TABLE OF CONTENTS




|                                                |                                                                                                         |  |  |  |  |  |  | 
|----------------------------------------------- | ------------------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|PART I                                         
|                                                | Item 1. Business                                                                                       
|                                                | Item 2. Properties                                                                                     
|                                                | Item 3. Legal Proceedings                                                                              
|                                                | Item 4. Submission of Matters to a Vote of Security Holders                                            
|PART II                                        
|                                                | Item 7A. Quantitative and Qualitative Disclosures About Market Risk                                    
|                                                | Item 8. Financial Statements and Supplementary Data                                                    
|Index to Consolidated Financial Statements     
|Report of Independent Auditors                 
|Report of Former Independent Public Accountants
|Consolidated Balance Sheets                    
|Consolidated Statements of Operations          
|Consolidated Statements of Cash Flows          
|Consolidated Statements of Shareholders Equity
|Notes to Consolidated Financial Statements     
|Note 1 -- Significant Accounting Policies      
|                                                | Note 2 -- Share Reclassification                                                                       
|                                                | Note 3 -- Store Closings                                                                               
|                                                | Note 4 -- Income Taxes                                                                                 
|                                                | Note 5 -- Financing                                                                                    
|                                                | Note 6 -- Capital Stock                                                                                
|                                                | Note 7 -- Stock-Based Compensation Plans                                                               
|                                                | Note 8 -- Savings Plan and Postretirement Benefits                                                     
|                                                | Note 9 -- Commitments and Contingencies                                                                
|                                                | Note 10 -- Leases                                                                                      
|                                                | Note 12 -- Consolidating Financial Statements                                                          
|                                                | Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure           
|                                                | Item 9A. Controls and Procedures                                                                       
|PART III                                       
|                                                | Item 10. Directors and Executive Officers of the Registrant                                            
|                                                | Item 11. Executive Compensation                                                                        
|                                                | Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
|                                                | Item 13. Certain Relationships and Related Transactions                                                
|                                                | Item 14. Principal Accountant Fees and Services                                                        
|PART IV                                        
|                                                | Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K                              
|SIGNATURES                                     
|Second Amended and Restated Rights Agreement   
|Indenture                                      
|Registration Rights Agreement                  
|List of Executive Officers                     
|List of Executive Officers                     
|1998 Incentive Compensation Plan               
|Agreement                                      
|Second Amendment to Credit Agreement           
|Third Amendment to Credit Agreement            
|Code of Business Conduct and Ethics            
|Subsidiaries                                   
|Exhibit 23                                     
|Notice Regarding Consent of Arthur Andersen LLP
|Power of Attorney                              
|Certificate                                    
|Certificate                                    
|Certificate                                    



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##### Table of Contents









SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549




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FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE

SECURITIES EXCHANGE ACT OF 1934


For the fiscal year-ended January 31,
2004

Commission File No. 1-6695



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JO-ANN STORES, INC.

(Exact name of Registrant as specified in its
charter)


|                                                                           |  |                                               
|-------------------------------------------------------------------------- |  | ----------------------------------------------
|Ohio(State or other jurisdiction of
    incorporation or organization)     |  | 34-0720629(I.R.S. Employer Identification No.)
|                                                                          
|5555 Darrow Road, Hudson, Ohio(Address of principal
    executive offices) |  | 44236(Zip Code)                               

Registrants telephone number, including
area code: (330) 656-2600

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

|                                |  |                        
|------------------------------- |  | -----------------------
|                                |  | Name of Each Exchange  
|Title of Class                  |  | on Which Registered    
|                                |  |                        
|Common Stock, Without Par Value |  | New York Stock Exchange



---

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

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

Indicate by check mark whether the registrant is
an accelerated filer (as defined in Rule 12b-2 of the
Exchange
Act).  Yes x  No o

The aggregate market value of the common stock of
the registrant held by non-affiliates of the registrant as of
August 1, 2003 was $501.3 million.

The number of common shares outstanding, as of
April 5, 2004, of the registrants Common Stock was
22,198,824.

Documents incorporated by reference:

Portions of the following documents are
incorporated by reference:



| |                                                                                                       
| | ------------------------------------------------------------------------------------------------------
| | Proxy Statement for 2004 Annual Meeting of
    Shareholders  Items 10, 11, 12 and 14 of Part
    III.



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##### Table of Contents






PART I

Except as otherwise stated, the information
contained in this report is given as of January 31, 2004,
the end of our latest fiscal year. The words Jo-Ann
Stores, Inc., Jo-Ann Stores, Jo-Ann
Fabrics and Crafts, Jo-Ann etc,
Registrant, Company, we,
our and us refer to Jo-Ann Stores, Inc.
and, unless the context requires otherwise, to our subsidiaries.
Jo-Ann Stores, Inc. is an Ohio corporation, founded in 1943. Our
fiscal year ends on the Saturday closest to January 31 and
refers to the year in which the period ends (e.g., fiscal 2004
refers to the period ended January 31, 2004).




Item 1. Business

We are the nations largest specialty
retailer of fabrics and one of the largest specialty retailers
of crafts, serving customers in their pursuit of apparel and
craft sewing, crafting, home decorating and other creative
endeavors. We have a well-established, national brand name. Our
retail stores (operating as Jo-Ann Fabrics and Crafts
traditional stores and Jo-Ann superstores) feature a
variety of competitively priced merchandise used in sewing,
crafting and home decorating projects, including fabrics,
notions, crafts, frames, scrapbooking material, artificial and
dried flowers, home accents, finished seasonal and home
décor merchandise.

As of January 31, 2004, we operated 892
stores in 47 states (806 traditional stores and 86 superstores).
Our traditional stores offer a complete selection of fabrics and
notions and a convenience assortment of crafts, floral, finished
seasonal and home décor merchandise. Our traditional stores
average 14,400 square feet and generated net sales per store of
approximately $1.5 million in fiscal 2004. Our superstores
offer an expanded and more comprehensive product assortment than
our traditional stores. Our superstores also offer custom
framing, floral arrangement and educational programs that our
traditional stores do not. Our superstores that were opened
prior to fiscal 2003, average 45,000 square feet and generated
net sales per store of approximately $6.0 million in fiscal
2004. Our current superstore prototype averages 35,000 square
feet and targets sales of $5.25 million in its first year
of operation. We opened 13 of these new prototype superstores in
fiscal 2004 and we have 14 of the prototype superstores in
operation at January 31, 2004.

We believe stability in our business and our
industry is partially a function of recession-resistant
characteristics. For example, according to a 2002 research study
conducted by the Hobby Industry Association, approximately
60 percent of all U.S. households participated in crafts
and hobbies in 2002. While expenditures for such projects are
generally discretionary in nature, our average sales ticket
during fiscal 2004 was relatively low at $22 in our superstores
and $16 in our traditional stores. Industry sales, according to
the Hobby Industry Associations Consumer Usage and
Purchase Study for 2002, were approximately $29 billion, a
13 percent increase from $25.7 billion in 2001. Our
market is highly fragmented and is served by multi-store fabric
retailers, arts and crafts retailers, mass merchandisers, small
local specialty retailers, mail order vendors and a variety of
other retailers.

We provide a solution-oriented shopping
experience with employees who are encouraged to assist customers
in creating and completing creative projects. Many of our store
level employees are sewing and/or craft enthusiasts, which
enables them to provide exceptional customer service. We believe
our focus on service contributes to a high proportion of repeat
business from our customers. A significant portion of our
advertising budget is allocated to our direct mail program
targeting three million of our preferred customers on a regular
basis. According to the 2002 research study conducted by the
Hobby Industry Association, avid customers or enthusiasts, who
represent approximately 25 percent of the participants in this
industry, drive almost 80 percent of industry sales. As a
result, we believe our proprietary customer mailing list, which
we refresh continuously, is a competitive asset.

We believe that our superstores are uniquely
designed to offer a destination location for our customers. We
offer over 70,000 SKUs across three broad product categories in
our superstores: sewing, crafting and home decorating
components, as well as finished seasonal, home accessory and
floral products. We manage our vast product selection with SAP
Retail, which was implemented in fiscal 2001. We believe that
our inventory management systems are the most advanced in our
industry. From fiscal 2001 through fiscal 2004, we improved our
inventory turns from 1.8 to 2.4 times. We believe that our
inventory management systems

1



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provide us with a platform that will drive
continuous improvement and support enhanced software
applications and functionality.


Business Strategy

We intend to improve our operating performance by
opening additional superstores, growing same-store sales and
improving margins and inventory productivity. Key elements of
this business strategy are:

Open Additional
Superstores.Our strategy is to roll
out our refined superstore format across the nation. Our
research has demonstrated that our customers have a better
perception of the quality and pricing of our products when they
are presented in our superstore format. We believe that our
prototype 35,000 square foot superstore gives us a competitive
advantage in the industry. Our superstores provide a unique
shopping experience by offering a full creative
selection  of sewing, crafting, floral, framing,
seasonal and home décor accessories  all under
one roof. We generally close 1.3 traditional stores for every
superstore that we open. Our superstores typically average over
three times the revenues of the traditional stores they
replaced. In markets where we have opened multiple superstores,
we have been able to grow our revenues significantly and, we
believe, expand the market size and our share of market. For
example, in Phoenix, Arizona, we have replaced seven of the 15
traditional stores in that market with four superstores over the
last six years, and we have increased our revenues in that
market from $13 million to $38 million. We believe we have
an opportunity to replace an additional six traditional stores
in that market with superstores and further grow our revenues.
We believe we can replicate our performance in Phoenix in the
top 100 to 125 markets across the nation. As of January 31,
2004, we operated 86 superstores in 19 states.

Grow Same-Store
Sales.Both our traditional stores and
superstores present opportunities to improve same-store sales.
Our focus in this effort is improving in-stocks, customer
service and merchandise-driven initiatives. We primarily market
via direct mail. We send direct mail circulars to three million
customers approximately every two weeks. We believe that we can
more efficiently and effectively drive repeat business by
fine-tuning our direct mail and newspaper insert promotions. We
are committed to frequent updates of the category merchandise
offerings in our stores to keep our product offering fresh and
compelling to our customers. Our focus is on placing key items
at compelling prices on our end-cap displays. Because many of
our store team members are sewing and crafting enthusiasts
themselves, we also believe we can drive increased sales with
knowledgeable customer service and assistance.

Improve Margins.We
believe we can improve gross margins by further reducing our
level of clearance and promotional activity, a strategy we
successfully executed over the last half of fiscal 2004, through
less aggressive use of coupons and tighter seasonal purchase
commitments. We believe we can also improve margins by refining
our supply chain management and merchandising in our stores. We
continually examine our partnerships with our vendors to improve
supply chain efficiency. We also continue to explore new product
sourcing opportunities or sources through different channels. We
continuously monitor store performance to optimize our store
portfolio. For stores that have been open for more than one
year, we have only six that are not cash flow positive on a
four-wall basis today.

Improve Inventory
Productivity.Our enterprise-wide
inventory management system enables us to improve our product
mix on an ongoing basis. Our SAP Retail merchandising systems
have been in operation since March 2000, and we have been
operating since July 2001 on our current automated
replenishment systems. We believe we have further opportunities
to improve the accuracy of our perpetual inventories, perfect
our merchandise and assortment planning tools and develop more
sophisticated sales forecasting tools in order to replenish
goods in our stores more efficiently and effectively. We believe
we have the ability to improve margins by further increasing
inventory turns. Our goal is to increase inventory turns from
2.4 times in fiscal 2004 to 3 times over the next several years.

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Product Selection

The following table shows our net sales by
principal product line as a percentage of total net sales:

|                        |                        |                   |  |             |     |             |  |    |     |   |  |    |     |  
|----------------------- | ---------------------- | ----------------- |  | ----------- | --- | ----------- |  | -- | --- | - |  | -- | --- | -
|                        |                        |                  
|                        |                        | Fiscal Year-Ended
|                        |                        |                  
|                        |                        | January 31,       |  | February 1, |     | February 2,
|                        |                        | 2004              |  | 2003        |     | 2002       
|                        |                        |                   |  |             |     |            
|Principal product line: |                        |                   |  |             |     |             |  |    |     |   |  |   
|                        | Softlines              |                   |  | 63          | %   |             |  | 63 | %   |   |  | 64 | %  
|                        | Hardlines and seasonal |                   |  | 37          | %   |             |  | 37 | %   |   |  | 36 | %  
|                        |                        |                   |  |             |     |             |  |    |     |   |  |   
|                        |                        | Total             |  |             | 100 | %           |  |    | 100 | % |  |    | 100 | %
|                        |                        |                   |  |             |     |             |  |    |     |   |  |   

Softlines

We offer a broad and comprehensive assortment of
fabrics in both our traditional and superstore formats. These
fabrics are merchandised by end use much like a department store
and are sourced from throughout the world to offer our customers
a combination of unique design, fashion forward trends, and
value. Our assortments feature a combination of national brands
and private labels. Our stores are organized in the following
categories for the convenience of the sewer:



| |   |                                                                                                                                                                                                                                                                         
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | fashion and sportswear fabrics, used primarily in
    the construction of garments for the customer seeking a unique,
    fashion forward look;                                                                                                                         
|
| |  | special occasion fabrics used to construct
    evening wear, bridal and special occasion outfits;                                                                                                                                                                       
|
| |  | craft fabrics, used primarily in the construction
    of quilts, craft and seasonal projects for the home;                                                                                                                                                              
|
| |  | juvenile designs for the construction of garments
    as well as blankets and décor accessories;                                                                                                                                                                        
|
| |  | special-buy or fabrics representing extreme
    values for our customer;                                                                                                                                                                                                
|
| |  | home decorating fabrics and accessories used in
    home related projects such as window treatments, furniture and
    bed coverings (in addition to the in-store assortment, we offer
    a special order capability for additional designs);                          
|
| |  | a wide array of notions, which represent items
    incidental to sewing-related projects  including
    cutting implements, threads, zippers, trims, tapes, pins,
    elastics, buttons and ribbons as well as the patterns necessary
    for most sewing projects; and
|
| |  | sewing-related accessories including lighting,
    organizers, and sewing machines. Our high volume stores offer a
    wider selection of sewing machines through leased departments
    with third parties from whom we receive sublease income.                       

Hardlines and Seasonal

We offer a broad assortment of hardlines
merchandise for the creative enthusiast. Our superstores offer
the complete array of categories while our traditional stores,
due to their smaller size, merchandise edited assortments. We
offer the following hardline selections:



| |   |                                                                                                                                                                 
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | papercrafting components, such as albums, papers,
    stickers, stamps, and books used in the popular home based
    activities of scrapbooking and card making;
|
| |  | craft materials, including items used for
    stenciling, jewelry making, decorative painting, wall decor, and
    kids crafting;                               
|
| |  | brand-name fine art materials, including items
    such as pastels, water colors, oil paints, acrylics, easels,
    brushes, paper and canvas;                  
|
| |  | yarn and accessories as well as needlecraft kits
    and supplies;                                                                                              

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| |   |                                                                                                                                                                                                                                                               
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | a comprehensive assortment of books and magazines
    to provide inspiration for our customer;                                                                                                                                                                
|
| |  | framed art, photo albums and ready-made frames
    and, in superstores, full service in-store framing departments;                                                                                                                                            
|
| |  | floral products, including artificial flowers,
    dried flowers and artificial plants, sold separately or in
    ready-made and custom floral arrangements and a broad selection
    of accessories essential for floral arranging and wreath making;
    and
|
| |  | home décor accessories including baskets,
    candles and accent collections designed to complement our home
    décor fashions.                                                                                                                              

In addition to the basic categories described
above, our stores regularly feature seasonal products, which
complement our core merchandising strategy. Our seasonal
offering spans all product lines and includes finished
decorations, gifts and accessories that focus on holidays
including Easter, Halloween and Christmas, as well as seasonal
categories such as patio/garden. We own several private label
seasonal brands including the Cottontale Collection,
Spooky Hollow, Santas Workbench,
and Garden Gate Designs.

During the Christmas selling season, a
significant portion of floor and shelf space is devoted to
seasonal crafts, decorating and gift-making merchandise. Due to
the project-oriented nature of these items, our peak selling
season extends longer than that of other retailers and generally
runs from September through December. In fiscal 2004,
approximately 32 percent of our net sales and
57 percent of our operating profits were generated during
the fourth quarter.

During fiscal 2004, 50 percent of superstore
net sales were derived from softlines and 50 percent from
hardlines. For our traditional stores, 69 percent of net sales
were derived from softlines and 31 percent from hardlines
during fiscal 2004.

Marketing

We have a proprietary mailing list, and we send
direct mail circulars to the top customers approximately every
two weeks. This allows us to efficiently reach our target
market. We focus our advertising on direct mail circulars for
our traditional stores. For our superstores, we supplement our
direct mail advertising program with newspaper insert
advertising. Our circulars and newspaper inserts feature
numerous products offered at competitive prices and emphasize
the wide selection of merchandise available in our stores.

In our efforts to market the Jo-Ann Stores
concept we also focus on developing long-term relationships with
our customers. These efforts include providing knowledge and
inspiration in-store through classes, demonstrations and project
sheets. This inspiration is also reinforced in our quarterly
Jo-Ann magazine, sold in our stores and other outlets, and other
collateral marketing tactics.

We also reach our customers through our
relationship with IdeaForest, which operates joann.com, an
on-line site for sewing and craft merchandise, creative ideas,
advice and supplies. As part of the strategic relationship,
IdeaForest, which operates as an independent entity, is
responsible for all on-line marketing and technology support to
the joann.com website. We hold a 28.5 percent equity
investment in IdeaForest, and we sell product to IdeaForest,
with customer fulfillment and service being handled by
IdeaForest.

Purchasing

We have numerous domestic and international
sources of supply available for each category of product that we
sell. During fiscal 2004, approximately 71 percent of our
purchases were sourced domestically and 29 percent were
sourced internationally. Although we have no long-term purchase
commitments with any of our suppliers, we strive to maintain
continuity with them. All purchases are centralized through our
store support center, allowing store team leaders and store team
members to focus on customer sales and service and enabling us
to negotiate volume discounts, control product mix and ensure
quality. Currently, none of our suppliers represent more than
3 percent of our annual purchase volume and the top ten
suppliers represent less than 20 percent of our total
annual purchase volume. We currently utilize approximately 900
merchandise suppliers, with the top 200 representing more than
80 percent of our purchasing volume.

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Logistics

At the end of fiscal 2004, we operated two owned
distribution centers which ship products to all of our stores on
a weekly basis. Based on purchase dollars, approximately
82 percent of the products in our stores are shipped
through our distribution center network, with the remaining
18 percent of our purchases shipped directly from our
suppliers to our stores. Our primary distribution center
facility is located in Hudson, Ohio and supplies product to
approximately two-thirds of our store base and our Visalia,
California distribution center, which opened in April 2001,
services the remaining one-third of our store base.

We transport product from our distribution
centers to our stores utilizing contract carriers. Merchandise
is shipped directly from our distribution centers to our stores
using dedicated core carriers for approximately 90 percent of
our store base. For the remaining 10 percent of our chain,
we transport product to the stores using less than truckload
carriers or through three regional hubs where it is
crossdocked for local delivery. We do not own either the
regional hubs or the local delivery vehicles.

Store Operations

Site Selection.We
believe that our store locations are integral to our success.
New sites are selected through a coordinated effort of our real
estate, finance and operations management teams. In evaluating
the desirability of a potential store site, we consider both
market demographics and site-specific criteria. Market
demographic criteria that we consider important include total
population, number of households, median household income,
percentage of home ownership versus rental, and historical and
projected population growth over a ten-year period.
Site-specific criteria that we consider important include rental
terms, our position within the strip shopping center, size of
the location, age of the shopping center, co-tenants, proximity
to highway access, traffic patterns and ease of entry from the
major roadways framing the strip location.

Our expansion strategy is to give priority to
adding stores in existing superstore markets in order to create
economies of scale associated with advertising, distribution,
field supervision, and other regional expenses. We believe that
there are attractive opportunities in most of our existing
markets and in numerous new markets.

Costs of Opening
Stores.We employ standard operating
procedures that allow us to efficiently open new stores and
integrate them into our information and distribution systems. We
develop a standardized floor plan, inventory layout, and
marketing program for each new store we open. We typically open
new stores during the period from February through October to
maximize sales, and minimize disruption to store operations,
during our peak selling season.

Store Management.Traditional stores generally have four full-time team members
and 10 to 15 part-time team members, while superstores typically
have approximately 10 full-time team members and 35 to 40
part-time team members. Store team leaders are compensated with
a base salary plus a bonus which is tied to quarterly store
sales and customer satisfaction survey results and annual store
shrink rates. In addition, superstore team leader bonuses are
tied to annual store operating profit.

Traditional store team leaders are typically
promoted from a group of top performing assistant managers, some
of whom started as our customers. This continuity serves to
solidify long-standing relationships between our stores and our
customers. When a traditional store is closed due to the opening
of a superstore, we generally retain its team members to staff
the new superstore. Superstore team leaders have primarily been
staffed with individuals from outside the Company who have
previous experience in managing big-box retail
concepts; however, as we have increased the number of superstore
openings, we are developing training and development programs to
promote more new superstore managers from within our
organization.

Each store is under the supervision of a district
team leader who reports to a regional vice president. Our
prospective store team leaders are assigned to one of our
existing stores as management-trainees for several weeks where
they receive in-depth on-the-job training.

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Stores

The following table shows our stores by type and
state at January 31, 2004:

|               |  |             |     |            |  |       |    |  |  |    
|-------------- |  | ----------- | --- | ---------- |  | ----- | -- |  |  | ---
|               |  | Traditional |     | Superstore |  | Total
|               |  |             |     |            |  |      
|Alabama        |  |             | 2   |            |  |       |   |  |  | 2  
|Alaska         |  |             | 6   |            |  |       |   |  |  | 6  
|Arizona        |  |             | 13  |            |  |       | 4  |  |  | 17 
|Arkansas       |  |             | 1   |            |  |       |   |  |  | 1  
|California     |  |             | 91  |            |  |       | 6  |  |  | 97 
|Colorado       |  |             | 13  |            |  |       |   |  |  | 13 
|Connecticut    |  |             | 15  |            |  |       | 2  |  |  | 17 
|Delaware       |  |             | 3   |            |  |       |   |  |  | 3  
|Florida        |  |             | 48  |            |  |       | 9  |  |  | 57 
|Georgia        |  |             | 8   |            |  |       | 4  |  |  | 12 
|Idaho          |  |             | 9   |            |  |       |   |  |  | 9  
|Illinois       |  |             | 40  |            |  |       | 2  |  |  | 42 
|Indiana        |  |             | 26  |            |  |       | 3  |  |  | 29 
|Iowa           |  |             | 11  |            |  |       |   |  |  | 11 
|Kansas         |  |             | 8   |            |  |       | 1  |  |  | 9  
|Kentucky       |  |             | 5   |            |  |       |   |  |  | 5  
|Louisiana      |  |             | 7   |            |  |       |   |  |  | 7  
|Maine          |  |             | 5   |            |  |       |   |  |  | 5  
|Maryland       |  |             | 19  |            |  |       | 3  |  |  | 22 
|Massachusetts  |  |             | 24  |            |  |       |   |  |  | 24 
|Michigan       |  |             | 43  |            |  |       | 12 |  |  | 55 
|Minnesota      |  |             | 16  |            |  |       | 6  |  |  | 22 
|Missouri       |  |             | 12  |            |  |       | 1  |  |  | 13 
|Montana        |  |             | 7   |            |  |       |   |  |  | 7  
|Nebraska       |  |             | 5   |            |  |       |   |  |  | 5  
|Nevada         |  |             | 4   |            |  |       | 2  |  |  | 6  
|New Hampshire  |  |             | 8   |            |  |       |   |  |  | 8  
|New Jersey     |  |             | 13  |            |  |       |   |  |  | 13 
|New Mexico     |  |             | 6   |            |  |       |   |  |  | 6  
|New York       |  |             | 37  |            |  |       | 7  |  |  | 44 
|North Carolina |  |             | 8   |            |  |       |   |  |  | 8  
|North Dakota   |  |             | 4   |            |  |       |   |  |  | 4  
|Ohio           |  |             | 56  |            |  |       | 11 |  |  | 67 
|Oklahoma       |  |             | 5   |            |  |       |   |  |  | 5  
|Oregon         |  |             | 26  |            |  |       |   |  |  | 26 
|Pennsylvania   |  |             | 47  |            |  |       | 1  |  |  | 48 
|Rhode Island   |  |             | 2   |            |  |       |   |  |  | 2  
|South Carolina |  |             | 2   |            |  |       |   |  |  | 2  
|South Dakota   |  |             | 2   |            |  |       |   |  |  | 2  
|Tennessee      |  |             | 2   |            |  |       | 3  |  |  | 5  
|Texas          |  |             | 50  |            |  |       | 4  |  |  | 54 
|Utah           |  |             | 13  |            |  |       |   |  |  | 13 
|Vermont        |  |             | 4   |            |  |       |   |  |  | 4  
|Virginia       |  |             | 22  |            |  |       |   |  |  | 22 
|Washington     |  |             | 32  |            |  |       | 5  |  |  | 37 
|West Virginia  |  |             | 5   |            |  |       |   |  |  | 5  
|Wisconsin      |  |             | 21  |            |  |       |   |  |  | 21 
|               |  |             |     |            |  |       |    |  |  |    
|Total          |  |             | 806 |            |  |       | 86 |  |  | 892
|               |  |             |     |            |  |       |    |  |  |    

The following table reflects the number of stores
opened, expanded or relocated and closed during each of the past
five fiscal years (square footage in thousands):

|       |  |        |    |        |  |              |     |              |  |         |       |  |  |  |    |  |  |  |        | 
|------ |  | ------ | -- | ------ |  | ------------ | --- | ------------ |  | ------- | ----- |  |  |  | -- |  |  |  | ------ | 
|       |  |        |    |        |  | Stores in    |     |              |  |        
|Fiscal |  | Stores |    | Stores |  | Operation at |     | Expanded     |  | Square 
|Year   |  | Opened |    | Closed |  | Year-End     |     | or Relocated |  | Footage
|       |  |        |    |        |  |              |     |              |  |        
|2000   |  |        | 29 |        |  |              | (61 | )            |  |         | 1,026 |  |  |  | 22 |  |  |  | 15,642 | 
|2001   |  |        | 18 |        |  |              | (37 | )            |  |         | 1,007 |  |  |  | 9  |  |  |  | 16,068 | 
|2002   |  |        | 12 |        |  |              | (60 | )            |  |         | 959   |  |  |  | 10 |  |  |  | 15,897 | 
|2003   |  |        | 3  |        |  |              | (43 | )            |  |         | 919   |  |  |  | 6  |  |  |  | 15,435 | 
|2004   |  |        | 19 |        |  |              | (46 | )            |  |         | 892   |  |  |  |   |  |  |  | 15,377 | 

Our new store opening costs depend on the
building type, store size and general cost levels in the
geographical area. During fiscal 2004, we opened 16 superstores,
13 of which represented our 35,000 square foot prototype. Our
average net opening cost of a superstore is $1.9 million,
which includes leasehold improvements, furniture, fixtures and
equipment, inventory (net of payable support) and pre-opening
expenses. Also during fiscal 2004, we opened three traditional
stores, with an average square footage of approximately 22,000
square feet. Our average net opening cost of a traditional store
is $1.1 million, which includes leasehold improvements,
furniture, fixtures and equipment, inventory (net of payable
support) and pre-opening expenses.

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During fiscal 2005, we expect to open
approximately 30 new superstores and five traditional stores and
close approximately 70 traditional stores, approximately 40 of
which are related to the superstore openings. We currently have
committed to leases for 32 of the 35 planned projects.

Information Technology

Our point-of-sale register transactions are
polled nightly and our point-of-sale system interfaces with both
our financial and merchandising systems. We utilize
point-of-sale registers and scanning devices to record the sale
of product at a SKU level at our stores. We also utilize
handheld radio frequency terminals for a variety of store tasks
including price look-up, perpetual inventory exception counting,
merchandise receiving, vendor returns and fabric sales
processing. In the past two years, we installed broadband
communication and new store controllers in all of our stores,
resulting in a greatly enhanced customer checkout experience and
a better platform to further automate internal store
communications.

Information obtained from item-level scanning
through our point-of-sale system enables us to identify
important trends to eliminate less profitable SKUs, increase
in-stock levels of more popular SKUs, analyze product margins
and generate data for advertising cost/benefit evaluations. We
also believe that our point-of-sale system allows us to provide
better customer service by increasing the speed and accuracy of
register checkout, enabling us to more rapidly re-stock
merchandise and efficiently re-price sale items.

In March 2000, we went live on SAP Retail.
The completion of the retail portion of this project merged all
of our financial, merchandise and retail systems and linked
business processes on a single software platform. The total cost
of SAP Retail was approximately $33.0 million and is being
amortized over five years. We experienced operating difficulties
stemming from the implementation of SAP Retail, as discussed
further in Managements Discussion and Analysis of
Financial Condition and Results of Operations. During
fiscal year 2002, we stabilized operations under SAP Retail and
the system is now being used to fine tune our processes.
In-stock positions and inventory turns have significantly
improved, primarily driven by our auto-replenishment and
improved inventory management capabilities.

Status of Product or Line of
Business

During fiscal 2004, there was no public
announcement nor is there a public announcement anticipated,
about either a new product line or line of business involving
the investment of a material portion of our assets.

Trademarks

We do business under the federally registered
trademark Jo-Ann Fabrics and Crafts and we also own
several trademarks relating to our private label products. We
believe that our trademarks are significant to our business.

Seasonal Business

Our business exhibits seasonality which is
typical for most retail companies, with much stronger sales in
the second half of the year than in the first half of the year.
Net earnings are highest during the months of September through
December when sales volumes provide significant operating
leverage. Borrowing requirements needed to finance our
operations fluctuate during the year and reach their highest
levels during the second and third fiscal quarters as we
increase our inventory in preparation for our peak selling
season.

Customer Base

We are engaged in the retail sale of merchandise
to the general public and, accordingly, no part of our business
is dependent upon a single customer or a few customers. During
fiscal 2004, no one store accounted for more than one percent of
total net sales.

7



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##### Table of Contents



Backlog of Orders

We sell merchandise to the general public on a
cash and carry basis and, accordingly, we have no significant
backlog of orders.

Competitive Conditions

We are the nations largest specialty
retailer of fabrics and one of the largest specialty retailers
of crafts, serving customers in their pursuit of apparel and
craft sewing, crafting, home decorating and other creative
endeavors. Our stores compete with other specialty fabric and
craft retailers and selected mass merchants, including Wal-Mart,
that dedicate a portion of their selling space to a limited
selection of fabrics and craft supply items. We compete on the
basis of product assortment, price, convenience and customer
service. We believe the combination of our product assortment,
customer service emphasis, systems technology and frequent
advertising provides us with a competitive advantage.

There are two public companies that we compete
with nationally in the fabric and craft specialty retail
industry, one in the fabric segment (Hancock Fabrics, Inc.
 433 stores and $440 million in revenues) and one in
the craft segment (Michaels Stores, Inc.  969 stores and
$3.1 billion in revenues). There is also a public company
competitor in the craft segment (A.C. Moore, Arts & Crafts,
Inc.) that is a rapidly growing regional operator of 81 stores
and over $430 million in revenues. The balance of our
competition is comprised of regional and local operators. We
believe that there are only three or four other competitors, in
addition to those described above, with fabric or craft sales
exceeding $100 million annually. We believe that we have
several advantages over most of our smaller competitors,
including:



| |   |                                                                                                
| | - | -----------------------------------------------------------------------------------------------
| |  | purchasing power;                                                                              
|
| |  | ability to support efficient nationwide
    distribution; and                                  
|
| |  | the financial resources to execute our strategy
    and capital investment needs going forward.

Research and Development

During the three fiscal years ended
January 31, 2004, we have not incurred any material expense
on research activities relating to the development of new
products or services or the improvement of existing products or
services.

Environmental Disclosure

We are not engaged in manufacturing. Accordingly,
we do not believe that compliance with federal, state and local
provisions regulating the discharge of material into the
environment or otherwise relating to the protection of the
environment will have a material adverse effect upon our capital
expenditures, income or competitive position.

Employees

As of January 31, 2004, we had approximately
21,750 full and part-time employees, of whom 20,200 worked in
our stores, 400 were employed in our Hudson distribution center,
250 were employed in our Visalia distribution center and 900
were employed at our store support center in Hudson. The number
of part-time employees is substantially higher during our peak
selling season. We believe our employee turnover is below
average for retailers primarily because our stores are staffed
with sewing and crafting enthusiasts. In addition, we provide an
attractive work environment, employee discounts, flexible hours
and competitive compensation packages within the local labor
markets. Our ability to offer flexible scheduling is important
in attracting and retaining these employees since approximately
73 percent of our employees work part-time.

The United Steelworkers of America, Upholstery
and Allied Industries Division currently represents employees
who work in our Hudson, Ohio distribution center. Our current
contract expires on May 2, 2004. Negotiations are currently
underway to extend the union contract. We believe that our
relations with our

8



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##### Table of Contents



employees and the union are good and we have no
reason to believe that current contract negotiations will not be
successful.


Foreign Operations and Export Sales

In fiscal 2004, we purchased approximately
29 percent of our products directly from manufacturers
located in foreign countries. These foreign suppliers are
located primarily in China and other Asian countries. In
addition, many of our domestic suppliers purchase a portion of
their products from foreign suppliers. Because a large
percentage of our products are manufactured or sourced abroad,
we are required to order these products further in advance than
would be the case if the products were manufactured
domestically. If we underestimate consumer demand, we may not be
able to fully satisfy our customers on a timely basis. If we
overestimate consumer demand, we may be required to hold goods
in inventory for a longer period of time or to reduce selling
prices in order to clear excess inventory at the end of a
selling season. We do not have long-term contracts with any
manufacturers.

Foreign manufacturing is also subject to a number
of other risks, including work stoppages, transportation delays
and interruptions, political instability, economic disruptions,
the imposition of tariffs and import and export controls,
changes in governmental policies and other events. If any of
these events occur, it could result in a material adverse effect
on our business, financial condition, results of operations and
prospects. In addition, reductions in the value of the U.S.
dollar could ultimately increase the prices that we pay for our
products.

Other Available Information

We also make available, free of charge, on our
Internet website at www.joann.com, our annual reports on
Form 10-K, quarterly reports on Form 10-Q, current
reports on Form 8-K and amendments to reports filed or
furnished pursuant to Section 13(a) or 15(d) of the
Securities Exchange Act of 1934 as soon as we file such
material, or furnish it to, the Securities and Exchange
Commission. We will also post, prior to our Annual Shareholder
meeting on June 10, 2004, the charters of our Audit,
Compensation and Corporate Governance Committees; our Corporate
Governance Guidelines, Code of Business Conduct and Ethics
(including the Code of Ethics for the CEO and Financial
Officers), and any amendments or waivers thereto. These
documents are also available in print to any stockholder
requesting a copy from our Investor Relations department at our
principal executive offices.




Item 2. Properties

Our store support center and Hudson distribution
center are located in a 1.4 million square foot facility on
105 acres in Hudson, Ohio. We own both the facility and the real
estate. The distribution center occupies 1.0 million square
feet and the remainder is used as our store support center, a
superstore, and office space we lease to another tenant. In
addition, we own 65 acres of land adjacent to our Hudson, Ohio
facility.

During January 2001, we completed
construction of a 630,000 square foot distribution center
located on an 80-acre site in Visalia, California. We own both
the facility and the real estate.

The remaining properties that we occupy are
leased retail store facilities, located primarily in
high-traffic shopping centers. All store leases are operating
leases. Traditional store leases generally have initial terms of
five to ten years and renewal options for up to 20 years.
Superstore leases generally have initial terms of
10-15 years and renewal options generally ranging from
10-20 years. Certain store leases contain escalation
clauses and contingent rents based on a percent of net sales in
excess of defined minimums. During the fiscal year-ended
January 31, 2004, we incurred $146.0 million of rental
expense, including common area maintenance, taxes and insurance
for store locations. As we pursue our transformation plan to
replace traditional stores with superstores over time, we have
been able to build flexibility by reducing the outstanding term
of existing traditional store leases through splitting of
renewal options or negotiating short-term renewals. We manage
our lease exit costs aggressively on traditional stores that we
close.

9



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##### Table of Contents



As of January 31, 2004, the current terms of
our store leases, assuming we exercise all lease renewal
options, were as follows:

|                        |       |              |     |     | 
|----------------------- | ----- | ------------ | --- | --- | 
|                        |       | Number of   
|Year Lease Terms Expire |       | Store Leases
|                        |       |             
|Month-to-month          |       |              | 27  |    
|2005                    |       |              | 34  |    
|2006                    |       |              | 25  |    
|2007                    |       |              | 29  |    
|2008                    |       |              | 24  |    
|2009                    |       |              | 26  |    
|Thereafter              |       |              | 726 |    
|                        |       |              |     |    
|                        | Total |              |     | 891 | 
|                        |       |              |     |    




Item 3. Legal Proceedings

We are involved in various litigation matters in
the ordinary course of our business. We are not currently
involved in any litigation which we expect, either individually
or in the aggregate, will have a material adverse effect on our
financial condition or results of operations.




