S. real property holding corporation" for U.S.
federal income tax purposes at any time during the shorter of the
five-year period ending on the date of disposition or the period that
the non-U.S. holder held our common stock.

Generally, a corporation is a "U.S. real property holding corporation" if
the fair market value of its "U.S. real property interests" equals or exceeds
50% of the sum of the fair market value of its worldwide real property interests
plus its other assets used or held for use in a trade or business. We believe
that we are not currently, and we do not anticipate becoming in the future, a
U.S. real property holding corporation.

However, even if we are or have been a U.S. real property holding
corporation, a non-U.S. holder which did not beneficially own, directly or
indirectly, more than 5% of the total fair market value of our common stock at
any time during the shorter of the five-year period ending on the date of
disposition or the period that our common stock was held by the non-U.S. holder
(a "non-5% holder") and which is not otherwise taxed under any other
circumstances described above, generally will not be taxed on any gain realized
on the disposition of our common stock if, at any time during the calendar year
of the disposition, our common stock was regularly traded on an established
securities market within the meaning of the applicable U.S. Treasury
regulations.

FEDERAL ESTATE TAX

Our common stock that is owned or treated as owned by an individual who
is a non-U.S. holder (as specially defined for U.S. federal estate tax purposes)
at the time of death will be included in the individual's gross estate for U.S.
federal estate tax purposes, unless an applicable estate tax or other treaty
provides otherwise and, therefore, may be subject to U.S. federal estate tax.

INFORMATION REPORTING AND BACKUP WITHHOLDING TAX

Dividends paid to you may be subject to information reporting and United
States backup withholding tax. If you are a non-U.S. holder, you will be exempt
from such backup withholding tax if you provide a Form W-8BEN or otherwise meet
documentary evidence requirements for establishing that you are a non-U.S.
holder or otherwise establish an exemption. If you are a U.S. Holder, you will
be exempt from back up withholding if you provide a completed and executed form
W-9 and the IRS has not advised us that you are subject to back up withholding,
or you meet certain other exemptions from back up withholding.

The gross proceeds from the disposition of our common stock may be
subject to information reporting and backup withholding tax. If you sell your
common stock outside the United States through a non-U.S. office of a non-U.S.
broker and the sales proceeds are paid to you outside the United States, then
the United States backup withholding and information reporting requirements
generally will not apply to that payment. However, U.S. information reporting,
but not backup withholding, will apply to a payment of sales proceeds, even if
that payment is made outside the United States, if you sell your common stock
through a non-U.S. office of a broker that:

- is a United States person;

- derives 50% or more of its gross income in specific periods from the
conduct of a trade or business in the United States;

- is a "controlled foreign corporation" for United States federal income
tax purposes; or

- is a foreign partnership, if at any time during its tax year:

- one or more of its partners are United States persons who in the
aggregate hold more than 50% of the income or capital interests
in the partnership; or

- the foreign partnership is engaged in a United States trade or
business, unless the broker has documentary evidence in its
files that you are a non-U.S. person and certain other
conditions are met or you otherwise establish an exemption.

If you receive payments of the proceeds of a sale of our common stock to
or through a United States office of a broker, the payment is subject to both
United States backup withholding and information reporting unless you are a
non-US person and provide a Form W-8BEN certifying that you are a non-U.S.
person or you are a US person and you provide a completed and executed Form W-9,
and the IRS has not advised us that you are subject to back up withholding, or
you otherwise establish an exemption.

You generally may obtain a refund of any amounts withheld under the
backup withholding rules that exceed your income tax liability by filing a
refund claim with the U.S. Internal Revenue Service.

UNDERWRITING

We intend to offer the shares in the U.S. and Canada through the
underwriters. Merrill Lynch, Pierce, Fenner & Smith Incorporated, CIBC World
Markets Corp., SunTrust Capital Markets, Inc. and U.S. Bancorp Piper Jaffray
Inc. are acting as representatives of the underwriters named below. Subject to
the terms and conditions described in a purchase agreement among us, the selling
shareholders and the underwriters, we and the selling shareholders have agreed
to sell to the underwriters, and the underwriters severally have agreed to
purchase from us and the selling shareholders, the number of shares listed
opposite their names below.

<Table>
<Caption>
NUMBER
UNDERWRITERS OF SHARES
------------ ---------

Merrill Lynch, Pierce, Fenner & Smith
Incorporated...................................
CIBC World Markets Corp. ...................................
SunTrust Capital Markets, Inc. .............................
U.S. Bancorp Piper Jaffray Inc. ............................
--------
Total..........................................
========
</Table>

The underwriters have agreed to purchase all of the shares sold under the
purchase agreement if any of these shares are purchased. If an underwriter
defaults, the purchase agreement provides that the purchase commitments of the
nondefaulting underwriters may be increased or the purchase agreement may be
terminated.

We and the selling shareholders have agreed to indemnify the underwriters
against certain liabilities, including liabilities under the Securities Act, or
to contribute to payments the underwriters may be required to make in respect of
those liabilities.

The underwriters are offering the shares, subject to prior sale, when, as
and if issued to and accepted by them, subject to approval of legal matters by
their counsel, including the validity of the shares, and other conditions
contained in the purchase agreement, such as the receipt by the underwriters of
officer's certificates and legal opinions. The underwriters reserve the right to
withdraw, cancel or modify offers to the public and to reject orders in whole or
in part.

COMMISSIONS AND DISCOUNTS

The representatives have advised us and the selling shareholders that the
underwriters propose initially to offer the shares to the public at the initial
public offering price on the cover page of this prospectus and to dealers at
that price less a concession not in excess of $ per share. The underwriters
may allow, and the dealers may reallow, a discount not in excess of $ per
share to other dealers. After the initial public offering, the public offering
price, concession and discount may be changed.

The following table shows the public offering price, underwriting
discount and proceeds before expenses to Kirkland's and the selling
shareholders. The information assumes either no exercise or full exercise by the
underwriters of their overallotment option.

<Table>
<Caption>
PER SHARE WITHOUT OPTION WITH OPTION
--------- -------------- -----------

Public offering price...................... $ $ $
Underwriting discount...................... $ $ $
Proceeds, before expenses, to Kirkland's... $ $ $
Proceeds, before expenses, to the selling
shareholders............................. $ $ $
</Table>

The expenses of the offering, not including the underwriting discount,
are estimated at $1,400,000 and are payable by Kirkland's.

OVERALLOTMENT OPTION

The selling shareholders have granted an option to the underwriters to
purchase up to 1,050,000 additional shares at the public offering price less the
underwriting discount. The underwriters may exercise this option for 30 days
from the date of this prospectus solely to cover any overallotments. If the
underwriters exercise this option, each will be obligated, subject to conditions
contained in the purchase agreement, to purchase a number of additional shares
proportionate to that underwriter's initial amount reflected in the above table.

RESERVED SHARES

At our request, the underwriters have reserved for sale, at the initial
public offering price, up to 700,000 shares offered by this prospectus for sale
to some of our directors, officers, employees and related persons. If these
persons purchase reserved shares, this will reduce the number of shares
available for sale to the general public. Any reserved shares that are not
orally confirmed for purchase within one day of the pricing of this offering
will be offered by the underwriters to the general public on the same terms as
the other shares offered by this prospectus.

NO SALES OF SIMILAR SECURITIES

We, our executive officers and directors and all of our existing
shareholders have agreed, with exceptions, not to sell or transfer any common
stock for 180 days after the date of this prospectus without first obtaining the
written consent of Merrill Lynch. Specifically, we and these other individuals
have agreed not to directly or indirectly

- offer, pledge, sell or contract to sell any common stock,

- sell any option or contract to purchase any common stock,

- purchase any option or contract to sell any common stock,

- grant any option, right or warrant for the sale of any common stock,

- lend or otherwise dispose of or transfer any common stock,

- request or demand that we file a registration statement related to the
common stock, or

- enter into any swap or other agreement that transfers, in whole or in
part, the economic consequence of ownership of any common stock whether
any such swap or transaction is to be settled by delivery of shares or
other securities, in cash or otherwise.

This lockup provision applies to common stock and to securities
convertible into or exchangeable or exercisable for or repayable with common
stock. It also applies to common stock owned now or acquired later by the person
executing the agreement or for which the person executing the agreement later
acquires the power of disposition.

Merrill Lynch has informed us that while it does not currently expect to
release the entities or persons bound by the lock-up arrangements, including
affiliates, prior to the end of the lock-up period, it retains the right to do
so at any time without notice at its sole discretion.

The release of any lockup by Merrill Lynch is considered on a
case-by-case basis. Factors in deciding whether to release shares may include
the length of time before the lock-up expires, the number of shares involved,
the reason for the requested release, market conditions, the trading price of
our common stock, and whether the person or entity seeking the release is us or
one of our affiliates, shareholders, executive officers or directors.

QUOTATION ON THE NASDAQ NATIONAL MARKET

Our common stock has been approved for listing on the Nasdaq National
Market under the symbol "KIRK."

Before this offering, there has been no public market for our common
stock. The initial public offering price will be determined through negotiations
among us, the selling shareholders and the representatives. In addition to
prevailing market conditions, the factors to be considered in determining the
initial public offering price are

- the valuation multiples of publicly traded companies that the
representatives believe to be comparable to us,

- our financial information,

- the history of, and the prospects for, our company and the industry in
which we compete,

- an assessment of our management, its past and present operations, and
the prospects for, and timing of, our future revenues,

- the present state of our development, and

- the above factors in relation to market values and various valuation
measures of other companies engaged in activities similar to ours.

An active trading market for the shares may not develop. It is also
possible that after this offering the shares will not trade in the public market
at or above the initial public offering price.

The underwriters do not expect to sell more than 5% of the shares in the
aggregate to accounts over which they exercise discretionary authority.

NASD REGULATIONS

Because more than ten percent of the net proceeds of the offering may be
paid to members or affiliates of members of the National Association of
Securities Dealers, Inc. participating in the offering, the offering will be
conducted in accordance with NASD Conduct Rule 2710(c)(8). This rule requires
that the public offering price of an equity security be no higher than the price
recommended by a qualified independent underwriter which has participated in the
preparation of the registration statement and performed its usual standard of
due diligence with respect to that registration statement. Merrill Lynch has
agreed to act as qualified independent underwriter for the offering. The price
of the shares will be no higher than that recommended by Merrill Lynch.

PRICE STABILIZATION, SHORT POSITIONS AND PENALTY BIDS

Until the distribution of the shares is completed, Securities and
Exchange Commission rules may limit underwriters and selling group members from
bidding for and purchasing our common stock. However, the representatives may
engage in transactions that stabilize the price of the common stock, such as
bids or purchases to peg, fix or maintain that price.

In connection with the offering, the underwriters may make short sales of
the issuer's shares and may purchase the issuer's shares on the open market to
cover positions created by short sales. Short sales involve the sale by the
underwriters of a greater number of shares than they are required to purchase in
the offering.

"Covered" short sales are sales made in an amount not greater than the
underwriters' "overallotment" option to purchase additional shares in the
offering. The underwriters may close out any covered short position by either
exercising their overallotment option or purchasing shares in the open market.
In determining the source of shares to close out the covered short position, the
underwriters will consider, among other things, the price of shares available
for purchase in the open market as compared to the price at which they may
purchase shares through the overallotment option.

"Naked" short sales are sales in excess of the overallotment option. The
underwriters must close out any naked short position by purchasing shares in the
open market. A naked short position is more likely to be created if the
underwriters are concerned that there may be downward pressure on the price of

the shares in the open market after pricing that could adversely affect
investors who purchase in the offering.

Similar to other purchase transactions, the underwriters' purchases to
cover the syndicate short sales may have the effect of raising or maintaining
the market of our stock or preventing or retarding a decline in the market price
of our stock. As a result, the price of our common stock may be higher than the
price that might otherwise exist in the open market.

The representatives may also impose a penalty bid on underwriters and
selling group members. This means that if the representatives purchase shares in
the open market to reduce the underwriter's short position or to stabilize the
price of such shares, they may reclaim the amount of the selling concession from
the underwriters and selling group members who sold those shares. The imposition
of a penalty bid may also affect the price of the shares in that it discourages
resales of those shares.

Neither we nor any of the underwriters makes any representation or
prediction as to the direction or magnitude of any effect that the transactions
described above may have on the price of the common stock. In addition, neither
we nor any of the underwriters makes any representation that the representatives
will engage in these transactions or that these transactions, once commenced,
will not be discontinued without notice.

INTERNET DISTRIBUTION

Merrill Lynch will be facilitating Internet distribution for this
offering to certain of its Internet subscription customers. Merrill Lynch
intends to allocate a limited number of shares for sale to its online brokerage
customers. An electronic prospectus is available on the Internet Web site
maintained by Merrill Lynch. Other than the prospectus in electronic format, the
information on the Merrill Lynch Web site is not part of this prospectus.

OTHER RELATIONSHIPS

SunTrust Robinson Humphrey, a division of SunTrust Capital Markets, Inc.,
or its predecessor firm, The Robinson-Humphrey Company, LLC, has from time to
time provided us with investment banking services, including services rendered
in connection with our 1996 recapitalization, and may continue to provide such
services in the future.

LEGAL MATTERS

The validity of the shares of common stock offered hereby is being passed
upon for us by Baker, Donelson, Bearman & Caldwell, a Professional Corporation,
and certain other matters will be passed upon for us by Pepper Hamilton LLP. The
underwriters are being represented by Fried, Frank, Harris, Shriver & Jacobson
(a partnership including professional corporations). Pepper Hamilton LLP and
Fried, Frank, Harris, Shriver & Jacobson will rely upon Baker, Donelson, Bearman
& Caldwell with respect to matters governed by Tennessee law.

EXPERTS

The consolidated balance sheets of Kirkland's as of February 2, 2002,
February 3, 2001 and December 31, 2000, and the related consolidated statements
of operations, changes in shareholders' deficit and cash flows for the year
ended February 2, 2002, the 34 days ended February 3, 2001 and each of the two
years in the period ended December 31, 2000, included in this prospectus and
elsewhere in the registration statement have been so included in reliance upon
the report (which includes an explanatory paragraph related to the restatement
of the 2001 financial statements described in Note 16 to the financial
statements) of PricewaterhouseCoopers LLP, independent accountants, given on the
authority of said firm as experts in auditing and accounting.

