UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-K

þ		ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended February 2, 2008

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     

Claire’s Stores, Inc.

(Exact name of registrant as specified in its charter)

Florida		59-0940416
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)
3 S.W. 129th Avenue, Pembroke Pines, Florida		33027
(Address of principal executive offices)		(Zip Code)

Securities registered pursuant to Section 12(b) or 12(g) of the Act: None

     Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No þ

     Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes o No þ

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

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

     Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o		Accelerated filer o		Non-accelerated filer þ		Smaller reporting company o
		(Do not check if a smaller reporting company)

     Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

     The aggregate market value of the registrant’s voting and non-voting common equity held by non-affiliates of the registrant is zero. The registrant is a privately held corporation.

As of April 1, 2008, 100 shares of the Registrant’s common stock, $.001 par value were outstanding.

None

 

 

TABLE OF CONTENTS

Item		Page No.
PART I.			3
Item 1. Business			4
Item 1A. Risk Factors			11
Item 1B. Unresolved Staff Comments			20
Item 2. Properties			21
Item 3. Legal Proceedings			21
Item 4. Submission of Matters to a Vote of Security Holders			22
PART II			22
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities			22
Item 6. Selected Financial Data			22
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations			23
Item 7A. Quantitative and Qualitative Disclosures About Market Risk			37
Item 8. Financial Statements and Supplementary Data			38
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure			82
Item 9A. Controls and Procedures			82
Item 9B. Other Information			83
PART III.			83
Item 10. Directors, Executive Officers and Corporate Governance			83
Item 11. Executive Compensation			83
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters			83
Item 13. Certain Relationships and Related Transactions			83
Item 14. Principal Accountant Fees and Services			83
PART IV.			84
Item 15. Exhibits, Financial Statement Schedules			84
Signatures			87
EX-10.11 Zimmermann Employment Agreement
EX-21.1 Subsidiaries
EX-31.1 Section 302 Certification of CEO
EX-31.2 Section 302 Certification of CFO
EX-32.1 Section 906 Certification of CEO
EX-32.2 Section 906 Certification of CFO

PART I.

Explanatory Notes

We refer to Claire’s Stores, Inc., a Florida corporation, as “Claire’s,” the “Company,” “we,” “our” or similar terms, and typically these references include our subsidiaries.

On March 20, 2007, our former Board of Directors approved an agreement (the “Merger Agreement”) to sell the Company to Apollo Management VI, L.P. (“Apollo”), together with certain affiliated co-investment partnerships (collectively the “Sponsor”), through a merger of Bauble Acquisition Sub, Inc., a wholly-owned subsidiary of Bauble Holdings Corp., both of which are entities affiliated with Apollo, into Claire’s Stores, Inc. (the “Merger”). On May 24, 2007, our shareholders approved the Merger at a special meeting of shareholders. On May 29, 2007, the Merger occurred and Claire’s Stores, Inc. became a wholly-owned subsidiary of Claire’s Inc., f/k/a Bauble Holdings Corp. (“Holdings”). The Merger was financed by the issuance of $250.0 million aggregate principal amount of 9.25% senior notes due 2015 (the “Senior Fixed Rate Notes”), $350.0 million aggregate principal amount of 9.625%/10.375% senior toggle notes due 2015 (the “Senior Toggle Notes” and together with the Senior Fixed Rate Notes, the “Senior Notes”), and $335.0 million aggregate principal amount of 10.50% senior subordinated notes due 2017 (the “Senior Subordinated Notes” and together with the Senior Notes, the “Notes”). The Notes are guaranteed by all wholly-owned domestic subsidiaries of Claire’s that guarantee our $1.45 billion senior secured term loan facility and $200.0 million senior secured revolving credit facility (collectively the “Credit Facility”).

Upon consummation of the Merger the Company delisted its shares of common stock from the New York Stock Exchange (the “NYSE”) and deregistered under Section 12 of the Securities Act of 1934. The last day of trading on the NYSE was May 29, 2007.

In connection with the consummation of the Transactions, the Company is sometimes referred to as the “Successor Entity” for periods on or after May 29, 2007, and the “Predecessor Entity” for periods prior to May 29, 2007.

Our fiscal year ends on the Saturday closest to January 31. We refer to the fiscal year ended February 3, 2007 as “Fiscal 2007”, the fiscal year ended February 2, 2008 as “Fiscal 2008” and the fiscal year that will end on January 31, 2009 as “Fiscal 2009.”

An amendment to this Annual Report on Form 10-K to include Part III of the Form 10-K will be filed with the Securities and Exchange Commission no later than 120 days after the end of Fiscal 2008.

Statement Regarding Forward-Looking Disclosures

This annual report on Form 10-K contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. We and our representatives may from time to time make written or verbal forward-looking statements, including statements contained in this and other filings with the Securities and Exchange Commission and in our press releases and reports to shareholders. All statements which address operating performance, events or developments that we expect or anticipate will occur in the future, including statements relating to our future financial performance, planned capital expenditures, upgrades to our information technology systems, and new store openings for future fiscal years, are forward-looking statements within the meaning of the Act. The forward-looking statements may use the words “expect,” “anticipate,” “plan,” “intend,” “project,” “may,” “believe,” “forecast,” and similar expressions. The forward-looking statements are and will be based on management’s then current views and assumptions regarding future events and operating performance, and we assume no obligation to update any forward-looking statement. Forward-looking statements involve known or unknown risks, uncertainties and other factors, including changes in estimates and judgments discussed under “Critical Accounting Policies and Estimates” and elsewhere in this Form 10-K, which may cause our actual results, performance or achievements, or industry results to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements.

Item 1. Business

The Company

We believe we are the world’s largest specialty retailer of value-priced, fashion-right costume jewelry and accessories focusing on girls and young women in the 7 to 27 age range. We are organized based on our geographic markets, which include our North American operations and our European operations. As of February 2, 2008, we operated a total of 3,040 stores, of which 2,135 were located in all 50 states of the United States, Puerto Rico, Canada, and the U.S. Virgin Islands (our North American operations) and 905 stores were located in the United Kingdom, Ireland, France, Spain, Portugal, Belgium, Switzerland, Austria, the Netherlands and Germany (our European operations). Our stores are operated mainly under the trade names “Claire’s” and “Icing.”

In addition, as of February 2, 2008, we franchised 166 stores in the Middle East, Turkey, Russia, Poland, South Africa and Guatemala under franchising agreements. We account in our North America division for the goods we sell under the merchandising agreements with our franchisees within “Net sales” and “Cost of sales, occupancy and buying expenses.” The royalty fees are accounted for within our European division in “Other income” in our consolidated financial statements included in this Annual Report.

We also operated, as of February 2, 2008, 198 stores in Japan through our Claire’s Nippon 50:50 joint venture with AEON Co. Ltd. We account for the results of operations of Claire’s Nippon under the equity method. These results are included within our North America division in “Other income” in our consolidated financial statements included in this Annual Report.

Our primary store concept in North America and exclusively in Europe is Claire’s. Our Claire’s customers are predominantly teens (ages 13-17) and tweens (ages 7-11). Claire’s customers also include children (ages 3-5), marketed through our “Claire’s Club” brand. Our second store concept in North America is Icing, which caters to college students and young women entering the work force between the ages of 18 and 27.

We offer a wide selection of merchandise, which in Fiscal 2008 typically ranged in retail price between $2.00 and $24.00, with an average selling price of approximately $4.40, and an average transaction value of approximately $13.00, net of promotions and markdowns, in two principal product categories.

	•		Jewelry (53.6% of Fiscal 2008 net sales) — Which includes earrings, including ear piercing studs, necklaces, bracelets and rings; and
	•		Accessories (46.4% of Fiscal 2008 net sales) — Which includes hairgoods, handbags, small leather goods, and other fashion accessory classifications, as well as cosmetics.

We believe that we are the leading jewelry and accessories destination for our target customers because of our value orientation at competitive prices, our broad selection of merchandise, a fun experience and exciting in-store environment, and excellent customer service.

The differentiation of our Claire’s and Icing concepts allows us to operate multiple store locations within a single mall. In North America, our stores are located primarily in shopping malls and average approximately 1,200 square feet. In Europe and Japan, our stores are located primarily on high streets, in shopping malls and in high traffic urban areas and average approximately 600 square feet.

We also have a substantial organization dedicated to developing and sourcing our products, including our Company-owned and operated Hong Kong sourcing, buying and logistics office, RSI. The majority of our products are manufactured to our specifications through a global network of suppliers and vendors.

Our mission is to be the global leader in our retail niche, offering value-priced, fashion right costume jewelry and accessories targeted to the life-style and ever-growing disposable income of tweens, teens and young women.

A description of the Company’s recent history is described in the Explanatory Notes set forth at the beginning of this Annual Report.

Industry Overview

We compete in the large and growing global market for costume jewelry and accessories. Costume jewelry allows consumers to achieve the latest looks at a fraction of the cost of higher-priced jewelry. According to Euromonitor, the market for costume jewelry and accessories generated approximately $138 billion in retail sales globally in 2006, comprised of $58 billion in costume jewelry and $80 billion in accessories. From 2001 through 2006, these markets grew at a compound annual rate of 6.1%, 4.9% and 7.0%, respectively. In addition, the global market for costume jewelry and accessories has grown each of the last five years.

Within this market, our offerings of value-priced jewelry and accessories primarily address girls and young women. We believe this is an attractive target demographic for the following reasons:

	•		Large Customer Base. According to U.S. Census estimates, there were over 40 million girls and young women between the ages of 5 and 24 in the United States in 2005. According to Euromonitor, there were over 57 million girls and young women between the ages of 5 and 24 in Western Europe in 2006.
	•		Significant Spending Power. U.S. teenagers (ages 12-21) spend approximately $220 billion according to U.S. Census estimates. In addition, according to a 2006 teen consumer spending power report by Mintel, jewelry and accessories represented more than 40% of spending by U.S. females ages 12-27.
	•		High Shopping Frequency. Shoppers tend to frequently visit their destination for value-priced jewelry and accessories. For example, Claire’s 8 to 17 year old customers averaged 10.6 visits and 5.7 purchases, according to the 2004 Harris Interactive study.

Our Competitive Strengths

Established Global Category Leader with Strong Brand Recognition. We believe we are the world’s largest specialty retailer of value-priced fashion-right costume jewelry and accessories to girls and young women and the category leader in the markets in which we compete. We have a presence in 95% of all U.S. shopping malls. According to the 2004 Harris Interactive study, 98% of U.S. teenage girls knew the Claire’s name and 69% of U.S. women ages 8 to 54 visited a Claire’s store in the year prior to the study, while 58% made a purchase. Our products and brand name are featured in editorial coverage and press clips in popular periodicals, reinforcing our presence and allowing us to operate without incurring any advertising expenses for external media.

Proven Go-to-Market Strategy. We have a proven merchandising strategy supported by efficient, low-cost global sourcing capabilities. We offer a broad selection of up-to-date, exciting merchandise at value prices. Approximately two-thirds of our net sales are generated from the sale of always in style, everyday products. To keep our assortment fresh and exciting, we typically replenish our stores three to five times per week. We employ a low-cost sourcing strategy that is diversified across approximately 600 suppliers. Approximately 86% of our Fiscal 2008 merchandise was purchased from suppliers outside the United States, including approximately 70% purchased from China which we believe provides us with a significant cost advantage. The majority of our international purchases are made directly from manufacturers through our sourcing, buying and logistics offices in Hong Kong and China, enabling us to buy and source merchandise rapidly and cost effectively.

Diversification Across Geographies and Merchandise Categories. As of February 2, 2008, we operated a total of 3,040 stores, of which 2,135 were located in all 50 states of the United States, Puerto Rico, Canada, and the U.S. Virgin Islands and 905 stores were located in the United Kingdom, Ireland, France, Spain, Portugal, Belgium, Switzerland, Austria, the Netherlands, and Germany. In addition, as of February 2, 2008, we franchised 166 stores in the Middle East, Turkey, Russia, Poland, South Africa, and Guatemala under franchising agreements and operated 198 stores in Japan through our Claire’s Nippon 50:50 joint venture with AEON Co. Ltd. During Fiscal 2008, we generated approximately 65.9% of our net sales from North America and 34.1% from the 10 countries in our European operations.

In addition, 53.6% of our Fiscal 2008 net sales were derived from the jewelry category, with the remaining 46.4% were derived from the accessories category. Our net sales are diversified across approximately 11,000 stock-keeping units (“SKUs”) and are not dependent on any one category, product or style.

Compelling Unit Economics. We have grown our Company-operated store base to 3,040 in Fiscal 2008. Our stores realize a high return on invested capital, and approximately 96% of our stores that were open for at least one year were cash flow positive in Fiscal 2008. Our average store has an initial investment of approximately $180,000, including leasehold improvements, fixtures, and net working capital, and a payback period of less than two years. In addition, we refresh and invest in our store base to maintain our fun and exciting in-store environment. Our minimal working capital requirements result from high merchandise margins, low unit cost of our merchandise and the limited seasonality of our business. Over the past three fiscal years, no single quarter represented less than 21% or more than 32% of annual net sales for the respective year.

Strong and Experienced Management Team. We have a strong and experienced management team with extensive retail experience. Gene Kahn is our Chief Executive Officer. Mr. Kahn was formerly Chairman and Chief Executive Officer of The May Department Stores Company from May 2001 until January 2005 after serving as President and Chief Executive Officer since May 1998. Mark Smith is our President and Managing Director of Europe. Mr. Smith led our European operations from 1996 to 2002, during which time our European store base grew from 48 to 577 stores. Since December 2007, we have strengthened our senior management team with individuals possessing strong industry, management and leadership experience. In December 2007, we expanded our senior management team by appointing James Conroy as Executive Vice President. Mr. Conroy has over 15 years of experience in retail. In February 2008, we appointed J. Per Brodin as Senior Vice President and Chief Financial Officer. Mr. Brodin has extensive financial accounting and management skills within and outside of retail. In April 2008, we hired John A. Zimmermann as President North America, who has over 25 years of retail experience, spending the last six years with Zale Corporation, most recently as Corporate Vice President and President, Zale North America.

Our Business Strategy

We continue to focus on driving same stores sales and new store sales and increasing profitability and cash flow through the following strategies:

Build on Effective Organizational Model. We are recruiting executives who possess strong industry, management and leadership experience. We are committed to having a strong team able to step up to challenges associated with exceeding our expectations. We have recently strengthened our management team based on an organizational model developed to provide the framework with which we will operate and to provide us with appropriate structure, better discipline and communication across our Company.

