SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                   FORM 10-K


  X                     ANNUAL REPORT PURSUANT TO SECTION
              13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
                   For the fiscal year ended August 30, 1997
                                       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: 0-19194

                               RAG SHOPS, INC.                   
               (Exact name of registrant as specified in its charter)

             DELAWARE                                      51-0333503     
   (State or other jurisdiction                        (I.R.S. Employer
 of incorporation or organization)                  Identification Number)

         111 WAGARAW ROAD
      HAWTHORNE, NEW JERSEY                                   07506         
  (Address of principal executive                          (Zip Code)
            offices)

Registrant's telephone number including area code: (973) 423-1303

Securities registered pursuant to Section 12(b) of the Act:  NONE

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

                       COMMON STOCK, $.01 PAR VALUE
                             (Title of Class)

    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, and
(2) has been subject to such filing requirements for the past 90
days.  Yes    x       No       

    Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained herein, and
will not be contained, to the best of registrant's knowledge, in
definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this
Form 10-K.  Yes    x       No       <PAGE>

     As of October 20, 1997, there were outstanding 4,514,400
shares of Common Stock.  Based on the price at which such stock was
sold on that date, the approximate aggregate market value of such
shares held by non-affiliates was $6,531,544.


                   DOCUMENTS INCORPORATED BY REFERENCE

      Portions of the Registrant's 1997 Definitive Proxy Statement,
which statement will be filed not later than 120 days after the end
of the fiscal year covered by this Report, are incorporated by
reference in Part III hereof.

     Certain exhibits are incorporated by reference to the
Company's Registration Statement on Form S-1 and Amendment No. 1
thereto, as listed in response to Item 14(a)(3).

                 [The remainder of this page is intentionally blank.]<PAGE>

                                     PART I

ITEM 1. BUSINESS.

General

     Rag Shops, Inc., a Delaware corporation formed in April 1991,
is the successor by merger to a New Jersey corporation having the
same name which was incorporated in September 1984, as a holding
company for numerous subsidiaries that have operated retail stores
since 1963.  As of August 30, 1997, Rag Shops, Inc. operates 66
specialty retail stores which sell competitively priced fabric and
craft merchandise.  The Company caters to value conscious consumers
who sew and create decorative accessories.  The Company believes
that its wide selection of currently popular merchandise, value-
pricing policy and commitments to both customer service and
advertising are principal factors contributing to its
profitability.  The Company's stores are destination-oriented and
also attract shoppers from other stores located in the same
shopping center.

    As of August 30, 1997, the Company operated 33 retail stores
in New Jersey, 19 in Florida, seven in Pennsylvania, six in New
York and one in Connecticut. The Company anticipates opening two to
four stores, relocating one store and closing three stores during
the remainder of its fiscal year ending August 29, 1998.  The
Company's expansion strategy is to grow by expanding within areas
from which it presently attracts customers and into contiguous
market areas, enabling the Company to capitalize on pre-existing
advertising and name recognition.  The following table sets forth
information with respect to store openings and closings since
fiscal 1993:


                                                   Fiscal Years

                                    1997      1996     1995      1994     1993

Stores open at beginning of period    67        69       68        61       54
Stores opened during period            4         1        2         8       10
Stores closed during period            5         3        1         1        3
Stores open at end of period          66        67       69        68       61


Products

       The Company's stores offer a diverse and extensive assortment
of value-priced crafts, fabrics and related items to creative craft
and sewing consumers. For fiscal years 1995, 1996 and 1997, sales
of crafts accounted for approximately 66.2%, 65.3% and 67.3%
respectively, of the Company's net sales, and sales of fabrics
accounted for the remainder.

    Each of the Company's stores offers fabric, craft and related
products.  Fabric items available at the Company's stores include
apparel and home decorative fabrics, trimmings, patterns and sewing
notions.  Craft items include silk flowers, wicker, picture frames,
wood products, stitchery, yarn, wearable art, art supplies and
craft supplies. As of August 30, 1997, fifty-seven stores offer
custom picture framing.  The Company also sells a wide variety of
seasonal merchandise with special emphasis on the Easter, Back-to-
School, Halloween and Christmas seasons.

     Through their purchase of craft, fabric and other items, used
either individually or in combination, the Company's customers can
hand make a wide variety of finished products for personal use,
gifts, home beautification and seasonal decoration.  For example,
fabrics can be made into career, leisure, children's, bridal and
special occasion fashions, draperies and upholstery for home
decoration and hand made quilts and, from the Company's selection
of craft items, customers can create needle point and stitchery,
personalized hand painted apparel, floral arrangements and dolls.

Merchandising and Advertising

     The Company's marketing and merchandising strategy emphasizes
the sale of multiple products to be used by the customer to create
a single project.  To assist customers in making their own
selections and to encourage their purchase of several products, the
Company's stores display finished models that incorporate a variety
of merchandise in close proximity to where the components are sold.
The models are created by employees at the stores conforming to
Company guidelines.

    Craft or sewing classes are offered every week at a select
number of each of the Company's stores to further promote both
specific products and store business.  During each class,
participants complete a project using materials purchased from the
store at which the class is offered.  Merchandise instructional
demonstrations are held periodically at charitable organizations,
conventions and schools as an effective method of attracting
customers and generating the purchase of fabrics, crafts and
related merchandise necessary for the customer to create the
featured apparel.

           Merchandise at the Company's stores is displayed on
conveniently arranged fabric tables and fixtures to facilitate
customer access.  The general layout of merchandise, adjusted
seasonally and as otherwise necessary to adapt to marketing
conditions, is planned by the Company's management to give
prominence to the types of merchandise currently in demand.

    Approximately five percent of the Company's sales is expended
for a 52 week per year advertising program. In September 1996 the
Company commenced utilizing free standing newspaper inserts,
alternating with newspaper print advertisements. These newspaper
inserts are also displayed at the front of each store and describe
a calendar of promotions emphasizing special sale items, seasonal
products and other currently popular merchandise. Previously the
Company utilized direct mail, newspaper print, weekly in-store
promotions and television in the New Jersey metropolitan area and
in Florida. The free standing newspaper inserts are received by
approximately 3 million people as compared to the direct mail
previously utilized that was received by approximately 1 million
people.

    For the Back-to-School season and holiday seasons of Easter,
Halloween and Christmas, the Company utilizes a fully developed
merchandising program including special inventory, layout,
instructional ideas and promotions with highly focused displays. 
During these peak seasons approximately 25% of store selling space
is devoted to seasonal merchandise.

Seasonality

    The Company's business is seasonal, which the Company believes
is typical of the retail fabric and craft industry.  The Company's
highest sales and earnings levels historically occur between
September and December. The Company has generally operated at a
loss during its fourth fiscal quarter, the June through August
summer period. The Company's results of operations depend
significantly upon the sales generated from September through
December and any material decrease in sales for such period could
have a material adverse effect upon the Company's profitability. 
See "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Seasonality."

Store Operations

    The Company's store operations are divided into six geographic
districts, each managed by a district manager.  Stores typically
are staffed with a manager, an assistant manager, one department
head each for fabrics and crafts, sales personnel, cashiers and
stock clerks.

          District managers supervise store management, monitor the
Company's stores to ensure compliance with procedures, policies and
budgets, determine whether adequate levels of merchandise are
available at the stores and reallocate merchandise among stores as
dictated by selling trends at individual stores.  Store managers
are responsible for operation of individual stores, including
recruiting and hiring store personnel.

      Store managers place orders to replenish inventory from the
Company's 85,000 square foot distribution center in Paterson, New
Jersey, and may also directly order certain core merchandise
designated by management from the Company's suppliers.  Orders for
merchandise stocked in the distribution center are placed by the
store manager on a regular basis through a computer in the store. 
Deliveries from the distribution center are made by Company-owned
vehicles or by independent trucking companies.

