# <R>Form 10-K/A</R>



We service our dealers by buying merchandise in quantity lots, mainly from manufacturers. We then

warehouse large quantities of this merchandise and sell it in smaller lots to our dealers. Most of the products

that we distribute to our members from our warehouses are sold at a price that we establish ("dealer

cost"), to which a 10% adder ("handling charge") is generally added. In fiscal year 2001, warehouse sales

were 72% of our merchandise sales and bulletin sales were 3% of our merchandise sales with the balance of 25% being

direct shipment sales.</R>



The following is a breakdown of our total warehouse sales among various general classes of merchandise

for each of the past three fiscal years:
Class of Merchandise                          
2001    2000    1999
Paint, cleaning and related
supplies           
21%     20%     20%
Plumbing and heating
supplies                  
15%     15%     15%
Hand and power tools                           
14%     14%     14%
Garden, rural equipment and related supplies   
14%     14%     13%
Electrical supplies                            
12%     12%     13%
General
hardware                               
11%     12%     12%
Sundry                                          
8%      7%      7%
Housewares and
appliances                       
5%      6%      6%We sponsor two major hardware conventions each year at various locations. We invite dealers and

vendors to attend, and dealers generally place orders that are delivered before the next convention.

During the convention, there are exhibits of regular merchandise, new merchandise and seasonal

merchandise. Lawn and garden supplies and exterior paints are seasonal merchandise in many parts of

the country. Some types of goods such as holiday decorations are also seasonal.

Warehouse sales involve the sale of merchandise that we inventory at our warehouses. Direct shipment

sales involve sales where the merchandise is shipped directly to dealers by vendors. Bulletin sales

involve our special bulletin offers where we order specific merchandise after dealers sign up to buy particular

quantities of it.

Dealers place direct shipment orders with our vendors using special purchase orders. The vendors

then bill us for these orders, which are shipped directly to dealers. We, in turn, bill the ordering dealers

with an adder ("handling charge") that varies according to the following schedule:
Invoice Amount                 
Adder (Handling Charge)
$    0.00 to $ 
999.99                  
2.00%
$1,000.00 to
$1,999.99                  
1.75%
$2,000.00 to
$2,999.99                  
1.50%
$3,000.00 to
$3,999.99                  
1.25%
$4,000.00 to
$4,999.99                  
1.00%
$5,000.00 to
$5,999.99                   
..75%
$6,000.00 to
$6,999.99                   
..50%
$7,000.00 to
$7,999.99                   
..25%
$8,000.00 and
over                       
..00%
We make bulletin sales based upon notices from dealers that they wish to participate in one of our

special bulletin offers. Generally, we notify dealers of our intention to purchase certain products for

bulletin shipment. We then purchase these products in the quantities that the dealers order. When the

bulletin shipment arrives, we do not place it into warehouse inventory. Rather, we break it up into smaller

quantities and deliver it to the dealers who ordered it. We generally apply a 6% adder ("handling charge")

to this category of sales.

We typically apply an additional adder of 3% to merchandise that is exported outside of the United

States, its territories and possessions. Ace dealers located outside of the United States, its territories and

possessions who are not subject to the additional 3% adder are assessed a flat 2% adder on all direct shipment

sales. We maintain inventories to meet only normal resupply orders. Resupply orders help keep our

inventories at normal levels. Usually these resupply orders are filled within one day of receipt. Bulletin

orders are somewhat similar to resupply orders, but can be for future delivery. We do not backlog normal

resupply orders and therefore, no significant backlog exists at any point in time.



Our Store Traffic Opportunity Program ("STOP") is a program where we offer our dealers specific

products that we assign to a "competitive price sales" classification. These products are delivered from our

warehouses with or without the addition of freight charges and with an adder (if any) of up to 5%, determined

on an item by item basis. Management has the authority to add and withdraw items from the STOP

program, and to establish reasonable minimum or multiple item purchase requirements for this program.

We do not make any patronage dividend distributions for purchases under the STOP program. We do,

however, consider STOP purchases to be either warehouse purchases or bulletin purchases, as applicable,

in determining the forms of patronage dividend distributions. (See the heading "Business," subheading

"Forms of Patronage Dividend Distributions.")

Our LTL Plus Program allows dealers to purchase full or partial truckloads of products from specific

vendors for direct shipment delivery. No adder or national advertising assessment applies to these

purchases. (See heading "Business," subheading "Patronage Dividend Determinations and Allocations.")

In addition to hosting conventions as well as other shows and product exhibits for our dealers, we also

provide many special services. We offer these services at established charges. These services include

inventory control systems, as well as price and bin ticketing. We also provide dealers with a checklist

service so that they can have current information about the merchandise that we offer. We also provide a

choice of ongoing educational and training programs for dealers. (See the heading "Business," subheading

"Special Charges and Assessments.")
<R>
     Our wholly owned subsidiary, Ace Insurance Agency, Inc., offers a Group Dealer Insurance Program

so that dealers can purchase different types of insurance coverage. This program offers "all risk" property

insurance and business interruption, crime, liability and workers' compensation insurance, in addition to

medical insurance for store employees. Loss Prevention Services, Inc., another wholly
owned
subsidiary, offers security training and other loss prevention services to dealers.

Our wholly owned subsidiary, Ace Hardware Canada, Limited, operates as a wholesaler of hardware

and related merchandise in Canada. It has two distribution facilities located in Calgary, Alberta

and Brantford, Ontario. In November 2001, Ace announced the closure of the Calgary
facility.
Ace Hardware Canada, Limited generated less than one percent (1%) of our consolidated
revenue
during fiscal year 2001.</R>

We operate our Company-owned retail hardware stores through our wholly owned subsidiary Ace

Corporate Stores, Inc. For further information about these stores, please see the heading "Properties."

We manufacture paint and similar coating products at our factories in Matteson and Chicago Heights,

Illinois. These factories are the main source of the paint products that we offer for sale. We operate our

paint manufacturing business as a separate Division of our Company for accounting purposes. We purchase

all our raw materials for paint manufacturing from outside sources. We have had adequate sources of raw

materials in the past, and we do not currently expect any shortages of raw materials that would have a major

impact on our paint operations. Paint manufacturing is seasonal in the sense that greater paint sales occur

from April through September. Historically, our need to comply with environmental laws and regulations

has not had a major effect on our ability to conduct our paint manufacturing operations.

Our business, both hardware wholesaling and paint manufacturing, is not dependent on any major suppliers

and we feel that seasonal fluctuations do not have a major effect on our operations. For more discussion of our

business, see "Management's Discussion and Analysis of Financial Condition and Results of Operations."

We also offer services to members that relate to the operation of their retail businesses. We provide

these services (such as advertising, merchandising and training programs) to assist our members and in

some cases, to maximize our centralized buying power.





Strategic Planning
<R>
     We have a strategic planning process that results in goals, objectives and programs that we want to

develop in the future for Ace and our members. Because strategic plans deal with the future,

this discussion of them contains "forward looking statements," which are based on our current expectations.

The actual results of our efforts can differ greatly from the results that we might desire. We believe

that we have the facilities, the employees and the resources for ongoing success as we implement our

plans and programs, but the future is difficult to forecast, especially areas such as revenues, costs, margins

and profits which are influenced by many factors. Some of these factors are discussed below.</R>

The effects of future growth in the hardware and hardlines-related industries are uncertain. By "hardlines-related

industries" we mean home center, do-it-yourself, rental and commercial/industrial categories. The future

condition of the economy is also uncertain, when viewed domestically, internationally or in specific geographical

regions. Some other uncertainties that could affect our plans include possible future changes in merchandise

and inventory prices, and the effect of increasingly intense competition. There could be potential shifts in market

demand for some products. Lawsuits and laws, especially laws dealing with franchising, licensing, importing,

exporting and environmental matters could affect our future business. We cannot predict whether these uncertainties

might cause future costs or liabilities or have some other effect on our future ability to achieve our plans.

Through our ongoing strategic planning process we have focused our plans around four segments for

future growth and success in our competitive industry. These four segments are: Retail Success (store operations),

Wholesale Success (distribution), International growth and new member growth. Retail success for our

dealers is a primary objective because, in our opinion, it drives both their retail performance and our wholesale

growth. We have therefore increased our efforts to assist members in "retail success initiatives," which are

designed to improve their retail performance and competitiveness. These retail success initiatives include retail

goals that we urge dealers to strive for within their stores and in locally competitive markets. These goals do

not, however, impose major restrictions or requirements on members. Our minimum requirements for the

acceptance of new members are outlined in the current Membership Agreement and Supplement and in the

Member Operational Requirements that apply under that Agreement. The Operational Requirements do

require that, within one year, the member must make us the primary source of supply and terminate any

previous participation in the program of any other major hardware wholesaler. There are currently no general

requirements (apart from special voluntary programs) where members have to make particular percentages of

purchases from us or have to achieve minimum retail performance levels, such as sales dollars per square foot.
<R>
     Our current strategic initiative, Vision 21, focuses on becoming a world class organization through encouraging

dealers to adopt certain merchandising, marketing and operational practices that are supported by some of our

most successful dealers to improve Ace's and the dealers' overall competitiveness and efficiency. The

cornerstones to Vision 21 are to improve retailer's sales and profits, streamline our processes, bring wholesale

and retail together as one Ace team and provide ultimate customer satisfaction. Vision 21 goals include minimizing

disparities between retail and wholesale, developing dealer-friendly procedures that take duplication

and costs out of dealers' operations, achieving consistent implementation of programs more rapidly and

improving the dealers' financial performance and their ability to pursue new stores and store expansions. As

retailers become Vision 21 retailers they are afforded various benefits to assist them to succeed at retail.
</R>
Special Charges and Assessments
<R>
     We sponsor a national advertising program. To pay for this program, we assess dealers an amount equal to

1.50% of their purchases (except purchases of LTL Plus products and certain hardware and software computer

systems), with minimum and maximum yearly assessments of $2,223.00 and $6,800.00, respectively, (based on

purchases) for each store location. We grant exemptions from these assessments and make various adjustments

to them for stores located outside the continental United States and for new stores during their start up year,

and for stores operating under an agreement that does not permit them to use "Ace" or "Ace Hardware". For

the year 2002, we will also impose a flat charge of $100.00 on May 1, 2002 and November 1, 2002 per store location

to pay for national sales promotions for Memorial Day and the day after Thanksgiving. The amount of our

national advertising assessment can be changed from time to time by our Board of Directors. We can also impose

assessments at a flat monthly rate or based on a percentage of sales for regional advertising not to exceed 2% of

a dealer's annual purchases. Regional advertising assessments are subject to the same minimum and maximum

amounts as the national advertising assessment.</R>

Every two weeks, we bill the member store for a special low volume account service charge of $75 if

annual purchases from us are less than $50,000. We will bill the member store for a special low volume

account service charge of $60 per bi-weekly billing statement period if purchases from us during such

period are less than $5,700.00. The low volume service charges that we bill to the store in a specific year

are automatically refunded if that store's total purchases increase to over $148,200 during the year. The

store is excused from this low volume account service charge during the first 12 months that it is a

member. There are some exceptions to our low volume account service charges that are described below:

1. Stores which purchase $148,200 of merchandise from us during the year, are given a credit on

the next billing statement for any low volume charges which we billed that store earlier in the

year. We then stop billing that store for low volume account service charges for the rest of the

year, even if its current purchases on a billing statement are less than $5,700; and

2. We do not bill low volume account service charges every two weeks if a store's sales volume with us

the year before was at our minimum ($148,200), but we will bill these charges in a lump sum to a

store's last statement of the year if that store does not reach our applicable minimum by that time.
<R>
     Low volume service charges are not included in a
retailer's purchases of merchandise that
qualify for patronage dividends.  An Ace store that falls below our minimum
purchase levels can
be subject to termination.</R>
     We add a late payment service charge on any past due balance that we are owed for merchandise,

services, or for a stock subscription. The current rate for the late payment service charge is .77% per

bi-weekly statement period, except in Texas where the charge is .384% and Georgia where the charge is

.692%. We consider a past due balance to exist whenever we do not receive payment of the amount shown

as due on a billing statement within 10 days after the date of that statement. We can change the rate of

our late payment service charge from time to time.