WHERE YOU CAN FIND MORE INFORMATION

We filed with the Securities and Exchange Commission a registration
statement on Form S-1 under the Securities Act for the shares of common stock to
be sold in this offering. This prospectus does not contain all of the
information in the registration statement and the exhibits that were filed with
the registration statement. For further information with respect to us and our
common stock, we refer you to the registration statement and the exhibits that
were filed with the registration statement. Statements contained in this
prospectus about the contents of any contract or any other document that is
filed as an exhibit to the registration statement are not necessarily complete,
and we refer you to the full text of the contract or other document filed as an
exhibit to the registration statement. A copy of the registration statement and
the exhibits that were filed with the registration statement may be inspected
without charge at the public reference facilities maintained by the Securities
and Exchange Commission in Room 1024, 450 Fifth Street, N.W., Washington, D.C.
20549, and copies of all or any part of the registration statement may be
obtained from the Securities and Exchange Commission upon payment of the
prescribed fee. Information on the operation of the public reference facilities
may be obtained by calling the Securities and Exchange Commission at
1-800-SEC-0330. The Securities and Exchange Commission maintains a World Wide
Web site that contains reports, proxy and information statements and other
information regarding registrants that file electronically with the Securities
and Exchange Commission. The address of the site is http://www.sec.gov. You may
also request copies of these filings, at no cost, by telephone at (731) 668-2444
or by mail to: Kirkland's, Inc., 805 N. Parkway, Jackson, TN 38305, Attention:
General Counsel.

Upon completion of this offering, we will become subject to the
information and periodic reporting requirements of the Exchange Act, and, in
accordance with such requirements, will file periodic reports, proxy statements
and other information with the Securities and Exchange Commission. These
periodic reports, proxy statements and other information will be available for
inspection and copying at the regional offices, public reference facilities and
web site of the Securities and Exchange Commission referred to above. We intend
to furnish our shareholders with annual reports containing financial statements
audited by our independent accountants.

INDEX TO FINANCIAL STATEMENTS

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<Table>
<Caption>
PAGE
----

Report of the Independent Accountants....................... F-2
Consolidated Statements of Operations for the years ended
December 31, 1999 and 2000, 34 days ended February 3,
2001, year ended February 2, 2002 and quarters ended May
5, 2001 and May 4, 2002................................... F-3
Consolidated Balance Sheets as of December 31, 2000,
February 3, 2001, February 2, 2002 and May 4, 2002........ F-4
Consolidated Statements of Changes in Shareholders' Deficit
for the years ended December 31, 1999 and 2000, 34 days
ended February 3, 2001, year ended February 2, 2002 and
quarter ended May 4, 2002................................. F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 1999 and 2000, 34 days ended February 3,
2001, year ended February 2, 2002 and quarters ended May
5, 2001 and May 4, 2002................................... F-6
Notes to Consolidated Financial Statements.................. F-7
</Table>

F-1

REPORT OF THE INDEPENDENT ACCOUNTANTS

To the Board of Directors and Shareholders of
Kirkland's, Inc.

The stock split described in Note 14 to the consolidated financial
statements has not been consummated at June 21, 2002. When it has been
consummated, we will be in a position to furnish the following report:

"In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations, of changes in shareholders'
deficit and of cash flows present fairly, in all material respects, the
financial position of Kirkland's, Inc. at December 31, 2000, February 3, 2001,
and February 2, 2002, and the results of their operations and their cash flows
for each of the two years in the period ended December 31, 2000, the 34 days
ended February 3, 2001, and the year ended February 2, 2002 in conformity with
accounting principles generally accepted in the United States of America. These
financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these consolidated financial 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.

As indicated in Note 16, the Company's financial statements for 2001 have
been restated to reflect non-cash expenses related to the determination of fair
value for the Company's common stock."

PricewaterhouseCoopers LLP
Memphis, TN

April 19, 2002, except for Note 13

as to which the date is May 31, 2002,

Note 14 as to which the date is , 2002, and

Note 16 as to which the date is June 20, 2002

F-2

KIRKLAND'S, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(IN THOUSANDS EXCEPT SHARE AND PER SHARE AMOUNTS)

<Table>
<Caption>
YEAR ENDED
--------------------------- 34 DAYS ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, FEBRUARY 3, FEBRUARY 2, QUARTER ENDED QUARTER ENDED
1999 2000 2001 2002 MAY 5, 2001 MAY 4, 2002
------------ ------------ ------------- ----------- ------------- -------------
(UNAUDITED) (UNAUDITED)

Net sales....................... $ 236,622 $ 259,240 $ 23,875 $ 307,213 $ 55,961 $ 66,184
Cost of sales................... 154,104 172,226 18,990 200,063 40,447 43,976
---------- ---------- ---------- ---------- ---------- ----------
Gross profit................... 82,518 87,014 4,885 107,150 15,514 22,208
Operating expenses:
Other operating expenses....... 57,894 67,422 7,388 71,993 15,654 17,164
Depreciation and
amortization................. 5,969 6,522 517 6,370 1,372 1,653
Non-cash stock compensation
charge....................... -- -- -- 1,220 -- 812
---------- ---------- ---------- ---------- ---------- ----------
Total operating expenses..... 63,863 73,944 7,905 79,583 17,026 19,629
Operating income (loss)........ 18,655 13,070 (3,020) 27,567 (1,512) 2,579
Interest expense:
Senior, subordinated and other
notes payable................ 10,232 11,221 1,043 9,759 2,607 1,486
Class C Preferred Stock........ 1,647 1,850 154 2,007 499 544
Amortization of debt issue
costs........................ 1,307 1,305 84 1,308 252 366
Accretion of common stock
warrants..................... -- -- -- 11,315 -- --
---------- ---------- ---------- ---------- ---------- ----------
Total interest expense....... 13,186 14,376 1,281 24,389 3,358 2,396
Interest income................. (27) (1) -- (278) -- (67)
Offering and financing costs
(Note 1)....................... 852 782 -- --
Other income.................... (222) (199) (26) (109) (30) (37)
Other expenses.................. -- -- -- -- -- 44
---------- ---------- ---------- ---------- ---------- ----------
Income (loss) before income
taxes........................ 4,866 (1,888) (4,275) 3,565 (4,840) 243
Income tax provision
(benefit)...................... 807 (573) (1,619) 1,782 (2,115) 100
---------- ---------- ---------- ---------- ---------- ----------
Net income (loss).............. 4,059 (1,315) (2,656) 1,783 (2,725) 143
Accretion of redeemable
preferred stock and dividends
accrued........................ (5,053) (6,555) (778) (6,439) (1,931) (1,311)
---------- ---------- ---------- ---------- ---------- ----------
Net loss allocable to common
shareholders................... $ (994) $ (7,870) $ (3,434) $ (4,656) $ (4,656) $ (1,168)
========== ========== ========== ========== ========== ==========
Loss per common share:
Basic.......................... $ (0.20) $ (1.30) $ (0.46) $ (0.62) $ (0.62) $ (0.16)
========== ========== ========== ========== ========== ==========
Diluted........................ $ (0.20) $ (1.30) $ (0.46) $ (0.62) $ (0.62) $ (0.16)
========== ========== ========== ========== ========== ==========
Weighted average number of
common shares outstanding:
Basic.......................... 5,063,938 6,052,715 7,518,939 7,521,093 7,518,939 7,532,964
========== ========== ========== ========== ========== ==========
Diluted........................ 5,063,938 6,052,715 7,518,939 7,521,093 7,518,939 7,532,964
========== ========== ========== ========== ========== ==========
Pro Forma Earnings Per Share
(unaudited) (Note 15):
Earnings per common share:
Basic........................ $ 0.71 $ 0.07
========== ==========
Diluted...................... $ 0.70 $ 0.06
========== ==========
Weighted average number of
common shares outstanding:
Basic........................ 17,186,340 17,198,211
========== ==========
Diluted...................... 17,554,991 17,992,868
========== ==========
</Table>

The accompanying notes are an integral part of these consolidated financial
statements.
F-3

KIRKLAND'S, INC.

CONSOLIDATED BALANCE SHEETS

(IN THOUSANDS, EXCEPT FOR SHARE AMOUNTS)

<Table>
<Caption>
PRO FORMA
AS OF
MAY 4,
DECEMBER 31, FEBRUARY 3, FEBRUARY 2, MAY 4, 2002
2000 2001 2002 2002 (NOTE 15)
------------ ----------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED)

ASSETS
Current assets:
Cash and cash equivalents............ $ 28,156 $ 26,914 $ 29,751 $ 23,111 $ 23,111
Inventories.......................... 47,993 45,330 32,763 36,805 36,805
Prepaid expenses and other current
assets............................ 1,999 2,006 1,902 2,502 2,502
Income taxes receivable.............. -- -- 69 523 523
Deferred income taxes................ 2,139 1,371 1,375 1,375 1,375
-------- -------- --------- --------- ---------
Total current assets.............. 80,287 75,621 65,860 64,316 64,316
Property and equipment, net............ 26,047 25,682 23,748 23,819 23,819
Noncurrent deferred income taxes....... 4,210 6,597 5,303 1,008 1,008
Debt issue costs, net.................. 1,345 1,261 757 566 566
Goodwill, net.......................... 1,472 1,465 1,382 1,382 1,382
Other assets........................... 21 14 -- -- --
-------- -------- --------- --------- ---------
Total assets...................... $113,382 $110,640 $ 97,050 $ 91,091 $ 91,091
======== ======== ========= ========= =========
LIABILITIES, REDEEMABLE PREFERRED STOCK AND SHAREHOLDERS' DEFICIT
Current liabilities:
Current maturities of long-term
debt.............................. $ 9,167 $ 9,167 $ 38,177 $ 2,250 $ 2,250
Revolving line of credit............. 20,000 20,000 -- -- --
Accounts payable..................... 19,072 19,110 12,530 11,429 11,429
Income taxes payable................. 100 114 -- -- --
Accrued expenses..................... 14,242 14,075 22,569 21,087 21,087
-------- -------- --------- --------- ---------
Total current liabilities......... 62,581 62,466 73,276 34,766 34,766
-------- -------- --------- --------- ---------
Long-term debt:
Senior credit facility............... 38,177 38,177 -- 34,927 34,927
Subordinated debt.................... 19,894 19,897 19,940 19,951 19,951
Mandatorily redeemable preferred
stock (Class C)................... 17,122 17,122 17,122 17,122 9,205
Other liabilities...................... 1,558 1,584 2,198 2,245 2,245
Common stock warrants.................. -- -- 11,315 -- --
Commitments and Contingencies, note 10
Redeemable convertible preferred stock,
no par value:
Class D.............................. 20,680 20,879 21,464 21,785 --
Class A.............................. 45,460 45,890 47,089 47,773 --
Class B.............................. 15,769 15,918 16,741 17,047 --
Shareholders' deficit:
Common stock, at stated value;
5,075,233 7,518,939, 7,531,585 and
7,657,111 shares issued and
outstanding at December 31, 2000,
February 3, 2001, February 2, 2002
and May 4, 2002 respectively...... 229 229 229 229 229
Additional paid-in capital........... -- -- -- 7,644 103,454
Loan to shareholder.................. -- -- -- (217) (217)
Accumulated deficit.................. (108,088) (111,522) (112,324) (112,181) (112,181)
-------- -------- --------- --------- ---------
Total liabilities, redeemable
preferred stock, and
shareholders' deficit........... $113,382 $110,640 $ 97,050 $ 91,091 $ 91,091
======== ======== ========= ========= =========
</Table>

The accompanying notes are an integral part of these consolidated financial
statements.
F-4

KIRKLAND'S, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' DEFICIT

(IN THOUSANDS, EXCEPT FOR SHARE AMOUNTS)

<Table>
<Caption>
COMMON STOCK
------------------ ADDITIONAL LOAN TO ACCUMULATED
SHARES AMOUNT PAID IN CAPITAL SHAREHOLDER DEFICIT
--------- ------ --------------- ----------- -----------

Balance at December 31, 1998......... 5,063,907 $229 $ -- $ -- $ (99,224)
Accretion of redeemable preferred
stock and dividends accrued........ (5,053)
Issuance of common stock............. 11,326
Net income........................... 4,059
--------- ---- ------- ----- ---------
Balance at December 31, 1999......... 5,075,233 229 -- -- (100,218)
Accretion of redeemable preferred
stock and dividends accrued........ (6,555)
Issuance of common stock (see Note
2)................................. 2,443,706
Net loss............................. (1,315)
--------- ---- ------- ----- ---------
Balance at December 31, 2000......... 7,518,939 229 -- -- (108,088)
Accretion of redeemable preferred
stock and dividends accrued........ (778)
Net loss............................. (2,656)
--------- ---- ------- ----- ---------
Balance at February 3, 2001.......... 7,518,939 229 -- -- (111,522)
Fair value adjustment for dividend
rate change on preferred stock (see
Note 6)............................ 3,832
Accretion of redeemable preferred
stock and dividends accrued........ (22) (6,417)
Exercise of stock options............ 12,646 22
Net income........................... 1,783
--------- ---- ------- ----- ---------
Balance at February 2, 2002.......... 7,531,585 229 -- -- (112,324)
Reclassification of common stock
warrants to equity (see Note 6)
(unaudited)........................ 7,020
Accretion of redeemable preferred
stock and dividends accrued
(unaudited)........................ (1,311)
Exercise of stock options
(unaudited)........................ 125,526 -- 1,935 (217) --
Net income (unaudited)............... 143
--------- ---- ------- ----- ---------
Balance at May 4, 2002 (unaudited)... 7,657,111 $229 $ 7,644 $(217) $(112,181)
========= ==== ======= ===== =========
</Table>

The accompanying notes are an integral part of these consolidated financial
statements.
F-5

KIRKLAND'S, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(IN THOUSANDS)

<Table>
<Caption>
YEAR ENDED
--------------------------- 34 DAYS ENDED YEAR ENDED QUARTER ENDED QUARTER ENDED
DECEMBER 31, DECEMBER 31, FEBRUARY 3, FEBRUARY 2, MAY 5, MAY 4,
1999 2000 2001 2002 2001 2002
------------ ------------ ------------- ----------- -------------- --------------
(UNAUDITED) (UNAUDITED)

