<PAGE>   1

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                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                            ------------------------

                                   FORM 10-K
              ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                        SECURITIES EXCHANGE ACT OF 1934

                   FOR THE FISCAL YEAR ENDED FEBRUARY 3, 2001

                           COMMISSION FILE NO. 1-6695
                            ------------------------

                              JO-ANN STORES, INC.
             (Exact name of Registrant as specified in its charter)

<TABLE>
<S>                                       <C>
                  OHIO                                 34-0720629
    (State or other jurisdiction of       (I.R.S. Employer Identification No.)
     incorporation or organization)

     5555 DARROW ROAD, HUDSON, OHIO                      44236
(Address of principal executive offices)               (Zip Code)
</TABLE>

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

          SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:

<TABLE>
<CAPTION>
                                            NAME OF EACH EXCHANGE
             TITLE OF CLASS                  ON WHICH REGISTERED
             --------------                 ---------------------
<S>                                        <C>
Class A Common Shares, Without Par Value   New York Stock Exchange
Class B Common Shares, Without Par Value   New York Stock Exchange
</TABLE>

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

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

     Indicate 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.  [X]

     As of April 13, 2001, there were 9,512,449 Class A common shares and
8,806,211 Class B common shares outstanding and the aggregate market value of
these common shares (based upon the closing price on April 12, 2001 of these
shares on the New York Stock Exchange) of the Registrant held by persons other
than affiliates of the Registrant was approximately $51.5 million.

     Documents incorporated by reference:

     Portions of the following documents are or will be incorporated by
reference:

        Proxy Statement for 2001 Annual Meeting of Shareholders -- Items 10, 11
        and 12 of Part III.

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<PAGE>   2

                                     PART I

     Except as otherwise stated, the information contained in this report is
given as of February 3, 2001, the end of our latest fiscal year. The words
"Jo-Ann Stores, Inc.," "Jo-Ann Stores," "Jo-Ann Fabrics and Crafts," "Jo-Ann
etc," "Jo-Ann," "Registrant," "Company," "we," "our," and "us" refer to Jo-Ann
Stores, Inc. and, unless the context requires otherwise, to our subsidiaries.
Our fiscal year ends on the Saturday closest to January 31 and refers to the
year in which the period ends (e.g., fiscal 2001 ended February 3, 2001).

ITEM 1. BUSINESS

     We are the largest national category-dominant retailer, serving customers
in their pursuit of apparel and craft sewing, crafting, home decorating, and
other creative endeavors. We were founded as a single retail store in 1943 and,
as of February 3, 2001, we operated 949 Jo-Ann Fabrics and Crafts traditional
stores in 49 states and 58 Jo-Ann etc superstores in 16 states. We serve the
approximately 70% of U.S. households that engaged in crafts and hobbies during
the past year by offering a large variety of competitively priced, high quality
apparel, craft and home decorating fabrics, notions, crafts, seasonal and home
accessories, and floral and framing products.

     Our traditional stores primarily serve small and middle markets, and our
superstores serve selected markets where traditional store performance and area
demographics are favorable. Our traditional stores average 14,100 square feet.
Over the past five years we have strategically relocated certain traditional
stores, increasing average square footage per store and sales per square foot by
approximately 15%. As a result, net sales per traditional store have increased
to approximately $1.2 million over this period. In November 1995, we opened our
first large format "category killer" superstore which offers an expanded and
more comprehensive product assortment than our traditional stores. Our
superstores average 46,300 square feet and in fiscal 2001, on a per store basis,
generated more than four and one-half times the revenue and over 30% higher
sales per square foot than our traditional stores. We believe our superstores,
which accounted for almost 20% of fiscal 2001 total net sales, present
opportunities for future sales growth.

     Historically, we have grown and increased market share principally through
existing store growth, new store openings and strategic acquisitions. In April
1998, we acquired House of Fabrics, Inc., a chain of 261 fabric and craft stores
located primarily on the West Coast. By September 1998, we successfully
integrated, remerchandised and rebranded the former House of Fabrics stores.

                                        1
<PAGE>   3

STORES

     The following table shows our stores by type and state at February 3, 2001:

<TABLE>
<CAPTION>
                       TRADITIONAL   SUPERSTORE   TOTAL                         TRADITIONAL   SUPERSTORE   TOTAL
                       -----------   ----------   -----                         -----------   ----------   -----
<S>                    <C>           <C>          <C>       <C>                 <C>           <C>          <C>
Alabama..............        3           --          3      Nebraska..........        6           --           6
Alaska...............        5           --          5      Nevada............        5            2           7
Arizona..............       16            3         19      New Hampshire.....       10           --          10
Arkansas.............        3           --          3      New Jersey........       16           --          16
California...........      116            3        119      New Mexico........        6           --           6
Colorado.............       15           --         15      New York..........       41            7          48
Connecticut..........       16            2         18      North Carolina....        9           --           9
Delaware.............        3           --          3      North Dakota......        4           --           4
Florida..............       53            5         58      Ohio..............       67            8          75
Georgia..............       12            5         17      Oklahoma..........        5           --           5
Idaho................        9           --          9      Oregon............       26           --          26
Illinois.............       46           --         46      Pennsylvania......       60           --          60
Indiana..............       31            1         32      Rhode Island......        3           --           3
Iowa.................       12           --         12      South Carolina....        2           --           2
Kansas...............       10            1         11      South Dakota......        2           --           2
Kentucky.............        5           --          5      Tennessee.........        3            3           6
Louisiana............        8           --          8      Texas.............       67           --          67
Maine................        5           --          5      Utah..............       14           --          14
Maryland.............       20            3         23      Vermont...........        4           --           4
Massachusetts........       26           --         26      Virginia..........       24           --          24
Michigan.............       53            7         60      Washington........       35            2          37
Minnesota............       21            5         26      West Virginia.....        6           --           6
Mississippi..........        2           --          2      Wisconsin.........       23           --          23
Missouri.............       12            1         13      Wyoming...........        2           --           2
                                                                                    ---           --       -----
Montana..............        7           --          7      Total.............      949           58       1,007
                                                                                    ===           ==       =====
</TABLE>

     The following table reflects the number of stores opened, expanded or
relocated, closed and acquired during each of the past five fiscal years:

<TABLE>
<CAPTION>
                                                                         TOTAL
                                                          STORES IN     SQUARE
   FISCAL     STORES   EXPANDED OR   STORES    STORES    OPERATION AT   FOOTAGE
    YEAR      OPENED    RELOCATED    CLOSED   ACQUIRED     YEAR-END     (000'S)
   ------     ------   -----------   ------   --------   ------------   -------
<S>           <C>      <C>           <C>      <C>        <C>            <C>
    1997        13         37         (35)       --           914       11,612
    1998        24         42         (35)       --           903       12,119
    1999        31         26         (47)      171(1)      1,058       15,270
    2000        29         22         (61)       --         1,026       15,642
    2001        18          9         (37)       --         1,007       16,068
</TABLE>

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

(1) In April 1998, we completed a merger with House of Fabrics, Inc., a chain of
    261 fabric and craft stores located primarily on the West Coast. Of the 261
    stores acquired, 90 stores were consolidated with existing traditional
    stores. As a result, 171 net new units were added to the store base.

     During fiscal 2002, we expect to open 12 new superstores and to relocate 10
traditional stores. We have committed to leases for all but one of these 22
planned projects.

     Our new store opening costs depend on the building type, store size and
general cost levels in the area. During fiscal 2001, we opened 2 new traditional
stores, with an average square footage per store of 21,700 square feet. Our
average net opening cost of these traditional stores was approximately $0.3
million per store, which included leasehold improvements, furniture, fixtures
and equipment, and pre-opening expenses. The initial inventory investment, net
of payables support, associated with each new traditional store during fiscal
2001 was approximately $0.3 million. Also during fiscal 2001, we opened 16
superstores, with an average square footage per store of approximately 45,600
square feet. Our average net opening cost of these superstores was approximately
$1.3 million per store, which included leasehold improvements, furniture,

                                        2
<PAGE>   4

fixtures and equipment, and pre-opening expenses. The initial inventory
investment, net of payables support, associated with each new superstore in
fiscal 2001 was approximately $0.9 million.

PRODUCT SELECTION

     Each of our stores offers a broad selection of softlines (apparel, craft
and home decorating fabrics and notions) and hardlines (craft, seasonal, and
home accessories and floral and framing merchandise).

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

<TABLE>
<CAPTION>
                                                    FISCAL YEAR ENDED
                                        -----------------------------------------
                                        FEBRUARY 3,    JANUARY 29,    JANUARY 30,
                                           2001           2000           1999
                                        -----------    -----------    -----------
<S>                                     <C>            <C>            <C>
Principal product line:
  Softlines...........................       63%            64%            66%
  Hardlines...........................       37             36             34
                                            ---            ---            ---
          Total.......................      100%           100%           100%
                                            ===            ===            ===
</TABLE>

     Our traditional stores have historically carried a full selection of
softlines and a convenience assortment of hardlines. Our superstores offer a
competitive assortment of merchandise in all of our product lines and have a
more diversified sales mix. During fiscal 2001, 48% of superstore net sales was
derived from softlines and 52% from hardlines.

Softlines

     We believe that we provide the most extensive offering of apparel,
quilting, craft and home decorating fabrics and sewing-related products
available to our customers. We offer the following softlines selection:

     - apparel fabrics, used primarily in the construction of garments,
       including a wide variety of solid and printed cottons, linens, wools,
       fleece and outerwear;

     - an upscale selection of fabrics, including satins, metallics, evening
       wear, bridal and special occasion;

     - craft fabrics, used primarily in the construction of quilts, craft and
       holiday projects, including calico, quilting, solids, holiday fabric and
       juvenile designs;

     - printed fabrics, including juvenile prints, seasonal designs for spring,
       summer, fall and winter, and logo-related prints such as team emblems of
       the National Football League;

     - proprietary print designs which are unique to our stores;

     - fabrics used in home decorating projects such as window treatments and
       furniture and bed coverings; and

     - notions, which represent all items incidental to sewing-related projects
       other than fabric, including cutting implements, threads, zippers, trims,
       tapes, pins, elastics, buttons and ribbons.

     We also sell patterns and a limited number of sewing machines. Our high
volume stores offer a broader selection of sewing machines through leased
departments with third parties, from whom we receive sublease income.

Hardlines

     Our superstores offer a full line of hardline products, while our
traditional stores offer a convenience assortment. We offer the following
hardlines selection:

     - general craft materials, including items used for stenciling, doll
       making, jewelry making, woodworking, wall decor, rubber stamps, memory
       books and plaster;

                                        3
<PAGE>   5

     - brand name fine art materials, including items such as pastels, water
       colors, oil paints, acrylics, easels, brushes, paper and canvas;

     - hobby items, including wooden and plastic model kits and related
       supplies, and paint-by-number kits;

     - home accessories, including baskets, candles and potpourri;

     - needlecraft items, including hand-knitting yarns, needles, canvas,
       needlepoint, embroidery and cross-stitching, knitting, crochet and other
       stitchery supplies;

     - framed art, photo albums and ready-made frames and, in superstores, full
       service framing departments with picture framing materials, including
       custom frames, mat boards, glass, backing materials and related supplies;
       and

     - floral products, including silk flowers, dried flowers, artificial plants
       sold separately or in ready-made and custom floral arrangements and a
       broad selection of accessories required for floral arranging and wreath
       making.

     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 decorations, gifts and
supplies 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" and
"Santa's Workbench."

     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. Accordingly, a fully developed seasonal
merchandising program, including inventory, merchandise layout and instructional
ideas, is implemented in every store during our third quarter of each fiscal
year. This program includes increasing inventory levels so that each store is
fully stocked during our peak selling season.

     During the fourth quarter of fiscal 2001, we commenced an inventory
productivity initiative (the "SKU Reduction Initiative"), which entailed a
thorough review of inventory investment and gross margin performance by item or
stock-keeping unit ("SKU"). This analysis identified approximately 10,000 active
items or approximately $60 million in merchandise, at cost, that we decided to
discontinue. We will begin clearance programs in the second quarter of fiscal
2002 designed to aggressively clear this product. Our strategy for fiscal 2002
is to fund improved fill rates for our most productive items by eliminating
investment in less-productive inventory. The SKU Reduction Initiative is an
important step in this inventory productivity initiative.