Our organizational model is defined into five groupings:

	•		Corporate, comprised of senior leaders that set our strategies and provide oversight to help drive sales.
	•		North American Division, our largest group, with fundamental responsibility for the Claire’s and Icing brands in North America from merchandise concept, to delivery, in-store set-up and execution, to selling and building our brand and connecting with our customers.
	•		European Division, formally established at the time of the Merger in May 2007 under one leader based in Europe, to better maximize our growth potential in Europe, with similar operating responsibilities as the North American Division.
	•		International Group, which is comprised of our Franchise and Joint Venture business, dedicated to identifying and fostering partnerships and providing oversight to these business groups to ensure execution and integrity of our brand and store concepts.
	•		RSI, our sourcing, buying and logistics subsidiary based in Hong Kong, with responsibility for coordinating merchandise procurement, overseas vendor relationships and quality control, including supervising our global testing requirements.

In addition to the recent hires in our senior management team discussed above, we are in the final phases of recruiting for a new position, Chief Merchandise Officer (CMO). The CMO will oversee our global merchandise strategy, focusing on assortment planning, selection, and buying processes from pre-trend development and each delivery period line concept through to merchandise commitment.

Strengthen our Merchandise Offense. We are focusing our efforts on our merchandise assortment to improve the relevance of our product selection by embracing the customer profiles that we have developed through research and thinking of our customer along the full expanse of our accessory and jewelry businesses. The three major components of our merchandise offense are:

	•		Research and fact gathering, to better understand our market and competitive landscape. We have completed an in-depth study of our Claire’s North America customer and developed targeted customer profiles for our young (13-17), younger (7-11) and youngest (3-5) customers. We plan to conduct similar research of our Claire’s European and Icing customers.
	•		Improve the planning and buying surrounding our merchandise assortments, so we can impact the content, spirit, and relevance of our merchandise offering. We are taking various steps to achieve this initiative, including focusing on three fashion sensibilities: trend, fashion core, and basic; implementing good-better-best price point tiering; and better monitoring of our entry and exit points in the fashion cycle.
	•		Create a dynamic merchandising cycle to narrow our focus and bring better balance to our merchandise assortment through various initiatives, including:

	•		structuring five distinct buying periods with merchandise recaps during the development process, ongoing styleouts, and product placement reviews.
	•		ensuring our in-store plan-o-gram process will begin from product inception and continue through in-store execution.
	•		implementing a merchandising strategy that presupposes a 50% global assortment, 25% customized for either North America or Europe, and the remaining 25% to be regionalized or localized as appropriate.
	•		enhancing sourcing capabilities by leveraging our buying power, narrowing our vendor base, and continuing to develop a team orientation to provide our customer with value, quality, and a timely product offering.

Implement Our Pan European Transformation (PET). We are beginning to implement the initial phases of our strategy to form a new European division that will have start to finish responsibility for buying, operations, and real estate for our European operations.

	•		Transition merchandising responsibility, including buying and planning for continental Europe, currently residing in North America, to the European group, based in Birmingham, United Kingdom.
	•		Consolidate distribution operations currently in multiple locations in Europe to a single distribution center model for all of Europe based in Birmingham, United Kingdom.
	•		Leverage the best of both the North America and European information systems for roll-out in Europe and then globally.
	•		Create a more traditional store operations structure to further enhance our real estate function and store execution, including the establishment of three operating regions, each led by a Managing Director.

Reposition Icing. We are continuing our focus on the Icing concept in North America to achieve the differentiation and transformation that should make Icing a profitable stand-alone concept. Key components of this strategy include:

	•		Conduct market, competitor and customer research to further evolve the Icing strategy and merchandising concept.
	•		Separate the buying, planning and allocation for Claire’s and Icing into two separate organizations to focus these teams on one brand, either Claire’s or Icing.

Focus on Expense Reduction Opportunities. We are intensifying our efforts to reduce expenses to counterbalance the adverse impact of the current economic downturn affecting many retailers. We will flex variable costs down and intend to eliminate fixed costs in both payroll and non-payroll areas.

Stores

Our stores in North America are located primarily in shopping malls and average approximately 1,200 square feet. Our stores in Europe are located primarily on high streets, in shopping malls and in high traffic urban locations and average approximately 600 square feet. Each store uses our proprietary collateral, which enhance the presentation of a wide variety of items in a relatively small space.

Our stores are distinctively designed for customer identification, ease of shopping and display of a wide selection of merchandise. Store hours are dictated by shopping mall operators and our stores are typically open from 10:00 a.m. to 9:00 p.m. Monday through Saturday and, where permitted by law, from noon to 5:00 p.m. on Sunday.

Approximately 68% of our sales in Fiscal 2008 were made in cash (including checks and debit card transactions), with the balance made by credit cards. We permit, with restrictions on certain items, returns for exchange or refund.

Purchasing and Distribution

We purchased our merchandise from approximately 600 suppliers in Fiscal 2008. Approximately 86% of our merchandise in Fiscal 2008 was purchased from outside the United States, including approximately 70% purchased from China. We are not dependent on any single supplier for merchandise purchased. All merchandise is currently shipped from suppliers to our distribution facility in Hoffman Estates, Illinois, a suburb of Chicago (which services our North American stores as well as our stores operated under franchise agreements outside of North America); our distribution facility in Birmingham, United Kingdom (which services our stores in the United Kingdom, Ireland, France, Belgium and the Netherlands); our distribution facility in Zurich, Switzerland (which services our stores in Switzerland); and our distribution facility in the Netherlands (which services our stores in Spain, Portugal, Austria and Germany). We are in the process of transitioning the distribution operations in our Netherlands and Switzerland facilities to our Birmingham, United Kingdom facility. After inspection in our distribution center, merchandise is shipped by common carrier to our individual store locations. To keep our assortment fresh and exciting, we typically replenish our stores three to five times a week.

Our primary objectives for inventory management are (1) maximizing the efficiency of the flow of product to the stores, (2) maintaining adequate store in-stock levels, (3) enhancing store labor efficiency, and (4) optimizing our overall investment in inventory. We determine the allocation of merchandise to our stores based on an analysis of various factors, including size, location, demographics, sales and inventory history. Merchandise typically is sold at its original marked price, with the length of time our merchandise remains at the original price varying by item. We review our inventory levels to identify slow-moving merchandise and use markdowns and promotions to clear this merchandise. Markdowns and promotions may be used if inventory exceeds customer demand for reasons of design, seasonal adaptation or changes in customer preference, or if it is otherwise determined that the inventory will not sell at its currently marked price.

We are transitioning the merchandising responsibility for Continental Europe that currently resides in North America to Birmingham, United Kingdom. As a result of this shift, all buying and planning for our European business will be done from Europe. Concurrent with this shift, we are also separating the buying for Claire’s and Icing in North America into two separate organizations. We have also created a new corporate position, Chief Merchandise Officer (CMO), to oversee in their entirety our merchandise strategies for our global business. The CMO will work in concert with our General Merchandise Managers in North America and Europe, as well as have direct responsibility for our fashion, trend, product innovation and product design and development teams. We are in the final phase of recruiting for this position.

Store Management

Our President North America is responsible for managing our North American stores and reports to our Chief Executive Officer. Our stores are organized and controlled on a district level. As of February 2, 2008, we employed 226 District Managers in North America, each of whom oversees and manages approximately 9 stores in their respective geographic area and reports to 1 of 22 Regional Managers. Each Regional Manager in North America reports to one of five Territorial Vice Presidents, who report to the Senior Vice President of Store Operations and Real Estate. The Senior Vice President of Store Operations and Real Estate reports to our President of North America. Each store is typically staffed by a Manager, an Assistant Manager and one or more part-time employees.

Our President and Managing Director of Europe reports to our Chief Executive Officer. We have recently created a more traditional store operations structure in Europe. We now have three operating regions within Europe: (1) United Kingdom and Ireland (Region 1), (2) France, Spain, Portugal and Belgium (Region 2), and (3) Switzerland, Austria, Netherlands and Germany (Region 3). Each region is led by a Managing Director, who reports to our Chief Operating Officer (COO) in Europe. Our COO Europe reports to our President and Managing Director of Europe, and has responsibility for both Stores and Real Estate.

Store Openings, Closings and Future Growth

For Fiscal 2008, we opened 126 stores and closed 78 stores, for a net increase of 48 stores. In our European group, we increased our operations by 46 stores, net, resulting in a total of 905 stores. In North America, we increased our operations by 2 stores, net, to 2,135 stores. “Stores, net” refers to stores opened, net of closings, if any. In Fiscal 2009, we expect a net increase of approximately 70 to 80 company owned stores, primarily in Europe, approximately 15 new stores in our Japanese joint venture, and approximately 20 new stores in our franchise operations.

We closed stores in Fiscal 2008 primarily due to certain locations not meeting our established profit benchmarks, the unwillingness of landlords to renew leases on terms acceptable to us, and the elimination of stores in connection with our acquisition of Afterthoughts. Most of these stores were closed at or near lease expiration. We have not experienced any substantial difficulty in renewing desired store leases and have no reason to expect any such difficulty in the future.

We plan to continue opening stores when suitable locations are found and satisfactory lease negotiations are concluded. Our initial investment in new stores opened during Fiscal 2008, which includes leasehold improvements and fixtures, averaged approximately $180,000 per store. In addition to the investment in leasehold improvements and fixtures, we may also purchase intangible assets or incur initial direct costs for leases relating to certain store locations in our European operations.

Brand Building

Our continued ability to develop our existing brand is a key to our success. We believe our distinct brand name is among our most important assets globally. All aspects of brand development from product design and distribution, to marketing, merchandising and shopping environments are controlled by us. We plan to invest in the development of our brand through consumer research, as well as continue to enhance the customer experience through the expansion and remodeling of existing stores, the closure of under-performing stores and a focus on the clarity of the merchandise offering for each targeted customer, ease of shopping and customer service.

Trademarks and Service Marks

We are the owner in the United States of various marks, including “Claire’s,” “Claire’s Accessories,” “The Icing,” and “Icing by Claire’s.” We have also registered these marks outside of the United States. We currently license certain of our marks under franchising arrangements in the Middle East, Turkey, Russia, Poland, South Africa and Guatemala. We also license our Claire’s mark under our joint venture arrangement in Japan. We believe our rights in our marks are important to our business and intend to maintain our marks and the related registrations.

Management Information Systems

Management information systems are key to our business strategy. Our information and operational systems use a broad range of both purchased and internally developed applications to support our retail operations, financial, real estate, merchandising, inventory management and marketing processes. Sales information is automatically collected from POS terminals in our stores on a daily basis. We have developed proprietary software to support key decisions in various areas of our business including merchandising, allocation and operations. We periodically review our critical systems to evaluate disaster recovery plans and the security of our systems.

Competition

The specialty retail business is highly competitive. We compete on a national, regional and local level with other specialty and discount store chains and independent retail stores. Our competition also includes Internet, direct marketing to consumer and catalog businesses. We also compete with department stores, mass merchants and other chain store concepts. We cannot estimate the number of our competitors because of the large number of companies in the retail industry that fall into one of these categories. We believe the main competitive factors in our business are brand recognition, price, merchandise, store location and customer service.

Seasonality

Sales of each category of merchandise vary from period to period depending on current trends. We experience traditional retail patterns of peak sales during the Christmas, Easter, and back-to-school periods. Sales as a percentage of total sales in each of the four quarters of Fiscal 2008 were 23%, 24%, 24%, and 29%, respectively.

Employees

On February 2, 2008, we had approximately 18,700 employees, approximately 57% of whom were part-time. Part-time employees typically work up to 20 hours per week. We do not have collective bargaining agreements with any labor unions, and we consider employee relations to be good.

Available Information

Prior to the consummation of the Merger on May 29, 2007, when the common stock of Claire’s Stores, Inc. was publicly traded on the New York Stock Exchange, the Company made available free of charge through its website www.clairestores.com, all materials that Claire’s Stores, Inc. filed electronically with the Securities Exchange Commission (“SEC”), including annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as soon as reasonably practicable after electronically filing such materials with, or furnishing them to, the SEC.

As a result of becoming a privately-held company upon the consummation of the Merger and the issuance in a private placement of the Notes, the Company was not required to file these reports with the SEC. However, in accordance with the indenture governing these notes, reports were prepared on a basis that was equivalent to, but not filed with, the SEC, and such reports were furnished to noteholders by making them available on the Company’s website. In February 2008, the notes were exchanged for new notes with terms that were identical to the original notes except that the exchange notes were registered under the Securities Act. At such time, the Company once again became subject to filing obligations with the SEC pursuant to the Securities Exchange Act. The Company has made available free of charge through its website all materials subsequently filed by the Company electronically with the SEC, including its Registration Statement on Form S-4 and current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act, as soon as reasonably practicable after electronically filing such materials with, or furnishing them to, the SEC.

Investors may also read and copy any materials filed by the Company with the SEC at the SEC’s Public Reference Room at 100 F Street, N.E., Room 1580, Washington, DC 20549-0102. You may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. In addition, the SEC maintains an Internet website, www.sec.gov, that contains reports, proxy and information statements and other information which the Company or its predecessors filed electronically with the SEC.

Item 1A. Risk Factors

These risks could have a material adverse effect on our business, financial position or results of operations. The following risk factors may not include all of the important factors that could affect our business or our industry or that could cause our future financial results to differ materially from historic or expected results.

Risks Relating to Our Company

Our business is affected by consumer spending patterns.

Our business is sensitive to a number of factors that influence the levels of consumer spending, including political and economic conditions, such as recessionary and inflationary environments, the levels of disposable consumer income, energy costs, consumer debt, interest rates and consumer confidence. Declines in consumer spending on value-priced jewelry and accessories could have a material adverse effect on our operating results.

Fluctuations in consumer preference may adversely affect the demand for our products and result in a decline in our sales.

Our retail value-priced jewelry and accessories business fluctuates according to changes in consumer preferences. If we are unable to anticipate, identify or react to changing styles or trends, our sales may decline, and we may be faced with excess inventories. If this occurs, we may be forced to rely on additional markdowns or promotional sales to dispose of excess or slow moving inventory, which could have a material adverse effect on our results of operations and adversely affect our gross margins. In addition, if we miscalculate customer tastes and our customers come to believe that we are no longer able to offer merchandise that appeals to them, our brand image may suffer.

Advance purchases of our merchandise make us vulnerable to changes in consumer preferences and pricing shifts and may negatively affect our results of operations.

Fluctuations in the demand for retail accessories and apparel especially affect the inventory we sell because we usually order our merchandise in advance of the applicable season and sometimes before trends are identified or evidenced by customer purchases. In addition, the cyclical nature of the retail business requires us to carry a significant amount of inventory, especially prior to peak selling seasons when we and other retailers generally build up inventory levels. We must enter into contracts for the purchase and manufacture of merchandise with our suppliers in advance of the applicable selling season. As a result, we are vulnerable to demand and pricing shifts and it is more difficult for us to respond to new or changing customer needs. As a result, if sales do not meet our expectations, our results of operations may be negatively impacted.