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

A Special Meeting of Shareholders of the Company
was held on November 4, 2003.

Shareholders voted to approve an amendment to the
Companys Articles of Incorporation providing for a
reclassification of the Companys shares pursuant to which:



| |   |                                                                                                                                                                                                                              
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | each of the Class B Common Shares, which
    previously did not have voting rights other than as required by
    law, were amended to have one vote per share and were
    redesignated as the Companys Common Shares; and
|
| |  | each of the Class A Common Shares, which had
    one vote per share, were reclassified into 1.15 Common Shares by
    the following vote:                                                                                    

|                      |  |           |           |               |  |             |           |  |  |  |        | 
|--------------------- |  | --------- | --------- | ------------- |  | ----------- | --------- |  |  |  | ------ | 
|Class                 |  | Votes For |           | Votes Against |  | Abstentions
|                      |  |           |           |               |  |            
|Class A Common Shares |  |           | 8,059,261 |               |  |             | 815,119   |  |  |  | 15,505 | 
|Class B Common Shares |  |           | 5,152,144 |               |  |             | 2,265,350 |  |  |  | 3,126  | 

Also at the special meeting, shareholders of
Class A Common Shares voted to approve amendments to the
Companys Code of Regulations that would:



| |   |                                                                                                                                                
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------
| |  | raise from 25 percent to 50 percent the
    percentage of shares required to call a special meeting of
    shareholders, by the following vote:

| |  |           |           |               |  |             |           |  |  |  |         | 
| |  | --------- | --------- | ------------- |  | ----------- | --------- |  |  |  | ------- | 
| |  | Votes For |           | Votes Against |  | Abstentions
| |  |           |           |               |  |            
| |  |           | 5,507,689 |               |  |             | 3,254,090 |  |  |  | 128,106 | 



| |   |                                                                                                                                                                     
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | provide for 90 days advance notice of
    any proposals or director nominations to be made by shareholders
    at any shareholders meeting, by the following vote:

| |  |           |           |               |  |             |           |  |  |  |         | 
| |  | --------- | --------- | ------------- |  | ----------- | --------- |  |  |  | ------- | 
| |  | Votes For |           | Votes Against |  | Abstentions
| |  |           |           |               |  |            
| |  |           | 5,734,736 |               |  |             | 3,032,032 |  |  |  | 123,117 | 



| |   |                                                                                                                                                                          
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | require an 80 percent shareholder vote for
    any change in the number of directors that is not approved by
    the Companys Board of Directors, by the following vote:

| |  |           |           |               |  |             |           |  |  |  |         | 
| |  | --------- | --------- | ------------- |  | ----------- | --------- |  |  |  | ------- | 
| |  | Votes For |           | Votes Against |  | Abstentions
| |  |           |           |               |  |            
| |  |           | 5,451,659 |               |  |             | 3,315,273 |  |  |  | 122,953 | 

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| |   |                                                                                                                                                        
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | require an 80 percent shareholder vote to
    eliminate any of these shareholder protective measures or our
    staggered board, by the following vote:

| |  |           |           |               |  |             |           |  |  |  |         | 
| |  | --------- | --------- | ------------- |  | ----------- | --------- |  |  |  | ------- | 
| |  | Votes For |           | Votes Against |  | Abstentions
| |  |           |           |               |  |            
| |  |           | 5,442,508 |               |  |             | 3,322,723 |  |  |  | 124,654 | 

Executive Officers of the Registrant

The following information is set forth pursuant
to Item 401(b) of Regulation S-K.

Our executive officers are as follows:

|                      |  |     |    |          |  |                                                                     
|--------------------- |  | --- | -- | -------- |  | --------------------------------------------------------------------
|Name                  |  | Age |    | Position
|                      |  |     |    |         
|Alan Rosskamm         |  |     | 54 |          |  | Chairman of the Board, President and Chief
    Executive Officer    
|Dave Bolen            |  |     | 52 |          |  | Executive Vice President, Merchandising,
    Marketing and Logistics
|Brian Carney          |  |     | 43 |          |  | Executive Vice President, Chief Financial Officer                   
|Michael Edwards       |  |     | 43 |          |  | Executive Vice President, Operations                                
|Valerie Gentile Sachs |  |     | 48 |          |  | Executive Vice President, General Counsel and
    Secretary         
|Rosalind Thompson     |  |     | 54 |          |  | Executive Vice President, Human Resources                           

Alan Rosskammhas
been Chairman of the Board, President and Chief Executive
Officer of our Company for more than five years. He is a member
of one of the two founding families of our Company and has been
employed by us since 1978. Mr. Rosskamm is also a Director
of Charming Shoppes Inc., a womens apparel retailer.

Dave Bolenhas been
Executive Vice President, Merchandising, Marketing and Logistics
of our Company since March 2001. He was Executive Vice
President, Stores and Business Development from August 1997
to March 2001 and Senior Vice President, General Manager of
Jo-Ann etc from March 1997 to August 1997. Prior to
joining our Company, he was Executive Vice President-Operations
of Michaels Stores, Inc., a national craft retailer, from
July 1994 to August 1996.

Brian Carneyhas
been Executive Vice President, Chief Financial Officer of our
Company for more than five years. Prior to joining our Company,
he was Senior Vice President-Finance from May 1996 to
August 1997, and Vice President and Controller from
June 1992 to May 1996, of Revco D.S., Inc., a retail
drugstore chain (acquired by CVS Corporation in 1997).

Michael Edwardshas
been Executive Vice President, Operations of our Company since
April 2001. Prior to joining our Company, he was Executive
Vice President, Merchandising and Chief Marketing Officer of
West Marine, Inc., a specialty retailer of boating supplies,
from June 1999 to March 2001. He was Vice President,
General Merchandise Manager of Golfsmith LP, a retailer of golf
equipment, from September 1998 to May 1999. Prior to
that, Mr. Edwards was with CompUSA, a retailer of
computer-related products, from 1990 to 1998 where he served as
Senior Vice President of Merchandising and Operations during his
tenure. Mr. Edwards was also a Director and Chairman of the
Board of iGo Corporation, a mobile technology products parts
provider, from October 1999 to January 2001.

Valerie Gentile Sachshas been Executive Vice President,
General Counsel and Secretary of our Company since
January 2003. Prior to joining our Company, she was the
General Counsel of Marconi plc, of London, England, a global
company serving the communications industry, from
March 2002. Previously she was Executive Vice President and
General Counsel from April 2001 to March 2002, and
Vice President and General Counsel from November 2000 to
April 2001 of Marconi Communications, Inc., the operating
company for Marconi in the Americas. From December 1997 to
November 2000 she was Vice President, General Counsel and
Secretary for RELTEC Corporation, a network equipment and
network services provider. RELTEC Corporation went public in
March 1998 and was acquired by Marconi in April 1999.

11



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##### Table of Contents



Rosalind Thompsonhas been Executive Vice President,
Human Resources of our Company since December 1999. She was
previously Senior Vice President, Human Resources from
March 1992 to December 1999.




PART II



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

The Companys common shares are traded on
the New York Stock Exchange under the ticker symbol
JAS. As of April 5, 2004, there were 757 common
shareholders of record. The closing price of the shares on
April 5, 2004 was $29.47.

On November 4, 2003, the Company announced
that shareholders approved the reclassification of its
Class A and Class B common shares into a single class
of stock. All references to the number of shares of Common
Stock, stock options, per share prices, and earnings per share
amounts in the Selected Financial Data,
Managements Discussion and Analysis of Financial
Condition and Results of Operations, the consolidated
financial statements and accompanying notes included in this
Annual Report on Form 10-K have been adjusted to
retroactively reflect the share reclassification. Shares of the
single class of common stock began trading on the New York Stock
Exchange on November 5, 2003, under the symbol
JAS.

In the reclassification, Class B common
shares, which did not have voting rights other than as required
by law, were amended to have one vote per share and were
re-designated as the common shares. Each of the
Class A common shares, which had one vote per share, were
reclassified into 1.15 common shares. This resulted in
approximately 1.6 million incremental common shares being
issued at the time of the reclassification, increasing the
number of common shares outstanding by approximately
8 percent.

The quarterly high and low closing stock prices
for fiscal 2004 and 2003 are presented in the table below:

|                 |  |               |       |              |  |              |       |     |  |      |       |     |  |   |       |  |  |   |       |  |  |   |       | 
|---------------- |  | ------------- | ----- | ------------ |  | ------------ | ----- | --- |  | ---- | ----- | --- |  | - | ----- |  |  | - | ----- |  |  | - | ----- | 
|                 |  |               |       |              |  |              |       |    
|                 |  |               |       | Class A      |  | Class B     
|                 |  | Common Shares |       | Common Stock |  | Common Stock
|                 |  |               |       |              |  |             
|                 |  | High          |       | Low          |  | High         |       | Low |  | High |       | Low
|                 |  |               |       |              |  |              |       |     |  |      |       |    
|Fiscal 2004:     |  |               |       |              |  |              |       |     |  |      |       |     |  |   |       |  |  |   |       |  |  |   |       | 
|January 31, 2004 |  | $             | 26.92 |              |  | $            | 18.55 |     |  | $    | 31.14 |     |  | $ | 30.35 |  |  | $ | 27.08 |  |  | $ | 26.43 | 
|November 1, 2003 |  |               |      |              |  |              |      |     |  |      | 32.01 |     |  |   | 25.40 |  |  |   | 27.87 |  |  |   | 22.24 | 
|August 2, 2003   |  |               |      |              |  |              |      |     |  |      | 27.95 |     |  |   | 19.57 |  |  |   | 24.84 |  |  |   | 16.91 | 
|May 3, 2003      |  |               |      |              |  |              |      |     |  |      | 26.30 |     |  |   | 16.75 |  |  |   | 23.30 |  |  |   | 14.00 | 
|                
|Fiscal 2003:     |  |               |       |              |  |              |       |     |  |      |       |     |  |   |       |  |  |   |       |  |  |   |       | 
|February 1, 2003 |  |               |      |              |  |              |      |     |  | $    | 26.85 |     |  | $ | 21.81 |  |  | $ | 22.85 |  |  | $ | 18.19 | 
|November 2, 2002 |  |               |      |              |  |              |      |     |  |      | 33.75 |     |  |   | 23.35 |  |  |   | 26.69 |  |  |   | 18.32 | 
|August 3, 2002   |  |               |      |              |  |              |      |     |  |      | 29.25 |     |  |   | 19.15 |  |  |   | 21.50 |  |  |   | 14.50 | 
|May 4, 2002      |  |               |      |              |  |              |      |     |  |      | 20.34 |     |  |   | 10.70 |  |  |   | 17.30 |  |  |   | 9.15  | 

The Company did not pay cash dividends on its
common stock during fiscal 2004 and fiscal 2003. The
Companys dividend policy has been to retain earnings for
the operation and growth of its business. Payments of dividends,
if any, in the future will be determined by the Board of
Directors in light of appropriate business conditions.

See Part III, Item 12 for a description of
our equity compensation plans.

12



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##### Table of Contents



Item 6. Selected Financial
Data

The following table presents the Companys
selected financial data for each of the five years ending
January 31, 2004. The selected financial data was derived
from the audited financial statements and should be read in
conjunction with Managements Discussion and
Analysis of Financial Condition and Results of Operations,the consolidated financial statements and notes thereto. The
Company reclassified certain amounts in the financial statements
for the five years ending January 31, 2004, in order to
conform to the current period presentation. The Company also
restated all share and earnings per share amounts to reflect the
effect of the share reclassification that was completed on
November 4, 2003. See Note 2  Share Reclassification.

|                                                            |                                              |                                              |         |             |   |             |         |             |   |             |         |     |   |   |         |     |   |   |         |      |  
|----------------------------------------------------------- | -------------------------------------------- | -------------------------------------------- | ------- | ----------- | - | ----------- | ------- | ----------- | - | ----------- | ------- | --- | - | - | ------- | --- | - | - | ------- | ---- | -
|                                                            |                                              |                                             
|                                                            |                                              | Fiscal Year-Ended                           
|                                                            |                                              |                                             
|                                                            |                                              | January 31,                                  |         | February 1, |   | February 2, |         | February 3, |   | January 29,
|                                                            |                                              | 2004                                         |         | 2003        |   | 2002        |         | 2001(a)     |   | 2000       
|                                                            |                                              |                                              |         |             |   |             |         |             |   |            
|                                                            |                                              |                                             
|                                                            |                                              | (Dollars in millions, except per share data)
|Operating Results:                                          |                                              |                                              |         |             |   |             |         |             |   |             |         |     |   |   |         |     |   |   |         |     
|Net sales                                                   |                                              | $                                            | 1,734.1 |             |   | $           | 1,682.0 |             |   | $           | 1,570.3 |     |   | $ | 1,483.3 |     |   | $ | 1,381.5 |     
|                                                            | Total net sales percentage increase          |                                              |         | 3.1         | % |             |         | 7.1         | % |             |         | 5.9 | % |   |         | 7.4 | % |   |         | 11.2 | %
|                                                            | Same-store sales percentage
    increase (b) |                                              |         | 3.6         | % |             |         | 8.4         | % |             |         | 5.9 | % |   |         | 1.3 | % |   |         | 4.5  | %
|Gross margin                                                |                                              |                                              | 810.6   |             |   |             | 777.5   |             |   |             | 693.1   |     |   |   | 645.1   |     |   |   | 633.2   |     
|Selling, general and administrative
    expenses (c)        |                                              |                                              | 677.1   |             |   |             | 641.0   |             |   |             | 644.2   |     |   |   | 589.2   |     |   |   | 533.8   |     
|Depreciation and amortization                               |                                              |                                              | 37.7    |             |   |             | 36.1    |             |   |             | 39.3    |     |   |   | 38.3    |     |   |   | 32.0    |     
|Stock option compensation
    expense (d)                   |                                              |                                              | 5.7     |             |   |             |        |             |   |             |        |     |   |   |        |     |   |   |        |     
|Debt repurchase and share reclassification
    expenses (e) |                                              |                                              | 5.5     |             |   |             | 1.9     |             |   |             | 1.0     |     |   |   |        |     |   |   |        |     
|                                                            |                                              |                                             
|Operating profit (f)                                        |                                              |                                              | 84.6    |             |   |             | 98.5    |             |   |             | 8.6     |     |   |   | 17.6    |     |   |   | 67.4    |     
|                                                            | Operating profit percent of net sales        |                                              |         | 4.9         | % |             |         | 5.9         | % |             |         | 0.5 | % |   |         | 1.2 | % |   |         | 4.9  | %
|Interest expense                                            |                                              |                                              | 18.1    |             |   |             | 26.0    |             |   |             | 32.7    |     |   |   | 29.0    |     |   |   | 26.2    |     
|Net income (loss)                                           |                                              | $                                            | 41.0    |             |   | $           | 44.9    |             |   | $           | (14.9   | )   |   | $ | (13.6   | )   |   | $ | 25.6    |     
|Net income percent of net sales                             |                                              |                                              | 2.4     | %           |   |             | 2.7     | %           |   |             | (0.9    | )%  |   |   | (0.9    | )%  |   |   | 1.9     | %   
|Per Share
    Data (g):                                     |                                              |                                              |         |             |   |             |         |             |   |             |         |     |   |   |         |     |   |   |         |     
|Net income (loss)  diluted                                 |                                              | $                                            | 1.86    |             |   | $           | 2.08    |             |   | $           | (0.75   | )   |   | $ | (0.70   | )   |   | $ | 1.28    |     
|Average shares outstanding  diluted
    (000s)            |                                              |                                              | 22,003  |             |   |             | 21,632  |             |   |             | 19,888  |     |   |   | 19,420  |     |   |   | 19,983  |     
|                                                           
|Financial Position:                                         |                                              |                                              |         |             |   |             |         |             |   |             |         |     |   |   |         |     |   |   |         |     
|Cash and cash equivalents                                   |                                              | $                                            | 17.4    |             |   | $           | 63.2    |             |   | $           | 21.1    |     |   | $ | 17.5    |     |   | $ | 21.4    |     
|Inventories                                                 |                                              |                                              | 404.6   |             |   |             | 363.1   |             |   |             | 369.0   |     |   |   | 451.0   |     |   |   | 442.5   |     
|Inventory turnover                                          |                                              |                                              | 2.4x    |             |   |             | 2.5x    |             |   |             | 2.1x    |     |   |   | 1.8x    |     |   |   | 1.8x    |     
|Current assets                                              |                                              |                                              | 470.5   |             |   |             | 471.7   |             |   |             | 438.2   |     |   |   | 505.8   |     |   |   | 497.9   |     
|Property, equipment and leasehold
    improvements, net     |                                              |                                              | 203.2   |             |   |             | 190.3   |             |   |             | 210.1   |     |   |   | 190.2   |     |   |   | 194.7   |     
|Total assets                                                |                                              |                                              | 707.7   |             |   |             | 704.5   |             |   |             | 693.7   |     |   |   | 742.2   |     |   |   | 746.9   |     
|Current liabilities                                         |                                              |                                              | 198.1   |             |   |             | 205.8   |             |   |             | 205.4   |     |   |   | 223.5   |     |   |   | 208.1   |     
|Long-term debt                                              |                                              |                                              | 113.7   |             |   |             | 162.9   |             |   |             | 223.7   |     |   |   | 240.0   |     |   |   | 245.2   |     
|Shareholders equity                                        |                                              |                                              | 346.2   |             |   |             | 289.4   |             |   |             | 232.8   |     |   |   | 248.8   |     |   |   | 259.4   |     
|Long-term debt to total capitalization                      |                                              |                                              | 24.7    | %           |   |             | 36.0    | %           |   |             | 49.0    | %   |   |   | 49.1    | %   |   |   | 48.6    | %   
|Long-term debt to total capitalization, net
    of cash     |                                              |                                              | 21.8    | %           |   |             | 25.6    | %           |   |             | 46.5    | %   |   |   | 47.2    | %   |   |   | 46.3    | %   
|Per Share
    Data (g):                                     |                                              |                                              |         |             |   |             |         |             |   |             |         |     |   |   |         |     |   |   |         |     
|Book value (h)                                              |                                              | $                                            | 15.86   |             |   | $           | 13.73   |             |   | $           | 11.58   |     |   | $ | 12.69   |     |   | $ | 13.52   |     
|Shares outstanding, net of treasury shares
    (000s)      |                                              |                                              | 21,828  |             |   |             | 21,079  |             |   |             | 20,106  |     |   |   | 19,612  |     |   |   | 19,193  |     
|                                                           
|Other Financial Information:                                |                                              |                                              |         |             |   |             |         |             |   |             |         |     |   |   |         |     |   |   |         |     
|Return on average equity (i)                                |                                              |                                              | 12.9    | %           |   |             | 17.2    | %           |   |             | (6.2    | )%  |   |   | (5.4    | )%  |   |   | 10.1    | %   
|Capital expenditures                                        |                                              | $                                            | 52.2    |             |   | $           | 22.7    |             |   | $           | 66.5    |     |   | $ | 35.9    |     |   | $ | 67.4    |     

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##### Table of Contents



Item 6. Selected Financial Data
(Continued)


|                                    |  |                                              |        |             |  |             |        |             |  |             |        |  |  |  |        |  |  |  |        | 
|----------------------------------- |  | -------------------------------------------- | ------ | ----------- |  | ----------- | ------ | ----------- |  | ----------- | ------ |  |  |  | ------ |  |  |  | ------ | 
|                                    |  |                                             
|                                    |  | Fiscal Year-Ended                           
|                                    |  |                                             
|                                    |  | January 31,                                  |        | February 1, |  | February 2, |        | February 3, |  | January 29,
|                                    |  | 2004                                         |        | 2003        |  | 2002        |        | 2001(a)     |  | 2000       
|                                    |  |                                              |        |             |  |             |        |             |  |            
|                                    |  |                                             
|                                    |  | (Dollars in millions, except per share data)
|Store Count:                        |  |                                              |        |             |  |             |        |             |  |             |        |  |  |  |        |  |  |  |        | 
|Traditional stores                  |  |                                              | 806    |             |  |             | 847    |             |  |             | 889    |  |  |  | 949    |  |  |  | 984    | 
|Superstores                         |  |                                              | 86     |             |  |             | 72     |             |  |             | 70     |  |  |  | 58     |  |  |  | 42     | 
|                                    |  |                                             
|Total                               |  |                                              | 892    |             |  |             | 919    |             |  |             | 959    |  |  |  | 1,007  |  |  |  | 1,026  | 
|                                    |  |                                             
|                                   
|Store Square Footage
    (000s)(j) |  |                                              |        |             |  |             |        |             |  |             |        |  |  |  |        |  |  |  |        | 
|Traditional stores                  |  |                                              | 11,646 |             |  |             | 12,165 |             |  |             | 12,684 |  |  |  | 13,381 |  |  |  | 13,685 | 
|Superstores                         |  |                                              | 3,731  |             |  |             | 3,270  |             |  |             | 3,213  |  |  |  | 2,687  |  |  |  | 1,957  | 
|                                    |  |                                             
|Total                               |  |                                              | 15,377 |             |  |             | 15,435 |             |  |             | 15,897 |  |  |  | 16,068 |  |  |  | 15,642 | 
|                                    |  |                                             





---



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) | All years include 52 weeks except for the
    fiscal year-ended February 3, 2001, which includes
    53 weeks.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|   
|(b) | Same-store sales are defined as net sales from
    stores that have been open one year or more. Net sales are
    included in the same-store sales calculation on the first day of
    the first month following the one-year anniversary of a
    stores opening. In conjunction with the expansion or
    relocation of our stores, we exclude the net sales results from
    these stores in our same-store sales calculation until the first
    day of the first month following the one-year anniversary of its
    expansion or relocation. Further, in a 53-week year, net sales
    are compared to the comparable 53 weeks of the prior period.
|   
|(c) | Includes store pre-opening and closing costs
    which the Company reports separately in its consolidated
    statements of operations for the three years ended
    January 31, 2004. See the consolidated financial statements
    and accompanying notes included elsewhere in this Annual Report
    on Form 10-K.                                                                                                                                                                                                                                                                                                                                    
|   
|(d) | Stock option compensation expense reflects the
    adoption of the fair value provisions of SFAS No. 123,
    Accounting for Stock-Based Compensation and SFAS
    No. 148, Accounting for Stock-Based
    Compensation  Transition and Disclosure. See
    Managements Discussion and Analysis of Financial
    Condition and Results of Operations and Note
    7  Stock-Based Compensation Plans contained in
    the financial statements.                                                                                                                                                                                                 
|   
|(e) | Debt repurchase and share reclassification
    expenses include losses on extinguishments of debt and costs
    associated with the share reclassification. See Note
    2  Share Reclassification contained in the
    financial statements.                                                                                                                                                                                                                                                                                                                                                                                                          



|    |                                                                                                                                                                                                                                                                                                                                                                                         
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(f) | Included in operating profit for the fiscal years
    ended February 2, 2002 and February 3, 2001 are
    charges related to the Turnaround Plan and a fiscal 2002
    litigation settlement charge. See Turnaround Plan and
    Store Closing Charges and Litigation
    Settlement in Managements Discussion and
    Analysis of Financial Condition and Results of Operations.



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(g) | Shares outstanding, as well as average basic and
    diluted shares outstanding used to calculate earnings per share,
    have been retroactively restated as of the beginning of all
    periods presented to reflect the impact of the increased shares
    outstanding as a result of the share reclassification that was
    approved by shareholders on November 4, 2003. Per share
    data have also been restated to give effect to the impact of
    this share reclassification.
|   
|(h) | Book value is calculated by dividing
    shareholders equity by shares outstanding, net of treasury
    shares.                                                                                                                                                                                                                                                                                                                                                                          



|    |                                                                                                                                                                                     
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(i) | Return on average equity is calculated by
    dividing net income by the average of the Company
    shareholders equity as of the beginning and end of its
    current fiscal year.
|   
|(j) | Total store square footage includes selling floor
    space and inventory storage areas.                                                                                            

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##### Table of Contents





|        |                                                                                          
|------- | -----------------------------------------------------------------------------------------
|Item 7. | Managements Discussion and Analysis of
    Financial Condition and Results of Operations

General Overview

For an understanding of the significant factors
that influenced our performance during the past three fiscal
years, the following discussion should be read in conjunction
with the audited consolidated financial statements and notes to
the consolidated financial statements presented in this
Form 10-K. All share and earnings per share amounts
included in this Form 10-K have been restated to reflect
the effect of the share reclassification that we completed on
November 4, 2003. The financial information presented for
years prior to fiscal 2004 have been reclassified for certain
amounts to conform to the fiscal 2004 presentation.

We are the nations largest specialty
retailer of fabrics and one of the largest specialty retailers
of crafts, serving customers in their pursuit of apparel and
craft sewing, crafting, home decorating and other creative
endeavors. Our retail stores (operating as Jo-Ann Fabrics and
Crafts traditional stores and Jo-Annsuperstores)
feature a variety of competitively priced merchandise used in
sewing, crafting and home decorating projects, including
fabrics, notions, crafts, frames, scrapbooking material,
artificial and dried flowers, home accents, finished seasonal
and home décor merchandise.

As of January 31, 2004, we operated 892
stores in 47 states (806 traditional stores and 86 superstores).
Our traditional stores offer a complete selection of fabric and
a convenience assortment of crafts, floral, finished seasonal
and home décor merchandise. Our traditional stores average
14,400 square feet and generated net sales per store of
approximately $1.5 million in fiscal 2004. Our superstores offer
an expanded and more comprehensive product assortment than our
traditional stores. Our superstores also offer custom framing,
floral arrangement and educational programs that our traditional
stores do not. Our superstores opened prior to fiscal 2003
average 45,000 square feet and generated net sales per store of
approximately $6.0 million in fiscal 2004. Our current
superstore prototype averages 35,000 square feet and targets
sales of $5.25 million in its first year of operation. We
opened 13 of these new prototype superstores in fiscal 2004 and
at the end of fiscal 2004, we had 14 prototype superstores in
operation.

Management reviews and manages to a number of key
indicators in evaluating financial performance, the most
significant of which are:



| |   |                                                                                                                                                                                                                                                                                                                                                               
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Net sales, including same-store sales by our two
    store formats, traditional stores and superstores. We also
    closely monitor per transaction average ticket value and
    customer traffic, both in total and by store format. We also
    measure our sales per square foot performance in both of our
    store formats to our immediate competitors.
|
| |  | Gross margin rate to sales. In addition, gross
    margin return on investment (GMROI) is used by our
    merchandising organization to evaluate the gross margin
    performance relative to the average inventory investment.
    Merchandise selection and future decisions are, in part, based
    on the GMROI performance.                            
|
| |  | Selling, general and administrative expense as a
    rate to sales. We compare operating margins to those of our
    competitors.                                                                                                                                                                                                                             
|
| |  | Inventory turnover. We monitor and focus
    extensive effort on managing our inventory investment, which is
    our single largest invested asset. Increasing inventory turnover
    is critical to improving our working capital position and
    improving our overall GMROI.                                                                              
|
| |  | Debt to total capitalization. We have a goal of
    maintaining our year-end debt to total capitalization ratios at
    or below the current level.                                                                                                                                                                                                           

Executive Overview of Fiscal 2004

Fiscal 2004 represented our second consecutive
year of strong operating performance, after completing a
turnaround announced three years ago at the end of fiscal 2001.
The reasons for our turnaround are described in further detail
below under Turnaround Plan and Store Closing
Charges.

Having completed all of the key milestones we
established as part of the turnaround, most notably a return to
profitability with significantly improved operating margins, and
a sharp reduction in interest expense

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##### Table of Contents



due to reduced debt levels, we began to open
superstores in fiscal 2004 after limiting new store growth
during the two years of our turnaround.


Our strategy is to grow by replacing many of our
existing traditional stores with superstores over time. Our
research has demonstrated that our customers have a better
perception of the quality and pricing of our products when they
are presented in our superstore format. We believe that our
prototype 35,000 square foot superstore gives us a competitive
advantage in the industry. Our superstores provide a unique
shopping experience by offering a full creative
selection  sewing, crafting, framing, seasonal,
floral and home décor accessories  all under one
roof. On average we close 1.3 traditional stores for every
superstore that we open. Our superstores typically average over
three times the revenues of the traditional stores they
replaced. In markets where we have opened multiple superstores,
we have been able to grow our revenues significantly and, we
believe, expand the market size and our share of market.

Fiscal 2003 was a record earnings year in the
Companys 60 year history, and we set expectations for
fiscal 2004 to further improve our earnings relative to fiscal
2003. We did not accomplish our fiscal 2004 earnings goal, but
we did generate strong operating momentum in the last half of
the year. A number of strategic and corporate governance related
initiatives were accomplished in fiscal 2004. These are
highlighted as follows:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Initiated the rollout of our new 35,000 square
    foot prototype superstore. During fiscal 2004, we opened 19 new
    stores after opening only three in fiscal 2003. Of the 19 new
    stores opened in fiscal 2004, 13 represented our new prototype
    design. Our current superstore prototype is 10,000 square feet
    smaller than our larger existing superstore and displays our
    destination assortment of fabric and crafts in a visually
    exciting, yet more productive format.                  
|
| |  | We simplified our equity structure. On
    November 4, 2003, shareholders approved the
    reclassification of our former Class A and Class B
    common shares into a single class of common stock. Shares of the
    single class of common stock began trading on the New York Stock
    Exchange on November 5, 2003, under the symbol
    JAS. Separate discussion of the reclassification is
    contained in the notes to consolidated financial statements
    under Note 2  Share
    Reclassification.

In the reclassification, Class B common
shares, which did not have voting rights other than as required
by law, were amended to have one vote per share and were
re-designated as common shares. Each of the
Class A common shares, which had one vote per share, were
reclassified into 1.15 common shares. This resulted in
approximately 1.6 million incremental common shares being
issued at the time of the reclassification, increasing the
number of common shares outstanding by approximately
8 percent to 21.8 million shares.



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | We enhanced our corporate governance. Two members
    of the founding families, who were members of the Board of
    Directors, resigned from active participation on the Board and
    were appointed to Director Emeritus status. We named two
    independent directors to our Board to replace them; Tracey
    Thomas Travis, who is the Senior Vice President, Finance of
    Limited Brands, Inc., and Patricia Morrison, who is the Chief
    Information Officer for Office Depot, Inc.

Our financial performance in fiscal 2004,
although not up to our planned expectations, was strong for the
second straight year and represented the second best earnings
performance in the Companys 60 year history.
Highlights of our financial performance are as follows:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Net revenue for fiscal 2004 increased
    3.1 percent to $1.734 billion. We improved our
    same-store sales, despite challenging comparisons. Same-store
    sales grew 3.6 percent in fiscal 2004 over the prior year
    increase of 8.4 percent. For the second consecutive year,
    our same-store sales performance was the strongest among our
    publicly traded direct competitors in the specialty retail
    sewing and crafting industry.
|
| |  | We expanded our gross profit margin by 50 basis
    points, to 46.7 percent of net revenue in fiscal 2004 from
    46.2 percent in fiscal 2003. This improvement in fiscal
    2004 was due to our decision to be less                                                                                                                                                                                                                                  

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##### Table of Contents



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   | promotional in the second half of the year,
    reduced clearance sales activity and further improvement of our
    store shrink rates.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|
| |  | Net income was $1.86 per diluted share, compared
    to $2.08 per diluted share in fiscal 2003. Fiscal 2004 includes
    the non-cash pre-tax expense of $5.7 million related to the
    expensing of stock options, which is important to note when
    comparing our earnings with our direct competitors, none of whom
    currently expense stock options. We adopted Statement of
    Financial Accounting Standard (SFAS) No. 123,
    Accounting for Stock-Based Compensation, under the
    modified prospective method of adoption permitted by SFAS
    No. 148, Accounting for Stock-Based
    Compensation-Transition and Disclosure, an Amendment of SFAS
    No. 123, and began expensing stock options in the
    first quarter of fiscal 2004. We also incurred $3.6 million
    in incremental charges in fiscal 2004 related to the early
    retirement of our 10 3/8 percent subordinated notes
    and the completion of our share reclassification.
|
| |  | We continued to focus on debt reduction and the
    strengthening of our balance sheet and lowered our debt levels
    to approximately $114 million, our lowest year-end debt
    level in six years.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         

On February 26, 2004, shortly after the end
of fiscal 2004, we issued $100 million of 7.5 percent
senior subordinated notes. The proceeds from these notes were
used to redeem $39.2 million of our existing
10 3/8 percent senior subordinated notes outstanding
through a tender offer; the remaining $25.2 million of the
10 3/8 percent notes outstanding will be redeemed on
May 1, 2004 (the next call date). The remaining proceeds
will be used for general corporate purposes and to reduce
borrowings under our bank credit facility going forward.

Results of Operations

The following table sets forth the financial
information through operating profit, expressed as a percentage
of net sales. The following discussion should be read in
conjunction with our consolidated financial statements and
related notes thereto.

|                                                        |                  |                         |       |             |   |             |       |     |   |  |       |     |  
|------------------------------------------------------- | ---------------- | ----------------------- | ----- | ----------- | - | ----------- | ----- | --- | - |  | ----- | --- | -
|                                                        |                  |                        
|                                                        |                  | Percentage of Net Sales
|                                                        |                  |                        
|                                                        |                  |                        
|                                                        |                  | Fiscal Year-Ended      
|                                                        |                  |                        
|                                                        |                  | Jan 31, 2004            |       | Feb 1, 2003 |   | Feb 2, 2002
|                                                        |                  |                         |       |             |   |            
|Net sales                                               |                  |                         | 100.0 | %           |   |             | 100.0 | %   |   |  | 100.0 | %  
|Gross margin                                            |                  |                         | 46.7  | %           |   |             | 46.2  | %   |   |  | 44.1  | %  
|Selling, general and administrative expenses            |                  |                         | 38.4  | %           |   |             | 37.7  | %   |   |  | 39.7  | %  
|Store pre-opening and closing costs                     |                  |                         | 0.6   | %           |   |             | 0.4   | %   |   |  | 1.3   | %  
|Depreciation and amortization                           |                  |                         | 2.2   | %           |   |             | 2.1   | %   |   |  | 2.5   | %  
|Stock option compensation expense                       |                  |                         | 0.3   | %           |   |             |      |     |   |  |      |    
|Debt repurchase and share
    reclassification expenses |                  |                         | 0.3   | %           |   |             | 0.1   | %   |   |  | 0.1   | %  
|                                                        |                  |                         |       |             |   |             |       |     |   |  |       |    
|                                                        | Operating profit |                         |       | 4.9         | % |             |       | 5.9 | % |  |       | 0.5 | %
|                                                        |                  |                         |       |             |   |             |       |     |   |  |       |    

Comparison of the 52 Weeks Ended
January 31, 2004 and February 1, 2003

Net sales.Net sales
for fiscal 2004 increased 3.1 percent to $1.734 billion
from $1.682 billion in the prior year. Same-store sales
increased 3.6 percent compared with a same-store sales increase
of 8.4 percent for fiscal 2003. Approximately
80 percent of this increase was driven by an increase in
average ticket. Same-store sales growth generated all of the
overall net sales increase, as we operated fewer stores at the
end of fiscal 2004 than a year ago. Our total store count at the
end of the year was down 27 units; however, the number of
superstores in operation increased to 86 from 72 in fiscal 2003.
Store square footage decreased slightly by 0.4 percent to
15.377 million square feet during the year. Superstores
accounted for approximately 27 percent of total net sales
for fiscal 2004.

By store format, our same-store sales performance
for traditional stores increased 3.7 percent for fiscal
2004 versus a same-store sales increase of 8.5 percent in fiscal
2003, with almost the entire increase attributable to an
increase in average ticket. Same-store sales for superstores
increased 3.1 percent versus a

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##### Table of Contents



same-store sales increase of 7.8 percent for
the prior year. The majority of the increase, over
80 percent, was driven by an increase in customer traffic.


During the year, we saw sales strength with
positive same-store sales increases in all of our major product
categories with the exception of finished seasonal goods.
Same-store sales of finished seasonal goods, which represented
12 percent of our total same-store sales for the year,
decreased approximately 3.7 percent; however the gross
margin rate in this category improved over 200 basis points
versus fiscal 2003. We made the decision to be less aggressive
in our promotional pricing during the second half of the year
versus the prior year. The finished seasonal business,
specifically Fall, Halloween and Christmas merchandise, was the
category that had the largest negative sales impact from the
less promotional stance.