Cash flows from operating
activities:
Net income (loss).................. $ 4,059 $(1,315) $(2,656) $ 1,783 $ (2,725) $ 143
Adjustments to reconcile net income
(loss) to net cash provided by
(used in) operating activities:
Depreciation of property and
equipment........................ 5,892 6,439 510 6,287 1,352 1,653
Amortization of debt issue costs,
debt discount and goodwill....... 1,384 1,430 94 1,434 283 377
Non-cash stock compensation
charge........................... -- -- -- 1,220 -- 812
Loss on disposal of property and
equipment........................ -- 21 -- 371 39 61
Accretion of common stock
warrants......................... -- -- 11,315 -- --
Write-off of debt issue costs...... -- 782 -- -- -- --
Write-off of offering costs........ 852 -- -- -- -- --
Deferred tax expense (benefit)..... (2,385) (1,015) (1,619) 1,290 -- --
Changes in assets and liabilities:
Inventories...................... (5,091) (6,146) 2,663 12,567 2,985 (4,042)
Prepaid expenses and other
current assets................. (593) (179) (7) 104 4 (600)
Other noncurrent assets.......... (15) -- 7 14 -- --
Accounts payable................. 6,405 1,369 38 (6,580) (11,324) (1,101)
Income taxes payable............. 206 (2,591) 14 (183) (2,392) (454)
Accrued expenses and other
noncurrent liabilities......... 2,231 2,541 (141) 7,888 (56) (529)
-------- ------- ------- -------- -------- -------
Net cash provided by (used in)
operating activities......... 12,945 1,336 (1,097) 37,510 (11,834) (3,680)
-------- ------- ------- -------- -------- -------
Cash flows from investing
activities:
Proceeds from sale of property and
equipment........................ -- 60 -- -- -- --
Capital expenditures............... (10,825) (6,041) (145) (4,724) (1,406) (1,785)
-------- ------- ------- -------- -------- -------
Net cash used in investing
activities................... (10,825) (5,981) (145) (4,724) (1,406) (1,785)
-------- ------- ------- -------- -------- -------
Cash flows from financing
activities:
Net borrowings (repayments) on
revolving line of credit......... (7,000) 20,000 -- (20,000) -- --
Proceeds from issuance of
short-term debt.................. 7,500 -- -- -- -- --
Proceeds from issuance of long-term
debt............................. 2,500 -- -- -- -- --
Debt issue and offering costs...... (595) (881) -- (804) -- (175)
Principal payments on long-term
debt............................. (5,775) (6,648) -- (9,167) (954) (1,000)
Proceeds from equity contribution,
net of issue costs............... -- 7,384 -- -- -- --
Exercise of options................ -- -- -- 22 -- --
-------- ------- ------- -------- -------- -------
Net cash (used in) provided by
financing activities......... (3,370) 19,855 -- (29,949) (954) (1,175)
-------- ------- ------- -------- -------- -------
Cash and cash equivalents
Net (decrease) increase........ (1,250) 15,210 (1,242) 2,837 (14,194) (6,640)
Beginning of period............ 14,196 12,946 28,156 26,914 26,914 29,751
-------- ------- ------- -------- -------- -------
End of period.................. $ 12,946 $28,156 $26,914 $ 29,751 $ 12,720 $23,111
======== ======= ======= ======== ======== =======
Supplemental disclosures:
Interest paid...................... $ 10,211 $10,992 -- $ 7,298 $ 1,844 $ 771
======== ======= ======= ======== ======== =======
Income taxes paid.................. $ 3,132 $ 3,033 $ (16) $ 613 $ 278 $ 616
======== ======= ======= ======== ======== =======
</Table>

The accompanying notes are an integral part of these consolidated financial
statements.
F-6

KIRKLAND'S, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 - DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES

Kirkland's, Inc. (the "Company") is a leading specialty retailer of home
decor with stores in 28 states.

The consolidated financial statements of the Company include the accounts
of Kirkland's, Inc. and its wholly owned subsidiaries Kirkland's Stores, Inc.
and kirklands.com, inc. Significant intercompany accounts and transactions have
been eliminated.

Fiscal Year - Effective January 1, 2001, the Company elected to change
its fiscal year from a calendar basis to a 52/53-week year ending on the
Saturday closest to January 31. The 34-day transition period ended February 3,
2001 is presented separately in these consolidated financial statements. Unless
specifically indicated otherwise, any reference herein to "1999" and "2000" or
"Fiscal 1999" and "Fiscal 2000" relates to as of or for the years ended December
31, 1999 and 2000, respectively. Any reference to "2001" or "Fiscal 2001"
relates to as of or for the year ended February 2, 2002.

Interim Data - The accompanying interim financial data as of May 4, 2002
and for the quarters ended May 5, 2001 and May 4, 2002 and the pro forma
financial data as of May 4, 2002 are unaudited; however, in the opinion of
management, the interim data and pro forma data have been prepared on a basis
consistent with the audited consolidated financial statements and reflect all
adjustments (consisting of only normal recurring accruals) which, in the opinion
of management, are necessary for a fair statement of the results for the interim
periods. The statements should be read in conjunction with the notes to the
consolidated financial statements for the fiscal year ended February 2, 2002.

Cash Equivalents - Cash equivalents consist of investments with
maturities of 90 days or less at the date of purchase.

Inventories - Inventories are stated at the lower of cost or market with
cost being determined using the average cost method which approximates current
cost.

Property and Equipment - Property and equipment are stated at cost.
Tenant allowances provided by the lessors for reimbursement of construction
costs incurred in connection with store openings and remodelings are recorded as
reductions to the basis of the respective tenant improvements. Depreciation is
computed on a straight-line basis over the estimated useful lives of the
respective assets. Furniture, fixtures and equipment are depreciated over 5-7
years. Buildings are depreciated over 40 years. Leasehold improvements are
amortized over the shorter of the useful life of the asset or the lease term.
Maintenance and repairs are expensed as incurred and improvements are
capitalized.

Debt Issue Costs - Debt issue costs are amortized using the straight-line
method over the life of the debt and are shown net of accumulated amortization
of $5,224,000 at December 31, 2000, $4,702,000 at February 3, 2001 and
$3,676,000 at February 2, 2002. Amortization of debt issue costs is included in
interest expense in the consolidated statements of operations.

Goodwill - During 1998, the Company purchased 100% of the stock of Briar
Patch Management Corporation ("Briar Patch"). In connection with this purchase,
the Company recorded goodwill in the amount of the excess of the purchase price
over the fair market value of the net assets of Briar Patch. The goodwill is
being amortized on a straight-line basis over 20 years. The Company recorded
amortization expense of $79,000 for December 31, 1999, $83,000 at both December
31, 2000 and February 2, 2002, and $7,000 for the 34-day period ended February
3, 2001.

Long-Lived Assets - The Company periodically reviews the recoverability
of property and equipment, goodwill, and other long-lived assets whenever an
event or change in circumstances indicates the carrying amount of an asset or
group of store-level assets may not be recoverable. The impairment review
includes comparison of future cash flows expected to be generated by the asset
or group of assets

F-7

KIRKLAND'S, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

with their associated carrying value. If the carrying value of the asset or
group of store-level assets exceeds the expected cash flows (undiscounted and
without interest charges), an impairment loss is recognized to the extent the
carrying amount of the asset exceeds its fair value. The Company recorded an
impairment of $103,000 and $82,000 at December 31, 2000 and February 2, 2002,
respectively, which represents the remaining carrying value of these assets,
relating to the leasehold improvements of stores anticipated to be closed. Other
assets, consisting of computer equipment, furniture and fixtures, with carrying
values of $124,000 and $146,000 were not considered to be impaired. This charge
is included in depreciation and amortization on the consolidated statement of
operations.

Cost of Sales - Cost of sales includes cost of product sold, freight,
store occupancy and central distribution costs.

Other Operating Expenses - Other operating expenses consist primarily of
store compensation costs, corporate salaries, insurance, advertising, property
taxes, losses on disposal of assets and various other store and corporate
expenses.

Other Income - Other income consists of sales tax rebates of $120,000,
$125,000 and $91,000 for fiscal years 1999, 2000 and 2001, respectively, and
$26,000 for the 34-day period ended February 3, 2001, and other miscellaneous
income of $102,000, $74,000 and $18,000 for fiscal years 1999, 2000 and 2001,
respectively. There were no other miscellaneous income items for the 34-day
period ended February 3, 2001.

Offering and Financing Costs - During 2000, the Company expensed offering
and financing costs on the Company's statement of operations of $782,000 for
costs related to a refinancing effort that was not consummated. Additionally,
during 1999, the Company indefinitely postponed plans for an offering of its
common stock resulting in an expense of $852,000 for costs previously
anticipated to be deducted from the proceeds of the offering.

Preopening Expenses - Preopening expenses, which consist primarily of
payroll and occupancy costs, are expensed as incurred.

Advertising Expenses - Advertising costs are expensed as incurred.
Advertising expense, including lease-required advertising, was $1,553,000,
$2,595,000 and $3,743,000 for fiscal years 1999, 2000 and 2001, respectively,
and $402,000 for the 34-day period ended February 3, 2001.

Internally Developed Software Costs - Costs related to development of
internal use software, other than those incurred during the application
development stage, are expensed as incurred. Costs incurred during the
application development stage have not been material.

Income Taxes - Deferred tax assets and liabilities are determined based
on differences between financial reporting and tax bases of assets and
liabilities and are measured using the enacted tax rates and laws that will be
in effect when the differences are expected to reverse.

Authorized Capital - At February 2, 2002, the authorized capital of the
Company consisted of 27,491,350 shares of common stock; 3,100,000 shares of
Class A Preferred Stock; 1,100,000 shares of Class B Preferred Stock; 600,000
shares of Class C Preferred Stock; and 75,000 shares of Class D Preferred Stock.
See Notes 2 and 6 for a description of the terms of each issue.

Stock Options and Warrants - The Company applies Accounting Principles
Board Opinion No. 25, Accounting for Stock Issued to Employees, in accounting
for its stock compensation plans. Compensation cost on stock options is measured
as the excess, if any, of the fair value of the Company's common stock at the
date of the grant over the exercise price. The Company has provided pro forma
disclosures of net income as if the fair value based method of accounting for
the plan, as prescribed by Statement of

F-8

KIRKLAND'S, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation,
had been applied (see Note 8).

The fair value of detachable put warrants is initially recorded as a
discount to the related debt and is amortized to interest expense, using the
straight-line method which approximates the effective interest method, over the
term of the related debt. The put warrants are adjusted to their current fair
value at each balance sheet date.

Use of Estimates - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of certain assets and
liabilities and disclosure of contingencies at the date of the financial
statements and the related reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.

Insurance Reserves - Workers' compensation, general liability and
employee medical insurance programs are partially self-insured. It is the
Company's policy to record its self-insurance liability using estimates of
claims incurred but not yet reported or paid, based on historical trends. Actual
results can vary from estimates for many reasons, including, among others,
inflation rates, claim settlement patterns, litigation trends and legal
interpretations.

Fair Value of Financial Instruments - At December 31, 2000, February 3,
2001 and February 2, 2002, the Company did not have any outstanding financial
derivative instruments. Financial instruments include cash, accounts payable, a
revolving credit agreement and long-term debt. The carrying amounts of these
financial instruments, except for long-term debt, approximate fair value because
of their short maturities. Long-term debt approximates fair value based on the
short periods of interest rate repricing for variable rate long-term debt and
estimates based on the current borrowing rates available to the Company for bank
loans with similar terms and average maturities for fixed rate long-term debt.

Non-cash Supplemental Disclosure - Accretion and dividends accrued for
redeemable Class A Preferred Stock; Class B Preferred Stock; and Class D
Preferred Stock of $5,053,000, $6,555,000 and $6,439,000 have been excluded from
the Statements of Cash Flows for the years ended December 31, 1999, December 31,
2000 and February 2, 2002, respectively. Accretion and dividends accrued of
$778,000 have been excluded from the Statement of Cash Flows for the 34-day
period ended February 3, 2001. The effect of the fair value adjustment to the
Class A Preferred Stock, Class B Preferred Stock and Class D Preferred Stock of
$3,832,000, as more fully discussed in Note 6, was excluded from the Statement
of Cash Flows for the year ended February 2, 2002.

Revenue Recognition - The Company recognizes revenue at the time of sale
of merchandise to the Company's customers. Net sales include the sale of
merchandise, net of returns, and exclusive of sales taxes.

Earnings Per Share - Earnings per share is presented on a basic and
diluted basis. Basic earnings per share excludes dilution and is computed by
dividing income available to common shareholders by the weighted-average number
of common shares outstanding for the period. Diluted earnings per share reflects
the potential dilution that could occur if securities or other contracts to
issue common stock were exercised or converted into common stock or resulted in
the issuance of common stock that then shared in the earnings of the Company.

Comprehensive income - Comprehensive income is reported in accordance
with SFAS No. 130, Reporting Comprehensive Income. Comprehensive income does not
differ from the consolidated net income presented in the consolidated statements
of operations.

Business Segments - An operating segment is defined as a component of an
enterprise that engages in business activities from which it may earn revenues
and incur expenses, and about which separate
F-9

KIRKLAND'S, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

financial information is regularly evaluated by the chief operating decision
maker in deciding how to allocate resources. The Company's business is operated
as one operating segment.

Recent Accounting Pronouncements - In June 2001, the Financial Accounting
Standards Board issued SFAS No. 141, "Business Combinations" and SFAS No. 142,
"Goodwill and Other Intangible Assets", effective for fiscal years beginning
after December 15, 2001. SFAS 141 requires that the purchase method of
accounting be used for all business combinations initiated after June 30, 2001.
Under SFAS 142 goodwill (and intangible assets deemed to have indefinite lives)
will no longer be amortized but will be subject to annual impairment tests.
Other intangible assets will continue to be amortized over their useful lives.
The Company had goodwill, net of accumulated amortization, of $1,472,000,
$1,465,000 and $1,382,000 as of December 31, 2000, February 3, 2001 and February
2, 2002, respectively. The Company applied the new rules of accounting for
goodwill and other intangible assets beginning in the first quarter of fiscal
2002. The Company ceased amortization of goodwill in accordance with SFAS 142
and performed a test for impairment as of the date of adoption and will test
again during 2002 in the month the Company expects to perform its annual testing
in future years. The Company will test for impairment on an annual basis or more
frequently when events and circumstances indicate that a impairment may have
occurred. The application of SFAS 141 and SFAS 142 did not have a significant
impact on the Company's financial condition or results of operations.