     Stores are generally open from 10:00 A.M. to 9:00 P.M. Monday
through Saturday and 11:00 A.M. to 6:00 P.M. on Sunday, with
extended hours during the  Christmas season. All stores are
operating with point-of-sale cash register systems as of July 1997.
Approximately 73% of receipts at the Company's stores are for cash
or check, with the balance paid for with MasterCard, Visa, Discover
or American Express. The average sale is approximately $12.00.

Expansion Strategy

      While management does not believe there are significant
geographic constraints on the locations of future stores, the
Company's strategy is to grow by expanding within areas from which
it presently attracts customers and into contiguous market areas,
enabling the Company to capitalize on pre-existing advertising and
name recognition. When deciding whether to open a new store, the
principal factors the Company typically evaluates are the amount of
consumer traffic generated by the market area, the demographic
composition of the customer base in the market area, store position
in the shopping center, rent structure, available media,
advertising expense, and other costs associated with opening the
store.  Historically, stores tend to become profitable after six to
twenty-four months.

Sources of Supply

        The Company purchases its merchandise from more than 300
suppliers. The Company's merchandise is primarily purchased from
domestic suppliers (including distributors that import goods from
the Far East) and the balance is acquired directly from
manufacturers in the Far East, including Hong Kong, Taiwan, Korea,
China and the Philippines. All of the merchandise purchased
directly from foreign manufacturers, consisting primarily of silk
flowers, seasonal merchandise and staple craft products, is sold
under the Company's private label. As is customary in the industry,
the Company does not have any long-term or exclusive contracts with
any suppliers. The Company believes that alternate sources of
merchandise are readily available at comparable prices.

           Consistent with industry practice, merchandise from
manufacturers in the Far East is ordered four to six months in
advance to assure delivery prior to the selling season for the
merchandise.  Letters of credit are issued to the foreign
manufacturers with specific terms regarding the merchandise
ordered, inspection prior to shipment and time and place of
delivery.  The Company assumes the risk of loss on a F.O.B. basis
when goods are delivered to a shipper and is insured against
casualty losses arising during shipping.

<PAGE>

Competition

      The retail craft and fabric industry (the "Industry") is
highly competitive. The Company competes with other national,
regional and independent specialty craft and/or fabric retailers
and mass merchandisers, some of which have greater financial and
other resources than the Company. The Company believes it competes
on the basis of merchandise selection, customer service, price and
advertising. Competitors include A.C. Moore, Fabri-Centers of
America, Inc., and Michaels Stores, Inc.

Employees

       As of August 30, 1997, the Company has approximately 1,080
employees, consisting of approximately 320 full time and 760 part
time employees. Full time personnel consist of approximately 190
salaried and 130 hourly employees. All part time personnel are
hourly employees. During seasonal peak periods, the Company hires
temporary personnel. Approximately 35 employees in the Company's
distribution center are covered by a collective bargaining
agreement with Local 161 of the Union Of Needletrades, Industrial
And Textile Employees, AFL-CIO. This agreement expires in March
1999. The Company considers its relationships with its employees to
be good. 


Trademarks

     The Company's trademark "THE RAG SHOP" was registered in the
United States Patent Office on September 9, 1969 and thereafter
renewed.  This registration is renewable indefinitely so long as
the mark is used by the Company.  

ITEM 2.  PROPERTIES.

      The Company's office facilities and its Hawthorne, New Jersey
store occupy approximately 15,900 and 17,600 square feet,
respectively, in the same strip shopping center in Hawthorne, New
Jersey. The store and offices are leased from Momar Realty L.L.C.,
the two members of which are Stanley Berenzweig, Chairman of the
Board and Doris Berenzweig, Secretary.  The Company's distribution
center and all of its other stores are leased from non-affiliates
of the Company.

        The Company's 85,000 square foot distribution center is
located in Paterson, New Jersey. The Company believes that its
distribution center is adequate for its needs through the
expiration of the current term of the lease in July 2000. The
Company has one option to renew the lease for a period of two
years. The Company also expects to lease approximately 30,000 to
50,000 square feet of warehouse space for approximately eight
months each year to accommodate seasonal merchandise.

         The Company's stores, all of which are located in leased
facilities, range in size from approximately 5,200 square feet to
17,600 square feet.  The average size of the Company's stores is
approximately 9,400 square feet with approximately 90% of the area
of each store representing selling space.  The Company seeks to
open new stores in the range of approximately 12,000 to 15,000
square feet.  However, the Company often maintains options to
expand store size and will exercise those options or otherwise
enlarge particular stores as circumstances warrant. The following
table sets forth the number of store leases due to expire,
including options to renew, during the year indicated.

                         LEASE EXPIRATIONS

     Year              Number             Year                 Number

     2000                1                2013                   5
     2001                3                2014                   3
     2003                2                2015                   1
     2004                2                2016                   3
     2005                2                2017                   9
     2006                2                2018                   5
     2008                4                2019                   4
     2009                3                2020                   2
     2010                2                2021                   2
     2011                4                2023                   1
     2012                3                2026                   1
                                          2027                   2

     Sixty-three of the above stores are located in strip shopping
centers, and the remaining three are free-standing buildings.  The
stores generally are located in close proximity to population
centers and other retail operations and are usually on a major
highway or thoroughfare, making them easily accessible by
automobile.  All of the stores provide free parking.

     The leases for the Company's stores are generally for a term
of five years, usually with four options to renew for five years
each. Under most leases, the Company is required to pay, in
addition to fixed minimum rental payments, additional rent based on
charges for real estate taxes, common area maintenance fees,
utility charges and insurance premiums.  


ITEM 3.  LEGAL PROCEEDINGS.

       The Company is not a party to, nor is any of its property the
subject of, any material pending legal proceedings.

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

       The Company did not submit any matters to vote of its
stockholders, through the solicitation of proxies or otherwise,
during the fourth quarter of the fiscal year ended August 30, 1997.<PAGE>

                                 PART II

ITEM 5.  MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED
         STOCKHOLDER MATTERS.

       The Company's Common Stock is traded on the NASDAQ National
Market System ("NASDAQ/NMS") under the symbol "RAGS."

       The following table sets forth, for the periods indicated, the
range of high and low sale prices of the Common Stock as reported
by NASDAQ from September 3, 1995, through August 30, 1997. These
prices reflect interdealer prices and do not include retail mark-
ups, mark-downs or commissions, and do not necessarily represent
actual transactions.

                                          High             Low

        Fiscal Quarter Ended

        November 30, 1996                $ 2.50           $1.938
        March 1, 1997                      4.313           2.00
        May 31, 1997                       3.75            2.688
        August 30                          3.688           2.50

        Fiscal Quarter Ended

        December 2, 1995                  $ 3.25          $1.875
        March 2, 1996                       2.625          1.875
        June 1, 1996                        2.50           2.00
        August 31, 1996                     2.50           2.00

       On October 20, 1997, the closing price of the Common Stock was
$3.15625.

      The approximate number of stockholders of record of the Common
Stock at October 20, 1997 was 270. The number of beneficial owners
whose shares are held by banks, brokers and other nominees exceeds
1,000.

       The Company has not paid any dividends.  The Company presently
intends to retain all earnings for the operation and expansion of
its business and does not anticipate paying cash dividends on its
Common Stock in the foreseeable future.  Any future determination
as to the payment of dividends on the Common Stock will depend upon
future earnings, results of operations, capital requirements, the
financial condition of the Company and any other factors the Board
of Directors of the Company may consider.  In addition, pursuant to
the Company's bank line of credit, the Company is prohibited from
declaring dividends in any year in excess of its earnings for
such year or which would otherwise result in a violation of the
Company's covenant to maintain a tangible net worth (as defined in
the line of credit commitment letter) of $9,000,000.<PAGE>

ITEM 6.            SELECTED FINANCIAL DATA.