     We believe the review process we completed in the fourth quarter for the
SKU Reduction Initiative was thorough. We are committed to an ongoing
disciplined, detailed review of our product mix. Although additional product may
be targeted for reduction based on that analysis, we believe that the extent of
such reduction decisions will be more comparable to what is normal course
business practice in retailing.

MARKETING

     We rebranded all of our stores under the Jo-Ann name in September 1998 and
began a national advertising campaign. Our proprietary mailing list includes
more than three million preferred customers who have shopped with us in the past
year. This allows us to efficiently reach our target market. Through our
national advertising campaign and proprietary mailing list, we believe that we
are able to create high impact, low cost marketing campaigns. We focus our
advertising on direct mail circulars for our traditional stores. For our
superstores, we supplement our direct mail advertising program with newspaper
advertising. Our circulars and newspaper inserts feature numerous products
offered at competitive prices and emphasize the wide selection of merchandise
available in our stores.

                                        4
<PAGE>   6

     During fiscal 2001, we entered into a strategic relationship with
IdeaForest.com, Inc. ("IdeaForest"), an online destination site for arts and
crafts merchandise, creative ideas, advice and supplies. IdeaForest, which
operates as an independent entity, brings online selling capability and enriched
content and community features to our joann.com website. IdeaForest is
responsible for all content and technology support to the joann.com website. We
provide product to the site, with customer fulfillment and service being handled
by IdeaForest. Our website is currently the number one visited arts and crafts
site based on unique monthly visitors.

PURCHASING

     We have numerous competitive domestic and international sources of supply
available for each category of merchandise that we sell. During fiscal 2001,
approximately 80% of our purchases were sourced domestically and 20% 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 corporate office, 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 represents more than four percent of our purchasing volume
and the top ten suppliers represent less than 20% of our total purchasing
volume. We currently utilize more than 1,100 suppliers, with the top 200
representing more than 80% of our purchasing volume.

LOGISTICS

     As of the end of fiscal 2001, we operated one owned distribution center in
Hudson, Ohio, which ships products to all of our stores on a weekly basis.
During fiscal 2001, approximately 80% of the merchandise sold in a traditional
store and 70% of the merchandise sold in a superstore were handled through this
distribution center with the remainder shipped directly from our vendors. During
the past three years, we have also utilized a contract warehouse in Southern
California to distribute seasonal product directly to stores.

     During January 2001, construction was completed on a new 630,000 square
foot West Coast distribution center located on an 80-acre site in Visalia,
California. We began shipping product from this facility to approximately 80
stores in April 2001, and we expect to be fully operational and shipping product
to more than 300 stores by the end of July 2001. The new facility will
ultimately serve all of our stores west of the Mississippi, or more than 30% of
our store base. The cost of construction and equipment for this project is
approximately $45 million. Later in fiscal 2002, we expect to exit the Southern
California contract warehouse after we are fully transitioned to our Visalia
distribution center.

     We transport merchandise from our distribution centers to our stores
utilizing contract carriers. Some merchandise is transported to 31 regional
"hubs" and repacked for local delivery. We do not own either the regional hubs
or the local delivery vehicles. We expect that the number of regional hubs we
will utilize in the future will be reduced as a result of the Visalia
distribution center. When fully operational, use of the Visalia distribution
center, in conjunction with the Hudson distribution center, will allow us to
distribute product directly to over 80% of our store base without use of
regional hubs.

STORE OPERATIONS

     Site Selection. We believe that our store locations are integral to our
success. Sites are selected through a coordinated effort of our real estate 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 shopping strip location, size of the location, age of the
shopping strip location, co-tenants, proximity to highway access, traffic
patterns and ease of entry from the major roadways framing the strip location.

                                        5
<PAGE>   7

     Our expansion strategy is to give priority to adding stores in existing
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 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 during our
peak Christmas selling season.

     Store Management. Traditional stores have approximately three full-time
team members and 10 to 15 part-time team members, while superstores typically
have approximately 15 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 annual store profit. The average
tenure of our store team leaders is approximately seven years.

     Traditional store team leaders are typically promoted from a group of top
performing sales team members, 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 been staffed from within or externally, generally
with individuals who have previous experience in managing "big-box" retail
concepts.

     Each store is under the supervision of a district team leader who reports
to a regional vice president. Our human resource department and field training
department are responsible for recruiting and training new store team leaders.
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. In addition, quarterly training seminars are conducted for existing
store team leaders and orientation and training programs are conducted for new
store team members.

INFORMATION TECHNOLOGY

     We believe we have employed industry leading information technology in our
stores. Our point of sale register transactions are polled nightly and our point
of sale system is interfaced into both our financial and merchandising systems.
We utilize point of sale registers and scanning devices to record the sale of
merchandise at a SKU level at the stores. We also utilize hand-held radio
frequency terminals for a variety of store tasks including price look-up,
ordering and fabric sales processing.

     Information obtained from item-level scanning through our point of sale
system enables us to identify important trends to assist in managing inventory
by facilitating the elimination of less profitable SKUs, increasing the in-stock
level of more popular SKUs, analyzing product margins and generating 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 check out, enabling us to more rapidly restock merchandise
and efficiently re-price sale items.

     In March 2000, we went live on the retail portion of our fully integrated
enterprise-wide system ("SAP Retail System"). 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. During
fiscal 2001, we experienced operating difficulties stemming from the
implementation of the SAP Retail System, resulting in out-of-stock conditions on
key basic products while being overstocked on slower selling products. We are
currently working on restoring inventory to appropriate levels, as well as
realizing the replenishment and forecasting benefits of the SAP Retail System.
The total cost of the SAP Retail System, including expenses, was approximately
$33 million and is being amortized over five years.

                                        6
<PAGE>   8

STATUS OF PRODUCT OR LINE OF BUSINESS

     During fiscal 2001, there has been 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 trademarks "Jo-Ann Fabrics
and Crafts" and "Jo-Ann etc." We believe that these names 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 the
first half of the year. Net earnings are highest during the months of September
through December when sales volumes provide significant operating leverage.
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.

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 2001, no one store accounted for more than one
percent of total sales.

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 largest national category-dominant retailer serving the retail
fabric and craft industry. Our stores compete with other specialty fabric and
craft retailers and selected mass merchants 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.

     We have one direct national competitor in the fabric and craft segments of
the industry, with the balance of the competitors being regional and local
operators. We believe that there are only a few competitors with fabric or
crafts sales exceeding $200 million annually. We believe that we have several
advantages over most of our smaller competitors, including:

     - purchasing power;

     - ability to support an 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 February 3, 2001, we have not incurred
any material expense for research activities relating to the development of new
products or services or the improvement of existing products or services.

                                        7
<PAGE>   9

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 February 3, 2001, we had approximately 22,300 full and part-time
employees, of which 21,000 worked in our stores, 450 were employed in our Hudson
distribution center, 120 were employed in the Visalia distribution center and
the balance held corporate and administrative positions. The number of part-
time employees is substantially higher during the Christmas 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 66% of our employees work part-time.

     The United Steelworkers of America, Upholstery and Allied Industries
Division currently represents employees who work in our Hudson distribution
center. Our current contract expires in May 2001. Negotiations are currently
underway to extend the union contract. We believe that our relations with our
employees and the union are good.

FOREIGN OPERATIONS AND EXPORT SALES

     In fiscal 2001, we purchased approximately 20% of our products directly
from manufacturers located in foreign countries. We currently use suppliers
located in Hong Kong, China and Taiwan. 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 fill orders on a timely basis. If we overestimate
consumer demand, we may be required to hold goods in inventory for a long period
of time or to reduce selling prices in order to clearance excess inventory at
the end of a selling season. We do not have long-term contracts with any
manufacturers, and none of our suppliers manufacture products for us
exclusively.

     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.

ITEM 2. PROPERTIES

     Our store support center and Hudson distribution center are located in an
approximately 1.4 million square foot facility on approximately 105 acres in
Hudson, Ohio. We own both the facility and the real estate. The distribution
center occupies approximately 1.1 million square feet and the remainder is used
as our store support center and a superstore. In addition, we own approximately
77 acres of land adjacent to our Hudson, Ohio facility.

     During January 2001, we completed construction on a 630,000 square foot
West Coast distribution center on an 80-acre site located in Visalia,
California. The construction was financed through a synthetic lease facility.
This property is owned by us.

     The remaining properties that we occupy are leased retail store facilities,
located primarily in high-traffic shopping centers. All store leases are
operating leases, generally with initial terms of five to ten years and renewal
options for up to 20 years. Certain retail store leases contain escalation
clauses and contingent rents
                                        8
<PAGE>   10

based on a percent of sales in excess of defined minimums. During the fiscal
year ended February 3, 2001, we incurred $140.2 million of rental expense and
common area maintenance for store locations.

     As of February 3, 2001, the current terms of our store leases, assuming we
exercise all lease renewal options, were as follows:

<TABLE>
<CAPTION>
                                                                      NUMBER OF
                  YEAR LEASE TERMS EXPIRE                            STORE LEASES
                  -----------------------                            ------------
<S>                                                             <C>
Month-to-month..............................................               21
2002........................................................               43
2003........................................................               37
2004........................................................               22
2005........................................................               16
2006........................................................               18
Thereafter..................................................              849
                                                                        -----
          Total.............................................            1,006
                                                                        =====
</TABLE>

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.

     In February 1997, we settled enforcement proceedings brought by the U.S.
Securities and Exchange Commission ("SEC") involving our financial statements
for the fiscal year ended February 1, 1992, the use of those statements in
connection with the sale in March 1992 of our 6 1/4% Convertible Subordinated
Debentures due 2002 (subsequently redeemed in June 1997), our financial
statements for the first three quarters of fiscal 1993, and the adequacy of
certain disclosures relating to such periods. The principal allegation was that
we materially overstated earnings for such periods because of the manner in
which we calculated one of our inventory-related reserves, thereby allegedly
violating certain federal securities laws, including provisions regarding
anti-fraud, reporting, internal controls and books and records. The accounting
and disclosure issues that were raised are not related to any current period,
and no current accounting policies or financial statements were in question. At
the same time as the settlement, the SEC filed a civil action against us and our
former chief financial officer and our former controller in the United States
District Court for the District of Columbia. Without admitting or denying the
allegations, we consented to the entry of an order enjoining us from violations
of the federal securities laws and agreed to pay $3.3 million in settlement of
the action against us.

     In February 1997, our Chief Executive Officer consented to a separate SEC
administrative cease and desist order settling certain allegations, without
admitting or denying the allegations. The SEC contended that he violated certain
federal securities laws as a result of not making adequate inquiry of the
financial staff before signing management representation letters given to our
auditors in connection with the 1992 debenture offering, and as a result of
signing our Form 10-Q for the quarter ended May 2, 1992.

     In February 2000, the former chief financial officer and the former
controller, without admitting or denying the allegations, consented to the entry
of an order enjoining them from violations of the federal securities laws and
agreed to pay $0.2 million in settlement.

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

     No matters were submitted to a vote of shareholders during our fourth
quarter.

                                        9
<PAGE>   11

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:

<TABLE>
<CAPTION>
                   NAME                     AGE                     POSITION
                   ----                     ---                     --------
<S>                                         <C>    <C>
Alan Rosskamm.............................  51     Chairman of the Board, President and Chief
                                                   Executive Officer
David Bolen...............................  49     Executive Vice President, Merchandising
Brian Carney..............................  40     Executive Vice President, Chief Financial
                                                   Officer
Michael Edwards...........................  40     Executive Vice President, Operations
Rosalind Thompson.........................  51     Executive Vice President, Human Resources
Debra Walker..............................  44     Executive Vice President, Marketing and E-
                                                   Commerce
</TABLE>

     Alan Rosskamm has 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.