<Table>
<Caption>
YEAR ENDED
--------------------------- 34 DAYS ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, FEBRUARY 3, FEBRUARY 2,
1999 2000 2001 2002
------------ ------------ ------------- -----------
(IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)

Reported net loss allocable
to common
shareholders:............ $ (994) $(7,870) $(3,434) $(4,656)
Add back: Goodwill
amortization............. 79 83 7 83
------- ------- ------- -------
Adjusted net loss allocable
to common
shareholders:............ $ (915) $(7,787) $(3,427) $(4,573)
======= ======= ======= =======
Earnings per share (basic
and diluted):
Reported net loss allocable
to common
shareholders:............ $ (0.20) $ (1.30) $ (0.46) $ (0.62)
Add back: Goodwill
amortization............. 0.02 0.01 0.00 0.01
------- ------- ------- -------
Adjusted net loss allocable
to common
shareholders:............ $ (0.18) $ (1.29) $ (0.46) $ (0.61)
======= ======= ======= =======
</Table>

In August 2001, the Financial Accounting Standards Board issued SFAS No.
144, "Accounting for the Impairment or Disposal of Long-Lived Assets," which
addresses financial accounting and reporting for the impairment or disposal of
long-lived assets and supersedes SFAS No. 121, "Accounting for the Impairment or
Disposal of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," and
the accounting and reporting provisions of Accounting Principles Board (APB)
Opinion No. 30, "Reporting the Results of Operations" for a disposal of a
segment of a business. SFAS 144 is effective for fiscal years beginning after
December 15, 2001. The adoption of this standard did not have a significant
impact on the Company's financial condition or results of operations.

F-10

KIRKLAND'S, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 2 - EQUITY TRANSACTIONS AND CAPITAL STRUCTURE

EQUITY TRANSACTIONS

Recapitalization

On June 12, 1996, the Company completed a leveraged recapitalization (the
"Recapitalization") pursuant to which Advent International Group, through
affiliated entities, ("Advent"), a private equity investment firm, became the
largest beneficial owner of the Company. The Recapitalization permitted the
founding shareholders of the Company to realize a portion of their investment in
cash. As a result of the Recapitalization, the capital structure of the Company
changed to consist of two classes of redeemable convertible preferred stock
("Class A Preferred Stock" and "Class B Preferred Stock"), a class of
mandatorily redeemable preferred stock ("Class C Preferred Stock") and common
stock. At the time of the Recapitalization, the Company discontinued its
subchapter S corporation election and became a C corporation for federal income
tax purposes. Since a new capital structure was formed, the existing retained
earnings of the Company were transferred to additional paid-in capital so that a
new historical accumulation of earnings could begin post-recapitalization.
Distributions of cash and securities to the former shareholders of the Company
made immediately subsequent to the Recapitalization were recorded to retained
earnings, creating a negative retained earnings balance of $116 million at the
beginning of the post-recapitalization period.

August 2000 Equity Offering

On August 8, 2000, the Company and certain of its existing shareholders
completed an additional equity offering of $20 million. Investors in the
offering received shares of redeemable convertible preferred stock ("Class D
Preferred Stock") and common stock. The new equity offering included the
following components:

- A contribution of $7.5 million in cash from shareholders affiliated
with Advent ($3.8 million) and a management employee of the Company
($3.7 million) in exchange for a total of 916,397 shares of common
stock at $0.01 per share and 16,667 shares of Class D Preferred Stock
at $449.99 per share.

- A conversion of a $5.0 million note held by a management employee of
the Company to equity through an exchange of the principal on the note
for 610,913 shares of common stock at $0.01 per share and 11,111 shares
of Class D Preferred Stock at $449.99 per share.

- The repayment of a $7.5 million term note. The term note had been
provided to the Company in conjunction with an amendment (see Note 6)
to its Senior Debt Agreement and Supplemental Loan Agreement. Of the
$7.5 million advanced under the term note, $4.1 million had been
collateralized by a pledge from certain shareholders of the Company,
and $3.4 million had been loaned to the Company by shareholders
affiliated with Advent. The $7.5 million principal on the note was
repaid through the surrender of the collateral provided by shareholders
in exchange for equity, and conversion into equity of the loan advanced
by shareholders affiliated with Advent. Total consideration received by
shareholders in connection with the term note repayment was 916,397
shares of common stock at $0.01 per share and 16,667 shares of Class D
Preferred Stock at $449.99 per share.

In conjunction with the equity offering, the Company also issued warrants
to purchase an aggregate of 305,429 shares of the Company's common stock for
$0.01 per share. The warrants were issued to the investors in the equity
offering on a pro-rata basis in relation to their participation in the total
offering. The warrants were considered to have nominal value at August 8, 2000,
based upon the market value received in exchange for common shares in the equity
offering.

F-11

KIRKLAND'S, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Capital Structure - As a result of the aforementioned capital
transactions, the charter of Kirkland's, Inc. was amended to establish the
following capital structure.

Common Stock

At February 2, 2002, the authorized capital of Kirkland's, Inc. included
27,491,350 shares of voting common stock. The holders of the common stock have
one vote per share and are not entitled to cumulative voting in the election of
directors.

Redeemable Convertible Preferred Stock (Class A, Class B and Class D)

The Class A Preferred Stock, Class B Preferred Stock and Class D
Preferred Stock have voting privileges on par with common shareholders and have
liquidation values of $30,749,000; $10,654,500; and $20,000,000, respectively,
plus accrued dividends. The dividends are cumulative and accrue from 4% to 10%
compounded quarterly (see Note 6). The Class D Preferred Stock has a redemption
preference over all other classes of stock of the Company. The Class A Preferred
Stock and Class B Preferred Stock can be redeemed in whole or in part at the
option of the Company once all Class D Preferred Stock and Class C Preferred
Stock have been redeemed. The Class A Preferred Stock, Class B Preferred Stock
and Class D Preferred Stock are redeemable at our option after the earliest to
occur of June 12, 2004 or the closing of a liquidity event (as defined). The
Class A Preferred Stock and Class B Preferred Stock must be redeemed in equal
proportions. Additionally, at the option of 60% of the holders, all of the
outstanding Class A Preferred Stock, Class B Preferred Stock and Class D
Preferred Stock, other than any shares being redeemed at our option, will
automatically convert into common stock upon the occurrence of an initial public
offering of the Company's common stock at a rate equal to the liquidation value
plus accrued dividends, divided by the initial public offering price.

The following table summarizes the components of the carrying value of
each class of redeemable convertible preferred stock (in thousands):

<Table>
<Caption>
PREFERRED A PREFERRED B PREFERRED D TOTAL
----------- ----------- ----------- -------

Original Face Amount................ $30,749 $10,655 $20,000 $61,404
Accrued Dividends................... 18,152 6,505 2,372 27,029
------- ------- ------- -------
Liquidation Value at February 2,
2002.............................. 48,901 17,160 22,372 88,433
Unamortized Issue Discount.......... -- -- (79) (79)
Unamortized modification adjustment
(see Note 6)...................... (1,812) (419) (829) (3,060)
------- ------- ------- -------
Carrying Value at February 2,
2002.............................. $47,089 $16,741 $21,464 $85,294
======= ======= ======= =======
</Table>

F-12

KIRKLAND'S, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 3 - PROPERTY AND EQUIPMENT

Property and equipment is comprised of the following (in thousands):

<Table>
<Caption>
DECEMBER 31, FEBRUARY 3, FEBRUARY 2,
2000 2001 2002
------------ ----------- -----------

Land........................................ $ 402 $ 402 $ 402
Buildings................................... 3,460 3,460 3,460
Equipment................................... 10,430 10,438 12,916
Furniture and fixtures...................... 25,889 25,850 23,706
Leasehold improvements...................... 15,791 15,786 12,406
Projects in process......................... 2,088 2,143 623
------- ------- -------
58,060 58,079 53,513
Less accumulated depreciation............... 32,013 32,397 29,765
------- ------- -------
$26,047 $25,682 $23,748
======= ======= =======
</Table>

NOTE 4 - ACCRUED EXPENSES

Accrued expenses are comprised of the following (in thousands):

<Table>
<Caption>
DECEMBER 31, FEBRUARY 3, FEBRUARY 2,
2000 2001 2002
------------ ----------- -----------

Accrued compensation........................ $ 759 $ 891 $ 3,838
Sales taxes payable......................... 3,458 1,678 1,234
Percentage rent accrual..................... 441 460 827
Gift certificates and store credits......... 2,597 2,323 2,992
Accrued interest payable.................... 6,416 7,613 12,352
Other....................................... 571 1,110 1,326
------- ------- -------
$14,242 $14,075 $22,569
======= ======= =======
</Table>

NOTE 5 - INCOME TAXES

The provision (benefit) for income taxes consists of the following (in
thousands):

Current
Federal.................... $ 2,563 $ 318 $ -- $ 222
State...................... 629 124 -- 270
------- ------- ------- ------
3,192 442 -- 492
------- ------- ------- ------
Deferred
Federal.................... (2,008) (1,092) (1,363) 1,295
State...................... (377) 77 (256) (5)
------- ------- ------- ------
(2,385) (1,015) (1,619) 1,290
------- ------- ------- ------
$ 807 $ (573) $(1,619) $1,782
======= ======= ======= ======
</Table>

F-13

KIRKLAND'S, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Significant components of the Company's deferred tax assets are as
follows (in thousands):

<Table>
<Caption>
DECEMBER 31, FEBRUARY 3, FEBRUARY 2,
2000 2001 2002
------------ ----------- -----------

Current deferred tax assets
Inventory valuation methods............... $ 772 $ 663 $ 502
Accruals.................................. 1,367 708 873
------ ------ ------
2,139 1,371 1,375
------ ------ ------
Noncurrent deferred tax assets
Property and equipment.................... 546 601 --
Stock warrants valuation.................. -- -- 4,403
Other..................................... 630 603 835
Net operating loss and credit
carryforwards.......................... 3,234 5,593 2,111
Valuation allowance....................... (200) (200) (200)
------ ------ ------
4,210 6,597 7,149
------ ------ ------
Noncurrent deferred tax liability
Property and equipment.................... -- -- 1,846
------ ------ ------
Net noncurrent deferred tax asset........... 4,210 6,597 5,303
------ ------ ------

Total deferred tax assets................... $6,349 $7,968 $6,678
====== ====== ======
</Table>

A reconciliation of the provision for income taxes to the amount computed
by applying the federal statutory tax rate of 35.0% to income before income
taxes for the periods indicated below, respectively, is as follows:

Statutory Federal income tax
rate....................... 35.0% (35.0)% (35.0)% 35.0%
State income taxes, net of
Federal income tax
effect..................... 3.4 (4.2) (3.9) 4.8
Benefit from surtax
exemptions................. (21.2) 1.0 1.0 --
Deferred taxes: impact of
merger on state NOL's...... -- 4.4 -- --
Non-deductible stock
compensation............... -- -- -- 11.9
Other........................ (0.6) 3.5 -- (1.7)
----- ----- ----- -----
16.6% (30.3)% (37.9)% 50.0%
===== ===== ===== =====
</Table>

Prior to the Company's reorganization of its corporate structure on
December 31, 1999, the Company received a tax benefit from surtax exemptions due
to graduating tax rates applicable to the separate corporate entities under the
previous corporate structure. Differences in the federal statutory rate and the
Company's effective rate included in "other" above include non-deductible
goodwill amortization and business meals and entertainment expense offset by
rate differentials in the establishment of the deferred tax asset.

F-14

KIRKLAND'S, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

At December 31, 2000, February 3, 2001, and February 2, 2002, the Company
was in a net operating loss carryforward position for federal taxes and in
certain states. These loss carryforwards aggregated approximately $10.8 million
and $14.5 million for federal purposes and $6.7 million and $10.0 million for
state purposes as of December 31, 2000 and February 3, 2001, respectively. As of
February 2, 2002, the Company had $4.7 million in net operating loss
carryforwards for federal purposes and $4.3 million in certain states. These
carryforwards will expire, if unused, in 2004 through 2021. During the year
ended December 31, 2000, certain state loss carryforwards were disallowed. A
valuation allowance is provided when it is more likely than not that some
portion of the deferred tax assets will not be realized. The Company has
established a valuation allowance, as it is more likely than not that certain
net operating loss carryforward items will expire unused.

NOTE 6 - INDEBTEDNESS

Indebtedness consists of the following (in thousands):

<Table>
<Caption>
DECEMBER 31, FEBRUARY 3, FEBRUARY 2,
2000 2001 2002
------------ ----------- -----------

Senior Credit Facility:
Senior Debt (Tranche A), principal and interest
payable quarterly at varying amounts through
June 2002, interest at a floating rate, as
defined in the credit agreement (average rate
of 9.8% in 2000, 11.9% in the 34-day period
ended February 3, 2001 and 5.6% in 2001)...... $ 1,667 $ 1,667 $ --
Senior Debt (Tranche B), principal and interest
payable quarterly at varying amounts through
June 2002, interest at a floating rate, as
defined in the credit agreement (average rate
of 10.8% in 2000, 12.4% in the 34-day period
ended February 3, 2001 and 8.5% in 2001)...... 45,677 45,677 38,177
Revolving credit facility, interest at a
floating rate, as defined in the credit
agreement (average rate of 9.2% in 2000, 11.9%
in the 34-day period ended February 3, 2001
and 8.2% in 2001)............................. 20,000 20,000 --
-------- -------- -------
67,344 67,344 38,177
Senior Subordinated Notes, interest payable
quarterly, principal due in June 2003 (average
rate of 13.5% in 2000, 15.0% in the 34-day
period ended February 3, 2001 and 15.0% in
2001)........................................... 20,000 20,000 20,000
Mandatorily redeemable preferred stock, Class C,
interest at 9% annually......................... 17,122 17,122 17,122
-------- -------- -------
104,360 104,363 75,299
Less:
Unamortized debt discount....................... 106 103 60
Current portion................................. 29,167 29,167 38,177
-------- -------- -------
Total long-term indebtedness.................... $ 75,193 $ 75,196 $37,062
======== ======== =======
</Table>

Senior Credit Facility - The senior credit facility as amended (the
"Senior Debt Agreement") entered into in connection with the Recapitalization
(see Note 2), with a syndicate bank group provides for $65 million in senior
term debt (Tranche A $20 million and Tranche B $45 million) and a $20 million
revolving line of credit ("Line of Credit"). The Line of Credit requires a
30-day consecutive zero balance between January 1 and March 1 of each year. The
Company is required to pay a commitment fee to the

F-15

KIRKLAND'S, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

bank at a rate per annum equal to .5% of the unused portion of the Line of
Credit. Borrowings under the Tranche A term loan and the Line of Credit bear
interest at a floating rate (the higher of the federal funds rate plus .5% or
the prime rate) plus 2.25% or a Eurodollar Rate, as defined in the Senior Debt
Agreement, plus 3.25%. Borrowings under the Tranche B term loan bear interest at
a floating rate (the higher of the federal funds rate plus .5% or the prime
rate) plus 2.95% or a Eurodollar Rate, as defined, plus 3.95%.