                                               Year Ended(1)                   
                      August 30, August 31, September 2, September 3, August 28,
                        1997       1996        1995         1994        1993    
                      (in thousands, except Common Stock Data and Statistics)

OPERATIONS

Net sales        $      86,528   $   83,767 $   86,089 $   89,529  $   84,151
Gross profit            31,044       30,440     31,592     33,886      34,293
Store exp & general
  and administrative
  expenses              30,578       29,500     30,566     32,504      30,953
Interest expense, net      115          161        134        266          46
Income before inc taxes    351          779        893      1,117       3,294
Income before cumulative effect 
  of change in accounting
  principle                207          520        542        692       2,011
Net income        $        207    $     520  $     542  $     767  $    2,011

COMMON STOCK DATA

Net income per share before
  cumulative effect of change
  in acctg principle
                  $        .05    $     .12  $     .12  $     .15  $      .44
Net income per share       .05          .12        .12        .17         .44
Dividends per share          -            -          -          -           -
Stockholders' equity per
  share           $       4.61    $    4.56  $    4.45  $    4.33  $     4.16
Weighted average out-
  standing           4,538,971    4,515,527  4,526,108  4,515,102   4,571,305

FINANCIAL POSITION

Working capital   $     16,256    $  16,985   $ 15,161  $  13,851  $   13,308
Total assets            32,264       33,555     34,821     36,079      32,136
Short-term               3,119        1,762      4,735      6,555       2,796
Long-term debt             554        1,231          -          -           -
Stockholders' 
  equity          $     20,800    $  20,593   $ 20,073  $  19,531  $   18,764

<PAGE>
                                           Year Ended(1)                   
                     August 30, August 31, September 2, September 3, August 28,
                        1997       1996       1995         1994         1993    
                       (in thousands, except Common Stock Data and Statistics)

STATISTICS

Net sales increase
 (decrease)             3.3%      (2.7%)     (3.8%)        6.4%        14.4%
Comparable store net
  sales increases(decreases)
  (1)(3)                3.8%      (4.9%)     (7.3%)       (4.1%)       (.5%)
Return on net sales,
  after income taxes     .2%        .6%        .6%          .9%        2.4%
Return on average
  stockholders' equity  1.0%       2.6%       2.7%         4.0%       11.3%
Average net sales per
  gross square ft(2) $  139  $     135  $     141   $      154    $    166
Average net sales per
  store (000's)(2)   $ 1,296 $    1,214 $   1,265   $    1,362    $    1,447
Stores open at end of
  period                  66         67        69           68            61

  (1)        Data for the fiscal years ended August 28, 1993, September 3,
             1994, September 2, 1995, August 31, 1996 and August 30, 1997
             include the results of operations for 52 weeks, 53 weeks, 52
             weeks, 52 weeks and 52 weeks, respectively.

  (2)        For purposes of calculating these amounts, the number of stores
             and the amount of gross square footage have been adjusted to
             reflect the number of months during the period that new stores
             were open.  These amounts have not been adjusted to reflect the
             seasonal nature of the Company's net sales or the resulting
             impact of opening stores in different periods during the year. 
             See "Management's Discussion and Analysis of Financial
             Information and Results of Operations--Seasonality."

  (3)        Comparable store sales increases for a fiscal year include stores
             commencing with their thirteenth consecutive entire fiscal month.
<PAGE>

ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
           AND RESULTS OF OPERATIONS.

Results of Operations

        The following table sets forth as a percentage of net sales, certain
items appearing in the Company's Consolidated Income Statements for the
indicated year
                                                Year Ended        
                                           1997     1996     1995 
     Net sales                            100.0%   100.0%   100.0%
     Cost of merchandise sold
       and occupancy costs                 64.1     63.7     63.3
     Gross profit                          35.9     36.3     36.7
     Store expenses                        23.9     23.8     23.9
     General and administrative
       expenses                            11.5     11.4     11.6
     Income from operations                 0.5      1.1      1.2
     Net income                              .2%      .6%      .6%

     The Company's net sales increased in 1997 by $2,761,000 or 3.3% due
to increases in comparable store sales of $3,038,000 or 3.8% in addition
to new store sales of $3,417,000 net of the impact of closed store sales.
Management believes that the marketing plan launched in September 1996
and the mild weather conditions in the northeast region during the fiscal
second quarter compared to the comparable prior periods contributed
significantly to the positive comparable store sales results. The
Company's net sales decreased in 1996 by $2,323,000 or 2.7% due to
decreases in comparable store sales of $4,169,000 or 4.9% partially
offset by new store sales of $2,732,000. Management believes the
decreases in comparable store sales in 1996 were primarily due to
inclement weather conditions in the northeast region during the winter
compared to the comparable prior period and the weak retail environment
which existed throughout the spring and summer selling seasons in our
industry segment.

  Gross profit percentage decreased by .4% in 1997 as compared to 1996
as a result of an increase in the annual shrinkage of inventory of .7%
partially offset by a decrease in markdowns of .4% due to improved
control of promotions during the Christmas selling season. Gross profit
percentage decreased by .4% in 1996 as compared to 1995 as a result of a
1.2% increase in markdowns, which was primarily attributed to increased
competitive promotional sales activity during the Christmas selling
season and secondarily to a .7% increase in occupancy costs. These
amounts were partially offset by the Company's ability to obtain a .7%
increase on the initial markup of inventory purchases by increasing the
mix of direct imports, which are more profitable than domestic purchases,
and improve the annual shrinkage results by .8%. 

      Store expenses increased by $754,000 or 3.8% in 1997 as compared to
1996. The dollar increase was primarily due to an increase in (i) payroll
and payroll related expenses, (ii) depreciation expense due to the
installation of the Company's point-of-sale cash register software, data
collection and computer systems ("point-of-sale systems") and (iii)
advertising in connection with the new marketing plan. As a percentage of
net sales, store expenses in 1997 remained relatively constant compared
to 1996. Store expenses decreased by $675,000 or 3.3% in 1996 as compared
to 1995. The decrease was primarily the result of an expanded vendor
cooperative advertising program and secondarily due to a reduction in
payroll and payroll related expenses. As a percentage of net sales, store
expenses in 1996 remained relatively constant compared to 1995.

   General and administrative expenses increased by $324,000 or 3.4% in
1997 as compared to 1996. The increase was primarily due to an increase
in payroll and payroll related expenses. As a percentage of net sales,
general and administrative expenses in 1997 remained relatively constant
compared to 1996. General and administrative expenses  decreased by
$391,000 or 3.9% in 1996 as compared to 1995. As a percentage of net
sales, general and administrative expenses decreased by .2%
notwithstanding the decrease in net sales and comparable store sales. The
decrease in general and administrative expenses and as a percentage of
net sales was primarily due to a reduction in payroll and related
expenses and secondarily a result of a reduction in professional fees.

         Interest expense-net decreased in 1997 as compared to 1996 as a
result of lower borrowings on the Company's line of credit. This decrease
was net of additional interest on the Company's term loan to finance its
point-of-sale systems. See "Liquidity and Capital Resources." Interest
expense increased in 1996 as compared to 1995 as a result of the
Company's term loan discussed above.

      The effective tax rate for 1997 was 41.0% as compared to 33.2% in
1996. The increase is primarily due to a $15,000 tax settlement paid in
1997 for the tax years 1993 through 1995 based upon the results of an
Internal Revenue Service audit. The effective tax rate for 1996 was 33.2%
as compared to 39.3% in 1995. The decrease is attributed to Corporate
state tax planning that resulted in a lower effective state and local
income tax rate.