A disruption of imports from our foreign suppliers or significant fluctuation in the value of the U.S. dollar or foreign exchange rates may increase our costs and reduce our supply of merchandise.

We do not own or operate any manufacturing facilities. We purchased merchandise from approximately 600 suppliers in Fiscal 2008. Approximately 86% of our Fiscal 2008 merchandise is purchased from suppliers outside the United States, including approximately 70% purchased from China. Any event causing a sudden disruption of imports from China or other foreign countries, including political and financial instability, would likely have a material adverse effect on our operations. We cannot predict whether any of the countries in which our products currently are manufactured or may be manufactured in the future will be subject to additional trade restrictions imposed by the United States and other foreign governments, including the likelihood, type or effect of any such restrictions. Trade restrictions, including increased tariffs or quotas, embargoes and customs restrictions, on merchandise that we purchase could increase the cost or reduce the supply of merchandise available to us and adversely affect our business, financial condition and results of operations. The United States has previously imposed trade quotas on specific categories of goods and apparel imported from China, and may impose additional quotas in the future.

Historically, substantially all of our foreign purchases of merchandise have been negotiated and paid for in U.S. dollars. As a result, our sourcing operations also may be adversely affected by significant fluctuation in the value of the U.S. dollar against foreign currencies, restrictions on the transfer of funds and other trade disruptions.

Additionally, if China further adjusts the exchange rate of the Chinese yuan or allows the value to float, we will likely experience an increase in the cost of our merchandise purchased from China.

Our cost of doing business could increase as a result of changes in federal, state or local regulations.

Unanticipated changes in the federal or state minimum wage or living wage requirements or changes in other workplace regulations could adversely affect our ability to meet our financial targets. In addition, changes in federal, state or local regulations governing the sale of our products, particularly regulations relating to metal content in jewelry, could increase our cost of doing business and could adversely affect our sales results. The U.S. Congress, as well as various states and the Consumer Product Safety Commission, have proposed various standards for lead content in jewelry. Our inability to timely comply with these regulatory changes, if adopted, could result in significant fines or penalties that could adversely affect our financial results.

Recalls, product liability claims, and government, customer or consumer concerns about product safety could harm our reputation, increase costs or reduce sales.

We are subject to regulation by the Consumer Product Safety Commission and similar state and international regulatory authorities, and our products could be subject to involuntary recalls and other actions by these authorities. Concerns about product safety, including but not limited to concerns about the safety of products manufactured in China (where most of our products are manufactured), could lead us to recall selected products. Product safety concerns, recalls, or errors could result in the rejection of our products by consumers, damage to our reputation, lost sales, and increased costs, any of which could have a material adverse effect on our financial results. Recalls and government, customer or consumer concerns about product safety could harm our reputation, increase costs or reduce sales.

Government or consumer concerns about product safety could result in recalls or changes to laws, which could harm our reputation, increase costs, or reduce sales.

We are subject to regulation by the Consumer Product Safety Commission and similar state and international regulatory authorities, and our products could be subject to involuntary recalls and other actions by these authorities. In Fiscal 2008, we purchased merchandise from approximately 600 suppliers; including approximately 86% from suppliers outside the United States, including approximately 70% from China. One or more of our suppliers might not adhere to product safety requirements or our quality control standards, and we might not identify the deficiency before merchandise ships to our stores. Any issues of product safety, including but not limited to those manufactured in foreign countries, could result in a recall of our products. Additionally, the U.S. Congress, as well as various states and the Consumer Product Safety Commission, have proposed various standards for lead content in jewelry, and other consumer products. Product safety concerns or recalls could result in the rejection of our products by our customers, damage to our reputation, lost sales, and increased costs. In addition, our inability to timely comply with regulatory changes, if adopted, could result in significant fines or penalties. Any of these occurrences could have a material adverse effect on our financial position, earnings or cash flow.

Interruptions in distribution of our merchandise from our distribution facilities may negatively affect our profitability.

Distribution functions for all of our North American stores are handled from our distribution center in Hoffman Estates, Illinois. Distribution functions for our stores outside of North America are currently handled through three distribution centers located in the United Kingdom, Switzerland and the Netherlands. We are presently in the process of transitioning the distribution operations in our Netherlands and Switzerland facilities to our Birmingham, UK facility. As we complete this transition, we could experience delays and cost overruns, such as shortages of materials, shortages of skilled labor or work stoppages, unforeseen construction, scheduling, engineering, environmental or geological problems, weather interference, fires or other casualty losses and unanticipated cost increases. The completion dates and ultimate costs could differ significantly from initial expectations due to construction-related or other reasons. Any significant interruption in the operation of our distribution centers, due to natural disaster or otherwise, would have a material adverse effect on our business, financial condition and results of operations.

Our continued success will depend upon our ability to implement our operational strategy and manage our growth.

Our continued success depends, in part, upon our ability to increase our same store sales, to open new stores, to operate stores on a profitable basis and to maintain good relationships with shopping mall developers and operators. As a result, our profitability and future growth may be negatively affected if we are unable to open new stores in desirable locations. Our ability to open new stores depends on a number of factors, including our ability to locate and obtain favorable store sites, negotiate acceptable lease terms that meet our financial targets, obtain adequate supplies of merchandise, hire and train qualified employees and expand our infrastructure to accommodate growth. Our ability to operate stores on a profitable basis depends on various factors, including whether we have to take additional merchandise markdowns due to excessive inventory levels compared to sales trends, whether we can reduce the number of under-performing stores which have a higher level of fixed costs in comparison to net sales and our ability to maintain a proportion of new stores to mature stores that does not harm existing sales. In addition, our ability to establish franchisee relationships will depend upon our ability to identify acceptable franchisees. Furthermore, our ability to successfully expand our franchised stores will depend on our ability to maintain good relationships with current franchisees. There can be no assurance that our growth will result in enhanced profitability or that we will achieve our targeted growth rates with respect to new store openings.

If we are unable to renew or replace our store leases or enter into leases for new stores on favorable terms, or if any of our current leases are terminated prior to the expiration of their stated term and we cannot find suitable alternate locations, our growth and profitability could be adversely harmed.

All of our stores are leased. Our ability to renew any expired lease or, if such lease cannot be renewed, our ability to lease a suitable alternate location, and our ability to enter into leases for new stores on favorable terms will depend on many factors which are not within our control, such as conditions in the local real estate market, competition for desirable properties and our relationships with current and prospective landlords. If we are unable to renew existing leases or lease suitable alternate locations, or enter into leases for new stores on favorable terms, our growth and our profitability could be adversely harmed.

The failure to grow our store base in Europe or expand our international franchising may adversely affect our business.

Two of our key business strategies are to grow our store base in Europe and expand our international franchising business. If we do not successfully implement these strategies, our results of operations are likely to be adversely affected. Our ability to grow successfully outside of North America depends in part on determining a sustainable formula to build customer loyalty and gain market share in certain especially challenging international retail environments. Additionally, the integration of our operations in foreign countries presents certain challenges not necessarily presented in the integration of our North American operations.

We plan to expand into new countries through organic growth and by entering into franchising and merchandising agreements with unaffiliated third parties who are familiar with the local retail environment and have sufficient retail experience to operate stores in accordance with our business model, which requires strict adherence to the guidelines established by us in our franchising agreements. Failure to identify appropriate franchisees or negotiate acceptable terms in our franchising and merchandising agreements that meet our financial targets would adversely affect our international expansion goals, and could have a material adverse effect on our operating results and impede our strategy of increasing our net sales through expansion. Additionally, future store openings in Asia are currently subject to our 50:50 joint venture agreement with AEON Co. Ltd.

Natural disasters or unusually adverse weather conditions or potential emergence of disease or pandemic could adversely affect our net sales or supply of inventory.

Unusually adverse weather conditions, natural disasters, potential emergence of disease or pandemic or similar disruptions, especially during the peak Christmas selling season, but also at other times, could significantly reduce our net sales. In addition, these disruptions could also adversely affect our supply chain efficiency and make it more difficult for us to obtain sufficient quantities of merchandise from suppliers, which could have a material adverse effect on our financial position, earnings, and cash flow.

Information technology systems changes may disrupt our supply of merchandise.

Our success depends, in large part, on our ability to source and distribute merchandise efficiently. We continue to evaluate and are in the process of leveraging the best of both our North American and European information systems to support our product supply chain, including merchandise planning and allocation, inventory and price management. Modifications involve replacing legacy systems with successor systems or making changes to the legacy systems. We are aware of inherent risks associated with replacing and changing these core systems, including accurately capturing data and possibly encountering supply chain disruptions. There can be no assurances that we will successfully launch these new systems as planned or that they will occur without supply chain or other disruptions. Supply chain disruptions, if not anticipated and appropriately mitigated, could have a material adverse effect on our operations.

We are implementing certain other changes to our information technology systems that may disrupt operations.

In addition to modifying and replacing our systems related to global retail store operations and international finance operations, we continue to implement modifications and upgrades to our information technology systems for POS (cash registers), real estate and international financial accounting. Modifications involve replacing legacy systems with successor systems, making changes to legacy systems or acquiring new systems with new functionality. We are aware of inherent risks associated with replacing these successor systems, including accurately capturing data and system disruptions and the ability to maintain effective internal controls. There can be no assurances that we will successfully launch these systems as planned or that they will occur without disruptions to operations. Information technology system disruptions, if not anticipated and appropriately mitigated, could have material adverse effect on our operations.

Changes in the anticipated seasonal business pattern could adversely affect our sales and profits and our quarterly results may fluctuate due to a variety of factors.

Our business follows a seasonal pattern, peaking during the Christmas, Easter and back-to-school periods. Any decrease in sales or margins during these periods would be likely to have a material adverse effect on our business, financial condition and results of operations. Seasonal fluctuations also affect inventory levels, because we usually order merchandise in advance of peak selling periods. Our quarterly results of operations may also fluctuate significantly as a result of a variety of factors, including the time of store openings, the amount of revenue contributed by new stores, the timing and level of markdowns, the timing of store closings, expansions and relocations, competitive factors and general economic conditions.

A decline in number of people who go to shopping malls, particularly in North America, could reduce the number of our customers and reduce our net sales.

Substantially all of our North American stores are located in shopping malls. Our North American sales are derived, in part, from the high volume of traffic in those shopping malls. We benefit from the ability of the shopping mall’s “anchor” tenants, generally large department stores and other area attractions, to generate consumer traffic around our stores. We also benefit from the continuing popularity of shopping malls as shopping destinations for girls and young women. Sales volume and shopping mall traffic may be adversely affected by economic downturns in a particular area, competition from non-shopping mall retailers, other shopping malls where we do not have stores and the closing of anchor tenants in a particular shopping mall. In addition, a decline in the popularity of shopping malls among our target customers, and increased gasoline prices that may curtail customer visits to shopping malls, could result in decreased sales that would have a material adverse affect on our business, financial condition and results of operations.

Our industry is highly competitive.

The specialty retail business is highly competitive. We compete with international, national and local department stores, specialty and discount store chains, independent retail stores, the Internet, direct marketing to consumers and catalog businesses that market similar lines of merchandise. Some competitors have more resources than us. Given the large number of companies in the retail industry, we cannot estimate the number of our competitors. Our successful performance in recent years has increased the amount of imitation by other retailers. This imitation has made and will continue to make the retail environment in which we operate more competitive. Also, a significant shift in customer buying patterns to purchasing value-priced jewelry and accessories via the Internet could have a material adverse effect on our financial results.

We may be unable to continue to successfully execute our business strategies and, as a result, our competitive strengths may be harmed.

Our success depends on our brand awareness and our ability to appeal to our target customers by providing a broad selection of up-to-date quality merchandise at value prices in an exciting in-store environment. If our merchandising, sourcing and distribution systems are ineffective in the implementation of our strategies, we may not be able to achieve our growth targets. For example, we may not be able to further differentiate our Icing concept from our Claire’s concept, which is part of our strategies to attract young women aged 17 to 27 as customers. Additionally, our sales could be negatively affected if we are not successful in continuing to strategically open new stores or our new stores are unable to meet our standards for in-store environment and customer service.

Higher labor and health care costs could adversely affect our business.

We compete with other retailers for good and dependable employees. The supply of such employees is limited, and competition to hire and retain them results in higher labor costs. In addition, the costs of health care continue to increase each year unabatedly. Recently, some states and localities have passed laws mandating the provision of certain levels of health benefits by some employers. Although we are currently not affected by such laws and a legal challenge has been brought against such laws, such requirements may be extended to us in the future.

Our profitability could be adversely affected by high petroleum prices.

The profitability of our business depends to a certain degree upon the price of petroleum products, both as a component of the transportation costs for delivery of inventory from our vendors to our stores and as a raw material used in the production of our merchandise. Petroleum prices have recently risen to historic or near historic highs. We are unable to predict what the price of crude oil and the resulting petroleum products will be in the future. We may be unable to pass along to our customers the increased costs that would result from higher petroleum prices. Therefore, any such increase could have a material adverse impact on our business and profitability.

The possibility of war and acts of terrorism could disrupt our information or distribution systems and increase our costs of doing business.

A significant act of terrorism could have a material adverse impact on us by, among other things, disrupting our information or distributions systems, causing dramatic increases in fuel prices, thereby increasing the costs of doing business and affecting consumer spending, or impeding the flow of imports or domestic products to us.

We depend on our key personnel.

Our ability to anticipate and effectively respond to changing trends and consumer preferences depends in part on our ability to attract and retain key personnel in our design, merchandising, marketing and other functions. Competition for this personnel is intense, and we cannot be sure that we will be able to attract and retain a sufficient number of qualified personnel in future periods. The loss of services of key members of our senior management team or of certain other key employees could negatively affect our business. In addition, future performance will depend upon our ability to attract, retain and motivate qualified employees to keep pace with our expansion schedule. The inability to do so may limit our ability to effectively penetrate new market areas.

Litigation matters incidental to our business could be adversely determined against us.

We are involved from time to time in litigation incidental to our business. Management believes that the outcome of current litigation will not have a material adverse effect on our results of operations or financial condition. Depending on the actual outcome of pending litigation, charges would be recorded in the future that may have an adverse effect on our operating results.

There are factors that can affect our provision for income taxes.

We are subject to income taxes in both the United States and numerous foreign jurisdictions. Our provision for income taxes in the future could be adversely affected by numerous factors including, but not limited to, the mix of income and losses from our foreign and domestic operations that may be taxed at different rates, changes in the valuation of deferred tax assets and liabilities, and changes in tax laws, regulations, accounting principles or interpretations thereof, which could adversely impact earnings in future periods. In addition, the estimates we make regarding domestic and foreign taxes are based on tax positions that we believe are supportable, but could potentially be subject to successful challenge by the Internal Revenue Service or a foreign jurisdiction. If we are required to settle matters in excess of our established accruals for uncertain tax positions, it could result in a charge to our earnings.