On July 7, 1999, the Company entered an amendment to its Senior Debt
Agreement and Supplemental Loan Agreement. The amendment provided an additional
$2.5 million in borrowings under the Tranche B term loan and a term note (the
"Term Note") for $7.5 million due June 2000. Of the $7.5 million advanced under
the Term Note, $3.4 million was loaned by shareholders affiliated with Advent
and $4.1 million was collateralized by cash and letters of credit supplied by
other shareholders of the Company. In conjunction with the amendment, the
Company issued warrants to purchase an aggregate of 871,311 shares of common
stock of the Company for $0.01 per share. The warrants were issued to certain
shareholders of the Company in consideration for collateralizing the principal
on the Term Note or advancing a portion of the borrowings represented by the
Term Note. The warrants were considered to have nominal value at July 7, 1999,
based upon a fair value analysis of the Company's common stock. On August 8,
2000, the Term Note was repaid through the surrender of the collateral provided
by shareholders in exchange for equity and conversion into equity of the loan
advanced by shareholders affiliated with Advent (see Note 2).

Effective June 19, 2001, the Company completed an amendment to its Senior
Debt Agreement with its senior bank syndicate, whereby all previous financial
covenant violations were waived and new financial covenant requirements were
established for the duration of the amended agreement. As of February 2, 2002,
the Company was in compliance with all financial covenants. In May 2002, the
Company completed a refinancing of its senior credit facility (see Note 13).

Subordinated Note Agreement - Concurrent with the Senior Debt Agreement,
the Company entered into a Senior Subordinated Note and Warrant Purchase
Agreement (the "Subordinated Note Agreement") with a group of preferred
shareholders providing for $20 million in subordinated notes. The notes have a
maturity date of June 30, 2003 and bear interest at the rate of 12.50% per
annum. The holders of the subordinated notes also received warrants to purchase,
for $0.01 per share, 654,569 shares of common stock of the Company. Additional
warrants ("Incentive Warrants") were reserved for the holders of the notes,
entitling them to purchase, for $0.01 per share, an additional 264,852 shares of
common stock of the Company if a liquidity event achieving certain valuation
targets had not occurred prior to December 31, 1999. This condition not having
been met, the Incentive Warrants became exercisable to the holders of the notes
effective January 1, 2000. Under the original provisions of this agreement, all
of these warrants could be sold back (i.e. put) to the Company at the holders'
option on the maturity date of the debt for fair market value, as defined in the
Subordinated Note Agreement. An initial value of $300,000 was allocated to the
919,421 warrants and recorded as a discount on the related debt. This discount
is being amortized over the life of the notes.

Prior to January 1, 1998, at which time the holders of the warrants
agreed to terminate their put option, the warrants were marked to market based
upon the fair value of the underlying common stock as of each period end. Upon
termination of the put option the recorded liability of $879,000 was
reclassified as equity. The put option was reinstated on December 31, 1999. The
919,421 warrants were determined to have nominal value based upon a fair value
analysis of the Company's common stock. At December 31, 2000 and February 2,
2002, the warrants were marked to market resulting in accretion of $0 and
$11,315,000, respectively, based upon the fair value of the underlying common
stock. The put option was terminated again on February 3, 2002.

F-16

KIRKLAND'S, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Concurrent with the June 19, 2001 amendment to the senior credit
facilities, the Company also entered into an amendment of its Subordinated Note
Agreement (the "Subordinated Amendment"). Pursuant to the Subordinated
Amendment, all previous events of default were waived and new financial covenant
requirements were established for the duration of the facility. Effective
January 1, 2001, the interest rate on the subordinated notes, plus accrued
interest, was increased to 15.0% per annum compounded quarterly. Effective
January 1, 2002, the interest rate on the subordinated notes, plus accrued
interest, was increased to 15.5% per annum. Additionally, as a condition of the
Subordinated Amendment, the Company agreed to amend its charter to reduce the
dividend rate on the Class A Preferred Stock and Class D Preferred Stock to 4%
effective June 30, 2001. Further, the Company agreed to use its best efforts to
file an amendment to the same effect with respect to the Class B Preferred Stock
on or before June 30, 2001. Although the Company could not get the requisite
shareholder consent with respect to the Class B Preferred Stock, in October 2001
the Company entered into an agreement with two of the shareholders of the Class
B Preferred Stock whereby the dividend rate for these two shareholders was
reduced to 4% effective June 30, 2001. The Company recorded a $2,269,000,
$525,000 and $1,038,000 reduction to the Class A Preferred Stock, Class B
Preferred Stock and Class D Preferred Stock, respectively, to reflect the fair
value adjustment for the change in the dividend rate at July 1, 2001. This
reduction was accounted for as a contribution of capital and is being accreted
to the liquidation values of each class of preferred stock over their remaining
redemption periods.

Under the Company's amended credit agreements (both senior and
subordinated), the Company is required to maintain stated levels of net worth as
well as comply with certain coverage ratios and limits on capital expenditures.
The borrowings are collateralized by substantially all of the Company's assets.

Mandatorily Redeemable Preferred Stock - The Class C Preferred Stock
issued in conjunction with the Recapitalization (see Note 2) has a liquidation
preference to the Class A Preferred Stock and the Class B Preferred Stock. The
liquidation value of $17,122,000 at December 31, 2000, February 3, 2001 and
February 2, 2002 is equal to the Class C Preferred Stock original face value and
current carrying value. The Class C Preferred Stock has no conversion privileges
(see Note 13), is non-voting and can be redeemed in whole or in part at the
option of the Company at any time provided that all of the Class D Preferred
Stock has been redeemed, and is mandatorily redeemable in whole at the earliest
to occur of July 2004 or the closing of a liquidity event, as defined. In
connection with the Class C Preferred Stock, the Company incurs interest expense
equal to 9% per annum of the outstanding balance, including accrued interest
compounded semi-annually. This has been reflected in interest expense in the
accompanying consolidated statements of operations. At December 31, 2000,
February 3, 2001 and February 2, 2002, accrued interest expense related to the
Class C Preferred Stock was $5,036,000, $5,190,000, and $7,211,000,
respectively.

Other Indebtedness - On October 15, 1998, the Company entered into a
Subordinated Promissory Note Agreement (the "Promissory Note Agreement") with a
management employee of the Company. Under the Promissory Note Agreement, the
Company was permitted to borrow up to $5 million from this employee. The
interest rate was equal to the rate specified in the Company's Line of Credit
until May 1, 1999, at which time the rate increased to 2.0% higher than the rate
specified in the Line of Credit. On August 8, 2000, the management employee
exchanged the principal of this note for equity in the Company and received cash
for the unpaid interest (see Note 2).

The principal maturities of long-term debt outstanding at February 2,
2002 including unamortized discounts in years subsequent to 2001 are as follows:
$38,177,000 in 2002; $20,000,000 in 2003; and $17,122,000 in 2004.

F-17

KIRKLAND'S, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 7 - LONG-TERM LEASES

The Company leases retail store facilities and certain equipment under
operating leases with terms ranging up to ten years and expiring at various
dates through 2013. Most of the retail store lease agreements include renewal
options and provide for minimum rentals and contingent rentals based on sales
performance in excess of specified minimums. Rent expense under operating leases
was $19,570,000, $22,371,000 and $24,344,000 in fiscal years 1999, 2000 and
2001, respectively, and $1,936,000 for the 34 days ended February 3, 2001.
Contingent rental expense was $435,000, $199,000 and $752,000 for fiscal years
1999, 2000 and 2001, respectively, and $57,000 for the 34-day period ended
February 3, 2001.

Future minimum lease payments under all operating leases with initial
terms of one year or more are as follows: $22,392,000 in 2002; $20,636,000 in
2003; $19,778,000 in 2004; $18,520,000 in 2005; $15,767,000 in 2006; and
$31,797,000 thereafter.

NOTE 8 - EMPLOYEE BENEFIT PLANS

Stock Options - On June 12, 1996, the Company adopted the "1996 Executive
Incentive and Non-Qualified Stock Option Plan" (the "Plan") which provides
employees and officers with opportunities to purchase shares of the Company's
common stock. The Plan authorizes the grant of incentive and non-qualified stock
options and requires that the exercise price of incentive stock options be at
least 100% of the fair market value of the stock at the date of the grant.

In connection with the 1996 Recapitalization, the Company entered into
agreements to grant options to two management employees. The agreements provide
that each of the two management employees will receive option grants
representing 2% of the fully diluted shares. The agreements further provide that
future issuances of common stock shall not dilute the management employees'
position and that additional grants will be awarded upon each issuance of common
stock. These options become 100% vested 24 hours prior to an asset sale, public
offering, or stock sale, in which the investors in the 1996 recapitalization
achieve a specified internal rate of return on their invested funds. If the
specified internal rate of return targets are not met upon a liquidity event,
the options automatically terminate and are forfeited. Options outstanding under
these agreements were 261,828, 261,828 and 434,364 at December 31, 2000,
February 3, 2001, and February 2, 2002, respectively. The increase in the number
of options outstanding under these agreements by 172,536 (to a total of 434,364)
at February 2, 2002 occurred by virtue of the anti-dilution provisions of these
agreements. No compensation expense has been recognized since the options have
not vested and management believes the likelihood of exercise is remote.

On September 28, 1999, the Company's Board of Directors re-priced certain
employee options granted in 1998 to $1.73 per share, which was not less than the
fair value of the Company's stock at the date of the repricing, as determined by
the Company's Board of Directors. These options to purchase 125,526 shares
remained outstanding at February 2, 2002. The repricing resulted in variable
accounting under the provisions of APB 25 and FIN 44. The compensation charge is
based on the excess of the fair value of the Company's common stock over the
$1.73 exercise price of the stock options. The Company has recognized a non-cash
stock compensation charge of approximately $0, $0 and $1,174,000 for fiscal
years 1999, 2000 and 2001, respectively. No such charge was recorded for the
34-day period ended February 3, 2001.

On November 27, 2001, the Company granted options to purchase 505,841
shares of common stock to certain employees at an exercise price of $1.29 per
share. The estimated fair value of the Company's common stock was greater than
the exercise price of the stock options on the date of grant. The Company has
recognized compensation expense of approximately $46,000 for fiscal 2001 under
the provisions of APB 25 in connection with this grant of employee stock
options.

F-18

KIRKLAND'S, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The following table summarizes information about employee stock options
outstanding at February 2, 2002:

<Table>
<Caption>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- ----------------------------------------------- ----------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
RANGE OF NUMBER REMAINING AVERAGE NUMBER AVERAGE
EXERCISE OUTSTANDING CONTRACTUAL EXERCISE EXERCISABLE EXERCISE
PRICES 02/02/2002 LIFE PRICE 02/02/2002 PRICE

$0.01 434,364 6.52 $0.01 -- $0.01
$1.29 505,841 9.82 $1.29 -- $1.29
$1.73 246,432 5.30 $1.73 246,433 $1.73
--------- ---- ----- ------- -----
1,186,637 7.76 $0.91 246,433 $1.73
========= ==== ===== ======= =====
</Table>

Transactions under the Plan in each of the periods indicated are as
follows:

<Table>
<Caption>
WEIGHTED WEIGHTED AVERAGE
RANGE OF AVERAGE FAIR VALUE OF
NUMBER EXERCISE EXERCISE STOCK AT
OF SHARES PRICES PRICE GRANT DATE
--------- ----------- -------- ----------------

Outstanding at December 31,
1999......................... 538,831 $0.01-$1.73 $0.89 --
Granted...................... -- -- -- --
Exercised.................... -- -- -- --
Forfeited.................... (14,186) $ 1.73 1.73 --
--------- ----------- ----- -----
Outstanding at December 31,
2000......................... 524,645 $0.01-$1.73 $0.87
Granted...................... -- -- -- --
Exercised.................... -- -- -- --
Forfeited.................... -- -- -- --
--------- ----------- ----- -----
Outstanding at February 3,
2001......................... 524,645 $0.01-$1.73 $0.87 --
Granted
Exercise price less than
FMV of common stock..... 172,536 $ 0.01 $0.01 $2.95
Exercise price less than
FMV of common stock..... 505,841 $ 1.29 $1.29 $2.95
Exercised.................... (12,646) $ 1.73 1.73 --
Forfeited.................... (3,739) $ 1.73 1.73 --
--------- ----------- ----- -----
Outstanding at February 2,
2002......................... 1,186,637 $0.01-$1.73 $0.91
--------- ----------- -----
Granted (unaudited).......... -- -- -- --
Exercised (unaudited)........ (125,525) $ 1.73 $1.73 --
Forfeited (unaudited)........ -- -- -- --
Outstanding at May 4, 2002
(unaudited).................. 1,061,111 $0.01-$1.73 $0.83
========= =========== =====
</Table>

The 505,841 options granted during the year ended February 2, 2002 with
an exercise price of $1.29 per share vest ratably over three years. The 172,536
options deemed granted (by virtue of anti-dilution provisions in option
agreements entered into in 1996) during the year ended February 2, 2002 with an
exercise price of $0.01 per share vest immediately upon a liquidity event.