  Net income decreased by $313,000 for 1997 as compared to 1996 due to
the increase in operating expenses which was partially offset by the
increase in sales and the related increase in gross profit. Net income
for 1996 remained relatively constant when compared to 1995.

Seasonality

     The Company's business is seasonal, which the Company believes is
typical of the retail fabric and craft industry. The Company's highest
sales and earnings levels historically occur between September and
December.  This period includes the Back-to-School, Halloween and
Christmas seasons. The Company has generally operated at a loss during
its fourth quarter, the June through August summer period. See "Business-
-Seasonality."
<PAGE>

    Year to year comparisons of quarterly results and comparable store
sales can be affected by a variety of factors, including the timing and
duration of holiday selling seasons and the timing of new store openings
and promotional markdowns.  

Liquidity and Capital Resources

      The Company's primary needs for liquidity are to maintain inventory
for the Company's existing stores and to fund the costs of opening new
stores, including capital improvements, initial inventory and pre-opening
expenses. In 1997 and 1996, the Company relied on short-term borrowings, 
internally generated funds and credit made available by suppliers to
finance inventories and new store openings.

      The Company's working capital has decreased $729,000 in 1997 as
compared to 1996 primarily as a result of the reduction in its
merchandise inventories.

   The Company maintains a $10 million credit facility with a bank. The
credit facility is renewable annually on or before each December 31 and
consists of a discretionary $8,000,000 unsecured line of credit for
direct borrowings and the issuance and refinance of letters of credit and
a $2,000,000 three (3) year term loan maturing May 1, 1999. Borrowings
under the line of credit bear interest  at the bank's prime rate (8.50%
at August 30, 1997) and under the term loan are fixed at eight percent
(8%). The credit facility requires the Company to maintain a compensating
balance of $400,000 in addition to certain financial covenants which
require a minimum defined working capital and tangible net worth, a
maximum ratio of debt to tangible net worth and set limits on the payment
of dividends. As of August 30, 1997, the Company was in compliance with
such covenants. Historically, the amount borrowed has varied based on the
Company's seasonal requirements, generally reaching a maximum amount
outstanding during the fourth quarter of each fiscal year.  The maximum
amount borrowed under the line was $2,755,000, $4,935,000 and $6,930,000 
in 1997, 1996 and 1995, respectively. As of August 30, 1997 and August
31, 1996, $2,435,000 and $1,130,000, respectively, was outstanding under
the line of credit for direct borrowings and $1,227,000 and $1,852,000,
respectively, was outstanding under the term loan with $678,000 and
$549,000 maturing in 1998 and 1999, respectively. The Company intends to
maintain the availability of the line of credit for working capital
requirements and in order to be able to take advantage of future
opportunities and to continue to utilize the term loan to finance its new
point-of-sale systems. The Company completed installation of its point-
of-sale systems in all stores as of July 1997. In addition, the Company
is continuing with the development of its automated store ordering
systems and anticipates commencing installation in January 1998.

    The Company purchases merchandise directly from manufacturers in the
Far East.  Generally, these purchases are supported by letters of credit
payable in United States dollars.  The results of operations of the
Company have not been significantly affected by foreign currency
fluctuation. At August 30, 1997, the Company had outstanding letters of
credit in the approximate amount of $146,600.

      During 1997, 1996 and 1995, the Company had net cash provided by
operating activities of $1,135,000, $2,659,000 and $1,982,000,
respectively, and used $1,877,000, $1,001,000 and $432,000, respectively,
for purchases of property and equipment. Cash provided by operating
activities decreased in 1997 primarily as a result of a reduction in
accounts payable due to the timing of merchandise receipts at year end.
The Company expects to open two to four stores, relocate one store and
close three existing stores during 1998. Costs associated with opening of
new stores, including capital expenditures, inventory and pre-opening
expenses have approximated $350,000 per store. These costs will be
financed primarily from cash provided by operating activities, credit
made available by suppliers to finance inventories and, if necessary,
from the Company's bank line of credit. However, the Company will
redeploy assets of stores being closed to the new stores as opportunities
evolve in order to curtail the costs of opening stores.

Forward-Looking Statements

    Certain statements contained in this report that are not historical
facts are forward-looking statements that are subject to certain risks
and uncertainties that could cause actual results to differ materially
from those set forth in the forward-looking statement. These risks and
uncertainties include, but are not limited to, changes in customer
demand, changes in trends in the fabric and craft industry, changes in
competitive pricing for products, the impact of competitor store openings
and closings, the availability of merchandise, general economic
conditions, lease negotiations and other risk factors.

New Accounting Standards

         In February 1997, the Financial Accounting Standards Board (FASB)
issued Statement of Financial Accounting Standards No. 128, "Earnings per
Share" (SFAS No. 128), which establishes new standards for computing and
presenting net income per share and replaces the standards previously
found in Accounting Principles Board Opinion No. 15, "Earnings Per
Share." The Company will begin reporting net income per share according
to this new standard in its 1998 annual report on Form 10-K. The Company
does not expect the implementation of SFAS No. 128 to have a material
effect on the Company's computation of earnings per share.

       In June 1997, the FASB issued Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income" (SFAS No. 130) and
No. 131 "Disclosure about Segments of an Enterprise and Related
Information" (SFAS No. 131). SFAS No. 130 establishes standards for
reporting the display of comprehensive income and its components in a
full set of general-purpose financial statements. This Statement requires
that an enterprise (a) classify items of other comprehensive income by
their nature in a financial statement and (b) display the accumulated
balance of other comprehensive income separately from retained earnings
and additional paid-in capital in the equity section of a statement of
financial position.

      SFAS No. 131 establishes standards for the way that public business
enterprises report information about operating segments in annual
financial statements and requires that those enterprises report selected
information about operating segments in interim financial reports issued
to shareholders. It also establishes standards for related disclosures
about products and services, geographic areas and major customers.

       Both SFAS No. 130 and SFAS No. 131 are effective for fiscal periods
beginning after December 15, 1997. The Company has not yet determined the
impact, if any, of adopting these standards.
<PAGE>

ITEM 8.    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.


           See Item 14(a)1 in Part IV.

ITEM 9.    CHANGES IN AND DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.


           Not Applicable.
<PAGE>

                                         PART III


ITEM 10.    DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

     The information required for this item is incorporated by reference
to the Company's 1997 Definitive Proxy Statement which the Company will
file with the Securities and Exchange Commission no later than 120 days
subsequent to August 30, 1997.


ITEM 11.     EXECUTIVE COMPENSATION.

      The information required for this item is incorporated by reference
to the Company's 1997 Definitive Proxy Statement which the Company will
file with the Securities and Exchange Commission no later than 120 days
subsequent to August 30, 1997.


ITEM 12.     SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

       The information required for this item is incorporated by reference
to the Company's 1997 Definitive Proxy Statement which the Company will
file with the Securities and Exchange Commission no later than 120 days
subsequent to August 30, 1997.



ITEM 13.     CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

        The information required for this item is incorporated by reference
to the Company's 1997 Definitive Proxy Statement which the Company will
file with the Securities and Exchange Commission no later than 120 days
subsequent to August 30, 1997.<PAGE>
    

                                 PART IV

ITEM 14.     EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.

               (a)      Documents filed as part of this report.