     David Bolen has been Executive Vice President, Merchandising, of our
company since March 2001. He was Executive Vice President, Stores and Business
Development from December 1998 to March 2001. He was Executive Vice President,
Business Development from August 1997 to December 1998 and Senior Vice
President, General Manager Jo-Ann etc from March 1997 to August 1997. Prior to
joining our company, he was Executive Vice President-Operations of Michaels
Stores, Inc. from July 1994 to August 1996.

     Brian Carney has been Executive Vice President, Chief Financial Officer of
our company since October 1997. 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 Edwards was named Executive Vice President, Operations of our
company in March 2001 and assumed his responsibilities in April 2001. Prior to
joining our company, Mr. Edwards was Executive Vice President, Merchandising and
Chief Marketing Officer of West Marine, Inc. from June 1999 to March 2001. He
was Vice President, General Merchandise Manager of Goldsmith LP from September
1998 to May 1999. Prior to that, Mr. Edwards was with CompUSA from 1990 to 1998
where he served as Senior Vice President of Merchandising and Senior Vice
President of Operations during his tenure.

     Rosalind Thompson has 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.

     Debra Walker has been Executive Vice President, Marketing and E-Commerce of
our company since June 2000. She was a member of our Board of Directors from
August 1998 to June 2000. Prior to joining our company, she was Executive Vice
President and Chief Marketing Officer and co-founder of iCARumba, Inc., an
on-line auto services site from August 1999 to May 2000. She was previously Vice
President and Chief Information Officer from March 1997 to July 1999 and Vice
President-Retail responsible for the operation of all retail stores from
February 1995 to March 1997, of The Goodyear Tire and Rubber Company, where she
had been employed since 1979.

                                        10
<PAGE>   12

                                    PART II

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

     The Company's Class A and Class B common shares are traded on the New York
Stock Exchange under the ticker symbols JAS.a and JAS.b, respectively. The
number of Class A and Class B common shareholders of record as of April 13, 2001
were 710 and 663, respectively.

     The quarterly high and low closing stock prices for fiscal 2001 and 2000
are presented in the table below:

<TABLE>
<CAPTION>
                                                           CLASS A               CLASS B
                                                        COMMON SHARES         COMMON SHARES
                                                      ------------------    ------------------
                                                       HIGH        LOW       HIGH        LOW
                                                       ----        ---       ----        ---
<S>                                                   <C>        <C>        <C>        <C>
Fiscal 2001:
February 3, 2001....................................  $ 7.188    $ 5.500    $ 5.375    $ 3.688
October 28, 2000....................................    7.500      6.188      7.188      5.125
July 29, 2000.......................................    9.500      6.938      8.688      7.063
April 29, 2000......................................   10.313      8.063     10.000      6.000

Fiscal 2000:
January 29, 2000....................................  $14.250    $ 9.563    $13.000    $ 9.625
October 30, 1999....................................   14.688     12.438     12.688     11.313
July 31, 1999.......................................   17.250     12.375     13.000     11.750
May 1, 1999.........................................   17.125     13.188     12.875     10.625
</TABLE>

                                        11
<PAGE>   13

ITEM 6. SELECTED FINANCIAL DATA

     The following table presents our selected financial data for each of the
ten years ending February 3, 2001, as restated for the change from the last-in,
first-out inventory method to the first-in, first-out inventory method, as
discussed in Note 2 to the financial statements. 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, and other
financial data that we have filed with the U.S. Securities and Exchange
Commission.

<TABLE>
<CAPTION>
                                                                      FISCAL YEARS ENDED
                             ----------------------------------------------------------------------------------------------------
                              FEB 3,    JAN 29,    JAN 30,    JAN 31,   FEB 1,    JAN 27,   JAN 28,   JAN 29,   JAN 30,   FEB 1,
                             2001(a)      2000       1999      1998     1997(a)    1996      1995      1994      1993      1992
                             --------   --------   --------   -------   -------   -------   -------   -------   -------   -------
                                                (Millions of dollars, except share, per share and store data)
<S>                          <C>        <C>        <C>        <C>       <C>       <C>       <C>       <C>       <C>       <C>
OPERATING RESULTS:
Net sales..................  $1,483.3   $1,381.5   $1,242.9   $ 975.0   $929.0    $ 834.6   $ 677.3   $ 582.1   $ 574.1   $ 442.0
Total sales percentage
  increase.................       7.4%      11.2%      27.5%      5.0%    11.3%      23.2%     16.4%      1.4%     29.9%     19.9%
Same-store sales percentage
  increase.................       1.3%       4.5%       3.5%      3.8%     7.5%       3.0%      1.0%      4.4%      7.6%     11.9%
Gross margin...............     645.1      633.2      564.0     441.5    412.1      378.5     299.3     251.6     244.2     208.9
Selling, general and
  administrative
  expenses.................     589.2      533.8      476.7     363.1    340.9      319.9     257.2     223.4     221.2     171.8
Non-recurring charge.......        --         --       25.1        --       --         --        --        --        --        --
Depreciation and
  amortization.............      38.3       32.0       27.7      21.7     21.2       18.2      14.0      12.0      10.1       5.5
Operating profit...........      17.6       67.4       34.5      56.7     50.0       40.4      28.1      16.2      12.9      31.6
Interest expense...........      29.0       26.2       12.5       5.9     10.6       12.0       8.4       5.6       5.5       2.9
Income (loss) from
  continuing operations
  before income taxes......     (11.4)      41.2       22.0      50.8     39.4       28.4      19.7      10.6       7.4      28.7
Income tax provision
  (benefit)................      (4.3)      15.6        8.6      19.1     14.8       10.6       7.6       3.9       2.8      10.3
Income (loss) from
  continuing operations....      (7.1)      25.6       13.4      31.7     24.6       17.8      12.1       6.7       4.6      18.4
Losses from extraordinary
  items/discontinued
  operations...............        --         --         --      (1.1)      --         --        --      (4.8)     (1.0)     (0.6)
Equity and asset impairment
  losses of minority
  investment...............      (6.5)        --         --        --       --         --        --        --        --        --
Net income (loss)..........     (13.6)      25.6       13.4      30.6     24.6       17.8      12.1       1.9       3.6      17.8
EBITDA (b) (c).............  $   55.9   $   99.4   $   87.3   $  78.4   $ 71.2    $  58.6   $  42.1   $  28.2   $  23.0   $  37.1
                             ----------------------------------------------------------------------------------------------------
PER SHARE DATA (d):
Net income (loss) from
  continuing operations --
  diluted..................  $  (0.75)  $   1.38   $   0.67   $  1.59   $ 1.26    $  0.91   $  0.65   $  0.35   $  0.24   $  1.00
Average shares
  outstanding -- diluted
  (000's)..................    18,041     18,583     19,904    20,592   21,216     19,293    18,749    18,877    19,263    18,398
Book value.................  $  13.67   $  14.54   $  13.10   $ 12.31   $10.59    $  9.27   $  8.25   $  8.16   $  7.99   $  7.75
Shares outstanding, net of
  treasury shares
  (000's)..................    18,207     17,845     19,012    18,767   17,921     18,486    18,398    18,194    18,555    18,584
                             ----------------------------------------------------------------------------------------------------
FINANCIAL POSITION:
Inventories................  $  451.0   $  442.5   $  404.0   $ 278.9   $280.6    $ 322.6   $ 274.7   $ 223.8   $ 223.2   $ 185.9
Current assets.............     505.8      497.9      480.1     312.3    308.7      351.8     315.8     247.1     242.0     211.2
Property, equipment and
  leasehold improvements,
  net......................     190.2      194.7      164.0     110.0     94.6      102.0      84.1      75.6      77.9      54.6
Current liabilities........     223.5      208.1      209.2     164.8    141.2      129.2     127.5      80.2      93.6      97.8
Long-term debt.............     240.0      245.2      182.5      24.7     72.1      155.5     127.0     102.5     104.1      40.1
Shareholders' equity.......  $  248.8   $  259.4   $  249.0   $ 231.1   $189.8    $ 171.4   $ 151.8   $ 148.4   $ 148.2   $ 144.1
                             ----------------------------------------------------------------------------------------------------
</TABLE>

                                        12
<PAGE>   14
ITEM 6. SELECTED FINANCIAL DATA -- CONTINUED

<TABLE>
<CAPTION>
                                                                      FISCAL YEARS ENDED
                             ----------------------------------------------------------------------------------------------------
                              FEB 3,    JAN 29,    JAN 30,    JAN 31,   FEB 1,    JAN 27,   JAN 28,   JAN 29,   JAN 30,   FEB 1,
                             2001(a)      2000       1999      1998     1997(a)    1996      1995      1994      1993      1992
                             --------   --------   --------   -------   -------   -------   -------   -------   -------   -------
                                                (Millions of dollars, except share, per share and store data)
<S>                          <C>        <C>        <C>        <C>       <C>       <C>       <C>       <C>       <C>       <C>
STATISTICS AND OTHER
  FINANCIAL INFORMATION:
Operating income percent of
  sales (c)................       1.2%       4.9%       4.8%      5.8%     5.4%       4.8%      4.1%      2.8%      2.2%      7.1%
EBITDA percent of sales
  (c)......................       3.8%       7.2%       7.0%      8.0%     7.7%       7.0%      6.2%      4.8%      4.0%      8.4%
Return on average assets
  (e)......................      (1.0)%      3.6%       5.1%      7.4%     5.5%       4.0%      3.2%      1.9%      1.4%      7.5%
Return on average equity
  (e)......................      (2.8)%     10.1%      12.0%     15.1%    13.6%      11.0%      8.1%      4.5%      3.1%     16.5%
Capital expenditures.......  $   35.9   $   67.4   $   75.1   $  36.6   $ 13.2    $  34.7   $  11.7   $   8.5   $  32.3   $  18.5
Long-term debt to total
  capitalization...........      49.1%      48.6%      42.3%      9.7%    27.5%      47.6%     45.6%     40.9%     41.3%     21.8%
Ratio of EBITDA to interest
  expense (times)..........       1.9        3.8        7.0      13.3      6.7        4.9       5.0       5.0       4.2      12.8
Ratio of debt to EBITDA
  (times)..................       4.3        2.5        2.1       0.3      1.0        2.7       3.0       3.6       4.5       1.1
                             ----------------------------------------------------------------------------------------------------
STORE INFORMATION:
Number of traditional
  stores...................       949        984      1,034       896      913        935       964       655       693       664
Number of etc
  superstores..............        58         42         24         7        1          1        --        --        --        --
                             ----------------------------------------------------------------------------------------------------
Total store count..........     1,007      1,026      1,058       903      914        936       964       655       693       664
Traditional stores total
  square footage (000's)...    13,381     13,685     14,144    11,794   11,566     11,476    11,424     7,481     7,376     5,890
etc superstores total
  square footage (000's)...     2,687      1,957      1,126       325       46         46        --        --        --        --
                             ----------------------------------------------------------------------------------------------------
Total stores square footage
  (000's)..................    16,068     15,642     15,270    12,119   11,612     11,522    11,424     7,481     7,376     5,890
</TABLE>

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

(a) 53-week year.

(b) Earnings before interest, taxes, depreciation and amortization.

(c) Fiscal 1999 excludes a $25.1 million non-recurring charge recorded in
    connection with the acquisition of House of Fabrics.

(d) The number of shares and per share data have been restated to give effect to
    changes required by Statement of Financial Accounting Standards No. 128,
    "Earnings Per Share," and the Recapitalization Amendment, effective August
    2, 1995, which has been accounted for as a two-for-one stock split.

(e) Calculated based on income from continuing operations. Fiscal 1999 excludes
    the non-recurring charge, net of tax.

                                        13
<PAGE>   15

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

     We are the largest national category-dominant retailer, 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-Ann etc superstores) feature a variety of
competitively priced merchandise -- from apparel, crafts and home decorating
fabrics and notions to crafts, seasonal and home accessories, and floral and
framing products. As of February 3, 2001, we operated 1,007 stores in 49 states
(949 traditional stores and 58 superstores).