F-19

KIRKLAND'S, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Had compensation expense for the Company's stock option plan been
determined based on the fair values at the grant date for stock option awards
granted during the fiscal years 1999, 2000, and 2001 and the quarter ended May
4, 2002, the Company's pro forma net income (loss) allocable to common
shareholders would have been approximately $(1,054,000), $(7,880,000),
$(4,661,000) and $(1,160,000), respectively. Net loss for the 34-day period
ended February 3, 2001, on a pro forma basis would have been approximately
$(3,247,000). The earnings per share would have been:

<Table>
<Caption>
YEAR ENDED 34 DAYS
--------------------------- ENDED YEAR ENDED QUARTER ENDED
DECEMBER 31, DECEMBER 31, FEBRUARY 3, FEBRUARY 2, MAY 4,
1999 2000 2001 2002 2002
------------ ------------ ------------- ----------- -------------

Basic.................. $(0.21) $(1.30) $(0.43) $(0.62) $(0.15)
====== ====== ====== ====== ======
Diluted................ $(0.21) $(1.30) $(0.43) $(0.62) $(0.15)
====== ====== ====== ====== ======
</Table>

The fair value of each option grant was estimated on the date of grant
using the Black-Scholes option pricing model based upon the following
assumptions: expected volatility of 55%; risk-free interest rates of 5.5%;
expected lives of 5 years, and no expected dividend payments. The weighted
average remaining contractual life of the options was 7.2 years, 6.2 years, 7.9
years and 7.6 years for the fiscal years ended 1999, 2000 and 2001 and the
quarter ended May 4, 2002, respectively. The weighted average contractual life
of the options was 6.1 years at February 3, 2001.

401(k) Savings Plan - The Company maintains a defined contribution 401(k)
employee benefit plan, which covers all employees meeting certain age and
service requirements. Up to 6% of the employee's compensation may be matched at
the Company's discretion. This discretionary percentage was 50% of an employee's
contribution subject to Plan maximums in 2001. The Company's matching
contributions were approximately $82,000, $102,000 and $249,000 in 1999, 2000
and 2001, respectively. The Company has the option to make additional
contributions to the Plan on behalf of covered employees; however, no such
contributions were made in 1999, 2000 or 2001.

NOTE 9 - EARNINGS PER SHARE

Basic earnings per share are based upon the weighted average number of
shares outstanding. Diluted earnings per share are based upon the weighted
average number of shares outstanding plus the shares that would be outstanding
assuming exercise of dilutive stock options and warrants.

The computations for basic and diluted earnings per share are as follows
(in thousands, except for share and per share amounts):

<Table>
<Caption>
YEAR ENDED QUARTER QUARTER
--------------------------- 34-DAY PERIOD YEAR ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, ENDED FEBRUARY 3, FEBRUARY 2, MAY 5, MAY 4,
1999 2000 2001 2002 2001 2002
------------ ------------ ----------------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED)

Numerator:
Net loss allocable
to common
stock........... $ (994) $ (7,870) $ (3,434) $ (4,656) $ (4,656) $ (1,168)
========= ========= ========= ========= ========= =========
Denominator for basic
earnings per share:
Average number of
common shares
outstanding..... 5,063,938 6,052,715 7,518,939 7,521,093 7,518,939 7,532,964
========= ========= ========= ========= ========= =========
</Table>

F-20

KIRKLAND'S, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Denominator for
diluted earnings
per share:
Average number of
common shares
outstanding..... 5,063,938 6,012,715 7,518,939 7,521,093 7,518,939 7,532,964
--------- --------- --------- --------- --------- ---------
5,063,938 6,012,715 7,518,939 7,521,093 7,518,939 7,532,964
========= ========= ========= ========= ========= =========
Basic earnings per
share........... $ (0.20) $ (1.30) $ (0.46) $ (0.62) $ (0.62) $ (0.16)
========= ========= ========= ========= ========= =========
Diluted earnings
per share....... $ (0.20) $ (1.30) $ (0.46) $ (0.62) $ (0.62) $ (0.16)
========= ========= ========= ========= ========= =========
</Table>

The calculation of fully diluted earnings per share for December 31,
1999, December 31, 2000, and February 3, 2001 and February 2, 2002 excludes
stock options outstanding of 538,830, 524,645, 524,645 and 1,290,444
respectively and outstanding warrants of 2,096,160 as their effect would be
anti-dilutive.

NOTE 10 - RELATED PARTIES

Inventory is purchased in the ordinary course of business from an entity
formerly owned by a substantial shareholder of the Company. Purchases
approximated $237,000, $128,000 and $332,000 in 1999, 2000 and 2001,
respectively.

The Company purchases inventory from a manufacturer in which one of the
shareholders had a significant ownership interest. Purchases from this
manufacturer totaled $292,000 and $5,000 in 1999 and 2000, respectively. The
Company purchased no inventory from this manufacturer in 2001.

The Company rents aircraft from an entity owned by a substantial
shareholder. Rental expense approximated $63,000, $92,000 and $23,000 in 1999,
2000 and 2001, respectively.

NOTE 11 - COMMITMENTS AND CONTINGENCIES

Financial instruments which potentially subject the Company to
concentration of risk are primarily cash and cash equivalents. The Company
places its cash and cash equivalents in insured depository institutions and
attempts to limit the amount of credit exposure to any one institution within
the covenant restrictions imposed by the Company's debt agreements.

The Company has employment agreements with two key management employees
and a consulting agreement with another individual, all of whom were
shareholders of the Company prior to the Recapitalization. The employment
agreements as amended expire in May 2006 and require annual aggregate salary
payments of $450,000. The consulting agreement expires on the earlier of a
liquidity event or June 12, 2003. The Company recorded expenses related to this
agreement of $679,000 during fiscal 1999, 2000 and 2001, and approximately
$57,000 during the 34-day period ended February 3, 2001. These three individuals
own all of the outstanding Class C Preferred Stock (see Note 6).

The Company is party to pending legal proceedings and claims. Although
the outcome of such proceedings and claims cannot be determined with certainty,
the Company's management is of the opinion

F-21

KIRKLAND'S, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

that it is unlikely that these proceedings and claims will have a material
effect on the financial condition, operating results or cash flows of the
Company.

NOTE 12 - CONSULTING CONTRACT

In July 2001, the Company entered into a three-year contract with a
consultant to provide services to the Company for $16,667 per month. The
contract is cancelable by either party upon 30 days notice. Under the terms of
the agreement, the consultant was also granted a warrant to purchase 103,807
shares of the Company's common stock for $0.01 per share. The warrant only
becomes exercisable upon the consummation of a liquidity event, as defined, and,
following the occurrence of such an event, may be exercised until the later of
July 1, 2005 or twelve months following the termination of the consulting
contract. At the date of a liquidity event, the Company may choose to settle the
warrant for a cash payment equal to the excess of the fair value of 103,807
shares of the Company's common stock over the exercise price of the warrant. The
Company will measure and record the amount of the expense related to this
arrangement at the date of a liquidity event, based upon the fair value of the
warrant at that date.

NOTE 13 - SUBSEQUENT EVENTS

In May 2002, the Company completed a refinancing of its senior secured
credit facility. The Company entered into a new, three-year senior secured
credit facility that includes a $45 million revolving credit facility ($30
million for the first six months of each calendar year) and a $15 million term
loan. The revolving credit facility bears interest at a floating rate equal to
the prime rate or LIBOR plus 2.25%, at the Company's election. Borrowings under
the new revolving credit facility are subject to certain conditions and events
of default the most restrictive of which are the maintenance of certain minimum
levels of operating profit minus capital expenditures and certain maximum ratios
of debt to operating profit. The Company is also restricted from paying any cash
dividends on any class of capital stock. The term loan bears interest at the
prime rate plus 7.25%. The proceeds of the term loan, together with a total of
approximately $33.6 million of a combination of available cash and borrowings
under the revolving credit facility, were used (1) to repay all indebtedness
(including accrued interest outstanding) outstanding under the Company's former
senior secured credit facility under which $38.3 million was outstanding at May
4, 2002, (2) to pay all accrued and unpaid interest on the Company's
subordinated debt, of which there was $4.7 million as of May 4, 2002 and (3) to
pay $5.7 million of accrued interest associated with the Class C Preferred
Stock, of which there was $7.7 million accrued and unpaid as of May 4, 2002. As
a result, the interest rate on the subordinated notes was reduced from 15.5% to
12.5% and the dividend rate on the Class A, Class B and Class D Preferred Stock
was increased from 4% to 10%.

On May 4, 2002, the Company loaned $217,000 to its Executive Vice
President and Chief Financial Officer. The note bears interest at the rate of
4.75% per year which is payable over the term of the note. The note matures in
May 2005 and is due and payable in full at that time. The loan is collateralized
by marketable securities having a value of no less than the principal amount of
the loan together with 125,526 shares of our common stock owned by borrower. The
pledge agreement between the Company and the borrower requires the borrower to
supply additional collateral at any time the value of existing collateral falls
below 125% of the then principal amount of the loan. In addition, at the request
of the borrower, the Company may lend up to an additional $500,000 principal
amount under the note in April 2003. Any additional principal amount would be
subject to the same interest rate, principal repayment and collateral provisions
as the original principal amount. The loan was approved by the board of
directors and audit committee.

As part of the Pre-Offering Transactions, in May 2002, the Company
entered into a stock repurchase agreement with certain shareholders. This
agreement governs the use of a portion of the proceeds from the planned initial
public offering to repurchase shares of the Company's capital stock from

F-22

KIRKLAND'S, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

certain of its shareholders. The class of and number of shares of capital stock
that will be repurchased will vary pro rata based upon the proceeds received in
the planned initial public offering. The purchase price for each share of Class
A, Class B and Class D Preferred Stock will be an amount equal to 93% of the sum
of (i) the stated value of such share plus all dividends with respect to such
share accrued and unpaid through the completion of the planned initial public
offering. The purchase price for a share of Class C Preferred Stock will be an
amount equal to 100% of the stated value of each share. The purchase price for
each share of common stock will be an amount equal to 93% of the initial
offering price of the planned initial public offering.

In May 2002, the Company entered into an agreement with the Company's
current Chairman under which he agreed to exchange all of his outstanding shares
of Class C Preferred Stock, having an aggregate stated value of $7.9 million,
into shares of the Company's common stock. The number of shares to be issued
under this agreement equals the stated value of the shares of Class C Preferred
Stock divided by 93% of the initial public offering price in the planned initial
public offering. This 7% discount related to the inducement associated with this
exchange agreement will be recorded as a charge to interest expense, and
accordingly reflected as a component of the Company's earnings per share, upon
the occurrence of the planned initial public offering. All of the shares
acquired by the current Chairman under this exchange agreement will be sold in
the planned initial public offering.

NOTE 14 - PRE-OFFERING STOCK SPLIT

Prior to the completion of the Company's planned initial public offering,
the Company intends to effect a 54.9827-for-one split of its common stock. All
share and per share information in the consolidated financial statements has
been retroactively restated to reflect the stock split for all periods
presented.

NOTE 15 - UNAUDITED PRO FORMA BALANCE SHEET AND EARNINGS PER SHARE INFORMATION

The unaudited pro forma balance sheet information as of May 4, 2002 gives
effect to the conversion or redemption of the Class A, Class B, and Class D
redeemable convertible preferred stock, the exchange of the Class C redeemable
preferred stock, the repurchase of certain shares of common stock, and the
exercise of all outstanding common stock warrants that is expected to occur upon
the consummation of the initial public offering of the Company's common stock.

The unaudited pro forma earnings per share information for the year ended
February 2, 2002 and the quarter ended May 4, 2002 gives effect to the
conversion or redemption of the Class A, Class B, and Class D redeemable
convertible preferred stock and the exercise of all outstanding common stock
warrants that is expected to occur upon the consummation of the initial public
offering of the Company's common stock, as if they had occurred as of February
4, 2001.

The unaudited pro forma balance sheet and pro forma earnings information
does not give effect to the sale of shares by the Company in its planned initial
public offering.

NOTE 16 - REVISION OF FINANCIAL STATEMENTS

In connection with the planned initial public offering of common stock,
the accompanying 2001 financial statements have been revised to reflect
additional non-cash expenses for the accretion of common stock warrants and
compensation charges for employee stock options. These additional expenses
result from a refinement in the valuation methodology utilized in determining
the estimated fair value of the

F-23

KIRKLAND'S, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Company's common stock which is a primary determinant for measuring these
non-cash charges. Following is a summary of the effect of these changes on the
2001 financial statements.

<Table>
<Caption>
AS PREVIOUSLY REPORTED AS ADJUSTED
---------------------- -----------

2001:
Net income.......................................... $ 4,579 $ 1,783
Net loss allocable to common shareholders........... $(1,860) $(4,656)
Loss per common share:
Basic............................................ $ (0.25) $ (0.62)
Diluted.......................................... $ (0.25) $ (0.62)
</Table>

F-24

UNAUDITED PRO FORMA CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

Immediately prior to completion of this offering as a part of the
Pre-Offering Transactions, $27.2 million of aggregate stated value and accrued
dividends on the outstanding shares of our Class A Preferred Stock, Class B
Preferred Stock and Class D Preferred Stock will be converted into an aggregate
of 1,511,968 shares of common stock (at an assumed initial public offering price
of $18.00 per share). Additionally, prior to completion of this offering, our
warrantholders will exercise all of our outstanding warrants resulting in the
purchase of 2,096,139 shares of common stock. See "Related Party
Transactions - Pre-Offering Transactions." Using a portion of the net proceeds
of this offering we will purchase or redeem from current shareholders $11.3
million of the outstanding stated value plus accrued and unpaid interest of our
Class C Preferred Stock, $63.4 million of aggregate stated value and accrued
dividends on the outstanding shares of Class A Preferred Stock, Class B
Preferred Stock and Class D Preferred Stock and 589,799 shares of common stock.

The pro forma consolidated condensed balance sheet as of May 4, 2002 and
the pro forma consolidated condensed statement of operations for the quarter
ended May 4, 2002 which follow give effect to: (i) the refinancing of our former
senior credit facility with our new senior credit facility, as discussed in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources," (ii) the Pre-Offering
Transactions and (iii) this offering and the application of the estimated net
proceeds therefrom as if such transactions had occurred as of the balance sheet
date for these adjustments affecting the pro forma balance sheet and as of the
beginning of the period for those adjustments affecting the pro forma statement
of operations.

The pro forma consolidated condensed statement of operations for the year
ended February 2, 2002 which follows gives effect to the transactions referred
to in clauses (ii) and (iii) as stated above as if such transactions had
occurred as of the beginning of the period.