Gross margin.Gross
margins may not be comparable to those of our competitors and
other retailers. Some retailers include all of the costs related
to their distribution network in cost of sales, while we exclude
a portion of them from gross margin, including those costs
instead in our selling, general and administrative expenses line
item. As a percent of net sales, gross margin was
46.7 percent for fiscal 2004 compared with
46.2 percent in the prior year, an increase of 50 basis
points. An increase in selling margins of 10 basis points, which
was accomplished by a strong performance in the second half of
the fiscal year due to a less promotional stance, coupled with a
40 basis point improvement in store shrink rates, were the
primary contributors to the increase in the gross margin rate
for the year.

Selling, general and administrative
expenses.Selling, general and
administrative (SG&A) expenses include store and
administrative payroll, employee benefits, distribution costs,
store occupancy costs, advertising expenses and administrative
expenses. SG&A expenses were $666.2 million for fiscal
2004 versus $635.1 million in the prior year. As a
percentage of net sales, SG&A expenses increased to
38.4 percent versus 37.7 percent for fiscal 2003.
Higher advertising costs in the third quarter, due to our 60th
Anniversary celebration, and increased logistics costs,
attributable to the decision to flow seasonal product to stores
differently and replenish in-season, were the primary
contributors to the deterioration in expense leverage.

Depreciation and
amortization.Depreciation and
amortization expense increased $1.6 million to
$37.7 million in fiscal 2004 from $36.1 million in
fiscal 2003, due to the increased level of capital expenditures
year-over-year. Further discussion of capital expenditures is
provided under Liquidity and Capital
Resources.

Store pre-opening and closing
costs.Pre-opening costs are expensed
as incurred and relate to the costs incurred prior to a new
store opening, which includes hiring and training costs for new
employees and processing of initial merchandise. Store closing
costs consist of lease termination costs, lease costs for closed
locations, loss on disposal of fixtures and equipment, severance
for employees, inventory liquidation costs and other costs
incidental to store closings. Store pre-opening and closing
costs increased $5.0 million to $10.9 million in
fiscal 2004, due to the increased level of real estate activity
year-over-year. As a percentage of sales, store pre-opening and
closing costs for fiscal 2004 increased to 0.6 percent from
0.4 percent in the prior year. During fiscal 2004, we
opened 16 superstores, converted four larger traditional stores
to the superstore format and opened three larger traditional
stores. We closed 45 traditional stores and one superstore. We
expect continued pressure on overall expense, as a rate to
sales, to result in fiscal 2005 as the number of new store
openings increases to 35 stores from 19 last year.

Stock option compensation
expense.Stock option compensation
expense of $5.7 million resulted from our adoption of the
fair-value based method of accounting for stock options under
SFAS No. 123 effective February 2, 2003. We adopted
SFAS No. 123 in the first quarter of fiscal 2004 under the
modified-prospective method allowed under the transition
provisions provided under SFAS No. 148. See Note
1  Significant Accounting Policies 
Stock-Based Compensation.

Debt repurchase and share reclassification
expenses.Debt repurchase and share
reclassification expenses for fiscal 2004 were $5.5 million
versus $1.9 million in the prior year, a $3.6 million
increase. Share reclassification expenses associated with the
reclassification of our former Class A and Class B
common shares into a single class of common stock totaled
$1.2 million for the fiscal year. Debt repurchase expenses
of $4.3 million were incurred to repurchase, either in the
open market or through an early call, approximately

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$58.5 million of our
10 3/8 percent senior subordinated notes in fiscal
2004 versus $1.9 million of expenses incurred to
repurchase, in the open market, $27.1 million of senior
subordinated notes in the prior year. The charges include the
cash premium paid for the early redemption and the write-off of
the related deferred finance charges.


Operating profit.Operating profit was $84.6 million in fiscal 2004, compared
with $98.5 million for fiscal 2003.

Interest expense.Interest expense for fiscal 2004 decreased $7.9 million to
$18.1 million from $26.0 million in fiscal 2003. The
decrease is primarily due to a reduction of approximately
$65 million in our average debt levels between years. Our
average debt levels were $174 million this fiscal year
versus $239 million last year.

Income taxes.Our
effective income tax rate for fiscal 2004 increased to
38.4 percent from 38.0 percent in the prior year, as a
result of an adjustment to the effective rate in fiscal 2004 due
to a permanent tax difference related to stock option
compensation expense, under SFAS No. 123.

Comparison of the 52 Weeks Ended
February 1, 2003 and February 2, 2002

Net sales.Net sales
for fiscal 2003 were $1.682 billion compared with
$1.570 billion in fiscal 2002, an increase of
$112.0 million, or 7.1 percent. Same-store sales
increased 8.4 percent for fiscal 2003 compared with a
same-store sales increase of 5.9 percent for the prior
year. Same-store sales generated all of the overall net sales
increase, as we operated 40 fewer stores at the end of fiscal
2003 than the year before. Store square footage decreased
2.9 percent during the year.

By store format, our same-store sales for
traditional stores increased 8.5 percent for fiscal 2003
compared with a 5.1 percent same-store sales increase in
fiscal 2002. Approximately 75 percent of the increase is
attributable to a higher average ticket, with the remaining
25 percent increase due to customer traffic. Same-store
sales for superstores, which accounted for 25 percent of
total revenues, increased 7.8 percent for fiscal 2003
compared with a 9.4 percent same-store sales increase in fiscal
2002. Approximately 60 percent of the increase is
attributable to increased customer traffic, with the remainder
due to a higher average ticket. We attribute the improvement in
same-store sales to strong industry fundamentals, improved
merchandising initiatives as well as an improved inventory
in-stock position on key basic items and advertised items in our
stores.

Gross margin.Gross
margins may not be comparable to those of our competitors and
other retailers. Some retailers include all of the costs related
to their distribution network in cost of sales, while we exclude
a portion of them from gross margin, including those costs
instead in our selling, general and administrative expenses line
item. As you review our gross margin performance, we believe you
should consider the following important information related to
charges recorded in fiscal 2002 (which are discussed in further
detail below under Turnaround Plan and Store Closing
Charges):



| |   |                                                                                                                                                                                                                                                                         
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | During fiscal 2002, sales related to the SKU
    Reduction Initiative totaled $34 million, recorded at zero
    gross margin. This negatively impacted the fiscal 2002 gross
    margin rate by approximately 100 basis points (100 basis points
    equal one percent).
|
| |  | During fiscal 2002, $2.6 million of the
    $19.7 million in Turnaround Charges were recorded in cost
    of sales. This negatively impacted the fiscal 2002 gross margin
    rate by approximately 20 basis points.                                                    

Gross margin for fiscal 2003 was
$777.5 million compared with $693.1 million in fiscal 2002.
As a percentage of net sales, fiscal 2003 gross margin was
46.2 percent compared with 44.1 percent in the prior
year, an increase of 210 basis points. Turnaround Charges
recorded in fiscal 2002 accounted for approximately 20 basis
points of the improvement, while the absence of the SKU
Reduction Initiative sales accounted for another 100 basis
points of the improvement. The remaining margin rate improvement
was largely driven by improvement in the store shrink expense
rate of approximately 150 basis points. Partially offsetting
this improvement were lower selling margins caused by the more
challenging retail environment in the third and

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fourth quarters of fiscal 2003, which
necessitated promotional pricing, particularly on seasonal
goods, to be more aggressive versus the year earlier period.


Selling, general and administrative
expenses.SG&A expenses include
store and administrative payroll, employee benefits,
distribution costs, store occupancy costs, advertising expenses
and administrative expenses. During fiscal 2002, the settlement
of certain California wage litigation resulted in a charge of
$6.5 million. This negatively impacted the SG&A rate by
approximately 40 basis points (which is discussed in further
detail below under Litigation Settlement)

SG&A expenses were $635.1 million for
fiscal 2003 versus $623.2 million in fiscal 2002. As a
percentage of net sales, SG&A expenses decreased 200 basis
points to 37.7 percent versus 39.7 percent for fiscal
2002. The charge for the litigation settlement recorded in
fiscal 2002 discussed above accounted for 40 basis points of the
improvement. The remaining rate improvement was due to positive
expense leverage realized primarily in store expenses, with
strong cost controls complementing the favorable impact of
improved same-store sales growth.

Depreciation and
amortization.Depreciation and
amortization expense for fiscal 2003 decreased $3.2 million
to $36.1 million from $39.3 million in fiscal 2002.
This decrease was attributable to discontinuing goodwill
amortization, pursuant to the adoption of SFAS No. 142,
Goodwill and Intangible Assets (SFAS
No. 142), which lowered amortization expense by
$0.7 million, and due to lower capital expenditures.

Store pre-opening and closing
costs.Pre-opening costs are expensed
as incurred and relate to the costs incurred prior to opening a
new store, which includes hiring and training costs for new
employees and processing of initial merchandise. Store closing
costs consist of lease termination costs, lease costs for closed
locations, loss on disposal of fixtures and equipment, severance
for employees, inventory liquidation costs and other costs
incidental to store closings. Store pre-opening and closing
costs decreased $15.1 million to $5.9 million in
fiscal 2004, primarily due to the Turnaround Charges recorded in
fiscal 2002. During fiscal 2002, $17.1 million of the $19.7
million in Turnaround Charges were recorded in store pre-opening
and closing costs. See Turnaround Plan and Store
Closing Chargesdiscussion below.

Debt repurchase
expenses.Debt repurchase expenses of
$1.9 million were incurred in fiscal 2003 to repurchase
$27.1 million of our 10 3/8 percent senior
subordinated notes in the open market at a purchase price of
$28.3 million or 104.3 percent to par value. The charge is
comprised of the premium paid on the purchase plus a pro-rata
portion of the capitalized deferred finance charges. In fiscal
2002 debt repurchase expenses were $1.0 million. During
fiscal 2002, the Company entered into a $365.0 million
senior secured credit facility. The deferred financing costs of
$1.0 million related to the prior bank credit facility were
written off and are reflected in debt repurchase expenses.

Operating profit.Operating profit for fiscal 2003 was $98.5 million,
compared with $8.6 million for fiscal 2002. The fiscal 2002
operating profit was impacted by the $19.7 million in
Turnaround Plan charges and $6.5 million in litigation
settlement costs recorded. See the Gross margin,
Selling, general and administrative expenses and
Store pre-opening and closing costs discussions
above.

Interest expense.Interest expense for fiscal 2003 was $26.0 million,
compared with $32.7 million in fiscal 2002, a decrease of
$6.7 million. Substantially all of this decrease was
attributable to a decrease in average debt levels. Our average
debt levels during fiscal 2003 were $239 million compared
with $319 million during fiscal 2002.

Income taxes.Our
effective income tax rate was 38.0 percent for both fiscal
2003 and fiscal 2002.

Turnaround Plan and Store Closing
Charges

In fiscal 2001, we experienced significant
difficulty with the implementation of SAP Retail, negatively
impacting our ability to stay in stock on key basic products
while, at the same time, being overstocked on slower selling
products. As a result, sales were negatively affected and our
operating performance suffered.

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As a result of these implementation issues,
coupled with increased debt from elevated levels of capital
spending to install SAP Retail and to construct and open a
second distribution center in fiscal 2002, as well as a decline
in operating margins, our strategy shifted from accelerating the
growth of our superstore concept to improving the productivity
of our existing asset base and realizing the benefits from our
completed infrastructure investments. At the end of fiscal 2001,
we announced the implementation of a turnaround plan (the
Turnaround Plan). A number of charges were taken
during fiscal 2002 and 2001 related to the Turnaround Plan.

These charges included store closing costs,
inventory markdowns to net realizable value in connection with a
SKU reduction initiative (see SKU Reduction
Initiativediscussion below) and store closings, and
asset impairment losses for store fixtures and leaseholds.
Summarized below is an analysis of store closing charges,
incurred as part of the Turnaround Plan initiatives, as well as
store closings from normal operating activity. We also provide
discussion on other charges taken as part of the Turnaround Plan
initiative.

Store Closing
Charges.We review the productivity of
our store base on an ongoing basis and actively manage our real
estate to preserve maximum flexibility in lease terms. As a
result, we have only six stores in operation, that have been
operating for more than one year, where the store contribution
is not cash flow positive. In addition, despite an aggressive
store rationalization policy, pursuant to which we have closed
247 stores in the last five years, we are paying rent on just
six store locations where we have not yet obtained a sublease
tenant or executed a lease termination. The remaining lease
obligation on these six store properties is $1.7 million at
the end of fiscal 2004.

In accordance with the then applicable accounting
literature (Emerging Issues Task Force Issue (EITF)
94-3, Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity
(Including Certain Costs Incurred in a Restructuring),
Statement of Financial Accounting Standards (SFAS)
No. 121, Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of and
Staff Accounting Bulletin No. 100, Restructuring and
Impairment Charges,) we recorded pre-tax charges in
operating expenses of $17.1 million in fiscal 2002 and
$6.7 million in fiscal 2001 for restructuring and asset
impairment costs resulting from 148 identified store closings
associated with the Turnaround Plan. We also incurred expense of
$0.5 million in fiscal 2002 for store closings unrelated to
the Turnaround Plan.

Through the end of fiscal 2004, 131 of the stores
identified for closure as part of the Turnaround Plan have been
closed. The remaining stores to be closed, with the exception of
eight store locations, will be closed in fiscal 2005. At the end
of fiscal 2003, a decision was made to continue to operate these
eight locations due to our inability to successfully negotiate
an acceptable arrangement to exit the lease. A total of
$7.7 million for estimated lease obligations of stores to
be closed as part of the Turnaround Plan were reversed in the
fourth quarter of fiscal 2003. The reversal related to stores
where estimates were revised, as well as the eight stores we
could not close. We also recorded an asset impairment charge in
the fourth quarter of fiscal 2003 of $6.7 million for
various store locations, representing the difference between the
asset carrying value and the future net discounted cash flows
estimated to be generated by those assets. The remainder of the
store closing charges in fiscal 2003 and the store closing
charges incurred in fiscal 2004, highlighted in the table below,
represent lease obligations and other costs associated with
stores identified for closure that were not part of the
Turnaround Plan.

As discussed in Note 1  Significant
Accounting Policies, effective December 31, 2002, we
began to account for the costs of store closings as required
under SFAS No. 146 Accounting for Costs Associated
with Exit or Disposal Activities. In addition, we have
adopted the new accounting requirements related to asset
impairment as required by SFAS No. 144 Accounting for
the Impairment or Disposal of Long-Lived Assets
(SFAS No. 144), effective February 3, 2002.

The charges to the statement of operations for
the three fiscal years ended January 31, 2004 related to
store closings are summarized below, and include charges for
both store closings as part of our turnaround initiatives, as
well as store closings from normal operating activity. These
charges are included in the line

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item Store pre-opening and closing
costs in the statements of operations included in the
consolidated financial statements.


|                       |                                  |                       |     |      |   |      |     |      |   |   |      |     | 
|---------------------- | -------------------------------- | --------------------- | --- | ---- | - | ---- | --- | ---- | - | - | ---- | --- | 
|                       |                                  |                      
|                       |                                  | Fiscal Year-Ended    
|                       |                                  |                      
|                       |                                  | 2004                  |     | 2003 |   | 2002
|                       |                                  |                       |     |      |   |     
|                       |                                  |                      
|                       |                                  | (dollars in millions)
|Store Closing Charges: |                                  |                       |     |      |   |      |     |      |   |   |      |    
|                       | Non-cancelable lease obligations |                       | $   | (0.1 | ) |      | $   | (5.9 | ) |   | $    | 9.6 | 
|                       | Asset impairment                 |                       |     | 2.1  |   |      |     | 6.7  |   |   |      | 5.0 | 
|                       | Other costs                      |                       |     | 1.3  |   |      |     | 0.6  |   |   |      | 3.0 | 
|                       |                                  |                       |     |      |   |      |     |      |   |   |      |    
|Total                  |                                  | $                     | 3.3 |      |   | $    | 1.4 |      |   | $ | 17.6 |    
|                       |                                  |                       |     |      |   |      |     |      |   |   |      |    

Non-cancelable lease obligationsfor fiscal 2003 and 2002 include the
lesser of the estimated buyout or remaining lease obligations of
the stores to be closed. Estimated continuing lease obligations
were reduced by anticipated sublease rental income. In fiscal
2004, these costs are accounted for in accordance with SFAS
No. 146, which requires certain lease costs to be expensed
as incurred.

Asset impairmentsinclude write-downs of fixed assets to
estimated fair value for stores closed, or scheduled to be
closed, and certain other store locations where impairment
exists. The asset impairment represents the difference between
the asset carrying value and our estimate of the future net
discounted cash flows to be generated by those assets.

Other costsrepresent other miscellaneous store
closing costs, including among other things, costs related to
fixtures, signage and register removal.

Summarized below is a reconciliation of the
beginning and ending store closing reserve balances for the
three fiscal years ended January 31, 2004:

|                            |          |                       |      |             |   |       |     |       |   |   |     |      |   |   |      |      |  
|--------------------------- | -------- | --------------------- | ---- | ----------- | - | ----- | --- | ----- | - | - | --- | ---- | - | - | ---- | ---- | -
|                            |          | Non-cancelable        |      |             |   |       |     |      
|                            |          | Lease                 |      | Asset       |   | Other |     |      
|                            |          | Obligations           |      | Impairments |   | Costs |     | Total
|                            |          |                       |      |             |   |       |     |      
|                            |          |                      
|                            |          | (dollars in millions)
|Balance at February 3, 2001 |          | $                     | 5.5  |             |   | $     |    |       |   | $ | 3.8 |      |   | $ | 9.3  |     
|Amounts charged to income   |          |                       | 9.6  |             |   |       | 5.0 |       |   |   | 3.0 |      |   |   | 17.6 |     
|Utilization:                |          |                       |      |             |   |       |     |       |   |   |     |      |   |   |      |     
|                            | Cash     |                       |      | (3.9        | ) |       |     |      |   |   |     | (5.6 | ) |   |      | (9.5 | )
|                            | Non-Cash |                       |      |            |   |       |     | (5.0  | ) |   |     |     |   |   |      | (5.0 | )
|                            |          |                       |      |             |   |       |     |       |   |   |     |      |   |   |      |     
|Balance at February 2, 2002 |          |                       | 11.2 |             |   |       |    |       |   |   | 1.2 |      |   |   | 12.4 |     
|Amounts charged to income   |          |                       | (5.9 | )           |   |       | 6.7 |       |   |   | 0.6 |      |   |   | 1.4  |     
|Utilization:                |          |                       |      |             |   |       |     |       |   |   |     |      |   |   |      |     
|                            | Cash     |                       |      | (1.8        | ) |       |     |      |   |   |     | (0.9 | ) |   |      | (2.7 | )
|                            | Non-Cash |                       |      |            |   |       |     | (6.7  | ) |   |     |     |   |   |      | (6.7 | )
|                            |          |                       |      |             |   |       |     |       |   |   |     |      |   |   |      |     
|Balance at February 1, 2003 |          |                       | 3.5  |             |   |       |    |       |   |   | 0.9 |      |   |   | 4.4  |     
|Amounts charged to income   |          |                       | (0.1 | )           |   |       | 2.1 |       |   |   | 1.3 |      |   |   | 3.3  |     
|Utilization:                |          |                       |      |             |   |       |     |       |   |   |     |      |   |   |      |     
|                            | Cash     |                       |      | (1.6        | ) |       |     |      |   |   |     | (1.3 | ) |   |      | (2.9 | )
|                            | Non-Cash |                       |      |            |   |       |     | (2.1  | ) |   |     | 0.1  |   |   |      | (2.0 | )
|                            |          |                       |      |             |   |       |     |       |   |   |     |      |   |   |      |     
|Balance at January 31, 2004 |          | $                     | 1.8  |             |   | $     |    |       |   | $ | 1.0 |      |   | $ | 2.8  |     
|                            |          |                       |      |             |   |       |     |       |   |   |     |      |   |   |      |     

SKU Reduction
Initiative.During the fourth quarter
of fiscal 2001, we commenced the SKU Reduction Initiative which
entailed a thorough review of our inventory investment and gross
margin performance by item (or SKU) utilizing analytical
capabilities available under SAP Retail. This analysis
identified approximately 10,000 active items, totaling more than
$50 million at cost, that were under-performing and

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that we decided to discontinue. In connection
with this initiative, we recorded a $23.0 million pre-tax
charge to reserve for the portion of this product that we
estimated would be sold below cost. However, liquidating this
inventory at reduced selling prices put pressure on overall
realized gross margins in fiscal 2002, since the sales were
recorded at a zero gross margin. The SKU Reduction Initiative
was the start of an ongoing, disciplined, detailed review of our
product mix. We began clearance programs in the second quarter
of fiscal 2002 designed to eliminate this product. These
clearance programs were completed by the end of fiscal 2002.


Litigation Settlement

In August 2000, a former employee of the
Company filed a purported class action complaint against us, on
behalf of the Companys former and current California store
management employees. The complaint was filed in the Superior
Court of California and alleged that we violated certain
California laws by erroneously treating our store management
employees as exempt employees who are not entitled
to overtime compensation. This case was consolidated with a
similar class action complaint filed in October 2000 in the
Superior Court of California. This case was settled in fiscal
2002 for $6.5 million. The settlement was paid in the first
quarter of fiscal 2003.

Liquidity and Capital Resources

Our capital requirements are primarily for
capital expenditures in connection with new store openings, new
store inventory purchases and seasonal working capital
requirements. These requirements will be funded through a
combination of internally generated cash flows from operations,
credit extended by suppliers and borrowings under our bank
credit facility.

The following table provides cash flow related
information for the three fiscal years ended January 31,
2004.

|                                                         |  |      |       |      |  |      |       |   |  |   |       |  
|-------------------------------------------------------- |  | ---- | ----- | ---- |  | ---- | ----- | - |  | - | ----- | -
|                                                         |  | 2004 |       | 2003 |  | 2002
|                                                         |  |      |       |      |  |     
|Net cash provided by operating activities                |  | $    | 48.5  |      |  | $    | 119.2 |   |  | $ | 88.2  |  
|Net cash used for investing activities                   |  |      | (47.9 | )    |  |      | (22.7 | ) |  |   | (66.5 | )
|Net cash used for financing activities                   |  |      | (46.4 | )    |  |      | (54.4 | ) |  |   | (18.1 | )
|                                                         |  |      |       |      |  |      |       |   |  |   |       |  
|Net (decrease) increase in cash and
    cash equivalents |  | $    | (45.8 | )    |  | $    | 42.1  |   |  | $ | 3.6   |  
|                                                         |  |      |       |      |  |      |       |   |  |   |       |  
|Ending cash and cash equivalents                         |  | $    | 17.4  |      |  | $    | 63.2  |   |  | $ | 21.1  |  
|                                                         |  |      |       |      |  |      |       |   |  |   |       |  

Net Cash Provided By Operating
Activities

Net cash provided by operating activities was
$48.5 million in fiscal 2004, compared with
$119.2 million in fiscal 2003, a decrease of
$70.7 million, primarily caused by an increase in inventory
and a decrease in accounts payable, together totaling a decrease
of $62.1 million from fiscal 2003. Cash flows from
operating activities, before changes in operating assets and
liabilities, were $95.9 million in fiscal 2004 and were
comparable to the $100.9 million generated in fiscal 2003.

Inventories, net of payable support, increased
$49.4 million in fiscal 2004, compared with a decrease of
$12.7 million in fiscal 2003. The increase in inventory was
substantially in core product categories that have experienced
solid sales performance, primarily fabric and scrapbooking
merchandise. An earlier arrival of spring seasonal goods,
compared with the prior year, also contributed to the increase
in inventory levels. Inventory turns for fiscal 2004 were
approximately 2.4 times, compared with 2.5 times in fiscal 2003
and 2.1 times in fiscal 2002.

Net cash provided by operating activities was
$119.2 million in fiscal 2003, compared with
$88.2 million in fiscal 2002, an increase of
$31.0 million driven by strong operating performance. Cash
flows from operating activities, before changes in operating
assets and liabilities, were $100.9 million in fiscal 2003
versus $18.4 million in fiscal 2002. During fiscal 2003,
the Company generated $18.3 million from changes in

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operating assets and liabilities versus
$69.9 million in fiscal 2002. During fiscal 2002, the
Company achieved significant reductions in inventory from its
SKU Reduction Initiative and store closings.


Net Cash Used For Investing
Activities

Net cash used for investing activities for fiscal
2004 totaled $47.9 million compared with $22.7 million in
fiscal 2003. The increase was due to an increase in capital
expenditures, primarily due to new store openings. Capital
expenditures were $52.2 million during fiscal 2004 versus
$22.7 million in fiscal 2003 and are discussed further
below under the caption Capital Expenditures.
Partially offsetting the increase in capital expenditures were
proceeds of $4.3 million from the sale of our equity
investment in BouClair, Inc., a Canadian fabric retailer. Total
consideration for the sale of BouClair was $6.5 million,
$4.3 million of which was received in fiscal 2004. There
was no material impact on the statement of operations from the
sale of this investment.

Net cash used for investing activities for fiscal
2003 totaled $22.7 million compared with $66.5 million
in fiscal 2002 which consisted entirely of capital expenditures.

Capital Expenditures

Capital expenditures for fiscal 2004 totaled
$52.2 million. Store related expenditures, including 19 new
store openings, represented over 80 percent of the capital
spending. During the year, we opened 16 superstores, converted
four larger traditional stores to the superstore format and
opened three larger traditional stores. The Company also closed
45 traditional stores and one superstore. In addition, five
stores the Company had previously reported in its superstore
count were reclassified as large traditional stores.

Capital expenditures for fiscal 2003 totaled
$22.7 million, our lowest level of capital spending in six
years, as we focused on maximizing cash flow to reduce debt.
During fiscal 2003, we opened one superstore and two traditional
stores and converted two larger traditional stores to our
superstore format. We also relocated four traditional stores and
closed 42 smaller or under-performing traditional stores and one
superstore.

Capital expenditures of $66.5 million in
fiscal 2002 included approximately $40.0 million related to
the unwind of a synthetic lease facility which was replaced by
our new credit facility (discussed further under
Financingbelow). The synthetic lease
facility was originally used to finance the construction and
equipment cost of our distribution center in Visalia,
California. During fiscal 2001, construction was completed on
this new 630,000 square foot distribution center. This facility
was fully operational and shipping product to more than 300
stores, or over 30 percent of our chain, by the end of the
second quarter of fiscal 2002.

Excluding the unwind of the synthetic lease,
capital expenditures of $26.5 million during fiscal 2002 related
primarily to the opening of new superstores and other store
related projects. During the year, we opened 12 superstores,
relocated or expanded 10 and closed 60 smaller or
under-performing traditional stores.

We anticipate capital expenditures in fiscal 2005
of approximately $70 to $75 million. The increase in
capital spending is attributable to increased store opening
activity and the first phase over the next three years to
replace the point-of-sale systems in our stores. During fiscal
2005, we plan to open approximately 30 new superstores and five
traditional stores and close approximately 70 stores, 40 of
which are attributable to the superstore openings. As we open
more new stores and begin to increase capital expenditures in
the coming years, we envision our growth plans will be
self-funding through cash from operations.

Net Cash Used For Financing
Activities

Net cash used for financing activities was
$46.4 million during fiscal 2004 compared with
$54.4 million during fiscal 2003. Long-term debt at the end
of fiscal 2004 was $113.7 million, our lowest year-end debt
level in six years. Debt levels decreased $49.2 million
during fiscal 2004, compared with a net decrease of
$60.8 million in the prior year. During fiscal 2004, we
redeemed or repurchased in the open market, approximately
$58.5 million of our 10 3/8 percent senior
subordinated notes at an aggregate premium of

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105.4 percent to par value. These purchases
were made utilizing excess cash on hand and borrowings under our
bank credit facility.


Net cash used for financing activities during
fiscal 2003 was $54.4 million, primarily related to a
$60.8 million net decrease in debt borrowings resulting
from cash generated by strong operating performance. During
fiscal 2003 we repurchased, in the open market,
$27.1 million of our 10 3/8 percent senior
subordinated notes at a purchase price of $28.3 million or
104.3 percent to par value.

Net cash used for financing activities during
fiscal 2002 was $18.1 million, primarily related to a
$16.3 million net decrease in debt borrowings. This debt
reduction was achieved despite the unwinding of a
$40.0 million synthetic lease, which added
$40.0 million to our balance sheet debt levels, and changes
to our letter of credit payment terms, which we estimate added
$30.0 million to our debt levels. The debt reduction in
fiscal 2002 was achieved primarily through our inventory
reduction efforts.

Common Share Repurchases

During fiscal 2004, we purchased a total of
0.1 million of our common shares at an aggregate price of
$1.6 million, utilizing proceeds received from stock option
exercises. As of January 31, 2004, we are authorized to
purchase up to an additional 1.4 million shares of our
common stock under previous authorizations from our Board of
Directors.

Sources of Liquidity

We have three principal sources of liquidity:
cash from operations, cash and cash equivalents on hand, and our
credit facility. We believe that our credit facility, coupled
with cash on hand and cash from operations, will be sufficient
to cover our working capital, capital expenditure and debt
service requirement needs for the foreseeable future.

Our liquidity is based, in part, on maintaining
our current debt ratings. As of January 31, 2004, our
long-term unsecured debt was rated B2 by
Moodys Investor Services and B- by Standard
& Poors. In assessing our credit strength, both
Moodys and Standard & Poors consider our capital
structure and financial policies, as well as our consolidated
balance sheet and other financial information. If our debt
ratings were downgraded, it could adversely impact, among other
things, our future borrowing costs, access to capital markets
and new store operating lease costs.

Our current debt obligations, as of the end of
fiscal 2004, include $49.3 million outstanding under our
$365 million bank senior credit facility, and
$64.4 million outstanding 10 3/8 percent senior
subordinated notes. Subsequent to year-end, we issued
$100 million of 7.5 percent senior subordinated notes
and executed an early tender offer for our remaining
10 3/8 percent senior subordinated notes. Each of
these debt obligations are described in further detail below.

Senior Credit
Facility.In April 2001, we
entered into a four year $365 million senior credit facility
(the credit facility), led by Fleet Retail Finance,
Inc. This credit facility consists of a $325.0 million
revolver and a $40.0 million term loan, both secured by a
first priority perfected security interest in our inventory,
accounts receivable, property and other assets. The credit
facility is fully and unconditionally guaranteed by each of our
subsidiaries. There is no penalty if we elect to prepay the term
loan principal, which is due on April 5, 2005. Interest on
borrowings under the credit facility is calculated at the
banks base rate or London Interbank Offered Rate
(LIBOR) plus 1.75 percent to 2.25 percent,
depending on the level of excess availability (as defined in the
credit agreement) that is maintained. At January 31, 2004,
our interest on borrowings under our credit facility was LIBOR
plus 1.75 percent. The credit facility contains a sub-limit
for letters of credit of $150.0 million. Proceeds from the
credit facility were used to repay all outstanding borrowings
under our prior $300.0 million senior credit facility and
refinance a $40.0 million synthetic lease facility. In
connection with this refinancing, we acquired the building and
equipment at our West Coast distribution center and terminated
our synthetic lease facility. Accordingly, the related property,
plant and equipment was recorded as a capital expenditure in the
first quarter of fiscal 2002. The debt obligation of
$40.0 million was also recorded at that time. The deferred
financing costs associated with our synthetic lease

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facility totaling $1.0 million pre-tax, were
written-off and are included in our debt repurchase and share
reclassification expenses line item on the statement of
operations.


During fiscal 2001, we entered into a synthetic
lease facility to fund the construction of the building and
acquisition of equipment at our West Coast distribution center
in Visalia, California. The cost of the building and equipment
acquired using this facility was $40.0 million. The
synthetic lease facility was determined to be an operating lease
and, accordingly, the distribution center assets and related
obligation were not recorded on our balance sheet. The interest
payments were capitalized until the facility began operations.

Our decision to unwind the synthetic lease was a
result of entering into the new senior secured credit facility.
Keeping the synthetic lease as part of our capital structure may
have been problematic in syndicating the new senior secured
credit facility and, as a result, the decision was made to
collapse it.

Effective May 15, 2001, in connection with
our financing under the credit facility, the agent bank for the
credit facility assumed assignment of our two outstanding
interest rate swap agreements. On May 16, 2001, the agent
bank terminated those interest rate swap agreements and
established a new interest rate swap with a fixed LIBOR of
6.72 percent and a notional amount of $90.0 million, which
decreased to $40.0 million on May 1, 2003, until its
expiration on April 30, 2005.

As of January 31, 2004, we had borrowings
outstanding of $49.3 million under the credit facility at
an interest rate of 3.1 percent (which excludes the impact
of the interest rate swap referred to above) and
$51.1 million of letters of credit outstanding.

Our weighted average interest rate (including the
impact of the interest rate swaps referred to above) and
weighted average borrowings under the credit facility were
6.3 percent and $88.3 million during fiscal 2004 and
7.9 percent and $104.7 million during fiscal 2003.

The senior credit facility contains covenants
that, among other things, restrict the Companys ability to
incur additional indebtedness or guarantee obligations,engage in mergers or consolidations, dispose of assets, make
investments, acquisitions,loans or advances, engage in
certain transactions with affiliates, conduct certain corporate
activities, create liens, or change the nature of its business.
The Company is restricted in capital expenditures and its
ability to prepay or modify the terms of other indebtedness, pay
dividends and make other distributions when Excess Availability,
as defined, falls below certain levels. Further, the Company is
required to comply with a minimum net worth financial covenant
if Excess Availability, as defined, is less than
$35 million at any time. As of the end of January 31,
2004, Excess Availability was $178.2 million, and at the
Companys peak borrowing level during fiscal 2004, the
Excess Availability was $126.7 million. The senior credit
facility also defines various events of default,including cross default provisions, defaults for any
material judgments or a change in control. At January 31,
2004, the Company is in compliance with all covenants under its
credit agreement.

Senior Subordinated
Notes.On May 5, 1999 we issued
$150.0 million of 10 3/8 percent senior
subordinated notes due May 1, 2007. Interest on the notes
is payable on May 1 and November 1 of each year. Deferred
charges and the original issue discount (the notes were issued
at 98.5 percent of face value) recorded at issuance in the
amounts of $4.3 million and $2.3 million,
respectively, are reflected in other long-term assets and are
being amortized as interest expense over the term of the notes
utilizing the effective interest method. We have the option of
redeeming the notes at any time after May 1, 2003, in
accordance with certain call provisions of the related note
indenture. The notes represent unsecured obligations that are
subordinated to the credit facility and are fully and
unconditionally guaranteed by each of our subsidiaries.

The senior subordinated note indenture contains
covenants that, among other things, restrict the Companys
ability to incur additional indebtedness, make restricted
payments, engage in certain transactions with affiliates, create
liens, sell assets,issue guarantees of and pledges
securing indebtedness and require an offer to repurchase the
notes in the event of a change in control. The indenture defines
various events of default, including cross default provisions
and defaults for any material judgments. At January 31, 2004,
the Company is in compliance with all covenants under its note
indenture.

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Failure to comply with these restrictions and
covenants could result in defaults under the Companys
senior credit facility and/or senior subordinated notes
indenture. Any default, if not waived, could result in the
Companys debt becoming immediately due and payable.

During fiscal 2004 and 2003, we purchased
$58.5 million and $27.1 million, respectively, in face
value of the notes. The purchases were made at an aggregate
premium of 105.4 percent and 104.3 percent,
respectively, to par value. During fiscal 2004 and 2003, we
recorded pre-tax charges of $4.3 million and $1.9 million,
respectively, which includes the cash premium paid and the
related write-off of applicable deferred debt costs, which are
reflected in the debt repurchase and share reclassification
expenses line item on the statement of operations.

On February 26, 2004, we completed the
placement of $100 million 7.5 percent senior subordinated
notes due 2012. Proceeds from the offering were used to
repurchase $39.2 million of 10 3/8 percent senior
subordinated notes due 2007 that were tendered as part of the
refinancing. The balance of the proceeds will be used to
repurchase the remaining $25.2 million in 10 3/8
percent senior subordinated notes that remain outstanding on
May 1, 2004, the next date when their call premium is
reduced, and for general corporate purposes. The financing is
expected to save approximately $1 million in interest and
more importantly, positions our capital structure to enable our
long-term growth strategy. When the debt repurchase of the
10 3/8 percent senior subordinated notes is completed,
we will record a pre-tax charge of approximately
$4.1 million to recognize the premium paid to retire the
notes and write-off the deferred debt costs.

Off-Balance Sheet Transactions

Our liquidity is not currently dependent on the
use of off-balance sheet transactions other than letters of
credit and operating leases, which are typical in a retail
environment.