                 1. Financial Statements                        Page

                    Independent Auditors' Report                F-1

                    Consolidated Balance Sheets as of August
                    30, 1997 and August 31, 1996                F-2

                    Consolidated Statements of Income for the
                    years ended August 30, 1997,
                    August 31, 1996 and September 2, 1995       F-3

                    Consolidated Statements of Stockholders'
                    Equity for the years ended August 30, 1997,
                    August 31, 1996 and September 2, 1995       F-4

                    Consolidated Statements of Cash Flows for
                    the years ended August 30, 1997, August 31,
                    1996 and September 2, 1995                  F-5

                    Notes to Consolidated Financial Statements  F-7


                 2. Financial Statement Schedules

                    None


                 3. Exhibits
                      3.1*  Certificate of Incorporation of the Company

                      3.2*  By-Laws of the Company

                      10.1* Promissory Note (Revolving) with Valley National
                            Bank

                      10.2* 1991 Stock Option Plan

                      10.3* Lease between Momar Realty Co. and the Company,
                            dated as of March 1, 1991

                      21.1  List of subsidiaries of the Company

                      23.1  Consent of Deloitte & Touche LLP

<PAGE>
                      24.1  Power of Attorney to sign Form 10-K (set forth on
                            page 20)

                      27    Financial Data Schedule (Filed electronically with
                            SEC only)



________________________________

     *Incorporated by reference to the Company's Registration Statement
on Form S-1 and Amendment No. 1 thereto.

      (b)    The Company did not file a Current Report on Form 8-K during the
last quarter of the period covered by this Report.<PAGE>

                                     SIGNATURES

    Pursuant to the requirements of Section 13 or 15(d) 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, in the City of 
Hawthorne, New Jersey, on November 12, 1997.

                                                   RAG SHOPS, INC.



                                      By:      /s/ Stanley Berenzweig
                                               STANLEY BERENZWEIG, Chairman

                                POWER OF ATTORNEY

   Each of the undersigned hereby appoints Stanley Berenzweig and 
Steven Barnett as his or her attorneys-in-fact to sign his or her name, in 
any and all capacities, to any amendments to this Form 10-K and any other
documents filed in connection therewith to be filed with the Securities and
Exchange Commission. Each of such attorneys has the power to act with or
without the others.

    Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following person on behalf of the
Registrant and in the capacities and on the dates indicated.

Signature                     Title(s)                        Date


/s/ Michael Aaronson          Director                        November 12, 1997
  Michael Aaronson

/s/ Steven Barnett            Principal Financial             November 12, 1997
  Steven Barnett              Officer, Principal
                              Accounting Officer and
                              Director

/s/ Evan Berenzweig           Director                        November 12, 1997
  Evan Berenzweig

/s/ Stanley Berenzweig        Principal Executive             November 12, 1997
  Stanley Berenzweig          Officer and Director

/s/ Fred J. Damiano           Director                        November 12, 1997
  Fred J. Damiano

/s/ Judith Lombardo           Director                        November 12, 1997
  Judith Lombardo
 
/s/ Alan C. Mintz             Director                        November 12, 1997
  Alan C. Mintz

<PAGE>

                            RAG SHOPS, INC.

               Index to Consolidated Financial Statements
                          INDEX TO EXHIBITS

                                                                     

Exhibit                                                         Sequentially
Number         Description of Exhibits                         Numbered Pages

3.1            Certificate of Incorporation of the Company            *

3.2            By-Laws of the Company                                 *

10.1           Promissory Note (Revolving) with Valley National Bank  *

10.2           1991 Stock Option Plan                                 *

10.3           Lease between Momar Realty Co. and the Company, dated 
               as of March 1, 1991                                    *

21.1           List of subsidiaries of the Company

23.1           Consent of Deloitte & Touche LLP

24.1           Power of Attorney to sign Form 10-K 
               (set forth on page 20)

27             Financial Data Schedule
               (Filed electronically with SEC only)



________________________________

*  Incorporated by reference to the Company's Registration Statement on Form
S-1 and Amendment No. 1 thereto.<PAGE>

                       RAG SHOPS, INC. AND SUBSIDIARIES


                 Consolidated Financial Statements and Independent
                       Auditors' Report for the Three Years
                             Ended August 30, 1997<PAGE>



INDEPENDENT AUDITORS' REPORT



To the Board of Directors
  and Stockholders
Rag Shops, Inc.
Hawthorne, New Jersey


We have audited the accompanying consolidated balance sheets of Rag
Shops, Inc. and its subsidiaries as of August 30, 1997 and August 31,
1996, and the related consolidated statements of income, changes in
stockholders' equity and cash flows for each of the three years in the
period ended August 30, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards.  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, such consolidated financial statements present fairly, in
all material respects, the financial position of Rag Shops, Inc. and
subsidiaries as of August 30, 1997 and August 31, 1996, and the results
of their operations and their cash flows for each of the three years in
the period ended August 30, 1997, in conformity with generally accepted
accounting principles.  


Deloitte & Touche LLP


Parsippany, New Jersey
October 24, 1997


                                          F-1
<PAGE>

RAG SHOPS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

                                         August 30,                August 31,
ASSETS                                     1997                       1996    

CURRENT ASSETS:
      Cash                           $    763,668               $    820,985
      Merchandise inventories          25,123,037                 26,280,442
      Prepaid expenses                    298,823                    345,449
      Other current assets                242,297                    473,979
      Deferred taxes                      697,146                    727,746

         Total current assets          27,124,971                 28,648,601

PROPERTY AND EQUIPMENT, NET             4,885,520                  4,462,121

OTHER ASSETS                              253,198                    444,539

                                      $32,263,689                $33,555,261

LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES:
      Note payable - bank             $ 2,435,000                $ 1,130,000
      Accounts payable - trade          5,080,546                  7,604,083
      Accrued expenses and other current
                     liabilities        1,857,216                  1,714,346
      Accrued salaries and wages          812,028                    583,085
      Current portion of long-term debt   683,980                    631,969

           Total current liabilities   10,868,770                 11,663,483

DEFERRED TAXES                             40,361                     68,061

LONG-TERM DEBT                            554,298                  1,230,880

COMMITMENTS AND CONTINGENCIES

STOCKHOLDERS' EQUITY:
     Preferred stock, $.01 par value
        2,000,000 shares authorized;
        no shares issued or outstanding       -                          -      
      Common stock, $.01 par value,
        13,000,000 shares authorized;
        4,514,400 shares issued and
        outstanding at August 30, 
        1997 and August 31, 1996         45,144                      45,144
      Additional paid-in capital      6,039,162                   6,039,162
      Retained earnings              14,715,954                  14,508,531

      Total stockholders' equity     20,800,260                  20,592,837

                                    $32,263,689                 $33,555,261

See notes to the consolidated financial statements.<PAGE>

RAG SHOPS, INC. AND SUBSIDIARIES


CONSOLIDATED STATEMENTS OF INCOME
                                          Year Ended                            
                                     August 30,   August 31,  September 2,
                                        1997        1996          1995     


NET SALES                           $86,527,566  $83,766,651  $86,089,364

COST OF MERCHANDISE SOLD AND
   OCCUPANCY COSTS                   55,483,180   53,326,702   54,497,390

     Gross profit                    31,044,386   30,439,949   31,591,974

OPERATING EXPENSES:
  Store expenses                     20,692,692   19,938,761   20,614,048
      General and administrative
       expenses                       9,885,242    9,561,294    9,951,815

          Total operating expenses   30,577,934   29,500,055   30,565,863

INCOME FROM OPERATIONS                  466,452      939,894    1,026,111

INTEREST EXPENSE, Net                   115,129      160,887      133,602

INCOME BEFORE PROVISION FOR
    INCOME TAXES                        351,323      779,007      892,509

PROVISION FOR INCOME TAXES              143,900      258,700      350,600

NET INCOME                          $   207,423   $  520,307  $   541,909

PER SHARE DATA:

NET INCOME PER SHARE                       $.05        $.12          $.12

WEIGHTED AVERAGE SHARES
    OUTSTANDING                       4,538,971   4,515,527     4,526,108


See notes to the consolidated financial statements.<PAGE>

RAG SHOPS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY


                                               Additional
                               Common Stock     Paid-In   Retained
                              Shares  Dollars   Capital   Earnings     Total