In our opinion all adjustments necessary to present fairly such pro forma
consolidated condensed statements of operations have been made. These unaudited
pro forma consolidated condensed statements of operations are not necessarily
indicative of what actual results would have been had the transactions occurred
at the beginning of the respective periods nor do they purport to indicate the
results of our future operations. These unaudited pro forma consolidated
condensed financial statements should be read in conjunction with the
accompanying notes.

P-1

UNAUDITED PRO FORMA CONSOLIDATED CONDENSED STATEMENT OF OPERATIONS

FOR THE YEAR ENDED FEBRUARY 2, 2002

<Table>
<Caption>
PRO FORMA
HISTORICAL ADJUSTMENTS AS ADJUSTED
----------- ------------ ------------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE
DATA)

Net sales................................................... $ 307,213 $ 307,213
Cost of sales............................................... 200,063 200,063
--------- ----------
Gross profit.............................................. 107,150 107,150
Operating expenses:
Other operating expenses.................................. 71,993 71,993
Depreciation and amortization............................. 6,370 6,370
Non-cash stock compensation charge........................ 1,220 1,220
--------- ----------
Operating income.......................................... 27,567 27,567
Interest expense:
Senior credit facility and other indebtedness............. 6,066 6,066
Subordinated debt......................................... 3,693 (3,693)(b) --
Class C Preferred Stock................................... 2,007 (2,007)(c) --
Amortization of debt issue costs.......................... 1,308 (147)(b) 1,161
Accretion of common stock warrants........................ 11,315 (11,315)(d) --
Interest income............................................. (278) (278)
Other expense, net.......................................... (109) (109)
--------- ----------
Income before income taxes.............................. 3,565 20,727
Income tax provision........................................ 1,782 6,716(e) 8,498
--------- ------- ----------
Net income.............................................. 1,783 12,229
Accretion of redeemable preferred stock and dividends
accrued................................................... (6,439) 6,439(f) --
--------- ----------
Net income allocable to common stock(a)..................... (4,656) 12,229
--------- ----------
Earnings per common share(a):
Basic..................................................... $ (0.62) $ 0.71
--------- ----------
Diluted................................................... $ (0.62) $ 0.70
--------- ----------
Weighted average number of common shares
outstanding(a):
Basic..................................................... 7,521,093 17,186,340
--------- ----------
Diluted................................................... 7,521,093 17,554,991
--------- ----------
</Table>

- ------------------------------

(a) Assumes the Pre-Offering Transactions were effected as of the beginning of
the period, at an assumed initial public offering price of $18.00 per share.
At a different initial public offering price, the pro forma number of shares
outstanding and pro forma net earnings per share would be different. See
"Related Party Transactions - Pre-Offering Transactions." A reconciliation
of historical weighted average shares outstanding to pro forma weighted
average shares outstanding is as follows:

<Table>
<Caption>
BASIC DILUTED
---------- ----------

Historical weighted average shares outstanding.............. 7,521,093 7,521,093
New shares issued......................................... 6,174,000 6,174,000
Exercise of common stock warrants......................... 2,096,139 2,096,139
Exchange of Class C Preferred Stock for common stock...... 472,939 472,939
Conversion of Class A, Class B and Class D Preferred
Stock.................................................. 1,511,968 1,511,968
Repurchase of common stock................................ (589,799) (589,799)
Dilution from stock options............................... -- 368,651
---------- ----------
Pro forma weighted average shares outstanding............... 17,186,340 17,554,991
========== ==========
</Table>

P-2

(b) Represents the interest and amortization expense reduction of $3.7 million
and $0.1 million resulting from repayment of approximately $20.0 million of
subordinated debt from the estimated net proceeds of this offering. See "Use
of Proceeds."

(c) Represents the interest expense reduction of $2 million resulting from
repayment of all outstanding mandatorily redeemable Class C Preferred Stock
and amounts classified as interest associated with such preferred stock from
the estimated net proceeds of this offering. See "Use of Proceeds."

(d) Represents the reduction in accretion of common stock warrants of $11.3
million resulting from the exercise of warrants as part of the Pre-Offering
Transactions pursuant to irrevocable exercise notices that have been signed
by the holders of the warrants.

(e) Represents the tax effect of the foregoing adjustments, resulting in an
effective tax rate of approximately 41.0%.

(f) Represents the reduction in accretion and dividends accrued of $6.4 million
resulting from the conversion and/or redemption of all $89.4 million of
aggregate stated value and accrued dividends on our outstanding Class A
Preferred Stock, Class B Preferred Stock and Class D Preferred Stock (at an
assumed initial public offering price of $18.00 per share).

P-3

UNAUDITED PRO FORMA CONSOLIDATED CONDENSED BALANCE SHEET

MAY 4, 2002
(IN THOUSANDS)

<Table>
<Caption>
PRE-OFFERING
AND
REFINANCING OFFERING PRO FORMA
HISTORICAL ADJUSTMENTS SUBTOTAL ADJUSTMENTS AS ADJUSTED
---------- ------------ --------- ------------ -----------

ASSETS
Current assets:
Cash and cash equivalents................... $ 23,111 $(17,713)(a) $ 5,398 $ 5,398
Inventories................................. 36,805 36,805 36,805
Other current assets........................ 4,400 4,400 4,400
--------- --------- ---------
Total current assets...................... 64,316 46,603 46,603
Property and equipment, net................... 23,819 23,819 23,819
Other noncurrent assets....................... 2,956 2,956 2,956
--------- --------- ---------
Total assets.............................. $ 91,091 $ 73,378 $ 73,378
========= ========= =========
LIABILITIES, REDEEMABLE PREFERRED STOCK AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Revolving credit facility................... -- 16,000 (a) 16,000 (1,000) (b) 15,000
Current maturities of long-term debt........ 2,250 2,250 2,250
Accounts payable............................ 11,429 11,429 11,429
Other current liabilities................... 21,087 (1,122)(a) 9,551 (2,064)(b) 9,447
(4,737)(a) 1,960 (e)
(5,677)(a)
--------- --------- ---------
Total current liabilities..................... 34,766 39,230 38,126
--------- --------- ---------
Senior debt:
Revolving credit facility................... --
Senior term loan............................ 34,927 (37,177)(a) 12,750 12,750
15,000 (a)
Subordinated debt............................. 19,951 19,951 (20,000)(b) --
49 (c)
Class C Preferred Stock....................... 17,122 17,122 (17,122)(b) --
Other liabilities............................. 2,245 2,245 2,245
--------- --------- ---------
Total liabilities......................... 109,011 91,298 53,121
--------- --------- ---------
Redeemable convertible preferred stock:
Class D..................................... 21,785 21,785 (22,597)(b)(d) --
812 (f)
Class A..................................... 47,773 47,773 (49,393)(b)(d) --
1,620 (f)
Class B..................................... 17,047 17,047 (17,422)(b)(d) --
375 (f)
Shareholders' equity (deficit):
Common stock................................ 229 229 229
Paid-in capital............................. 7,644 7,644 102,383 (b) 137,796
27,215 (b)
554 (e)
Loan to shareholder......................... (217) (217) (217)
Accumulated deficit......................... (112,181) (112,181) (2,514)(e) (117,551)
(49)(c)
(2,807)(f)
--------- --------- ---------
Total shareholders' equity (deficit)...... (104,525) (104,525) 20,257
--------- --------- ---------
Total liabilities, redeemable preferred
stock and shareholders' equity
(deficit)............................... $ 91,091 $ 73,378 $ 73,378
========= ========= =========
</Table>

- ------------------------------

(a) Represents the repayment of our former senior credit facility of $38.3
million (which consists of $37.2 million of principal on our former term
loan and $1.1 million of accrued interest), $4.7 million of accrued interest
on subordinated debt and $5.7 million of accrued interest associated with
the Class C Preferred Stock with the proceeds from a new credit facility
consisting of a $15 million term loan and a revolving line of credit. This
refinancing transaction closed during May 2002. The maturity date for the
new senior credit facility is May 2005.

(b) Assumes proceeds to us of $101.1 million from this offering, of which $20
million is used to retire subordinated debt, $11.3 million is used to redeem
mandatorily redeemable Class C Preferred Stock

P-4

(including related accruals classified as interest), $58.9 million is used
to redeem $62.2 of the aggregate stated value of our outstanding Class A
Preferred Stock, Class B Preferred Stock and Class D Preferred Stock, $9.9
million is used to redeem shares of outstanding common stock and $1.0
million is used for working capital and general corporate purposes. Also
assumes the exchange of $7.9 million of the aggregate stated value of the
Class C Preferred Stock into common stock as part of the Pre-Offering
Transactions.

(c) Relates to the accretion of debt discount of $49,000 associated with the
early extinguishment of the subordinated debt.

(d) Assumes conversion of $27.2 million of redeemable convertible preferred
stock (Class A, Class B and Class D). The conversion of preferred stock will
result in additional common shares outstanding as will the redemption for
cash since any cash redemption will be funded by proceeds from the offering.

(e) Reflects the recording of the following: (i) a charge in the amount of $2.0
million associated with stock options granted in July 2001 to a consultant
which will become immediately exercisable upon completion of this offering
and (ii) a charge in the amount of $0.6 million associated with the
inducement relating to the exchange of certain Class C Preferred Stock for
common stock as part of the Pre-Offering Transactions. These charges have
not been reflected in the pro forma statements of operations for the year
ended February 2, 2002 or the quarter ended May 4, 2002. They will be
recorded in our historical statement of operations in the period that this
offering occurs.

(f) Relates to the accretion of redeemable convertible preferred stock (Class A,
Class B and Class D) that would occur on the date of this offering in order
to increase the carrying values of each class of convertible preferred stock
to their respective liquidation values.

P-5

UNAUDITED PRO FORMA CONSOLIDATED CONDENSED STATEMENT OF OPERATIONS

FOR THE QUARTER ENDED MAY 4, 2002

<Table>
<Caption>
PRO FORMA
HISTORICAL ADJUSTMENTS AS ADJUSTED
---------- ----------- -----------
(IN THOUSANDS, EXCEPT SHARE
AND PER SHARE DATA)

Net sales................................................... $ 66,184 $ 66,184
Cost of sales............................................... 43,976 43,976
---------- ----------
Gross profit.............................................. 22,208 22,208
Operating expenses:
Other operating expenses.................................. 17,164 17,164
Depreciation and amortization............................. 1,653 1,653
Non-cash stock compensation charge........................ 812 812
---------- ----------
Operating income.......................................... 2,579 2,579
Interest expense:
Senior credit facility and other indebtedness............. 542 78(b) 620
Subordinated debt......................................... 944 (944)(c) --
Class C Preferred Stock................................... 544 (544)(d) --
Amortization of debt issue costs.......................... 366 (283)(e) 83
Interest income............................................. (67) (67)
Other expense, net.......................................... 7 7
---------- ----------
Income (loss) before income taxes....................... 243 1,936
Income tax provision (benefit).............................. 100 695(f) 795
---------- ----------
Net income (loss)....................................... 143 1,141
Accretion of redeemable preferred stock and dividends
accrued................................................... (1,311) 1,311(g) --
---------- ----------
Net income allocable to common stock(a)..................... (1,168) 1,141
---------- ----------
Earnings per common share(a):
Basic..................................................... $ (0.16) $ 0.07
---------- ----------
Diluted................................................... $ (0.16) $ 0.06
---------- ----------
Weighted average number of common shares
outstanding(a):
Basic..................................................... 7,532,964 17,198,279
---------- ----------
Diluted................................................... 7,532,964 17,992,968
---------- ----------
</Table>

- ------------------------------

<Table>
<Caption>
BASIC DILUTED
---------- ----------

Historical weighted average shares outstanding.............. 7,532,964 7,532,964
New shares issued......................................... 6,174,000 6,174,000
Exercise of common stock warrants......................... 2,096,139 2,096,139
Exchange of Class C Preferred Stock for common stock...... 472,939 472,939
Conversion of Class A, Class B and Class D Preferred
Stock.................................................. 1,511,968 1,511,968
Repurchase of common stock................................ (589,799) (589,799)
Dilution from stock options............................... -- 794,757
---------- ----------
Pro forma weighted average shares outstanding............... 17,198,211 17,992,968
========== ==========
</Table>

(b) Represents the change in interest expense between the actual amount incurred
during the quarter ended May 4, 2002 under the former senior credit facility
and the interest expense that would have been incurred had the new senior
credit facility been in place at the beginning of the period. A 1/8% change
in the interest rate would increase or decrease the pro forma adjustment by
approximately $10,000.

P-6

(c) Represents the interest expense reduction of $0.9 million resulting from
repayment of approximately $20.0 million of subordinated debt from the
estimated net proceeds of this offering. See "Use of Proceeds."

(d) Represents the interest expense reduction of $0.5 million resulting from
repayment of all outstanding mandatorily redeemable Class C Preferred Stock
and amounts classified as interest associated with such preferred stock from
the estimated net proceeds of this offering. See "Use of Proceeds."

(e) Represents the difference between the amount actually recorded during the
quarter ended May 4, 2002 pertaining to the amortization of debt issue costs
and the amortization that would have been recorded if the new senior credit
facility had been in place at the beginning of the period.

(f) Represents the tax effect of the foregoing adjustments, resulting in an
effective tax rate of approximately 41.0%.

(g) Represents the reduction in accretion and dividends accrued of $1.3 million
resulting from the conversion and/or redemption of all $89.4 million of
aggregate stated value and accrued dividends on our outstanding Class A
Preferred Stock, Class B Preferred Stock and Class D Preferred Stock (at an
assumed initial public offering price of $18.00 per share).

P-7

[photographs of stores, customers and merchandise]

- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------

Through and including , 2002 (the 25th day after the date of
this prospectus), all dealers effecting transactions in these securities,
whether or not participating in this offering, may be required to deliver a
prospectus. This is in addition to the dealers' obligation to deliver a
prospectus when acting as underwriters and with respect to their unsold
allotments or subscriptions.

7,000,000 SHARES

(KIRKLAND'S, INC. LOGO)

COMMON STOCK

---------------------

PROSPECTUS
---------------------

MERRILL LYNCH & CO.

CIBC WORLD MARKETS

SUNTRUST ROBINSON HUMPHREY

U.S. BANCORP PIPER JAFFRAY

, 2002
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------

PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.