Contractual Obligations and
Commitments

The following tables summarize our future cash
outflows resulting from contractual obligations and commitments
as of January 31, 2004:

|                                                          |  |                            |       |           |  |           |       |           |  |               |       |  |  |   |       |  |  |   |       | 
|--------------------------------------------------------- |  | -------------------------- | ----- | --------- |  | --------- | ----- | --------- |  | ------------- | ----- |  |  | - | ----- |  |  | - | ----- | 
|                                                          |  |                           
|                                                          |  | Payments Due by Period (1)
|                                                          |  |                           
|                                                          |  |                            |       | Less than |  |          
|                                                          |  | Total                      |       | 1 year    |  | 1-3 years |       | 4-5 years |  | After 5 years
|                                                          |  |                            |       |           |  |           |       |           |  |              
|10 3/8 percent senior
    subordinated notes              |  | $                          | 64.4  |           |  | $         |      |           |  | $             |      |  |  | $ | 64.4  |  |  | $ |      | 
|Credit facility  revolving facility                      |  |                            | 9.3   |           |  |           |      |           |  |               | 9.3   |  |  |   |      |  |  |   |      | 
|Credit facility  term loan                               |  |                            | 40.0  |           |  |           |      |           |  |               | 40.0  |  |  |   |      |  |  |   |      | 
|10 3/8 percent senior subordinated
    notes interest (2) |  |                            | 21.7  |           |  |           | 6.7   |           |  |               | 13.4  |  |  |   | 1.6   |  |  |   |      | 
|Letters of credit (3)                                     |  |                            | 51.1  |           |  |           | 51.1  |           |  |               |      |  |  |   |      |  |  |   |      | 
|Operating leases (4)                                      |  |                            | 713.8 |           |  |           | 124.1 |           |  |               | 224.6 |  |  |   | 144.7 |  |  |   | 220.4 | 
|                                                          |  |                            |       |           |  |           |       |           |  |               |       |  |  |   |       |  |  |   |       | 
|Total Contractual Cash Obligations                        |  | $                          | 900.3 |           |  | $         | 181.9 |           |  | $             | 287.3 |  |  | $ | 210.7 |  |  | $ | 220.4 | 
|                                                          |  |                            |       |           |  |           |       |           |  |               |       |  |  |   |       |  |  |   |       | 



---



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | The above table does not include the placement of
    $100 million 7.5 percent senior subordinated notes due 2012
    nor the repurchase of $39.2 million 10 3/8 percent
    senior subordinated notes that were tendered as part of the
    refinancing, both of which occurred subsequent to year end in
    February 2004.                                                                                                                                                                                                                                       
|   
|(2) | Interest is included as a contractual obligation
    on the 10 3/8 percent senior subordinated notes only.
    The calculation of interest on the credit facility is dependent
    on the average borrowings during the year and a variable
    interest rate, which currently approximates 3.25 percent
    (set at 175 basis points over LIBOR). The Company did not
    include these amounts due to their subjectivity and estimation
    required. See Liquidity and Capital Resources  Sources
    of Liquidityfor further discussion of the credit facility.
|   
|(3) | Includes commercial letters of credit of
    $25.9 million and $25.2 million of standby letters of
    credit.                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|   
|(4) | The remaining cash payments include
    $1.7 million associated with lease obligations for stores
    closed.                                                                                                                                                                                                                                                                                                                                                                                                                                                       

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Seasonality and Inflation

Our business exhibits seasonality, which is
typical for most retail companies. Our sales are much stronger
in the second half of the year than the first half of the year.
Net earnings are highest during the months of September through
December when sales volumes provide significant operating
leverage. Working capital requirements needed to finance our
operations fluctuate during the year and reach their highest
levels during the second and third fiscal quarters as we
increase our inventory in preparation for our peak selling
season.

Summarized below are key line items by quarter
from our statements of operations and balance sheets:

|                                   |  |             |       |             |  |             |       |       |  |       |       |       |  |       |       |       |  |       |       |       |  |       |       |       |  |   |       |   |  |   |       |   |  |   |       |    |  |   |       |    |  |   |       |    |  |   |       |  
|---------------------------------- |  | ----------- | ----- | ----------- |  | ----------- | ----- | ----- |  | ----- | ----- | ----- |  | ----- | ----- | ----- |  | ----- | ----- | ----- |  | ----- | ----- | ----- |  | - | ----- | - |  | - | ----- | - |  | - | ----- | -- |  | - | ----- | -- |  | - | ----- | -- |  | - | ----- | -
|                                   |  |             |       |             |  |            
|                                   |  | Fiscal 2004 |       | Fiscal 2003 |  | Fiscal 2002
|                                   |  |             |       |             |  |            
|                                   |  | Qtr 1       |       | Qtr 2       |  | Qtr 3       |       | Qtr 4 |  | Qtr 1 |       | Qtr 2 |  | Qtr 3 |       | Qtr 4 |  | Qtr 1 |       | Qtr 2 |  | Qtr 3 |       | Qtr 4
|                                   |  |             |       |             |  |             |       |       |  |       |       |       |  |       |       |       |  |       |       |       |  |       |       |      
|Net sales                          |  | $           | 374.8 |             |  | $           | 359.2 |       |  | $     | 447.5 |       |  | $     | 552.6 |       |  | $     | 372.4 |       |  | $     | 353.7 |       |  | $ | 430.1 |   |  | $ | 525.8 |   |  | $ | 328.9 |    |  | $ | 330.2 |    |  | $ | 413.0 |    |  | $ | 498.2 |  
|Same-store sales percentage change |  |             | 2.6   | %           |  |             | 2.4   | %     |  |       | 4.2   | %     |  |       | 4.5   | %     |  |       | 13.5  | %     |  |       | 7.7   | %     |  |   | 6.5   | % |  |   | 6.9   | % |  |   | (2.0  | )% |  |   | 9.7   | %  |  |   | 8.0   | %  |  |   | 7.4   | %
|Gross margin                       |  | $           | 180.5 |             |  | $           | 172.6 |       |  | $     | 215.1 |       |  | $     | 242.4 |       |  | $     | 180.8 |       |  | $     | 171.6 |       |  | $ | 197.4 |   |  | $ | 227.7 |   |  | $ | 151.1 |    |  | $ | 139.2 |    |  | $ | 182.6 |    |  | $ | 220.2 |  
|Gross margin percent to sales      |  |             | 48.2  | %           |  |             | 48.1  | %     |  |       | 48.1  | %     |  |       | 43.9  | %     |  |       | 48.5  | %     |  |       | 48.5  | %     |  |   | 45.9  | % |  |   | 43.3  | % |  |   | 45.9  | %  |  |   | 42.2  | %  |  |   | 44.2  | %  |  |   | 44.2  | %
|Operating profit (loss)            |  | $           | 11.6  |             |  | $           | 0.7   |       |  | $     | 24.1  |       |  | $     | 48.2  |       |  | $     | 20.4  |       |  | $     | 9.9   |       |  | $ | 21.4  |   |  | $ | 46.8  |   |  | $ | (3.1  | )  |  | $ | (17.3 | )  |  | $ | (9.7  | )  |  | $ | 38.7  |  
|Operating profit percent to sales  |  |             | 3.1   | %           |  |             | 0.2   | %     |  |       | 5.4   | %     |  |       | 8.7   | %     |  |       | 5.5   | %     |  |       | 2.8   | %     |  |   | 5.0   | % |  |   | 8.9   | % |  |   | (0.9  | )% |  |   | (5.2  | )% |  |   | (2.3  | )% |  |   | 7.8   | %
|Net income (loss)                  |  | $           | 4.1   |             |  | $           | (2.2  | )     |  | $     | 12.0  |       |  | $     | 27.1  |       |  | $     | 8.7   |       |  | $     | 2.0   |       |  | $ | 8.9   |   |  | $ | 25.3  |   |  | $ | (6.4  | )  |  | $ | (16.1 | )  |  | $ | (11.3 | )  |  | $ | 18.9  |  
|Inventory                          |  | $           | 369.1 |             |  | $           | 471.6 |       |  | $     | 520.3 |       |  | $     | 404.6 |       |  | $     | 400.1 |       |  | $     | 496.2 |       |  | $ | 483.4 |   |  | $ | 363.1 |   |  | $ | 476.7 |    |  | $ | 483.0 |    |  | $ | 467.1 |    |  | $ | 369.0 |  
|Net working capital                |  |             | 244.3 |             |  |             | 305.9 |       |  |       | 372.0 |       |  |       | 272.4 |       |  |       | 250.0 |       |  |       | 321.4 |       |  |   | 330.1 |   |  |   | 265.9 |   |  |   | 341.9 |    |  |   | 359.1 |    |  |   | 333.2 |    |  |   | 232.8 |  
|Long-term debt                     |  |             | 124.9 |             |  |             | 190.5 |       |  |       | 237.4 |       |  |       | 113.7 |       |  |       | 223.5 |       |  |       | 286.4 |       |  |   | 276.2 |   |  |   | 162.9 |   |  |   | 345.9 |    |  |   | 375.0 |    |  |   | 356.0 |    |  |   | 223.7 |  

We believe that inflation has not had a
significant effect on the growth of net sales or on net income
over the past three years. There can be no assurance, however,
that our operating results will not be affected by inflation in
the future.

Critical Accounting Policies

The preparation of our financial statements
requires management to make estimates and judgments that affect
the reported amounts of assets, liabilities, revenues, expenses
and related disclosures of contingent assets and liabilities. We
base our estimates on historical experience and on other
assumptions that we believe to be relevant under the
circumstances, the results of which form the basis for making
judgments about carrying values of assets and liabilities that
are not readily apparent from other sources. Actual results
could differ from these estimates under different assumptions
and/or conditions. We continually evaluate the information used
to make these estimates as our business and the economic
environment changes. The use of estimates is pervasive
throughout our financial statements, but the accounting policies
and estimates we consider most critical are as follows:

Inventory Valuation

Inventories are stated at the lower of cost or
market with cost determined on a first-in, first-out basis.
Inventory valuation methods require certain management estimates
and judgments. These include estimates of shrink, as well as
estimates of net realizable value on product designated for
clearance, which affects the ending inventory valuation at cost
as well as the gross margins reported for the year.

Our accrual for shrink is based on the actual
historical shrink results of our recent store physical
inventories. These estimates are compared to actual results as
physical inventory counts are taken and reconciled to the
general ledger. Substantially all of our store physical
inventory counts are taken in the first three-quarters of each
year and the shrink accrual recorded at January 31, 2004 is
based on shrink results of prior physical inventories. All of
our store locations that have been open one year or more are
physically inventoried once a year. We will continue to monitor
and adjust our shrink rate estimates based on the results of
store physical inventories and shrink trends.

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We estimate our reserve for clearance product
based on the consideration of a variety of factors, including,
but not limited to, quantities of slow moving or carryover
seasonal merchandise on hand, historical recovery statistics and
future merchandising plans. The accuracy of our estimates can be
affected by many factors, some of which are outside of our
control, including changes in economic conditions and consumer
buying trends.

Vendor Allowances

All vendor consideration, including cash
discounts, volume discounts and co-operative advertising fees
are included as a reduction of cost of sales. Cash discounts and
volume discounts are recognized in cost of sales when the
related merchandise is sold. Historically, the Company
recognized co-operative advertising fees when received from its
vendors. Beginning January 1, 2003, upon the adoption of
EITF Issue 02-16, Accounting by a Customer (including a
Reseller) for Certain Consideration Received from a
Vendor, and the execution of new or modifications of
existing vendor agreements, the Company recognizes co-operative
advertising fees when the related merchandise is sold. The
effect of adopting the EITF did not have a material impact on
the Companys results of operations or financial position.

Gift cards

Proceeds from the sale of gift cards are recorded
as gift card liability and recognized as revenue when redeemed
by the holder.

Valuation of Long-Lived Assets

Long-lived assets and certain identifiable
intangibles historically have been reviewed for impairment
whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable.
Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of the assets to future net
cash flows estimated by us to be generated by those assets. If
such assets are considered to be impaired, the impairment to be
recognized is the amount by which the carrying amount of the
assets exceeds the fair value of the assets.

In July 2001, the Financial Accounting
Standards Board (FASB) issued SFAS No. 142
which establishes accounting standards for intangible assets and
goodwill. The Company adopted SFAS No. 142 on
February 3, 2002. The Company performed the first of the
required impairment tests of goodwill and based upon the
transition impairment test performed on recorded goodwill, no
impairment to goodwill exists. In the fourth quarter of fiscal
2004 and 2003, the Company also performed the required annual
impairment test of the carrying amount of goodwill and
determined that no goodwill impairment existed. Application of
the non-amortization provision of SFAS No. 142 reduced
amortization expense by approximately $0.7 million in
fiscal 2004 and 2003. Fiscal 2002 included amortization expense
of $0.7 million.

In August 2001, the FASB issued SFAS
No. 144 which supersedes SFAS No. 121 to supply a
single accounting approach for measuring impairment of
long-lived assets, including a segment of a business accounted
for as a discontinued operation or those to be sold or disposed
of other than by sale. SFAS No. 144 was adopted in fiscal
2003. See the asset impairment discussion contained above in
Turnaround Plan and Store Closing Charges.

Accrued Store Closing Costs

Prior to December 31, 2002, we accrued costs
related to stores closed or identified for closing, which
included future rental obligations, carrying costs, and other
closing costs. These expenses were accrued when we had committed
to closing or relocating a store and were calculated at the
lesser of future rental obligations remaining under the lease
(less estimated sublease rental income) or the estimated lease
termination cost. The determination of the accrual was dependent
on our ability to make estimates of costs to be incurred
post-closing and of sublease rental income to be received from
subleases. Differences in our estimates and assumptions could
result in an accrual requirement different from the calculated
accrual.

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In July 2002, the FASB issued SFAS
No. 146 Accounting for Costs Associated with Exit or
Disposal Activities. SFAS No. 146 requires companies
to recognize costs associated with exit or disposal activities
when they are incurred rather than at the date of a commitment
to an exit or disposal plan. SFAS No. 146 also establishes
that the liability should initially be measured and recorded at
fair value. SFAS No. 146 replaces EITF Issue No. 94-3
Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity (including Certain
Costs Incurred in a Restructuring). SFAS No. 146 is
to be applied prospectively to exit or disposal activities
initiated after December 31, 2002, and we began to account
for the costs of store closings under SFAS No. 146 on that
date.

Accrued Expenses

We estimate certain material expenses in an
effort to record those expenses in the period incurred. Our most
material estimates relate to compensation, taxes and insurance
related expenses, portions of which are self-insured. Our
workers compensation and general liability insurance
accruals are recorded based on insurance claims processed as
well as historical claims experience for claims incurred, but
not yet reported. These estimates are based on historical loss
development factors. Our employee medical insurance accruals are
recorded based on our medical claims processed as well as
historical medical claims experience for claims incurred but not
yet reported. Differences in our estimates and assumptions could
result in an accrual requirement materially different from the
calculated accrual.

Recent Accounting Pronouncements

In addition to the accounting pronouncements
referenced above in our discussion of critical accounting
policies, the following accounting pronouncements may have an
impact on our results of operations or financial position, as
discussed further below.

SFAS No. 150, Accounting for Certain
Financial Instruments with Characteristics of both Liabilities
and Equity

During May 2003, the Financial Accounting
Standards Board (FASB) issued SFAS No. 150,
Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity. SFAS
No. 150 clarifies the accounting for certain financial
instruments with characteristics of both liabilities and equity
and requires that those instruments be classified as liabilities
in the statement of financial position. Previously, many of
those financial instruments were classified as equity. SFAS
No. 150 is effective for financial instruments entered into
or modified after May 31, 2003 and otherwise is effective
at the beginning of the first interim period beginning after
June 15, 2003. The adoption of SFAS No. 150 had no
impact on our overall financial position or results of
operations.

SFAS No. 149, Amendment of Statement 133
on Derivative Instruments and Hedging Activities

During April 2003, the FASB issued SFAS
No. 149, Amendment of Statement 133 on Derivative
Instruments and Hedging Activities. SFAS No. 149
amends and clarifies accounting for derivative instruments,
including certain derivative instruments embedded in other
contracts, and for hedging activities under Statement 133. SFAS
No. 149, the provisions of which are to be applied
prospectively, is effective for contracts entered into or
modified after June 30, 2003 and for hedging relationships
designated after June 30, 2003. The adoption of SFAS
No. 149 had no impact on our consolidated financial
statements.

FASB Interpretation No. 46, Consolidation
of Variable Interest Entities

In January 2003, the FASB issued FASB
Interpretation No. 46 (FIN 46),
Consolidation of Variable Interest Entities. FIN 46
clarifies the application of Accounting Research Bulletin
No. 51, Consolidated Financial Statements, for
certain entities which do not have sufficient equity at risk for
the entity to finance its activities without additional
subordinated financial support from other parties or in which
equity investors do not have the characteristics of a
controlling financial interest (variable interest
entities). Variable interest entities will be required to
be consolidated by their primary beneficiary. The primary
beneficiary of a variable interest entity is determined to be
the party that absorbs a majority of the entitys expected
losses,

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receives a majority of its expected returns, or
both, as a result of holding variable interests, which are
ownership, contractual, or other pecuniary interests in an
entity. On December 24, 2003, the FASB issued a revision to
FIN 46 to defer the adoption requirements in financial
statements for public entities that do not have an interest in
structures commonly referred to as special-purpose entities,
however, adoption will be required for the periods ending after
March 15, 2004. Accordingly, we expect to complete our
analysis and adopt FIN 46 during our first quarter in fiscal
2005, as required. We are in the process of determining what
impact, if any, the adoption of the provisions of FIN 46 will
have upon our financial condition or results of operations.


Cautionary Statement Concerning
Forward-Looking Statements

Certain statements contained in this report that
are not historical facts are forward-looking statements within
the meaning of the Private Securities Litigation Reform Act of
1995. Such forward-looking statements which reflect the
Companys current views of future events and financial
performance, involve certain risks and uncertainties. When used
herein, the terms anticipates, plans,
estimates, expects,
believes, and similar expressions as they relate to
us or future events or conditional verbs such as
will, should, would,
may, and could are intended to identify
such forward-looking statements. Our actual results, performance
or achievements may materially differ from those expressed or
implied in the forward-looking statements. Risks and
uncertainties that could cause or contribute to such material
differences include, but are not limited to, general economic
conditions, changes in customer demand, changes in trends in the
fabric and craft industry, seasonality, the availability of
merchandise, changes in the competitive pricing for products,
the impact of our and our competitors store openings and
closings, fuel and energy costs, changes in tariff and freight
rates, consumer debt levels, and other capital market and
geo-political conditions. We caution readers not to place undue
reliance on these forward-looking statements. We assume no
obligation to update any of the forward-looking statements.




Item 7A. Quantitative and Qualitative
Disclosures About Market Risk

We are exposed to foreign currency fluctuations
on merchandise that is sourced internationally and the impact of
interest rate changes on our outstanding borrowings under our
credit facility.

We believe foreign currency exchange rate
fluctuations do not contain significant market risk due to the
nature of our relationships with our international vendors. All
merchandise contracts are denominated in U.S. dollars and are
subject to negotiation prior to our commitment for purchases. As
a result, there is not a direct correlation between merchandise
prices and fluctuations in the exchange rate. We sourced
approximately 29 percent of our purchases internationally
in fiscal 2004. Our international purchases are concentrated in
China and other Asian countries.

In the normal course of business, we employ
established policies and procedures to manage our exposure to
changes in interest rates. Our objective in managing the
exposure to interest rate changes is to limit the volatility and
impact of interest rate changes on earnings and cash flows.
Interest rate swaps are primarily utilized to achieve this
objective. We utilize interest rate swaps to manage net exposure
to interest rate changes related to our debt structure. We
estimate that a one-percent increase or decrease in interest
rates, based on fiscal 2004 average debt levels, would cause an
increase or decrease to interest expense of $0.5 million.
This includes the impact resulting from our interest rate swap
arrangement, as discussed below. The Company has a
$40.0 million interest rate swap with a fixed LIBOR of 6.72
percent that expires on April 30, 2005.

Effective February 4, 2001, we adopted SFAS
No. 133, Accounting for Derivative Instruments and
Hedging Activities, as amended. In accordance with SFAS
No. 133, we have reviewed and designated our interest rate
swap agreement as a cash flow hedge and recognized the fair
value of our interest rate swap agreement on the balance sheet
in accrued expenses. Changes in the fair value of this agreement
is recorded in other comprehensive income (loss) and
reclassified into earnings as the underlying hedged item affects
earnings. During fiscal 2004 and fiscal 2003, unrealized
after-tax net gains of $1.0 million and $0.4 million,
respectively, were recorded in other comprehensive income
(loss). The fiscal 2002 after-tax net loss included a

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$1.7 million cumulative transition
adjustment, as of the date of adoption of SFAS No. 133. The
hedge ineffectiveness (income) expense for fiscal 2004,
fiscal 2003 and 2002 was $(0.7) million, $(0.3) million and
$1.0 million, respectively, and is reflected in interest
expense.


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Item 8. Financial Statements and
Supplementary Data

Jo-Ann Stores, Inc.






Index to Consolidated Financial
Statements


|                                                                                                                                |  |      |    | 
|------------------------------------------------------------------------------------------------------------------------------- |  | ---- | -- | 
|                                                                                                                                |  | Page
|                                                                                                                                |  |     
|Report of Management                                                                                                            |  |      | 34 | 
|Report of Independent Auditors                                                                                                  |  |      | 35 | 
|Report of Former Independent
    Public Accountants                                                                             |  |      | 37 | 
|Consolidated Balance Sheets as of
    January 31, 2004 and February 1, 2003                                                     |  |      | 38 | 
|Consolidated Statements of Operations for each of
    the three fiscal years in the period ended
    January 31, 2004           |  |      | 39 | 
|Consolidated Statements of Cash Flows for each of
    the three fiscal years in the period ended
    January 31, 2004           |  |      | 40 | 
|Consolidated Statements of Shareholders
    Equity for each of the three fiscal years in the period ended
    January 31, 2004 |  |      | 41 | 
|Notes to Consolidated Financial Statements                                                                                      |  |      | 42 | 
|Report of Former Independent Public Accountants
    on the Financial Statement Schedule                                         |  |      | 66 | 
|Schedule II  Valuation and
    Qualifying Accounts                                                                             |  |      | 67 | 

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Report of Management

We have prepared the accompanying consolidated
financial statements and related information included herein for
the years ended January 31, 2004, February 1, 2003 and
February 2, 2002. The opinion of Ernst & Young LLP, the
Companys independent auditors, for the years ended
January 31, 2004 and February 1, 2003, on those
financial statements is included. The opinion of Arthur Andersen
LLP, the Companys former independent public accountants,
who have ceased operations, for the year ended February 2,
2002 on those financial statements is included. The primary
responsibility for the integrity of the financial information
included in this annual report rests with management. This
information is prepared in accordance with accounting principles
generally accepted in the United States, based on our best
estimates and judgments and giving due consideration to
materiality.

The Company maintains accounting and control
systems which are designed to provide reasonable assurance that
assets are safeguarded from loss or unauthorized use, and which
produce records adequate for preparation of financial
information. There are limits inherent in all systems of
internal control based on the recognition that the cost of such
systems should not exceed the benefits to be derived. We believe
our systems provide this appropriate balance.

The Board of Directors pursues its responsibility
for these financial statements through the Audit Committee,
composed exclusively of independent directors. The Audit
Committee meets periodically with management, our internal
auditors and our independent auditors to discuss the adequacy of
financial controls, the quality of financial reporting, and the
nature, extent and results of the audit effort. Both the
internal auditors and independent auditors have private and
confidential access to the Audit Committee at all times.

|                                                                                   |  |                                                                          
|---------------------------------------------------------------------------------- |  | -------------------------------------------------------------------------
|Alan Rosskamm
    Chairman of the Board,
    President and Chief Executive Officer |  | Brian P. Carney
    Executive Vice President,
    Chief Financial Officer

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Report of Independent Auditors

To the Shareholders and Board of Directors of
Jo-Ann Stores, Inc.:

We have audited the accompanying consolidated
balance sheets of Jo-Ann Stores, Inc. and subsidiaries (the
Company) as of January 31, 2004 and February 1, 2003, and
the related consolidated statements of operations,
shareholders equity, and cash flows for each of the two
fiscal years then ended. Our audits also included the financial
statement schedule for the years ended January 31, 2004 and
February 1, 2003 listed in Item 15(a). These financial
statements and schedule are the responsibility of the
Companys management. Our responsibility is to express an
opinion on these financial statements and schedule based on our
audits. The consolidated financial statements and schedule of
the Company for the fiscal year ended February 2, 2002,
were audited by other auditors, who have ceased operations and
whose report dated March 7, 2002 expressed an unqualified
opinion on those statements before the restatement adjustments
and related disclosures described below and in Notes 1, 2, 4, 7,
and 12.

We conducted our audits in accordance with
auditing standards generally accepted in the United States.
Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial
statements and schedule are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial
statements referred to above present fairly, in all material
respects, the consolidated financial position of Jo-Ann Stores,
Inc. and subsidiaries at January 31, 2004 and
February 1, 2003, and the consolidated results of their
operations and their cash flows for each of the two fiscal years
then ended in conformity with accounting principles generally
accepted in the United States. Also, in our opinion, the
financial statement schedule for the years ended
January 31, 2004 and February 1, 2003 when considered
in relation to the basic financial statements as a whole,
present fairly, in all material respects, the information set
forth therein.

As discussed in Note 1 to the consolidated
financial statements, in 2004 the Company changed its method of
accounting for stock based compensation.

As discussed above, the consolidated financial
statements and schedule of the Company for the year ended
February 2, 2002, were audited by other auditors who have
ceased operations. However, the Company has made certain
adjustments and changes in disclosures to the 2002 consolidated
financial statements to reflect the share reclassification noted
below and the adoption requirements of new accounting
pronouncements, as follows:



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (i) as described in Note 2, the
    Companys shareholders approved a share
    reclassification of its Class A and Class B Common
    Shares into a single class of Common Stock in
    November 2003. This resulted in approximately 1.6 million
    of incremental shares of Common Stock being issued at the time
    of the reclassification. Shares, shares outstanding, average
    shares outstanding utilized to compute basic and diluted
    earnings per share, and stock options have been retroactively
    restated to reflect the impact of the increased shares
    outstanding and stock options as a result of the share
    reclassification. We audited the retroactive restatement that
    was applied to (a) the basic and diluted earnings per share
    amounts in the consolidated statements of operations,
    (b) the common and treasury shares and stock and additional
    paid-in capital amounts presented in the consolidated statement
    of shareholders equity, (c) the share and per share
    amounts included in the Earnings Per Share and Stock-Based
    Compensation sections of Note 1, and (d) the share, option
    and price information amounts in Note 7. Our procedures included
    (a) agreeing the historical share, per share, stock option
    and additional paid-in capital amounts to the Companys
    underlying accounting records obtained from management,
    (b) testing the mathematical accuracy in the restated
    amounts giving effect to the share reclassification of
    Class A Common Shares into Common Stock at an exchange
    ratio of 1 to 1.15, and (c) agreeing the restated amounts
    to the amounts reflected in the accompanying consolidated
    financial statements and footnotes, and

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| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (ii) as described in Note 1, effective in
    fiscal 2004, the Company adopted Statement of Financial
    Accounting Standards (Statement) No. 145, Rescission
    of FASB Statements No. 4, 44, and 64, Amendment of FASB
    Statement No. 13, and Technical Corrections and
    revised the consolidated statement of operations to reclassify
    the fiscal 2002 loss related to early retirement of debt from
    extraordinary item to debt repurchase and share reclassification
    expenses in accordance with the Statement. Our procedures with
    respect to the consolidated statement of operations and Notes 4
    and 12 with respect to the impact of the adoption of this
    Statement described in Note 1 included (a) agreeing the
    previously reported net loss related to the early extinguishment
    of debt to the Companys underlying accounting records
    obtained from management, and (b) testing the mathematical
    accuracy of the restated statement of operations, related per
    share amounts and restated provision for income taxes which
    changed as a result of the reclassification.

In our opinion, the adjustments and disclosures
described in (i) and (ii) above are appropriate and
have been properly applied. However, we were not engaged to
audit, review, or apply any procedures to the 2002 consolidated
financial statements of the Company other than with respect to
such adjustments and disclosures noted above and, accordingly,
we do not express an opinion or any other form of assurance on
the 2002 consolidated financial statements taken as a whole.



| |                      
| | ---------------------
| | /s/ Ernst & Young LLP

Cleveland, Ohio,

March 8, 2004


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Report of Former Independent Public
Accountants

This is a copy of the audit report previously
issued by Arthur Andersen LLP in connection with the
Companys filing on Form 10-K for the fiscal year
ended February 2, 2002. This audit report has not been
reissued by Arthur Andersen LLP in connection with this filing
on Form 10-K nor has Arthur Andersen LLP provided a consent
to the inclusion of its report in this Form 10-K. See
Exhibit 23.1 for further discussion.

To the Shareholders and Board of Directors of
Jo-Ann Stores, Inc.:

We have audited the accompanying consolidated
balance sheet of Jo-Ann Stores, Inc. (an Ohio corporation) and
Subsidiaries as of February 2, 2002 February 3, 2001,
and the related consolidated statements of operations,
shareholders equity and cash flows for each of the three
fiscal years in the period ended February 2, 2002. These
consolidated financial statements are the responsibility of the
Companys management. Our responsibility is to express an
opinion on these financial statements based on our audits.

We conducted our audits in accordance with
auditing standards generally accepted in the United States.
Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.

In our opinion, the financial statements referred
to above present fairly, in all material respects, the financial
position of Jo-Ann Stores, Inc. and Subsidiaries as of
February 2, 2002 and February 2, 2001 and the results
of their operations and their cash flows for each of the three
fiscal years in the period ended February 2, 2002 in
conformity with accounting principles generally accepted in the
United States.

As explained in Note 1 to the consolidated
financial statements, effective February 4, 2001, the
Company changed its method of accounting for derivative
instruments.

/s/ Arthur Andersen LLP

Cleveland, Ohio,

March 7, 2002.


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Jo-Ann Stores, Inc.






Consolidated Balance Sheets


|                                                        |                                                                                                                            |                              |       |             |   |   |       |       |  
|------------------------------------------------------- | -------------------------------------------------------------------------------------------------------------------------- | ---------------------------- | ----- | ----------- | - | - | ----- | ----- | -
|                                                        |                                                                                                                            | January 31,                  |       | February 1,
|                                                        |                                                                                                                            | 2004                         |       | 2003       
|                                                        |                                                                                                                            |                              |       |            
|                                                        |                                                                                                                            |                             
|                                                        |                                                                                                                            | (Dollars in millions, except
|                                                        |                                                                                                                            | share and
per share data)   
|Assets                                                  |                                                                                                                            |                              |       |             |   |   |       |      
|Current assets:                                         |                                                                                                                            |                              |       |             |   |   |       |      
|                                                        | Cash and cash equivalents                                                                                                  |                              | $     | 17.4        |   |   | $     | 63.2  |  
|                                                        | Inventories                                                                                                                |                              |       | 404.6       |   |   |       | 363.1 |  
|                                                        | Deferred income taxes                                                                                                      |                              |       | 25.0        |   |   |       | 28.2  |  
|                                                        | Prepaid expenses and other current assets                                                                                  |                              |       | 23.5        |   |   |       | 17.2  |  
|                                                        |                                                                                                                            |                              |       |             |   |   |       |      
|Total current assets                                    |                                                                                                                            |                              | 470.5 |             |   |   | 471.7 |      
|Property, equipment and leasehold
    improvements, net |                                                                                                                            |                              | 203.2 |             |   |   | 190.3 |      
|Goodwill, net                                           |                                                                                                                            |                              | 26.5  |             |   |   | 26.5  |      
|Other assets                                            |                                                                                                                            |                              | 7.5   |             |   |   | 16.0  |      
|                                                        |                                                                                                                            |                              |       |             |   |   |       |      
|Total assets                                            |                                                                                                                            | $                            | 707.7 |             |   | $ | 704.5 |      
|                                                        |                                                                                                                            |                              |       |             |   |   |       |      
|Liabilities and Shareholders
    Equity                |                                                                                                                            |                              |       |             |   |   |       |      
|Current liabilities:                                    |                                                                                                                            |                              |       |             |   |   |       |      
|                                                        | Accounts payable                                                                                                           |                              | $     | 122.0       |   |   | $     | 129.9 |  
|                                                        | Accrued expenses                                                                                                           |                              |       | 76.1        |   |   |       | 75.9  |  
|                                                        |                                                                                                                            |                              |       |             |   |   |       |      
|Total current liabilities                               |                                                                                                                            |                              | 198.1 |             |   |   | 205.8 |      
|Long-term debt                                          |                                                                                                                            |                              | 113.7 |             |   |   | 162.9 |      
|Deferred income taxes                                   |                                                                                                                            |                              | 39.4  |             |   |   | 37.2  |      
|Other long-term liabilities                             |                                                                                                                            |                              | 10.3  |             |   |   | 9.2   |      
|Commitments and contingencies (Note 9)                  |                                                                                                                            |                              |       |             |   |   |       |      
|Shareholders equity:                                   |                                                                                                                            |                              |       |             |   |   |       |      
|                                                        | Preferred stock, no par value, 5,000,000 shares
    authorized, none issued                                                |                              |       |            |   |   |       |      |  
|                                                        | Common stock, stated value $0.05 per share;
    150,000,000 authorized, issued 25,603,035 and
    24,885,466, respectively |                              |       | 1.3         |   |   |       | 1.3   |  
|                                                        | Additional paid-in capital                                                                                                 |                              |       | 131.5       |   |   |       | 113.7 |  
|                                                        | Unamortized restricted stock awards                                                                                        |                              |       | (2.5        | ) |   |       | (0.4  | )
|                                                        | Retained earnings                                                                                                          |                              |       | 258.8       |   |   |       | 217.8 |  
|                                                        | Accumulated other comprehensive loss                                                                                       |                              |       | (1.6        | ) |   |       | (2.6  | )
|                                                        |                                                                                                                            |                              |       |             |   |   |       |      
|                                                        |                                                                                                                            |                              | 387.5 |             |   |   | 329.8 |      
|                                                        | Treasury stock, at cost, 3,774,800 shares and
    3,806,363 shares, respectively                                           |                              |       | (41.3       | ) |   |       | (40.4 | )
|                                                        |                                                                                                                            |                              |       |             |   |   |       |      
|Total shareholders equity                              |                                                                                                                            |                              | 346.2 |             |   |   | 289.4 |      
|                                                        |                                                                                                                            |                              |       |             |   |   |       |      
|Total liabilities and
    shareholders equity          |                                                                                                                            | $                            | 707.7 |             |   | $ | 704.5 |      
|                                                        |                                                                                                                            |                              |       |             |   |   |       |      

See notes to consolidated financial
statements

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Jo-Ann Stores, Inc.






Consolidated Statements of
Operations


|                                                        |                                   |                              |         |             |  |             |         |       |  |   |         |       |  
|------------------------------------------------------- | --------------------------------- | ---------------------------- | ------- | ----------- |  | ----------- | ------- | ----- |  | - | ------- | ----- | -
|                                                        |                                   |                             
|                                                        |                                   | Fiscal Year-Ended           
|                                                        |                                   |                             
|                                                        |                                   | January 31,                  |         | February 1, |  | February 2,
|                                                        |                                   | 2004                         |         | 2003        |  | 2002       
|                                                        |                                   |                              |         |             |  |            
|                                                        |                                   |                             
|                                                        |                                   | (Dollars in millions, except
|                                                        |                                   | earnings per share data)    
|Net sales                                               |                                   | $                            | 1,734.1 |             |  | $           | 1,682.0 |       |  | $ | 1,570.3 |      
|Cost of sales                                           |                                   |                              | 923.5   |             |  |             | 904.5   |       |  |   | 877.2   |      
|                                                        |                                   |                              |         |             |  |             |         |       |  |   |         |      
|                                                        | Gross margin                      |                              |         | 810.6       |  |             |         | 777.5 |  |   |         | 693.1 |  
|Selling, general and administrative expenses            |                                   |                              | 666.2   |             |  |             | 635.1   |       |  |   | 623.2   |      
|Store pre-opening and closing costs                     |                                   |                              | 10.9    |             |  |             | 5.9     |       |  |   | 21.0    |      
|Depreciation and amortization                           |                                   |                              | 37.7    |             |  |             | 36.1    |       |  |   | 39.3    |      
|Stock option compensation expense                       |                                   |                              | 5.7     |             |  |             |        |       |  |   |        |      
|Debt repurchase and share
    reclassification expenses |                                   |                              | 5.5     |             |  |             | 1.9     |       |  |   | 1.0     |      
|                                                        |                                   |                              |         |             |  |             |         |       |  |   |         |      
|                                                        | Operating profit                  |                              |         | 84.6        |  |             |         | 98.5  |  |   |         | 8.6   |  
|Interest expense, net                                   |                                   |                              | 18.1    |             |  |             | 26.0    |       |  |   | 32.7    |      
|                                                        |                                   |                              |         |             |  |             |         |       |  |   |         |      
|                                                        | Income (loss) before income taxes |                              |         | 66.5        |  |             |         | 72.5  |  |   |         | (24.1 | )
|Income tax provision (benefit)                          |                                   |                              | 25.5    |             |  |             | 27.6    |       |  |   | (9.2    | )    
|                                                        |                                   |                              |         |             |  |             |         |       |  |   |         |      
|Net income (loss)                                       |                                   | $                            | 41.0    |             |  | $           | 44.9    |       |  | $ | (14.9   | )    
|                                                        |                                   |                              |         |             |  |             |         |       |  |   |         |      
|Basic net income (loss) per common share                |                                   | $                            | 1.92    |             |  | $           | 2.17    |       |  | $ | (0.75   | )    
|                                                        |                                   |                              |         |             |  |             |         |       |  |   |         |      
|Diluted net income (loss) per
    common share          |                                   | $                            | 1.86    |             |  | $           | 2.08    |       |  | $ | (0.75   | )    
|                                                        |                                   |                              |         |             |  |             |         |       |  |   |         |      

See notes to consolidated financial
statements

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Jo-Ann Stores, Inc.