     Our traditional stores average approximately 14,100 square feet. Over the
past five years, we have strategically relocated certain traditional stores,
increasing average square footage per store and sales per square foot by
approximately 15%. As a result, net sales per traditional store have increased
to approximately $1.2 million over this period. In November 1995, we opened our
first large format "category killer" superstore, which offers an expanded and
more comprehensive product assortment than our traditional stores. Our
superstores average 46,300 square feet and in fiscal 2001, on a per-store basis,
generated more than four and one-half times the revenue and over 30% higher
sales per square foot than our traditional stores. We believe our superstores,
which accounted for almost 20% of fiscal 2001 total net sales, present
opportunities for future sales growth.

     In March 1998, we acquired House of Fabrics, Inc., a retail chain operating
predominantly on the West Coast. Operating results of the House of Fabrics
stores have been included in our results of operations since the date of the
acquisition. The acquisition was accounted for using the purchase method of
accounting.

     Over the past three years, we have invested heavily in our infrastructure,
primarily in the areas of systems and logistics, which in turn has resulted in
higher debt levels and interest expense. This infrastructure spending was
required in order to improve our efficiency and to build the necessary platform
for continued future store growth. In fiscal 2000, we improved our operating
performance but our net earnings declined due to the increased interest expense.
The construction of our West Coast distribution center, located in Visalia,
California, and the implementation of our fully integrated enterprise-wide
system ("SAP Retail System") were substantially completed during fiscal 2001,
with relatively minor capital expenditures required thereafter to complete the
investments. In fiscal 2001, we experienced difficulty with the implementation
of the SAP Retail System, resulting in out-of-stock conditions on key basic
products while being overstocked on slower selling products. As a result, sales
were negatively impacted which hurt our operating performance.

     Due to our recent earnings trends and the weak retail economic environment
that currently exists, our strategy has 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. We
plan to implement this strategy by:

     - slowing new store growth to maximize free cash flow;

     - getting our stores back in-stock while reducing overall inventory levels;

     - opening our new West Coast distribution center on time and on budget
       without disruption to the business; and

     - challenging all aspects of our existing business to focus on execution
       and to improve our operating discipline.

     We expect to limit the growth of our superstore concept to the 12 store
openings to which we have committed for fiscal 2002. During the fourth quarter
of fiscal 2001, we recognized one-time pretax charges of $29.7 million related
to store closings and inventory productivity initiatives. We have made
significant and necessary improvements to our infrastructure; we are now poised
to begin to realize the benefits from these investments. By focusing our
attention on the productivity of our existing store base, improving our
inventory management processes, and managing our capital spending tightly, we
expect to reduce inventory and debt levels in fiscal 2002 and beyond. However,
we currently expect operating results for the first three quarters of fiscal
2002 to be below that of the prior year and do not expect to show improved
results until the fourth quarter due to the recent economic downturn, lingering
effects of our out-of-stock situation, higher store expenses and higher
distribution costs related to the transition to our new Visalia distribution
center.

                                        14
<PAGE>   16

RESULTS OF OPERATIONS

     The following table sets forth certain financial information from our
audited consolidated statements of operations expressed as a percentage of net
sales and should be read in conjunction with our consolidated financial
statements and related notes thereto.

<TABLE>
<CAPTION>
                                                          PERCENTAGE OF NET SALES
                                                --------------------------------------------
                                                             FISCAL YEARS ENDED
                                                --------------------------------------------
                                                FEB 3, 2001     JAN 29, 2000    JAN 30, 1999
                                                ------------    ------------    ------------
<S>                                             <C>             <C>             <C>
Net sales...................................       100.0%          100.0%          100.0%
Cost of sales...............................        56.5(a)         54.2            54.6
                                                   -----           -----           -----
Gross margin................................        43.5            45.8            45.4
Selling, general and administrative
  expenses..................................        39.7(b)         38.6            38.4
Depreciation and amortization...............         2.6             2.3             2.2
Non-recurring charge........................          --              --             2.0
                                                   -----           -----           -----
Operating profit............................         1.2             4.9             2.8
Interest expense............................         2.0             1.9             1.0
                                                   -----           -----           -----
Income (loss) before income taxes...........        (0.8)            3.0             1.8
Income tax provision (benefit)..............        (0.3)            1.1             0.7
                                                   -----           -----           -----
Net income (loss) before equity loss........        (0.5)            1.9             1.1
Equity and asset impairment losses of
  minority investment.......................        (0.4)             --              --
                                                   -----           -----           -----
Net income (loss)...........................        (0.9)%           1.9%            1.1%
                                                   =====           =====           =====
</TABLE>

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

(a) Includes $23.0 million charge, or 1.6% of sales, related to the SKU
    Reduction Initiative (as defined below).

(b) Includes $6.7 million charge, or 0.5% of sales, related to 42 stores
    identified for closing in fiscal 2002.

COMPARISON OF THE 53 WEEKS ENDED FEBRUARY 3, 2001 AND THE 52 WEEKS ENDED JANUARY
29, 2000

     Our results for the year were a major disappointment. Sales performance
suffered due to the weak economic environment, experienced in the second half of
fiscal 2001, and the out-of-stock problems that we encountered as a result of
difficulties in implementing our SAP Retail System. We went live on this system
in March 2000 after a two-year installation period. As a result of the sales
softness, our operating performance deteriorated from the prior year. Coupled
with charges for the "SKU Reduction Initiative" (defined below), store closings
and equity and asset impairment losses from our joint venture with
IdeaForest.com, Inc. ("IdeaForest"), all discussed in further detail below, we
recorded a net loss for fiscal 2001 of $13.6 million, or $0.75 per diluted
share, versus prior year net income of $25.6 million, or $1.38 per diluted
share.

     Net sales. Net sales for fiscal 2001 were $1,483.3 million compared with
$1,381.5 million in fiscal 2000, an increase of $101.8 million, or 7.4%. Fiscal
2001 was a 53-week year. Excluding the 53rd week, sales increased 5.7% over
fiscal 2000. Same-store sales increased 1.3% for fiscal 2001 over fiscal 2000,
our worst same-store sales performance in six years. Same-store sales increased
4.5% for fiscal 2000 over fiscal 1999. Same-store sales on a comparable week
basis accounted for $17.0 million of the overall sales increase, and the 53rd
week accounted for $22.6 million of the overall increase. The majority of the
sales increase was due to the increase in the number of superstores in
operation. We operated 58 superstores at February 3, 2001 compared with 42
superstores at January 29, 2000.

     Gross margin. Gross margin for fiscal 2001 was $645.1 million compared with
$633.2 million in fiscal 2000. As a percentage of net sales, fiscal 2001 gross
margin was 43.5% compared with 45.8% in the prior year, a decrease of 230 basis
points. Approximately 160 basis points of this decrease was due to a

                                        15
<PAGE>   17

$23.0 million charge for the estimated write-down below cost of approximately
$60 million of inventory that has been identified for discontinuance as part of
an inventory productivity initiative (the "SKU Reduction Initiative"). Excluding
this charge, gross margin decreased 70 basis points from fiscal 2000, resulting
primarily from lower realized gross margins on the softlines side of our
business, due to fourth quarter clearance markdowns in our apparel and craft
fabric categories.

     During the fourth quarter of fiscal 2001, we commenced the SKU Reduction
Initiative which entailed a thorough review of inventory investment and gross
margin performance by item or stock-keeping unit ("SKU"). This analysis
identified approximately 10,000 active items that we decided to discontinue. We
will begin clearance programs in the second quarter of fiscal 2002 designed to
aggressively clear this product.

     The analysis performed in connection with the SKU Reduction Initiative was
conducted utilizing new measurement capabilities made available to us from our
SAP Retail System. While the conversion to the SAP Retail System has been
difficult, we are beginning to extract very useful analytical data that is
changing the way we manage our business. Our strategy for fiscal 2002 is to fund
improved fill rates for our most productive items by eliminating investment in
less-productive inventory. The SKU Reduction Initiative is an important step in
this inventory productivity initiative.

     Even though we took a charge in the fourth quarter of fiscal 2001 to
reserve for the estimated portion of product that we will sell below cost,
liquidating this inventory at reduced selling prices is expected to put pressure
on overall realized gross margins in fiscal 2002.

     We believe the review process we completed in the fourth quarter for the
SKU Reduction Initiative was thorough. We are committed to an ongoing
disciplined, detailed review of our product mix. Although additional product may
be targeted for reduction based on that analysis, we believe that the extent of
such reduction decisions will be more comparable to what is normal course
business practice in retailing.

     Selling, general and administrative expenses. Selling, general and
administrative ("SG&A") expenses were $589.2 million in fiscal 2001 compared
with $533.8 million in fiscal 2000. As a percentage of sales, SG&A expenses
increased 110 basis points, to 39.7%, compared with 38.6% in fiscal 2000.
Approximately 45 basis points of this increase is due to the $6.7 million charge
for 42 stores identified for closing in fiscal 2002. These expenses consist
primarily of the cost of reducing store fixed assets and leasehold improvements
to realizable value and accruing for any remaining closed store rent liability
under the non-cancelable lease agreements. The remaining expense increase, as a
percentage of sales, was due to a loss in store expense leverage, primarily in
store payroll as modest same-store sales increases were not sufficient to offset
inflationary pressure in the average wage rate we paid to our store team
members. We expect this loss in store payroll expense leverage to continue in
fiscal 2002 if we are not able to improve the level of our same-store sales
performance from fiscal 2001.

     We review the productivity of our store base on an ongoing basis and are
very active in managing our real estate and preserving flexibility in our lease
terms. As a result, there are very few stores in operation that are not cash
flow positive on a "four-wall" contribution basis. In addition, despite an
aggressive store rationalization policy, pursuant to which we have closed over
230 stores in the last three years, we are only paying rent on 16 store
locations where we have not yet obtained a sublease tenant or executed a lease
termination.

     Nevertheless, in addition to the 42 identified store closings for fiscal
2002, we are currently analyzing the relative contribution of each of our stores
on a stand-alone basis, after considering the assets and incremental overhead
costs deployed to operate that location. We expect to complete that analysis in
the next three to six months, and based on the results of that analysis, we may
initiate additional store closings.

     Depreciation and amortization. Depreciation and amortization expense for
fiscal 2001 was $38.3 million compared with $32.0 million in fiscal 2000, an
increase of $6.3 million. We began depreciating the cost of our SAP Retail
System in April 2000, adding approximately $4.0 million in incremental
depreciation expense for fiscal 2001. The remaining increase in depreciation
expense was primarily due to the growth of the superstores, as we bring new,
larger stores online and close older, largely depreciated locations.

                                        16
<PAGE>   18

     Operating profit. Operating profit for fiscal 2001 was $17.6 million,
compared with $67.4 million in fiscal 2000, a decrease of $49.8 million.
Excluding the $29.7 million in charges associated with the SKU Reduction
Initiative and the 42 store closings identified for fiscal 2002, operating
profit was $47.3 million for the year.

     Interest expense. Interest expense for fiscal 2001 was $29.0 million
compared with $26.2 million in fiscal 2000, an increase of $2.8 million. The
increase was attributable both to a higher average borrowing rate on our
revolving credit facility, tied to increases in the LIBOR rate, as well as the
completion of our 10 3/8% $150.0 million senior subordinated debt issue. This
debt issue was completed at the end of the first quarter of fiscal 2000 and
added $1.7 million of incremental interest expense for the full year comparison.

     Income taxes. An effective income tax rate of 38.0% was recognized for both
fiscal 2001 and fiscal 2000.

     Equity and asset impairment losses of minority investment. During fiscal
2001, we invested $6.5 million in IdeaForest to form a strategic relationship
for e-commerce. During fiscal 2001, we recognized equity losses of $3.2 million,
representing our 28.5% share of IdeaForest's net operating losses. During the
fourth quarter of fiscal 2001, we reduced the carrying value of this investment
to zero, as discussed further under the caption "Minority Investment" under
"Liquidity and Capital Resources" below.

     Net income (loss). Net loss during fiscal 2001 was $13.6 million compared
with net income of $25.6 million in fiscal 2000.