Effective August, 2001, we assess members operating under a standard Membership Agreement a

mandatory monthly fee for Core Retail Services in the amount of $197 per month for all single stores or

parent stores and $67 per month for all branch stores located in the United States. Core Retail Services

consist of the following elements:

1. ACENET. This service is our primary communications vehicle with our members. It is an

electronic network that allows defective goods claims processing, product search online or

through a CD-ROM catalog, electronic communications, employee testing and training courses,

review and payment of retailer statements and numerous other applications.

2. Material Safety Data Sheet Subscription Service. This service provides members with access

24 hours per day and 7 days per week to information on the chemical ingredients of certain

products that we sell.

3. Ace Training Network. This service is one of our retail training programs. Each single store or

parent store is credited with 16 points per month and each branch store is credited with 11 points

per month. A single store or parent store is one that has purchased or subscribed for a share of

our Class A voting stock. A branch store is one whose membership involves only shares (or a

subscription for shares) of our nonvoting Class C Stock. (See Article XXV, Section 2 of our By-laws).

A
store may use its points at any time to buy one of the training programs that we offer. If a
store does

not have enough points for the program that it
wants, it can use the points that it has and

be
billed the difference. Multiple stores and member groups can pool their points together 
     to purchase our training programs.



4. NRHA E-Tools. These include unlimited use of certain Internet-based services offered by

the National Retail Hardware Association (NRHA), including their Advanced Course in

Hardware Retailing, the Forte International Communications Survey and their Employee

Compensation Study.

5. Retail Pricing. This includes access to our national price shopping and ad data collected from

non-Ace stores, our suggested retail prices, our customized retail pricing strategy services and

catalog updates to our suggested retail prices.

Members operating under a Contractor agreement are assessed a mandatory monthly fee of $53 for

ACENET and the Material Safety Data Sheet Subsciption Service.



Trademark and Service Mark Registrations
<R>
     The names "ACE HARDWARE" and "ACE" are used extensively by members and ourselves in the

promotion, advertising and marketing of products and services that we sell. We have had the following

trademark and service mark registrations issued by the U.S. Patent and Trademark Office for our marks:
</R>
Registration
        Description of Mark      
   Type of Mark    Number      
Expiration Date
"ACE HARDWARE" with winged
  emblem
design                     
Service Mark    840,176     December 5, 2007
"ACE HARDWARE" with winged
  emblem
design                     
Trademark       898,070    
September 8, 2010
"THE PAINTIN' PLACE"                
Service Mark  1,138,654     August 12, 2010
"PACE" with
design                  
Service Mark  1,208,887     September 14, 2002
"ACE HARDWARE" with winged
  emblem
design                     
Trademark     1,277,581     May 15, 2004
"ACE HARDWARE" in stylized
  lettering
design                  
Trademark     1,426,137     January 27,
2007
"ACE" in stylized lettering design   Service Mark 
1,464,025     November 3, 2007
"ACE HARDWARE" in stylized
  lettering
design                  
Service Mark  1,486,528     April 26, 2008
"ACE HARDWARE AND
  GARDEN CENTER" in stylized
  lettering
design                  
Service Mark  1,487,216     May 3, 2008
"ACE NEW EXPERIENCE" in
  stylized lettering design         
Trademark     1,554,322     September 5,
2009
"ACE SEVEN STAR" in stylized
  lettering
design                  
Trademark     1,556,389     September
19, 2009
"ACE BEST BUYS" in circle design     Service Mark 
1,560,250     October 10, 2009
"ACENET"                            
Service Mark  1,574,019     December 26, 2009
"ACE IS THE PLACE"                  
Service Mark  1,602,715     June 19, 2010
"LUB-E"                             
Trademark     1,615,386     October 2,
2010
"ASK ACE"                           
Service Mark  1,653,263     August 6, 2010
"ACE 2000"                        
 
Service Mark  1,682,467     April 7, 2002
"ACE" in stylized lettering design   Trademark    
1,683,538     April 12, 2002
"THE OAKBROOK COLLECTION"
  in stylized lettering design      
Trademark     1,707,986     August 18,
2002
"ACE HARDWARE BROWN BAG
  BONANZA" with
design              
Service Mark  1,761,277     April 13, 2003
"ACE HARDWARE
  COMMITTED TO A QUALITY
  ENVIRONMENT"
design               
Service Mark  1,764,803     April 13, 2003
"CELEBRATIONS"              
       
Service Mark  1,918,785     September 12, 2005
Repetitive Stylized "A" design       Service Mark 
1,926,798     October 10, 2005
"The NEW AGE OF ACE" design         
Service Mark  1,937,008     November 21, 2005
"ACE RENTAL PLACE"
  in stylized lettering design       Service
Mark  1,943,140     December 19, 2005
"HELPFUL HARDWARE FOLKS"            
Service Mark  1,970,828     April 30, 2006
"ACE HOME CENTER"              
    
Service Mark  1,982,130     June 25, 2006
"SEALTECH"                        
 
Trademark     2,007,132     October 8,
2006
"GREAT FINISHES"                 
  
Trademark     2,019,696     November 26,
2006
"WOODROYAL"                      
  
Trademark     2,065,927     May 27, 2007
"ROYAL SHIELD"           
          
Trademark     2,070,848     June 10,
2007
"ROYAL TOUCH"              
        
Trademark     2,070,849     June 10,
2007
"QUALITY SHIELD"             
      
Trademark     2,102,305     September
30, 2007
"QUALITY TOUCH"                
    
Trademark     2,102,306     September
30, 2007
"STAINHALT"                      
  
Trademark     2,122,418     December 16,
2007
"ACE CONTRACTOR CENTER"             
Service Mark  2,158,681     May 19, 2008
"NHS NATIONAL
  HARDLINES SUPPLY"                 
Service Mark  2,171,775     July 7, 2008
"ACE COMMERCIAL &
  INDUSTRIAL SUPPLY"                
Service Mark  2,186,394     September 1, 2008
"THE OAKBROOK COLLECTION"           
Trademark     2,187,586     September 8,
2008
"ACE GARDEN PLACE"           
      
Service Mark  2,227,729     March 2, 2009
"ACE ROYAL"                    
    
Trademark     2,237,981     April 13,
2009
"HELPFUL HARDWARE CLUB"          
  
Service Mark  2,239,400     April 13, 2009
"THE FOLKS IN THE RED VEST"         
Service Mark  2,261,946     July 20, 2009
"ACE CONTRACTOR PRO"                
Trademark     2,273,483     August 31,
2009
"ILLUMINATIONS"             
       
Trademark     2,353,666     May 30, 2010
"ACE YOUR NEIGHBROHOOD
  SOLUTIONS PLACE"                  
Service Mark  2,386,359     September 12, 2010
"ACE" with accent
design             Service
Mark  2,378,123     August 15, 2010
"ACE SOLUTIONS PLACE"           
   
Service Mark  2,394,181     October 10, 2010
"ACE" with halo
design              
Service Mark  2,558,478     April 19, 2012
     As of the date of this filing, we also have the following applications for new registrations pending in

the U.S. Patent and Trademark Office:
Mark                                    
Type of goods/services
"STORE-IT-RIGHT"                        
hardware products, namely, hooks
                                        
brackets, knobs, hangers and
                                        
extensions for support or hanging
"ACE HOMEPLACE"                         
magazines
"COLOR YOUR LIFE"                       
indoor and outdoor paint, coatings and
                                        
varnishes
"CONTRACTOR CENTERS OF AMERICA"
and
design                              
retail store services in the field of
                                        
hardware and related goods
"NATIONAL SUPPLY NETWORK"               
wholesale store services; namely
                                        
providing wholesale industrial supplies
                                        
and equipment to commercial and
                                        
industrial customers
"NSN" in circle
design                  
wholesale store services; namely providing
                                        
wholesale industrial supplies and                                         
equipment to commercial and industrial
                                        
customers
Competition



Competitive conditions in the wholesale and retail hardware industry are intense and increasing.

Independent hardware retailers must remain competitive with discount stores and chain stores, such as

WalMart, Home Depot, Menard's, Sears, and Lowe's, and with other mass merchandisers. Retail hardware

stores have been slowly shifting their locations to high rent shopping centers. There has also been a

trend toward longer store hours. There is intense pressure on hardware retailers to obtain low cost wholesale

supply sources. In several markets in the United States, we also compete directly with other

dealer-owned wholesalers such as TruServ Corporation, Do it Best Corporation and United Hardware

Distributing Co.



Employees



We have 5,229 full-time employees, of which 1,590 are salaried employees. Excluding our Canadian

operations and Company-owned retail locations, we have 4,828 full-time employees to support our

domestic and international retailers. We also have, as of the end of the 2001 fiscal year, union contracts

covering one (1) truck drivers' bargaining unit and two (2) warehouse bargaining units. We consider our

employee relations with both union and non-union employees to be good, and we have had no strikes in

the past five years. In general, our employees are covered by either negotiated or nonnegotiated benefit

plans that include hospitalization, death benefits and, with few exceptions, retirement benefits.



Limitations on Ownership of Stock
<R>
     Our members own all of our outstanding shares of capital stock. Membership in Ace is

limited to approved dealers in hardware and related products who have Membership Agreements with

us. These are the only ones eligible to own or purchase shares of any class of our stock.</R>

No dealer is allowed to own more than 1 share of our Class A voting stock, no matter how many store

locations that dealer owns or controls. This ensures that each stockholder in our cooperative has equal

voting power. We treat an unincorporated member or a partnership member as being controlled by

someone else if 50% or more of the assets or profit shares of that member are owned by (i) another

person, partnership or corporation; or (ii) the owner(s) of 50% or more of the assets or profit shares of

another unincorporated business firm or (iii) the owner(s) of at least 50% of the capital stock of a corporation.

We treat a member that is a corporation as being controlled by someone else if at least 50% of the

capital stock of that member is owned by (i) another person, partnership or corporation; or (ii) the

owner(s) of at least 50% of the capital stock of another corporation; or (iii) the owner(s) of at least 50%

of the assets or profit shares of another unincorporated business.



Distribution of Patronage Dividends



<R>
     We operate on a cooperative basis for patronage purchases of merchandise from us that are made by

dealers who have become members of Ace. We also operate on a cooperative basis with dealers

who have subscribed for shares of our stock but who have not yet actually become "members" because they

have not yet fully paid for their $1,000 par value shares of our Class A voting stock. The dealers in either

of these two categories are entitled to receive patronage dividends once a year on an equitable basis.
</R>
     We made patronage dividend distributions at the following percentages of our sales in the warehouse,

bulletin and direct shipment categories and on the total sales of products manufactured by our Paint

Division during the past three fiscal years:
2001     2000     1999
Warehouse
Sales            4.27330%
4.43564% 4.98172%
Bulletin
Sales                
2.0%     2.0%     2.0%
Direct Shipment Sales          1.0%    
1.0%     1.0%
Paint
Sales                
8.9371%  8.1131%  7.8827%
Under our LTL Plus Program, we also calculate patronage dividends separately on sales of full or

partial truckloads of products purchased by eligible dealers from certain vendors (see discussion of LTL

Plus Program under the heading "Business.") The LTL Plus Program patronage dividend was .5% of

these sales for fiscal year 2001, 2000 and 1999.

Sales of merchandise under our Contractor and Industrial Distributor Programs are made on a

nonpatronage basis.



Patronage Dividend Determinations and Allocations
<R>
     The amounts that we distribute as patronage dividends consist of our gross profits on patronage business

that we do with dealers who qualify for patronage dividend distributions, less a proportionate share

of our expenses for administration and operations. Our gross profits consist of the difference between our

selling price for the merchandise that these dealers buy from us and our purchase price for that merchandise.