Consolidated Statements of Cash
Flows


|                                                         |                                                                                              |                                                                |       |             |       |             |       |       |      |   |       |        |       |  
|-------------------------------------------------------- | -------------------------------------------------------------------------------------------- | -------------------------------------------------------------- | ----- | ----------- | ----- | ----------- | ----- | ----- | ---- | - | ----- | ------ | ----- | -
|                                                         |                                                                                              |                                                               
|                                                         |                                                                                              | Fiscal Year-Ended                                             
|                                                         |                                                                                              |                                                               
|                                                         |                                                                                              | January 31,                                                    |       | February 1, |       | February 2,
|                                                         |                                                                                              | 2004                                                           |       | 2003        |       | 2002       
|                                                         |                                                                                              |                                                                |       |             |       |            
|                                                         |                                                                                              |                                                               
|                                                         |                                                                                              | (Dollars in millions)                                         
|Net cash flows from operating activities:                |                                                                                              |                                                                |       |             |       |             |       |       |      |   |       |       
|                                                         | Net income (loss)                                                                            |                                                                | $     | 41.0        |       |             | $     | 44.9  |      |   | $     | (14.9  | )    
|                                                         | Adjustments to reconcile net income
    (loss) to net cash provided by operating activities: |                                                                |       |             |       |             |       |       |      |   |       |        |      
|                                                         |                                                                                              | Depreciation and amortization                                  |       |             | 37.7  |             |       |       | 36.1 |   |       |        | 39.3  |  
|                                                         |                                                                                              | Deferred income taxes                                          |       |             | 4.6   |             |       |       | 15.7 |   |       |        | (8.3  | )
|                                                         |                                                                                              | Stock option compensation expense                              |       |             | 5.7   |             |       |       |     |   |       |        |      |  
|                                                         |                                                                                              | Loss on disposal of fixed assets                               |       |             | 1.8   |             |       |       | 2.3  |   |       |        | 1.2   |  
|                                                         |                                                                                              | Loss associated with purchase of senior
    subordinated notes |       |             | 4.3   |             |       |       | 1.9  |   |       |        | 1.0   |  
|                                                         | Changes in operating assets and liabilities:                                                 |                                                                |       |             |       |             |       |       |      |   |       |        |      
|                                                         |                                                                                              | (Increase) decrease in inventories                             |       |             | (41.5 | )           |       |       | 5.9  |   |       |        | 82.0  |  
|                                                         |                                                                                              | Increase (decrease) in accounts payable                        |       |             | (7.9  | )           |       |       | 6.8  |   |       |        | (40.9 | )
|                                                         |                                                                                              | Increase (decrease) in accrued expenses                        |       |             | 0.2   |             |       |       | (2.8 | ) |       |        | 20.8  |  
|                                                         |                                                                                              | Other, net                                                     |       |             | 2.6   |             |       |       | 8.4  |   |       |        | 8.0   |  
|                                                         |                                                                                              |                                                                |       |             |       |             |       |       |      |   |       |       
|Net cash provided by operating activities                |                                                                                              |                                                                | 48.5  |             |       |             | 119.2 |       |      |   | 88.2  |       
|Net cash flows used for investing activities:            |                                                                                              |                                                                |       |             |       |             |       |       |      |   |       |       
|                                                         | Capital expenditures                                                                         |                                                                |       | (52.2       | )     |             |       | (22.7 | )    |   |       | (66.5  | )    
|                                                         | Proceeds from sale of equity investment                                                      |                                                                |       | 4.3         |       |             |       |      |      |   |       |       |      
|                                                         |                                                                                              |                                                                |       |             |       |             |       |       |      |   |       |       
|Net cash used for investing activities                   |                                                                                              |                                                                | (47.9 | )           |       |             | (22.7 | )     |      |   | (66.5 | )     
|Net cash flows used for financing activities:            |                                                                                              |                                                                |       |             |       |             |       |       |      |   |       |       
|                                                         | Purchase of senior subordinated notes                                                        |                                                                |       | (61.7       | )     |             |       | (28.3 | )    |   |       |       |      
|                                                         | Net change in revolving credit facility                                                      |                                                                |       | 9.3         |       |             |       | (33.7 | )    |   |       | (69.1  | )    
|                                                         | Proceeds from senior secured credit
    facility, net                                        |                                                                |       |            |       |             |       |      |      |   |       | 171.6  |      
|                                                         | Repayment of prior senior credit facility                                                    |                                                                |       |            |       |             |       |      |      |   |       | (123.8 | )    
|                                                         | Proceeds from exercise of stock options                                                      |                                                                |       | 4.0         |       |             |       | 8.5   |      |   |       |       |      
|                                                         | Purchase of common stock                                                                     |                                                                |       | (1.6        | )     |             |       | (3.4  | )    |   |       | (0.4   | )    
|                                                         | Other, net                                                                                   |                                                                |       | 3.6         |       |             |       | 2.5   |      |   |       | 3.6    |      
|                                                         |                                                                                              |                                                                |       |             |       |             |       |       |      |   |       |       
|Net cash used for financing activities                   |                                                                                              |                                                                | (46.4 | )           |       |             | (54.4 | )     |      |   | (18.1 | )     
|                                                         |                                                                                              |                                                                |       |             |       |             |       |       |      |   |       |       
|Net increase (decrease) in cash and
    cash equivalents |                                                                                              |                                                                | (45.8 | )           |       |             | 42.1  |       |      |   | 3.6   |       
|Cash and cash equivalents at beginning
    of year       |                                                                                              |                                                                | 63.2  |             |       |             | 21.1  |       |      |   | 17.5  |       
|                                                         |                                                                                              |                                                                |       |             |       |             |       |       |      |   |       |       
|Cash and cash equivalents at end of year                 |                                                                                              | $                                                              | 17.4  |             |       | $           | 63.2  |       |      | $ | 21.1  |       
|                                                         |                                                                                              |                                                                |       |             |       |             |       |       |      |   |       |       
|Supplemental disclosures of cash flow information:       |                                                                                              |                                                                |       |             |       |             |       |       |      |   |       |       
|                                                         | Cash paid during the year for:                                                               |                                                                |       |             |       |             |       |       |      |   |       |        |      
|                                                         |                                                                                              | Interest                                                       |       | $           | 17.5  |             |       | $     | 22.5 |   |       | $      | 30.6  |  
|                                                         |                                                                                              | Income taxes, net of refunds                                   |       |             | 8.0   |             |       |       | 4.9  |   |       |        | 0.5   |  

See notes to consolidated financial
statements

40



---



##### Table of Contents



Jo-Ann Stores, Inc.






Consolidated Statements of Shareholders
Equity


|                          |                                                                                                |                            |        |                       |   |        |       |            |   |             |     |          |  |          |       |             |   |               |      |      |   |   |       |      |   |   |       |       |   |   |      |      |   |   |       |       |       |  
|------------------------- | ---------------------------------------------------------------------------------------------- | -------------------------- | ------ | --------------------- | - | ------ | ----- | ---------- | - | ----------- | --- | -------- |  | -------- | ----- | ----------- | - | ------------- | ---- | ---- | - | - | ----- | ---- | - | - | ----- | ----- | - | - | ---- | ---- | - | - | ----- | ----- | ----- | -
|                          |                                                                                                |                            |        |                       |   | Common |       |            |   | Unamortized |     |          |  |          |       | Accumulated |   |              
|                          |                                                                                                | Net                        |        |                       |   | Stock  |       | Additional |   | Restricted  |     |          |  |          |       | Other       |   | Total        
|                          |                                                                                                | Common                     |        | Treasury              |   | Stated |       | Paid-In    |   | Stock       |     | Treasury |  | Retained |       | Comprehen-  |   | Shareholders
|                          |                                                                                                | Shares                     |        | Shares                |   | Value  |       | Capital    |   | Awards      |     | Stock    |  | Earnings |       | sive Loss   |   | Equity       
|                          |                                                                                                |                            |        |                       |   |        |       |            |   |             |     |          |  |          |       |             |   |              
|                          |                                                                                                |                            |        |                      
|                          |                                                                                                | (Shares in thousands)      |        | (Dollars in millions)
|Balance, February 3, 2001 |                                                                                                |                            | 19,612 |                       |   |        | 3,837 |            |   | $           | 1.2 |          |  | $        | 99.1  |             |   | $             | (1.2 | )    |   | $ | (38.1 | )    |   | $ | 187.8 |       |   | $ |     |      |   | $ | 248.8 |      
|                          | Net loss                                                                                       |                            |        |                      |   |        |       |           |   |             |     |         |  |          |       |            |   |               |      |     |   |   |       |     |   |   |       | (14.9 | ) |   |      |     |   |   |       | (14.9 | )    
|                          | Cumulative effect of change in accounting for
    derivatives, net of $1.0 million tax benefit |                            |        |                      |   |        |       |           |   |             |     |         |  |          |       |            |   |               |      |     |   |   |       |     |   |   |       |      |   |   |      | (1.7 | ) |   |       | (1.7  | )    
|                          | Change in fair value of derivatives, net of
    $0.8 million tax benefit                       |                            |        |                      |   |        |       |           |   |             |     |         |  |          |       |            |   |               |      |     |   |   |       |     |   |   |       |      |   |   |      | (1.3 | ) |   |       | (1.3  | )    
|                          |                                                                                                |                            |        |                       |   |        |       |            |   |             |     |          |  |          |       |             |   |               |      |      |   |   |       |      |   |   |       |       |   |   |      |      |   |   |       |      
|                          |                                                                                                | Total comprehensive loss   |        |                       |   |        |       |            |   |             |     |          |  |          |       |             |   |               |      |      |   |   |       |      |   |   |       |       |   |   |      |      |   |   |       |       | (17.9 | )
|                          | Restricted stock awards activity, net                                                          |                            |        | 5                     |   |        |       |           |   |             |     |         |  |          |       | (0.2        | ) |               |      | 0.6  |   |   |       |     |   |   |       |      |   |   |      |     |   |   |       | 0.4   |      
|                          | Purchase of common stock                                                                       |                            |        | (81                   | ) |        |       | 81         |   |             |     |         |  |          |       |            |   |               |      |     |   |   |       | (0.4 | ) |   |       |      |   |   |      |     |   |   |       | (0.4  | )    
|                          | Issuance of treasury shares                                                                    |                            |        | 229                   |   |        |       | (229       | ) |             |     |         |  |          |       | (0.3        | ) |               |      |     |   |   |       | 1.2  |   |   |       |      |   |   |      |     |   |   |       | 0.9   |      
|                          | Issuance of common stock  Associate Stock
    Ownership Plan                                  |                            |        | 341                   |   |        |       |           |   |             |     |         |  |          |       | 1.0         |   |               |      |     |   |   |       |     |   |   |       |      |   |   |      |     |   |   |       | 1.0   |      
|                          |                                                                                                |                            |        |                       |   |        |       |            |   |             |     |          |  |          |       |             |   |               |      |      |   |   |       |      |   |   |       |       |   |   |      |      |   |   |       |      
|Balance, February 2, 2002 |                                                                                                |                            | 20,106 |                       |   |        | 3,689 |            |   |             | 1.2 |          |  |          | 99.6  |             |   |               | (0.6 | )    |   |   | (37.3 | )    |   |   | 172.9 |       |   |   | (3.0 | )    |   |   | 232.8 |      
|                          | Net income                                                                                     |                            |        |                      |   |        |       |           |   |             |     |         |  |          |       |            |   |               |      |     |   |   |       |     |   |   |       | 44.9  |   |   |      |     |   |   |       | 44.9  |      
|                          | Change in fair value of derivatives, net of
    $0.2 million tax provision                     |                            |        |                      |   |        |       |           |   |             |     |         |  |          |       |            |   |               |      |     |   |   |       |     |   |   |       |      |   |   |      | 0.4  |   |   |       | 0.4   |      
|                          |                                                                                                |                            |        |                       |   |        |       |            |   |             |     |          |  |          |       |             |   |               |      |      |   |   |       |      |   |   |       |       |   |   |      |      |   |   |       |      
|                          |                                                                                                | Total comprehensive income |        |                       |   |        |       |            |   |             |     |          |  |          |       |             |   |               |      |      |   |   |       |      |   |   |       |       |   |   |      |      |   |   |       |       | 45.3  |  
|                          | Exercise of stock options                                                                      |                            |        | 844                   |   |        |       |           |   |             |     | 0.1      |  |          |       | 8.4         |   |               |      |     |   |   |       |     |   |   |       |      |   |   |      |     |   |   |       | 8.5   |      
|                          | Tax benefit on options exercised                                                               |                            |        |                      |   |        |       |           |   |             |     |         |  |          |       | 3.6         |   |               |      |     |   |   |       |     |   |   |       |      |   |   |      |     |   |   |       | 3.6   |      
|                          | Restricted stock awards activity, net                                                          |                            |        | (5                    | ) |        |       |           |   |             |     |         |  |          |       |            |   |               |      | 0.2  |   |   |       |     |   |   |       |      |   |   |      |     |   |   |       | 0.2   |      
|                          | Purchase of common stock                                                                       |                            |        | (164                  | ) |        |       | 164        |   |             |     |         |  |          |       |            |   |               |      |     |   |   |       | (3.4 | ) |   |       |      |   |   |      |     |   |   |       | (3.4  | )    
|                          | Issuance of treasury shares                                                                    |                            |        | 47                    |   |        |       | (47        | ) |             |     |         |  |          |       | 0.6         |   |               |      |     |   |   |       | 0.3  |   |   |       |      |   |   |      |     |   |   |       | 0.9   |      
|                          | Issuance of common stock -Associate Stock
    Ownership Plan                                   |                            |        | 251                   |   |        |       |           |   |             |     |         |  |          |       | 1.5         |   |               |      |     |   |   |       |     |   |   |       |      |   |   |      |     |   |   |       | 1.5   |      
|                          |                                                                                                |                            |        |                       |   |        |       |            |   |             |     |          |  |          |       |             |   |               |      |      |   |   |       |      |   |   |       |       |   |   |      |      |   |   |       |      
|Balance, February 1, 2003 |                                                                                                |                            | 21,079 |                       |   |        | 3,806 |            |   |             | 1.3 |          |  |          | 113.7 |             |   |               | (0.4 | )    |   |   | (40.4 | )    |   |   | 217.8 |       |   |   | (2.6 | )    |   |   | 289.4 |      
|                          | Net income                                                                                     |                            |        |                      |   |        |       |           |   |             |     |         |  |          |       |            |   |               |      |     |   |   |       |     |   |   |       | 41.0  |   |   |      |     |   |   |       | 41.0  |      
|                          | Change in fair value of derivatives, net of
    $0.6 million tax provision                     |                            |        |                      |   |        |       |           |   |             |     |         |  |          |       |            |   |               |      |     |   |   |       |     |   |   |       |      |   |   |      | 1.0  |   |   |       | 1.0   |      
|                          |                                                                                                |                            |        |                       |   |        |       |            |   |             |     |          |  |          |       |             |   |               |      |      |   |   |       |      |   |   |       |       |   |   |      |      |   |   |       |      
|                          |                                                                                                | Total comprehensive income |        |                       |   |        |       |            |   |             |     |          |  |          |       |             |   |               |      |      |   |   |       |      |   |   |       |       |   |   |      |      |   |   |       |       | 42.0  |  
|                          | Exercise of stock options                                                                      |                            |        | 418                   |   |        |       |           |   |             |     |         |  |          |       | 4.0         |   |               |      |     |   |   |       |     |   |   |       |      |   |   |      |     |   |   |       | 4.0   |      
|                          | Tax benefit on equity compensation                                                             |                            |        |                      |   |        |       |           |   |             |     |         |  |          |       | 2.4         |   |               |      |     |   |   |       |     |   |   |       |      |   |   |      |     |   |   |       | 2.4   |      
|                          | Stock option compensation                                                                      |                            |        |                      |   |        |       |           |   |             |     |         |  |          |       | 5.7         |   |               |      |     |   |   |       |     |   |   |       |      |   |   |      |     |   |   |       | 5.7   |      
|                          | Restricted stock awards activity, net                                                          |                            |        | 150                   |   |        |       |           |   |             |     |         |  |          |       | 2.8         |   |               |      | (2.1 | ) |   |       |     |   |   |       |      |   |   |      |     |   |   |       | 0.7   |      
|                          | Purchase of common stock                                                                       |                            |        | (75                   | ) |        |       | 75         |   |             |     |         |  |          |       |            |   |               |      |     |   |   |       | (1.6 | ) |   |       |      |   |   |      |     |   |   |       | (1.6  | )    
|                          | Issuance of treasury shares                                                                    |                            |        | 106                   |   |        |       | (106       | ) |             |     |         |  |          |       | 0.7         |   |               |      |     |   |   |       | 0.7  |   |   |       |      |   |   |      |     |   |   |       | 1.4   |      
|                          | Issuance of common stock  Associate Stock
    Ownership Plan                                  |                            |        | 150                   |   |        |       |           |   |             |     |         |  |          |       | 2.2         |   |               |      |     |   |   |       |     |   |   |       |      |   |   |      |     |   |   |       | 2.2   |      
|                          |                                                                                                |                            |        |                       |   |        |       |            |   |             |     |          |  |          |       |             |   |               |      |      |   |   |       |      |   |   |       |       |   |   |      |      |   |   |       |      
|Balance, January 31, 2004 |                                                                                                |                            | 21,828 |                       |   |        | 3,775 |            |   | $           | 1.3 |          |  | $        | 131.5 |             |   | $             | (2.5 | )    |   | $ | (41.3 | )    |   | $ | 258.8 |       |   | $ | (1.6 | )    |   | $ | 346.2 |      
|                          |                                                                                                |                            |        |                       |   |        |       |            |   |             |     |          |  |          |       |             |   |               |      |      |   |   |       |      |   |   |       |       |   |   |      |      |   |   |       |      

See notes to consolidated financial
statements

41



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##### Table of Contents



Jo-Ann Stores, Inc.




Notes to Consolidated Financial
Statements




Note 1  Significant Accounting
Policies

Nature of Operations

Jo-Ann Stores, Inc. (the Company), an
Ohio corporation, is a fabric and craft retailer with 892 retail
stores in 47 states at January 31, 2004. The 806
traditional and 86 superstores feature a variety of
competitively priced merchandise used in sewing, crafting and
home decorating projects, including fabrics, notions, crafts,
frames, scrapbooking materials, artificial and dried flowers,
home accents, finished seasonal and home décor merchandise.

The significant accounting policies applied in
preparing the accompanying consolidated financial statements of
the Company are summarized below:

Basis of Presentation

The consolidated financial statements include the
accounts of the Company and its subsidiaries. All significant
intercompany accounts and transactions have been eliminated.
Certain amounts in the fiscal 2003 and 2002 financial statements
have been reclassified in order to conform with the current year
presentation.

Shares outstanding, stock options, as well as
average basic and diluted shares outstanding used to calculate
earnings per share, have been retroactively restated to reflect
the impact of the increased shares outstanding as a result of
the share reclassification as of the beginning of all periods
presented. See Note 2  Share Reclassification.

Use of Estimates

The preparation of financial statements in
conformity with accounting principles generally accepted in the
United States (GAAP) requires management to make
estimates and assumptions that affect 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. Since actual results may differ from those estimates,
the Company revises its estimates and assumptions, as new
information becomes available.

Fiscal Year

The Companys fiscal year ends on the
Saturday closest to January 31. Fiscal years consist of
52 weeks, unless noted otherwise. The fiscal year refers to
the year in which the period ends (e.g., fiscal 2004 refers to
the year-ended January 31, 2004).

Cash and Cash Equivalents

Cash equivalents are all highly liquid
investments with original maturities of three months or less.

Inventories

Inventories are stated at the lower of cost or
market with cost determined on a first-in, first-out basis.
Inventory valuation methods require certain management estimates
and judgments, which affect the ending inventory valuation at
cost as well as the gross margins reported for the year. These
valuation methods include estimates of net realizable value on
product designated for clearance and estimates of shrink between
periods when the Company conducts store physical inventories to
substantiate inventory balances.

The Companys accrual for shrink is based on
the actual historical shrink results of recent store physical
inventories. These estimates are compared to actual results as
physical inventory counts are taken and reconciled to the
general ledger. Substantially all of our store physical
inventory counts are taken in the first three quarters of each
year and the shrink accrual recorded at January 31, 2004 is
based on shrink results of

42



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##### Table of Contents



Jo-Ann Stores, Inc.


Notes to Consolidated Financial Statements
(Continued)



Note 1  Significant Accounting
Policies (Continued)


prior physical inventories. All store locations
that have been open one year or longer are physically
inventoried once a year. The Company continually monitors and
adjusts the shrink rate estimates based on the results of store
physical inventories and shrink trends.

Inventory reserves for clearance product are
estimated based on the consideration of a variety of factors,
including, but not limited to, quantities of slow moving or
carryover seasonal merchandise on hand, historical recovery
statistics and future merchandising plans. The accuracy of the
Companys estimates can be affected by many factors, some
of which are outside of the Companys control, including
changes in economic conditions and consumer buying trends.

Property, Equipment and Leasehold
Improvements

Property, equipment and leasehold improvements
are stated at cost less accumulated depreciation and
amortization. Depreciation and amortization is provided over the
estimated useful life of the assets principally by the
straight-line method. The major classes of assets and ranges of
estimated useful lives are: buildings from 10 to 40 years;
furniture, fixtures and equipment from 2 to 10 years; and
leasehold improvements for 10 years or the remainder of the
lease term, whichever is shorter. Maintenance and repair
expenditures are charged to expense as incurred and improvements
and major renewals are capitalized.

Property, equipment and leasehold improvements
consists of the following (dollars in millions):

|                                                        |  |             |        |      |  |   |        |  
|------------------------------------------------------- |  | ----------- | ------ | ---- |  | - | ------ | -
|                                                        |  |            
|                                                        |  | Fiscal Year
|                                                        |  |            
|                                                        |  | 2004        |        | 2003
|                                                        |  |             |        |     
|Land and buildings                                      |  | $           | 54.9   |      |  | $ | 52.9   |  
|Furniture, fixtures and equipment                       |  |             | 305.3  |      |  |   | 272.9  |  
|Leasehold improvements                                  |  |             | 66.9   |      |  |   | 70.2   |  
|Construction in progress                                |  |             | 8.6    |      |  |   | 7.2    |  
|                                                        |  |             |        |      |  |   |        |  
|                                                        |  |             | 435.7  |      |  |   | 403.2  |  
|Less accumulated depreciation
    and amortization      |  |             | (232.5 | )    |  |   | (212.9 | )
|                                                        |  |             |        |      |  |   |        |  
|Property, equipment and leasehold
    improvements, net |  | $           | 203.2  |      |  | $ | 190.3  |  
|                                                        |  |             |        |      |  |   |        |  

Software Development

The Company capitalized $3.7 and
$2.7 million in fiscal 2004 and fiscal 2003, respectively,
for internal use software acquired from third parties. The
capitalized amounts are included in property, equipment and
leasehold improvements and are being amortized on a
straight-line basis over periods ranging from three to five
years beginning at the time the software becomes operational.

Goodwill

Goodwill represents the excess of purchase price
and related costs over the fair value assigned to the net
tangible assets acquired from House of Fabrics, Inc.
(HOF). The goodwill recorded at February 1,
2003 was non-deductible for tax purposes.

Effective February 3, 2002, the Company
adopted Financial Accounting Standards Board (FASB)
Statement of Financial Accounting Standard (SFAS)
No. 142, Goodwill and Other Intangible Assets.
In accordance with SFAS No. 142, goodwill is no longer amortized
but is subject to impairment testing, using fair value-based
approaches. Prior to the adoption of SFAS No. 142, goodwill
was amortized using the straight-line method over an estimated
life of 40 years. As part of adopting this standard, the
Company

43



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##### Table of Contents



Jo-Ann Stores, Inc.


Notes to Consolidated Financial Statements
(Continued)



Note 1  Significant Accounting
Policies (Continued)


performed the first of the required impairment
tests of goodwill and based upon the transition impairment tests
performed on recorded goodwill, no impairment to goodwill
exists. During the fourth quarter of fiscal 2004 and 2003, the
Company performed the required annual impairment tests of the
carrying amount of goodwill and determined that no goodwill
impairment existed. Application of the non-amortization
provision of SFAS No. 142 reduced amortization expense by
approximately $0.7 million for both fiscal 2004 and fiscal
2003. Fiscal 2002 included amortization expense of
$0.7 million.

Impairment of Long-Lived Assets

Effective February 3, 2002, the Company
adopted SFAS No. 144, Accounting for the Impairment
or Disposal of Long-Lived Assets (SFAS No. 144). SFAS
No. 144 supersedes SFAS No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of,to supply a single accounting approach for
measuring impairment of long-lived assets, including definite
lived intangible assets, businesses accounted for as a
discontinued operation, assets to be sold and assets to be
disposed of other than by sale.

Under SFAS No. 144, long-lived assets,
except for goodwill and indefinite lived intangible assets, are
reviewed for impairment when circumstances indicate the carrying
value of an asset may not be recoverable. Recoverability of
assets to be held and used is measured by a comparison of the
carrying amount of the assets to future net cash flows estimated
by the Company to be generated by such assets. If such assets
are considered to be impaired, the impairment to be recognized
is the amount by which the carrying amount of the assets exceeds
the fair value of the assets. Assets to be disposed of are
recorded at the lower of carrying value or estimated net
realizable value.

The adoption of SFAS No. 144 did not have a
significant impact on the Companys results of operations
or financial position. The carrying values of long-lived assets
for stores identified for closure are reduced to their estimated
fair value. See Note 3  Store Closings for details
related to the results of impairment testing performed.

Accrued Store Closing Costs

In July 2002, the FASB issued SFAS
No. 146 Accounting for Costs Associated with Exit or
Disposal Activities. SFAS No. 146 requires companies
to recognize costs associated with exit or disposal activities
when they are incurred rather than at the date of a commitment
to an exit or disposal plan. SFAS No. 146 also establishes
that the liability should initially be measured and recorded at
fair value. SFAS No. 146 replaces EITF Issue No. 94-3
Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity (including Certain
Costs Incurred in a Restructuring). SFAS No. 146 is
to be applied prospectively to exit or disposal activities
initiated after December 31, 2002. Under Issue 94-3, a
liability for an exit cost was recognized at the date of our
commitment to an exit plan.

The Company follows SFAS No. 146 to account
for costs related to store closings after December 31,
2002. Prior to December 31, 2002, the Company followed
Issue 94-3 and accrued for costs of store closings, including
future rental obligations, carrying costs and other closing
costs when the Company committed to closing or relocating a
store. The determination of the accrual was dependent on the
Companys ability to make estimates of costs to be incurred
post-closing. Future rental obligations were calculated at the
lesser of contractual obligations remaining under the lease
(less estimated sublease rental income) or the estimated lease
termination cost. Differences in estimates and assumptions could
result in an accrual requirement materially different from the
calculated accrual. See Note 3  Store Closings.

44



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##### Table of Contents



Jo-Ann Stores, Inc.


Notes to Consolidated Financial Statements
(Continued)



Note 1  Significant Accounting
Policies (Continued)


Accrued Expenses

Certain material expenses are estimated in an
effort to record those expenses in the period incurred. The most
material estimates relate to compensation, taxes and insurance
related expenses, portions of which the Company is self-insured
for. Workers compensation and general liability insurance
accruals are recorded based on insurance claims processed as
well as historical claims experience for claims incurred, but
not yet reported. These estimates are based on historical loss
development factors. Employee medical insurance accruals are
recorded based on medical claims processed as well as historical
medical claims experience for claims incurred but not yet
reported. Differences in the Companys estimates and
assumptions could result in an accrual requirement materially
different from the calculated accrual. Accrued expenses consists
of the following (dollars in millions):

|                       |  |             |      |      |  |   |      | 
|---------------------- |  | ----------- | ---- | ---- |  | - | ---- | 
|                       |  |            
|                       |  | Fiscal Year
|                       |  |            
|                       |  | 2004        |      | 2003
|                       |  |             |      |     
|Accrued compensation   |  | $           | 16.8 |      |  | $ | 23.1 | 
|Accrued taxes          |  |             | 21.5 |      |  |   | 10.6 | 
|Accrued insurance      |  |             | 12.1 |      |  |   | 11.6 | 
|Other accrued expenses |  |             | 25.7 |      |  |   | 30.6 | 
|                       |  |             |      |      |  |   |      | 
|                       |  | $           | 76.1 |      |  | $ | 75.9 | 
|                       |  |             |      |      |  |   |      | 

Financial Instruments

A financial instrument is cash or a contract that
imposes an obligation to deliver, or conveys a right to receive
cash or another financial instrument. The carrying values of
cash and cash equivalents and accounts payable are considered to
be representative of fair value because of the short maturity of
these instruments. The price of the 10 3/8 percent
senior subordinated notes (the Notes) at
January 31, 2004 in the high yield debt market was 104.0
percent to par value. Accordingly, the fair value of the
10 3/8 percent Notes was $66.9 million versus
their carrying value of $64.4 million.

In the normal course of business, the Company
employs established policies and procedures to manage exposure
to changes in interest rates. The Companys objective in
managing the exposure to interest rate changes is to limit the
volatility and impact of interest rate changes on earnings and
cash flows. Interest rate swaps are primarily utilized to
achieve this objective. Interest rate swaps are utilized to
manage net exposure to interest rate changes related to the
Companys debt structure. The interest rate swap agreements
require the Company to pay a fixed interest rate while receiving
a floating interest rate based on London Interbank Offered Rate
(LIBOR). The Company does not enter into financial
instruments for trading purposes. The Company has a $40.0
million interest rate swap with a fixed LIBOR rate of
6.72 percent that expires on April 30, 2005.

Effective February 4, 2001, the Company
adopted SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, as amended. In
accordance with SFAS No. 133, the Company reviewed and
designated its interest rate swap agreement as a cash flow hedge
and recognized the fair value of its interest rate swap
agreement on the balance sheet in accrued expenses. Changes in
the fair value of this agreement is recorded in other
comprehensive income (loss) and reclassified into earnings as
the underlying hedged item affects earnings. During fiscal 2004
and fiscal 2003, unrealized after-tax net gains of $1.0 million
and $0.4 million, respectively, were recorded in other
comprehensive income (loss). The fiscal 2002 after-tax net loss
included a $1.7 million cumulative transition adjustment,
as of the date of adoption of SFAS No. 133. The hedge
ineffectiveness (income) expense for fiscal 2004, fiscal
2003 and 2002 was $(0.7) million, $(0.3) million and
$1.0 million, respectively, and is reflected in interest
expense.

45



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##### Table of Contents



Jo-Ann Stores, Inc.


Notes to Consolidated Financial Statements
(Continued)



Note 1  Significant Accounting
Policies (Continued)


Income Taxes

The Company accounts for income taxes pursuant to
the asset and liability method. Under that method, deferred tax
assets and liabilities are recognized for the future tax
consequences attributable to differences between financial
statement carrying amounts of existing assets and liabilities
and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect
on deferred tax assets and liabilities of a change in the tax
rate is recognized in income or expense in the period that the
change is effective.

Revenue Recognition

The Company recognizes revenue at the time of
sale of merchandise to its customers in compliance with Staff
Accounting Bulletin No. 101, Revenue Recognition in
Financial Statements. The Company allows for merchandise
to be returned under most circumstances, however, the Company
does not provide a reserve as the amounts of returns have not
historically had a material impact on the financial statements.

The Company recognizes the sale for layaway and
custom orders when the product is delivered to the customer and
any remaining balance due from the customer is collected.
Deposits received for layaway and custom orders are deferred as
a liability until the related product is delivered to the
customer.

Proceeds from the sale of gift cards are recorded
as gift card liability and recognized as revenue when redeemed
by the holder.

Cost of Sales

Inbound freight and duties related to import
purchases and internal transfer costs are considered to be
direct costs of the Companys merchandise and accordingly
are recognized when the related merchandise is sold as cost of
sales. Purchasing and receiving costs, warehousing costs and
other costs of the Companys distribution network are
considered to be period costs not directly attributable to the
value of merchandise and accordingly are expensed as incurred as
selling, general and administrative expenses. Distribution
network costs of $51.5 million, $43.4 million and
$42.1 million were included in selling, general and
administrative expenses for fiscal 2004, 2003 and 2002,
respectively.

All vendor consideration, including cash
discounts, volume discounts and co-operative advertising fees
are included as a reduction of cost of sales. Cash discounts and
volume discounts are recognized in cost of sales when the
related merchandise is sold. Historically, the Company
recognized co-operative advertising fees when received from its
vendors. Beginning January 1, 2003, upon the adoption of
Emerging Issues Task Force (EITF) Issue 02-16,
Accounting by a Customer (including a Reseller) for
Certain Consideration Received from a Vendor, and the
execution of new or modifications of existing vendor agreements,
the Company recognizes co-operative advertising fees when the
related merchandise is sold. The effect of adopting the EITF did
not have a material impact on the Companys results of
operations or financial position. Historically, vendor
consideration has not had a significant impact to the trend of
cost of sales or gross margin.

Store Pre-Opening Costs

Store pre-opening costs are expensed as incurred
and relate to the costs incurred prior to a new store opening,
which includes the hiring and training costs for new employees
and processing of initial merchandise. Store pre-opening costs
were $7.6 million, $4.5 million and $3.4 million
in fiscal 2004, 2003 and 2002, respectively.

46



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##### Table of Contents



Jo-Ann Stores, Inc.


Notes to Consolidated Financial Statements
(Continued)



Note 1  Significant Accounting
Policies (Continued)


Advertising Costs

The Company expenses production costs of
advertising the first time the advertising takes place.
Advertising expense was $47.7 million, $39.7 million
and $37.9 million for fiscal 2004, 2003 and 2002,
respectively.

Earnings Per Share

Basic and diluted earnings per share are
calculated in accordance with SFAS No. 128, Earnings
per Share. Basic earnings per common share are computed by
dividing net income (loss) by the weighted average number
of shares outstanding during the year. Diluted earnings per
share for fiscal 2004 and 2003 include the effect of the assumed
exercise of dilutive stock options under the treasury stock
method. Stock options are antidilutive for fiscal 2002 and
therefore are excluded from the calculation of diluted earnings
per share. Basic and diluted earnings per share are as follows:

|                                               |         |                                                               |      |        |     |      |      |        |     |   |       |        |   | 
|---------------------------------------------- | ------- | ------------------------------------------------------------- | ---- | ------ | --- | ---- | ---- | ------ | --- | - | ----- | ------ | - | 
|                                               |         |                                                              
|                                               |         | Fiscal Year-Ended                                            
|                                               |         |                                                              
|                                               |         | 2004                                                          |      | 2003   |     | 2002
|                                               |         |                                                               |      |        |     |     
|                                               |         |                                                              
|                                               |         | (Dollars in millions, except per                             
|                                               |         | share data)                                                  
|Net income (loss)                              |         | $                                                             | 41.0 |        |     | $    | 44.9 |        |     | $ | (14.9 | )     
|                                               |         |                                                               |      |        |     |      |      |        |     |   |       |       
|Weighted average shares (shares in thousands): |         |                                                               |      |        |     |      |      |        |     |   |       |       
|                                               | Basic   |                                                               |      | 21,372 |     |      |      | 20,682 |     |   |       | 19,888 |  
|                                               |         | Incremental shares from assumed exercise of
    stock options |      |        | 631 |      |      |        | 950 |   |       |        |  | 
|                                               |         |                                                               |      |        |     |      |      |        |     |   |       |       
|                                               | Diluted |                                                               |      | 22,003 |     |      |      | 21,632 |     |   |       | 19,888 |  
|                                               |         |                                                               |      |        |     |      |      |        |     |   |       |       
|Basic net income (loss) per common share       |         | $                                                             | 1.92 |        |     | $    | 2.17 |        |     | $ | (0.75 | )     
|                                               |         |                                                               |      |        |     |      |      |        |     |   |       |       
|Diluted net income (loss) per
    common share |         | $                                                             | 1.86 |        |     | $    | 2.08 |        |     | $ | (0.75 | )     
|                                               |         |                                                               |      |        |     |      |      |        |     |   |       |       

For fiscal years 2004, 2003 and 2002, 175,000
stock options, 137,000 stock options and 3.8 million stock
options, respectively, that could potentially dilute earnings
per share in the future, were not included in the computation of
diluted earnings per share because to do so would have been
anti-dilutive.