COMPARISON OF THE 52 WEEKS ENDED JANUARY 29, 2000 AND JANUARY 30, 1999

     Net sales. Net sales for fiscal 2000 were $1,381.5 million compared with
$1,242.9 million in fiscal 1999, an increase of $138.6 million, or 11.2%.
Same-store sales accounted for $48.1 million or approximately 35% of this
increase. Same-store sales increased 4.5% for fiscal 2000 over fiscal 1999 while
same-store sales increased 3.5% for fiscal 1999 over fiscal 1998. The balance of
the increase was primarily due to the increase in the number of superstores in
operation. At January 29, 2000, 42 superstores were in operation compared with
24 superstores at January 30, 1999.

     Gross margin. Gross margin for fiscal 2000 was $633.2 million compared with
$564.0 million in fiscal 1999, an increase of $69.2 million. As a percentage of
net sales, fiscal 2000 gross margin was 45.8%, an increase of 40 basis points
from fiscal 1999. The margin rate improvement resulted from improvements in our
point of sale margin rate. This improvement was the result of earlier
sell-through on seasonal products, a less promotional stance in the second half
of fiscal 2000 and an improved margin in the House of Fabrics stores, which were
in the process of stock reduction during fiscal 1999.

     Selling, general and administrative expenses. SG&A expenses, excluding the
non-recurring charge recorded in fiscal 1999, were $533.8 million in fiscal 2000
compared with $476.7 million in fiscal 1999, an increase of $57.1 million. SG&A
expenses as a percentage of net sales were 38.6% in fiscal 2000 compared with
38.4% in fiscal 1999, an increase of 20 basis points. The increase, as a
percentage of sales, was due to higher store expenses, resulting primarily from
higher store payroll costs to handle increased product flow.

     Depreciation and amortization. Depreciation and amortization expense for
fiscal 2000 was $32.0 million compared with $27.7 million in fiscal 1999, an
increase of $4.3 million. This increase was due to higher capital expenditure
levels in recent years.

     Non-recurring charge. During fiscal 1999, we recorded a pretax
non-recurring charge of $25.1 million related to the House of Fabrics
acquisition. This charge consisted of write-downs of previously owned assets
affected by the acquisition to estimated net realizable value, the cost of
operating duplicate corporate facilities during the six-month transition period
following the acquisition, and costs associated with the remerchandising of the
acquired stores. The total cash costs included in the non-recurring charge were
approximately $15.9 million.

     Operating profit. Operating profit for fiscal 2000 was $67.4 million,
compared with $34.5 million in fiscal 1999, an increase of $32.9 million, or
95.4%. Excluding the non-recurring charge incurred in fiscal
                                        17
<PAGE>   19

1999, operating profit increased $7.8 million or 13.1%. As a percentage of
sales, operating profit increased slightly from 4.8% in fiscal 1999 to 4.9% in
fiscal 2000.

     Interest expense. Interest expense for fiscal 2000 was $26.2 million
compared with $12.5 million in fiscal 1999, an increase of $13.7 million. The
increase was due to higher debt levels resulting from, among other things, the
House of Fabrics acquisition, and related working capital expenditures, capital
expenditures, and increased inventory levels.

     Income taxes. Income taxes during fiscal 2000 were $15.6 million compared
with $8.6 million in fiscal 1999, an increase of $7.0 million. The effective
income tax rate was 38.0% for fiscal 2000 compared to 39.0% for fiscal 1999. The
effective tax rate decreased due to a lower effective state tax rate and federal
tax credits related to our participation in various government hiring programs.

     Net income. Net income during fiscal 2000 was $25.6 million compared with
$13.4 million in fiscal 1999, an increase of $12.2 million, or 91.0%. Excluding
the after-tax effect of the non-recurring charge recorded in fiscal 1999, net
income in fiscal 1999 would have been $28.7 million.

LIQUIDITY AND CAPITAL RESOURCES

Fiscal 2001 Cash Flows

     Cash, including temporary cash investments, decreased $3.9 million during
fiscal 2001 to $17.5 million as of February 3, 2001.

     Net cash provided by operating activities was $39.0 million in fiscal 2001,
compared with $27.7 million in fiscal 2000. Excluding the charges for the SKU
Reduction Initiative and the 42 stores identified for closing in fiscal 2002,
cash generated by operations in fiscal 2001, before working capital items,
totaled $58.4 million, a decrease of $13.4 million from the $71.8 million
generated during fiscal 2000. Excluding the amounts for the SKU Reduction
Initiative and the 42 stores identified for closing in fiscal 2002, working
capital used $19.4 million of cash in fiscal 2001 versus $44.1 million of cash
in fiscal 2000, primarily due to an improved level of payables support in fiscal
2001.

     Net cash used for investing activities for fiscal 2001 totaled $40.7
million compared with $66.0 million in fiscal 2000. Capital expenditures were
$35.9 million during fiscal 2001 versus $67.4 million in fiscal 2000 and are
discussed further under the caption "Capital Expenditures." In addition, we
invested $6.5 million in IdeaForest.com, which is discussed below under
"Minority Investment."

     Net cash used for financing activities during fiscal 2001 was $2.2 million,
primarily related to a decrease in net borrowings under the prior senior credit
facility of $5.2 million.

Settlement of House of Fabrics Tax Liability

     During the third quarter of fiscal 2001, we reached a final settlement on a
contingent income tax liability of $22.5 million (discussed in Note 4 to the
consolidated financial statements) assumed during the acquisition of House of
Fabrics. The income tax contingency and accrued interest was recorded at $26.9
million as of the acquisition date. On October 20, 2000, this issue was settled
with the Internal Revenue Service ("IRS") for $19.6 million ($14.7 million of
tax liability and $4.9 million of accrued interest). Of this total settlement,
$16.1 million of the liability was paid in fiscal 2000 in the form of a deposit
payment (cash bond) to the IRS. The remaining $3.5 million was paid during the
third quarter of fiscal 2001. Due to the settlement of this liability, goodwill
recorded at the acquisition date was reduced by $8.2 million. We reduced
goodwill amortization on a prospective basis beginning in the fourth quarter of
fiscal 2001.

Minority Investment

     On June 6, 2000, we announced the formation of a strategic relationship
with IdeaForest, an online destination site for arts and crafts merchandise,
creative ideas, advice and supplies. As part of the strategic relationship,
IdeaForest, which operates as an independent entity, is responsible for all
content and technology support to the joann.com website. We provide product to
the site, with customer fulfillment and service being handled by IdeaForest. We
invested $6.5 million in IdeaForest, which, combined with our contribution of
                                        18
<PAGE>   20

strategic assets, entitled us to a 28.5% ownership interest. In addition, we
have the ability to increase our future ownership percentage through the vesting
and exercise of warrants. Our investment in IdeaForest is accounted for using
the equity method. During fiscal 2001, we recorded equity losses of $3.2 million
related to this minority investment.

     During the fourth quarter of fiscal 2001, we reduced the carrying value of
our investment in IdeaForest to zero, which resulted in a $3.3 million charge.
IdeaForest's current projections anticipate that it will not achieve
profitability until its third year of operations and that an additional cash
investment in IdeaForest will be required before then. IdeaForest has sufficient
cash to continue to run its operation at its lowered cost structure through the
end of fiscal 2002. Although we remain committed to an online presence, the
level of any future cash investment by us in IdeaForest is uncertain. As a
result, we concluded the carrying value of the initial investment should be
reduced to zero.

Fiscal 2000 Cash Flows

     Cash, including temporary cash investments, increased $1.0 million during
fiscal 2000 to $21.4 million as of January 29, 2000.

     Net cash provided by operating activities was $27.7 million in fiscal 2000,
compared to net cash used for operating activities of $15.3 million in fiscal
1999. Cash generated by operations in fiscal 2000, before working capital items,
totaled $71.8 million, an improvement of $11.0 million from the $60.8 million
generated during fiscal 1999. Working capital consumed $44.1 million of cash in
fiscal 2000. Inventories, net of payables support, increased $39.3 million
primarily due to the opening of 18 additional superstores and an increase in the
average store inventory levels for our traditional store base from fiscal 1999.

     Net cash used for investing activities for fiscal 2000 totaled $66.0
million compared to $94.3 million in fiscal 1999. Capital expenditures were
$67.4 million during fiscal 2000 versus $75.1 million in fiscal 1999 and are
discussed further under the caption "Capital Expenditures."

     Net cash provided by financing activities during fiscal 2000 was $39.3
million, consisting of a net increase of $56.1 million in long-term debt, offset
by the repurchase of $20.0 million of common shares.

Capital Expenditures

     During fiscal 2001, we reinvested $35.9 million into our business. We
invested $26.2 million during the year in new stores and upgrades through the
relocation or remodeling of our existing store base. During fiscal 2001, we
opened 16 superstores and two traditional stores, relocated six stores and
closed 37 smaller or under-performing traditional stores (excluding the 42
traditional stores identified for closing in fiscal 2002). Of the fiscal 2001
closings, 14 directly related to superstore openings.

     We spent $4.0 million in fiscal 2001 on capitalizable systems technology,
of which $3.0 million related to the installation of the SAP Retail System. This
software replaced substantially all of our existing financial and merchandising
systems. We became operational on the SAP Retail System in March 2000. The total
cost of this two-year project, including expenses, was approximately $33 million
and is being amortized over five years.

     We also spent $3.3 million in fiscal 2001 on capital projects for our
distribution network, among other improvements, to prepare our Hudson
distribution center for seasonal product handling.

     During fiscal 2001, construction was completed on a new 630,000 square foot
West Coast distribution center, located on an 80-acre site in Visalia,
California. This facility began shipping inventory to select stores in April
2001. We expect this facility to be fully operational and shipping product to
more than 300 stores, or over 30% of our chain, by the end of the second quarter
of fiscal 2002. See "Sources of Liquidity" for additional information regarding
the financing of this facility.

     During fiscal 2000, we reinvested $67.4 million into our business, of which
$39.9 million represented investment in new stores and upgrades through the
relocation or remodeling of our existing store base. During fiscal 2000, we
opened 18 superstores and 11 traditional stores, relocated 18 traditional stores
and closed 61
                                        19
<PAGE>   21

smaller or under-performing traditional stores. Twenty of these closings
directly related to superstore openings.

     We spent $17.1 million in fiscal 2000 on capitalizable systems technology,
of which $15.8 million related to the installation of the SAP Retail System.

     We also spent $4.2 million in fiscal 2000 on capital projects for our
distribution network, including among other improvements, the installation of a
second fabric selection module in our Hudson distribution center.

     During fiscal 2002, we intend to open 12 new superstores and to relocate 10
traditional stores. We are limiting our store expansion in fiscal 2002 to the 12
new superstores for which we have already executed leases. We will refrain from
any new commitments until the overall economic picture and our specific
performance improves. We are limiting our capital spending in order to maximize
our cash flows to reduce debt. Our total capital expenditures are expected to
approximate $30 million in fiscal 2002 and we envision a lower amount in fiscal
2003. We expect funds for these expenditures to come from borrowings under our
senior credit facility and cash generated internally. Our superstore openings
for fiscal 2002 will average slightly less than 42,000 square feet compared with
the average of 46,300 square feet for the 58 superstores in operation today.

Common Share Repurchases

     During fiscal 2000, we purchased a total of 1.5 million common shares at an
aggregate price of $20.0 million. During fiscal 2001, we avoided share
repurchase opportunities in order to focus on debt reduction. As of February 3,
2001, we are authorized to purchase up to an additional 1.5 million shares under
previous authorizations from our Board of Directors. However, we have no plans
to repurchase additional shares at the present time.

Sources of Liquidity

     We have three principal sources of liquidity:

     - cash from operations;

     - cash and temporary cash investments; and

     - the Credit Facility (defined below).

