<PAGE>

                     SECURITIES AND EXCHANGE COMMISSION
                           WASHINGTON, D.C. 20549

                                  FORM 10-Q

(MARK ONE)
[X]       QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
          OF THE SECURITIES EXCHANGE ACT OF 1934

                For the quarterly period ended August 1, 1998
                          
                                     OR

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

            For the transition period from          to         
                                           --------    --------

                       Commission file number 0-11822

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

                           MICHAELS STORES, INC.
           (Exact name of registrant as specified in its charter)

         DELAWARE                                    75-1943604
(State of incorporation)                          (I.R.S. employer
                                               identification number)

                8000 BENT BRANCH DRIVE, IRVING, TEXAS  75063
                  P.O. BOX 619566, DFW, TEXAS  75261-9566
        (Address of principal executive offices, including zip code)

                               (972) 409-1300
            (Registrant's telephone number, including area code)

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

     INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS 
REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 
1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE 
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO 
SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS.    YES X   NO   
                                                     ---    ---

     INDICATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE REGISTRANT'S 
CLASSES OF COMMON STOCK, AS OF THE LATEST PRACTICABLE DATE.

<TABLE>
<CAPTION>
                                              SHARES OUTSTANDING AS OF
         TITLE                                   SEPTEMBER 9, 1998
         -----                                   -----------------
<S>                                           <C>
Common stock, par value $.10 per share               29,668,794  
</TABLE>

<PAGE>

                           MICHAELS STORES, INC
                                 FORM 10-Q
                       PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

                           MICHAELS STORES, INC.
                        CONSOLIDATED BALANCE SHEETS
                      (In thousands except share data)
                                

<TABLE>
<CAPTION>
                                         August 1, 1998  January 31, 1998
                                         --------------  ----------------
                                          (Unaudited)
<S>                                      <C>             <C>
ASSETS

CURRENT ASSETS:
  Cash and equivalents                     $  42,918        $ 162,283
  Merchandise inventories                    553,851          385,580
  Income taxes receivable and
    deferred income taxes                     11,292           11,291
  Prepaid expenses and other                  19,204           14,029
                                         --------------  ----------------
    Total current assets                     627,265          573,183
                                         --------------  ----------------

PROPERTY AND EQUIPMENT, AT COST              353,755          331,755
  Less accumulated depreciation             (157,245)        (138,719)
                                         --------------  ----------------
                                             196,510          193,036
                                         --------------  ----------------

COSTS IN EXCESS OF NET ASSETS OF
  ACQUIRED OPERATIONS, NET                   134,893          136,827
DEFERRED INCOME TAXES                          2,694            2,695
OTHER ASSETS                                   2,519            2,753
                                         --------------  ----------------
                                             140,106          142,275
                                         --------------  ----------------
                                           $ 963,881        $ 908,494
                                         --------------  ----------------
                                         --------------  ----------------

LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES:
  Accounts payable                         $ 149,755        $ 109,456
  Accrued liabilities and other               99,785          105,036
                                         --------------  ----------------
    Total current liabilities                249,540          214,492
                                         --------------  ----------------

SENIOR NOTES                                 125,000          125,000
CONVERTIBLE SUBORDINATED NOTES                96,940           96,940
OTHER LONG-TERM LIABILITIES                   28,927           30,151
                                         --------------  ----------------
    Total long-term liabilities              250,867          252,091
                                         --------------  ----------------
                                             500,407          466,583
                                         --------------  ----------------

COMMITMENTS AND CONTINGENCIES

STOCKHOLDERS' EQUITY:
  Common stock, 29,661,386 shares
    outstanding                                2,966            2,903
  Additional paid-in capital                 366,810          350,977
  Retained earnings                           93,698           88,031
                                         --------------  ----------------
    Total stockholders' equity               463,474          441,911
                                         --------------  ----------------
                                           $ 963,881        $ 908,494
                                         --------------  ----------------
                                         --------------  ----------------
</TABLE>

        See accompanying notes to consolidated financial statements.