The following table sets forth an itemization of all estimated expenses,
all of which will be paid by us in connection with the issuance and distribution
of the securities being registered:

<Table>
<Caption>
NATURE OF EXPENSE AMOUNT
- ----------------- ------

SEC Registration Fee........................................ $ 14,071
Nasdaq National Market Listing Fee.......................... 100,000
NASD Fee.................................................... 15,795
Printing and engraving fees................................. 280,000
Registrant's counsel fees and expenses...................... 900,000
Selling shareholders' counsel fees and expenses............. 25,000
Accounting fees and expenses................................ 250,000
Officers and Directors Liability Insurance.................. 80,000
Blue Sky expenses and counsel fees.......................... 5,000
Transfer agent and registrar fees........................... 10,000
Miscellaneous............................................... 134
----------
Total..................................................... $1,680,000
==========
</Table>

- ---------------

ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.

The Tennessee Business Corporation Act ("TBCA") sets forth in Sections
48-18-502 through 48-18-508 the circumstances governing the indemnification of
directors, officers, employees and agents of a corporation against liability
incurred in the course of their official capacities. Section 48-18-502 of the
TBCA provides that a corporation may indemnify any director against liability
incurred in connection with a proceeding if (i) the director acted in good
faith, (ii) the director reasonably believed, in the case of conduct in his or
her official capacity with the corporation, that such conduct was in the
corporation's best interest, or, in all other cases, that his or her conduct was
not opposed to the best interests of the corporation and (iii) in connection
with any criminal proceeding, the director had no reasonable cause to believe
that his or her conduct was unlawful. In actions brought by or in the right of
the corporation, however, the TBCA provides that no indemnification may be made
if the director or officer is adjudged to be liable to the corporation.
Similarly, the TBCA prohibits indemnification in connection with any proceeding
charging improper personal benefit to a director, if such director is adjudged
liable on the basis that a personal benefit was improperly received. In cases
where the director is wholly successful, on the merits or otherwise, in the
defense of any proceeding instigated because of his or her status as a director
of a corporation, Section 48-18-503 of the TBCA mandates that the corporation
indemnify the director against reasonable expenses incurred in the proceeding.
Notwithstanding the foregoing, Section 48-18-505 of the TBCA provides that a
court of competent jurisdiction, upon application, may order that a director or
officer be indemnified for reasonable expense if, in consideration of all
relevant circumstances, the court determines that such individual is fairly and
reasonably entitled to indemnification, whether or not the standard of conduct
set forth above was met. Officers, employees, and agents who are not directors
are entitled, through the provisions of Section 48-18-507 of the TBCA to the
same degree of indemnification afforded to directors under Sections 48-18-503
and 48-18-505.

Our charter and our bylaws will provide that we will indemnify from
liability, and advance expenses to, any of our present or former directors or
officers to the fullest extent allowed by the TBCA, as amended from time to
time, or any subsequent law, rule, or regulation adopted. Additionally, the

II-1

charter will provide that none of our directors will be personally liable to us
or any of our shareholders for monetary damages for breach of any fiduciary duty
except for liability arising from (i) any breach of a director's duty of loyalty
to us or our shareholders, (ii) any acts or omissions not in good faith or which
involve intentional misconduct or a knowing violation of law, (iii) any unlawful
distributions, or (iv) receiving any improper personal benefit.

ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.

Since April 1999, we sold the following securities (giving retroactive
effect to a 54.9827-for-one stock split to be effected in connection with the
Pre-Offering Transactions) without registration under the Securities Act:

1. In July 1999, in connection with an additional loan from our
former senior lenders, certain of our then-existing shareholders
collateralized, by cash and letters of credit, $4.1 million of the
additional loan or loaned funds directly to us. In consideration for
this, we issued to such shareholders warrants to purchase an aggregate of
871,311 shares of common stock at $0.01 per share.

2. In December 1999, we reorganized by merging each of the
separate corporations that operated our stores and Briar Patch Management
Corporation, which was our wholly-owned subsidiary, into Kirkland's
Stores, Inc., a wholly owned subsidiary of Kirkland's. In conjunction
with the merger, we issued 11,326 additional shares of our common stock,
2,939,230 additional shares of our Class A Preferred Stock, 1,019,535
additional shares of our Class B Preferred Stock and 541,771 additional
shares of our Class C Preferred Stock to all of our then-existing
shareholders in the same proportion as their ownership interests in each
such class prior to the merger.

3. In August 2000, we sold to certain then-existing
shareholders, including a management shareholder, 2,443,706 shares of
common stock, 44,445 shares of Class D Preferred Stock and warrants to
purchase an aggregate of 305,429 shares of common stock for $0.01 per
share, for an aggregate of $7.5 million in cash, the surrender of a $5.0
million note held by a management shareholder and the repayment of a $7.5
million note held by our former senior lenders.

4. In July 2001, in connection with entering into a consulting
agreement with a consultant for services to be rendered for us, we
granted a stock option to such consultant to purchase 103,807 shares of
common stock at an exercise price of $0.01 per share.

5. In November 2001, we granted stock options to 30 of our
employees to purchase an aggregate of 505,841 shares of common stock
under our 1996 Executive Incentive and Non-Qualified Stock Option Plan at
an exercise price of $1.29 per share.

6. Between December 2001 and June 2002, we issued 143,780 shares
of common stock at an exercise price of $1.73 per share to an executive
officer and a former employee upon exercise of options granted between
1997 and 1998.

We believe that the transactions described in paragraphs 1 through 6
above were exempt from registration under Section 3(b) or 4(2) of the Securities
Act because the subject securities were either (i) issued pursuant to a
compensatory benefit plan pursuant to Rule 701 under the Securities Act or (ii)
sold to a limited group of persons, each of whom was believed to have been a
sophisticated investor or to have had a preexisting business or personal
relationship with us or our management and to have been purchasing for
investment without a view to further distribution.

II-2

ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.

(a) Exhibits:

<Table>
<Caption>
EXHIBIT
NO. DESCRIPTION
- ------- -----------

**1.1 Form of Underwriting Agreement
+2.1 Recapitalization Agreement dated June 12, 1996, by and among
Kirkland Holdings L.L.C., Kirkland's, Inc., Certain
Companies Affiliated with Kirkland's, Inc., Carl Kirkland,
Robert E. Kirkland, Bruce Moore and Robert E. Alderson
(Certain exhibits and schedules have been omitted in
accordance with Item 601(b)(2) of Regulation S-K. A copy of
such exhibits and schedules shall be furnished
supplementally to the Securities and Exchange Commission
upon request.) (Incorporated herein by reference to Exhibit
2.1 to the registration statement on Form S-1 of Kirkland's
filed on May 5, 1998 Registration No. 333-51517 [the "1998
Form S-1"])
**3.1 Amended and Restated Charter of Kirkland's, Inc.
3.2 Form of Amended and Restated Charter of Kirkland's, Inc. (to
become effective immediately prior to completion of this
offering)
**3.3 Bylaws of Kirkland's, Inc.
**3.4 Form of Amended and Restated Bylaws of Kirkland's, Inc. (to
become effective immediately prior to completion of this
offering)
**4.1 Form of Specimen Stock Certificate
5.1 Opinion of Baker, Donelson, Bearman & Caldwell, a
Professional Corporation
**10.1 Loan and Security Agreement dated as of May 22, 2002, by and
among Kirkland's, Kirkland's Stores, Inc., Kirklands.com,
Inc., Congress Financial Corporation (Southern) and other
financial institutions from time to time party to the
agreement.
+10.2 Senior Subordinated Note Due 2003 in the amount of
$8,000,000 dated June 12, 1996 issued to Capital Resource
Lenders II, L.P. (Identical Senior Subordinated Notes Due
2003, except as to the payee and the amount of the notes,
were issued to The Marlborough Capital Investment Fund, L.P.
($3,800,000), Allied Capital Corporation ($3,600,000),
Allied Capital Corporation II ($2,800,000), and Capital
Trust Investments, Ltd. ($1,800,000) (Incorporated herein by
reference to Exhibit 10.2 to the 1998 Form S-1)
**10.3 Amended and Restated Registration Rights Agreement dated as
of April 15, 2002, 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
+10.4 Consulting Agreement by and between Kirkland's and Robert E.
Kirkland dated June 12, 1996 (Incorporated herein by
reference to Exhibit 10.5 to the 1998 Form S-1)
**10.5 Employment Agreement by and between Kirkland's and Carl
Kirkland dated June 1, 2002
**10.6 Employment Agreement by and between Kirkland's and Robert E.
Alderson dated June 1, 2002
**10.7 Employment Agreement by and between Kirkland's and Reynolds
C. Faulkner dated June 1, 2002
**10.8 Employment Agreement by and between Kirkland's and H.R.
Harvey dated June 18, 2001
**10.9 Employment Agreement by and between Kirkland's and C. Edmond
Wise, Jr. dated December 4, 2000
**10.10 1996 Executive Incentive and Non-Qualified Stock Option
Plan, as amended through April 17, 2002
**10.11 2002 Equity Incentive Plan
**10.12 Employee Stock Purchase Plan
</Table>

II-3

<Table>
<Caption>
EXHIBIT
NO. DESCRIPTION
- ------- -----------

**10.13 Amended and Restated Shareholders 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
**10.14 Stock Option Agreement by and between Kirkland's and Carl
Kirkland dated June 11, 1996 as amended through April 17,
2002
+10.15 Stock Option Agreement by and between Kirkland's and
Reynolds C. Faulkner dated as of February 2, 1998
(Incorporated herein by reference to Exhibit 10.16 to the
registration statement on Form S-1/A of Kirkland's filed on
July 16, 1998 Registration No. 333-51517 1998 Amendment No.
1 to Form S-1)
**10.16 Sublease Agreement by and between Southwind Properties and
Kirkland's dated March 5, 2001
**10.17 Sublease Agreement by and between Phoenician Properties and
Kirkland's dated February 1, 2002
**10.18 Stock Repurchase Agreement by and among Kirkland's and
certain shareholders of Kirkland's dated as of May 31, 2002
**10.19 Letter Agreement by and between Kirkland's and Robert E.
Kirkland dated June 3, 2002
**10.20 Exchange Agreement by and between Kirkland's and Carl
Kirkland dated May 31, 2002
**10.21 Special Bonus Agreement by and between Kirkland's and Carl
Kirkland dated June 1, 2002
**10.22 Special Bonus Agreement by and between Kirkland's and Robert
E. Alderson dated June 1, 2002
**10.23 Promissory Note for up to $717,000 by Reynolds C. Faulkner
in favor of Kirkland's dated May 4, 2002
10.24 Security Agreement by Reynolds C. Faulkner and Mary Ruth
Faulkner in favor of Kirkland's effective as of May 4, 2002.
**21 Subsidiaries of Kirkland's
23.1 Consent of PricewaterhouseCoopers LLP
23.2 Consent of Baker, Donelson, Bearman & Caldwell, a
Professional Corporation (included in Exhibit 5.1)
**24.1 Power of Attorney (included on signature pages)
</Table>

- ---------------

** Previously filed.
+ Incorporated by reference.

(b) Financial Statement Schedules:

All schedules have been omitted because they are not applicable, not
required or the required information is included in the Financial Statements or
the notes thereto.

ITEM 17. UNDERTAKINGS.

The undersigned registrant hereby undertakes to provide to the
underwriters at the closing specified in the underwriting agreement,
certificates in such denominations and registered in such names as required by
the underwriters to permit prompt delivery to each purchaser.

Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of counsel the matter has
been settled by controlling precedent, submit to a court of appropriate
II-4

jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.

The undersigned registrant hereby undertakes that:

(i) for purposes of determining any liability under the
Securities Act, the information omitted from the form of prospectus filed
as part of this registration statement in reliance upon Rule 430A and
contained in a form of prospectus filed by the registrant pursuant to
Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed
to be part of this registration statement as of the time it was declared
effective.

(ii) for purposes of determining any liability under the
Securities Act, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at
that time shall be deemed to be the initial bona fide offering thereof.

II-5

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, the
registrant has duly caused this registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Jackson,
State of Tennessee, on the 18th day of June, 2002.

KIRKLAND'S, INC.

By: /s/ ROBERT E. ALDERSON
------------------------------------
Robert E. Alderson
Chief Executive Officer

Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed below by the following persons in the
capacities and on the dates indicated.

<Table>
<Caption>
SIGNATURE TITLE DATE
--------- ----- ----

/s/ ROBERT E. ALDERSON President, Chief Executive Officer June 18, 2002
- --------------------------------------------- and Director (Principal Executive
Robert E. Alderson Officer)

/s/ REYNOLDS C. FAULKNER Executive Vice President, Chief June 18, 2002
- --------------------------------------------- Financial Officer and Director
Reynolds C. Faulkner (Principal Financial Officer)

/s/ CONNIE L. SCOGGINS Vice President of Finance and June 18, 2002
- --------------------------------------------- Treasurer/Controller (Principal
Connie L. Scoggins Accounting Officer)

/s/ CARL KIRKLAND Chairman of the Board June 18, 2002
- ---------------------------------------------
Carl Kirkland

* Director June 18, 2002
- ---------------------------------------------
Alexander S. McGrath

* Director June 18, 2002
- ---------------------------------------------
David M. Mussafer

* Director June 18, 2002
- ---------------------------------------------
R. Wilson Orr, III

* Director June 18, 2002
- ---------------------------------------------
John P. Oswald
</Table>

II-6

<Table>
<Caption>
SIGNATURE TITLE DATE
--------- ----- ----

* Director June 18, 2002
- ---------------------------------------------
Murray Spain

*By: /s/ ROBERT E. ALDERSON
-----------------------------------------
Robert E. Alderson
Attorney-in-Fact
</Table>

II-7

EXHIBIT INDEX

<Table>
<Caption>
EXHIBIT
NO. DESCRIPTION
- ------- -----------

3.2 Form of Amended and Restated Charter of Kirkland's, Inc. (to
become effective immediately prior to completion of this
offering)
5.1 Opinion of Baker, Donelson, Bearman & Caldwell, a
Professional Corporation
10.24 Security Agreement by Reynolds C. Faulkner and Mary Ruth
Faulkner in favor of Kirkland's effective as of May 4, 2002
23.1 Consent of PricewaterhouseCoopers LLP
23.2 Consent of Baker, Donelson, Bearman & Caldwell, a
Professional Corporation (included in Exhibit 5.1)
</Table>