     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. In
April 2001, we entered into new senior secured credit facilities (the "Credit
Facility") which, as explained below, refinanced and replaced our prior senior
credit facility and expire on April 30, 2005. The Credit Facility consists of a
$365 million credit facility providing for $325 million in revolving loans and a
$40 million term loan (the "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. As of April 7, 2001, excess availability exceeded $120
million. Interest on borrowings under the Credit Facility is calculated at the
bank's base rate or London Interbank Offered Rate ("LIBOR") plus 1.75% to 2.25%,
depending on the level of excess availability (as defined in the Credit
Agreement) that is maintained. Proceeds from the Credit Facility were used to
repay all outstanding borrowings under our prior senior credit facility and
synthetic lease facility. As of February 3, 2001, we had outstanding borrowings
of $90.0 million under the prior senior credit facility at a weighted average
interest rate of 7.94% and $54.6 million of letters of credit outstanding.

     Our weighted average interest rate and weighted average borrowings under
the prior senior credit facility and other lines of credit were 7.87% and $119.3
million during fiscal 2001 and 6.24% and $161.1 million during fiscal 2000.

                                        20
<PAGE>   22

     The Term Loan replaces a $40 million synthetic lease facility that we used
to finance the construction of our West Coast distribution center located in
Visalia, California. The synthetic lease facility was accounted for as an
operating lease, with interest payments capitalized until the facility began
operations. Accordingly, no asset or debt obligation related to the construction
of the Visalia distribution center is reflected on the accompanying consolidated
balance sheet at February 3, 2001. As a result of the termination of the
synthetic lease facility, we will record the appropriate assets and debt
obligation of $40 million in the first quarter of fiscal 2002. The Term Loan,
while outstanding, reduces availability under the Credit Facility.

     On May 5, 1999, we issued $150.0 million of 10 3/8% senior subordinated
notes due May 1, 2007. Interest on the senior subordinated notes is payable on
May 1 and November 1 of each year. We have the option of redeeming the notes at
any time after May 1, 2003, in accordance with certain call provisions. The
notes represent unsecured obligations that are subordinated to the Credit
Facility and are fully and unconditionally guaranteed by each of our
subsidiaries.

     Our total debt-to-capitalization ratio was 49.1% at February 3, 2001 and
48.6% at January 29, 2000. This increase in the debt-to-capitalization ratio
resulted primarily from the reduction in shareholders' equity due to the fiscal
2001 net loss.

     We have a goal to reduce debt and inventory levels during fiscal 2002. Our
new SAP Retail System should help us achieve our inventory reduction goals, and
we are limiting our capital spending and forgoing share buyback opportunities to
focus on debt reduction.

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.
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.

     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.

DERIVATIVE FINANCIAL INSTRUMENTS AND MARKET RISK

     We are exposed to the impact of:

     - interest rate changes on our outstanding borrowings under the Credit
       Facility; and

     - foreign currency fluctuations on merchandise that is sourced
       internationally.

     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 and to lower our
overall borrowing costs. To achieve our objective, we utilize interest rate
swaps to manage net exposure to interest rate changes related to our debt
structure. On March 15, 1998, we entered into a five-year interest rate swap
agreement to hedge our interest rate exposure. The notional amount of this
interest rate swap is $75.0 million, with a fixed LIBOR of 5.98%, reduced to
$50.0 million on March 15, 2001 until its expiration on March 15, 2003. In May
2000, we entered into an interest rate swap agreement to hedge interest rate
exposure on $40.0 million of variable rate debt. The interest rate swap has a
term of five years effective May 1, 2001, with a notional amount of $40.0
million and a fixed LIBOR rate of 6.80%.

     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 source approximately 20% of our purchases
internationally.
                                        21
<PAGE>   23

RECENT ACCOUNTING PRONOUNCEMENTS

     Derivatives. In June 1998, Statement of Financial Accounting Standards
("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging
Activities," as amended by SFAS No. 138, was issued. This statement will be
adopted in the first quarter of fiscal 2002. Under the provisions of this
statement, we are required to record all derivatives on the balance sheet at
fair value and to recognize changes in the fair value of derivatives in our
results of operations, unless specific hedge accounting criteria are met, in
which case the charge will be reflected in other comprehensive income as a
charge to shareholders' equity. As of February 4, 2001, we expect the adoption
of this new accounting standard to result in an after tax charge to be
classified as a cumulative effect of change in accounting principle of $1.7
million.

FORWARD-LOOKING STATEMENTS

     Certain statements contained in this report that are not historical facts
are forward-looking statements that are subject to certain risks and
uncertainties. When used herein, the terms "anticipates," "plans," "estimates,"
"expects," "believes," and similar expressions as they relate to us 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, our failure to manage our growth or our
transition to our new Visalia distribution center, our failure to execute our
productivity initiatives outlined, including the SKU Reduction Initiative and
the store base productivity review, loss of key management, the availability of
merchandise, changes in the competitive pricing for products, and the impact of
competitor store openings and closings.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     The information required by this item is included in the "Derivative
Financial Instruments and Market Risk" section of "Management's Discussion and
Analysis of Financial Condition and Results of Operations."

                                        22
<PAGE>   24

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

                              JO-ANN STORES, INC.

                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
                                                                PAGE
                                                                ----
<S>                                                             <C>
Report of Management........................................     24
Report of Independent Public Accountants....................     25
Consolidated Balance Sheets as of February 3, 2001 and
  January 29, 2000..........................................     26
Consolidated Statements of Operations for each of the three
     fiscal years in the period ended February 3, 2001......     27
Consolidated Statements of Cash Flows for each of the three
     fiscal years in the period ended February 3, 2001......     28
Consolidated Statements of Shareholders' Equity for each of
     the three fiscal years in the period ended February 3,
     2001...................................................     29
Notes to Consolidated Financial Statements..................     30
Report of Independent Public Accountants on Financial
  Statement Schedule........................................     49
Schedule II -- Valuation and Qualifying Accounts............     50
</TABLE>

                                        23
<PAGE>   25

                              REPORT OF MANAGEMENT

To the Shareholders of Jo-Ann Stores, Inc.

     We have prepared the accompanying consolidated financial statements and
related information included herein for the years ended February 3, 2001,
January 29, 2000 and January 30, 1999. The opinion of Arthur Andersen LLP, the
Company's independent public accountants, 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 outside
directors. The committee meets periodically with management, internal auditors
and our independent public accountants 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 public
accountants have private and confidential access to the Audit Committee at all
times.

<TABLE>
<S>                                             <C>
Alan Rosskamm                                   Brian P. Carney
Chairman of the Board,                          Executive Vice President,
President and Chief Executive Officer           Chief Financial Officer
</TABLE>

                                        24
<PAGE>   26

                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

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. (an Ohio corporation) and Subsidiaries as of February 3, 2001 and
January 29, 2000, and the related consolidated statements of operations,
shareholders' equity and cash flows for each of the three fiscal years in the
period ended February 3, 2001. 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 3, 2001 and January 29, 2000 and the results of
their operations and their cash flows for each of the three fiscal years in the
period ended February 3, 2001 in conformity with accounting principles generally
accepted in the United States.

     As explained in Note 2 to the consolidated financial statements, the
Company has given retroactive effect to a change in method of inventory
valuation from the last-in, first-out ("LIFO") method to the first-in, first-
out ("FIFO") method.

Arthur Andersen LLP

Cleveland, Ohio,
March 7, 2001.

                                        25
<PAGE>   27

                              JO-ANN STORES, INC.

                          CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                FEBRUARY 3,         JANUARY 29,
                                                                    2001                2000
                                                                -----------         -----------
                                                                     (Millions of dollars,
                                                                except share and per share data)
<S>                                                           <C>                 <C>
ASSETS
Current assets:
  Cash and temporary cash investments.......................       $ 17.5              $ 21.4
  Inventories...............................................        451.0               442.5
  Prepaid expenses and other current assets.................         37.3                34.0
                                                                   ------              ------
Total current assets........................................        505.8               497.9
Property, equipment and leasehold improvements, net.........        190.2               194.7
Goodwill, net...............................................         27.2                36.3
Other assets................................................         19.0                18.0
                                                                   ------              ------
Total assets................................................       $742.2              $746.9
                                                                   ======              ======

LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
  Accounts payable..........................................       $164.0              $149.6
  Accrued expenses..........................................         59.5                58.5
                                                                   ------              ------
Total current liabilities...................................        223.5               208.1
Long-term debt..............................................        240.0               245.2
Deferred income taxes.......................................         22.5                22.4
Other long-term liabilities.................................          7.4                11.8
Shareholders' equity:
  Common stock:
     Class A, stated value $0.05 per share; issued and
       outstanding 9,364,896 and 8,987,036, respectively....          0.6                 0.5
     Class B, stated value $0.05 per share; issued and
       outstanding 8,842,123 and 8,857,853, respectively....          0.5                 0.5
  Additional paid-in capital................................         99.2                97.9
  Unamortized restricted stock awards.......................         (1.2)               (2.1)
  Retained earnings.........................................        187.8               201.4
                                                                   ------              ------
                                                                    286.9               298.2
  Treasury stock, at cost...................................        (38.1)              (38.8)
                                                                   ------              ------
Total shareholders' equity..................................        248.8               259.4
                                                                   ------              ------
Total liabilities and shareholders' equity..................       $742.2              $746.9
                                                                   ======              ======
</TABLE>

                 See notes to consolidated financial statements

                                        26
<PAGE>   28

                              JO-ANN STORES, INC.

                     CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                                                        FISCAL YEARS ENDED
                                                           --------------------------------------------
                                                           FEBRUARY 3,     JANUARY 29,     JANUARY 30,
                                                               2001            2000            1999
                                                           ------------    ------------    ------------
                                                           (Millions of dollars, except per share data)
<S>                                                        <C>             <C>             <C>
Net sales................................................    $1,483.3        $1,381.5        $1,242.9
Cost of sales............................................       838.2           748.3           678.9
                                                             --------        --------        --------
Gross margin.............................................       645.1           633.2           564.0
Selling, general and administrative expenses.............       589.2           533.8           476.7
Depreciation and amortization............................        38.3            32.0            27.7
Non-recurring charge.....................................          --              --            25.1
                                                             --------        --------        --------
Operating profit.........................................        17.6            67.4            34.5
Interest expense.........................................        29.0            26.2            12.5
                                                             --------        --------        --------
Income (loss) before income taxes........................       (11.4)           41.2            22.0
Income tax provision (benefit)...........................        (4.3)           15.6             8.6
                                                             --------        --------        --------
Net income (loss) before equity loss.....................        (7.1)           25.6            13.4
Equity and asset impairment losses of minority
  investment.............................................        (6.5)             --              --
                                                             --------        --------        --------
Net income (loss)........................................    $  (13.6)       $   25.6        $   13.4
                                                             ========        ========        ========
Net income (loss) per common share:
  Basic..................................................    $  (0.75)       $   1.41        $   0.71
                                                             ========        ========        ========
  Diluted................................................    $  (0.75)       $   1.38        $   0.67
                                                             ========        ========        ========
</TABLE>

                 See notes to consolidated financial statements

                                        27
<PAGE>   29

                              JO-ANN STORES, INC.