                                      2

<PAGE>

                            MICHAELS STORES, INC.
                    CONSOLIDATED STATEMENTS OF OPERATIONS
                     (In thousands except per share data)
                                 (Unaudited)

<TABLE>
<CAPTION>
                                                        Quarter Ended       
                                                 --------------------------
                                                 August 1,        August 2,
                                                   1998             1997    
                                                 ---------        ---------
<S>                                              <C>              <C>
NET SALES                                        $314,171         $278,038

Cost of sales and occupancy expense               215,325          190,998
Selling, general and administrative
  expense                                          90,942           85,393
Store pre-opening costs                             2,283              154
                                                 ---------        ---------
OPERATING INCOME                                    5,621            1,493

Interest expense                                    5,580            5,702
Other (income) and expense, net                      (982)             461
                                                 ---------        ---------

INCOME (LOSS) BEFORE INCOME TAXES                   1,023           (4,670)
Provision (benefit) for income taxes                  389           (1,775)
                                                 ---------        ---------

NET INCOME (LOSS)                                $    634         $ (2,895)
                                                 ---------        ---------
                                                 ---------        ---------

EARNINGS (LOSS) PER COMMON SHARE:
  Basic                                             $0.02           $(0.11)
  Diluted                                           $0.02           $(0.11)

COMMON SHARES USED IN PER SHARE CALCULATIONS:
  Basic                                            29,602           26,299
  Diluted                                          31,408           26,299
</TABLE>

        See accompanying notes to consolidated financial statements.


                                      3

<PAGE>

                            MICHAELS STORES, INC.
                    CONSOLIDATED STATEMENTS OF OPERATIONS
                     (In thousands except per share data)
                                 (Unaudited)

<TABLE>
<CAPTION>
                                                       Six Months Ended 
                                                 --------------------------
                                                 August 1,        August 2,
                                                   1998             1997    
                                                 ---------        ---------
<S>                                              <C>              <C>
NET SALES                                        $649,941         $599,356

Cost of sales and occupancy expense               440,199          411,126
Selling, general and administrative
  expense                                         187,503          177,277
Store pre-opening costs                             4,071              154
                                                 ---------        ---------
OPERATING INCOME                                   18,168           10,799

Interest expense                                   11,283           11,444
Other income, net                                  (3,010)          (1,088)
                                                 ---------        ---------

INCOME BEFORE INCOME TAXES                          9,895              443
Provision for income taxes                          3,760              168
                                                 ---------        ---------

NET INCOME                                       $  6,135         $    275
                                                 ---------        ---------
                                                 ---------        ---------

EARNINGS PER COMMON SHARE:
  Basic                                             $0.21            $0.01
  Diluted                                           $0.20            $0.01

COMMON SHARES USED IN PER SHARE CALCULATIONS:
  Basic                                            29,462           25,764
  Diluted                                          31,342           26,882
</TABLE>
          See accompanying notes to consolidated financial statements.


                                      4

<PAGE>

                            MICHAELS STORES, INC.
                    CONSOLIDATED STATEMENTS OF CASH FLOWS
                                (In thousands)
                                 (Unaudited)

<TABLE>
<CAPTION>
                                                      Six Months Ended     
                                                   -----------------------
                                                   August 1,     August 2,
                                                     1998          1997    
                                                   ---------     ---------
<S>                                                <C>           <C>
OPERATING ACTIVITIES:
  Net income                                       $  6,135      $    275 
  Adjustments:            
    Depreciation                                     21,064        20,178
    Amortization                                      2,141         2,114
    Other                                               558           802
    Change in assets and liabilities:
      Merchandise inventories                      (168,271)      (69,614)
      Prepaid expenses and other                     (5,175)       (2,657)
      Deferred income taxes and other                  (500)        4,897 
      Accounts payable                               40,299        (7,235)
      Accrued liabilities and other                  (3,295)       (9,573)
                                                   ---------     ---------
        Net change in assets and liabilities       (136,942)      (84,182)
                                                   ---------     ---------
        Net cash used in operating activities      (107,044)      (60,813)
                                                   ---------     ---------

INVESTING ACTIVITIES:
  Additions to property and equipment               (41,510)      (15,836)
  Net proceeds from sales of property
    and equipment                                    19,155         1,594
  Net proceeds from sales of investments                 -          3,386
                                                   ---------     ---------
        Net cash used in investing activities       (22,355)      (10,856)
                                                   ---------     ---------

FINANCING ACTIVITIES:
  Payment of other long-term liabilities             (2,555)       (2,065)
  Proceeds from stock options exercised               6,461        50,172 
  Proceeds from issuance of common stock 
    and other                                         6,128            -- 
                                                   ---------     ---------
        Net cash provided by financing 
          activities                                 10,034        48,107 
                                                   ---------     ---------

NET DECREASE IN CASH AND EQUIVALENTS               (119,365)      (23,562)
CASH AND EQUIVALENTS AT BEGINNING OF PERIOD         162,283        59,069 
                                                   ---------     ---------

CASH AND EQUIVALENTS AT END OF PERIOD              $ 42,918      $ 35,507 
                                                   ---------     ---------
                                                   ---------     ---------
</TABLE>

         See accompanying notes to consolidated financial statements.