BALANCE, SEPTEMBER 3, 1994 4,514,400  $45,144 $6,039,162 $13,446,315 $19,530,621

Net income                       -        -          -       541,909     541,909

BALANCE, SEPTEMBER 2, 1995 4,514,400   45,144  6,039,162  13,988,224  20,072,530

Net income                       -        -          -       520,307     520,307

BALANCE, AUGUST 31, 1996   4,514,400   45,144  6,039,162  14,508,531  20,592,837

Net income                       -        -          -       207,423     207,423

BALANCE, AUGUST 30, 1997   4,514,400  $45,144 $6,039,162 $14,715,954 $20,800,260

See notes to the consolidated financial statements.<PAGE>

RAG SHOPS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

                                                        Year Ended             
                                            August 30,  August 31, September 2,
                                               1997        1996        1995  
CASH FLOWS FROM OPERATING ACTIVITIES:
     Net income                             $  207,423  $  520,307   $  541,909
     Adjustments to reconcile net income to
      net cash provided by operating activities:
       Depreciation and amortization         1,406,285   1,273,770    1,175,746
       Deferred taxes                            8,000    (132,900)    (113,600)
       Loss on disposition of property 
         and equipment                          59,738      15,613       47,397
     Changes in assets and liabilities:
       (Increase) decrease in:
         Merchandise inventories             1,157,405   1,278,377      302,872
         Prepaid expenses                       46,626     195,438        6,946
         Other current assets                  231,682    (381,948)     (37,457)
         Other assets                          169,668    (129,917)      15,659
        Increase (decrease) in:
         Accounts payable - trade           (2,523,537)    156,121      144,322
         Accrued expenses and other 
           current liabilities                 142,870     (66,206)     170,632
         Accrued salaries and wages            228,943     (69,211)    (272,904)

         Net cash provided by operating 
           activities                        1,135,103   2,659,444    1,981,522

CASH FLOWS FROM INVESTING ACTIVITIES:
     Proceeds from sale of property 
       and equipment                             4,331       3,895        2,350
     Payments for purchases of property 
       and equipment                        (1,877,180) (1,000,511)    (432,155)

         Net cash used in investing 
           activities                       (1,872,849)   (996,616)    (429,805)

CASH FLOWS FROM FINANCING ACTIVITIES:
     Proceeds from issuance of note 
       payable - bank                       14,520,000  34,415,000   29,101,000
     Repayments of note payable - bank     (13,215,000)(38,020,000) (30,921,000)
     Long-term borrowings                            -   2,000,000           -  
     Repayments of long-term debt             (624,571)   (148,080)          -  

         Net cash provided by (used in) 
           financing activities                680,429  (1,753,080)  (1,820,000)

NET DECREASE IN CASH                           (57,317)    (90,252)    (268,283)

CASH, BEGINNING OF YEAR                        820,985     911,237    1,179,520

CASH, END OF YEAR                          $   763,668 $   820,985  $   911,237









<PAGE>
                                                                    (continued)
RAG SHOPS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

SUPPLEMENTAL DISCLOSURES OF CASH FLOW
 INFORMATION:
  Cash paid during the year for:
    Interest                               $   165,922 $   232,667 $   104,004

    Income taxes                           $   532,087 $   200,013 $   463,756

SUPPLEMENTAL SCHEDULE OF NON-CASH
 INVESTING AND FINANCING ACTIVITIES:
     Purchase of property and equipment 
       in exchange for debt                $         - $    10,929 $         -

See notes to the consolidated financial statements.<PAGE>

RAG SHOPS, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Note 1.     Summary Of Significant Accounting Policies

Organization and Nature of Business
Rag Shops, Inc. (the "Company"), a Delaware corporation formed in April 1991, 
is the successor by merger to a New Jersey Corporation having the same name 
which was incorporated in 1984. The Company operates a chain of retail fabric 
and craft stores through its subsidiaries predominantly located in New Jersey, 
New York, Pennsylvania and Florida.

Principles of Consolidation
The consolidated financial statements include the accounts of the Company and 
its subsidiaries, all of which are wholly-owned. All significant intercompany
transactions and balances have been eliminated.

Merchandise Inventories
Inventories are stated at the lower of cost (first-in, first-out method) or 
market as determined by the retail inventory method, and consist primarily 
of fabrics and crafts.

Property and Equipment
Property and equipment are stated at cost.  Depreciation is computed over the 
estimated useful lives of the assets using straight-line and accelerated 
methods.  Leasehold improvements are amortized by the straight-line method over
an estimated useful life or the term of the related lease, whichever is shorter.

Effective September 1, 1996, the Company adopted Statement of Financial 
Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived 
Assets and for Long-Lived Assets to be Disposed of" (SFAS No. 121). This 
Statement establishes accounting standards for the impairment of long-lived 
assets, certain identifiable intangibles and goodwill related to those assets to
be held and used, and for long-lived assets and certain identifiable intangibles
to be held and used by an entity to be reviewed for impairment whenever 
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable.The provisions of SFAS No. 121 did not have any impact on
the Company's financial position or results of operations.

Pre-opening and Closing Store Expenses
All pre-opening costs incurred in connection with the opening of new retail 
stores are charged to expense on or before the stores opening. Costs 
associated with closing stores, when material, are charged to expense at the
time the decision to close a store is determined.

Amortization
Lease acquisition costs are being amortized on the straight-line method over the
remaining lives of the leases.


Net Income Per Share
Net income per share is based on the weighted average number of shares 
outstanding during each period. The dilutive effect of stock options and 
warrants is included in each of the three fiscal years in the period ended 
August 30, 1997.

Recent Accounting Pronouncements
In February 1997, the Financial Accounting Standards Board (FASB) issued 
Statement of Financial Accounting Standards No. 128, "Earnings per Share" 
(SFAS No. 128), which establishes new standards for computing and presenting 
net income per shareand replaces the standards previously found in Accounting 
Principles Board Opinion No. 15, "Earnings Per Share." The Company will begin
reporting net income per share according to this new standard in its 1998 annual
report on Form 10-K. The Company does not expect the implementation of SFAS No. 
128 to have a material effect on the Company's computation of earnings per 
share.

In June 1997, the FASB issued Statement of Financial Accounting Standards No. 
130, "Reporting Comprehensive Income" (SFAS No. 130) and No. 131 "Disclosure 
about Segments of an Enterprise and Related Information" (SFAS No. 131). SFAS
No. 130 establishes standards for reporting the display of comprehensive income 
and its components in a full set of general-purpose financial statements. 
This Statement requires that an enterprise (a) classify items of other 
comprehensive income by their nature in a financial statement and (b) display
the accumulated balance of other comprehensive income separately form retained
earnings and additional paid-in capital in the equity section of a statement of 
financial position.

SFAS No. 131 establishes standards for the way that public business enterprises 
report information about operating segments in annual financial statements 
and requires that those enterprises report selected information about operating 
segments in interim financial reports issued to shareholders. It also 
establishes standards for related disclosures about products and services,
geographic areas and major customers.

Both SFAS No. 130 and SFAS No. 131 are effective for fiscal periods beginning 
after December 15, 1997. The Company has not yet determined the impact, if 
any, of adopting these standards. 

Use Of Estimates
The preparation of financial statements in accordance with generally accepted 
accounting principles requires management to make estimates and assumptions 
that affect the amounts reported in the Company's financial statements and 
accompanying notes to financial statements. Actual results could differ from 
those estimates.

Fair Value Of Financial Instruments
Management of the Company believes that the fair value of financial instruments 
approximates their cost as of August 30, 1997 and August 31, 1996. In 
management's opinion, the fair value of its fixed-rate term loan approximates 
book value based on borrowing rates currently available to the Company and 
amounts outstanding under its line of credit approximate fair value due to
their variable rate. 