Stock-Based Compensation

Effective February 2, 2003, the Company
adopted the fair value recognition provisions of SFAS
No. 123, Accounting for Stock-Based
Compensation. Under the modified prospective method of
adoption selected by the Company under the provisions of SFAS
No. 148, Accounting for Stock-Based
Compensation-Transition and Disclosure, an Amendment of FASB
Statement No. 123, compensation cost recognized in
fiscal year 2004 is the same as that which would have been
recognized had the recognition provisions of SFAS No. 123
been applied from its original effective date. The Company
believes that this change is to the preferred method of
accounting for stock-based compensation.

Prior to fiscal 2004, the Company accounted for
these plans under the recognition and measurement provisions of
Accounting Principles Board (APB) Opinion
No. 25, Accounting for Stock Issued to
Employees, and related Interpretations. Therefore, no
stock-based employee compensation for stock options is reflected
in fiscal 2003 and 2002 net income (loss), as all options
granted under those plans had an exercise price equal to the
market value of the underlying common stock on the date of grant.

In accordance with the provisions of SFAS
No. 123 and SFAS No. 148, $6.4 million
($5.7 million of stock option compensation expense and
$0.7 million for amortization expense associated with
restricted stock) was

47



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##### Table of Contents



Jo-Ann Stores, Inc.


Notes to Consolidated Financial Statements
(Continued)



Note 1  Significant Accounting
Policies (Continued)


recorded for total stock-based compensation
expense in fiscal 2004. In accordance with APB No. 25, total
stock-based compensation, which represented amortization expense
associated with restricted stock, was $0.2 million and
$0.6 million, respectively, for fiscal 2003 and 2002.

The following table illustrates the effect on net
income (loss) and earnings per share if the fair value
based method had been applied to all outstanding and unvested
awards in each fiscal year (dollars in millions, except per
share data):

|                                                                                             |             |                   |      |      |  |      |      |      |  |   |       |       |  
|-------------------------------------------------------------------------------------------- | ----------- | ----------------- | ---- | ---- |  | ---- | ---- | ---- |  | - | ----- | ----- | -
|                                                                                             |             |                  
|                                                                                             |             | Fiscal Year-Ended
|                                                                                             |             |                  
|                                                                                             |             | 2004              |      | 2003 |  | 2002
|                                                                                             |             |                   |      |      |  |     
|Net income (loss) as reported                                                                |             | $                 | 41.0 |      |  | $    | 44.9 |      |  | $ | (14.9 | )    
|Add: Stock-based compensation expense included in
    reported net income (loss), net of tax |             |                   | 3.9  |      |  |      | 0.1  |      |  |   | 0.3   |      
|Less: Stock-based compensation determined under
    the fair value method, net of tax        |             |                   | (3.9 | )    |  |      | (2.3 | )    |  |   | (2.4  | )    
|                                                                                             |             |                   |      |      |  |      |      |      |  |   |       |      
|Pro forma net income (loss)                                                                  |             | $                 | 41.0 |      |  | $    | 42.7 |      |  | $ | (17.0 | )    
|                                                                                             |             |                   |      |      |  |      |      |      |  |   |       |      
|Basic income (loss) per common share:                                                        |             |                   |      |      |  |      |      |      |  |   |       |      
|                                                                                             | As reported |                   | $    | 1.92 |  |      | $    | 2.17 |  |   | $     | (0.75 | )
|                                                                                             | Pro forma   |                   |      | 1.92 |  |      |      | 2.06 |  |   |       | (0.85 | )
|Diluted income (loss) per common share:                                                      |             |                   |      |      |  |      |      |      |  |   |       |      
|                                                                                             | As reported |                   | $    | 1.86 |  |      | $    | 2.08 |  |   | $     | (0.75 | )
|                                                                                             | Pro forma   |                   |      | 1.86 |  |      |      | 1.97 |  |   |       | (0.85 | )

The fair values of the options granted under the
stock plans were determined at the date of grant using the
Black-Scholes option pricing model. The Company does not pay
dividends, so no dividend rate assumption was made. The
significant assumptions used to calculate the fair value of the
option grants were as follows:

|                                                   |  |                   |              |      |  |      |              |  |  |  |              | 
|-------------------------------------------------- |  | ----------------- | ------------ | ---- |  | ---- | ------------ |  |  |  | ------------ | 
|                                                   |  |                  
|                                                   |  | Fiscal Year-Ended
|                                                   |  |                  
|                                                   |  | 2004              |              | 2003 |  | 2002
|                                                   |  |                   |              |      |  |     
|Weighted average fair value of
    options granted |  |                   | $9.61        |      |  |      | $9.88        |  |  |  | $1.43        | 
|Expected volatility of underlying stock            |  |                   | .570 to .660 |      |  |      | .466 to .555 |  |  |  | .460         | 
|Risk-free interest rates                           |  |                   | 2.4% to 3.6% |      |  |      | 3.0% to 4.9% |  |  |  | 4.8% to 5.2% | 
|Expected life                                      |  |                   | 45.5 years  |      |  |      | 5-6 years    |  |  |  | 6-10 years   | 
|Expected life  Employee Stock Purchase            |  |                   |              |      |  |      |              |  |  |  |              | 
|Program                                            |  |                   | 6 months     |      |  |      | 6 months     |  |  |  | 6 months     | 

Recent Accounting Pronouncements

In addition to the accounting pronouncements
referenced above, the following accounting pronouncements may
have an impact on our results of operations or financial
position, as discussed further below.



| |                                                                                                                                    
| | -----------------------------------------------------------------------------------------------------------------------------------
| | SFAS No. 145, Rescission of FASB
    Statements No. 4, 44 and 64, Amendment of FASB Statement
    No. 13, and Technical Corrections

In April 2002, the FASB issued SFAS
No. 145, Rescission of FASB Statements No. 4,
44, and 64, Amendment of FASB Statement No. 13, and
Technical Corrections. SFAS No. 145 concludes that
debt extinguishments should not be classified as an
extraordinary item. SFAS No. 145 also requires
sale-leaseback accounting for certain lease modifications that
have economic effects that are similar to sale-leaseback

48



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##### Table of Contents



Jo-Ann Stores, Inc.


Notes to Consolidated Financial Statements
(Continued)



Note 1  Significant Accounting
Policies (Continued)


transactions. As a result of adopting SFAS
No. 145, the Company reclassified the fiscal 2002
consolidated statement of operations for the loss associated
with the early extinguishment of debt from extraordinary item to
the line item debt repurchase and share reclassification
expenses, included in operating profit, in accordance with
the statement. SFAS No. 145 is effective for fiscal years
beginning after May 15, 2002. SFAS No. 145 did not
have a significant impact on the Companys results of
operations or financial position.



| |                                                                                                                       
| | ----------------------------------------------------------------------------------------------------------------------
| | SFAS No. 150, Accounting for Certain
    Financial Instruments with Characteristics of both Liabilities
    and Equity

During May 2003, the Financial Accounting
Standards Board (FASB) issued SFAS No. 150,
Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity. SFAS
No. 150 clarifies the accounting for certain financial
instruments with characteristics of both liabilities and equity
and requires that those instruments be classified as liabilities
in the statement of financial position. Previously, many of
those financial instruments were classified as equity. SFAS
No. 150 is effective for financial instruments entered into
or modified after May 31, 2003 and otherwise is effective
at the beginning of the first interim period beginning after
June 15, 2003. The adoption of SFAS No. 150 had no
impact on the Companys overall financial position or
results of operations.



| |                                                                                              
| | ---------------------------------------------------------------------------------------------
| | SFAS No. 149, Amendment of Statement 133
    on Derivative Instruments and Hedging Activities

During April 2003, the FASB issued SFAS
No. 149, Amendment of Statement 133 on Derivative
Instruments and Hedging Activities. SFAS No. 149
amends and clarifies accounting for derivative instruments,
including certain derivative instruments embedded in other
contracts, and for hedging activities under Statement 133. SFAS
No. 149, the provisions of which are to be applied
prospectively, is effective for contracts entered into or
modified after June 30, 2003 and for hedging relationships
designated after June 30, 2003. The adoption of SFAS
No. 149 had no impact on the Companys consolidated
financial statements.



| |                                                                            
| | ---------------------------------------------------------------------------
| | FASB Interpretation No. 46, Consolidation
    of Variable Interest Entities

In January 2003, the FASB issued FASB
Interpretation No. 46 (FIN 46),
Consolidation of Variable Interest Entities. FIN 46
clarifies the application of Accounting Research Bulletin
No. 51, Consolidated Financial Statements, for
certain entities which do not have sufficient equity at risk for
the entity to finance its activities without additional
subordinated financial support from other parties or in which
equity investors do not have the characteristics of a
controlling financial interest (variable interest
entities). Variable interest entities will be required to
be consolidated by their primary beneficiary. The primary
beneficiary of a variable interest entity is determined to be
the party that absorbs a majority of the entitys expected
losses, receives a majority of its expected returns, or both, as
a result of holding variable interests, which are ownership,
contractual, or other pecuniary interests in an entity. On
December 24, 2003, the FASB issued a revision to FIN 46 to
defer the adoption requirements in financial statements for
public entities that do not have an interest in structures
commonly referred to as special-purpose entities, however,
adoption will be required for the periods ending after
March 15, 2004. Accordingly, the Company expects to
complete its analysis and adopt FIN 46 during its first quarter
in fiscal 2005, as required. The Company is in the process of
determining what impact, if any, the adoption of the provisions
of FIN 46 will have upon its financial condition or results of
operations.




Note 2   Share
Reclassification

On November 4, 2003, the Company announced
that shareholders approved the reclassification of its
Class A and Class B common shares into a single class
of stock. Shareholders also approved certain other

49



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##### Table of Contents



Jo-Ann Stores, Inc.


Notes to Consolidated Financial Statements
(Continued)



Note 2  Share Reclassification
(Continued)


governance proposals. On November 5, 2003,
shares of the single class of stock began trading on the New
York Stock Exchange, under the symbol JAS.

Under the reclassification, shares of the
Companys Class B common shares, which did not have
voting rights other than as required by law, were amended to
have one vote per share and were re-designated as the
Companys common shares. Each of the
Companys Class A Common shares, which had one vote
per share, were reclassified into 1.15 common shares. This
resulted in approximately 1.6 million incremental Common
shares being issued at the time of the reclassification,
increasing the number of common shares outstanding by
approximately 8 percent.

Shares outstanding, stock options, as well as
average basic and diluted shares outstanding used to calculate
earnings per share, have been retroactively restated to reflect
the impact of the increased shares outstanding as a result of
the share reclassification as of the beginning of all periods
presented.




Note 3   Store Closings

The Company reviews the productivity of its store
base on an ongoing basis and actively manages its real estate to
preserve maximum flexibility in its lease terms. As discussed
earlier under Note 1  Significant Accounting
Policies, effective December 31, 2002, the Company
began accounting for costs of store closings under SFAS
No. 146. In addition, the Company adopted the new
accounting requirements related to asset impairment as required
by SFAS No. 144, effective February 3, 2002.

During the fourth quarter of fiscal 2001,
management developed a turnaround plan (the Turnaround
Plan), which resulted from a thorough analysis of the
Companys business prompted by operating trends that were
occurring. As a result of the Companys decline in
earnings, significant increases in debt and inventory levels,
and issues surrounding the implementation of SAP Retail, the
Companys strategy shifted from accelerating the growth of
its superstore concept to improving the productivity of its
existing asset base and realizing the benefits from its
completed infrastructure investments.

In accordance with the then applicable accounting
literature (Emerging Issues Task Force Issue (EITF)
94-3, Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity
(Including Certain Costs Incurred in a Restructuring),
Statement of Financial Accounting Standards (SFAS)
No. 121, Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of and
Staff Accounting Bulletin No. 100, Restructuring and
Impairment Charges,) the Company recorded a $17.1 million
pre-tax charge to operating expenses in fiscal 2002 for
restructuring and asset impairment costs resulting from 148
identified store closings associated with its Turnaround Plan.
The Company also incurred expenses of $0.5 million in
fiscal 2002 for store closings unrelated to the Turnaround Plan.

Through the end of fiscal 2004, 131 of the stores
identified for closure as part of the Turnaround Plan have been
closed. The remaining stores to be closed with the exception of
eight store locations, will be closed in fiscal 2005. At the end
of fiscal 2003, a decision was made to continue to operate these
eight locations due to our inability to successfully negotiate
an acceptable arrangement to exit the lease. A total of
$7.7 million for estimated lease obligations of stores to
be closed as part of the Turnaround Plan were reversed in the
fourth quarter of fiscal 2003. The reversal related to stores
where estimates were revised, as well as the eight stores we
could not close. We also recorded an asset impairment charge in
the fourth quarter of fiscal 2003 of $6.7 million for
various store locations, representing the difference between the
asset carrying value and the future net discounted cash flows
estimated to be generated by those assets. The remainder of the
store closing charges in fiscal 2003 and the store closing
charges incurred in fiscal 2004, highlighted in the table below,
represent lease obligations and other costs associated with
stores identified for closure that were not part of the
Turnaround Plan.

50



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##### Table of Contents



Jo-Ann Stores, Inc.


Notes to Consolidated Financial Statements
(Continued)

Note 3  Store Closings
(Continued)

The charges to the statement of operations for
the three fiscal years ended January 31, 2004 related to
store closings are summarized as follows, and include charges
both as part of our turnaround initiatives, as well as store
closings from normal operating activity (dollars in millions):

|                       |                                  |                   |     |      |   |      |     |      |   |   |      |     | 
|---------------------- | -------------------------------- | ----------------- | --- | ---- | - | ---- | --- | ---- | - | - | ---- | --- | 
|                       |                                  |                  
|                       |                                  | Fiscal Year-Ended
|                       |                                  |                  
|                       |                                  | 2004              |     | 2003 |   | 2002
|                       |                                  |                   |     |      |   |     
|Store Closing Charges: |                                  |                   |     |      |   |      |     |      |   |   |      |    
|                       | Non-cancelable lease obligations |                   | $   | (0.1 | ) |      | $   | (5.9 | ) |   | $    | 9.6 | 
|                       | Asset impairment                 |                   |     | 2.1  |   |      |     | 6.7  |   |   |      | 5.0 | 
|                       | Other costs                      |                   |     | 1.3  |   |      |     | 0.6  |   |   |      | 3.0 | 
|                       |                                  |                   |     |      |   |      |     |      |   |   |      |    
|Total                  |                                  | $                 | 3.3 |      |   | $    | 1.4 |      |   | $ | 17.6 |    
|                       |                                  |                   |     |      |   |      |     |      |   |   |      |    

Non-cancelable lease obligationsfor fiscal 2003 and 2002 include the
lesser of the estimated buyout or remaining lease obligations of
the stores to be closed. Estimated continuing lease obligations
were reduced by anticipated sublease rental income. In fiscal
2004, these costs are accounted for in accordance with SFAS
No. 146, which requires certain lease costs to be expensed
as incurred.

Asset impairmentsinclude write-downs of fixed assets
for stores closed, or scheduled to be closed, and certain other
store locations where impairment exists, to estimated fair
value. The asset impairment represents the difference between
the asset carrying value and the future net discounted cash
flows estimated by us to be generated by those assets.

Other costsrepresent other miscellaneous store
closing costs, including among other things, costs related to
fixtures, signage and register removal.

Summarized below is a reconciliation of the
beginning and ending store closing reserve balances for the
three fiscal years ended January 31, 2004 (dollars in
millions):

|                          |          |                |      |             |   |       |     |       |   |   |     |      |   |   |      |      |  
|------------------------- | -------- | -------------- | ---- | ----------- | - | ----- | --- | ----- | - | - | --- | ---- | - | - | ---- | ---- | -
|                          |          | Non-cancelable |      |             |   |       |     |      
|                          |          | lease          |      | Asset       |   | Other |     |      
|                          |          | Obligations    |      | Impairments |   | Costs |     | Total
|                          |          |                |      |             |   |       |     |      
|Balance at Feb 3, 2001    |          | $              | 5.5  |             |   | $     |    |       |   | $ | 3.8 |      |   | $ | 9.3  |     
|Amounts charged to income |          |                | 9.6  |             |   |       | 5.0 |       |   |   | 3.0 |      |   |   | 17.6 |     
|Utilization:              |          |                |      |             |   |       |     |       |   |   |     |      |   |   |      |     
|                          | Cash     |                |      | (3.9        | ) |       |     |      |   |   |     | (5.6 | ) |   |      | (9.5 | )
|                          | Non-Cash |                |      |            |   |       |     | (5.0  | ) |   |     |     |   |   |      | (5.0 | )
|                          |          |                |      |             |   |       |     |       |   |   |     |      |   |   |      |     
|Balance at Feb 2, 2002    |          |                | 11.2 |             |   |       |    |       |   |   | 1.2 |      |   |   | 12.4 |     
|Amounts charged to income |          |                | (5.9 | )           |   |       | 6.7 |       |   |   | 0.6 |      |   |   | 1.4  |     
|Utilization:              |          |                |      |             |   |       |     |       |   |   |     |      |   |   |      |     
|                          | Cash     |                |      | (1.8        | ) |       |     |      |   |   |     | (0.9 | ) |   |      | (2.7 | )
|                          | Non-Cash |                |      |            |   |       |     | (6.7  | ) |   |     |     |   |   |      | (6.7 | )
|                          |          |                |      |             |   |       |     |       |   |   |     |      |   |   |      |     
|Balance at Feb 1, 2003    |          |                | 3.5  |             |   |       |    |       |   |   | 0.9 |      |   |   | 4.4  |     
|Amounts charged to income |          |                | (0.1 | )           |   |       | 2.1 |       |   |   | 1.3 |      |   |   | 3.3  |     
|Utilization:              |          |                |      |             |   |       |     |       |   |   |     |      |   |   |      |     
|                          | Cash     |                |      | (1.6        | ) |       |     |      |   |   |     | (1.3 | ) |   |      | (2.9 | )
|                          | Non-Cash |                |      |            |   |       |     | (2.1  | ) |   |     | 0.1  |   |   |      | (2.0 | )
|                          |          |                |      |             |   |       |     |       |   |   |     |      |   |   |      |     
|Balance at Jan 31, 2004   |          | $              | 1.8  |             |   | $     |    |       |   | $ | 1.0 |      |   | $ | 2.8  |     
|                          |          |                |      |             |   |       |     |       |   |   |     |      |   |   |      |     

51



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Jo-Ann Stores, Inc.


Notes to Consolidated Financial Statements
(Continued)






Note 4  Income Taxes

The significant components of the income tax
provision (benefit) are as follows (dollars in millions):

|                               |                 |                   |      |      |  |      |      |     |  |   |      |      |  
|------------------------------ | --------------- | ----------------- | ---- | ---- |  | ---- | ---- | --- |  | - | ---- | ---- | -
|                               |                 |                  
|                               |                 | Fiscal Year-Ended
|                               |                 |                  
|                               |                 | 2004              |      | 2003 |  | 2002
|                               |                 |                   |      |      |  |     
|Current:                       |                 |                   |      |      |  |      |      |     |  |   |      |     
|                               | Federal         |                   | $    | 18.7 |  |      | $    | 9.0 |  |   | $    | (0.8 | )
|                               | State and local |                   |      | 2.2  |  |      |      | 2.9 |  |   |      | (0.1 | )
|                               |                 |                   |      |      |  |      |      |     |  |   |      |     
|                               |                 |                   | 20.9 |      |  |      | 11.9 |     |  |   | (0.9 | )   
|Deferred                       |                 |                   | 4.6  |      |  |      | 15.7 |     |  |   | (8.3 | )   
|                               |                 |                   |      |      |  |      |      |     |  |   |      |     
|Income tax provision (benefit) |                 | $                 | 25.5 |      |  | $    | 27.6 |     |  | $ | (9.2 | )   
|                               |                 |                   |      |      |  |      |      |     |  |   |      |     

The reconciliation of income tax at the statutory
rate to the income tax provision (benefit) is as follows:

|                                         |                       |                   |      |      |  |      |      |      |   |   |      |      |  
|---------------------------------------- | --------------------- | ----------------- | ---- | ---- |  | ---- | ---- | ---- | - | - | ---- | ---- | -
|                                         |                       |                  
|                                         |                       | Fiscal Year-Ended
|                                         |                       |                  
|                                         |                       | 2004              |      | 2003 |  | 2002
|                                         |                       |                   |      |      |  |     
|Federal income tax at the statutory rate |                       | $                 | 23.3 |      |  | $    | 25.4 |      |   | $ | (8.5 | )   
|Effect of:                               |                       |                   |      |      |  |      |      |      |   |   |      |     
|                                         | State and local taxes |                   |      | 1.8  |  |      |      | 2.9  |   |   |      | (0.4 | )
|                                         | Other, net            |                   |      | 0.4  |  |      |      | (0.7 | ) |   |      | (0.3 | )
|                                         |                       |                   |      |      |  |      |      |      |   |   |      |     
|Income tax provision (benefit)           |                       | $                 | 25.5 |      |  | $    | 27.6 |      |   | $ | (9.2 | )   
|                                         |                       |                   |      |      |  |      |      |      |   |   |      |     

52



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##### Table of Contents



Jo-Ann Stores, Inc.


Notes to Consolidated Financial Statements
(Continued)



Note 4  Income Taxes
(Continued)


The significant components of the Companys
deferred tax assets and liabilities are as follows:

|                                       |                                         |                   |       |       |   |   |       |       |  
|-------------------------------------- | --------------------------------------- | ----------------- | ----- | ----- | - | - | ----- | ----- | -
|                                       |                                         |                  
|                                       |                                         | Fiscal Year      
|                                       |                                         | Asset/(Liability)
|                                       |                                         |                  
|                                       |                                         | 2004              |       | 2003 
|                                       |                                         |                   |       |      
|Current                                |                                         |                   |       |       |   |   |       |      
|Deferred tax assets:                   |                                         |                   |       |       |   |   |       |      
|                                       | Inventory items                         |                   | $     | 14.4  |   |   | $     | 15.7  |  
|                                       | Employee benefits                       |                   |       | 1.6   |   |   |       | 2.4   |  
|                                       | Lease obligations                       |                   |       | 7.9   |   |   |       | 8.0   |  
|                                       | Other                                   |                   |       | 2.5   |   |   |       | 3.5   |  
|                                       |                                         |                   |       |       |   |   |       |      
|                                       |                                         |                   | 26.4  |       |   |   | 29.6  |      
|Deferred tax liabilities:              |                                         |                   |       |       |   |   |       |      
|                                       | Basis difference in net assets acquired |                   |       | (1.4  | ) |   |       | (1.4  | )
|                                       |                                         |                   |       |       |   |   |       |      
|Net current deferred tax asset         |                                         | $                 | 25.0  |       |   | $ | 28.2  |      
|                                       |                                         |                   |       |       |   |   |       |      
|Non-current                            |                                         |                   |       |       |   |   |       |      
|Deferred tax assets:                   |                                         |                   |       |       |   |   |       |      
|                                       | Equity investment                       |                   | $     | 2.5   |   |   | $     | 2.5   |  
|                                       | Other                                   |                   |       | 2.3   |   |   |       | 0.4   |  
|                                       | Valuation allowance                     |                   |       | (2.5  | ) |   |       | (2.5  | )
|                                       |                                         |                   |       |       |   |   |       |      
|                                       |                                         |                   | 2.3   |       |   |   | 0.4   |      
|Deferred tax liabilities:              |                                         |                   |       |       |   |   |       |      
|                                       | Depreciation                            |                   |       | (40.9 | ) |   |       | (36.7 | )
|                                       | Basis difference in net assets acquired |                   |       | (0.6  | ) |   |       | (0.6  | )
|                                       | Other                                   |                   |       | (0.2  | ) |   |       | (0.3  | )
|                                       |                                         |                   |       |       |   |   |       |      
|                                       |                                         |                   | (41.7 | )     |   |   | (37.6 | )    
|                                       |                                         |                   |       |       |   |   |       |      
|Net non-current deferred tax liability |                                         | $                 | (39.4 | )     |   | $ | (37.2 | )    
|                                       |                                         |                   |       |       |   |   |       |      

The Company has recorded a valuation allowance
for equity losses on its minority investment, which may not be
realizable.




Note 5  Financing

Long-term debt consists of the following (dollars
in millions):

|                                             |  |             |       |      |  |   |       | 
|-------------------------------------------- |  | ----------- | ----- | ---- |  | - | ----- | 
|                                             |  |            
|                                             |  | Fiscal Year
|                                             |  |            
|                                             |  | 2004        |       | 2003
|                                             |  |             |       |     
|Credit Facility  term loan                  |  | $           | 40.0  |      |  | $ | 40.0  | 
|Credit Facility  revolver                   |  |             | 9.3   |      |  |   |      | 
|10 3/8 percent senior
    subordinated notes |  |             | 64.4  |      |  |   | 122.9 | 
|                                             |  |             |       |      |  |   |       | 
|Total Long-term debt                         |  | $           | 113.7 |      |  | $ | 162.9 | 
|                                             |  |             |       |      |  |   |       | 

Secured Credit Facilities

In April 2001, the Company entered into a
four year $365.0 million senior secured credit facility
(the credit facility), led by Fleet Retail Finance,
Inc. This credit facility consists of a $325.0 million
revolver and a $40.0 million term loan, both secured by a first
priority perfected security interest in our inventory,

53



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Jo-Ann Stores, Inc.


Notes to Consolidated Financial Statements
(Continued)



Note 5  Financing
(Continued)


accounts receivable, property and other assets.
The credit facility is fully and unconditionally guaranteed by
each of our subsidiaries. There is no penalty if the Company
elects to prepay the term loan principal, which is due on
April 30, 2005. Interest on borrowings under the credit
facility is calculated at the banks base rate or London
Interbank Offered Rate (LIBOR) plus
1.75 percent to 2.25 percent, depending on the level
of excess availability (as defined in the credit agreement) that
is maintained. At January 31, 2004, our interest on
borrowings under our credit facility was LIBOR plus
1.75 percent. The credit facility contains a sub-limit for
letters of credit of $150.0 million. Proceeds from the
credit facility were used to repay all outstanding borrowings
under the Companys prior $300.0 million senior credit
facility and refinance a $40.0 million synthetic lease
facility. In connection with this refinancing of the synthetic
lease facility, the Company acquired the building and equipment
at the West Coast distribution center. Accordingly, the related
property, plant and equipment was recorded as a capital
expenditure in the first quarter of fiscal 2002. The debt
obligation of $40.0 million was also recorded at that time.
The deferred financing costs associated with the synthetic lease
facility totaling $1.0 million pre-tax, were written-off
and are included in debt repurchase and share reclassification
expenses line item on the statement of operations.

During fiscal 2001, the Company entered into a
synthetic lease facility to fund the construction of the
building and acquisition of equipment at its West Coast
distribution center in Visalia, California. The cost of the
building and equipment acquired using this facility was
$40.0 million. The synthetic lease facility was determined
to be an operating lease and, accordingly, the distribution
center assets and related obligation were not recorded on the
Companys balance sheet. The interest payments were
capitalized until the facility began operations.

The decision of the Company to unwind the
synthetic lease was a result of entering into the new senior
secured credit facility. Keeping the synthetic lease as part of
the Companys capital structure may have been problematic
in syndicating the new senior secured credit facility and, as a
result, the decision was made to collapse it.

As of January 31, 2004, the Company had
borrowings outstanding of $49.3 million under the credit
facility at an interest rate of 3.1 percent (which excludes
the impact of the interest rate swap referred to in Financial
Instruments of Note 1  Significant Accounting
Policies) and $51.1 million of letters of credit
outstanding.

The Companys weighted average interest rate
(including the effect of the interest rate swap) and weighted
average borrowings under the credit facility were
6.3 percent and $88.3 million during fiscal 2004 and
7.9 percent and $104.7 million during fiscal 2003.

The senior credit facility contains covenants
that, among other things, restrict the Companys ability to
incur additional indebtedness or guarantee obligations, engage
in mergers or consolidations, dispose of assets, make
investments, acquisitions, loans or advances, engage in certain
transactions with affiliates, conduct certain corporate
activities, create liens, or change the nature of its business.
The Company is restricted in capital expenditures and its
ability to prepay or modify the terms of other indebtedness, pay
dividends and make other distributions when Excess Availability,
as defined, falls below certain levels. Further, the Company is
required to comply with a minimum net worth financial covenant
if Excess Availability, as defined, is less than
$35 million at any time. As of the end of January 31,
2004, Excess Availability was $178.4 million, and at the
Companys peak borrowing level during fiscal 2004, the
Excess Availability was $126.7 million. The senior credit
facility also defines various events of default,including cross default provisions, defaults for any
material judgments or a change in control. At January 31,
2004, the Company is in compliance with all covenants under its
credit agreement.

The fair value of the Companys credit
facility approximated carrying value at January 31, 2004
and February 1, 2003.

54



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##### Table of Contents



Jo-Ann Stores, Inc.


Notes to Consolidated Financial Statements
(Continued)



Note 5  Financing
(Continued)


Senior Subordinated Notes

On May 5, 1999, the Company issued
$150.0 million of 10 3/8 percent senior
subordinated notes due May 1, 2007 (the Notes.)
Interest on the Notes is payable on May 1 and November 1 of each
year. Deferred charges and the original issue discount (the
Notes were issued at 98.5 percent of face value) recorded
at issuance in the amounts of $4.3 million and
$2.3 million, respectively, are reflected in other
long-term assets and are being amortized as interest expense
over the term of the Notes utilizing the effective interest
method. The Company has the option of redeeming the Notes at any
time on or after May 1, 2003, in accordance with certain
call provisions of the Notes Indenture. The Notes represent
unsecured obligations that are subordinated to the credit
facility and are fully and unconditionally guaranteed by each of
the Companys subsidiaries.

The Notes Indenture contains covenants that,
among other things, restrict the Companys ability to incur
additional indebtedness, make restricted payments, engage in
certain transactions with affiliates, create liens, sell
assets,issue guarantees of and pledges securing
indebtedness and require an offer to repurchase the Notes in the
event of a change in control. The Notes Indenture defines
various events of default, including cross default provisions
and defaults for any material judgments. At January 31,
2004, the Company is in compliance with all covenants under its
Notes Indenture.

Failure to comply with these restrictions and
covenants could result in defaults under the Companys
credit facility and/or Notes Indenture. Any default, if
not waived, could result in the Companys debt becoming
immediately due and payable.

During fiscal 2004 and 2003, the Company
purchased $58.5 million and $27.1 million, respectively, in
face value of the Notes. The purchases were made at an aggregate
premium of 105.4 percent and 104.3 percent,
respectively, to par value. During fiscal 2004 and 2003, the
Company recorded pre-tax charges of $4.3 million and
$1.9 million, respectively, which includes the cash premium
paid and the related write-off of applicable deferred debt
costs, which are reflected in the debt repurchase and share
reclassification expenses line item on the statement of
operations.

On February 26, 2004, the Company completed
the placement of $100 million 7.5 percent Senior
Subordinated Notes due 2012. Proceeds from the offering were
used to repurchase $39.2 million of
10 3/8 percent Senior Subordinated Notes due 2007 that
were tendered as part of the refinancing. The balance of the
proceeds will be used to repurchase the remaining
$25.2 million in 10 3/8 percent Senior Subordinated
Notes that remain outstanding on May 1, 2004, the date when
their premium is reduced, and for general corporate purposes.

Aggregate maturities of long-term debt for the
next five years, before considering the impact of the
refinancing completed on February 26, 2004, as described in
more detail above, are: 2005  $0.0; 2006 
$49.3; 2007  $0.0; 2008  $64.4;
2009  $0.0 and thereafter  $0.0.




Note 6  Capital Stock

Shareholders Rights Plan

On November 4, 2003, the Company amended and
restated its Shareholders Rights Plan (the Rights
Plan). Under the Rights Plan, as amended and restated, one
right is issued for each common share outstanding. The rights
are exercisable only if a person or group buys or announces a
tender offer for 15 percent or more of the outstanding
common shares as defined in the Rights Plan. When exercisable,
each right initially entitles a holder of common shares to
purchase one common share for $52.17, or under certain
circumstances, one common share for $0.43. The rights, which do
not have voting privileges, expire at the close of business on
October 31, 2010, but may be redeemed by the Board of
Directors prior to that time,

55



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##### Table of Contents



Jo-Ann Stores, Inc.


Notes to Consolidated Financial Statements
(Continued)



Note 6  Capital Stock
(Continued)


under certain circumstances, for $0.005 per
right. Until the rights become exercisable, they have no effect
on earnings per share.

Right to Acquire Shares

The Company is a party to an agreement with
certain members of the two founding families of the Company,
whereby the Company has a right of first refusal to acquire, at
market prices, common shares disposed of by either of the
families. The total number of common shares, subject to this
agreement, was approximately 4.6 million shares as of
January 31, 2004.




Note 7  Stock-Based Compensation
Plans

The Company has various stock-based compensation
plans that it utilizes as long-term compensation for its board
of directors, executive officers, senior management and other
key employees. The Company issues stock under these various
stock-award compensation plans and uses treasury shares to fund
the Companys match under the 401(k) savings plan. As
discussed in Note 1, the Company adopted SFAS No. 123 in
the first quarter of fiscal 2004 under the modified-prospective
method under SFAS No. 148 and began expensing the costs of
stock options in its statements of operations in fiscal 2004,
For restricted stock awards, deferred compensation expense is
recorded as Unamortized restricted stock awards at
the time of the issuance and is amortized over the vesting
period of the award (typically five years).

1998 Incentive Compensation Plan

The 1998 Incentive Compensation Plan (the
1998 Plan) includes a stock option program, a
restricted stock program and an employee stock purchase program
for employees, and a stock option program, a restricted stock
and deferred stock program for non-employee directors. The total
number of shares subject to awards, other than those granted
under the employee stock purchase program, are limited in any
fiscal year to (1) four percent of the number of shares
outstanding at the beginning of the fiscal year, plus
(2) for each of the two prior fiscal years, the excess of
four percent of the number of shares outstanding at the
beginning of each such fiscal year over the number of shares
subject to awards actually granted in each such fiscal year.

56



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##### Table of Contents



Jo-Ann Stores, Inc.


Notes to Consolidated Financial Statements
(Continued)



Note 7  Stock-Based Compensation
Plans (Continued)


The following table summarizes award activity and
the number of shares available for future awards under the 1998
Plan at January 31, 2004:

|                              |                                        |         |  |            |   |       |  |         |   |  |           |          |  
|----------------------------- | -------------------------------------- | ------- |  | ---------- | - | ----- |  | ------- | - |  | --------- | -------- | -
|                              |                                        | Stock   |  | Restricted |   |      
|                              |                                        | Options |  | Stock      |   | Total
|                              |                                        |         |  |            |   |      
|Available at February 3, 2001 |                                        |         |  |            |   |       |  |         |   |  | 127,570   |         
|                              | Fiscal year 2002 incremental available |         |  |            |   |       |  |         |   |  |           | 656,900  |  
|                              | Granted                                |         |  | (429,443   | ) |       |  | (20,700 | ) |  |           | (450,143 | )
|                              | Cancellations                          |         |  | 265,329    |   |       |  | 18,400  |   |  |           | 283,729  |  
|                              |                                        |         |  |            |   |       |  |         |   |  |           |         
|Available at February 2, 2002 |                                        |         |  |            |   |       |  |         |   |  | 618,056   |         
|                              | Fiscal year 2003 incremental available |         |  |            |   |       |  |         |   |  |           | 804,236  |  
|                              | Granted                                |         |  | (204,125   | ) |       |  |        |   |  |           | (204,125 | )
|                              | Cancellations                          |         |  | 163,189    |   |       |  | 3,450   |   |  |           | 166,639  |  
|                              |                                        |         |  |            |   |       |  |         |   |  |           |         
|Available at February 1, 2003 |                                        |         |  |            |   |       |  |         |   |  | 1,384,806 |         
|                              | Fiscal year 2004 incremental available |         |  |            |   |       |  |         |   |  |           | 843,162  |  
|                              | Granted                                |         |  | (806,387   | ) |       |  | (11,500 | ) |  |           | (817,887 | )
|                              | Cancellations                          |         |  | 124,313    |   |       |  | 3,450   |   |  |           | 127,763  |  
|                              |                                        |         |  |            |   |       |  |         |   |  |           |         
|Available at January 31, 2004 |                                        |         |  |            |   |       |  |         |   |  | 1,537,844 |         
|                              |                                        |         |  |            |   |       |  |         |   |  |           |         



| |                     
| | --------------------
| | Stock Option Program

The employee and non-employee director stock
options granted under the 1998 Plan generally become exercisable
to the extent of one-fourth of the optioned shares for each full
year of continuous employment or service following the date of
grant and generally expire seven to ten years after the date of
the grant. Stock options granted under the Plan may become
exercisable or expire under different terms as approved by the
Compensation Committee of the Board of Directors.



| |                         
| | ------------------------
| | Restricted Stock Program

The vesting periods for the restricted shares
granted under the 1998 Plan are up to five years for employee
restricted shares and up to six years for non-employee director
restricted shares. All restrictions to such restricted shares
terminate if the grantee remains in the continuous service of
the Company throughout the vesting period. Unearned compensation
resulting from the issuance of restricted shares is being
amortized over the vesting periods, and the unamortized portion
has been reflected as a reduction of shareholders equity.