                                      5

<PAGE>

                           MICHAELS STORES, INC.
                 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  For the Six Months Ended August 1, 1998
                                (Unaudited)

NOTE A - BASIS OF PRESENTATION

     The accompanying consolidated financial statements are unaudited (except 
for the Consolidated Balance Sheet as of January 31, 1998) and have been 
prepared in accordance with generally accepted accounting principles for 
interim financial information and with the instructions to Form 10-Q and 
Article 10 of Regulation S-X.  Accordingly, they do not include all of the 
information and footnotes required by generally accepted accounting 
principles for complete financial statements.  In the opinion of management, 
all adjustments (consisting of normal recurring accruals) considered 
necessary for a fair presentation have been included.  Because of the 
seasonal nature of the Company's business, the results of operations for the 
three and six months ended August 1, 1998 are not indicative of the results 
to be expected for the entire year.  Certain fiscal 1997 amounts have been 
reclassified to conform to the fiscal 1998 presentation. For further 
information, refer to the consolidated financial statements and footnotes 
thereto included in the Company's annual report on Form 10-K for the year 
ended January 31, 1998.

NOTE B - SUPPLEMENTAL CASH FLOW INFORMATION

     Investing and financing activities not affecting cash during the six 
months ended August 1, 1998 included additions to property and equipment 
through capital lease obligations of $2,390,000 related to the acquisition of 
new computer equipment.

NOTE C - DEBT

In August 1998, the Company replaced its Credit Agreement and entered into a 
new unsecured revolving credit agreement with BankBoston, N.A. and other 
lending institutions (the "Revolving Credit Agreement") providing for a 
revolving loan of $100 million which may be increased to $125 million 
pursuant to certain terms and conditions as set forth in the Revolving Credit 
Agreement.  Borrowings available under the Revolving Credit Agreement are 
reduced by the aggregate amount of letters of credit outstanding.  The 
interest rate on the Revolving Credit Agreement is generally (a) the higher 
of (i) an annual rate of interest announced from time to time by BankBoston, 
N.A. or (ii) one-half of one percent (1/2%) above the Federal Funds Effective 
Rate or (b) the Eurodollar Rate as defined by the Revolving Credit Agreement. 
The Company is required to pay a commitment fee of up to .3% on the unused 
portion of the revolving line of credit. The Revolving Credit Agreement 
provides certain annual restrictions on the aggregate amount of capital 
expenditures, restricts the payment of dividends and requires that the 
Company maintain compliance with various financial ratios. The Revolving 
Credit Agreement expires in August 2001.

NOTE D - CONTINGENCIES

     A lawsuit was commenced against the Company and several other parties on 
September 19, 1994 in the Superior Court of Stanislaus County, California, on 
behalf of a former employee, Naomi Snyder, her child, and her husband.  The 
complaint alleges that the former employee and her then-unborn child were 
exposed to excessive levels of carbon monoxide in one of the Company's stores 
caused by a propane gas powered floor buffer which was operated by an outside 
cleaning service, resulting, among other things, in severe and permanent 


                                      6

<PAGE>

injuries to the child.  Plaintiffs' Statement of Damages, filed on or about 
January 26, 1995, seeks $11 million.  On April 10, 1995 the trial court ruled 
the plaintiff's pleadings did not state a cause of action against the Company 
upon which relief could be granted.  However, the ruling by the trial court 
was overturned by the Court of Appeals of the State of California, Fifth 
Appellate District, on September 23, 1996.  On October 30, 1997, the 
California Supreme Court sustained the appellate court ruling and remanded 
the case to the trial court.  A settlement agreement has been reached by the 
parties and the Company's portion of the settlement amount is expected to be 
fully covered by insurance.

     The Company is a defendant from time to time in lawsuits incidental to 
its business.  Based on currently available information, the Company believes 
that resolution of all known contingencies is uncertain, and there can be no 
assurance that future costs related to such litigation would not be material 
to the Company's financial position or results of operations.