If our independent manufacturers or franchisees or joint venture partners do not use ethical business practices or comply with applicable laws and regulations, our brand name could be harmed due to negative publicity and our results of operations could be adversely affected.

While our internal and vendor operating guidelines promote ethical business practices, we do not control our independent manufacturers, franchisees or joint venture partners, or their business practices. Accordingly, we cannot guarantee their compliance with our guidelines. Violation of labor or other laws, such as the Foreign Corrupt Practices Act, by our independent manufacturers, franchisees or joint venture partners, or the divergence from labor practices generally accepted as ethical in the United States, could diminish the value of our brand and reduce demand for our merchandise if, as a result of such violation, we were to attract negative publicity. As a result, our results of operations could be adversely affected.

We rely on third parties to distribute our merchandise and if these third parties do not adequately perform this function, our business would be disrupted.

The efficient operation of our business depends on the ability of our third party carriers to ship merchandise directly to our distribution facilities and individual stores. These carriers typically employ personnel represented by labor unions and have experienced labor difficulties in the past. Due to our reliance on these parties for our shipments, interruptions in the ability of our vendors to ship our merchandise to our distribution facilities or the ability of carriers to fulfill the distribution of merchandise to our stores could adversely affect our business, financial condition and results of operations.

Our business depends on the willingness of vendors and service providers to supply us with goods and services pursuant to customary credit arrangements which may not be available to us in the future.

Like most companies in the retail sector, we purchase goods and services from trade creditors pursuant to customary credit arrangements. If we are unable to maintain or obtain trade credit from vendors and service providers on terms favorable to us, or at all, then we may not be able to execute our business plan, develop or enhance our products or services, take advantage of business opportunities or respond to competitive pressures, any of which could have a material adverse affect on our business. In addition, the tightening of trade credit could limit our available liquidity.

We may be unable to protect our trademarks and other intellectual property rights.

We believe that our trademarks and service marks are important to our success and our competitive position due to their name recognition with our customers. There can be no assurance that the actions we have taken to establish and protect our trademarks and service marks will be adequate to prevent imitation of our products by others or to prevent others from seeking to block sales of our products as a violation of the trademarks, service marks and proprietary rights of others. The laws of some foreign countries may not protect proprietary rights to the same extent as do the laws of the United States, and it may be more difficult for us to successfully challenge the use of our proprietary rights by other parties in these countries. Also, others may assert rights in, or ownership of, our trademarks and other proprietary rights, and we may be unable to successfully resolve those types of conflicts to our satisfaction.

We may be unable to rely on liability indemnities given by foreign vendors which could adversely affect our financial results.

We imported approximately 86% of our merchandise from suppliers outside the United States in Fiscal 2008. Sources of supply may prove to be unreliable, or the quality of the globally sourced products may vary from our expectations. Our ability to obtain indemnification from the manufacturers of these products may be hindered by the manufacturers’ lack of understanding U.S. product liability laws, which may make it more likely that the we may have to respond to claims or complaints from our customers as if we were the manufacturer of the products. Any of these circumstances could have a material adverse effect on our business and financial results.

We are indirectly owned and controlled by the Sponsor, and its interests as an equity holder may conflict with the interest of our creditors.

We are indirectly owned and controlled by the Sponsor, and the Sponsor has the ability to elect all of the members of our board of directors and thereby control our policies and operations, including the appointment of management, future issuances of our common stock or other securities, the payments of dividends, if any, on our common stock, the incurrence of debt by us, amendments to our articles of incorporation and bylaws and the entering into of extraordinary transactions. The interests of the Sponsor may not in all cases be aligned with the interests of our creditors. For example, if we encounter financial difficulties or are unable to pay our indebtedness as it matures, the interests of the Sponsor as an equity holder might conflict with the interests of our creditors. In addition, the Sponsor may have an interest in pursuing acquisitions, divestitures, financings or other transactions that, in its judgment, could enhance its equity investments, even though such transactions might involve risks to you as a holder of the notes. Furthermore, the Sponsor may in the future own businesses that directly or indirectly compete with us. The Sponsor also may pursue acquisition opportunities that may be complementary to our business, and as a result, those acquisition opportunities may not be available to us. So long as the Sponsor continues to own a significant amount of our combined voting power, even if such amount is less than 50%, it will continue to be able to strongly influence or effectively control our decisions.

Risks Relating to Our Indebtedness

Our substantial leverage could adversely affect our ability to raise additional capital to fund our operations, limit our ability to react to changes in the economy or our industry and prevent us from meeting our obligations under the Notes and Credit Facility.

Our substantial leverage could adversely affect our ability to raise additional capital to fund our operations, limit our ability to react to changes in the economy or our industry, expose us to interest rate risk to the extent of our variable rate debt and prevent us from meeting our obligations under the Notes and Credit Facility. Our high degree of leverage could have important consequences for you, including:

	•		increasing our vulnerability to adverse economic, industry or competitive developments;
	•		requiring a substantial portion of cash flow from operations to be dedicated to the payment of principal and interest on our indebtedness, therefore reducing our ability to use our cash flow to fund our operations, capital expenditures and future business opportunities;
	•		exposing us to the risk of increased interest rates because certain of our borrowings, including borrowings under our senior secured credit facility, will be at variable rates of interest;
	•		making it more difficult for us to satisfy our obligations with respect to our indebtedness, including the notes, and any failure to comply with the obligations of any of our debt instruments, including restrictive covenants and borrowing conditions, could result in an event of default under the indentures governing the notes and the agreements governing such other indebtedness;
	•		restricting us from making strategic acquisitions or causing us to make non-strategic divestitures;
	•		limiting our ability to obtain additional financing for working capital, capital expenditures, product development, debt service requirements, acquisitions and general corporate or other purposes; and

•

limiting our flexibility in planning for, or reacting to, changes in our business or market conditions and placing us at a competitive disadvantage compared to our competitors who are less highly leveraged and who therefore, may be able to take advantage of opportunities that our leverage prevents us from exploiting.

Despite our high indebtedness level, we and our subsidiaries are still able to incur significant additional amounts of debt, which could further exacerbate the risks associated with our substantial indebtedness.

We and our subsidiaries may be able to incur substantial additional indebtedness in the future. Although the indentures governing the notes and our senior secured credit facility contain restrictions on the incurrence of additional indebtedness, these restrictions are subject to a number of significant qualifications and exceptions, and under certain circumstances, the amount of indebtedness that could be incurred in compliance with these restrictions could be substantial. In addition to the $1,450.0 million of borrowings under our senior secured term loan facility and the $200.0 million which is available to us for borrowing under our senior secured revolving credit facility, under the senior toggle notes, we have the option to elect to pay interest in the form of PIK interest through June 1, 2011, which will increase our debt by the amount of any such interest. If new debt is added to our and our subsidiaries’ existing debt levels, the related risks that we now face would increase. In addition, the indentures governing the notes do not prevent us from incurring obligations that do not constitute indebtedness under those agreements.

Our debt agreements contain restrictions that limit our flexibility in operating our business.

Our senior secured credit facility and the indentures governing the notes contain various covenants that limit our ability to engage in specified types of transactions. These covenants limit our, our parent’s and our restricted subsidiaries’ ability to, among other things:

	•		incur additional indebtedness or issue certain preferred shares;
	•		pay dividends on, repurchase or make distributions in respect of our capital stock or make other restricted payments;
	•		make certain investments;
	•		sell certain assets;
	•		create liens;
	•		consolidate, merge, sell or otherwise dispose of all or substantially all of our assets; and
	•		enter into certain transactions with our affiliates.

A breach of any of these covenants could result in a default under one or more of these agreements, including as a result of cross default provisions, and, in the case of our senior secured revolving credit facility, permit the lenders to cease making loans to us. Upon the occurrence of an event of default under our senior secured credit facility, the lenders could elect to declare all amounts outstanding under our senior secured credit facility to be immediately due and payable and terminate all commitments to extend further credit. Such actions by those lenders could cause cross defaults under our other indebtedness. If we were unable to repay those amounts, the lenders under our senior secured credit facility could proceed against the collateral granted to them to secure that indebtedness. We have pledged a significant portion of our assets as collateral under our senior secured credit facility. If the lenders under our senior secured credit facility accelerate the repayment of borrowings, we may not have sufficient assets to repay our senior secured credit facility as well as our unsecured indebtedness, including the notes.

We may not be able to generate sufficient cash to service all of our indebtedness, and may be forced to take other actions to satisfy our obligations under our indebtedness, which may not be successful.

Our ability to make scheduled payments on or to refinance our debt obligations depends on our financial condition and operating performance, which is subject to prevailing economic and competitive conditions and to certain financial, business and other factors beyond our control. We may not be able to maintain a level of cash flows from operating activities sufficient to permit us to pay the principal and interest on our indebtedness.

If our cash flows and capital resources are insufficient to fund our debt service obligations, we may be forced to reduce or delay investments and capital expenditures, or to sell assets, seek additional capital or restructure or refinance our indebtedness, including the notes. Our ability to restructure or refinance our debt will depend on the condition of the capital markets and our financial condition at such time. Any refinancing of our debt could be at higher interest rates and may require us to comply with more onerous covenants, which could further restrict our business operations. The terms of existing or future debt instruments and the indentures governing the notes may restrict us from adopting some of these alternatives. In addition, any failure to make payments of interest and principal on our outstanding indebtedness on a timely basis would likely result in a reduction of our credit rating, which could harm our ability to incur additional indebtedness. These alternative measures may not be successful and may not permit us to meet our scheduled debt service obligations.

Repayment of our debt is dependent on cash flow generated by our subsidiaries.

Our subsidiaries own a significant portion of our assets and conduct a significant portion of our operations. Accordingly, repayment of our indebtedness is dependent, to a significant extent, on the generation of cash flow by our subsidiaries and their ability to make such cash available to us, by dividend, debt repayment or otherwise. Our subsidiaries may not be able to, or may not be permitted to, make distributions to enable us to make payments in respect of our indebtedness. Each subsidiary is a distinct legal entity and, under certain circumstances, legal and contractual restrictions may limit our ability to obtain cash from our subsidiaries. While the indentures governing the notes limit the ability of our subsidiaries to incur consensual restrictions on their ability to pay dividends or make other intercompany payments to us, these limitations are subject to certain qualifications and exceptions. In the event that we do not receive distributions from our subsidiaries, we may be unable to make required principal and interest payments on our indebtedness.

If we default on our obligations to pay our other indebtedness, the holders of our debt could exercise rights that could have a material effect on us.

If we are unable to generate sufficient cash flow and are otherwise unable to obtain funds necessary to meet required payments of principal and interest on our indebtedness, or if we otherwise fail to comply with the various covenants in the instruments governing our indebtedness, we could be in default under the terms of the agreements governing such indebtedness. In the event of such default,

	•		the holders of such indebtedness may be able to cause all of our available cash flow to be used to pay such indebtedness and, in any event, could elect to declare all the funds borrowed thereunder to be due and payable, together with accrued and unpaid interest;
	•		the lenders under our senior secured credit facility could elect to terminate their commitments thereunder, cease making further loans and institute foreclosure proceedings against our assets; and
	•		we could be forced into bankruptcy or liquidation.

Item 1B.		Unresolved Staff Comments

None.

Item 2.		Properties

Our stores are located in all 50 states of the United States, Puerto Rico, Canada, the Virgin Islands, the United Kingdom, Ireland, France, Spain, Portugal, Belgium, Switzerland, Austria, the Netherlands and Germany. We lease all of our 3,040 store locations, generally for terms ranging from five to approximately 25 years. Under the terms of the leases, we pay a fixed minimum rent and/or rentals based on a percentage of net sales. We also pay certain other expenses (e.g., common area maintenance charges and real estate taxes) under the leases. The internal layout and fixtures of each store are designed by management and constructed under contracts with third parties.

Most of our stores in North America and the European division are located in enclosed shopping malls, while other stores are located within central business districts, power centers, lifestyle centers, “open-air” outlet malls or “strip centers.” Our criteria for new stores includes geographic location, demographic aspects of communities surrounding the store site, quality of anchor tenants, advantageous location within a mall or central business district, appropriate space availability, and rental rates. We believe that sufficient desirable locations are available to accommodate our expansion plans. We refurbish our existing stores on a regular basis.

We own central buying and store operations offices and the North American distribution center located in Hoffman Estates, Illinois which is on approximately 28.4 acres of land. The property has buildings with approximately 538,000 total square feet of space, of which 373,000 square feet is devoted to receiving and distribution and 165,000 square feet is devoted to office space.

Our subsidiary, Claire’s Accessories UK Ltd., or “Claire’s UK,” leases distribution and office space in Birmingham, United Kingdom. The facility consists of 25,000 square feet of office space and 60,000 square feet of distribution space. The lease expires in December 2024, and Claire’s UK has the right to assign or sublet this lease at any time during the term of the lease, subject to landlord approval. The Birmingham, United Kingdom distribution center currently services our stores in the United Kingdom, Ireland, France, Belgium, and the Netherlands.

Our stores operated in Switzerland are currently serviced by a distribution center and office in Zurich, Switzerland. The facility maintained in Zurich consists of 13,700 square feet devoted to distribution and 8,500 square feet devoted to offices. The lease for this location expires on December 31, 2011. Our stores operated in Spain, Portugal, Austria, and Germany are currently serviced by a distribution center in the Netherlands. The distribution center in the Netherlands consists of approximately 13,000 square feet and the lease will expire on June 30, 2008. Upon expiration of the lease, the stores currently serviced by the Netherlands distribution center will be serviced by our Birmingham, UK distribution center.

We lease approximately 36,000 square feet in Pembroke Pines, Florida, where we maintain our executive, accounting and finance offices. See Note 12 entitled “Related Party Transactions” to consolidated financial statements included in this Annual Report.

We also lease office space in New York City.

Item 3.		Legal Proceedings

We are, from time to time, involved in routine litigation incidental to the conduct of our business, including litigation instituted by persons injured upon premises under our control; litigation regarding the merchandise that we sell, including product and safety concerns regarding metal content in our merchandise; litigation with respect to various employment matters, including wage and hour litigation; litigation with present or former employees; and litigation regarding intellectual property rights. Although litigation is routine and incidental to the conduct of our business, like any business of our size which employs a significant number of employees, such litigation can result in large monetary awards when judges, juries or other finders of facts do not agree with management’s evaluation of possible liability or outcome of litigation. Accordingly, the consequences of these matters cannot be finally determined by management. However, in the opinion of management, we believe that current pending litigation will not have a material adverse effect on our consolidated financial results.

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

No matters were submitted to a vote of security holders during the fourth quarter of Fiscal 2008.

PART II

Item 5.		Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Market Information

Prior to the Merger, our Common Stock was listed on the New York Stock Exchange under the ticker symbol “CLE.” Subsequent to the Merger, our Common Stock is privately held and there is no established public trading market for our stock.