                     CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                      FISCAL YEARS ENDED
                                                           -----------------------------------------
                                                           FEBRUARY 3,    JANUARY 29,    JANUARY 30,
                                                              2001           2000           1999
                                                           -----------    -----------    -----------
                                                                     (Millions of dollars)
<S>                                                        <C>            <C>            <C>
Net cash flows from operating activities:
  Net income (loss)......................................    $(13.6)        $  25.6        $ 13.4
  Adjustments to reconcile net income (loss) to net cash
     provided by (used for) operating activities:
     Depreciation and amortization.......................      38.3            32.0          27.7
     Deferred income taxes...............................      (4.2)           13.0           8.3
     Loss on disposal of fixed assets....................       1.7             1.2           2.2
     Equity and asset impairment losses of minority
       investment........................................       6.5              --            --
     Non-cash portion of non-recurring charge............        --              --           9.2
  Changes in operating assets and liabilities:
     Increase in inventories.............................      (8.5)          (38.5)        (95.6)
     Decrease in prepaid expenses and other current
       assets............................................       1.0             5.9          19.2
     Increase (decrease) in accounts payable.............      14.4            (0.8)         14.6
     Increase (decrease) in accrued expenses.............       3.9             6.8         (14.3)
     Settlement of income tax contingency................      (3.5)          (16.1)           --
     Other, net..........................................       3.0            (1.4)           --
                                                             ------         -------        ------
Net cash provided by (used for) operating activities:....      39.0            27.7         (15.3)
Net cash flows used for investing activities:
  Capital expenditures...................................     (35.9)          (67.4)        (75.1)
  Minority investment....................................      (6.5)             --            --
  House of Fabrics acquisition, net of cash acquired.....        --              --         (23.5)
  Other, net.............................................       1.7             1.4           4.3
                                                             ------         -------        ------
Net cash used for investing activities...................     (40.7)          (66.0)        (94.3)
Net cash flows provided by (used for) financing
  activities:
  Proceeds from issuance of senior subordinated notes,
     net.................................................        --           143.4            --
  Proceeds from long-term debt...........................      73.7           158.4         159.8
  Repayment of long-term debt............................     (78.9)         (245.7)        (48.5)
  Purchase of common stock...............................      (0.1)          (20.0)         (1.5)
  Proceeds and tax benefit from exercise of stock
     options.............................................        --             1.9           4.4
  Issuance of treasury shares............................       1.0             1.2           1.0
  Other, net.............................................       2.1             0.1            --
                                                             ------         -------        ------
Net cash provided by (used for) financing activities.....      (2.2)           39.3         115.2
                                                             ------         -------        ------
Net increase (decrease) in cash..........................      (3.9)            1.0           5.6
Cash and temporary cash investments at beginning of
  year...................................................      21.4            20.4          14.8
                                                             ------         -------        ------
Cash and temporary cash investments at end of year.......    $ 17.5         $  21.4        $ 20.4
                                                             ======         =======        ======
Supplemental disclosures of cash flow information:
  Cash paid (received) during the year for:
     Interest............................................    $ 27.7         $  20.0        $ 12.5
     Income taxes, net of refunds........................    $  3.4         $  (5.9)       $ 14.6
</TABLE>

                 See notes to consolidated financial statements

                                        28
<PAGE>   30

                              JO-ANN STORES, INC.

                CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

<TABLE>
<CAPTION>
                                        CLASS A   CLASS B   ADDITIONAL   UNAMORTIZED                              TOTAL
                                        COMMON    COMMON     PAID-IN      RESTRICTED    RETAINED   TREASURY   SHAREHOLDERS'
                                         STOCK     STOCK     CAPITAL     STOCK AWARDS   EARNINGS    STOCK        EQUITY
                                        -------   -------   ----------   ------------   --------   --------   -------------
                                                                       (Millions of dollars)
<S>                                     <C>       <C>       <C>          <C>            <C>        <C>        <C>
Balance, January 31, 1998, as
  previously stated...................   $0.5      $0.5       $88.9         $(3.1)       $172.2     $(18.1)      $240.9
Adjustment for the cumulative effect
  on the prior years of applying
  retroactively the change in the
  method of accounting for inventories
  (Note 2)............................     --        --          --            --          (9.8)        --         (9.8)
                                         ----      ----       -----         -----        ------     ------       ------

Balance, January 31, 1998, as
  restated............................    0.5       0.5        88.9          (3.1)        162.4      (18.1)       231.1
  Net income..........................     --        --          --            --          13.4         --         13.4
  Exercise of stock options...........     --        --         2.7            --            --         --          2.7
  Tax benefit on options exercised....     --        --         1.7            --            --         --          1.7
  Issuance of restricted stock
    awards............................     --        --         1.3          (1.3)           --         --           --
  Cancellation of restricted stock
    awards............................     --        --        (0.9)          0.4            --         --         (0.5)
  Amortization of restricted stock
    awards............................     --        --          --           1.1            --         --          1.1
  Purchase of common stock............     --        --          --            --            --       (1.5)        (1.5)
  Issuance of treasury shares.........     --        --         0.7            --            --        0.3          1.0
                                         ----      ----       -----         -----        ------     ------       ------

Balance, January 30, 1999.............    0.5       0.5        94.4          (2.9)        175.8      (19.3)       249.0
  Net income..........................     --        --          --            --          25.6         --         25.6
  Exercise of stock options...........     --        --         1.3            --            --         --          1.3
  Tax benefit on options exercised....     --        --         0.6            --            --         --          0.6
  Issuance of restricted stock
    awards............................     --        --         0.6          (0.6)           --         --           --
  Cancellation of restricted stock
    awards............................     --        --        (0.3)          0.1            --         --         (0.2)
  Amortization of restricted stock
    awards............................     --        --          --           1.3            --         --          1.3
  Purchase of common stock............     --        --          --            --            --      (20.0)       (20.0)
  Issuance of treasury shares.........     --        --         0.7            --            --        0.5          1.2
  Issuance of common stock --
    Associate Stock Ownership Plan....     --        --         0.6            --            --         --          0.6
                                         ----      ----       -----         -----        ------     ------       ------

Balance, January 29, 2000.............    0.5       0.5        97.9          (2.1)        201.4      (38.8)       259.4
  Net loss............................     --        --          --            --         (13.6)        --        (13.6)
  Issuance of restricted stock
    awards............................     --        --         0.1          (0.1)           --         --           --
  Cancellation of restricted stock
    awards............................     --        --        (0.6)          0.2            --         --         (0.4)
  Amortization of restricted stock
    awards............................     --        --          --           0.8            --         --          0.8
  Purchase of common stock............     --        --          --            --            --       (0.1)        (0.1)
  Issuance of treasury shares.........     --        --         0.2            --            --        0.8          1.0
  Issuance of common stock --
    Associate Stock Ownership Plan....    0.1        --         1.6            --            --         --          1.7
                                         ----      ----       -----         -----        ------     ------       ------

Balance, February 3, 2001.............   $0.6      $0.5       $99.2         $(1.2)       $187.8     $(38.1)      $248.8
                                         ====      ====       =====         =====        ======     ======       ======
</TABLE>

                 See notes to consolidated financial statements

                                        29
<PAGE>   31

                              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 1,007 retail stores in 49 states at February 3, 2001. The
949 traditional and 58 superstores feature a broad line of apparel, craft and
home decorating fabrics, notions, crafts, seasonal and home accessories, and
floral and framing products.

     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 2000 and fiscal 1999
financial statements have been reclassified in order to conform with the current
year presentation.

USE OF ESTIMATES

     The preparation of financial statements in conformity with accounting
principles generally accepted in the United States 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. The
fiscal year refers to the year in which the period ends (e.g., fiscal 2001 ended
February 3, 2001). Fiscal 2001 is a 53-week year. Fiscal years 2000 and 1999
consist of 52 weeks.

CASH AND TEMPORARY CASH INVESTMENTS

     Temporary cash investments are all highly liquid investments with original
maturities of three months or less.

INVENTORIES

     Inventories are stated at the lower of cost or market. All inventories were
valued using the first-in, first-out ("FIFO") method (See Note
2 -- Inventories).

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, whichever is shorter.

     Expense for depreciation of property and equipment and amortization of
leasehold improvements amounted to $36.9 million, $30.0 million and $25.4
million in fiscal 2001, 2000 and 1999, respectively.

                                        30
<PAGE>   32
                              JO-ANN STORES, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 1 -- SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Maintenance and repair expenditures are charged to expense as incurred and
improvements and major renewals are capitalized.

SOFTWARE DEVELOPMENT

     The Company capitalized $3.5 million and $16.9 million in fiscal 2001 and
fiscal 2000, respectively, for internal use software. 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
value assigned to the net tangible assets acquired from House of Fabrics, Inc.
Goodwill is amortized on a straight-line basis over 40 years and is a
non-deductible expense for tax purposes. The Company periodically reviews the
recoverability of goodwill. The measurement of possible impairment is based
primarily on the ability to recover the balance of the goodwill from expected
future operating cash flows on an undiscounted basis. In management's opinion,
no material impairment exists on February 3, 2001. Amortization expense was $0.9
million, $1.0 million and $0.9 million for fiscal 2001, 2000 and 1999,
respectively. During fiscal 2001, goodwill was reduced by $8.2 million due to
the settlement of an income tax contingency (See Note 4 -- Acquisition of House
of Fabrics, Inc.)

IMPAIRMENT OF LONG-LIVED ASSETS

     The Company records impairment losses on long-lived assets when indicators
of impairment are present and the estimated undiscounted cash flows to be
generated by those assets are less than the assets' net book value. There were
no long-lived assets that required recognition of an impairment loss at February
3, 2001 or January 29, 2000.

FINANCIAL INSTRUMENTS

     Financial instruments held by the Company include cash and temporary cash
investments, accounts payable, debt obligations and interest rate swap
agreements. The carrying value of cash and temporary cash investments and
accounts payable is representative of fair value because of the short maturity
of these instruments. The carrying value of borrowings under the prior senior
credit facility approximates the fair value since the interest rate is variable
and fluctuates with market conditions. The fair value of the Company's senior
subordinated notes is based on market values in the high yield debt market. For
fair value disclosures of the Company's senior subordinated notes and interest
rate swap agreements, see Note 13 -- Fair Value of Financial Instruments.

     In June 1998, Statement of Financial Accounting Standards ("SFAS") No. 133,
"Accounting for Derivative Instruments and Hedging Activities," as amended by
SFAS No. 138, was issued. The statement will be adopted by the Company in the
first quarter of fiscal 2002, and requires that all derivatives be recorded on
the balance sheet at fair value and that changes in fair value of derivatives be
recognized in the Company's results of operations, unless specific hedge
accounting criteria are met, in which case the charge will be reflected in other
comprehensive income as a charge to shareholders' equity.

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
                                        31
<PAGE>   33
                              JO-ANN STORES, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 1 -- SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

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."

STORE OPENING EXPENSES

     Store opening expenses are charged to operations as incurred.

ADVERTISING COSTS

     The Company expenses production costs of advertising the first time the
advertising takes place. Advertising expense was $39.5 million, $32.6 million
and $32.5 million for fiscal 2001, 2000 and 1999, 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 2000 and fiscal 1999
include the effect of the assumed exercise of dilutive stock options under the
treasury stock method. Stock options are antidilutive for fiscal 2001 and
therefore are excluded from the calculation of diluted earnings per share. Basic
and diluted weighted average shares are as follows:

<TABLE>
<CAPTION>
          FISCAL YEARS ENDED                2001          2000          1999
          ------------------             ----------    ----------    ----------
<S>                                      <C>           <C>           <C>
Weighted average shares:
  Basic................................  18,041,192    18,198,325    18,964,082
  Incremental shares from assumed
     exercise of stock options.........          --       384,612       939,517
                                         ----------    ----------    ----------
  Diluted..............................  18,041,192    18,582,937    19,903,599
                                         ==========    ==========    ==========
</TABLE>

NOTE 2 -- INVENTORIES

CHANGE IN ACCOUNTING METHOD

     The Company has changed its method of valuing inventory and cost of sales
from the last-in, first-out method ("LIFO") to the FIFO method in fiscal 2001.
The change in inventory valuation method was made in order to facilitate more
appropriate comparisons within the industry as most of the Company's competitors
are on the FIFO inventory method, to simplify and provide more meaningful
reporting to lenders under the new senior secured credit facilities the Company
recently entered into and to more appropriately cost inventory in light of
continuous interim price volatility in the prices of the Company's inventory.
The financial statements for fiscal 2000 and prior years have been retroactively
restated to apply the new method.