The following table summarizes the restricted
shares granted and weighted average grant price under the 1998
Plan:

|            |  |               |        |          |  |   |       | 
|----------- |  | ------------- | ------ | -------- |  | - | ----- | 
|            |  |              
|            |  | Common Shares
|            |  |              
|            |  |               |        | Weighted
|            |  | Restricted    |        | Average 
|            |  | Shares        |        | Grant   
|Fiscal Year |  | Granted       |        | Price   
|            |  |               |        |         
|2004        |  |               | 11,500 |          |  | $ | 21.53 | 
|2003        |  |               |       |          |  |   |      | 
|2002        |  |               | 20,700 |          |  |   | 3.90  | 

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Jo-Ann Stores, Inc.


Notes to Consolidated Financial Statements
(Continued)



Note 7  Stock-Based Compensation
Plans (Continued)




| |                                
| | -------------------------------
| | Employee Stock Purchase Program

The employee stock purchase program (the
Associate Stock Ownership Plan or ASOP) was
established in April 1999, and enables employees to
subscribe to purchase shares of common stock on offering dates
at six-month intervals, at a purchase price equal to the lesser
of 85 percent of the fair market value of the common stock
on the first or last day of the offering period. The ASOP meets
the requirements of Section 423 of the Internal Revenue
Code of 1986. The total number of shares subject to stock
purchase rights granted in any fiscal year for the ASOP may not
exceed 1,000,000 shares. During fiscal 2004, 2003 and 2002,
stock purchase rights of 149,791 shares, 251,016 shares and
340,955 shares, respectively, were granted and exercised under
the ASOP.



| |                                                  
| | -------------------------------------------------
| | Non-Employee Directors Deferred Stock
    Program

On March 9, 2000, the Company established a
deferred stock program for non-employee directors. This program
allows non-employee directors to elect to convert the retainer
and meeting fee portion of their cash compensation into deferred
stock units. Under this feature, non-employee directors make an
irrevocable election prior to the Companys annual
shareholders meeting whereby they can elect to convert a
percentage (0 percent to 100 percent in 25 percent
increments) of their cash compensation for the following year to
deferred stock units. The conversion of cash compensation to
deferred stock units is based on the closing market price of the
Companys common shares on the date the cash compensation
would have been payable if it were paid in cash. These deferred
stock units are credited to an account of each non-employee
director, although no stock is issued until the earlier of an
elected distribution date, as selected by the non-employee
director, or retirement. During fiscal 2004, 2003 and 2002, 864
deferred stock units, 1,139 deferred stock units and 8,958
deferred stock units, respectively were deferred under the
deferred stock program.

Non-Employee Directors Stock Option
Plan

Under the 1996 Stock Option Plan for Non-Employee
Directors (the Directors Stock Option Plan), the
Company had granted stock options to each non-employee director
upon the completion of each year of service at prices not less
than the fair market value of the common stock at the date of
the grant. The options become exercisable to the extent of
one-fourth of the optioned shares for each full year of
continuous service following the date of grant and generally
expire ten years after the date of the grant. The Directors
Stock Option Plan is no longer used to grant stock options to
non-employee directors of the Company.

Other Plans

In addition to the 1998 Plan, nonqualified stock
options have been granted to certain officers and key employees
under the 1990 Employee Stock Option and Stock Appreciation
Rights Plan (the 1990 Plan) at prices not less than
fair market value of the common stock at the date of grant.
Vesting and expiration periods are identical to options issued
under the 1998 Plan. The 1990 Plan terminated on March 14,
2000. The termination of the plan does not affect outstanding
stock options granted prior to the termination.

In addition to the 1998 Plan, restricted shares
of the Companys common stock were available for, and have
been awarded to, executive officers, senior management and other
key employees under the 1994 Executive Incentive Plan (the
Executive Plan). The vesting period for the
restricted shares granted under the Executive Plan are up to
five years. All restrictions to such restricted shares terminate
if the grantee remains in the continuous service of the Company
throughout the vesting period. Unearned compensation resulting
from the issuance of restricted shares is being amortized over
the vesting periods, and the unamortized portion has been
reflected as a reduction of shareholders equity. The
Executive Plan terminated on

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Jo-Ann Stores, Inc.


Notes to Consolidated Financial Statements
(Continued)



Note 7  Stock-Based Compensation
Plans (Continued)


January 31, 2004. The termination of the
plan does not affect restricted shares outstanding granted prior
to the termination. At January 31, 2004, 154,535 restricted
shares were outstanding under the Executive Plan.

The following table summarizes the restricted
shares granted and weighted average grant price under the
Executive Plan:

|            |  |               |         |          |  |   |       | 
|----------- |  | ------------- | ------- | -------- |  | - | ----- | 
|            |  |              
|            |  | Common Shares
|            |  |              
|            |  |               |         | Weighted
|            |  | Restricted    |         | Average 
|            |  | Shares        |         | Grant   
|Fiscal Year |  | Granted       |         | Price   
|            |  |               |         |         
|2004        |  |               | 150,855 |          |  | $ | 18.22 | 
|2003        |  |               | 10,350  |          |  |   | 19.88 | 
|2002        |  |               | 2,300   |          |  |   | 6.09  | 

The following is a summary of the Companys
stock option activity for the 1998 Plan, the 1990 Plan and the
Directors Stock Option Plan (collectively the Plans):

|                                |           |         |           |          |   |   |       |       | 
|------------------------------- | --------- | ------- | --------- | -------- | - | - | ----- | ----- | 
|                                |           |         |           | Weighted
|                                |           |         |           | Average 
|                                |           | Total   |           | Exercise
|                                |           | Options |           | Price   
|                                |           |         |           |         
|Outstanding at February 3, 2001 |           |         | 3,979,941 |          |   | $ | 10.89 |      
|                                | Granted   |         |           | 429,443  |   |   |       | 3.21  | 
|                                | Exercised |         |           |         |   |   |       |      | 
|                                | Canceled  |         |           | (591,627 | ) |   |       | 11.57 | 
|                                |           |         |           |          |   |   |       |      
|Outstanding at February 2, 2002 |           |         | 3,817,757 |          |   |   | 9.90  |      
|                                | Granted   |         |           | 204,125  |   |   |       | 18.34 | 
|                                | Exercised |         |           | (844,884 | ) |   |       | 10.10 | 
|                                | Canceled  |         |           | (295,579 | ) |   |       | 10.49 | 
|                                |           |         |           |          |   |   |       |      
|Outstanding at February 1, 2003 |           |         | 2,881,419 |          |   |   | 10.37 |      
|                                | Granted   |         |           | 806,387  |   |   |       | 17.97 | 
|                                | Exercised |         |           | (478,973 | ) |   |       | 9.30  | 
|                                | Canceled  |         |           | (130,916 | ) |   |       | 12.67 | 
|                                |           |         |           |          |   |   |       |      
|Outstanding at January 31, 2004 |           |         | 3,077,917 |          |   | $ | 12.42 |      
|                                |           |         |           |          |   |   |       |      

|                |                  |         |  |           |  |  |   |       | 
|--------------- | ---------------- | ------- |  | --------- |  |  | - | ----- | 
|                |                  |         |  | Weighted 
|                |                  |         |  | Average  
|                |                  | Total   |  | Exercise 
|                |                  | Options |  | Price    
|                |                  |         |  |          
|Exercisable at: |                  |         |  |           |  |  |   |      
|                | January 31, 2004 |         |  | 1,490,091 |  |  | $ | 11.49 | 
|                | February 1, 2003 |         |  | 1,174,103 |  |  |   | 12.77 | 
|                | February 2, 2002 |         |  | 1,689,475 |  |  |   | 13.01 | 

59



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##### Table of Contents



Jo-Ann Stores, Inc.


Notes to Consolidated Financial Statements
(Continued)



Note 7  Stock-Based Compensation
Plans (Continued)


The following table summarizes the status of
stock options outstanding and exercisable at January 31,
2004:

|                    |           |                     |  |          |                 |             |  |             |       |          |  |  |           |  |  |  |           |  |  |   |       | 
|------------------- | --------- | ------------------- |  | -------- | --------------- | ----------- |  | ----------- | ----- | -------- |  |  | --------- |  |  |  | --------- |  |  | - | ----- | 
|                    |           |                    
|Options Outstanding |           | Options Exercisable
|                    |           |                    
|                    |           | Weighted            |  |         
|                    |           | Weighted            |  | Average  |                 |             |  | Weighted   
|                    |           | Range of            |  | Average  |                 | Remaining   |  |             |       | Average 
|Number              |           | Exercise            |  | Exercise |                 | Contractual |  | Number      |       | Exercise
|Outstanding         |           | Prices              |  | Price    |                 | Life        |  | Exercisable |       | Price   
|                    |           |                     |  |          |                 |             |  |             |       |         
|                    | 1,333,513 |                     |  | $        | 2.40 to $7.75   |             |  | $           | 6.58  |          |  |  | 5.8 years |  |  |  | 642,271   |  |  | $ | 6.03  | 
|                    | 1,168,262 |                     |  |          | 7.99 to 16.80   |             |  |             | 14.76 |          |  |  | 5.4 years |  |  |  | 544,848   |  |  |   | 12.66 | 
|                    | 576,142   |                     |  |          | 17.65 to  26.66 |             |  |             | 21.20 |          |  |  | 5.8 years |  |  |  | 302,972   |  |  |   | 20.99 | 
|                    |           |                     |  |          |                 |             |  |             |       |          |  |  |           |  |  |  |           |  |  |   |       | 
|                    | 3,077,917 |                     |  | $        | 2.40 to $26.66  |             |  | $           | 12.42 |          |  |  | 5.7 years |  |  |  | 1,490,091 |  |  | $ | 11.49 | 
|                    |           |                     |  |          |                 |             |  |             |       |          |  |  |           |  |  |  |           |  |  |   |       | 




Note 8  Savings Plan and
Postretirement Benefits

The Company sponsors the Jo-Ann Stores, Inc.
Savings Plan 401(k) (the Savings Plan), which is a
tax deferred savings plan whereby eligible employees may elect
quarterly to contribute up to the lesser of 15 percent of
annual compensation or the statutory maximum. The Company makes
a 50 percent matching contribution in the form of the
Companys common stock, up to a maximum employee
contribution of four percent of the employees annual
compensation. Employer contributions of the Companys
common stock have been made through the issuance of shares out
of treasury or by purchasing shares on the open market. The
amount of the Companys matching contributions during
fiscal 2004, 2003 and 2002 were $1.0 million,
$0.9 million and $1.0 million, respectively. Plan
assets included 1,044,957 common shares with a fair market value
of $24.6 million at January 31, 2004. Holders of the
common shares are entitled to vote their respective shares.

The Company does not provide post-retirement
health care benefits for its employees.




Note 9  Commitments and
Contingencies

The Company is involved in various litigation
matters in the ordinary course of its business. The Company is
not currently involved in any litigation, which it expects,
either individually or in the aggregate, will have a material
adverse effect on its financial condition or results of
operations.

On August 16, 2000, Sandy Lortz, a former
employee of the Company, filed a purported class action
complaint (the Lortz Complaint) against the Company,
on behalf of the Companys former and current California
store management employees. The Lortz Complaint was filed in the
Superior Court of California and alleged the Company violated
certain California laws by erroneously treating its store
management employees as exempt employees who are not
entitled to overtime compensation. This case was consolidated
with a similar class action complaint filed on behalf of Regina
Salas, filed on October 24, 2000 in the Superior Court of
California. A settlement in this case was reached and a pre-tax
charge of $6.5 million was recorded in the fourth quarter
of fiscal 2002. The settlement was paid in the first quarter of
fiscal 2003.




Note 10  Leases

With the exception of one superstore, all of the
Companys retail stores operate out of leased facilities.
Traditional store leases generally have initial terms of five to
ten years and renewal options for up to 20 years.
Superstore leases generally have initial terms of
10-15 years and renewal options generally ranging from
5-20 years. The Company also leases certain computer and
store equipment, generally under five-year or less lease terms.

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Jo-Ann Stores, Inc.


Notes to Consolidated Financial Statements
(Continued)



Note 10  Leases
(Continued)


The Company recognizes lease expense for step
rent provisions, escalation clauses, capital improvement funding
and other lease concessions using the straight-line method over
the minimum lease term. The Company does not have lease
arrangements that have minimum lease payments dependent on an
existing index or rate, such as the consumer price index or the
prime interest rate. Certain leases contain escalation clauses
and provide for contingent rents based on a percent of sales in
excess of defined minimums. In certain instances, the Company is
required to pay its pro rata share of real estate taxes and
common area maintenance expenses.

The following is a schedule of future minimum
rental payments under non-cancelable operating leases. Future
minimum rental payments are reduced by a total of
$14.6 million of sublease income.

|                      |  |         |       | 
|--------------------- |  | ------- | ----- | 
|                      |  | Minimum
|Fiscal Year-Ended     |  | Rentals
|                      |  |        
|(Dollars in millions) |  |        
|2005                  |  | $       | 124.1 | 
|2006                  |  |         | 117.8 | 
|2007                  |  |         | 106.8 | 
|2008                  |  |         | 82.9  | 
|2009                  |  |         | 61.8  | 
|Thereafter            |  |         | 220.4 | 
|                      |  |         |       | 
|                      |  | $       | 713.8 | 
|                      |  |         |       | 

Rent expense excluding common area maintenance
and real estate taxes was as follows:

|                      |  |      |       |      |  |      |       |   |  |   |       |  
|--------------------- |  | ---- | ----- | ---- |  | ---- | ----- | - |  | - | ----- | -
|Fiscal Year-Ended     |  | 2004 |       | 2003 |  | 2002
|                      |  |      |       |      |  |     
|(Dollars in millions) |  |      |       |      |  |     
|Minimum rentals       |  | $    | 127.9 |      |  | $    | 122.6 |   |  | $ | 122.6 |  
|Contingent rentals    |  |      | 3.6   |      |  |      | 4.1   |   |  |   | 2.7   |  
|Sublease rentals      |  |      | (8.6  | )    |  |      | (7.5  | ) |  |   | (6.0  | )
|                      |  |      |       |      |  |      |       |   |  |   |       |  
|                      |  | $    | 122.9 |      |  | $    | 119.2 |   |  | $ | 119.3 |  
|                      |  |      |       |      |  |      |       |   |  |   |       |  

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Jo-Ann Stores, Inc.


Notes to Consolidated Financial Statements
(Continued)

Note 11  Quarterly Financial
Information (Unaudited)

The Company has restated all earnings per share
amounts to reflect the effect of the share reclassification that
was completed on November 4, 2003 (See
Note 2  Share Reclassification). Summarized
below are the unaudited results of operations by quarter for
fiscal 2004 and 2003:

|                                             |         |         |       |         |  |         |       |         |   |   |       |      |  |   |       |      | 
|-------------------------------------------- | ------- | ------- | ----- | ------- |  | ------- | ----- | ------- | - | - | ----- | ---- |  | - | ----- | ---- | 
|                                             |         | First   |       | Second  |  | Third   |       | Fourth 
|Fiscal 2004                                  |         | Quarter |       | Quarter |  | Quarter |       | Quarter
|                                             |         |         |       |         |  |         |       |        
|(Dollars in millions, except per share data) |         |         |       |         |  |         |       |        
|Net sales                                    |         | $       | 374.8 |         |  | $       | 359.2 |         |   | $ | 447.5 |      |  | $ | 552.6 |     
|Gross margin                                 |         |         | 180.5 |         |  |         | 172.6 |         |   |   | 215.1 |      |  |   | 242.4 |     
|Net income                                   |         |         | 4.1   |         |  |         | (2.2  | )       |   |   | 12.0  |      |  |   | 27.1  |     
|Net income per common share:                 |         |         |       |         |  |         |       |         |   |   |       |      |  |   |       |     
|                                             | Basic   |         | $     | 0.19    |  |         | $     | (0.10   | ) |   | $     | 0.55 |  |   | $     | 1.26 | 
|                                             | Diluted |         |       | 0.19    |  |         |       | (0.10   | ) |   |       | 0.54 |  |   |       | 1.22 | 

Net income in the fourth quarter of fiscal 2004
was increased approximately $1.4 million, net-of-tax, due to
certain fourth quarter adjustments, which related to revisions
of estimates effecting prior quarters. Gross margin increased by
$1.0 million, pre-tax, as a result of adjustments to inventory
shrink and clearance reserves. Selling, general and
administrative expenses decreased $1.3 million, pre-tax,
primarily as a result of an adjustment to an incentive
compensation accrual.

|                                             |         |         |       |         |  |         |       |         |  |   |       |      |  |   |       |      | 
|-------------------------------------------- | ------- | ------- | ----- | ------- |  | ------- | ----- | ------- |  | - | ----- | ---- |  | - | ----- | ---- | 
|                                             |         | First   |       | Second  |  | Third   |       | Fourth 
|Fiscal 2003                                  |         | Quarter |       | Quarter |  | Quarter |       | Quarter
|                                             |         |         |       |         |  |         |       |        
|(Dollars in millions, except per share data) |         |         |       |         |  |         |       |        
|Net sales                                    |         | $       | 372.4 |         |  | $       | 353.7 |         |  | $ | 430.1 |      |  | $ | 525.8 |     
|Gross margin                                 |         |         | 180.8 |         |  |         | 171.6 |         |  |   | 197.4 |      |  |   | 227.7 |     
|Net income                                   |         |         | 8.7   |         |  |         | 2.0   |         |  |   | 8.9   |      |  |   | 25.3  |     
|Net income per common share:                 |         |         |       |         |  |         |       |         |  |   |       |      |  |   |       |     
|                                             | Basic   |         | $     | 0.43    |  |         | $     | 0.10    |  |   | $     | 0.43 |  |   | $     | 1.20 | 
|                                             | Diluted |         |       | 0.40    |  |         |       | 0.09    |  |   |       | 0.40 |  |   |       | 1.15 | 

Net income in the fourth quarter of fiscal 2003
was increased $2.2 million, net-of-tax, due to certain year-end
adjustments, a portion of which related to revisions of
estimates effecting previous quarters. Gross margin increased by
$4.3 million pre-tax as a result of adjustments to the
shrink reserve, net of an increase in the closed store inventory
reserves. Selling, general and administrative expenses increased
$0.7 million as a result of adjustments made to the closed
store reserves for asset impairment and non-cancelable lease
obligations.




Note 12  Consolidating Financial
Statements

The Companys 10 3/8 percent
senior subordinated notes and credit facility are fully and
unconditionally guaranteed, on a joint and several basis, by the
wholly-owned subsidiaries of the Company. The senior
subordinated notes are subordinated to the Companys credit
facility. The Company has restated shares outstanding, common
stock and paid-in-capital balances to reflect the effect of the
share reclassification that was completed on November 4,
2003 (See Note 2  Share Reclassification).
Summarized consolidating

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##### Table of Contents



Jo-Ann Stores, Inc.


Notes to Consolidated Financial Statements
(Continued)

Note 12  Consolidating Financial
Statements (Continued)

financial information of the Company (excluding
its subsidiaries) and the guarantor subsidiaries as of and for
the years ended January 31, 2004 is as follows:

|                                                        |                                           |                       |       |              |   |              |       |              |   |   |        |       |   |   |       |       |  
|------------------------------------------------------- | ----------------------------------------- | --------------------- | ----- | ------------ | - | ------------ | ----- | ------------ | - | - | ------ | ----- | - | - | ----- | ----- | -
|                                                        |                                           |                      
|                                                        |                                           | January 31, 2004     
|                                                        |                                           |                      
|Consolidating                                           |                                           |                       |       | Guarantor    |   |             
|Balance Sheets                                          |                                           | Parent                |       | Subsidiaries |   | Eliminations |       | Consolidated
|                                                        |                                           |                       |       |              |   |              |       |             
|                                                        |                                           |                      
|                                                        |                                           | (Dollars in millions)
|Assets                                                  |                                           |                       |       |              |   |              |       |              |   |   |        |       |   |   |       |      
|Current assets:                                         |                                           |                       |       |              |   |              |       |              |   |   |        |       |   |   |       |      
|                                                        | Cash and cash equivalents                 |                       | $     | 14.3         |   |              | $     | 3.1          |   |   | $      |      |   |   | $     | 17.4  |  
|                                                        | Inventories                               |                       |       | 154.0        |   |              |       | 250.6        |   |   |        |      |   |   |       | 404.6 |  
|                                                        | Deferred income taxes                     |                       |       | 19.4         |   |              |       | 5.6          |   |   |        |      |   |   |       | 25.0  |  
|                                                        | Prepaid expenses and other current assets |                       |       | 15.1         |   |              |       | 8.4          |   |   |        |      |   |   |       | 23.5  |  
|                                                        |                                           |                       |       |              |   |              |       |              |   |   |        |       |   |   |       |      
|Total current assets                                    |                                           |                       | 202.8 |              |   |              | 267.7 |              |   |   |       |       |   |   | 470.5 |      
|Property, equipment and leasehold
    improvements, net |                                           |                       | 80.1  |              |   |              | 123.1 |              |   |   |       |       |   |   | 203.2 |      
|Goodwill, net                                           |                                           |                       |      |              |   |              | 26.5  |              |   |   |       |       |   |   | 26.5  |      
|Other assets                                            |                                           |                       | 6.1   |              |   |              | 1.4   |              |   |   |       |       |   |   | 7.5   |      
|Investment in subsidiaries                              |                                           |                       | 55.5  |              |   |              |      |              |   |   | (55.5  | )     |   |   |      |      
|Intercompany receivable                                 |                                           |                       | 331.7 |              |   |              |      |              |   |   | (331.7 | )     |   |   |      |      
|                                                        |                                           |                       |       |              |   |              |       |              |   |   |        |       |   |   |       |      
|Total assets                                            |                                           | $                     | 676.2 |              |   | $            | 418.7 |              |   | $ | (387.2 | )     |   | $ | 707.7 |      
|                                                        |                                           |                       |       |              |   |              |       |              |   |   |        |       |   |   |       |      
|Liabilities and Shareholders
    Equity                |                                           |                       |       |              |   |              |       |              |   |   |        |       |   |   |       |      
|Current liabilities:                                    |                                           |                       |       |              |   |              |       |              |   |   |        |       |   |   |       |      
|                                                        | Accounts payable                          |                       | $     | 112.0        |   |              | $     | 10.0         |   |   | $      |      |   |   | $     | 122.0 |  
|                                                        | Accrued expenses                          |                       |       | 78.9         |   |              |       | (2.8         | ) |   |        |      |   |   |       | 76.1  |  
|                                                        |                                           |                       |       |              |   |              |       |              |   |   |        |       |   |   |       |      
|Total current liabilities                               |                                           |                       | 190.9 |              |   |              | 7.2   |              |   |   |       |       |   |   | 198.1 |      
|Long-term debt                                          |                                           |                       | 113.7 |              |   |              |      |              |   |   |       |       |   |   | 113.7 |      
|Deferred income taxes                                   |                                           |                       | 18.8  |              |   |              | 20.6  |              |   |   |       |       |   |   | 39.4  |      
|Other long-term liabilities                             |                                           |                       | 6.6   |              |   |              | 3.7   |              |   |   |       |       |   |   | 10.3  |      
|Intercompany payable                                    |                                           |                       |      |              |   |              | 331.7 |              |   |   | (331.7 | )     |   |   |      |      
|Shareholders equity:                                   |                                           |                       |       |              |   |              |       |              |   |   |        |       |   |   |       |      
|                                                        | Common stock                              |                       |       | 1.3          |   |              |       |             |   |   |        |      |   |   |       | 1.3   |  
|                                                        | Additional paid-in capital                |                       |       | 131.5        |   |              |       |             |   |   |        |      |   |   |       | 131.5 |  
|                                                        | Unamortized restricted stock awards       |                       |       | (2.5         | ) |              |       |             |   |   |        |      |   |   |       | (2.5  | )
|                                                        | Retained earnings                         |                       |       | 258.8        |   |              |       | 55.5         |   |   |        | (55.5 | ) |   |       | 258.8 |  
|                                                        | Accumulated other comprehensive Loss      |                       |       | (1.6         | ) |              |       |             |   |   |        |      |   |   |       | (1.6  | )
|                                                        |                                           |                       |       |              |   |              |       |              |   |   |        |       |   |   |       |      
|                                                        |                                           |                       | 387.5 |              |   |              | 55.5  |              |   |   | (55.5  | )     |   |   | 387.5 |      
|                                                        | Treasury stock, at cost                   |                       |       | (41.3        | ) |              |       |             |   |   |        |      |   |   |       | (41.3 | )
|                                                        |                                           |                       |       |              |   |              |       |              |   |   |        |       |   |   |       |      
|Total shareholders equity                              |                                           |                       | 346.2 |              |   |              | 55.5  |              |   |   | (55.5  | )     |   |   | 346.2 |      
|                                                        |                                           |                       |       |              |   |              |       |              |   |   |        |       |   |   |       |      
|Total liabilities and shareholders equity              |                                           | $                     | 676.2 |              |   | $            | 418.7 |              |   | $ | (387.2 | )     |   | $ | 707.7 |      
|                                                        |                                           |                       |       |              |   |              |       |              |   |   |        |       |   |   |       |      

[Additional columns below]

[Continued from above table, first column(s) repeated]

|                                                        |                                           |                       |       |              |   |              |       |              |   |   |        |       |   |   |       |       |  
|------------------------------------------------------- | ----------------------------------------- | --------------------- | ----- | ------------ | - | ------------ | ----- | ------------ | - | - | ------ | ----- | - | - | ----- | ----- | -
|                                                        |                                           |                      
|                                                        |                                           | February 1, 2003     
|                                                        |                                           |                      
|Consolidating                                           |                                           |                       |       | Guarantor    |   |             
|Balance Sheets                                          |                                           | Parent                |       | Subsidiaries |   | Eliminations |       | Consolidated
|                                                        |                                           |                       |       |              |   |              |       |             
|                                                        |                                           |                      
|                                                        |                                           | (Dollars in millions)
|Assets                                                  |                                           |                       |       |              |   |              |       |              |   |   |        |       |   |   |       |      
|Current assets:                                         |                                           |                       |       |              |   |              |       |              |   |   |        |       |   |   |       |      
|                                                        | Cash and cash equivalents                 |                       | $     | 60.2         |   |              | $     | 3.0          |   |   | $      |      |   |   | $     | 63.2  |  
|                                                        | Inventories                               |                       |       | 132.9        |   |              |       | 230.2        |   |   |        |      |   |   |       | 363.1 |  
|                                                        | Deferred income taxes                     |                       |       | 21.5         |   |              |       | 6.7          |   |   |        |      |   |   |       | 28.2  |  
|                                                        | Prepaid expenses and other current assets |                       |       | 11.2         |   |              |       | 6.0          |   |   |        |      |   |   |       | 17.2  |  
|                                                        |                                           |                       |       |              |   |              |       |              |   |   |        |       |   |   |       |      
|Total current assets                                    |                                           |                       | 225.8 |              |   |              | 245.9 |              |   |   |       |       |   |   | 471.7 |      
|Property, equipment and leasehold
    improvements, net |                                           |                       | 65.8  |              |   |              | 124.5 |              |   |   |       |       |   |   | 190.3 |      
|Goodwill, net                                           |                                           |                       |      |              |   |              | 26.5  |              |   |   |       |       |   |   | 26.5  |      
|Other assets                                            |                                           |                       | 14.6  |              |   |              | 1.4   |              |   |   |       |       |   |   | 16.0  |      
|Investment in subsidiaries                              |                                           |                       | 22.6  |              |   |              |      |              |   |   | (22.6  | )     |   |   |      |      
|Intercompany receivable                                 |                                           |                       | 371.4 |              |   |              |      |              |   |   | (371.4 | )     |   |   |      |      
|                                                        |                                           |                       |       |              |   |              |       |              |   |   |        |       |   |   |       |      
|Total assets                                            |                                           | $                     | 700.2 |              |   | $            | 398.3 |              |   | $ | (394.0 | )     |   | $ | 704.5 |      
|                                                        |                                           |                       |       |              |   |              |       |              |   |   |        |       |   |   |       |      
|Liabilities and Shareholders
    Equity                |                                           |                       |       |              |   |              |       |              |   |   |        |       |   |   |       |      
|Current liabilities:                                    |                                           |                       |       |              |   |              |       |              |   |   |        |       |   |   |       |      
|                                                        | Accounts payable                          |                       | $     | 130.3        |   |              | $     | (0.4         | ) |   | $      |      |   |   | $     | 129.9 |  
|                                                        | Accrued expenses                          |                       |       | 94.7         |   |              |       | (18.8        | ) |   |        |      |   |   |       | 75.9  |  
|                                                        |                                           |                       |       |              |   |              |       |              |   |   |        |       |   |   |       |      
|Total current liabilities                               |                                           |                       | 225.0 |              |   |              | (19.2 | )            |   |   |       |       |   |   | 205.8 |      
|Long-term debt                                          |                                           |                       | 162.9 |              |   |              |      |              |   |   |       |       |   |   | 162.9 |      
|Deferred income taxes                                   |                                           |                       | 17.6  |              |   |              | 19.6  |              |   |   |       |       |   |   | 37.2  |      
|Other long-term liabilities                             |                                           |                       | 5.3   |              |   |              | 3.9   |              |   |   |       |       |   |   | 9.2   |      
|Intercompany payable                                    |                                           |                       |      |              |   |              | 371.4 |              |   |   | (371.4 | )     |   |   |      |      
|Shareholders equity:                                   |                                           |                       |       |              |   |              |       |              |   |   |        |       |   |   |       |      
|                                                        | Common stock                              |                       |       | 1.3          |   |              |       |             |   |   |        |      |   |   |       | 1.3   |  
|                                                        | Additional paid-in capital                |                       |       | 113.7        |   |              |       |             |   |   |        |      |   |   |       | 113.7 |  
|                                                        | Unamortized restricted stock awards       |                       |       | (0.4         | ) |              |       |             |   |   |        |      |   |   |       | (0.4  | )
|                                                        | Retained earnings                         |                       |       | 217.8        |   |              |       | 22.6         |   |   |        | (22.6 | ) |   |       | 217.8 |  
|                                                        | Accumulated other comprehensive Loss      |                       |       | (2.6         | ) |              |       |             |   |   |        |      |   |   |       | (2.6  | )
|                                                        |                                           |                       |       |              |   |              |       |              |   |   |        |       |   |   |       |      
|                                                        |                                           |                       | 329.8 |              |   |              | 22.6  |              |   |   | (22.6  | )     |   |   | 329.8 |      
|                                                        | Treasury stock, at cost                   |                       |       | (40.4        | ) |              |       |             |   |   |        |      |   |   |       | (40.4 | )
|                                                        |                                           |                       |       |              |   |              |       |              |   |   |        |       |   |   |       |      
|Total shareholders equity                              |                                           |                       | 289.4 |              |   |              | 22.6  |              |   |   | (22.6  | )     |   |   | 289.4 |      
|                                                        |                                           |                       |       |              |   |              |       |              |   |   |        |       |   |   |       |      
|Total liabilities and shareholders equity              |                                           | $                     | 700.2 |              |   | $            | 398.3 |              |   | $ | (394.0 | )     |   | $ | 704.5 |      
|                                                        |                                           |                       |       |              |   |              |       |              |   |   |        |       |   |   |       |      

63



---



##### Table of Contents



Jo-Ann Stores, Inc.