Holders

As of April 1, 2008, there was one holder of record of our Common Stock, our parent, Claire’s Inc.

Item 6.		Selected Financial Data

The balance sheet and statement of operations data set forth below is derived from our consolidated financial statements and should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and the related notes thereto appearing elsewhere in this Annual Report. The consolidated Balance Sheet data as of May 28, 2007, January 28, 2006, January 29, 2005 and January 31, 2004 and the consolidated Statement of Operations data for each of the fiscal years ended January 29, 2005 and January 31, 2004 are derived from our consolidated financial statements which are not included herein.

As a result of the consummation of the Transactions, the Company is sometimes referred to as the “Successor Entity” for periods on or after May 29, 2007, and the “Predecessor Entity” for periods prior to May 29, 2007. The consolidated financial statements for the period after May 29, 2007 are presented on a different basis than that for the periods before May 29, 2007, as a result of the application of purchase accounting as of May 29, 2007 and therefore are not comparable. The acquisition of Claire’s Stores, Inc. is being accounted for as a business combination using the purchase method of accounting, whereby the purchase price was preliminarily allocated to the assets and liabilities based on the estimated fair market values at the date of acquisition. The Company has yet to complete the final evaluation and allocation of the purchase price as the appraisal associated with the valuation of certain assets and liabilities is not yet complete. The Company does not believe that the appraisal or its estimate of certain contingencies will materially modify the preliminary purchase price allocation.

							Predecessor Entity
		Successor
		Entity									Fiscal Year Ended
		May 29, 2007					Feb. 4, 2007
		Through					Through				February 3,				January 28,				January 29,				January 31,
		Feb. 2, 2008					May 28, 2007				2007 (1)				2006 (1)				2005 (1)				2004 (1)
							(In thousands, except for ratios and store data)
Statement of Operations Data:
Net sales		$	1,085,932				$	424,899			$	1,480,987			$	1,369,752			$	1,279,407			$	1,132,834
Cost of sales, occupancy and buying expenses			521,384					206,438				691,646				625,866				587,687				524,455
Gross profit			564,548					218,461				789,341				743,886				691,720				608,379
Other expenses (income):
Selling, general and administrative			358,353					154,482				481,979				449,430				430,868				394,152
Depreciation and amortization			61,451					19,652				56,771				48,900				44,882				41,451
Transaction-related costs			7,319					72,672				—				—				—				—
Other income			(3,088	)				(1,476	)			(3,484	)			(4,622	)			(2,335	)			(2,119	)
			424,035					245,330				535,266				493,708				473,415				433,484
Operating income (loss)			140,513					(26,869	)			254,075				250,178				218,305				174,895
Interest expense (income), net			147,892					(4,876	)			(14,575	)			(9,493	)			(3,331	)			473
Income (loss) from continuing operations before income taxes			(7,379	)				(21,993	)			268,650				259,671				221,636				174,422
Income taxes			(8,020	)				21,779				79,888				87,328				75,377				59,384
Income (loss) from continuing operations		$	641				$	(43,772	)		$	188,762			$	172,343			$	146,259			$	115,038
Other Financial Data:
Capital expenditures:
New stores and remodels		$	46,225				$	24,231			$	77,021			$	64,275			$	58,582			$	45,513
Other			12,259					3,757				18,171	(2)			9,169				5,052				3,325
Total capital expenditures			58,484					27,988				95,192				73,444				63,634				48,838
Cash interest expense (4)			123,620					79				118				125				193				2,561
Ratio of earnings to fixed charges (3)			—					—				5.2 x				5.3 x				4.7 x				4.0 x
Store Data:
Number of stores (at period end)
North America			2,135					2,124				2,133				2,106				2,119				2,112
Europe			905					879				859				772				717				700
Total number of stores (at period end)			3,040					3,003				2,992				2,878				2,836				2,812
Total gross square footage (000’s) (at period end)			3,105					3,043				3,021				2,883				2,801				2,175
Net sales per store (000’s) (5)		$	359				$	142			$	504			$	479			$	452			$	401
Net sales per square foot (6)			353					140				500				480				459				413
Balance Sheet Data (at period end)
Cash and cash equivalents		$	85,974				$	350,476			$	340,877			$	431,122			$	191,006			$	224,630
Total assets			3,348,497					1,119,047				1,091,266				1,090,701				966,129				805,924
Total debt			2,377,750					—				—				—				—				—
Total stockholders’ equity			605,200					792,071				847,662				868,318				755,687				632,450

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

Management’s Discussion and Analysis of Financial Condition and Results of Operations is designed to provide the reader of the financial statements with a narrative on our results of operations, financial position and liquidity, risk management activities, and significant accounting policies and critical estimates. It is useful to read Management’s Discussion and Analysis in conjunction with the Consolidated Financial Statements and related notes thereto contained elsewhere in this document.

Our fiscal year ends on the Saturday closest to January 31. As a result, our Fiscal 2008 results consisted of 52 weeks, our Fiscal 2007 results consisted of 53 weeks and our Fiscal 2006 results consisted of 52 weeks.

We include a store in the calculation of comparable store sales once it has been in operation sixty weeks after its initial opening. If a store is closed during a fiscal period, the store’s sales will be included in the computation of comparable store sales for that fiscal month, quarter, and year to date period only for the days in which it was operating as compared to those same days in the comparable period. Relocated, remodeled, and expanded square footage stores are classified the same as the original store and are not considered new stores upon relocation, remodeling or completion of their expansion. However, a store which is temporarily closed while undergoing relocation, remodeling or expansion is excluded from comparable store sales for the related period of closure.

Acquisition of the Company by Apollo Management VI, L.P.

As a result of the Merger in May 2007, described under “Explanatory Notes” in this annual report, there has been a significant change in the Company’s capital structure, including:

	•		the closing of the offering of the Notes;
	•		the closing of our $1.65 billion Credit Facility;
	•		the termination of the Company’s existing $60.0 million secured credit facility; and
	•		the equity investment of approximately $595.7 million by Apollo Management VI, L.P. on behalf of certain affiliated co-investment partnerships.

We refer to aforementioned transactions, including the Merger and our payment of any costs related to these transactions, collectively herein as the “Transactions.” In connection with the Transactions, we incurred significant indebtedness and became highly leveraged.

Effect of the Transactions

In connection with the Transactions, the Company incurred significant additional indebtedness, including $935.0 million aggregate principal amount of the Notes, and $1.45 billion under the Credit Facility. In addition, a standby letter of credit, in the face amount of approximately $4.5 million, was issued under the credit facility. As of February 3, 2007, the Company had no indebtedness outstanding. Therefore, our interest expense is significantly higher following the Transactions than experienced in prior periods.

The acquisition of Claire’s Stores, Inc. is being accounted for as a business combination using the purchase method of accounting, whereby the purchase price was preliminarily allocated to the assets and liabilities based on the estimated fair market values at the date of acquisition.

The Company has yet to complete the final evaluation and allocation of the purchase price as the appraisal associated with the valuation of certain assets and liabilities is not yet complete. The Company does not believe that the appraisal or its estimate of certain contingencies will materially modify the preliminary purchase price allocation.

The following discussion and analysis of the Company’s historical financial condition and results of operations covers periods prior to the consummation of the Transactions. Accordingly, the discussion and analysis of such periods does not reflect the significant impact the Transactions will have on the Company. After the Transactions, the Company became highly leveraged. See “—Analysis of Consolidated Financial Condition.”

Results of Consolidated Operations

As a result of the Transactions, the financial results for the fiscal year ended February 2, 2008 have been separately presented in the Consolidated Statements of Operations and Comprehensive Income (Loss). The results have been split between the “Predecessor Entity”, covering the period February 4, 2007 through May 28, 2007, and the “Successor Entity”, covering the period from May 29, 2007 (the date the Transactions were consummated) through February 2, 2008. For comparative purposes, the Company combined the Predecessor Entity and Successor Entity periods in its discussion below related to the fiscal year ended February 2, 2008. This combination is not a generally accepted accounting principles presentation. However, the Company believes this combination is useful to provide the reader a more accurate comparison and is provided to enhance the reader’s understanding of the results of operations for the fiscal year presented.

A summary of our consolidated results of operations is as follows (dollars in thousands):

						Successor
		Combined				Entity				Predecessor Entity
		Fiscal Year				May 29, 2007				Feb. 4, 2007
		Ended				Through				Through				Fiscal Year Ended
		February 2,				February 2,				May 28,				February 3,				January 28,
		2008				2008				2007				2007				2006
Net sales		$	1,510,831			$	1,085,932			$	424,899			$	1,480,987			$	1,369,752
Increase (decrease) in same store sales			(1.8	)%			(2.8	)%			0.5	%			1.5	%			5.9	%
Gross profit percentage			51.8	%			52.0	%			51.4	%			53.3	%			54.3	%
Selling, general and administrative expenses as a percentage of net sales			33.9	%			33.0	%			36.4	%			32.5	%			32.8	%
Depreciation and amortization as a percentage of net sales			5.4	%			5.7	%			4.6	%			3.8	%			3.6	%
Transaction-related costs as percentage of net sales			5.3	%			0.7	%			17.1	%			0.0	%			0.0	%
Operating income (loss)		$	113,644			$	140,513			$	(26,869	)		$	254,075			$	250,178
Net income (loss)		$	(43,131	)		$	641			$	(43,772	)		$	188,762			$	172,343
Number of stores at the end of the period (1)			3,040				3,040				3,003				2,992				2,878

Fiscal 2008 and Fiscal 2006 included 52 weeks of operations compared with Fiscal 2007, which included 53 weeks.

Net sales in Fiscal 2008 increased by $29.8 million, or 2.0%, from Fiscal 2007. This increase was primarily attributable to new store revenue, net of store closures, of $32.3 million, a net increase of $44.3 million resulting from foreign currency translation of our foreign operations, and increased sales to our franchisees of $2.2 million. These increases were offset by same store sales declining 1.8% or $26.2 million and the loss of $22.8 million of sales that were generated during the 53^rd week in Fiscal 2007.

The decrease in same store sales was primarily attributable to a decrease in the average number of transactions per store of 1.6%.

Net sales in Fiscal 2007 increased $111.2 million, or 8.1%, from Fiscal 2006. This increase was primarily attributable to new store revenue, net of store closures, of $45.3 million, increase in same store sales of 1.5% or $19.6 million, a net increase of $18.4 million resulting from foreign currency translation of our foreign operations, increased sales to our franchisees of $5.1 million and the additional $22.8 million of sales generated during the 53^rd week in Fiscal 2007.

We continue to experience a softening of the market as a result of the current economic downturn during the first quarter of this fiscal year.

The following table compares our sales of each product category for the last three fiscal years:

		Combined				Successor Entity				Predecessor Entity
		Fiscal Year				May 29, 2007				Feb. 4, 2007
		Ended				Through				Through				Fiscal Year Ended
		February 2,				February 2,				May 28,				February 3,				January 28,
% of Total		2008				2008				2007				2007				2006
Jewelry			53.6				52.6				55.8				57.8				57.8
Accessories			46.4				47.4				44.2				42.2				42.2
			100.0				100.0				100.0				100.0				100.0

Accessories as a percentage of our net sales has been increasing in the past three years.

In calculating gross profit and gross profit percentages, we exclude the costs related to our distribution center. These costs are included instead in selling, general and administrative expenses. Other retail companies may include these costs in cost of sales, so our gross profit percentages may not be comparable to those retailers.

In Fiscal 2008 gross profit percentage decreased by 150 basis points compared to the prior fiscal year. A 50 basis point improvement in merchandise margin was more than offset by a loss of operating leverage in occupancy and buying costs that resulted in a 200 basis point decline.

In Fiscal 2007 gross profit percentage decreased by 100 basis points compared to the prior fiscal year. This decrease was a result of an 80 basis point decrease in merchandise margin and the loss of leveraging of occupancy and buying costs that resulted in a 20 basis point decline.

In Fiscal 2008 selling, general and administrative expenses increased $30.9 million or a 6.4% increase over the prior fiscal year. Excluding a $16.6 million increase due to the effect of foreign currency translation, selling, general and administrative expenses increased 3.0% compared to the prior fiscal year. The remaining increase was primarily attributable to increases in expenses related to payroll and benefits. As a percentage of net sales, selling, general and administrative expenses increased 140 basis points compared to Fiscal 2007.

In Fiscal 2007 selling, general and administrative expenses increased $32.5 million or a 7.2% increase over the prior fiscal year. Excluding a $5.0 million increase due to the effect of foreign currency translation, selling, general and administrative expenses increased 6.1% compared to the prior fiscal year. The remaining increase was primarily attributable to increases in expenses related to payroll and benefits. As a percentage of net sales, selling, general and administrative expenses decreased 30 basis points compared to Fiscal 2006.

Depreciation and amortization expense increased by $24.3 million to $81.1 million for Fiscal 2008 compared to Fiscal 2007. This increase is primarily related to additional amortization expense arising from purchase accounting adjustments for store leasehold improvements and intangible assets, including franchise and non-compete agreements.

During Fiscal 2008, we incurred $80.0 million of one-time non-recurring costs associated with the sale of the Company. These costs consisted primarily of financial advisory fees, legal fees and change in control payments to employees.

Other income for Fiscal 2008 aggregated $4.6 million, an increase of $1.1 million from the prior year. This increase was due primarily to increased franchise royalty fees.

Interest income for Fiscal 2008 aggregated $7.4 million, a decrease of $7.3 million from the prior year. This decrease was due to lower cash and cash equivalent balances primarily resulting from cash used to fund the acquisition of the Company and related expenses.

Interest expense for Fiscal 2008 aggregated $150.4 million compared to $0.1 million of the prior year. This increase is primarily the result of interest expense associated with the financing of the acquisition of the Company. Included in interest expense for Fiscal 2008 is approximately $7.1 million of amortization of deferred debt issuance costs.

For Fiscal 2008, our income tax expense was approximately $13.8 million compared to $79.9 million and $87.3 million for Fiscal 2007 and 2006, respectively. This decrease in tax expense is due to the overall geographic mix of losses in jurisdictions with higher tax rates and income in jurisdictions with lower tax rates, partially offset by the additional tax expense of $10.6 million associated with non-deductible transaction costs related to the Merger, and of $22.0 million related to the repatriation of foreign earnings to fund, in part, the acquisition of the Company. For Fiscal 2008, we generated a loss before income taxes primarily due to losses in our U.S. operations caused by transaction costs related to the Merger, including interest expense. Our effective income tax rates for Fiscal 2008, Fiscal 2007, and Fiscal 2006 were (46.8)%, 29.7%, and 33.6%, respectively. Our effective income tax rate for Fiscal 2007 includes net benefits of approximately $5.3 million related to the settlement of certain multi-year foreign and domestic income tax audits. Our effective income tax rate for Fiscal 2006 includes additional tax expense of $5.7 million related to the repatriation of $95 million in foreign earnings from our foreign subsidiaries pursuant to the American Jobs Creation Act of 2004.