Fiscal Year
The Company's fiscal year end is the Saturday closest to August 31.  The 
financial statements for the fiscal years ended September 2, 1995, August 31,
1996 and August 30, 1997 were each comprised of 52 weeks.



Note 2. Property And Equipment

Property and equipment consists of the following:

                                    Useful       August 30,       August 31,
                                     Lives          1997             1996    

      Furniture and fixtures      5-10 years     $7,127,202       $6,744,696
      Leasehold improvements        10 years      2,579,142        2,340,000
      Transportation equipment     3-7 years        461,324          440,940
      Data processing equipment      5 years      3,295,785        2,359,911

                                                 13,463,453       11,885,547
      Less accumulated depreciation and
                  amortization                    8,577,933        7,423,426

                                                $ 4,885,520       $4,462,121


Note 3.     Note Payable - Bank

The Company maintains a $10,000,000 credit facility with a bank. The credit 
facility is renewable annually on or before each December 31 and consists of 
a discretionary $8,000,000 unsecured line of credit for direct borrowings and 
the issuance and refinance of letters of credit and a $2,000,000 three year 
term loan (see Note 4). The facility requires the Company to maintain a
compensating balance of $400,000 in addition to certain financial covenants 
which require a minimum defined working capital and tangible net worth, a 
maximum ratio of debt to tangible net worth and set limits on the payment of 
dividends. As of August 30, 1997, the Company was in compliance with such 
covenants. Borrowings under the line of credit bear interest payable
quarterly at the bank's prime rate (8.50% at August 30, 1997). The borrowings 
outstanding under the line of credit as of August 30, 1997 and August 31, 
1996 were $2,435,000 and $1,130,000, respectively, and the unused line of credit
for direct borrowings and the issuance of letters of credit at August 30, 
1997 was $5,418,381.

Note 4.           Long-Term Debt

Long-term debt outstanding consists of the following:

                                        August 30,     August 31,
                                           1997           1996   

                  Term loan             $1,227,349     $1,851,920
                  Other                     10,929         10,929

                                         1,238,278      1,862,849
                  Less current portion     683,980        631,969

                                        $  554,298     $1,230,880

During the year ended August 31, 1996, the Company borrowed $2,000,000 ("term 
loan") under the terms of its credit facility with a bank to finance its new
point-of-sale cash register software, data collection and computer systems. 
Interest on the term loan is payable monthly at a fixed interest rate of 8%. 
The term loan matures May 1, 1999, has monthly payments of $62,673 and is 
collateralized by equipment having a net book value of $1,630,945 as of 
August 30, 1997.

Aggregate annual maturities of long-term debt are as follows:

                  Fiscal Year Ended
                         1998          $  683,980
                         1999             554,298
                                       $1,238,278

Note 5.     Commitments And Contingencies

The Company leases its facilities in accordance with operating leases, having 
initial terms of more than one year, which expire in various years through 
2012. Substantially all of the leases contain renewal options.  In addition, 
certain leases require that the Company pay its pro rata share of utilities, 
taxes, insurance and maintenance.  Rent expense for 1997, 1996 and 1995 amounted
to $6,140,557, $5,863,758 and $5,606,092, respectively, and includes contingent 
rentals (computed on a percentage of sales, as defined in the leases) of 
$28,168, $42,565, and $84,269, respectively.

The Company leases certain premises from an entity controlled by the majority 
stockholders of the Company. For the years ended 1997, 1996 and 1995, rental 
payments under this agreement amounted to $307,695, $288,897, and $269,435, 
respectively.

Future minimum annual rental commitments under noncancellable operating leases 
are as follows:

             Fiscal Year Ended
                   1998               $6,200,136
                   1999                4,944,808
                   2000                4,003,055
                   2001                2,951,617
                   2002                1,873,916
                   Thereafter          4,118,514

                                     $24,092,046

In addition, at August 30, 1997 the Company has outstanding letters of credit 
for the purchase of merchandise inventories of approximately $146,600.

<PAGE>
Note 6. Stock Options And Warrants

In April 1991, the Company adopted the 1991 Stock Option Plan (the "Plan") 
covering employees and nonemployee directors. The plan permits options to 
purchase a total of 450,000 shares of common stock, of which 435,600 shares have
been reserved by the Company as of August 30, 1997. Such options may be 
incentive stock options ("ISO") or nonqualified options.  The term of
an option will not exceed ten years and an option is exercisable as determined 
by the Option Committee of the Board of Directors.  The exercise price of the
shares covered by an ISO may not be less than the fair market value of the 
shares at the time of grant.  The exercise price of the shares covered by a 
nonqualified option is determined by the Option Committee. The options 
granted are generally exercisable 20% per year.

The Company has adopted the disclosure-only provisions of Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" 
(SFAS No. 123). Accordingly, no compensation cost has been recognized for the 
stock options awarded. Had compensation cost for the Company's stock option plan
been recorded based on the fair value at the grant date for awards in 1997 
consistent with the provisions of SFAS No. 123, the Company's net income and 
income per share would have been reduced to the pro forma amounts indicated 
below:

                  Net income-as reported                     $207,423
                  Net income-pro forma                       $201,139
                  Net income per share as reported           $    .05
                  Net income per share-proforma              $    .04

The weighted-average fair value per share of options granted during the year is 
$1.39. The fair value of each option grant is estimated on the date of grant 
using the Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in 1997: dividends yield of 0%, expected 
volatility of 50%, risk-free interest rate of 4.5% and expected lives of
7.5 years. 

Information with respect to options granted under the Plan is as follows:

                                  Number of   Exercise Price Weighted-Average
                                    Shares       Per Share    Exercise Price

Outstanding, September 3, 1994     259,800     $6.00-$12.375     $7.213
Granted                             70,000     $2.375-$3.188     $2.607
Canceled                          (105,650)    $6.00-$12.375     $7.583

Outstanding, September 2, 1995     224,150     $2.375-$12.375    $5.601
Granted                             12,000        $2.125         $2.125
Canceled                           (21,400)    $3.188-$12.375    $6.107

Outstanding, August 31, 1996       214,750     $2.125-$12.375    $5.356
Granted                            115,000     $2.34-$3.00       $2.362
Canceled                           (23,700)    $2.125-$12.375    $7.228

Outstanding, August 30, 1997       306,050     $2.125-$12.375    $4.086

Exercisable, September 2, 1995     115,150     $6.00-$12.375     $6.814

Exercisable, August 31, 1996       136,200     $6.00-$12.375     $6.726

Exercisable, August 30, 1997       145,050     $2.375-$12.375    $5.980


The weighted-average remaining contractual life of stock options outstanding at 
August 30, 1997 is 6.8 years.

<PAGE>
Note 7.     Income Taxes

      Income tax expense consists of the following:

                                                Year Ended                 
                                    August 30,   August 31,    September 2,
                                       1997         1996          1995   

      Federal:
                Current           $  135,900    $  362,800     $  314,400
                Deferred               8,000      (115,800)       (60,400)

      State:
                Current                    -        28,800        149,800
                Deferred                   -       (17,100)       (53,200)

                                  $  143,900    $  258,700     $  350,600

The deferred income tax arises from the following temporary differences:

                                                    Year Ended                  
                                         August 30,  August 31, September 2,
                                            1997        1996        1995   

      Uniform inventory capitalization   $(30,600)   $ 53,800   $ 20,000
      Depreciation                         27,700      64,600     22,100
      Straight-line of leases              (5,100)     14,500     18,300
      Reserves not deductible                   -           -     53,200

                                         $ (8,000)  $ 132,900  $ 113,600

The effective tax rate differs from the Federal statutory rate as follows:

                                                     Year Ended                
                                           August 30, August 31, September 2,
                                               1997      1996       1995    

      Statutory tax rate                       34.0%     34.0%      34.0%
      State and local income taxes,
        net of federal income tax
        benefit                                   -       1.0        7.1
      Other                                     7.0      (1.8)      (1.8)

      Effective tax rate                       41.0%     33.2%      39.3%


Deferred income taxes reflect the net tax effects of temporary differences 
between the carrying amounts of assets and liabilities for financial 
reporting purposes and the amounts used for income tax purposes. The Company's 
state deferred tax asset has been reduced by a valuation allowance based on 
current evidence indicating that it is not more likely than not that the future 
benefits of these temporary differences will be realized.