The total patronage dividend
paid to members is based on net earnings calculated in accordance 
accounting principles generally accepted in the United States of America after
reducing or
increasing net earnings for non-member income or losses. Our computation of patronage
dividends
excludes all of our income and expenses from activities that
are not directly related to
patronage transactions. The excluded items primarily consist of profits or
losses generated from
non-shareholder international dealers and non-shareholder retail accounts served through National Hardlines 
 Supply, Inc.
and our industrial
distributor and contractor programs, profits or losses realized from Ace 
Insurance Agency, Inc.,
New Age Insurance Limited, Ace Hardware Canada Limited, company-owned retail
locations and our
share of the profits or losses realized from our minority-owned investments
including Builder
Marts of America, Inc. and joint ventures.  Additionally, any
income or loss that we realize from
the disposition of property and equipment is excluded
from patronage dividends.

Additionally, the amount we distribute as patronage
dividends excludes profits or losses
generated from our non-shareholder programs.  (See the heading
"Business" and the subheading
"Non-Shareholder Programs.")
     Patronage dividends are usually paid to members within
90 days after the close of Ace's
fiscal year; however, the Internal Revenue Code (the "Code") permits
distribution of patronage
dividends as late as the 15th day of the ninth month after the close of Ace's
fiscal year, and
Ace may elect to distribute the annual patronage dividend at a later time than
usual in
accordance with the provisions of the code.
     Our By-laws provide that, by virtue of dealers being "members" of Ace (that is, by owning

shares of our Class A voting stock), they consent to include in their gross income for federal income tax

purposes all patronage dividends that we distribute to them. These distributions must be included in gross

income for the taxable year in which the dealer receives them. Dealers who have not yet fully paid the $1,000

purchase price for their shares of our Class A voting stock are also required to include all patronage dividends

we distribute to them in their gross income as explained above. Under our Stock Subscription Agreement,

dealers must expressly consent to take these patronage dividend distributions into their gross incomes.

The amount of the patronage dividends which dealers must include in their gross incomes includes

both the cash portion of patronage dividends and any portion of patronage dividends that we apply against

any indebtedness the dealer owes to us in accordance with Section 7 of Article XXIV of our By-laws. It

also includes any portion of patronage dividends that they receive in shares of our Class C nonvoting

stock, other property and patronage refund certificates. Ace also has the authority to issue a

portion of the patronage dividend in the form of other property.</R>

Under our present program, patronage dividends on each of our three basic categories of sales (warehouse

sales, bulletin sales and direct shipment sales) are allocated separately, as are patronage dividends

under our LTL Plus Program. Dividend percentage calculations are made with reference to the net earnings

derived from each of the respective categories. The 2001 patronage dividend rate for the LTL Plus

Program is .5% of our LTL Plus sales. The 2001 patronage dividend rates for direct shipment and bulletin

sales are 1.0% and 2.0%, respectively, while the current 2001 patronage warehouse dividend rate is 4.27%.

Patronage dividends are calculated separately for full and partial truckloads of products purchased

under the LTL Plus Program. (See the heading "Business", discussion of LTL Plus Program and the

subheading "Forms of Patronage Dividend Distributions" below.)
<R>
     Any manufacturing profit realized on intracompany sales of products manufactured by our Paint

Division is allocated and distributed as patronage dividends to eligible dealers in proportion to their respective

annual dollar purchases of paint and related products from that division. The earnings we realize on wholesale

sales of the Paint Division's products to our eligible dealers are currently distributed as patronage

dividends to them as part of the patronage dividends which they receive each year in the basic patronage

dividend categories of warehouse sales, bulletin sales and direct shipment sales. The 2001 paint dividend rate

is 8.94%. Under Section 8 of Article XXIV of our By-laws, if the Paint Division's manufacturing operations

for any year result in a net loss instead of a profit to the Paint Division, this loss would be netted

against the earnings we realized from our other activities during the year, so that the earnings available for

distribution as patronage dividends from these other activities would be reduced for the year. 
Therefore, if a loss were to result from Paint Division activities it would
result in a reduced
patronage dividend to all members irrespective of their purchases.</R>

We have established a LBM Retailer Incentive Pool Plan for our members who purchase LBM products

through Builder Marts of America, Inc. ("BMA"), and are eligible participants under our Contractor

Center standards. This is not a patronage dividend plan, but rather an allocation of the increase in our stock

investment in BMA. Under the plan, we calculate an annual estimate of the amount by which our stock in

BMA has increased or decreased in value from our initial investment, net of certain expenses. We allocate

this estimate to eligible members annually based on their qualifying purchases of LBM products.

A member's pool allocation only becomes vested and can only be redeemed upon the termination of the

member's Ace membership which results in the sale or redemption of Ace stock held for that location,

Ace's termination of the LBM Retailer Incentive Pool Plan, or Ace's liquidation, whichever occurs first.

Negative pool balances are not charged to members. The 2001 incentive pool rate under this plan is .40%

of qualifying purchases.



Forms of Patronage Dividend Distributions
<R>
     We make patronage dividend distributions to our eligible dealers in cash, shares of our Class C Stock

and patronage refund certificates according to a specific plan that has been adopted by our Board of

Directors. This plan can be changed from time to time by the Board as they deem fit depending on business

conditions and Ace's needs.</R>

This plan is summarized below for the purchases that our eligible dealers make from us for the year

2001 and subsequent years.

1. For each of a dealer's eligible stores, we initially calculate the minimum cash patronage dividend

distribution as follows:

(a) 20% of the first $5,000 of the total patronage dividends allocated for distribution each year

to the
dealer based on the purchases made for the eligible store;

(b) 25% of the portion of the total patronage dividends allocated for that store which exceed

$5,000 but do not exceed $7,500;

(c) 30% of the portion of the total patronage dividends allocated for that store which exceed

$7,500 but do not exceed $10,000;

(d) 35% of the portion of the total patronage dividends allocated for that store which exceed

$10,000 but do not exceed $12,500;

(e) 40% of the portion of the total patronage dividends allocated for that store which exceed

$12,500.

2. We distribute the portion of patronage dividends in excess of the cash or property amounts above

in the form of shares of our Class C nonvoting stock (par value $100 per share) until the total par

value of all shares of all classes of our capital stock that a
dealer holds for the eligible store equals the

greater of:

(a) $20,000; or

(b) the sum of purchases in the following categories that a
dealer made for the eligible store during

the most recent calendar year:

(i) 15% of the volume of Ace manufactured paint and related products purchases, plus

(ii) 3% of the volume of drop-shipment or direct purchases (excluding Ace manufactured

paint and related products), plus

(iii) 15% of the volume of warehouse and bulletin purchases (including STOP and excluding

Ace manufactured paint and related products), plus

(iv) 4% of the volume of LTL Plus purchases.



Please note, however, that we do not issue fractional shares of Class C Stock. We take any amount

that would result in a fractional share of stock and distribute it in cash or patronage refund certificates

instead.

3. The portion of a
dealer's total patronage dividends for each of the
dealer's eligible stores which exceeds the

sum of:

(a) the cash amount determined under Paragraph 1 above and

(b) the amount of Class C Stock determined under Paragraph 2 above is distributed to the
dealer in cash

up to certain limits. The total amount that a
dealer receives in cash for an eligible store cannot exceed

45% of that store's total patronage dividends for the year. If a store's total cash distribution

would exceed this 45% limit, then the distribution over that amount is made instead in the form

of a non-negotiable patronage refund certificate. Our Board of Directors determines the maturity

dates and interest rates of these patronage refund certificates before they are issued. These

certificates include provisions that give us a first lien on the amount of any indebtedness that

a
dealer owes us. The certificates also contain language subordinating them to all the rights and

claims of our secured creditors, general creditors and our bank creditors. Historically, these

patronage refund certificates have matured within five years from the date we issued them.

Article XXIV, Section 7 of our By-laws requires the cash portion of any patronage dividends to be

applied against any indebtedness a member owes us where the membership for his store is terminated

before the distribution of patronage dividends. Despite this, however, 20% of a terminated store's total

annual patronage dividends will be paid in cash if we receive a timely request for this form of payment.

Because of the requirement of the U. S. Internal Revenue Code that we withhold 30% of the annual

patronage dividends distributed to eligible dealers whose places of business are located in foreign countries

or Puerto Rico, the cash portion of patronage dividends to these dealers is a minimum of 30%. There

are exceptions to this 30% cash payment in the case of 1) unincorporated Puerto Rico dealers owned by

individuals who are U.S. citizens, 2) certain dealers incorporated in Guam, American Samoa, the

Northern Mariana Islands or the U.S. Virgin Islands. These exceptions apply if less than 25% of the stock

of these dealers is owned by foreign persons, and at least 65% of their gross income for the last three years

has been sufficiently connected with a trade or business in one of these locations or in the United States,

and 3) dealers located in countries maintaining tax treaties with the United States that provide for

reduced rates of withholding.

We also have certain loan programs that allow dealers to pay us back with part of their patronage dividend

distributions. For example, to help members buy standardized exterior signs identifying their stores,

our Board of Directors has authorized a loan program. Under this program, a dealer may apply to borrow

between $100 to $25,000 per location from us for this purpose. If a
dealer obtains a loan under this program,

the dealer may either repay it in twelve payments billed on the regular bi-weekly billing statement, or the
dealer may

apply the non-cash portion of the annual patronage dividends (for up to the next three annual patronage

dividend distributions) toward payment of the loan.

Our Board of Directors has also authorized a loan program to help qualified dealers pay for costs of

converting their stores from another hardware distributor's program to our program. Under this loan

program, these dealers can borrow up to $95,000 per store. If the
dealer obtains a loan under this program, we will

apply the non-cash portion of the
dealer's annual patronage dividends (for up to the next three annual patronage

dividend distributions) towards payment of the loan. Unless extended by the Board of Directors, this loan

program will remain in effect until June 1, 2002 or until 100 loans are made, whichever occurs first.

Our Board of Directors has also authorized finance programs to help qualified dealers buy certain

computer systems from us and to finance capital improvements with patronage dividends. The amount

financed cannot exceed 80% of the cost of any system. For PAINTMAKER computers, members have

applied to borrow between $4,000 to $15,000 per location repayable over a period of three (3) years.



Under these programs, members have directed us to first apply the patronage refund certificate

portion of their patronage dividend distributions toward the balance owed on financed items and next to

apply patronage dividends which would otherwise be payable for the same year in the form of our Class C

Stock. These signage, computer financing and store conversion programs may be revised or discontinued

by our Board at any time.

Members also have the ability to apply for a Capital Stock loan which is designed to provide them with

access to their future patronage dividends to assist them in opening new retail stores or to assist in significant

store expansions. These loans are repaid at the end of seven (7) years from rebate distributions of the

non-cash portion of the annual rebate on the respective store during that period.



Federal Income Tax Treatment of Patronage Dividends
<R>
     Both the shares of Class C nonvoting stock and the patronage refund certificates that we use to pay

patronage dividends are "qualified written notices of allocation" within the meaning of Sections 1381

through 1388 of the U.S. Internal Revenue Code. Ace may pay a portion of its dividend in the

form of other qualified property pursuant to Section 1382 of the U.S. Internal Revenue Code. These

Sections of the Internal Revenue Code deal with the income tax treatment of cooperatives and their

patrons and have been in effect since 1963. The dollar amount stated on a qualified written notice of allocation

and fair market value of other qualified property must be taken into the gross income of the person

to whom the notice is issued, even though this dollar amount may not actually be paid to the person in

the same year that it is taxed.</R>

In order for us to receive a deduction from our gross income for federal income tax purposes for the

amount of any patronage dividends that we pay to a patron (that is, to one of our eligible and qualifying

dealers) in the form of qualified written notices of allocation or other qualified property, we have to pay

(or apply against any indebtedness that the patron owes us in accordance with Section 7 of Article XXIV

of our By-laws) not less than 20% of each patron's total patronage dividend distribution in cash and the

patron also has to consent to having the written notices of allocation at their stated dollar amounts, and

other qualified property at the fair market value, included in his gross income for the taxable year in which

he receives them. The Internal Revenue Code also requires that any patronage dividend distributions that

we deduct on our federal income tax return for business we do with patrons must be paid to those patrons

within eight and one-half months after the end of that taxable year.
<R>
     By becoming one of our "members" by owning 1 share of Class A voting stock, a
patron is deemed

under the U.S. Internal Revenue Code to have consented to take the written notices of allocation and

other qualified property that we distribute into the
patron's gross income. Such consent is deemed because

of 1) the act of obtaining or retaining membership in Ace, and 2) because our By-laws provide

that the membership constitutes this consent, and we give written notification of that By-law provision.