Segment Operations

We are organized into two business segments — North America and Europe. The following is a discussion of results of operations by business segment.

North America

Key statistics and results of operations for our North American division are as follows (dollars in thousands):

		Combined				Successor Entity				Predecessor Entity
		Fiscal Year				May 29, 2007				Feb. 4, 2007
		Ended				Through				Through				Fiscal Year Ended
		February 2,				February 2,				May 28,				February 3,				January 28,
		2008				2008				2007				2007				2006
Net sales		$	995,469			$	702,986			$	292,483			$	1,024,009			$	964,008
Increase (decrease) in same store sales			(2.6	)%			(4.2	)%			1.3	%			2.5	%			5.7	%
Gross profit percentage			52.0	%			51.5	%			53.1	%			53.6	%			54.5	%
Number of stores at the end of the period (1)			2,135				2,135				2,124				2,133				2,106

Net sales in North America during Fiscal 2008 decreased by $28.5 million, or 2.8%, from Fiscal 2007. The decrease in net sales was primarily attributable to same store sales decrease of $25.2 million or 2.6%, the loss of $15.5 million of sales generated during the 53^rd week of Fiscal 2007, which were partially offset by approximately $5.1 million in sales generated from new stores, net of store closures, an increase of $4.9 million resulting from foreign currency translation of our Canadian operations, and increases in sales to our franchisees of $2.2 million.

The decrease in same store sales in North America was primarily attributable to a decrease in the average number of transactions per store of 2.2%.

Net sales in North America during Fiscal 2007 increased by $60.0 million, or 6.2%, from Fiscal 2006. The increase in net sales was primarily attributable to same store sales increase of $23.7 million or 2.5%, approximately $11.7 million in sales generated from new stores, net of store closures, $15.5 million of sales during the 53^rd week, increase of $3.8 million resulting from foreign currency translation of our Canadian operations, and increases in sales to our franchisees of $5.1 million.

Gross profit percentage decreased 160 basis points for Fiscal 2008 compared to Fiscal 2007. A 40 basis point improvement in merchandise margin was more than offset by a loss of operating leverage in occupancy and buying costs that resulted in a 200 basis point decline in margin.

In Fiscal 2007 gross profit percentage decreased 90 basis points compared to Fiscal 2006, which was primarily attributable to a decline in merchandise margin.

The following table compares our sales of each product category for the last three fiscal years:

		Combined				Successor Entity				Predecessor Entity
		Fiscal Year				May 29, 2007				Feb. 4, 2007
		Ended				Through				Through				Fiscal Year Ended
		February 2,				February 2,				May 28,				February 3,				January 28,
% of Total		2008				2008				2007				2007				2006
Jewelry			57.2				56.3				59.4				62.0				63.9
Accessories			42.8				43.7				40.6				38.0				36.1
			100.0				100.0				100.0				100.0				100.0

Europe

Key statistics and results of operations for our European division are as follows (dollars in thousands):

		Combined				Successor Entity				Predecessor Entity
		Fiscal Year				May 29, 2007				Feb. 4, 2007
		Ended				Through				Through				Fiscal Year Ended
		February 2,				February 2,				May 28,				February 3,				January 28,
		2008				2008				2007				2007				2006
Net sales		$	515,362			$	382,946			$	132,416			$	456,978			$	405,744
Increase (decrease) in same store sales			(0.2	)%			0.2	%			(1.2	)%			(0.9	)%			6.4	%
Gross profit percentage			51.5	%			52.8	%			47.8	%			52.7	%			53.8	%
Number of stores at the end of the period (1)			905				905				879				859				772

Net sales in our European division during Fiscal 2008 increased by $58.4 million, or 12.8%, over Fiscal 2007. The increase in net sales was primarily attributable to an increase of $39.3 million resulting from the weakening U.S. Dollar when translating our foreign operations at higher exchange rates and new store revenue, net of store closures, of $27.2 million; offset by same store sales decrease of 0.2% or $0.9 million during the period and the loss of $7.2 million of sales that were generated during the 53^rd week of Fiscal 2007.

The decrease in same store sales in Europe was primarily driven by a decrease in the average number of transactions per store of 1.0%, which was offset by an increase of 1.0% in average transaction value.

Fiscal 2007 net sales in our European division increased by $51.2 million, or 12.6% compared to Fiscal 2006. The increase in net sales was due to new store revenue, net of store closures, of approximately $33.6 million, an increase of $14.5 million resulting from the weaker U.S. Dollar when translating our foreign operations at higher exchange rates, and $7.2 million of sales from the extra week; offset partially by same store sales decreases of 0.9% or $4.1 million during the period.

Gross profit percentage decreased 120 basis points for Fiscal 2008 compared to Fiscal 2007. A 30 basis point improvement in merchandise margin was more than offset by a loss of operating leverage in occupancy and buying costs that resulted in a 150 basis point decline in margin.

In Fiscal 2007 gross profit percentage decreased 110 basis points compared to Fiscal 2006. The decrease was primarily attributable to a 50 basis point decline in merchandise margin and a 60 basis point increase in occupancy and buying cost percentage.

The following table compares our sales of each product category for the last three fiscal years:

		Combined				Successor Entity				Predecessor Entity
		Fiscal Year				May 29, 2007				Feb. 4, 2007
		Ended				Through				Through				Fiscal Year Ended
		February 2,				February 2,				May 28,				February 3,				January 28,
% of Total		2008				2008				2007				2007				2006
Jewelry			46.5				46.0				47.9				48.3				44.7
Accessories			53.5				54.0				52.1				51.7				55.3
			100.0				100.0				100.0				100.0				100.0

Liquidity and Capital Resources

Prior to the Transactions, our operating liquidity requirements were funded through internally generated cash flow from normal sales and cash on hand. The Company’s primary uses of cash after the consummation of the Transactions are working capital requirements, new store expenditures, and debt service requirements. Cash outlays for the payment of interest are significantly higher in Fiscal 2008 than in prior years as a result of the Notes described below. Our current capital structure generates losses in our U.S. operations because of debt service requirements. Accordingly, we expect to pay minimal cash taxes in the U.S. in the near term, while our foreign cash taxes are less affected by our capital structure and debt service requirements. The Company anticipates that cash generated from operations together with the amounts available under its credit facility will be sufficient to meet its future working capital requirements, new store expenditures, and debt service requirements as they become due. However, the Company’s ability to fund future operating expenses and capital expenditures and its ability to make scheduled payments of interest on, to pay principal on, or refinance indebtedness and to satisfy any other present or future debt obligations will depend on future operating performance. Our future operating performance and liquidity may also be adversely affected by general economic, financial, and other factors beyond the Company’s control, including those disclosed in “Risk Factors.”

Credit Facility

Our credit facility provides senior secured financing of up to $1.65 billion, consisting of a $1.45 billion senior secured term loan facility and a $200.0 million senior secured revolving credit facility. On May 29, 2007, upon closing of the Transactions, we borrowed $1.45 billion under our senior secured term loan facility and were issued a $4.5 million letter of credit. As of February 2, 2008, our $200.0 million revolving credit facility was undrawn aside from the letter of credit, which was increased to $5.9 million.

Borrowings under our credit facility bear interest at a rate equal to, at our option, either (a) an alternate base rate determined by reference to the higher of (1) prime rate in effect on such day and (2) the federal funds effective rate plus 0.50% or (b) a LIBOR rate, with respect to any Eurodollar borrowing, determined by reference to the costs of funds for U.S. dollar deposits in the London Interbank Market for the interest period relevant to such borrowing, adjusted for certain additional costs, in each case plus an applicable margin. The initial applicable margin for borrowings under our credit facility is 1.75% per annum with respect to the alternate base rate borrowing and 2.75% per annum in the case of any LIBOR borrowings. The applicable margin for our revolving credit loans under our credit facility will be subject to one or more stepdowns, in each case based upon the ratio of our net senior secured debt to EBITDA for the period of four consecutive fiscal quarters most recently ended as of such date (the “Total Net Secured Leverage Ratio”).

Between July 20, 2007 and August 3, 2007, the Company entered into three interest swap agreements to manage exposure to interest rate changes related to the senior secured term loan facility. The interest rate swaps result in the Company paying a fixed rate of 5.11%, plus the applicable margin then in effect for LIBOR borrowings resulting in an interest rate of 7.86% at February 2, 2008, on a notional amount of $435.0 million of the senior secured term loan.

In addition to paying interest on outstanding principal under our credit facility, we are required to pay a commitment fee, initially 0.50% per annum, in respect of the unutilized revolving credit commitments thereunder. The commitment fee will be subject to one stepdown, based upon our Total Net Secured Leverage Ratio. We must also pay customary letter of credit fees and agency fees. At February 2, 2008, the weighted average interest rate for borrowings outstanding under our credit facility was 6.47% per annum.

Our senior secured term loan facility is amortized in equal quarterly installments of $3.625 million, beginning on September 30, 2007 and ending on March 31, 2014. The remaining balance of $1.352 billion is due on May 29, 2014. The principal amount outstanding of the loans under our senior secured revolving credit facility, plus interest accrued and unpaid thereon, will be due and payable in full at maturity on May 29, 2013.

All obligations under our credit facility are unconditionally guaranteed by (i) Claire’s Inc., our parent, prior to an initial public offering of Claire’s Stores, Inc. stock, and (ii) certain of our existing and future wholly-owned domestic subsidiaries, subject to certain exceptions.

All obligations under our credit facility, and the guarantees of those obligations, are secured, subject to certain exceptions, by (i) all of Claire’s Stores, Inc. capital stock, prior to an initial public offering of Claire’s Stores, Inc. stock, and (ii) substantially all of our material owned assets and the material owned assets of subsidiary guarantors, including:

	•		a perfected pledge of all the equity interests held by us or any subsidiary guarantor, which pledge, in the case of any foreign subsidiary, is limited to 100% of the non-voting equity interests and 65% of the voting equity interests of such foreign subsidiary held directly by us and the subsidiary guarantors; and
	•		perfected security interests in, and mortgages on, substantially all material tangible and intangible assets owned by us and each subsidiary guarantor, subject to certain exceptions.

Our credit facility contains customary provisions relating to mandatory prepayments, voluntary payments, affirmative and negative covenants, and events of default; however, it does not contain any covenants that require the Company to maintain any particular financial ratio or other measure of financial performance.

Notes

In connection with the Transactions, we also issued a series of notes.

Our senior notes were issued in two series: (1) $250.0 million of 9.25% senior notes due 2015; and (2) $350.0 million of 9.625%/10.375% senior toggle notes due 2015. The $250.0 million senior notes are unsecured obligations, mature on June 1, 2015 and bear interest at a rate of 9.25% per annum. The $350.0 million senior toggle notes are senior obligations and will mature on June 1, 2015. For any interest period through June 1, 2011, we may, at our option, elect to pay interest on the senior toggle notes (i) entirely in cash, (ii) entirely by increasing the principal amount of the outstanding senior toggle notes or by issuing payment-in-kind (PIK) Notes, or (iii) 50% as cash interest and 50% as PIK interest. After June 1, 2011, we will make all interest payments on the senior toggle notes in cash. Cash interest on the senior toggle notes will accrue at the rate of 9.625% annum and be payable in cash. PIK interest on the senior toggle notes will accrue at the cash interest rate per annum plus 0.75% and be payable by issuing PIK notes. In the event we make a PIK interest election, our debt will increase by the amount of such interest.

We also issued 10.50% senior subordinated notes due 2017 in an initial aggregate principal amount of $335.0 million. The senior subordinated notes are senior subordinated obligations and will mature on June 1, 2017. The senior subordinated notes bear interest at a rate of 10.50% per annum.

Interest on the notes is payable semi-annually to holders of record at the close of business on May 15 or November 15 immediately preceding the interest payment date on June 1 and December 1 of each year, commencing December 1, 2007. The notes are also subject to certain redemption and repurchase rights as described in Note 5 to the Consolidated Financial Statements.

The indentures governing the notes have certain covenants that we must meet during the term of the notes. However, if at any date, the notes have Investment Grade Ratings from both of the rating agencies of Moody’s Investment Service, Inc. and Standards & Poor’s Rating Group and no event of default has occurred, the majority of the covenants will not apply.

Pre-Transaction Credit Facilities

We entered into a revolving line of credit of up to $60.0 million, secured by inventory in the United States, on March 31, 2004. This credit facility was terminated simultaneously with the closing of the Transactions. At May 28, 2007, the entire amount of $60.0 million would have been available for borrowing by us, subject to reduction for $4.3 million of outstanding letters of credit.

Our non-U.S. subsidiaries have bank credit facilities totaling $3.4 million. These facilities are used for working capital requirements, letters of credit and various guarantees. These credit facilities have been arranged in accordance with customary lending practices in their respective countries of operation. At February 2, 2008, the entire amount of $3.4 million was available for borrowing by us, subject to reduction for $2.0 million of outstanding bank guarantees. These facilities remain in place.

Analysis of Consolidated Financial Condition

A summary of cash flows provided by (used in) operating, investing and financing activities is outlined in the table below (dollars in thousands):

		Combined				Successor Entity				Predecessor Entity
		Fiscal Year				May 29, 2007				Feb. 4, 2007
		Ended				Through				Through				Fiscal Year Ended
		February 2,				February 2,				May 28,				February 3,				January 28,
		2008				2008				2007				2007				2006
Operating activities		$	6,795			$	(35,851	)		$	42,646			$	232,250			$	242,358
Investing activities			(3,140,441	)			(3,112,372	)			(28,069	)			(99,256	)			52,614
Financing activities			2,874,807				2,880,810				(6,003	)			(224,584	)			(58,000	)

Our working capital at the end of Fiscal 2008 was $59.2 million compared to $343.2 million at the end of Fiscal 2007, a decrease of $284.0 million. The decrease in working capital reflects the decrease in cash and cash equivalents of $254.9 million as discussed below and new current liabilities for the current maturities of long-term debt and accrued interest payable aggregating $34.0 million.

In Fiscal 2008, we generated cash flows from operating activities of $6.8 million compared to $232.3 million in Fiscal 2007. This decrease of $225.5 million was primarily related to payment of interest expense of $123.6 million on the debt related to the Acquisition and $80.0 million of transaction-related costs. These items were the primary cause for a decrease in Fiscal 2008 in the amount of cash and cash equivalents of $254.9 million to $86.0 million as of February 2, 2008.

Cash used in investing activities for Fiscal 2008 was $3.1 billion, an increase of $3.0 billion over the cash used in investing activities for Fiscal 2007 of $99.3 million. This increase was directly attributable to the cash and cash equivalents used to fund the Acquisition. We funded these investing activities primarily from the financing activities discussed below.