NOTE E - EARNINGS PER SHARE

   The following table sets forth the computation of basic and diluted 
earnings per common share:

<TABLE>
<CAPTION>
                                     Quarter Ended         Six Months Ended 
                                  -------------------    -------------------
                                  August 1, August 2,    August 1, August 2,
                                    1998      1997         1998      1997  
                                  --------- ---------    --------- ---------
                                    (In thousands except per share amounts)
<S>                               <C>       <C>          <C>       <C>
Numerator:
  Net income (loss)                 $   634   $(2,895)     $ 6,135   $  275
                                  --------- ---------    --------- ---------
                                  --------- ---------    --------- ---------

Denominator:
  Denominator for basic
    earnings per share-weighted 
    average shares                   29,602    26,299       29,462   25,764

Effect of dilutive securities:
  Employee stock options              1,806        -         1,880    1,118 
                                  --------- ---------    --------- ---------

Denominator for diluted
earnings per share-adjusted 
weighted average shares and
assumed conversions                  31,408    26,299       31,342   26,882
                                  --------- ---------    --------- ---------
                                  --------- ---------    --------- ---------

Basic earnings (loss) per 
  common share                        $0.02    $(0.11)       $0.21    $0.01
                                  --------- ---------    --------- ---------
                                  --------- ---------    --------- ---------

Diluted earnings (loss) per
  common share                        $0.02    $(0.11)       $0.20    $0.01
                                  --------- ---------    --------- ---------
                                  --------- ---------    --------- ---------
</TABLE>

     The convertible subordinated notes were not included in the diluted 
earnings per common share calculation because they were antidilutive for the 
periods presented.  The convertible subordinated notes could potentially 
affect diluted earnings per common share in the future.


                                      7

<PAGE>

NOTE F - STORE PRE-OPENING COSTS

     In April 1998, the AICPA issued Statement of Position 98-5 ("SOP 98-5"), 
REPORTING THE COSTS OF START-UP ACTIVITIES, which requires that costs related 
to start-up activities be expensed as incurred.  Prior to fiscal 1998, the 
Company deferred store pre-opening costs until the fiscal year in which the 
store opened.  The Company adopted the provisions of SOP 98-5 in its 
financial statements for the first quarter of fiscal 1998 and, as a result, 
began expensing pre-opening costs as incurred.


                                      8

<PAGE>

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
          CONDITION AND RESULTS OF OPERATIONS

GENERAL

     Certain statements contained in this discussion and analysis which are 
not historical facts are forward looking statements that involve risks and 
uncertainties, including, but not limited to, customer demand and trends in 
the arts and crafts industry, related inventory risks due to shifts in 
customer demand, the effect of economic conditions, the impact of 
competitors' locations or pricing, the effectiveness of advertising 
strategies, the availability of acceptable real estate locations for new 
stores, difficulties with respect to new information system technologies and 
the Company's ability to address the Year 2000 Issue, supply constraints or 
difficulties, the results of financing efforts, and other risks detailed in 
the Company's Securities and Exchange Commission filings.

RESULTS OF OPERATIONS

     The following table sets forth the percentage relationship to net sales 
of each line item of the Company's Consolidated Statements of Operations.  
This table should be read in conjunction with the following discussion and 
with the Company's Consolidated Financial Statements, including the related 
notes.

<TABLE>
<CAPTION>
                                          Quarter Ended         Six Months Ended   
                                       -------------------    --------------------
                                       August 1, August 2,    August 1,  August 2,
                                         1998       1997        1998        1997  
                                       --------- ---------    ---------  ---------
     <S>                               <C>       <C>          <C>        <C>
     Net sales                            100.0%    100.0%       100.0%     100.0%
                                     
     Cost of sales and occupancy      
       expense                             68.5      68.7         67.7       68.6
     Selling, general and            
       administrative expense              29.0      30.7         28.9       29.6
     Store pre-opening costs                0.7       0.1          0.6        0.0
                                       --------- ---------    ---------  ---------
                                     
     Operating income                       1.8       0.5          2.8        1.8
                                     
     Interest expense                       1.8       2.0          1.7        1.9
     Other (income) and expense,      
       net                                 (0.3)      0.2         (0.4)      (0.2)
                                       --------- ---------    ---------  ---------
                                     
     Income (loss) before income     
       taxes                                0.3      (1.7)         1.5        0.1
     Provision (benefit) for income
       taxes                                0.1      (0.7)         0.6        0.0 
                                       --------- ---------    ---------  ---------
                                     
     Net income (loss)                      0.2%     (1.0)%        0.9%       0.1%
                                       --------- ---------    ---------  ---------
                                       --------- ---------    ---------  ---------
</TABLE>

     In the discussion below, all percentages given for expense items are 
calculated as a percentage of net sales.