Under another provision of the Internal Revenue Code, dealers who have subscribed for shares of

our stock are also deemed to have consented to take the dollar amounts of their written notices of allocation

and other qualified property into their gross incomes. This occurs because of the consent provisions

included in the Subscription Agreement for our stock.</R>

A patron receives a patronage refund certificate as part of a
patron's patronage dividends (see the subheading

"Forms of Patronage Dividend Distributions"), the
patron may be deemed to have received interest income.

This interest would arise in the form of an original issue discount to the extent that the face amount of

the certificate exceeds the present value of the stated principal and interest payments that we have to pay

the patron under the terms of the certificate. This interest income would be taxable to a
patron's "ratably" over the

term of the certificate under Section 7872(b) (2) of the U.S. Internal Revenue Code. Present value for

this purpose is determined by using a discount rate equal to the applicable Federal rate in effect as of the

day of issuance of the certificate, compounded twice a year.



We are required to backup withhold for federal income tax on the total patronage dividend distribution

we make to anyone who has not furnished us with a correct taxpayer identification number. We can

also be required to backup withhold federal taxes on the cash portion of each patronage dividend distribution

made to someone who fails to certify to us that he is not subject to backup withholding. This

backup withholding obligation based on a failure to certify may not be applicable, however, unless 50%

or more of the total distribution is made in cash. Since we distribute all of our patronage dividends for a

given year at the same time and since our current patronage dividend plan (see the heading "Business",

subheading "Forms of Patronage Dividend Distributions") does not permit any member store to receive

more than 45% of its patronage dividends for the year in cash, we believe that a certification failure like

this should not ordinarily have any effect on Ace or any of its dealers.

Patronage dividends that we distribute to patrons who are located in foreign countries or certain

U.S. possessions (including those who are incorporated in Puerto Rico or who reside in Puerto Rico but

have not become citizens of the United States) have been held to be "fixed or determinable annual or

periodic income." Patrons who receive this type of income are currently required to pay a tax of 30% of

the amount received under Sections 871(a)(1)(A) and 881(a)(1) of the Internal Revenue Code. When

dealers are subject to this 30% tax, we must withhold it from their patronage dividends and pay it over to

the U.S. Internal Revenue Service. The above does not apply to a corporation organized in Guam,

American Samoa, the Northern Mariana Islands or the U. S. Virgin Islands if less than 25% of its stock is

owned by foreign persons and at least 65% of its gross income for the last three years has been effectively

connected with the conduct of a trade or business in that location or in the United States. A reduced rate

of withholding may apply to dealers located in countries maintaining tax treaties with the United States.

The 20% minimum portion of the patronage dividends that must be paid in cash to patrons other than

those discussed above may not be enough, depending upon the patron's income tax bracket, to pay all of

the patron's federal income tax on his annual patronage dividend distributions. In our management's

opinion, the payment of a minimum of 20% of total patronage dividends in cash each year will not have

a material adverse affect on our operations or on our ability to obtain sufficient working capital for the

normal requirements of our business.



Membership Agreements



Persons
who apply to become an Ace member, must sign a Subscription Agreement to purchase our

stock. They must also sign our customary Membership Agreement and Supplement and submit

a payment of $1,500 ($2,500 for conversions or new investor ground-ups) with your signed

Membership Agreement and Supplement. We use this fee toward our estimated costs of processing

the membership applications. If a
person submits a membership application and we accept it, we sign your

Stock Subscription Agreement and your Membership Agreement and Supplement and send them

back to you for your records. Your membership may generally be terminated upon various notice

periods and for various reasons (including voluntary termination by either of us). The details of these

reasons and notice periods are in the Membership Agreement. These reasons for termination and

notice periods apply except where special laws or regulations in certain locations limit our right to

terminate memberships, or require longer notice periods.



Non-Shareholder Programs



In 1989, our Board of Directors first authorized us to affiliate non-shareholder international dealers

who operate retail businesses outside the United States, its territories and possessions. These international

dealers sign agreements that differ from our regular Membership Agreement. They may be granted

a license to use certain of our trademarks and service marks, but they do not sign stock subscription agreements

or become shareholders, nor do they receive patronage dividends.



In 1995, our Board of Directors first authorized us to affiliate non-shareholder retail accounts other

than international dealers. These accounts, which are generally served through our wholly-owned

subsidiary National Hardlines Supply, Inc. ("NHS"), are not granted an ongoing license to use our trademarks

and service marks. They can purchase selected types of products from us for resale. They are not

members of our cooperative, and therefore do not own our stock or receive patronage dividends.

In 1996, we established a license program for international non-shareholder dealers. These international

licensees typically receive the exclusive right to use our trademarks and service marks, as well as

exclusive rights to distribute the merchandise they purchase from us in their home countries.

International licensees pay us a negotiated license fee and ongoing royalties on their retail sales in

exchange for these rights, and for our ongoing training and support.

In 1996, we also began operations through our subsidiary Ace Hardware Canada, Limited ("Ace

Canada"). Ace Canada's customers are non-shareholders who do not receive patronage dividends from us.

Only customers signed under the Ace Canada Franchise Agreement are licensed to use our trademarks

and service marks.
<R>
     In 1998, the Company began developing joint ventures with certain dealers as a way of increasing the

Ace presence in key markets without the need for Ace to use solely its own resources to open company

stores. For each joint venture, the Company and the dealer enter into a Limited Liability Company

Agreement, with the dealer acting as the managing member, and form a limited liability company ("LLC")

to operate the joint venture stores. In each joint venture, we own 50% or less of the LLC's

units. Currently, Ace has an ownership interest in six joint ventures. In the future, we may

explore other joint venture opportunities with our members; however, we consider each situation unique

and we evaluate each opportunity on its own merits.</R>

In our sole discretion, we may offer a member a mutually agreeable termination arrangement.

In some situations, a member who terminates on this basis may be offered the opportunity to

purchase products from us (including Ace private label products) for a period of up to 5 years after the

termination of membership. The former member is not required to make any such purchases from us,

but must maintain favorable credit status in order to do so.

In 2001, we developed a non-shareholder industrial distributor program and contractor program.

These retailers can purchase selected types of products from us for resale. They are not members of our

cooperative, and therefore do not own stock or receive patronage dividends. These programs are made

available to cooperative members, however, members will not receive patronage dividends for purchases

of products under these programs.
<R>
     In 1999, we entered into an agreement with Builder
Marts of America (BMA), to combine our
lumber and building materials division (the "LBM division") with BMA,
a non-cooperative buying
group for lumber and building materials in the United States.  Under this
agreement, we 
contributed certain business assets (primarily vendor rebate receivables, fixed
assets and
inventories) in exchange for a non-controlling (28%) interest in the combined
entity.  The
investment in the combined entity is accounted for under the equity method of
accounting.  As a
result of this transaction, we have established an LBM Retailer Incentive Pool
Plan for our
members who purchase LBM products through BMA.  This program is not a
patronage dividend plan but
rather a process for allocating the increase in the value of our investment in
BMA to those 
qualifying dealers who purchase LBM products through BMA.  (See the heading
"Ace's Business",
subheading "Patronage Dividend Determinations and Allocations").
     Sales to international non-shareholder dealers accounted for approximately 4.4% of our merchandise sales in

2001, approximately 6.7% of our merchandise sales in 2000 and approximately 6.5% of our merchandise sales in 1999.

Sales to domestic non-shareholder locations accounted for less than 2.0% of our total sales in 2001, less

than 2.5% of our total sales in 2000 and less than 1.5% of our total sales in 1999. (See Appendix A, Article

XXV, section 2 of our By-laws regarding International Retail Merchants and non-member accounts.)

</R>



Item 2. Properties



Our general offices are located at 2200 Kensington Court, Oak Brook, Illinois 60523. Information

about our main properties appears below:
Square Feet   
Owned          Lease
                                   
of Facility     
or         Expiration
             Location            
(Land in Acres)  Leased         
Date
General Offices:
   Oak Brook,
Illinois               
291,816      Leased  September 30, 2009
   Downers Grove,
Illinois            
23,962      Leased  June 30, 2004
   Markham, Ontario,
Canada(1)        
15,372      Leased  February 28, 2006
Distribution Warehouses:
   Lincoln,
Nebraska                 
345,440      Leased  December 31, 2006
   Arlington,
Texas                  
313,091      Leased  July 31, 2003
   Perrysburg,
Ohio                  
393,720      Leased  December 31, 2004
   Tampa,
Florida                    
391,755       Owned
   Yakima,
Washington                
507,030       Owned
   Maumelle,
Arkansas                
597,253       Owned
   LaCrosse,
Wisconsin               
591,964       Owned
   Rocklin, California
(4)           
478,468       Owned
   Rocklin,
California                
75,000      Leased  July 31, 2003
   Gainesville,
Georgia              
481,013       Owned
   Prescott Valley,
Arizona          
631,485       Owned
   Princeton,
Illinois             
1,094,756       Owned
   Chicago, Illinois
(2)              
18,168      Leased  May 31, 2002
   Summit, Illinois
(2)               
37,236      Leased  February 28, 2017
   Baltimore, Maryland
(2)            
19,600      Leased  December 31, 2008
   Colorado Springs,
Colorado        
494,219       Owned
   Wilton, New
York                  
800,525      Leased  September 1, 2007
   Loxley,
Alabama                   
798,698      Leased  May 27, 2009
   Brantford, Ontario, Canada (3)    
354,000      Leased  March 31, 2006
   Calgary, Alberta, Canada (3)      
240,000      Leased  June 30, 2002
   Prince George County, Virginia    
798,786       Owned
   Fort Worth, Texas
(2)              
10,915      Leased  December 31, 2005
Print Shop Facility:
   Downers Grove,
Illinois            
41,000      Leased  April 30, 2003
Paint Manufacturing Facilities:
   Matteson,
Illinois                
371,411       Owned
   Chicago Heights,
Illinois         
194,000       Owned
(1) This property is leased by our subsidiary Ace Hardware Canada Limited for its corporate office.

(2) This property is leased for use as a freight consolidation center.

(3) Our subsidiary, Ace Hardware Canada Limited, leases this property for a distribution warehouse.

Ace Hardware Canada Limited has exercised an option to terminate the lease for the Calgary Warehouse

effective April 30, 2002.

(4) Ace has entered into an agreement to sell this property and plans to acquire vacant land and

construct a larger replacement warehouse.



In addition to the above, we or our subsidiary, Ace Corporate Stores, Inc., lease 26 retail hardware

stores ranging from 13,000 to 25,000 square feet in size located in the following states: Colorado, Georgia,

Illinois, New Jersey, Oregon, Washington and Wisconsin.

We also lease a fleet of trucks and equipment for the main purpose of delivering merchandise from

our warehouses to our dealers.



Item 3. Legal Proceedings



In the normal course of our business, we are a party to various legal proceedings. We do not expect

that any currently pending proceedings will, individually or in the aggregate, have a material adverse

effect on our business, results of operations or financial condition.



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



None.

``

``

</R>
Operations 2001 Compared to 2000
<R>
     Consolidated sales decreased 1.6%. Domestic merchandise
sales increased .7% primarily due to conversions of

new stores to the Ace program. Sales to our existing retailer base were flat due to the soft economy and

inventory reductions at retail. International sales decreased 35.6% primarily due to a sale of Ace affiliated

stores and reduced sales in Canada.