Capital expenditures of $86.5 million were made in Fiscal 2008 primarily to remodel existing stores, open new stores and to improve technology systems. In Fiscal 2009, we expect to fund a total of approximately $80.0 to $90.0 million of capital expenditures to remodel existing stores, open new stores and to improve technology systems.

Cash provided by financing activities for Fiscal 2008 was $2.9 billion, an increase of $3.1 billion from the cash used in financing activities for Fiscal 2007 of $224.6 million. In Fiscal 2008 we raised $1.45 billion from our credit facility and $935.0 million from our note offerings, an aggregate of $2.4 billion from debt. As part of the Transactions, our Sponsor contributed $595.7 million in capital. Therefore, the capital raised to fund the Acquisition was $2.98 billion. We paid $77.4 million of debt issuance costs from these proceeds and used the remainder from existing cash and cash equivalents to fund the Acquisition.

During Fiscal 2007, we used $199.7 million of cash and cash equivalents to repurchase outstanding stock. We paid dividends of $16.3 million and $37.6 million in Fiscal 2008 and Fiscal 2007, respectively. These dividends were declared prior to the Acquisition. No dividends have been declared by the Company since the Acquisition. During Fiscal 2008, we paid the first two quarterly installments of principal payments on our credit facility aggregating $7.3 million.

Critical Accounting Policies and Estimates

The preparation of financial statements requires us to estimate the effect of various matters that are inherently uncertain as of the date of the financial statements. Each of these required estimates varies in regard to the level of judgment involved and its potential impact on our reported financial results. Estimates are deemed critical when a different estimate could have reasonably been used or where changes in the estimate are reasonably likely to occur from period to period and would materially impact our financial condition, changes in financial condition or results of operations. Our significant accounting policies are discussed in note 2 of our consolidated financial statements. Critical estimates inherent in these accounting policies are discussed in the following paragraphs.

On an on-going basis, we evaluate our estimates. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances at the time, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Although management believes that the estimates discussed above are reasonable and the related calculations conform to generally accepted accounting principles, actual results could differ from these estimates, and such differences could be material.

Inventory Valuation

Our inventories in North America, Switzerland, Austria, Germany, Spain, and Portugal are valued at the lower of cost or market, with cost determined using the retail method. Inherent in the retail inventory calculation are certain significant management judgments and estimates including, among others, merchandise markups, markdowns and shrinkage, which impact the ending inventory valuation at cost as well as resulting gross margins. The methodologies used to value merchandise inventories include the development of the cost to retail ratios, the groupings of homogeneous classes of merchandise, development of shrinkage reserves and the accounting for retail price changes. The inventories in our United Kingdom, Ireland, France, Netherlands, and Belgium stores are accounted for under the lower of cost or market method, with cost determined using the average cost method. Inventory valuation is impacted by the estimation of slow moving goods, shrinkage and markdowns.

Valuation of Long-Lived Assets

We evaluate the carrying value of long-lived assets whenever events or changes in circumstances indicate that a potential impairment has occurred. A potential impairment has occurred if the projected future undiscounted cash flows are less than the carrying value of the assets. The estimate of cash flows includes management’s assumptions of cash inflows and outflows directly resulting from the use of the asset in operations. When a potential impairment has occurred, an impairment charge is recorded if the carrying value of the long-lived asset exceeds its fair value. Fair value is measured based on a projected discounted cash flow model using a discount rate we feel is commensurate with the risk inherent in our business. Our impairment analyses contain estimates due to the inherently judgmental nature of forecasting long-term estimated cash flows and determining the ultimate useful lives of assets. Actual results may differ, which could materially impact our impairment assessment. During Fiscal 2008, an impairment charge of approximately $3.5 million was recorded relating to computer software. We recorded no material impairment charges during Fiscal 2007 and Fiscal 2006.

Goodwill Impairment

We continually evaluate whether events and changes in circumstances warrant recognition of an impairment loss of goodwill. The conditions that would trigger an impairment assessment of goodwill include a significant, sustained negative trend in our operating results or cash flows, a decrease in demand for our products, a change in the competitive environment, and other industry and economic factors. We measure impairment of goodwill utilizing the discounted cash flow method for each of our reporting units. The estimated discounted cash flows are then compared to our goodwill amounts. If the balance of the goodwill exceeds the estimated discounted cash flows, the excess of the balance is written off. Future cash flows may not meet projected amounts, which could result in impairment. We performed these analyses during Fiscal 2008, Fiscal 2007, and Fiscal 2006 and no impairment charge was required.

Intangible Asset Impairment

We continually evaluate whether events and changes in circumstances warrant revised estimates of the useful lives, residual values or recognition of an impairment loss for intangible assets. Future adverse changes in market and legal conditions or poor operating results of underlying assets could result in losses or an inability to recover the carrying value of the intangible asset, thereby possibly requiring an impairment charge in the future. Prior to Fiscal 2007, we concluded that certain intangible assets, comprised primarily of lease rights in our stores in France, qualified as indefinite-life intangible assets. The fair market value of the lease rights was determined through the use of third-party valuations. In addition, prior to Fiscal 2007, we made investments in intangible assets upon the opening and acquisition of many of our other store locations in Europe. These other intangible assets are subject to amortization and are amortized over the useful lives of the respective leases, not to exceed 25 years. We evaluate the market value of these assets periodically and record the impairment charge when we believe the carrying amount of the asset is not recoverable. We recorded no material impairment charges during Fiscal 2008, Fiscal 2007, and Fiscal 2006.

During Fiscal 2007, we determined that our lease rights in France, which we previously accounted for as indefinite-life intangible assets, would be more appropriately accounted for as either intangible assets with finite lives or as initial direct costs of the related lease. Accordingly, intangible assets with finite lives and initial direct costs of the lease are now amortized to their estimated residual value on a straight line basis over the term of the lease. The impact of our decision to change our accounting lease rights in France did not have a material impact on our financial position, results of operations or cash flows.

Income Taxes

We are subject to income taxes in many jurisdictions, including the United States, individual states and localities and internationally. Our annual consolidated provision for income taxes is determined based on our income, statutory tax rates and the tax implications of items treated differently for tax purposes than for financial reporting purposes. Tax law requires certain items to be included in the tax return at different times than the items are reflected on the financial statements. Some of these differences are permanent, such as expenses that are not deductible in our tax return, and some differences are temporary, reversing over time, such as depreciation expense. We establish deferred tax assets and liabilities as a result of these temporary differences.

Our judgment is required in determining any valuation allowance recorded against deferred tax assets. In assessing the need for a valuation allowance, we consider all available evidence including past operating results, estimates of future taxable income and tax planning opportunities. In the event we change our determination as to the amount of deferred tax assets that can be realized, we will adjust our valuation allowance with a corresponding impact to income tax expense in the period in which such determination is made. Although realization is not assured, we believe it is more likely than not that our deferred tax assets, net of valuation allowance, will be realized. Decreases in valuation allowances associated with deferred tax assets acquired in a business combination reduce goodwill.

We establish accruals for uncertain tax positions in our consolidated financial statements based on tax positions that we believe are supportable, but are potentially subject to successful challenge by the taxing authorities. We believe these accruals are adequate for all open audit years based on our assessment of many factors including past experience, progress of ongoing tax audits and interpretations of tax law. If changing facts and circumstances cause us to adjust our accruals, or if we prevail in tax matters for which accruals have been established, or we are required to settle matters in excess of established accruals, our income tax expense for a particular period will be affected.

Income tax expense also reflects our best estimate and assumptions regarding, among other things, the geographic mix of income and losses from our foreign and domestic operations, interpretation of tax laws and regulations of multiple jurisdictions, earnings repatriation plans, and resolution of tax audits. Our effective income tax rates in future periods could be impacted by changes in the geographic mix of income and losses from our foreign and domestic operations that may be taxed at different rates, changes in tax laws, repatriation of foreign earnings, and the resolution of unrecognized tax benefits for amounts different from our current estimates. Given our capital structure, we will continue to experience volatility in our effective tax rate over the near term.

Stock-Based Compensation

We issue stock options and other stock-based awards to executive management, key employees and directors under our stock-based compensation plans. Prior to Fiscal 2007, we accounted for stock-based compensation under the provisions of APB No. 25, “Accounting for Stock Issued to Employees” (“APB No. 25”). Stock awards which qualified as fixed grants under APB No. 25, such as our time-vested stock awards, were accounted for at fair value at date of grant. The compensation expense was recorded over the related vesting period in a systematic and rational manner consistent with the lapse of restrictions on the shares.

Other stock awards, such as long-term incentive plan awards, were accounted for at fair value at the date it became probable that performance targets required to receive the award would be achieved. The compensation expense was recorded over the related vesting period. Determining the number of shares expected to be awarded under the long-term incentive plan requires judgment in determining the performance targets to be achieved over the period covered by the plan. If actual results differ significantly from those estimated, stock-based compensation expense and our results of operations could be materially impacted.

Stock options were accounted for under the intrinsic value method of APB No. 25. Modifications to option awards were accounted for under the provisions of FASB Interpretation No. 44, “Accounting for Certain Transactions involving Stock Compensation — an interpretation of APB Opinion No. 25.” The modification to accelerate vesting of outstanding options required an estimate of options which would have expired or been forfeited unexercisable absent the modification to accelerate.

On January 29, 2006, we adopted SFAS No. 123R.

Under SFAS No. 123R, time-vested stock awards are accounted for at fair value at date of grant. The compensation expense is recorded over the requisite service period. Compensation expense for time-vested stock awards granted in Fiscal 2008 is recorded over the requisite service period using the graded-vesting method.

The fair value of time and BOGO options granted during Fiscal 2008 was determined using the Black-Scholes option-pricing model. The fair value of performance based stock options issued during Fiscal 2008 was based on the Monte Carlo model. Both models incorporate various assumptions such as expected dividend yield, risk-free interest rate, expected life of the options and expected stock price volatility.

Other stock awards, such as long-term incentive plan awards, which qualified as equity plans under SFAS No. 123R, were accounted for based on fair value at date of grant. The compensation expense was based on the number of shares expected to be issued when it became probable that performance targets required to receive the award will be achieved. The expense was recorded over the requisite service period.

Other long-term incentive plans accounted for as liabilities under SFAS No. 123R were recorded at fair value at each reporting date until settlement. The compensation expense is based on the number of performance units expected to be issued when it became probable that performance targets required to receive the award will be achieved. The expense was recorded over the requisite service period.

Performance-based stock awards are accounted for at fair value at date of grant. The compensation expense is recognized over the longer of the service period and the period derived from the market conditions.

BOGO options, which are immediately vested and exercisable upon issuance, are accounted for at fair value at date of grant. The compensation expense is recognized over a four year period due to the terms of the option requiring forfeiture in certain cases including the grantee’s voluntary resignation from the Company’s employ prior to May 2011.

Derivatives and Hedging

The Company accounts for derivative instruments in accordance with SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities”. In accordance with SFAS No. 133, the Company reports all derivative financial instruments on its balance sheet at fair value. The Company formally designates and documents the financial instrument as a hedge of a specific underlying exposure, as well as the risk management objectives and strategies for undertaking the hedge transaction. The Company formally assesses, both at inception and at least quarterly thereafter, whether the financial instruments that are used in hedging transactions are effective at offsetting changes in either the fair value or cash flows of the related underlying exposure.

The Company primarily employs derivative financial instruments to manage its exposure to market risk from foreign exchange rates and interest rate changes and to limit the volatility and impact of interest rate changes on earnings and cash flows. The Company does not enter into derivative financial instruments for trading or speculative purposes. The Company faces credit risk if the counterparties to the financial instruments are unable to perform their obligations. However, the Company seeks to minimize this risk by entering into transactions with counterparties that are significant and creditworthy financial institutions. The Company monitors the credit ratings of the counterparties.

The Company records unrealized gains and losses on derivative financial instruments qualifying as cash flow hedges in accumulated other comprehensive income (loss) on the consolidated balance sheets, to the extent that hedges are effective. For derivative financial instruments which do not qualify as cash flow hedges, any changes in fair value would be recorded in the consolidated statements of operations.

The Company may at its discretion terminate or de-designate any such hedging instrument agreements prior to maturity. At that time, any gains or losses previously reported in accumulated other comprehensive income (loss) on termination would amortize into interest expense or interest income to correspond to the recognition of interest expense or interest income on the hedged debt. If such debt instrument was also terminated, the gain or loss associated with the terminated derivative included in accumulated other comprehensive income (loss) at the time of termination of the debt would be recognized in the consolidated statement of operations at that time.

Contractual Obligations and Off Balance Sheet Arrangements

We financed certain leasehold improvements and equipment used in our stores through transactions accounted for as non-cancelable operating leases. As a result, the rental expense for these leasehold improvements and equipment is recorded during the term of the lease contract in our consolidated financial statements, generally over four to seven years. In the event that any of the real property leases where leasehold improvements or equipment are located that are subject to these non-cancelable operating leases are terminated by us or our landlord prior to the scheduled expiration date of the real property lease, we will be required to accrue all future rent payments under these operating leases.

The following table sets forth our contractual obligations requiring the use of cash as of February 2, 2008:

		Payments Due by Period
Contractual Obligations						Less than				1-3				3-5				More than
(in millions)		Total				1 year				years				years				5 years
Operating leases for real estate		$	1,262.1			$	198.7			$	352.0			$	287.0			$	424.4
Operating leases for equipment, leasehold improvements, and equipment purchases			5.1				3.0				2.0				0.1				—
Long-term debt obligations			2,377.8				14.5				29.0				29.0				2,305.3	(1)
Letters of credit			5.9				5.9				—				—				—
Interest (2)			1,283.3				184.7				361.7				345.9				391.0
Total		$	4,934.2			$	406.8			$	744.7			$	662.0			$	3,120.7

The contractual obligations in the table above for our foreign entities have been translated to U.S. Dollars at March 31, 2008 exchange rates.

We have no material off-balance sheet arrangements (as such term is defined in Item 303(a)(4)(ii) under Regulation S-K of the Securities Act).

Seasonality and Quarterly Results

Sales of each category of merchandise vary from period to period depending on current trends. We experience traditional retail patterns of peak sales during the Christmas, Easter and back-to-school periods. Sales as a percentage of total sales in each of the four quarters of Fiscal 2008 were 23%, 24%, 24% and 29%, respectively. See note 13 of our consolidated financial statements for our quarterly results of operations.

Impact of Inflation

Inflation impacts our operating costs including, but not limited to, cost of goods and supplies, occupancy costs and labor expenses. We seek to mitigate these effects by passing along inflationary increases in costs through increased sales prices of our products where competitively practical or by increasing sales volumes.