Notes to Consolidated Financial Statements
(Continued)

Note 12  Consolidating Financial
Statements (Continued)

|                                                        |                            |                       |       |                  |  |              |         |              |  |           |        |              |  |              |         |              |  |   |       |       |  |   |         |       |  |   |        |   |  |   |         |       | 
|------------------------------------------------------- | -------------------------- | --------------------- | ----- | ---------------- |  | ------------ | ------- | ------------ |  | --------- | ------ | ------------ |  | ------------ | ------- | ------------ |  | - | ----- | ----- |  | - | ------- | ----- |  | - | ------ | - |  | - | ------- | ----- | 
|                                                        |                            |                      
|                                                        |                            | Fiscal Year-Ended    
|                                                        |                            |                      
|                                                        |                            |                       |       |                 
|                                                        |                            | January 31, 2004      |       | February 1, 2003
|Consolidating                                           |                            |                       |       |                 
|Statements                                              |                            |                       |       | Guarantor        |  |              |         |              |  | Guarantor |        |             
|of Operations                                           |                            | Parent                |       | Subsidiaries     |  | Eliminations |         | Consolidated |  | Parent    |        | Subsidiaries |  | Eliminations |         | Consolidated
|                                                        |                            |                       |       |                  |  |              |         |              |  |           |        |              |  |              |         |             
|                                                        |                            |                      
|                                                        |                            | (Dollars in millions)
|Net sales                                               |                            | $                     | 950.3 |                  |  | $            | 1,153.2 |              |  | $         | (369.4 | )            |  | $            | 1,734.1 |              |  | $ | 924.7 |       |  | $ | 1,525.6 |       |  | $ | (768.3 | ) |  | $ | 1,682.0 |      
|Cost of sales                                           |                            |                       | 567.5 |                  |  |              | 725.4   |              |  |           | (369.4 | )            |  |              | 923.5   |              |  |   | 562.1 |       |  |   | 1,110.7 |       |  |   | (768.3 | ) |  |   | 904.5   |      
|                                                        |                            |                       |       |                  |  |              |         |              |  |           |        |              |  |              |         |              |  |   |       |       |  |   |         |       |  |   |        |   |  |   |         |      
|                                                        | Gross margin               |                       |       | 382.8            |  |              |         | 427.8        |  |           |        |             |  |              |         | 810.6        |  |   |       | 362.6 |  |   |         | 414.9 |  |   |        |  |  |   |         | 777.5 | 
|Selling, general and administrative expenses            |                            |                       | 329.2 |                  |  |              | 337.0   |              |  |           |       |              |  |              | 666.2   |              |  |   | 318.7 |       |  |   | 316.4   |       |  |   |       |   |  |   | 635.1   |      
|Store pre-opening and closing costs                     |                            |                       | 5.3   |                  |  |              | 5.6     |              |  |           |       |              |  |              | 10.9    |              |  |   | (0.6  | )     |  |   | 6.5     |       |  |   |       |   |  |   | 5.9     |      
|Depreciation and amortization                           |                            |                       | 14.7  |                  |  |              | 23.0    |              |  |           |       |              |  |              | 37.7    |              |  |   | 13.0  |       |  |   | 23.1    |       |  |   |       |   |  |   | 36.1    |      
|Stock option compensation expense                       |                            |                       | 5.7   |                  |  |              |        |              |  |           |       |              |  |              | 5.7     |              |  |   |      |       |  |   |        |       |  |   |       |   |  |   |        |      
|Debt repurchase and share
    reclassification expenses |                            |                       | 5.5   |                  |  |              |        |              |  |           |       |              |  |              | 5.5     |              |  |   | 1.9   |       |  |   |        |       |  |   |       |   |  |   | 1.9     |      
|                                                        |                            |                       |       |                  |  |              |         |              |  |           |        |              |  |              |         |              |  |   |       |       |  |   |         |       |  |   |        |   |  |   |         |      
|                                                        | Operating profit           |                       |       | 22.4             |  |              |         | 62.2         |  |           |        |             |  |              |         | 84.6         |  |   |       | 29.6  |  |   |         | 68.9  |  |   |        |  |  |   |         | 98.5  | 
|Interest expense, net                                   |                            |                       | 6.7   |                  |  |              | 11.4    |              |  |           |       |              |  |              | 18.1    |              |  |   | 9.8   |       |  |   | 16.2    |       |  |   |       |   |  |   | 26.0    |      
|                                                        |                            |                       |       |                  |  |              |         |              |  |           |        |              |  |              |         |              |  |   |       |       |  |   |         |       |  |   |        |   |  |   |         |      
|                                                        | Income before income taxes |                       |       | 15.7             |  |              |         | 50.8         |  |           |        |             |  |              |         | 66.5         |  |   |       | 19.8  |  |   |         | 52.7  |  |   |        |  |  |   |         | 72.5  | 
|Income tax provision                                    |                            |                       | 7.6   |                  |  |              | 17.9    |              |  |           |       |              |  |              | 25.5    |              |  |   | 8.9   |       |  |   | 18.7    |       |  |   |       |   |  |   | 27.6    |      
|                                                        |                            |                       |       |                  |  |              |         |              |  |           |        |              |  |              |         |              |  |   |       |       |  |   |         |       |  |   |        |   |  |   |         |      
|                                                        | Income before equity loss  |                       |       | 8.1              |  |              |         | 32.9         |  |           |        |             |  |              |         | 41.0         |  |   |       | 10.9  |  |   |         | 34.0  |  |   |        |  |  |   |         | 44.9  | 
|Equity income (loss) from subsidiaries                  |                            |                       | 32.9  |                  |  |              |        |              |  |           | (32.9  | )            |  |              |        |              |  |   | 34.0  |       |  |   |        |       |  |   | (34.0  | ) |  |   |        |      
|                                                        |                            |                       |       |                  |  |              |         |              |  |           |        |              |  |              |         |              |  |   |       |       |  |   |         |       |  |   |        |   |  |   |         |      
|Net income (loss)                                       |                            | $                     | 41.0  |                  |  | $            | 32.9    |              |  | $         | (32.9  | )            |  | $            | 41.0    |              |  | $ | 44.9  |       |  | $ | 34.0    |       |  | $ | (34.0  | ) |  | $ | 44.9    |      
|                                                        |                            |                       |       |                  |  |              |         |              |  |           |        |              |  |              |         |              |  |   |       |       |  |   |         |       |  |   |        |   |  |   |         |      

|                                                        |                          |                                    |       |              |   |              |         |              |   |   |        |   |  |   |         |       |  
|------------------------------------------------------- | ------------------------ | ---------------------------------- | ----- | ------------ | - | ------------ | ------- | ------------ | - | - | ------ | - |  | - | ------- | ----- | -
|                                                        |                          |                                   
|                                                        |                          | Fiscal Year-Ended February 2, 2002
|                                                        |                          |                                   
|                                                        |                          |                                    |       | Guarantor    |   |             
|Consolidating Statements of Operations                  |                          | Parent                             |       | Subsidiaries |   | Eliminations |         | Consolidated
|                                                        |                          |                                    |       |              |   |              |         |             
|                                                        |                          |                                   
|                                                        |                          | (Dollars in millions)             
|Net sales                                               |                          | $                                  | 862.6 |              |   | $            | 1,614.7 |              |   | $ | (907.0 | ) |  | $ | 1,570.3 |      
|Cost of sales                                           |                          |                                    | 528.2 |              |   |              | 1,256.0 |              |   |   | (907.0 | ) |  |   | 877.2   |      
|                                                        |                          |                                    |       |              |   |              |         |              |   |   |        |   |  |   |         |      
|                                                        | Gross margin             |                                    |       | 334.4        |   |              |         | 358.7        |   |   |        |  |  |   |         | 693.1 |  
|Selling, general and administrative expenses            |                          |                                    | 317.1 |              |   |              | 306.1   |              |   |   |       |   |  |   | 623.2   |      
|Store pre-opening and closing costs                     |                          |                                    | 9.0   |              |   |              | 12.0    |              |   |   |       |   |  |   | 21.0    |      
|Depreciation and amortization                           |                          |                                    | 15.3  |              |   |              | 24.0    |              |   |   |       |   |  |   | 39.3    |      
|Stock option compensation expense                       |                          |                                    |      |              |   |              |        |              |   |   |       |   |  |   |        |      
|Debt repurchase and share reclassification
    expenses |                          |                                    | 1.0   |              |   |              |        |              |   |   |       |   |  |   | 1.0     |      
|                                                        |                          |                                    |       |              |   |              |         |              |   |   |        |   |  |   |         |      
|                                                        | Operating profit (loss)  |                                    |       | (8.0         | ) |              |         | 16.6         |   |   |        |  |  |   |         | 8.6   |  
|Interest expense, net                                   |                          |                                    | 14.5  |              |   |              | 18.2    |              |   |   |       |   |  |   | 32.7    |      
|                                                        |                          |                                    |       |              |   |              |         |              |   |   |        |   |  |   |         |      
|                                                        | Loss before income taxes |                                    |       | (22.5        | ) |              |         | (1.6         | ) |   |        |  |  |   |         | (24.1 | )
|Income tax provision benefit                            |                          |                                    | (8.9  | )            |   |              | (0.3    | )            |   |   |       |   |  |   | (9.2    | )    
|                                                        |                          |                                    |       |              |   |              |         |              |   |   |        |   |  |   |         |      
|                                                        | Loss before equity loss  |                                    |       | (13.6        | ) |              |         | (1.3         | ) |   |        |  |  |   |         | (14.9 | )
|Equity income (loss) from subsidiaries                  |                          |                                    | (1.3  | )            |   |              |        |              |   |   | 1.3    |   |  |   |        |      
|                                                        |                          |                                    |       |              |   |              |         |              |   |   |        |   |  |   |         |      
|Net income (loss)                                       |                          | $                                  | (14.9 | )            |   | $            | (1.3    | )            |   | $ | 1.3    |   |  | $ | (14.9   | )    
|                                                        |                          |                                    |       |              |   |              |         |              |   |   |        |   |  |   |         |      

64



---



##### Table of Contents



Jo-Ann Stores, Inc.


Notes to Consolidated Financial Statements
(Continued)

Note 12  Consolidating Financial
Statements (Continued)

|                                                         |                                         |                       |       |                  |   |              |       |              |   |           |   |              |  |              |       |              |   |   |       |       |   |   |       |       |   |   |   |   |  |   |       |       |  
|-------------------------------------------------------- | --------------------------------------- | --------------------- | ----- | ---------------- | - | ------------ | ----- | ------------ | - | --------- | - | ------------ |  | ------------ | ----- | ------------ | - | - | ----- | ----- | - | - | ----- | ----- | - | - | - | - |  | - | ----- | ----- | -
|                                                         |                                         |                      
|                                                         |                                         | Fiscal Year-Ended    
|                                                         |                                         |                      
|                                                         |                                         |                       |       |                 
|                                                         |                                         | January 31, 2004      |       | February 1, 2003
|                                                         |                                         |                       |       |                 
|Consolidating Statements                                 |                                         |                       |       | Guarantor        |   |              |       |              |   | Guarantor |   |             
|of Cash Flows                                            |                                         | Parent                |       | Subsidiaries     |   | Eliminations |       | Consolidated |   | Parent    |   | Subsidiaries |  | Eliminations |       | Consolidated
|                                                         |                                         |                       |       |                  |   |              |       |              |   |           |   |              |  |              |       |             
|                                                         |                                         |                      
|                                                         |                                         | (Dollars in millions)
|Net cash provided by operating activities                |                                         | $                     | 30.2  |                  |   | $            | 18.3  |              |   | $         |  |              |  | $            | 48.5  |              |   | $ | 107.6 |       |   | $ | 11.6  |       |   | $ |  |   |  | $ | 119.2 |      
|Net cash flows used for investing activities:            |                                         |                       |       |                  |   |              |       |              |   |           |   |              |  |              |       |              |   |   |       |       |   |   |       |       |   |   |   |   |  |   |       |      
|                                                         | Capital expenditures                    |                       |       | (34.0            | ) |              |       | (18.2        | ) |           |   |             |  |              |       | (52.2        | ) |   |       | (10.5 | ) |   |       | (12.2 | ) |   |   |  |  |   |       | (22.7 | )
|                                                         | Proceeds from sale of equity investment |                       |       | 4.3              |   |              |       |             |   |           |   |             |  |              |       | 4.3          |   |   |       |      |   |   |       |      |   |   |   |  |  |   |       |      |  
|                                                         |                                         |                       |       |                  |   |              |       |              |   |           |   |              |  |              |       |              |   |   |       |       |   |   |       |       |   |   |   |   |  |   |       |      
|Net cash used for investing activities                   |                                         |                       | (29.7 | )                |   |              | (18.2 | )            |   |           |  |              |  |              | (47.9 | )            |   |   | (10.5 | )     |   |   | (12.2 | )     |   |   |  |   |  |   | (22.7 | )    
|Net cash flows used for financing activities:            |                                         |                       |       |                  |   |              |       |              |   |           |   |              |  |              |       |              |   |   |       |       |   |   |       |       |   |   |   |   |  |   |       |      
|                                                         | Net change in revolving credit facility |                       |       | 9.3              |   |              |       |             |   |           |   |             |  |              |       | 9.3          |   |   |       | (33.7 | ) |   |       |      |   |   |   |  |  |   |       | (33.7 | )
|                                                         | Purchase of senior subordinated notes   |                       |       | (61.7            | ) |              |       |             |   |           |   |             |  |              |       | (61.7        | ) |   |       | (28.3 | ) |   |       |      |   |   |   |  |  |   |       | (28.3 | )
|                                                         | Proceeds from exercise of stock options |                       |       | 4.0              |   |              |       |             |   |           |   |             |  |              |       | 4.0          |   |   |       | 8.5   |   |   |       |      |   |   |   |  |  |   |       | 8.5   |  
|                                                         | Purchase of common stock                |                       |       | (1.6             | ) |              |       |             |   |           |   |             |  |              |       | (1.6         | ) |   |       | (3.4  | ) |   |       |      |   |   |   |  |  |   |       | (3.4  | )
|                                                         | Other, net                              |                       |       | 3.6              |   |              |       |             |   |           |   |             |  |              |       | 3.6          |   |   |       | 2.5   |   |   |       |      |   |   |   |  |  |   |       | 2.5   |  
|                                                         |                                         |                       |       |                  |   |              |       |              |   |           |   |              |  |              |       |              |   |   |       |       |   |   |       |       |   |   |   |   |  |   |       |      
|Net cash used for financing activities                   |                                         |                       | (46.4 | )                |   |              |      |              |   |           |  |              |  |              | (46.4 | )            |   |   | (54.4 | )     |   |   |      |       |   |   |  |   |  |   | (54.4 | )    
|                                                         |                                         |                       |       |                  |   |              |       |              |   |           |   |              |  |              |       |              |   |   |       |       |   |   |       |       |   |   |   |   |  |   |       |      
|Net increase (decrease) in cash and
    cash equivalents |                                         |                       | (45.9 | )                |   |              | 0.1   |              |   |           |  |              |  |              | (45.8 | )            |   |   | 42.7  |       |   |   | (0.6  | )     |   |   |  |   |  |   | 42.1  |      
|Cash and cash equivalents at beginning
    of year       |                                         |                       | 60.2  |                  |   |              | 3.0   |              |   |           |  |              |  |              | 63.2  |              |   |   | 17.5  |       |   |   | 3.6   |       |   |   |  |   |  |   | 21.1  |      
|                                                         |                                         |                       |       |                  |   |              |       |              |   |           |   |              |  |              |       |              |   |   |       |       |   |   |       |       |   |   |   |   |  |   |       |      
|Cash and cash equivalents at end of year                 |                                         | $                     | 14.3  |                  |   | $            | 3.1   |              |   | $         |  |              |  | $            | 17.4  |              |   | $ | 60.2  |       |   | $ | 3.0   |       |   | $ |  |   |  | $ | 63.2  |      
|                                                         |                                         |                       |       |                  |   |              |       |              |   |           |   |              |  |              |       |              |   |   |       |       |   |   |       |       |   |   |   |   |  |   |       |      

|                                                         |                                                       |                                    |       |              |   |              |       |              |   |   |   |   |  |   |       |        |  
|-------------------------------------------------------- | ----------------------------------------------------- | ---------------------------------- | ----- | ------------ | - | ------------ | ----- | ------------ | - | - | - | - |  | - | ----- | ------ | -
|                                                         |                                                       |                                   
|                                                         |                                                       | Fiscal Year-Ended February 2, 2002
|                                                         |                                                       |                                   
|                                                         |                                                       |                                    |       | Guarantor    |   |             
|Consolidating Statements of Cash Flows                   |                                                       | Parent                             |       | Subsidiaries |   | Eliminations |       | Consolidated
|                                                         |                                                       |                                    |       |              |   |              |       |             
|                                                         |                                                       |                                   
|                                                         |                                                       | (Dollars in millions)             
|Net cash provided by operating activities:               |                                                       | $                                  | 31.4  |              |   | $            | 56.8  |              |   | $ |  |   |  | $ | 88.2  |       
|Net cash flows used for investing activities:            |                                                       |                                    |       |              |   |              |       |              |   |   |   |   |  |   |       |       
|                                                         | Capital expenditures                                  |                                    |       | (9.6         | ) |              |       | (56.9        | ) |   |   |  |  |   |       | (66.5  | )
|                                                         |                                                       |                                    |       |              |   |              |       |              |   |   |   |   |  |   |       |       
|Net cash used for investing activities                   |                                                       |                                    | (9.6  | )            |   |              | (56.9 | )            |   |   |  |   |  |   | (66.5 | )     
|Net cash flows used for financing activities:            |                                                       |                                    |       |              |   |              |       |              |   |   |   |   |  |   |       |       
|                                                         | Proceeds from senior secured credit
    facility, net |                                    |       | 171.6        |   |              |       |             |   |   |   |  |  |   |       | 171.6  |  
|                                                         | Repayment of prior senior credit facility             |                                    |       | (123.8       | ) |              |       |             |   |   |   |  |  |   |       | (123.8 | )
|                                                         | Net change in revolving credit facility               |                                    |       | (69.1        | ) |              |       |             |   |   |   |  |  |   |       | (69.1  | )
|                                                         | Purchase of common stock                              |                                    |       | (0.4         | ) |              |       |             |   |   |   |  |  |   |       | (0.4   | )
|                                                         | Other, net                                            |                                    |       | 3.6          |   |              |       |             |   |   |   |  |  |   |       | 3.6    |  
|                                                         |                                                       |                                    |       |              |   |              |       |              |   |   |   |   |  |   |       |       
|Net cash used for financing activities                   |                                                       |                                    | (18.1 | )            |   |              |      |              |   |   |  |   |  |   | (18.1 | )     
|                                                         |                                                       |                                    |       |              |   |              |       |              |   |   |   |   |  |   |       |       
|Net increase (decrease) in cash and
    cash equivalents |                                                       |                                    | 3.7   |              |   |              | (0.1  | )            |   |   |  |   |  |   | 3.6   |       
|Cash and cash equivalents at beginning
    of year       |                                                       |                                    | 13.8  |              |   |              | 3.7   |              |   |   |  |   |  |   | 17.5  |       
|                                                         |                                                       |                                    |       |              |   |              |       |              |   |   |   |   |  |   |       |       
|Cash and cash equivalents at end of year                 |                                                       | $                                  | 17.5  |              |   | $            | 3.6   |              |   | $ |  |   |  | $ | 21.1  |       
|                                                         |                                                       |                                    |       |              |   |              |       |              |   |   |   |   |  |   |       |       

65



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##### Table of Contents



Jo-Ann Stores, Inc.


Notes to Consolidated Financial Statements
(Continued)

Report of Former Independent Public
Accountants on the Financial Statement Schedule

This is a copy of the report on the financial
schedule previously issued by Arthur Andersen LLP in connection
with the Companys filing on Form 10-K for the fiscal
year-ended February 2, 2002. This report on the financial
statement schedule has not been reissued by Arthur Andersen LLP
in connection with this filing on Form 10-K nor has Arthur
Andersen LLP provided a consent to the inclusion of its report
on the financial statement schedule included on page 67 in this
Form 10-K. For further discussion, see Exhibit 23.1.

To the Shareholders and Board of Directors of
Jo-Ann Stores, Inc.:

We have audited in accordance with auditing
standards generally accepted in the United States, the
consolidated financial statements of Jo-Ann Stores, Inc. and
Subsidiaries included in this Form 10-K, and have issued
our report thereon dated March 7, 2002. Our audits were
made for the purpose of forming an opinion on those financial
statements taken as a whole. The schedule on page 57 is the
responsibility of the Companys management and is presented
for purposes of complying with the Securities and Exchange
Commissions rules and is not part of the basic financial
statements. This schedule has been subjected to the auditing
procedures applied in the audits of the basic financial
statements and, in our opinion, fairly states in all material
respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.

Arthur Andersen LLP

Cleveland, Ohio,

March 7, 2002.


66



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##### Table of Contents



Schedule II

Jo-Ann Stores, Inc.

Valuation and Qualifying Accounts

Fiscal Year-Ended 2004, 2003 and
2002


(Dollars in millions)


|                                      |  |            |      |            |  |            |      |            |  |            |   |  |  |   |       |   |  |   |      | 
|------------------------------------- |  | ---------- | ---- | ---------- |  | ---------- | ---- | ---------- |  | ---------- | - |  |  | - | ----- | - |  | - | ---- | 
|                                      |  | Balance at |      | Charged to |  | Charged to |      |            |  | Balance at
|                                      |  | Beginning  |      | Costs and  |  | Other      |      |            |  | End of    
|                                      |  | of Period  |      | Expenses   |  | Accounts   |      | Deductions |  | Period    
|                                      |  |            |      |            |  |            |      |            |  |           
|January 31, 2004 Closed store reserve |  | $          | 4.4  |            |  | $          | 3.3  |            |  | $          |  |  |  | $ | (4.9  | ) |  | $ | 2.8  | 
|February 1, 2003 Closed store reserve |  |            | 12.4 |            |  |            | 1.4  |            |  |            |  |  |  |   | (9.4  | ) |  |   | 4.4  | 
|February 2, 2002 Closed store reserve |  |            | 9.3  |            |  |            | 17.6 |            |  |            |  |  |  |   | (14.5 | ) |  |   | 12.4 | 

67



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##### Table of Contents








|        |                                                                                         
|------- | ----------------------------------------------------------------------------------------
|Item 9. | Changes in and Disagreements with Accountants
    on Accounting and Financial Disclosure

None






|         |                        
|-------- | -----------------------
|Item 9A. | Controls and Procedures

As of the end of the period covered by this
report, the Company conducted an evaluation, under the
supervision and with the participation of the principal
executive officer and principal financial officer, of the
Companys disclosure controls and procedures (as defined in
Rules 13a-15(e) and 15d-15(e) under the Securities Exchange
Act of 1934 (the Exchange Act)). Based on this
evaluation, the principal executive officer and principal
financial officer concluded that the Companys disclosure
controls and procedures are effective to ensure that information
required to be disclosed by the Company in reports that it files
or submits under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in
Securities and Exchange Commission rules and forms. There was no
change in the Companys internal control over financial
reporting during the Companys most recently completed
fiscal year that has materially affected, or is reasonably
likely to materially affect, the Companys internal control
over financial reporting.




PART III






|         |                                                       
|-------- | ------------------------------------------------------
|Item 10. | Directors and Executive Officers of the
    Registrant

Information required by this Item 10 as to
the Directors of the Registrant is incorporated herein by
reference to the information set forth under the caption
Nominees to and Current Members of the Board of
Directors in the Registrants definitive proxy
statement for its 2004 Annual Meeting of Shareholders to be held
on June 10, 2004 (the Proxy Statement), which
is expected to be filed with the Securities and Exchange
Commission pursuant to Regulation 14A of the Securities
Exchange Act of 1934 within 120 days after the end of the
Companys fiscal year.

The information regarding the Audit Committee of
our Board of Directors and the information regarding audit
committee financial experts are set forth under the
caption entitled Meetings and Committees of the Board of
Directors  Audit Committee in our Proxy
Statement, which is incorporated herein by reference.

Information required by this Item 10 as to
the Executive Officers of the Registrant is included under
Item 4 of Part I of this Form 10-K as permitted by
Instruction 3 to Item 401(b) of Regulation S-K.
Information required by Item 405 of Regulation S-K is
incorporated herein by reference to the information set forth in
the Proxy Statement under the caption Section 16(a)
Beneficial Ownership Reporting Compliance.

Information required by this Item 10 as to
Involvement in Certain Legal Proceedings is included under
Item 3, Legal Proceedings contained in this document.

The Company has adopted a Code of Business
Conduct and Ethics (the Code), applicable to the
Companys directors, officers (including the Companys
principal executive officer and principal financial officer) and
employees, which has been filed as an exhibit to this
Form 10-K. The Company intends to post the Code and any
amendments to the Code on its website. In addition, any waivers
of the Code for the directors or executive officers of the
Company will be disclosed in a report on Form 8-K.






|         |                       
|-------- | ----------------------
|Item 11. | Executive Compensation

The information required by this Item 11 is
incorporated herein by reference to the information set forth
under the captions Compensation of Directors and
Executive Compensation in the Proxy Statement.






|         |                                                                                                   
|-------- | --------------------------------------------------------------------------------------------------
|Item 12. | Security Ownership of Certain Beneficial
    Owners and Management and Related Stockholder Matters

The information required by this Item 12 is
incorporated herein by reference to the information set forth
under the caption Principal Shareholders in the
Proxy Statement.

68



---



##### Table of Contents



Equity Compensation Plan Information

|                                                                  |  |                         |           |                      |  |                      |       |  |  |  |           | 
|----------------------------------------------------------------- |  | ----------------------- | --------- | -------------------- |  | -------------------- | ----- |  |  |  | --------- | 
|                                                                  |  |                         |           |                      |  | Number of securities
|                                                                  |  |                         |           |                      |  | remaining available 
|                                                                  |  |                         |           |                      |  | for future issuance 
|                                                                  |  | Number of securities to |           |                      |  | under equity        
|                                                                  |  | be issued upon          |           | Weighted-average     |  | compensation plans  
|                                                                  |  | exercise of             |           | exercise price of    |  | (excluding          
|                                                                  |  | outstanding options,    |           | outstanding options, |  | securities reflected
|                                                                  |  | warrants and rights     |           | warrants and rights  |  | in column (a))      
|Plan category                                                     |  | (a)                     |           | (b)                  |  | (c)                 
|                                                                  |  |                         |           |                      |  |                     
|Equity compensation plans approved by
    security holders        |  |                         | 2,913,417 |                      |  | $                    | 12.68 |  |  |  | 1,537,844 | 
|Equity compensation plans not approved by
    security holders(1) |  |                         | 164,500   |                      |  |                      | 7.75  |  |  |  |          | 
|                                                                  |  |                         |           |                      |  |                      |       |  |  |  |           | 
|Total                                                             |  |                         | 3,077,917 |                      |  | $                    | 12.42 |  |  |  | 1,537,844 | 
|                                                                  |  |                         |           |                      |  |                      |       |  |  |  |           | 



---



|    |                                                                                                                                                                                                                                                                                                                                                                                                          
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | On February 9, 2001, the Company registered
    319,000 common shares to be issued in connection with options to
    purchase common shares pursuant to award agreements with certain
    employees. The options were granted under the rules provided for
    in the 1998 Incentive Compensation Plan. As of January 31,
    2004, 164,500 of the 319,000 securities registered remain to be
    issued.






|         |                                                   
|-------- | --------------------------------------------------
|Item 13. | Certain Relationships and Related
    Transactions

Ira Gumberg, one of our Directors, is President
and Chief Executive Officer and a principal shareholder of J.J.
Gumberg Co., which manages numerous shopping centers. Twelve of
these shopping centers contain stores of our Company. Two of the
leases were entered into after Mr. Gumberg became a
Director of our Company, and we believe such leases are on terms
no less favorable to us than could have been obtained from an
unrelated party. The aggregate rent and related occupancy
charges paid during fiscal 2004, 2003 and 2002 on these stores
amounted to $1.6 million, $1.4 million and
$1.3 million, respectively.

Betty Rosskamm, Alma Zimmerman and the Company
are parties to an agreement, dated October 30, 2003,
relating to their Jo-Ann Stores Common Shares. Under this
agreement, Betty Rosskamm and her lineal descendants and
permitted holders (the Rosskamms) and Alma Zimmerman
and her lineal descendants and permitted holders (the
Zimmermans) may each sell up to 400,000 Common
Shares in any calendar year and may not sell more than 200,000
of those shares in any 180-day period. If either the Rosskamms
or Zimmermans plan to sell a number of their respective Common
Shares in excess of the number permitted under the agreement,
they must first offer to sell those shares to the other family
party and to the Company. Each of the Rosskamms and the
Zimmermans are permitted to sell an unlimited number of shares
to each other free of the Companys right of first refusal
and, with the permission of the other family party to the
agreement, to the Company.






|         |                                           
|-------- | ------------------------------------------
|Item 14. | Principal Accountant Fees and
    Services

The information required by this Item 14 is
incorporated herein by reference to the information set forth
under the caption Principal Accounting Firm Fees in
the Proxy Statement.




PART IV






|         |                                                                     
|-------- | --------------------------------------------------------------------
|Item 15. | Exhibits, Financial Statement Schedules, and
    Reports on Form 8-K

(a) The following documents are filed as
part of this report:



| |              |                                                          
| | ------------ | ---------------------------------------------------------
| | (1)  and (2) | Financial Statements and Financial Statement
    Schedule

The consolidated financial statements and the
related financial statement schedule filed as part of this Form
10-K are located as set forth in the index on page 33 of
this report.

69



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##### Table of Contents



(3) Exhibits

|        |       |                     |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|------- | ----- | ------------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |       |                    
|Number  |       | Exhibit Description
|        |       |                    
|        | 3.1   |                     |  | Amended and Restated Articles of Incorporation of
    Jo-Ann Stores, Inc. (filed as an Exhibit 3.1 to the
    Registrants Form 10-Q filed with the Commission on
    December 15, 2003 and incorporated herein by reference)                                                                                                                                                                                                                                              
|        | 3.2   |                     |  | Amended and Restated Code of Regulations (filed
    as an Exhibit 3.2 to the Registrants Form 10-Q filed with
    the Commission on December 15, 2003 and incorporated herein by
    reference)                                                                                                                                                                                                                                                                           
|        | 4.1   |                     |  | Second Amended and Restated Rights Agreement,
    dated November 4, 2003, between the Registrant and National City
    Bank, National Association, as Rights Agent                                                                                                                                                                                                                                                                                                         
|        | 4.2   |                     |  | Indenture between the Registrant and FCA
    Financial, Inc., Fabri-Centers of South Dakota, Inc.,
    Fabri-Centers of California, Inc., FCA of Ohio, Inc., and House
    of Fabrics, Inc., as guarantors, and Harris Trust and Savings
    Bank, as trustee relating to the 10 3/8% Senior
    Subordinated Notes due 2007 (filed as an Exhibit 4.2 to the
    Registrants Form S-4 filed with the Commission on June 16,
    1999 and incorporated herein by reference)
|        | 4.3   |                     |  | Form of Certificate of the 10 3/8% Senior
    Subordinated Notes due 2007 (filed as an Exhibit 4.3 to the
    Registrants Form S-4 filed with the Commission on June 16,
    1999 and incorporated herein by reference)                                                                                                                                                                                                                                                   
|        | 4.4   |                     |  | Indenture between the Registrant and Jo-Ann
    Stores Supply Chain Management, Inc., Team Jo-Ann, Inc., FCA of
    Ohio, Inc., and House of Fabrics, Inc., as guarantors, and
    National City Bank, as trustee relating to the 7.50% Senior
    Subordinated Notes due 2012, including the form of certificate.                                                                                                                                                         
|        | 4.5   |                     |  | Registration Rights Agreement among the
    Registrant, Jo-Ann Stores Supply Chain Management, Inc., Team
    Jo-Ann, Inc., FCA of Ohio, Inc., and House of Fabrics, Inc., and
    Merrill Lynch, Pierce, Fenner & Smith Incorporated, Wachovia
    Capital Markets, LLC, SG Cowen Securities Corporation and
    McDonald Investments Inc. relating to the 7.50% Senior
    Subordinated Notes due 2012                                                                   
|        | 10.1  |                     |  | Form of Split Dollar Life Insurance Agreement
    between the Registrant and certain of its officers (filed as an
    Exhibit 10.1 to the Registrants Form 10-K filed with the
    Commission on May 2, 2003 and incorporated herein by reference)*                                                                                                                                                                                                                       
|        | 10.2  |                     |  | List of Executive Officers who are parties to the
    Split Dollar Life Insurance Agreement with the Registrant *                                                                                                                                                                                                                                                                                                                                                          
|        | 10.3  |                     |  | Jo-Ann Stores, Inc. Supplemental Retirement
    Benefit Plan, as amended (filed as an Exhibit 10.5 to the
    Registrants Form 10-K filed with the Commission on May 2,
    2003 and incorporated herein by reference)*                                                                                                                                                                                                                                                   
|        | 10.4  |                     |  | List of Executive Officers who participate in the
    Registrants Supplemental Retirement Plan, as amended *                                                                                                                                                                                                                                                                                                                                                              
|        | 10.5  |                     |  | Employment Agreement dated July 30, 2001 between
    the Registrant and Alan Rosskamm (filed as an Exhibit 10.7 to
    the Registrants Form 10-K filed with the Commission on May
    2, 2002 and incorporated herein by reference)*                                                                                                                                                                                                                                      
|        | 10.6  |                     |  | Form of Employment Agreement between the
    Registrant and certain Executive Officers (filed as an Exhibit
    10.7.1 to the Registrants Form 10-K filed with the
    Commission on May 2, 2002 and incorporated herein by reference)*                                                                                                                                                                                                                                   
|        | 10.7  |                     |  | List of Executive Officers who are parties to an
    Employment Agreement with the Registrant (filed as an Exhibit
    10.7.2 to the Registrants Form 10-K filed with the
    Commission on May 2, 2003 and incorporated herein by reference)*                                                                                                                                                                                                                            
|        | 10.8  |                     |  | Fabri-Centers of America, Inc. 1990 Employees
    Stock Option and Stock Appreciation Rights Plan, as amended
    (filed as an Exhibit 10.8 to the Registrants Form 10-K
    filed with the Commission on May 2, 2003 and incorporated herein
    by reference)*                                                                                                                                                                                                          
|        | 10.9  |                     |  | Jo-Ann Stores, Inc. (formerly Fabri-Centers of
    America, Inc.) 1998 Incentive Compensation Plan as Amended*                                                                                                                                                                                                                                                                                                                                                             
|        | 10.10 |                     |  | Agreement dated October 30, 2003 among Jo-Ann
    Stores, Inc., Betty Rosskamm and Alma Zimmerman (Second Amended
    and Restated)                                                                                                                                                                                                                                                                                                                                        

70



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##### Table of Contents



|        |       |                     |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|------- | ----- | ------------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |       |                    
|Number  |       | Exhibit Description
|        |       |                    
|        | 10.11 |                     |  | Credit Agreement dated as of April 24, 2001 among
    the Registrant, as borrower, Fleet National Bank, as Issuing
    Bank, Fleet Retail Finance Inc., as Administrative Agent and
    Collateral Agent, Congress Financial Corporation, as
    Documentation Agent, GMAC Commercial Credit, LLC, National City
    Commercial Finance, Inc. and The CIT Group / Business Credit,
    Inc. as Co-Agents and Fleet Securities Inc. as Arranger and
    Syndication Agent (filed as an Exhibit 10.1 to the
    Registrants Form 10-Q filed with the Commission on June
    19, 2001 and incorporated herein by reference)
|        | 10.12 |                     |  | Amendment No. 1 to Credit Agreement dated as of
    April 24, 2001 (filed as an Exhibit 10.2 to the
    Registrants Form 10-Q filed with the Commission on June
    19, 2001 and incorporated herein by reference)                                                                                                                                                                                                                                                                                                                                                                                                      
|        | 10.13 |                     |  | Second Amendment to Credit Agreement dated as of
    March 17, 2003 by and among Jo-Ann Stores, Inc., as borrower,
    Fleet National Bank, as Issuing Bank, Fleet Retail Finance Inc.,
    as Administrative Agent and Collateral Agent, Congress Financial
    Corporation, as Documentation Agent, GMAC Commercial Finance
    LLC, National City Commercial Finance, Inc. and The CIT Group /
    Business Credit, Inc. as Co-Agents                                                                                                                                                                                 
|        | 10.14 |                     |  | Third Amendment to Credit Agreement dated as of
    February 18, 2004 by and among Jo-Ann Stores, Inc., as borrower,
    Fleet National Bank, as Issuing Bank, Fleet Retail Group, Inc.,
    as Administrative Agent and Collateral Agent, Congress Financial
    Corporation, as Documentation Agent, GMAC Commercial Finance
    LLC, National City Commercial Finance, Inc. and The CIT Group /
    Business Credit, Inc. as Co-Agents                                                                                                                                                                                
|        | 10.15 |                     |  | Fabri-Centers of America, Inc. Executive
    Incentive Plan (filed as an Exhibit 11 to the Registrants
    Form 10-K filed with the Commission on May 2, 2003 and
    incorporated herein by reference)*                                                                                                                                                                                                                                                                                                                                                                                                                
|        | 10.16 |                     |  | Fabri-Centers of America, Inc. 1996 Stock Option
    Plan for Non-Employee Directors (filed as an Exhibit 10.11 to
    the Registrants Form 10-K filed with the Commission on May
    4, 2001 and incorporated herein by reference)*                                                                                                                                                                                                                                                                                                                                                                                    
|        | 14    |                     |  | Code of Business Conduct and Ethics                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|        | 21    |                     |  | Subsidiaries of Jo-Ann Stores, Inc.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|        | 23    |                     |  | Consent of Ernst & Young LLP, Independent
    Auditors                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|        | 23.1  |                     |  | Notice regarding Consent of Arthur Andersen LLP                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|        | 24    |                     |  | Power of Attorney                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|        | 31.1  |                     |  | Section 302 Certification By Chief Executive
    Officer                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|        | 31.2  |                     |  | Section 302 Certification By Chief Financial
    Officer                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|        | 32.1  |                     |  | Section 906 Certification of Principal Executive
    Officer and Principal Financial Officer                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             



---



|  |                                                                        
|- | -----------------------------------------------------------------------
|* | Indicates a management contract or compensatory
    plan or arrangement



|    |                    
|--- | -------------------
|(b) | Reports on Form 8-K

The Company furnished a Current Report on
Form 8-K dated November 4, 2003 to report the issuance
of a press release announcing shareholder approval of the
reclassification of its Class A and Class B Common
Shares into a single class of stock. The press release also
announced that as a result of the share reclassification,
effective November 5, 2003, the Company began trading under
the new ticker symbol JAS on the New York Stock
Exchange.

The Company furnished a Current Report on
Form 8-K dated November 6, 2003 to report the issuance
of a press release announcing its net sales for the four weeks,
thirteen weeks and year-to-date periods ended November 1,
2003.

The Company furnished a Current Report on
Form 8-K dated November 17, 2003 to report the
issuance of a press release announcing its earnings for the
third quarter and year-to-date periods ended November 1,
2003.

The Company furnished a Current Report on
Form 8-K dated November 24, 2003 to report the
issuance of a press release announcing the election of a new
Board member.

71



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##### Table of Contents



The Company furnished a Current Report on
Form 8-K dated December 4, 2003 to report the issuance
of a press release announcing its net sales for the four weeks
and year-to-date period ended November 29, 2003.

The Company furnished a Current Report on
Form 8-K dated January 8, 2004 to report the issuance
of a press release announcing its net sales for the five weeks
and year-to-date period ended January 3, 2004.

72



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##### Table of Contents






SIGNATURES

Pursuant to the requirements of Section 13
or 15(d) of the Securities Exchange Act of 1934, the Registrant
has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.

JO-ANN STORES, INC.

|                                                                        |  |               
|----------------------------------------------------------------------- |  | --------------
|By: /s/ ALAN ROSSKAMMAlan RosskammPresident and Chief Executive Officer |  | April 15, 2004

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

|                                              |  |                                                                                        
|--------------------------------------------- |  | ---------------------------------------------------------------------------------------
|Signature                                     |  | Title                                                                                  
|                                              |  |                                                                                        
|/s/ ALAN ROSSKAMMAlan Rosskamm                |  | Chairman of the Board and Director
    (Chief Executive Officer)                       
|                                             
|/s/ BRIAN P. CARNEY*Brian P. Carney           |  | Executive Vice President and Chief Financial
    Officer
    (Chief Accounting Officer)
|                                             
|/s/ SCOTT COWEN*Scott Cowen                   |  | Director                                                                               
|                                             
|/s/ IRA GUMBERG*Ira Gumberg                   |  | Director                                                                               
|                                             
|/s/ PATRICIA MORRISON*Patricia Morrison       |  | Director                                                                               
|                                             
|/s/ FRANK NEWMAN*Frank Newman                 |  | Director                                                                               
|                                             
|/s/ BERYL RAFF*Beryl Raff                     |  | Director                                                                               
|                                             
|/s/ GREGG SEARLE*Gregg Searle                 |  | Director                                                                               
|                                             
|/s/ TRACEY THOMAS TRAVIS*Tracey Thomas Travis |  | Director                                                                               

The undersigned, by signing his name hereto, does
hereby sign this Form 10-K Annual Report on behalf of the
above-named officers and directors of Jo-Ann Stores, Inc.,
pursuant to powers of attorney executed on behalf of each of
such officers and directors.

|                                                       |  |               
|------------------------------------------------------ |  | --------------
|*By: /s/ ALAN ROSSKAMMAlan Rosskamm, Attorney-in- Fact |  | April 15, 2004

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