                                      9

<PAGE>

QUARTER ENDED AUGUST 1, 1998 COMPARED TO THE
  QUARTER ENDED AUGUST 2, 1997

     Net sales in the second quarter of fiscal 1998 increased $36.1 million, 
or 13%, over the second quarter of fiscal 1997.  The results for the second 
quarter of fiscal 1998 included sales from 33 Michaels and 4 Aaron Brothers 
stores that were opened during the 12-month period ended August 1, 1998. 
During the second quarter, sales at the new stores (net of 4 closures) 
accounted for an increase of $18.0 million.  Same-store sales increased 7% in 
the second quarter of fiscal 1998 compared to the second quarter of fiscal 
1997, which contributed $18.1 million to the net sales increase.  The sales 
increases were driven by increases in the Company's core categories of art 
supplies, floral, ribbon and hobbies. By utilizing the information provided 
by our point-of-sale system to continue to improve our store in-stock 
position in top-selling items and properly allocating seasonal merchandise to 
the stores based upon anticipated sales trends, we expect same-store sales 
increases to continue. 

     Cost of sales and occupancy expense, as a percentage of net sales, for 
the second quarter of fiscal 1998 was 68.5%, a decrease of 0.2% compared to 
the second quarter of fiscal 1997.  This decrease was primarily attributable 
to better leveraging of occupancy expense and reduced remodel expenses 
compared to the second quarter of fiscal 1997.

     Selling, general and administrative expense, as a percentage of net 
sales, decreased by 1.7% in the second quarter of fiscal 1998 compared to the 
second quarter of fiscal 1997.  This decrease was due to reduced legal and 
professional fees, and to improved expense leverage in store labor and all 
other categories of store operating expenses.

     Store pre-opening costs, as a percentage of net sales, increased by 0.6% 
in the second quarter of fiscal 1998 compared to the second quarter of fiscal 
1997 as the Company adopted a change in accounting rules requiring that store 
pre-opening costs be expensed as incurred.  See Note F in the Notes to 
Consolidated Financial Statements.

                                     10

<PAGE>

SIX MONTHS ENDED AUGUST 1, 1998 COMPARED TO THE
  SIX MONTHS ENDED AUGUST 2, 1997

     Net sales in the first six months of fiscal 1998 increased $50.6 
million, or 8%, over the first six months of fiscal 1997.  The results for 
the first six months of fiscal 1998 included sales from 33 Michaels and 4 
Aaron Brothers stores that were opened during the 12-month period ended 
August 1, 1998.  During the first six months, sales of the new stores (net of 
11 closures) accounted for an increase of $26.0 million.  Same-store sales 
increased 4% in the first six months of fiscal 1998 compared to the first six 
months of fiscal 1997, which contributed $24.6 million to the net sales 
increase.  The improvement in same-store sales performance was due to a 
strong performance in the Company's core categories of art supplies, ribbon, 
needlecrafts and hobbies.

     Cost of sales and occupancy expense, as a percentage of net sales, for 
the first six months of fiscal 1998 decreased by 0.9% compared to the first 
six months of fiscal 1997.  This decrease was principally due to improved 
gross margins, reduced remodel expenses, and an improved leveraging of fixed 
occupancy costs.

     Selling, general and administrative expense, as a percentage of net 
sales, decreased by 0.7% in the first six months of fiscal 1998 compared to 
the first six months of fiscal 1997.  This decrease was due to reduced legal 
and professional fees, and to improved expense leverage in store labor and 
nearly all other categories of store operating expenses with the exception of 
advertising, which reflects the impact of increased grand openings and higher 
costs associated with production and distribution of print advertising during 
the first six months of fiscal 1998 compared to the prior year.

     Store pre-opening costs of $4.1 million, or 0.6% as a percentage of net 
sales, were recognized in the first six months of fiscal 1998 as the Company 
adopted a change in accounting rules requiring that store pre-opening costs 
be expensed as incurred. See Note F in the Notes to Consolidated Financial 
Statements.


                                     11

<PAGE>

LIQUIDITY AND CAPITAL RESOURCES

     Cash flow used by operating activities during the first six months of 
fiscal 1998 was $107.0 million compared to $60.8 million of cash flow used by 
operating activities during the first six months of fiscal 1997.  These 
results are consistent with the Company's plan to build inventory and open 
and relocate stores early in the fiscal year.  Inventories per Michaels store 
increased 24% to $1,117,000 at August 1, 1998 compared to $904,000 at August 
2, 1997 as a result of increasing the number of items replenished by the 
Company's distribution centers from approximately 6,200 in the prior year to 
approximately 11,000 in fiscal 1998, and to an earlier receipt of fall basic 
product compared to the previous year.