Gross profit decreased $1.9 million; however increased slightly as a percent of total sales from 9.52% in 2000

to 9.61% in 2001. The decrease resulted primarily due to lower sales and lower cash discounts from reduced

merchandise purchases. Higher vendor rebates, paint manufacturing margins and margin from company-owned

retail locations offset the gross profit decline and contributed to the increase in gross profit as a percent of sales.

Warehouse and distribution expenses increased $2.7 million over 2000 and increased as a percent of

total sales from 1.29% in 2000 to 1.40% in 2001. Increased utilities and distribution expenses associated

with the new Loxley, Alabama distribution facility which was open for a full year in 2001 and the start-up

of the Prince George, Virginia distribution facility drove the higher expenses. Higher logistics income

partially offset the increased expenses.

Selling, general and administrative expenses decreased $1.1 million due to continued cost control

measures put into place offset by expenses related to the closure of three distribution facilities.

Retail success and development costs decreased $3.0 million due to continued cost control measures.

Expenses in this category are directly related to retail support of the Ace retailer. These
expenses consist primarily of field personnel and related costs, marketing,
advertising and
training programs for Ace retailers and expenses of company-owned retail
locations. Ace continues

to make investments in retail initiatives under its Vision 21 strategy to support Ace retailers.</R>

Interest expense increased $1.4 million due to higher average borrowing levels during the year

partially offset by lower interest rates. The
decline in interest rates is primarily the result
of a declining interest rate environment and the decline in LIBOR, the basis for
which our
interest rate is determined.  The higher borrowing levels result from the completion of the

Loxley, Alabama and Prince George, Virginia distribution centers, the expansion of the LaCrosse,

Wisconsin facility and increased retailer dating programs.

Other income decreased $2.1 million primarily due to an
increase in the write-down of a
minority-owned interest of $1.7 million and decreased interest income due to
declining interest
rates offset by a $3.6 million nonrecurring gain on pension plan termination
in 2000, the gain
recognized on the sale of two distribution facilities and higher income realized
on
non-controlling investments in affiliates.</R>

Income taxes increased $3.3 million primarily due to deferred taxes recorded on the sale/exchange of

two distribution centers.



Operations 2000 Compared to 1999
<R>
     On June 30, 1999 Ace entered into a business combination agreement with Builder Marts

of America, Inc. (BMA) to combine its lumber and building materials division (the "LBM
Division")
with BMA. Under this agreement, Ace contributed defined business assets (primarily
vendor
rebate receivables, fixed assets and inventories) for a non-controlling interest in the combined

entity. The investment in the combined entity is accounted for under the equity method of accounting.

The accompanying consolidated financial statements include the financial results of the LBM Division

through the closing date of August 2, 1999.

The total sales decrease of 7.2% was affected by the business combination of the LBM Division with

BMA. As a result of this transaction, lumber and building materials (LBM) sales are not reported within

Ace's sales results after August 2, 1999. Excluding LBM, sales increased 4.8% in 2000 primarily

due to conversions to Ace membership, additional sales to non-members, increased existing retailer

volume and targeted efforts on new store development within our retailer base. Domestic basic business

merchandise sales increased 5.3%, while international basic business sales decreased 1.8%.

Gross profit increased $6.3 million and increased as a percent of total sales from 8.64% in 1999 to

9.52% in 2000. The increase, as a percent of sales, results primarily from the loss of lower margin LBM

sales volume since August 1999. Basic business (excluding LBM Division) gross profit decreased slightly as

a percent of basic business sales (9.52% in 2000 vs. 9.55% in 1999) due to a sales mix shift towards the lower

margin direct ship sales category and higher warehousing costs absorbed into inventory. Increased vendor

rebates and increased company-owned store gross profit driven by higher sales volume partially offset the

year-to-date gross profit percentage decline.

Warehouse and distribution expenses increased $4.8 million over 1999 and increased as a percent of

total sales from 1.05% in 1999 to 1.29% in 2000. As a percent of basic business sales, these costs increased

from 1.18% in 1999 to 1.29% in 2000. Higher distribution wages required to support the increased sales

volume combined with pre-opening costs associated for a new Loxley, Alabama distribution facility are

partially offset by higher logistics income.

Selling, general and administrative expenses decreased $395,000 or 0.5% due to continued cost

control measures and lower LBM Division costs. Higher information technology costs and expenses associated

with opening the Loxley, Alabama distribution facility partially offset these expense decreases and,

along with the exclusion of LBM sales in the sales base, account for the increase in general and administrative

expenses as a percent of sales.



Retail success and development expenses increased $14.4 million primarily due to costs associated

with operating additional company-owned stores and investments made at retail to support our Vision 21

strategy. As part of this strategy, Ace entered into an agreement with an outside party to co-develop

a common retail software platform for our dealers. This resulted in a write-down of prior software

development costs which will not contribute to the new system. Increased advertising income partially

offset these expense increases. Increases in this category are directly related to retail support of the Ace

retailer as Ace continues to make retail investments in its dealer base.
These expenses consist
primarily of field personnel and related costs, marketing, advertising and
training programs for
Ace retailers and expenses of company-owned retail locations.</R>

Interest expense increased $5.2 million due to higher average borrowing levels and increased interest

rates. The increased borrowing levels resulted from the construction of the Loxley, Alabama distribution

center, the expansion of our LaCrosse, Wisconsin facility and increased retailer dating programs.
<R>
     Other income increased $3.8 million primarily due to a
$3.6 million gain on pension plan
termination, decreased interest income due to additional retailer loan programs
and additional
income realized on non-controlling investments in affiliates
offset by a $3.3 million write-off
of a minority-owned investment.</R>

Income tax expense decreased due to increased operating losses from non-patronage activities.



Impact of New Accounting Standards
<R>
     In July 2001, the FASB issued SFAS No. 141, "Business Combinations" and SFAS No. 142, "Goodwill

and Other Intangible Assets." SFAS No. 141 requires that all business combinations be accounted for

under the purchase method. The statement further requires separate recognition of intangible assets that

meet one of two specified criteria. The statement applies to all business combinations initiated after June30, 2001. SFAS No. 142 requires that an intangible asset that is acquired shall be initially recognized and

measured based on its fair value. The statement also provides that goodwill should not be amortized, but

shall be tested for impairment annually, or more frequently if circumstances indicate potential impairment,

through a comparison of fair value to its carrying amount. SFAS No. 142 is effective for fiscal

periods beginning after December 15, 2001. Ace will implement the pronouncement beginning
in the
first quarter of fiscal year 2002. Ace estimates that the adoption of this standard will
not have
a material effect on its financial statements.

In July 2001, the FASB issued SFAS No. 144. "Accounting for the Impairment or Disposal of Long-

Lived Assets." SFAS No. 144 addresses financial accounting and reporting for the impairment or disposal of

long-lived assets. This statement supercedes SFAS No. 121 on the same topic and the accounting and certain

reporting provisions of Accounting Principles Board ("APB") Opinion No. 30, "Reporting the Results of

Operations-Reporting Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and

Infrequently Occurring Events and Transactions," for the disposal of a segment of a business (as defined in

that Opinion). This statement also amends Accounting Research Bulletin No. 51, "Consolidated Financial

Statements" to eliminate the exception to consolidation for a subsidiary for which control is likely to be

temporary. SFAS No. 144 is effective for fiscal periods beginning after December 15, 2001. Ace

will implement the pronouncement beginning in the first quarter of fiscal year 2002. Ace
estimates that the adoption of this standard will not have a material effect on its financial statements.



Inflation and Changes in Prices



Ace's business is not generally governed by contracts that establish prices substantially in

advance of the receipt of goods or services. As vendors increase their prices for merchandise supplied to
Ace, Ace increases the price to its dealers in an equal amount plus the normal handling
charge
on such amounts. In the past, these increases have provided adequate gross profit to offset the

impact of inflation on operating expenses.





Item 7a. Quantitative and Qualitative Disclosures about Market Risk



Ace is subject to certain market risks, including foreign currency and interest rates. Ace

uses a variety of practices to manage these market risks, including, when considered appropriate,

derivative financial instruments. Ace uses derivative financial instruments only for risk

management and does not use them for trading or speculative purposes. Ace is exposed to

potential gains or losses from foreign currency fluctuations affecting net investments and earnings

denominated in foreign currencies. Ace's primary exposure is to changes in exchange rates for

the U.S. dollar versus the Canadian dollar.

Interest rate risk is managed through a combination of fixed rate debt and variable rate short-term

borrowings with varying maturities. At December 29, 2001, all long-term debt was issued at fixed rates.

The table below presents principal amounts and related weighted average interest rates by year of

maturity for Ace's investments and debt obligations:




2002    2003    2004    
2005    2006    Thereafter   
Total
                                                       
(000's omitted)
Assets:
   Short-term investment-
     fixed
rate                       
-    $3,474  $1,043     
-    $3,125     
$9,516    $17,158
   Fixed interest
rate                
-     6.96%   5.75%     
-     7.98%      
6.77%      6.97%
Liabilities:
   Short-term borrowings-
     variable
rate               
$72,600      
-       -      
-       
-          
-     $72,600
   Average variable interest rate  
2.58%       -      
-      
-       
-          
-       2.58%
   Long-term debt-fixed rate      $
7,179   $6,412  $6,066 $13,195  $17,857   
$126,857   $177,566
   Average fixed interest rate     
7.07%    7.07%   7.09%  
7.08%    7.09%      
7.12%      7.07%

Ace is exposed to credit risk on certain assets, primarily accounts receivable. Ace
provides
credit to customers in the ordinary course of business and performs ongoing credit evaluations.

Concentrations of credit risk with respect to trade receivables are limited due to the large number of

customers comprising Ace's customer base. Ace currently believes its allowance for
doubtful
accounts is sufficient to cover customer credit risks.

Ace's various currency exposures often offset each other, providing a natural hedge against

currency risk. Ace has utilized foreign exchange forward contracts to hedge non-U.S. equity

investments. Gains and losses on these foreign currency hedges are included in the basis of the underlying

hedged investment. Accumulated other comprehensive loss at December 29, 2001 and December
30,
2000 includes gains of approximately $2.0 million related to previously settled foreign currency

contracts. Ace did not have any outstanding foreign exchange forward contracts at December29, 2001. Settlement of foreign sales and purchases are generally denominated in U.S. currency resulting

in limited foreign currency transaction exposure.</R>



Item 8. Financial Statements and Supplementary Data



Financial statements covered by the report of the Company's independent certified public accountants

are listed on Page F-1.



Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosures



None.