Recent Accounting Pronouncements

In June 2006, the FASB ratified Emerging Issues Task Force (“EITF”) Issue No. 06-3, “How Taxes Collected from Customers and Remitted to Governmental Authorities Should Be Presented in the Income Statement (that is, Gross versus Net Presentation)”, which allows companies to adopt a policy of presenting taxes in the income statement on either a gross or net basis. Taxes within the scope of this EITF would include taxes that are imposed on a revenue transaction between a seller and a customer. If such taxes are significant, the accounting policy should be disclosed as well as the amount of taxes included in the financial statements if presented on a gross basis. EITF 06-3 was adopted on February 4, 2007, but there was no impact to the method for recording and reporting these sales or value added taxes in the consolidated financial statements as the Company does not record such taxes on a gross basis.

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements”. The Statement defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosure about fair value measurements. This Statement does not require any new fair value measurement and applies to financial statements issued for fiscal years beginning after November 15, 2007 with early application encouraged. Certain provisions of the Statement were effective for the Company on February 3, 2008, while the effective date of other provisions relating to nonfinancial assets and nonfinancial liabilities will be effective in the fiscal year beginning February 1, 2009. The adoption of this Statement is not expected to have a material impact on the Company’s financial position, results of operations or cash flows.

During December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business Combinations”. The Statement will modify how business acquisitions are accounted for both on the acquisition date and in subsequent periods. The Company will be required to apply the provisions of the new Statement to acquisitions that close in the fiscal year beginning February 1, 2009.

In December 2007, the SEC issued Staff Accounting Bulletin (“SAB”) No. 110, which allows the continued use of the “simplified” method discussed in SAB No. 107 in developing an estimate of the expected term of certain share options. SAB No. 107 did not provide for the use of the simplified method after December 31, 2007. The Company does not expect the adoption of SAB No. 110 to have a material impact on its financial position, results of operations or cash flows.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

Foreign Currency

We are exposed to market risk from foreign currency exchange rate fluctuations on the U.S. dollar value of foreign currency denominated transactions and our investment in foreign subsidiaries. We manage this exposure to market risk through our regular operating and financing activities, and from time to time, the use of foreign currency options. Exposure to market risk for changes in foreign exchange rates relates primarily to foreign operations’ buying, selling, and financing in currencies other than local currencies and to the carrying value of net investments in foreign subsidiaries. We manage our exposure to foreign exchange rate risk related to our foreign operations’ buying, selling, and financing in currencies other than local currencies by using foreign currency options from time to time to hedge foreign currency transactional exposure. At February 2, 2008, we maintained no foreign currency options. We do not generally hedge the translation exposure related to our net investment in foreign subsidiaries. Included in comprehensive income is $8.4 million and $17.2 million, net of tax, reflecting the unrealized gain on foreign currency translation during the period from February 4, 2007 through May 28, 2007 and the period from May 29, 2007 through February 2, 2008, respectively. Based on the extent of our foreign operations in Fiscal 2008, the potential gain or loss due to a 10% adverse change on foreign currency exchange rates could be significant to our consolidated operations.

Certain of our subsidiaries make significant U.S. dollar purchases from Asian suppliers particularly in China. In July 2005, China revalued its currency 2.1%, changing the fixed exchange rate from 8.28 to 8.11 Chinese Yuan to the U.S. Dollar. Since July 2005, the Chinese Yuan increased by 12.7% as compared to the U.S. Dollar, based on continued pressure from the international community. If China adjusts the exchange rate further or allows the value to float, we may experience increases in our cost of merchandise imported from China.

The results of operations of foreign subsidiaries, when translated into U.S. dollars, reflect the average rates of exchange for the months that comprise the periods presented. As a result, similar results in local currency can vary significantly upon translation into U.S. dollars if exchange rates fluctuate significantly from one period to the next.

Interest Rates

Between July 20, 2007 and August 3, 2007, we entered into three interest rate swap agreements (the “Swaps”) to manage exposure to fluctuations in interest rates. The Swaps represent contracts to exchange floating rate for fixed interest payments periodically over the lives of the Swaps without exchange of the underlying notional amount. At February 2, 2008, the Swaps cover an aggregate notional amount of $435.0 million of the $1.44 billion outstanding principal balance of the senior secured term loan facility. The fixed rates of the three swap agreements range from 4.96% to 5.25% and each swap expires on June 30, 2010. The Swaps have been designated as cash flow hedges. At February 2, 2008, the estimated fair value of the Swaps was a liability of approximately $22.6 million and is recorded, net of tax, as a reduction in other comprehensive income.

At February 2, 2008, we had fixed rate debt of $935 million and variable rate debt of $1.44 billion. Based on our variable rate debt balance (less $435 million of interest rate swaps) as of February 2, 2008, a 1% change in interest rates would increase or decrease our annual interest cost by approximately $10.1 million, net.

Item 8. Financial Statements and Supplementary Data

		Page No.
Report of Independent Registered Public Accounting Firm			39
Consolidated Balance Sheets as of February 2, 2008 (“Successor Entity”) and February 3, 2007 (“Predecessor Entity”)			40
Consolidated Statements of Operations and Comprehensive Income (Loss) for the period from May 29, 2007 through February 2, 2008 (“Successor Entity”), the period from February 4, 2007 through May 28, 2007 (“Predecessor Entity”), and the fiscal years ended February 3, 2007 (“Predecessor Entity”) and January 28, 2006 (“Predecessor Entity”)			41
Consolidated Statements of Changes in Stockholders’ Equity for the period from May 29, 2007 through February 2, 2008 (“Successor Entity”), the period from February 4, 2007 through May 28, 2007 (“Predecessor Entity”), and the fiscal years ended February 3, 2007 (“Predecessor Entity”) and January 28, 2006 (“Predecessor Entity”)			42
Consolidated Statements of Cash Flows for the period from May 29, 2007 through February 2, 2008 (“Successor Entity”), the period from February 4, 2007 through May 28, 2007 (“Predecessor Entity”), and the fiscal years ended February 3, 2007 (“Predecessor Entity”) and January 28, 2006 (“Predecessor Entity”)			43
Notes to Consolidated Financial Statements			44

Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders
Claire’s Stores, Inc.:

We have audited the accompanying consolidated balance sheets of Claire’s Stores, Inc. and subsidiaries as of February 2, 2008 (Successor Entity) and February 3, 2007 (Predecessor Entity), and the related consolidated statements of operations and comprehensive income (loss), changes in stockholders’ equity, and cash flows for the period May 29, 2007 to February 2, 2008 (Successor Entity), the period February 4, 2007 to May 28, 2007 (Predecessor Entity) and for each of the years in the two-year period ended February 3, 2007 (Predecessor Entity). These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards 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. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Claire’s Stores, Inc. and subsidiaries as of February 2, 2008 (Successor Entity) and February 3, 2007 (Predecessor Entity) and the results of their operations and their cash flows for the period May 29, 2007 to February 2, 2008 (Successor Entity), the period February 4, 2007 to May 28, 2007 (Predecessor Entity) and for each of the years in the two-year period ended February 3, 2007 (Predecessor Entity) in conformity with U.S. generally accepted accounting principles.

As discussed in note 11 to the consolidated financial statements, effective February 4, 2007, the Company adopted the provisions of the Financial Accounting Standards Board’s Interpretation No. 48, Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109.

As discussed in notes 2 and 8 to the consolidated financial statements, effective January 29, 2006, the Company adopted the provisions of the Financial Accounting Standards Board’s Statement of Financial Accounting Standard No. 123 (revised 2004), Share-Based Payment.

/s/ KPMG LLP

April 25, 2008
Tampa, Florida
Certified Public Accountants

CLAIRE’S STORES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS

		Successor Entity					Predecessor Entity
		February 2, 2008					February 3, 2007
		(In thousands, except share and per share amounts)
ASSETS
Current assets:
Cash and cash equivalents		$	85,974				$	340,877
Inventories			117,679					121,119
Prepaid expenses			37,315					35,565
Other current assets			37,658					41,081
Total current assets			278,626					538,642
Property and equipment:
Land and building			22,288					17,350
Furniture, fixtures and equipment			130,130					283,556
Leasehold improvements			211,163					288,499
			363,581					589,405
Less accumulated depreciation and amortization			(53,972	)				(324,080	)
			309,609					265,325
Intangible assets, net			777,130					51,582
Deferred financing costs, net of accumulated amortization of $7,079			70,511					—
Other assets			71,754					34,775
Goodwill			1,840,867					200,942
			2,760,262					287,299
Total assets		$	3,348,497				$	1,091,266
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Trade accounts payable		$	56,089				$	56,323
Current portion of long-term debt			14,500					—
Income taxes payable			12,191					35,102
Accrued interest payable			19,536					—
Accrued expenses and other liabilities			117,076					104,026
Total current liabilities			219,392					195,451
Long-term debt			2,363,250					—
Deferred tax liability			139,506					19,424
Deferred rent expense			10,572					26,125
Other liabilities			10,577					2,604
			2,523,905					48,153
Commitments and contingencies			—					—
Stockholders’ equity:
Preferred stock par value $1.00 per share; authorized 1,000,000 shares, issued and outstanding 0 shares (Predecessor Entity)			—					—
Class A common stock par value $0.05 per share; authorized 40,000,000 shares, issued and outstanding 4,869,041 shares (Predecessor Entity)			—					243
Common stock par value $0.001 per share; authorized 1,000 shares; issued and outstanding 100 shares (Successor Entity); par value $0.05 per share; authorized 300,000,000 shares, issued and outstanding 88,202,733 shares (Predecessor Entity)			—					4,410
Additional paid-in capital			601,201					75,486
Accumulated other comprehensive income, net of tax			3,358					33,956
Retained earnings			641					733,567
			605,200					847,662
Total liabilities and stockholders’ equity		$	3,348,497				$	1,091,266

See accompanying notes to consolidated financial statements.

CLAIRE’S STORES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(in thousands)

		Successor Entity					Predecessor Entity
		May 29, 2007					February 4, 2007
		Through					Through				Fiscal Year Ended
		February 2,					May 28,				February 3,				January 28,
		2008					2007				2007				2006
Net sales		$	1,085,932				$	424,899			$	1,480,987			$	1,369,752
Cost of sales, occupancy and buying expenses			521,384					206,438				691,646				625,866
Gross profit			564,548					218,461				789,341				743,886
Other expenses (income):
Selling, general and administrative			358,353					154,482				481,979				449,430
Depreciation and amortization			61,451					19,652				56,771				48,900
Transaction-related costs			7,319					72,672				—				—
Other income			(3,088	)				(1,476	)			(3,484	)			(4,622	)
			424,035					245,330				535,266				493,708
Operating income (loss)			140,513					(26,869	)			254,075				250,178
Interest expense (income), net			147,892					(4,876	)			(14,575	)			(9,493	)
Income (loss) before income taxes			(7,379	)				(21,993	)			268,650				259,671
Income tax expense (benefit)			(8,020	)				21,779				79,888				87,328
Net income (loss)		$	641				$	(43,772	)		$	188,762			$	172,343
Net income (loss)		$	641				$	(43,772	)		$	188,762			$	172,343
Foreign currency translation and interest rate swap adjustments			3,358					8,440				12,920				(7,005	)
Comprehensive income (loss)		$	3,999				$	(35,332	)		$	201,682			$	165,338

See accompanying notes to consolidated financial statements.

CLAIRE’S STORES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(In thousands, except per share amounts)

		Number of								Number of												Accumulated
		shares of				Class A				shares of								Additional				other
		Class A				common				common				Common				paid-in				comprehensive				Retained
Predecessor Entity		common stock				stock				stock				stock				capital				income, net				earnings				Total
Balance: January 29, 2005			5,125			$	256				93,858			$	4,693			$	50,477			$	28,041			$	672,220			$	755,687
Net income			—				—				—				—				—				—				172,343				172,343
Class A common stock converted to common stock			(229	)			(11	)			229				11				—				—				—				—
Cash dividends ($0.65 per common share and $0.325 per Class A common share)			—				—				—				—				—				—				(62,886	)			(62,886	)
Stock options exercised, including tax benefit			—				—				323				17				5,727				—				—				5,744
Acceleration of stock options			—				—				—				—				314				—				—				314
Restricted stock, net of unearned compensation			—				—				171				8				1,122				—				—				1,130
Long-term incentive plan			—				—				—				—				2,991				—				—				2,991
Foreign currency translation adjustment, net of tax			—				—				—				—				—				(7,005	)			—				(7,005	)
Balance: January 28, 2006			4,896				245				94,581				4,729				60,631				21,036				781,677				868,318
Net income			—				—				—				—				—				—				188,762				188,762
Class A common stock converted to common stock			(27	)			(2	)			27				2				—				—				—				—
Cash dividends ($0.40 per common share and $0.20 per Class A common share)			—				—				—				—				—				—				(37,553	)			(37,553	)
Stock options exercised, including tax benefit			—				—				619				31				12,618				—				—				12,649
Stock repurchased			—				—				(7,097	)			(356	)			—				—				(199,319	)			(199,675	)
Restricted stock, net of unearned compensation			—				—				19				1				1,287				—				—				1,288
Long-term incentive plan			—				—				54				3				950				—				—				953
Foreign currency translation adjustment, net of tax			—				—				—				—				—				12,920				—				12,920
Balance: February 3, 2007			4,869				243				88,203				4,410				75,486				33,956				733,567				847,662
Net loss for period from February 4, 2007 to May 28, 2007			—				—				—				—				—				—				(43,772	)			(43,772	)
Cash dividends ($0.18 per common share and $0.09 per Class A common share)			—				—				—				—				—				—				(16,317	)			(16,317	)
Stock options exercised, including tax benefits			—				—				—				—				177				—				—				177
Restricted stock			—				—				—				—				1,851				—				—				1,851
Option conversion payment			—				—				—				—				(7,924	)			—				—				(7,924	)
Tax benefit from options			—				—				—				—				2,885				—				—				2,885
Long-term incentive plan, net of amounts reclassified as liabilities upon acquisition			—				—				—				2				(933	)			—				—				(931	)
Foreign currency translation adjustment, net of tax			—				—				—				—				—				8,440				—				8,440
Balance: May 28, 2007			4,869				243				88,203				4,412				71,542				42,396				673,478				792,071
Successor Entity
Acquisition transaction			(4,869	)			(243	)			(88,103	)			(4,412	)			524,133				(42,396	)			(673,478	)			(196,396	)
Capital contribution			—				—				100				—				595,675				—				—				595,675
Net income for period May 29, 2007 to February 2, 2008			—				—				—				—				—				—				641				641
Stock option expense			—				—				—				—				5,092				—				—				5,092
Restricted stock, net of unearned compensation			—				—				—				—				434				—				—				434
Foreign currency translation adjustment and unrealized loss on interest rate swaps, net of tax			—				—				—				—				—				3,358				—				3,358
Balance: February 2, 2008			—			$	—				100			$	—			$	601,201			$	3,358			$	641			$	605,200