The tax effect of significant items comprising the Company's deferred tax 
assets and liabilities are as follows:
<PAGE>
                                                        Year Ended            
                                                August 30,        August 31,
                                                   1997             1996    

Current Deferred tax asset:
  Uniform inventory capitalization               $697,146         $727,746

Non-current deferred tax assets:
  Straight-line of leases                         111,673          116,773
  Net operating losses for State purposes         404,522          219,210
  Valuation allowance                            (329,822)        (144,510)

                                                  883,519          919,219
Non-current deferred tax liability:
  Difference between book and 
    tax depreciation methods                       40,361           68,061

Net deferred tax asset                           $843,158         $851,158

Note 8. Employee Benefit Plan

Effective January 1, 1996, the Company adopted a voluntary 401(k) savings plan. 
All non-union employees of the Company are eligible to participate on or 
after reaching age 21 and completing one year of eligibility service. The 
Company did not make any discretionary contributions to the 401(k) plan for 
the years ended August 30, 1997 and August 31, 1996.

Note 9. Quarterly Results (Unaudited)

The following is a summary of selected quarterly financial data (thousands of 
dollars, except per share amounts):


                                           Fiscal Quarter Ended         
                                  Nov. 30,   Mar. 1,   May 31,   Aug. 30,
   Fiscal 1997                      1996      1997      1997       1997

   Net sales                      $26,181   $23,707   $19,629    $17,011
   Gross profit                     9,791     8,718     7,120      5,415
   Net income (loss)                  921       218       167     (1,099)(a)
   Net income (loss) per share        .20       .05       .04       (.24)(a)


                                            Fiscal Quarter Ended          
                                  Dec. 2,     Mar. 2,   Jun. 1,   Aug. 31,
   Fiscal 1996                      1995       1996      1996       1996
   Net sales                      $27,782     $21,063   $18,506    $16,416
   Gross profit                    10,442       7,148     6,756      6,094
   Net income(loss)                   736        (303)      366       (279)(a)
   Net income(loss) per share         .16        (.07)      .08       (.06)(a)


(a) Included in the fiscal quarter ended August 30, 1997 and August 30, 1996 was
a charge $220,000 or $.05 per share and a credit of $335,000 or $.07 per 
share, respectively, based on the Company's annual shrinkage results
compared to those estimates.

Net income per share calculations are based on the weighted average number of 
shares outstanding during each of the quarters.  The sum of the four quarters
may not equal the full year computation due to rounding.

                               * * * * * *<PAGE>
            
                                                              EXHIBIT 21.1
                              RAG SHOPS, INC.
                       LIST OF SUBSIDIARY COMPANIES

Name                                                    State Incorporated

RSL, Inc.                                               Delaware
Mobile Fabrics, Inc.                                    New Jersey
The Rag Shop/Glen Burnie, Inc.                          Maryland
The Rag Shop, Inc.                                      New York
Rag Shop/Wayne, Inc.                                    New Jersey
Rag Shop/Parsippany, Inc.                               New Jersey
Rag Shop/Edison, Inc.                                   New Jersey
The Rag Shop/West Orange, Inc.                          New Jersey
The Rag Shop/Middletown, Inc.                           New Jersey
The Rag Shop/Toms River, Inc.                           New Jersey
The Rag Shop/Hamilton Square, Inc.                      New Jersey
The Rag Shop/Hazlet, Inc.                               New Jersey
The Rag Shop/Howell, Inc.                               New Jersey
The Rag Shop/Ocean, Inc.                                New Jersey
The Rag Shop/Sayreville, Inc.                           New Jersey
The Rag Shop/Bricktown, Inc.                            New Jersey
The Rag Shop/Totowa, Inc.                               New Jersey
The Rag Shop/North Lauderdale, Inc.                     Florida
The Rag Shop/West Palm Beach, Inc.                      Florida
The Rag Shop/Palm Beach Gardens, Inc.                   Florida
The Rag Shop/Lancaster, Inc.                            Pennsylvania
The Rag Shop/Sunrise, Inc.                              Florida
The Rag Shop/Lantana, Inc.                              Florida
The Rag Shop/York, Inc.                                 Pennsylvania
The Rag Shop/Selinsgrove, Inc.                          Pennsylvania
The Rag Shop/Pembroke Pines, Inc.                       Florida
The Rag Shop/Jacksonville, Inc.                         Florida
The Rag Shop/Olean, Inc.                                New York
The Rag Shop/Boca Raton, Inc.                           Florida
The Rag Shop/Port Richey, Inc.                          Florida
The Rag Shop/Deptford, Inc.                             New Jersey
The Rag Shop/Deerfield, Inc.                            Florida
The Rag Shop/Jacksonville-San Jose, Inc.                Florida
The Rag Shop/Rostraver, Inc.                            Pennsylvania
The Rag Shop/Evesham, Inc.                              New Jersey
The Rag Shop/Allentown, Inc.                            Pennsylvania
The Rag Shop/Jensen Beach, Inc.                         Florida
The Rag Shop/Jacksonville-Orange Park, Inc.             Florida
The Rag Shop/Jacksonville-Regional, Inc.                Florida
The Rag Shop/Boro Park, Inc.                            New York
The Rag Shop/Secaucus, Inc.                             New Jersey
The Rag Shop/North Bergen, Inc.                         New Jersey
The Rag Shop/Coral Springs, Inc.                        Florida
The Rag Shop/Turnersville, Inc.                         New Jersey
The Rag Shop/Hialeah, Inc.                              Florida
The Rag Shop/Hollywood, Inc.                            Florida
The Rag Shop/Binghamton, Inc.                           New York

                                                                  (continued)


                                                                  (continued)
                               RAG SHOPS, INC.
                         LIST OF SUBSIDIARY COMPANIES

Name                                                     State Incorporated


The Rag Shop/Lacey, Inc.                                 New Jersey
The Rag Shop/West Boca Raton, Inc.                       Florida
The Rag Shop/Ocala, Inc.                                 Florida
The Rag Shop/Fishkill, Inc.                              New York
The Rag Shop/Hampden, Inc.                               Pennsylvania
The Rag Shop/East Norriton, Inc.                         Pennsylvania
The Rag Shop/Wall Township, Inc.                         New Jersey
The Rag Shop/Northern Lights, Inc.                       New York
The Rag Shop/Linden, Inc.                                New Jersey
The Rag Shop/Burlington, Inc.                            New Jersey
The Rag Shop/Kingstown, Inc.                             Rhode Island
The Rag Shop/Norwalk, Inc.                               Connecticut
The Rag Shop/East Hollywood, Inc.                        Florida
The Rag Shop/Edgewater, Inc.                             New Jersey

Each of the above does business under the name "The Rag Shop."<PAGE>
  

                                                                EXHIBIT 23.1


                                RAG SHOPS, INC.


INDEPENDENT AUDITORS' CONSENT

We consent to the incorporation by reference in the Registration Statement of 
Rag Shops, Inc. on Form S-8 of our report dated October 24, 1997, appearing 
in this Annual Report on Form 10-K of Rag Shops, Inc. for the year ended 
August 30, 1997.


Deloitte & Touche LLP
Parsippany, New Jersey
November 12, 1997