INDEX TO EXHIBITS
Exhibits
   Enclosed                          
Description<R>
21            
21 Subsidiaries of the Registrant.*
23            
23 Consent of KPMG LLP.*
24            
24 Powers of Attorney.
*Filed herewith.  All other exhibits previously filed.</R>
   Exhibits
 Incorporated
 by Reference                        
Description
3-A           
Copy of Restated Certificate of Incorporation of the Registrant, as amended
              
through June 3, 1996, filed as Exhibit 3-A to Post-Effective Amendment No. 6 to
              
the Registrant's Form S-2 Registration Statement (Registration No. 33-58191) on or
              
about March 22, 2001 and incorporated herein by reference.
3-B           
Copy of By-laws of the Registrant as amended through January 26, 2002 included
              
as Appendix A to the Prospectus constituting a part of the Registrant's Form S-2
              
Registration Statement filed on or about March 22, 2002 and incorporated herein
              
by reference.
4-A           
Specimen copy of Class B Stock certificate as revised as of November, 1984 filed as
              
Exhibit 4-A to Post-Effective Amendment No. 2 to the Registrant's Form S-1
              
Registration Statement (Registration No. 2-82460) on or about March 15, 1985 and
              
incorporated herein by reference.
4-B           
Specimen copy of Patronage Refund Certificate as revised in 1988 filed as Exhibit
              
4-B to Post-Effective Amendment No. 2 to the Registrant's Form S-1 Registration
              
Statement (Registration No. 33-4299) on or about March 29, 1988 and incorporated
              
herein by reference.
4-C           
Specimen copy of Class A Stock certificate as revised in 1987 filed as Exhibit 4-C
              
to Post-Effective Amendment No. 2 to the Registrant's Form S-1 Registration
              
Statement (Registration No. 33-4299) on or about March 29, 1988 and incorporated
              
herein by reference.
4-D           
Specimen copy of Class C Stock certificate filed as Exhibit 4-I to the Registrant's
              
Form S-1 Registration Statement (Registration No. 2-82460) on or about March 16,
              
1983 and incorporated herein by reference.
4-E           
Copy of current standard form of Subscription for Capital Stock Agreement to be
              
used for dealers to subscribe for shares of the Registrant's stock in conjunction with
              
new membership agreements submitted to the Registrant filed as Exhibit 4-E to
              
the Registrant's Form S-2 Registration Statement filed on or about March 22, 2002
              
and incorporated herein by reference.
4-F           
Copy of plan for the distribution of patronage dividends with respect to purchases
              
of merchandise made from the Registrant for the year 2000 and subsequent years
              
adopted by the Board of Directors of the Registrant on December 6, 2000 and filed
              
as Exhibit 4-F to Post-Effective Amendment No. 6 to the Registrant's Form S-2
              
Registration Statement (Registration No. 33-58191) on or about March 22, 2001
              
and incorporated herein by reference.
4-G           
Copy of LBM Retailer Incentive Pool Plan adopted on December 8, 1999 by the
              
Board of Directors of the Registrant filed as Exhibit 4-G to Post-Effective
              
Amendment No. 5 to the Registrant's Form S-2 Registration Statement
              
(Registration No. 33-58191) filed on or about March 15, 2000 and incorporated
              
herein by reference.
10-A          
Copy of Ace Hardware Corporation Retirement Benefits Replacement Plan Restated
              
and Adopted December 7, 1993, consolidated and refiled with First, Second, Third and
              
Fourth Amendments filed as Exhibit 10-A to the Registrant's Form S-2 Registration
              
Statement on or about March 22, 2002 and incorporated herein by reference.
10-B          
Copy of Ace Hardware Corporation Directors' Deferral Option Plan Amended and
              
Restated as of January 1, 1997 (for years 1995-2001), consolidated and refiled with First
              
and Second Amendments filed as Exhibit 10-B to the Registrant's Form S-2 Registration
              
Statement on or about March 22, 2002 and incorporated herein by reference.
10-C          
Copy of First Amendment to Ace Hardware Corporation Deferred Compensation
              
Plan adopted on August 19, 1997 filed as Exhibit 10-C to Post-Effective Amendment
              
No. 3 to the Registrant's Form S-2 Registration Statement (Registration No.
              
33-58191) on or about March 18, 1998 and incorporated herein by reference.
10-D          
Copy of Restated PREP Plan (formerly known as Executive Supplemental Benefit
              
Plans) adopted on December 6, 2000 filed as Exhibit 10-D to Post-Effective
              
Amendment No. 6 to the Registrant's Form S-2 Registration Statement (Registration
              
No. 33-58191) on or about March 22, 2001 and incorporated herein by reference.
10-E          
Copy of Ace Hardware Corporation Restated Officer Incentive Plan effective
              
January 1, 1999 consolidated and refiled with First, Second and Third Amendments
              
filed as Exhibit 10-E to the Registrant's Form S-2 Registration Statement on or about
              
March 22, 2002 and incorporated herein by reference.
10-F          
Copy of Second Modification of Amended and Restated Note Purchase and Private Shelf
              
Agreement dated as of August 23, 1996 as amended by the First Modification of Amended
              
and Restated Purchase and Private Shelf Agreement dated as of April 2, 1997 with The
              
Prudential Insurance Company of America filed as Exhibit 10-F to Post-Effective
              
Amendment No. 3 to the Registrant's Form S-2 Registration Statement (Registration No.
              
33-58191) on or about March 18, 1998 and incorporated herein by reference.
10-G          
Copy of Participation Agreement with PNC Commercial Corp. dated December 17,
              
1997 establishing a $10,000,000 discretionary leasing facility for the purchase of land
              
and construction of retail hardware stores filed as Exhibit 10-G to Post-Effective
              
Amendment No. 3 to the Registrant's Form S-2 Registration Statement (Registration
              
No. 33-58191) on or about March 18, 1998 and incorporated herein by reference.
10-H          
Copy of form of Executive Officer Employment Agreement effective January 1,
              
1996 filed as Exhibit 10-a-17 to Post-Effective Amendment No. 1 to the Registrant's
              
Form S-2 Registration Statement (Registration No. 33-58191) filed on or about
              
March 11, 1996 and incorporated herein by reference.
10-I          
Copy of Note Purchase and Private Shelf Agreement with The Prudential
              
Insurance Company of America dated September 27, 1991 securing 8.74% Senior
              
Series A Notes in the principal sum of $20,000,000 with a maturity date of July 1, 2003
              
filed as Exhibit 10-A-q to the Registrant's Form S-2 Registration Statement (Registration
              
No. 33-46449) on or about March 23, 1992 and incorporated herein by reference.
   Exhibits
 Incorporated
 by Reference                        
Description
10-J          
Copy of current standard form of Ace Hardware Corporation International
              
Franchise Agreement filed as Exhibit 10-J to Post-Effective Amendment No. 6 to
              
the Registrant's Form S-2 Registration Statement (Registration No. 33-58191) on
              
or about March 22, 2001 and incorporated herein by reference.
10-K          
Copy of current standard form of Ace Hardware Membership Agreement filed as
              
Exhibit 10-P to Pre-Effective Amendment No. 2 to the Registrant's Form S-2
              
Registration Statement (Registration No. 33-58191) on or about April 26, 1995 and
              
incorporated herein by reference.
10-L          
Copy of Supplement to Ace Hardware Membership Agreement effective April 1,
              
2000, filed as Exhibit 10-L to Post-Effective Amendment No. 6 to the Registrant's
              
Form S-2 Registration Statement (Registration No. 33-58191) on or about March
              
22, 2001 and incorporated herein by reference.
10-M          
Copy of 6.47% Senior Series A notes in the aggregate principal sum of $30,000,000
              
issued September 22, 1993 with a maturity date of June 22, 2008 and $20,000,000
              
Private Shelf Facility, pursuant to Note Purchase and Private Shelf Agreement with
              
the Prudential Insurance Company of America dated as of September 22, 1993
              
filed as Exhibit 10-R to Post-Effective Amendment No. 2 to the Registrant's Form
              
S-2 Registration Statement (Registration No. 33-46449) on or about March 23,
              
1994 and incorporated herein by reference.
10-N          
Copy of Lease dated March 24, 1997 for print shop facility of Registrant in
              
Downers Grove, Illinois filed as Exhibit 10-N to Post-Effective Amendment No. 3
              
to the Registrant's Form S-2 Registration Statement (Registration No. 33-58191)
              
on or about March 18, 1998 and incorporated herein by reference.
10-O          
Copy of Lease dated September 30, 1992 for general offices of the Registrant in
              
Oak Brook, Illinois filed as Exhibit 10-a-u to the Post-Effective Amendment No.1
              
to the Registrant's Form S-2 Registration Statement (Registration No. 33-46449)
              
on or about March 22, 1993 and incorporated herein by reference.
10-P          
Copy of Deed of Lease with Arundel II L.L.C. dated as of January 30, 1998 for the
              
Registrant's redistribution center in Odenton, Maryland filed as Exhibit 10-P to
              
Post-Effective Amendment No. 4 to the Registrant's Form S-2 Registration Statement
              
(Registration No. 33-58191) on or about March 15, 1999 and incorporated
              
herein by reference.
10-Q          
Copy of Ace Hardware Corporation Deferred Compensation Plan effective
              
January 1, 1994 filed as Exhibit 10-X to Post-Effective Amendment No. 2 to the
              
Registrant's Form S-2 Registration Statement (Registration No. 33-46449) on or
              
about March 23, 1994 and incorporated herein by reference.
10-R          
Copy of current standard form of Ace Hardware Corporation License Agreement
              
for international licensees filed as Exhibit 10-R to Post-Effective Amendment No.
              
6 to the Registrant's Form S-2 Registration Statement (Registration No. 33-58191)
              
on or about March 22, 2001 and incorporated herein by reference.
10-S          
Copy of Lease dated May 4, 1994 for freight consolidation center of the Registrant
              
in Chicago, Illinois filed as Exhibit 10-Z to the Registrant's Form S-2 Registration
              
Statement (Registration No. 33-58191) on or about March 23, 1995 and incorporated
              
herein by reference.
   Exhibits
 Incorporated
 by Reference                        
Description
10-T          
Copy of Long-Term Incentive Compensation Deferral Option Plan of the
              
Registrant effective January 1, 2000 filed as Exhibit 10-a-13 to the Registrant's
              
Form S-2 Registration Statement (Registration No. 33-58191) on or about March
              
15, 2000 and incorporated herein by reference.
10-U          
Copy of Ace Hardware Corporation Directors' Deferral Option Plan effective
              
January 1, 2001 filed as Exhibit 10-U to Post-Effective Amendment No. 6 to the
              
Registrant's Form S-2 Registration Statement (Registration No. 33-58191) on or
              
about March 22, 2001 and incorporated herein by reference.
10-V          
Copy of Ace Hardware Corporation Long-Term Compensation Deferral Option
              
Plan effective January 1, 1995 consolidated and refiled with First, Second and
              
Third Amendments filed as Exhibit 10-V to the Registrant's Form S-2 Registration
              
Statement on or about March 22, 2002 and incorporated herein by reference.
10-W          
Copy of Lease dated July 28, 1995 between A.H.C. Store Development Corp. and
              
Tri-R Corporation for retail hardware store premises located in Yorkville, Illinois
              
filed as Exhibit 10-a-11 to Post-Effective Amendment No. 1 to the Registrant's
              
Form S-2 Registration Statement (Registration No. 33-58191) on or about March
              
11, 1996 and incorporated herein by reference.
10-X          
Copy of Lease dated October 31, 1995 between Brant Trade & Industrial Park, Inc.
              
and Ace Hardware Canada Limited for warehouse space in Brantford, Ontario,
              
Canada filed as Exhibit 10-a-12 to Post-Effective Amendment No. 1 to the
              
Registrant's Form S-2 Registration Statement (Registration No. 33-58191) on or
              
about March 11, 1996 and incorporated herein by reference.
10-Y          
Copy of Lease dated November 27, 1995 between 674573 Ontario Limited and
              
Ace Hardware Canada Limited for general office space in Markham, Ontario,
              
Canada filed as Exhibit 10-a-13 to Post-Effective Amendment No. 1 to the
              
Registrant's Form S-2 Registration Statement (Registration No. 33-58191) on or
              
about March 11, 1996 and incorporated herein by reference.
10-Z          
Copy of Executive Healthcare Plan adopted by the Board of Directors of the
              
Registrant on August 25, 1998 filed as Exhibit 10-Z to Post-Effective Amendment
              
No. 4 to the Registrant's Form S-2 Registration Statement (Registration No.
              
33-58191) on or about March 15, 1999 and incorporated herein by reference.
10-a-1        
Copy of Ace Hardware Corporation Executive Benefit Security Trust Agreement
              
effective July 19, 1995 filed as Exhibit 10-a-18 to Post-Effective Amendment No. 1
              
to the Registrant's Form S-2 Registration Statement (Registration No. 33-58191)
              
on or about March 11, 1996 and incorporated herein by reference.
10-a-2        
Copy of current standard form of International Retail Merchant Agreements filed
              
as Exhibit 10-a-2 to Post-Effective Amendment No. 6 to the Registrant's Form S-2
              
Registration Statement (Registration No. 33-58191) on or about March 22, 2001
              
and incorporated herein by reference.
10-a-3        
Copy of Lease Agreement dated as of September 1, 1996 for the Registrant's
              
project facility in Wilton, New York filed as Exhibit 10-a-13 to Post-Effective
              
Amendment No. 2 to the Registrant's Form S-2 Registration Statement
              
(Registration No. 33-58191) on or about March 12, 1997 and incorporated herein
              
by reference.
   Exhibits
 Incorporated
 by Reference                        
Description
10-a-4        
Copy of 6.47% Series A Senior Notes in the aggregate principal amount of
              
$30,000,000 issued August 23, 1996 with a maturity date of June 22, 2008 and
              
$70,000,000 Private Shelf Facility, pursuant to Amended and Restated Note
              
Purchase and Private Shelf Agreement with the Prudential Insurance Company
              
dated August 23, 1996 filed as Exhibit 10-a-14 to Post-Effective Amendment No.
              