     The Company opened 28 Michaels and 1 Aaron Brothers stores and relocated 
7 Michaels and 4 Aaron Brothers stores during the first six months of fiscal 
1998. Capital expenditures for the newly opened stores amounted to 
approximately $19.0 million. Additional capital expenditures of approximately 
$22.5 million during the first six months of fiscal 1998 related primarily to 
existing stores, and for interim construction costs for the relocation of the 
Company's California distribution center, and various systems enhancements.  
The Company completed two sale/leaseback transactions for the California 
distribution facility and a portion of its equipment during the second 
quarter of fiscal 1998 with gross proceeds amounting to $19.0 million.  The 
Company expects additional capital expenditures during the remainder of 
fiscal 1998 to total approximately $38 to $43 million, relating primarily to 
costs for new stores, store relocations and remodeling, merchandising and 
other information systems and various other projects.

     At August 1, 1998, the Company had working capital of $377.7 million 
compared to $358.7 million at January 31, 1998.  At August 1, 1998, the 
Company had a bank credit agreement ("Credit Agreement") which provided for 
an unsecured revolving line of credit of up to $100 million.  There were no 
borrowings outstanding on the revolving line of credit at any time during 
fiscal 1997 or the first six months of fiscal 1998.  In August 1998, the 
Company replaced its Credit Agreement and entered into a new unsecured 
revolving credit agreement with BankBoston, N.A. and other lending 
institutions (the "Revolving Credit Agreement") providing for a revolving 
loan of $100 million which may be increased to $125 million pursuant to 
certain terms and conditions as set forth in the Revolving Credit Agreement.  
Borrowings available under the Revolving Credit Agreement are reduced by the 
aggregate amount of letters of credit outstanding.  The interest rate on the 
Revolving Credit Agreement is generally (a) the higher of (i) an annual rate 
of interest announced from time to time by BankBoston, N.A. or (ii) one-half 
of one percent (1/2%) above the Federal Funds Effective Rate or (b) the 
Eurodollar Rate as defined by the Revolving Credit Agreement.  The Company is 
required to pay a commitment fee of up to .3% on the unused portion of the 
revolving line of credit.  The Revolving Credit Agreement provides certain 
annual restrictions on the aggregate amount of capital expenditures, 
restricts the payment of dividends and requires that the Company maintain 
compliance with various financial ratios.  The Revolving Credit Agreement 
expires in August 2001.  Management believes that the Company's available 
cash, funds generated by operating activities, funds available under the 
Revolving Credit Agreement and lease financing, should be sufficient to 
finance continuing operations and sustain current growth plans.  Management 
believes that the Company can finance an annual store expansion at a rate of 
12% to 15% (on a square footage basis) from internally generated cash flow.


                                     12

<PAGE>

                           MICHAELS STORES, INC.
                                 FORM 10-Q
                        PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

     For a description of legal proceedings, see Note D to "Notes to
     Consolidated Financial Statements," which description is incorporated
     herein by this reference.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a)  Exhibits

     Exhibit 4 - Credit Agreement dated as of August  28, 1998 among 
     Michaels Stores, Inc., BankBoston, N.A. and the other lenders 
     signatory thereto.

     Exhibit 27 - Financial Data Schedule.

(b)  Reports on Form 8-K

No reports on Form 8-K were filed by the Company during the period covered by 
this report.


                                     13

<PAGE>

                           MICHAELS STORES, INC.

                                 SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the 
registrant has duly caused this report to be signed on its behalf by the 
undersigned thereunto duly authorized.

MICHAELS STORES, INC.

By:  /s/ Bryan M. DeCordova      
    -----------------------------
    Bryan M. DeCordova
    Executive Vice President and
    Chief Financial Officer
    (Principal Financial Officer)

Dated: September 15, 1998


                                     14

<PAGE>

                               EXHIBIT INDEX

<TABLE>
<CAPTION>

EXHIBIT
NUMBER                               DESCRIPTION                         PAGE
<C>                   <S>                                                <C>
4                     Credit Agreement dated as of August 28, 1998
                      among Michaels Stores, Inc., BankBoston, N.A.
                      and the other lenders signatory thereto.

27                    Financial Data Schedule

</TABLE>


                                     15