2 to the Registrant's Form S-2 Registration Statement (Registration No. 33-58191)
              
on or about March 12, 1997 and incorporated herein by reference.
10-a-5        
Copy of First Amendment to Ace Hardware Corporation Directors' Deferral
              
Option Plan (effective January 1, 2001) adopted December 5, 2001 and effective
              
January 1, 2002 filed as Exhibit 10-a-5 to the Registrant's Form S-2 Registration
              
Statement on or about March 22, 2002 and incorporated herein by reference.
10-a-6        
Copy of Lease Agreement dated May 27, 1999 for the Registrant's project facility
              
in Loxley, Alabama filed as Exhibit 10-a-9 to Post-Effective Amendment No. 5 to
              
Registrant's Form S-2 Registration Statement (Registration No. 33-58191) on or
              
about March 15, 2000 and incorporated herein by reference.
10-a-7        
Copy of current standard form of Industrial Distributor Agreement filed as
              
Exhibit 10-a-7 to the Registrant's Form S-2 Registration Statement filed on or
              
about March 22, 2002 and incorporated herein by reference.
10-a-8        
Copy of First Amendment to Ace Hardware Corporation Long-Term Incentive
              
Compensation Deferral Option Plan (effective January 1, 2000) adopted
              
December 5, 2001 and effective January 1, 2002 filed as Exhibit 10-a-8 to the
              
Registrant's Form S-2 Registration Statement on or about March 22, 2002 and
              
incorporated herein by reference.
10-a-9        
Copy of Lease dated October 19, 2001 for the Registrant's freight consolidation center
              
in Baltimore, Maryland filed as Exhibit 10-a-9 to the Registrant's Form S-2 Registration
              
Statement on or about March 22, 2002 and incorporated herein by reference.
10-a-10       
Copy of Amendment dated April 24, 2001 to Note Purchase and Private Shelf
              
Agreement dated as of September 27, 1991, and Restated Note Purchase and Private
              
Shelf Agreement dated as of August 23, 1996 with The Prudential Insurance
              
Company of America filed as Exhibit 10-a-10 to the Registrant's Form S-2 Registration
              
Statement on or about March 22, 2002 and incorporated herein by reference.
10-a-11       
Copy of $175,000,000 Revolving Credit Facility Agreement dated as of May 2, 2000
              
filed as Exhibit 10-a-11 to Post-Effective Amendment No. 6 to the Registrant's
              
Form S-2 Registration Statement (Registration No. 33-58191) on or about March
              
22, 2001 and incorporated herein by reference.
10-a-12       
Copy of Lease effective November 27, 2000 for freight consolidation center of the
              
Registrant in Fort Worth, Texas filed as Exhibit 10-a-12 to Post-Effective
              
Amendment No. 6 to the Registrant's Form S-2 Registration Statement
              
(Registration No. 33-58191) on or about March 22, 2001 and incorporated herein
              
by reference.
10-a-13       
Copy of Lease (Reference Date April 1, 2000) for the Registrant's additional
              
general office space at 1220 and 1300 Kensington Rd., Oak Brook, Illinois filed as
              
Exhibit 10-a-13 to Post-Effective Amendment No. 6 to the Registrant's Form S-2
              
Registration Statement (Registration No. 33-58191) on or about March 22, 2001
              
and incorporated herein by reference.
   Exhibits
 Incorporated
 by Reference                        
Description
10-a-14       
Copy of current standard form of Limited Liability Company Agreement for retail
              
joint ventures filed as Exhibit 10-a-14 to Post-Effective Amendment No. 6 to the
              
Registrant's Form S-2 Registration Statement (Registration No. 33-58191) on or
              
about March 22, 2001 and incorporated herein by reference.
10-a-15       
Copy of Amendment dated September 25, 2000 to Restated Note Purchase and
              
Private Shelf Agreement dated as of August 23, 1996 with The Prudential
              
Insurance Company of America filed as Exhibit 10-a-15 to Post-Effective
              
Amendment No. 6 to the Registrant's Form S-2 Registration Statement
              
(Registration No. 33-58191) on or about March 22, 2001 and incorporated herein
              
by reference.
10-a-16       
Copy of Lease dated June 30, 2000 for the Registrant's supplemental warehouse
              
space in Rocklin, California filed as Exhibit 10-a-16 to the Registrant's Form S-2
              
Registration Statement on or about March 22, 2002 and incorporated herein by
              
reference.
10-a-17       
Copy of Lease dated January 16, 2002 for the Registrant's freight consolidation
              
center in Summit, Illinois filed as Exhibit 10-a-17 to the Registrant's Form S-2
              
Registration Statement on or about March 22, 2002 and incorporated herein by
              
reference.
10-a-18       
Copy of Amendment dated September 10, 2001 to Note Purchase and Private
              
Shelf Agreement dated as of September 27, 1991, and Restated Note Purchase and
              
Private Shelf Agreement dated as of August 23, 1996 with The Prudential
              
Insurance Company of America filed as Exhibit 10-a-18 to the Registrant's Form S-
              
2 Registration Statement on or about March 22, 2002 and incorporated herein by
              
reference.
10-a-19       
Copy of Note Purchase Agreement dated April 15, 2001 for the issuance and sale
              
of up to $100,000,000 of Senior Notes, under which $70,000,00 of 7.27% Senior
              
2001-A Notes with a maturity date of April 30, 2013 have been sold to various
              
purchasers filed as Exhibit 10-a-19 to the Registrant's Form S-2 Registration
              
Statement on or about March 22, 2002 and incorporated herein by reference.
    
Upon request of the Commission, we agree to furnish copies of any agreements regarding indebtedness
that does not exceed ten percent of our total assets and the assets of our subsidiaries on a consolidated basis.
    
Supplemental Information to be Furnished with Reports Filed Pursuant to Section 15(d) of
the Act by Registrants which have not Registered Securities Pursuant to Section 12 of the Act.
    
As of the date of the Report mentioned above, proxy soliciting materials for our 2002 annual meeting
have not been sent to our shareholders. Copies of proxy soliciting materials will be sent to our shareholders
and furnished to the Securities and Exchange Commission at a later date.

Item 14(a). Index to Consolidated Financial Statements and Financial Statement Schedules
Page
Independent Auditors' Report                                                           
F-2
Consolidated Balance Sheets at December 29, 2001 and December 30, 2000                 
F-3
Consolidated Statements of Earnings and Consolidated Statements of
Comprehensive Income for each of the years in the three-year period
ended December 29, 2001                                                                
F-5
Consolidated Statements of Member Dealers' Equity for each of the years in the
three-year period ended December 29, 2001                                              
F-6
Consolidated Statements of Cash Flows for each of the years in the three-year
period ended December 29, 2001                                                         
F-7
Notes to Consolidated Financial Statements                                             
F-8

All schedules have been omitted because the required information is not present or is not present in

amounts sufficient to require submission of the schedule or the required information is included in the

consolidated financial statements or the notes thereto.



> 

ACE HARDWARE CORPORATION
                                  
CONSOLIDATED BALANCE SHEETS
                             
December 29, 2001 and December 30, 2000
                                             
ASSETS
                                                          
December 29,     December 30,
                                                           2001     2000
                                                                 
(000's omitted)
Current assets:
   Cash and cash equivalents                              
$    25,213      $   
24,644
   Short-term
Investments                                      
17,158           12,772
   Receivables:
     
Trade                                                   
308,390          316,339
     
Other                                                63,064     59,090
                                                              
371,454          375,429
      Less allowances for doubtful receivables             (2,419)     (2,458)
            Net
receivables                                   
369,035          372,971
   Inventories (Note 2)                                       
412,568          395,565
   Prepaid expenses and other current assets               16,295     15,105
            Total current assets                           840,269     821,057
Property and equipment (Note 10):
  
Land                                                        
15,466           16,791
   Buildings and
improvements                                 
232,015          211,024
   Warehouse
equipment                                        
100,676           90,250
   Office
equipment                                           
111,175           99,560
   Manufacturing
equipment                                     
15,197           14,590
   Transportaion
equipment                                     
16,345           16,888
   Leasehold
improvements                                      
17,575           17,445
   Construction in
progress                                -     2,054
                                                              
508,449          468,602
      Less accumulated depreciation and
amortization       (220,942)     (206,712)
             Net
property and
equipment                       
287,507          261,890
Other assets                                               41,015     40,863
                                                          
$ 1,168,791      $ 1,123,810
                                                          
============     ============
                  
               
See accompanying notes to consolidated financial statements.
                                    
ACE HARDWARE CORPORATION
                                   
CONSOLIDATED BALANCE SHEETS
                             
December 29, 2001 and December 30, 2000
                              
LIABILITIES AND MEMBER DEALERS' EQUITY
                                                          
December 29,     December 30,
                                                           2001     2000
                                                                 
(000's omitted)
Current liabilities:
   Current installment of long-term debt (Note
4)         
$     7,179     
$     6,904
   Short-term borrowings (Note
3)                              
72,600           81,500
   Accounts payable                                           
409,789          448,766
   Patronage dividends payable in cash (Note
5)                
34,229           34,764
   Patronage refund certificates payable (Note
5)               
9,084            4,795
   Accrued expenses                                        81,062     63,224
      Total current liabilities                               
613,943          639,953
Long-term debt (Note
4)                                       
170,387          105,891
Patronage refund certificates payable (Note
5)                 
77,401           68,385
Other long-term liabilities                                27,184     24,923
      Total liabilities                                    888,915     839,152
Member dealers' equity (Notes 5 and 8):
   Class A Stock of $1,000 par value                       
    
3,693            3,783
   Class B Stock of $1,000 par value                      
     
6,499            6,499
   Class C Stock of $100 par value                        
   
260,224          250,480
   Class C Stock of $100 par value, issuable to dealers
     for patronage
dividends                                   
23,284           24,267
   Additional stock subscribed, net                 
             
303             
351
   Retained deficit                                           
(17,591)          (5,551)
   Contributed capital                                         
13,485           13,485
   Accumulated other comprehensive loss                    (1,239)     (162)
                                                              
288,658          293,152
Less: Treasury stock, at cost                              (8,782)     (8,494)
      Total member dealers' equity                         279,876     284,658
Commitments (Notes 6 and 10)                                    
                                                          
$ 1,168,791      $ 1,123,810
                                                          
============     ============
                   
               
See accompanying notes to consolidated financial statements.                                      
ACE HARDWARE CORPORATION
                       
CONSOLIDATED STATEMENTS OF EARNINGS
                                                
     Year
Ended
                                               
     
December 29,  December 30,  January 1,
                                               
      2001  2000  2000
                                              
                  
(000's omitted)
Net sales                                         
  
$ 2,951,829   $ 2,999,501   $3,232,860
Cost of sales                                      
  2,668,125  2,713,854  2,953,528
    Gross profit                                   
  283,704  285,647  279,332
Operating expenses:
    Warehouse and distribution                       
     41,319        38,606      
33,790
    Selling, general and administrative             
     
86,277       
87,368       87,763
    Retail success and development                
   68,523  71,558  57,149
       Total operating expenses                   
   196,119  197,532  178,702
         Operating income                         
       
87,585       
88,115      100,630
Interest expense (Note 12)                        
      
(23,156)      (21,803)     (16,651)
Other income,
net                                    
    
12,058       
14,207       10,416
Income taxes (Note 7)                             
   (3,418)  (127)  (1,833)
            Net earnings                          
  
$    73,069   $    80,392  
$   92,562
                                              
      
============  ============  ===========
Retained earnings (deficit) at beginning of year     
$    (5,551)  $      
594   $    3,292
Net
earnings                                         
    
73,069       
80,392       92,562
Patronage dividends (Note
5)                        
 (85,109)  (86,537)  (95,260)
Retained earnings (deficit) at end of year           
$   (17,591) 
$    (5,551)  $      594
                                                     
============  ============  ===========
             CONSOLIDATED
STATEMENTS OF COMPREHENSIVE INCOME
                                                    
 Year
Ended
                                                   
 
December 29,  December 30,  January 1,
                                                    
 2001  2000  2000
                                                              
  
(000's omitted)
Net earnings                                      
  
$    73,069   $    80,392  
$   92,562
Unrealized gains on
securities                      
        
129          
458           -
Foreign currency translation,
net               
     (1,206)  (911)  1,109
     Comprehensive income                          
 
$    71,992   $    79,939  
$   93,671
                                                 
   
============  ============  ===========
             See
accompanying notes to consolidated financial statements.

`ACE HARDWARE CORPORATION
                                                      CONSOLIDATED STATEMENTS OF MEMBER DEALERS' EQUITY
                                                     Three Years Ended December 29, 2001 (000's Omitted)`

`Class C Stock
                                                                              Issuable to                                      Accumulated
                                                                              Dealers for Additional  Retained                   Other
                                                Class A  Class B   Class C    Patronage     Stock     Earnings   Contributed Comprehensive   Treasury
                                                 Stock    Stock     Stock     Dividends   Subscribed* (deficit)    Capital   Income/(loss)    Stock        Total
Balance at January 2, 1999                      $3,846   $6,499   $226,571    $26,170      $  471       $3,292     $3,295       $(818)       $(7,814)    $261,512
   Net earnings                                     -        -          -          -           -        92,562         -           -              -        92,562
   Net payments on subscriptions                    -        -          -          -        1,531           -          -           -              -         1,531
   Patronage financing deductions                   -        -          -        (847)         -            -          -           -              -          (847)
   Stock issued                                    238       -      26,616    (25,323)     (1,504)          -          -           -              -            27
   Stock repurchased                                -        -          -          -           -            -          -           -         (12,509)     (12,509)
   Stock retired                                  (228)      -     (11,961)        -           -            -          -           -          12,189           -
   Patronage dividends issuable                     -        -          -      21,648          -            -      10,190          -              -        31,838
   Patronage dividends payable                      -        -          -          -           -       (95,260)        -           -              -       (95,260)
   Accumulated other comprehensive income (loss)    -        -          -          -           -            -          -        1,109             -         1,109 
Balance at January 1, 2000                       3,856    6,499    241,226     21,648         498          594     13,485         291         (8,134)     279,963
   Net earnings                                     -        -          -          -           -        80,392         -           -              -        80,392
   Net payments on subscriptions                    -        -          -          -        1,830           -          -           -              -         1,830
   Patronage financing deductions                   -        -          -        (158)         -            -          -           -              -          (158)
   Stock issued                                    234       -      23,391    (21,490)     (1,977)          -          -           -              -           158
   Stock repurchased                                -        -          -          -           -            -          -           -         (14,804)     (14,804)
   Stock retired                                  (307)      -     (14,137)        -           -            -          -           -          14,444           -
   Patronage dividends issuable                     -        -          -      24,267          -            -          -           -              -        24,267
   Patronage dividends payable                      -        -          -          -           -       (86,537)        -           -              -       (86,537)
   Accumulated other comprehensive income (loss)    -        -          -          -           -            -          -         (453)            -          (453)
Balance at December 30, 2000                     3,783    6,499    250,480     24,267         351       (5,551)    13,485        (162)        (8,494)     284,658
   Net earnings                                     -        -          -          -           -        73,069         -           -              -        73,069
   Net payments on subscriptions                    -        -          -          -        1,479           -          -           -              -         1,479
   Patronage financing deductions                   -        -          -      (1,324)         -            -          -           -              -        (1,324)
   Stock issued                                    170       -      24,202    (22,943)     (1,527)          -          -           -              -           (98)
   Stock repurchased                                -        -          -          -           -            -          -           -         (15,006)     (15,006)
   Stock retired                                  (260)      -     (14,458)        -           -            -          -           -          14,718           -
   Patronage dividends issuable                     -        -          -      23,284          -            -          -           -              -        23,284
   Patronage dividends payable                      -        -          -          -           -       (85,109)        -           -              -       (85,109)
   Accumulated other comprehensive income (loss)    -        -          -          -           -            -          -       (1,077)            -        (1,077)
Balance at December 29, 2001                    $3,693   $6,499   $260,224    $23,284      $  303     $(17,591)   $13,485     $(1,239)       $(8,782)    $279,876
			                =======  =======  =========   ========     =======    =========   ========    ========      =========   =========

*Additional stock subscribed is comprised of the following amounts at January 1, 2000, December 30, 2000 and December 29, 2001:`

1999    2000    2001

                               
Class A Stock           
$  118    $   41    $  
94
                               
Class B Stock               
-        
-         -
                               
Class C Stock            1,452    975    977
          
                                              
1,570     1,016     1,071
                               
Less unpaid portion      1,072    665    768
                      
                                 
$  498    $  351    $  303
                                                        
======    ======    ======See accompanying notes to consolidated financial statements.

ACE HARDWARE CORPORATION
                             
CONSOLIDATED STATEMENTS OF CASH FLOWS

`Year Ended`

`December 29,      December 30,      January 1,
                                                                  2001              2000             2000   
                                                                              (000's Omitted)`

`Operating Activities:
    Net Earnings                                              $    73,069       $   80,392        $  92,562
    Adjustments to reconcile net earnings
    to net cash provided by operating activities:
       Depreciation and amortization                               29,221           32,273           23,396
       Gain on sale of property and equipment, net of
         deferred taxes of $1,681                                  (3,264)              -                -
       Decrease (increase) in accounts receivable, net              3,936           (2,092)          26,095
       Increase in inventories                                    (17,003)         (22,475)         (38,685)
       Decrease (increase) in prepaid expenses
	and other current assets                              (1,334)          (1,764)           1,805
       Decrease in accounts payable and accrued expenses          (21,139)          (7,497)          (1,101)
       Increase in other long-term liabilities                      2,261            2,523            3,718

          Net Cash Provided by Operating Activities                65,747           81,360          107,790`

`Investing Activities:
       Purchase of short-term investments                          (4,386)         (12,314)              -
       Purchase of property and equipment                         (51,430)         (44,649)         (43,074)
       Proceeds from sale of property and equipment                    -             9,664              349
       Increase in other assets                                    (1,229)         (12,200)         (21,160)

          Net Cash Used in Investing Activities                   (57,045)         (59,499)         (63,885)`

`Financing Activities:
       Proceeds (payments) of short-term borrowings                (8,900)          31,631           24,869
       Proceeds from issuance of long-term debt                    70,000               -                -
       Payments on long-term debt                                  (5,229)          (3,167)          (6,892)
       Payment of cash portion of patronage dividend              (34,764)         (38,173)         (34,826)
       Payments of patronage refund certificates and
         patronage financing deductions                           (15,713)          (9,956)         (34,557)
       Proceeds from sale of common stock                           1,479            1,830            1,531
       Repurchase of common stock                                 (15,006)         (14,804)         (12,509)

          Net Cash Used in Financing Activities                    (8,133)         (32,639)         (62,384)`

`Increase (decrease) in Cash and Cash Equivalents                  569          (10,778)         (18,479)
    Cash and Cash Equivalents at beginning of year                 24,644           35,422           53,901`

`Cash and Cash Equivalents at end of year                  $    25,213       $   24,644        $  35,422
				           ============	   ===========       ==========`

`See accompanying notes to consolidated financial statements.`



Leasehold improvements are generally amortized on a straight-line basis over the term of the respective
lease.
    (h)  Foreign Currency TranslationSubstantially all assets and liabilities of foreign operations are translated at the rate of exchange in
effect at the balance sheet date while revenues and expenses are translated at the average monthly exchange
rates prevailing during the year. The Company has utilized foreign exchange forward contracts to
hedge non-U.S. equity investments. Gains and losses on these foreign hedges are included in the basis of
the underlying hedged investment. Accumulated other comprehensive loss at December 29, 2001 and
December 30, 2000 includes gains of $2.0 million related to previously settled foreign currency contracts.
Foreign currency translation adjustments, net of gains on foreign exchange contracts, are reflected in the
accompanying Consolidated Statements of Comprehensive Income for 2001, 2000 and 1999. The
Company did not have any outstanding foreign exchange forward contracts at December 29, 2001 or
December 30, 2000.
    (i)
Financial Instruments     The carrying value of assets and liabilities that meet the definition of a financial instrument included
in the accompanying Consolidated Balance Sheets approximates fair value.
    (j)
Retirement Plans     The Company has retirement plans covering substantially all non-union employees. Costs with
respect to the noncontributory pension plans are determined actuarially and consist of current costs and
amounts to amortize prior service costs and unrecognized gains and losses. The Company contribution
under the profit sharing plan is determined annually by the Board of Directors.
    (k)
Use of Estimates     The preparation of financial statements in conformity with accounting principles generally accepted
in the United States of America requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. Actual results could differ from those estimates.
    (l)Shipping
and Handling Costs     Amounts billed to customers for shipping and
handling costs are included in net sales.
Amounts incurred for shipping and handling are included in cost of sales.
    (m)
Fiscal Year     The Company's fiscal year ends on the Saturday nearest December 31st. Accordingly, 2001, 2000
and 1999 ended on December 29, 2001, December 30, 2000 and January 1, 2000, respectively.
    (n)
Reclassifications<R>     Certain financial statement reclassifications have been made to prior year amounts to conform to
comparable classifications followed in 2001. During 2001,
the Company reclassified as sales and cost of sales certain shipping and
handling costs that had previously been presented on a net basis within
warehouse and distribution expenses.  These reclassifications resulted in
increased sales of $57,460,000, $54,350,000 abd $51,058,000 in 2001, 2000 and
1999, respectively, and increased cost of sales of $51,056,000, $48,240,000 and
$45,390,000 in 2001, 2000 and 1999, respectively.  These reclassifications
had no effect on previously reported income.</R>
(2) Inventories
Inventories consist primarily of merchandise inventories. Substantially all of the Company's domestic
inventories are valued on the last-in, first-out (LIFO) method; the excess of replacement cost over the
LIFO value of inventory was approximately $57,809,000 and $62,502,000 at December 29, 2001 and
December 30, 2000, respectively. Indirect costs, consisting primarily of warehousing costs, are absorbed
as inventory costs rather than period costs.
(3) Short-Term Borrowings
At December 29, 2001 the Company has available a revolving credit
facility with a group of
banks providing for $175.0 million in committed lines and also has available $10.0
million in
uncommitted lines. The facility requires the Company to comply with
various financial covenants
for which the Company is in compliance at December 29, 2001 and December 30,
2000.  The facility
expires on May 2, 2005.  The maximum amount outstanding at any
month-end during the period was
$128.0 million in 2001 and $147.0 million in 2000. The
monthly weighted average borrowing levels
during 2001 and 2000 were $77.9 million and $109.8 million, respectively. 
The interest rate
under the revolving credit facility is based upon a spread over LIBOR based upon
quarterly debt
to EBITDA ratios.  The weighted
average interest rate effective as of December 29, 2001 and
December 30, 2000 was 2.58% and 7.18%,
respectively.  Short-term borrowings outstanding as of
December 29, 2001 and December 30, 2000 were
$72.6 and $81.5 million, respectively. The
aggregate unused line of credit available at December 29, 2001 and
December 30, 2000 was $112.4
million and $108.5 million, respectively. At December 29, 2001 the
Company had no compensating
balance requirements.