                                        32
<PAGE>   34
                              JO-ANN STORES, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 2 -- INVENTORIES (CONTINUED)

The effect of the accounting change, net of tax, on the Company's net income and
earnings per share, as previously reported, is as follows (millions of dollars,
except per share data):

<TABLE>
<CAPTION>
         FISCAL YEARS ENDED                    2000                      1999
         ------------------           ----------------------    ----------------------
                                          AS                        AS
                                      PREVIOUSLY       AS       PREVIOUSLY       AS
                                       REPORTED     RESTATED     REPORTED     RESTATED
                                      ----------    --------    ----------    --------
<S>                                   <C>           <C>         <C>           <C>
Net income..........................    $25.7        $25.6        $13.6        $13.4
Net income per common share:
  Basic.............................    $1.41        $1.41        $0.72        $0.71
  Diluted...........................     1.38         1.38         0.69         0.67
</TABLE>

SKU REDUCTION INITIATIVE

     During the fourth quarter of fiscal 2001, the Company commenced an
inventory productivity initiative (the "SKU Reduction Initiative") which
entailed a thorough review of inventory investment and gross margin performance
by item or stock-keeping unit ("SKU"), resulting in the identification of
approximately 10,000 active items, or approximately $60 million of inventory, at
cost, that the Company has made the decision to discontinue. During the fourth
quarter of fiscal 2001, the Company recorded a non-cash charge of $23.0 million,
included in cost of sales, to reserve for management's estimate of the expected
loss associated with the clearance sale of these products, below cost, during
fiscal 2002. This estimate was based on the Company's historical levels of
recovery experience. The Company will begin clearance programs in the second
quarter of fiscal 2002 designed to aggressively clear this product.

     Management believes the review process completed in the fourth quarter for
the SKU Reduction Initiative was thorough. Although additional product may be
targeted for reduction based on that analysis, the Company believes that the
extent of such reduction decisions will be more comparable to what is normal
course business practice in retailing.

NOTE 3 -- PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS

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

<TABLE>
<CAPTION>
                      FISCAL YEARS                          2001       2000
                      ------------                         -------    -------
<S>                                                        <C>        <C>
Land and buildings.......................................  $  25.6    $  23.2
Furniture, fixtures and equipment........................    244.3      200.4
Leasehold improvements...................................     69.7       64.5
Construction in progress.................................      5.8       28.4
                                                           -------    -------
                                                             345.4      316.5
Less accumulated depreciation............................   (155.2)    (121.8)
                                                           -------    -------
                                                           $ 190.2    $ 194.7
                                                           =======    =======
</TABLE>

NOTE 4 -- ACQUISITION OF HOUSE OF FABRICS, INC.

     On March 9, 1998, the Company acquired, through a cash tender offer, 77.2%
of the outstanding common stock of House of Fabrics, Inc. ("HOF") for $4.25 per
share (the "Acquisition"). On April 21, 1998, the merger of HOF with a wholly
owned subsidiary of the Company was approved by the shareholders of HOF. As a
result, HOF became a wholly owned subsidiary of the Company, and all shares of
HOF common stock not already owned by the Company were canceled and converted
into the right to receive

                                        33
<PAGE>   35
                              JO-ANN STORES, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 4 -- ACQUISITION OF HOUSE OF FABRICS, INC. (CONTINUED)

$4.25 in cash. The total value of the transaction was approximately $97.1
million, including the assumption of debt and other long-term liabilities
aggregating $73.6 million.

     HOF had annual revenues of approximately $240.0 million and operated 261
fabric and craft stores in 27 states at the time of the Acquisition. Of the 261
stores acquired, management identified 60 HOF stores and 30 Jo-Ann Fabrics and
Crafts stores for closing, due to the geographic overlap that existed between
the two companies. Operating results of the continuing HOF stores have been
included in the Company's results of operations since the date of the
Acquisition.

     The Acquisition was recorded as a purchase business combination using
Accounting Principles Board Opinion No. 16, "Business Combinations."
Accordingly, the carrying values of HOF net assets, including the establishment
of reserves for severance and costs associated with the HOF store closings, have
been adjusted to their estimated fair values. The excess of the purchase price
paid over the net identifiable assets and liabilities totaled $38.1 million,
before considering the settlement of the income tax contingency discussed below,
and is reported as goodwill, which is being amortized on a straight-line basis
over a 40-year life.

     In accordance with Emerging Issues Task Force 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)," the Company
recorded a non-recurring charge of $25.1 million during fiscal 1999 for direct
and other merger-related costs pertaining to the Acquisition.

     Following is a summary of the significant components of the non-recurring
charge (millions of dollars):

<TABLE>
<CAPTION>
                                                    CASH     NON-CASH    TOTAL
                                                    -----    --------    -----
<S>                                                 <C>      <C>         <C>
Write-downs of previously owned assets............  $  --     $ 9.2      $ 9.2
Costs of operating duplicate corporate
  facilities......................................    5.4        --        5.4
Store remerchandising costs.......................    5.1        --        5.1
Rental costs on closed stores and other costs.....    5.4        --        5.4
                                                    -----     -----      -----
                                                    $15.9     $ 9.2      $25.1
                                                    =====     =====      =====
</TABLE>

     The integration events associated with the Acquisition were completed in
fiscal 1999.

     Other long-term liabilities in fiscal 2000 and fiscal 1999 include a $22.5
million income tax contingency assumed in the Acquisition. Prior to the
Acquisition, HOF received refunds totaling $22.5 million pursuant to carrybacks
of certain net operating losses on claims filed for refund with the Internal
Revenue Service ("IRS") on Forms 1139. The claims for refund were examined by
the IRS, and a deficiency notice was issued. HOF appealed the deficiency
assessment. As of the date of the Acquisition, the Company recorded accrued
interest of $4.4 million associated with this contingency.

     On October 20, 2000, this income tax contingency was settled with the IRS
for $19.6 million ($14.7 million of tax liability and $4.9 million of accrued
interest). Of this total settlement, $16.1 million of the liability was paid in
fiscal 2000 in the form of a deposit payment (cash bond) to the IRS. The
remaining $3.5 million was paid during the third quarter of fiscal 2001. Due to
the settlement of this liability, goodwill recorded in connection with the
Acquisition was reduced by $8.2 million. Goodwill amortization has been reduced
on a prospective basis beginning in the fourth quarter of fiscal 2001.

NOTE 5 -- MINORITY INVESTMENT

     On June 6, 2000, the Company announced that it had entered into a strategic
relationship with IdeaForest.com, Inc. ("IdeaForest"), an online destination
site for arts and crafts merchandise, creative ideas,

                                        34
<PAGE>   36
                              JO-ANN STORES, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 5 -- MINORITY INVESTMENT (CONTINUED)

advice and supplies. As part of the strategic relationship, IdeaForest, which
operates as an independent entity, is responsible for all content and technology
support to the joann.com website. The Company provides product to the site, with
customer fulfillment and service being handled by IdeaForest. The Company
invested $6.5 million in IdeaForest, which, combined with the Company's
contribution of strategic assets, entitled the Company to a 28.5% ownership
interest. In addition, the Company has the ability to increase its future
ownership percentage through the vesting and exercise of warrants. The
investment in IdeaForest is accounted for using the equity method. During fiscal
2001, the Company recorded equity losses of $3.2 million related to this
minority investment.

     During the fourth quarter of fiscal 2001, the Company reduced the carrying
value of its investment in IdeaForest to zero, which resulted in a $3.3 million
charge. IdeaForest's current projections anticipate that it will not achieve
profitability until its third year of operations and that an additional cash
investment in IdeaForest will be required before then. IdeaForest has sufficient
cash to continue to run its operation at its lowered cost structure through the
end of fiscal 2002. Although the Company remains committed to an online
presence, the level of any future cash investment by the Company in IdeaForest
is uncertain. As a result, the Company concluded the carrying value of the
initial investment should be reduced to zero.

NOTE 6 -- INCOME TAXES

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

<TABLE>
<CAPTION>
                    FISCAL YEARS ENDED                       2001     2000     1999
                    ------------------                      ------    -----    -----
                                                             (Millions of dollars)
<S>                                                         <C>       <C>      <C>
Current:
  Federal.................................................  $  6.9    $ 1.6    $(1.4)
  State and local.........................................    (0.7)     1.2      1.4
                                                            ------    -----    -----
                                                               6.2      2.8       --
Deferred..................................................   (10.5)    12.8      8.6
                                                            ------    -----    -----
Income tax provision (benefit)............................  $ (4.3)   $15.6    $ 8.6
                                                            ======    =====    =====
</TABLE>

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

<TABLE>
<CAPTION>
                     FISCAL YEARS ENDED                       2001     2000     1999
                     ------------------                       -----    -----    ----
                                                              (Millions of dollars)
<S>                                                           <C>      <C>      <C>
Federal income tax at the statutory rate....................  $(4.0)   $14.4    $7.6
Effect of:
  State and local taxes.....................................   (0.2)     1.7     0.9
  Goodwill and other, net...................................   (0.1)    (0.5)    0.1
                                                              -----    -----    ----
Income tax provision (benefit)..............................  $(4.3)   $15.6    $8.6
                                                              =====    =====    ====
</TABLE>

                                        35
<PAGE>   37
                              JO-ANN STORES, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 6 -- INCOME TAXES (CONTINUED)

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

<TABLE>
<CAPTION>
                                                                ASSET/(LIABILITY)
                                                              ----------------------
                        FISCAL YEARS                            2001         2000
                        ------------                          ---------    ---------
                                                              (Millions of dollars)
<S>                                                           <C>          <C>
Current
Deferred tax assets:
  Inventory items...........................................    $ 14.4       $  6.9
  Employee benefits.........................................       2.3          2.5
  Lease obligations.........................................       3.0          1.6
  Other.....................................................       1.2          5.6
                                                                ------       ------
                                                                  20.9         16.6
Deferred tax liabilities:
  Basis difference in net assets acquired...................      (1.4)        (1.4)
                                                                ------       ------
Net current deferred tax asset..............................    $ 19.5       $ 15.2
                                                                ======       ======
Non-current
Deferred tax assets:
  NOL carryforward..........................................    $  9.3       $   --
  Other.....................................................       1.7          0.1
                                                                ------       ------
                                                                  11.0          0.1
Deferred tax liabilities:
  Depreciation..............................................     (32.8)       (21.6)
  Basis difference in net assets acquired...................      (0.6)        (0.7)
  Other.....................................................      (0.1)        (0.2)
                                                                ------       ------
                                                                 (33.5)       (22.5)
                                                                ------       ------
Net non-current deferred tax liability......................    $(22.5)      $(22.4)
                                                                ======       ======
</TABLE>

     In connection with the purchase of HOF, the Company incurred certain net
operating losses, of which approximately $22.5 million is available as of
February 3, 2001 to offset future years' tax payments. These losses expire in
2019. The Company has recorded valuation allowances for certain deferred tax
assets that may be unrealizable.

NOTE 7 -- FINANCING

CREDIT FACILITY

     In April 2001, the Company entered into new senior secured credit
facilities (the "Credit Facility") led by Fleet Retail Finance Inc. as Agent,
which, as explained below, refinanced and replaced our prior senior credit
facility and expire on April 30, 2005. The Credit Facility consists of a $365
million credit facility providing for $325 million in revolving loans and a $40
million term loan (the "Term Loan"), both secured by a first priority perfected
security interest in the inventory, accounts receivable, property and other
assets of the Company. The Credit Facility is fully and unconditionally
guaranteed by each of the Company's subsidiaries. The Credit Facility contains a
letter of credit sub-limit of $150 million. Interest on borrowings under the
Credit Facility is calculated at the bank's base rate or London Interbank
Offered Rate ("LIBOR") plus 1.75% to 2.25%, depending on the level of excess
availability (as defined in the Credit Agreement) that is maintained. The Credit
Facility provides for the applicable LIBOR margin to be set at 2.00% for the
first 12 months of the term of the facility. Proceeds from the Credit Facility
were used to repay all outstanding

                                        36
<PAGE>   38
                              JO-ANN STORES, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 7 -- FINANCING (CONTINUED)

borrowings under the Company's prior senior credit facility and synthetic lease
facility. As of February 3, 2001, the Company had outstanding borrowings of
$90.0 million under the prior senior credit facility at a weighted average
interest rate of 7.94% and $54.6 million of letters of credit outstanding.
Letters of credit are considered outstanding amounts under the Credit Facility.
The Company will pay quarterly usage fees of between 1.25% and 2.25% per annum
on outstanding letters of credit under the Credit Facility. The Company will
also pay quarterly fees of 0.375% per annum on the unused portion of the Credit
Facility.

     The Credit Facility does not contain any financial covenant tests as long
as excess availability, as defined, is greater than $35 million. A minimum net
worth financial covenant test exists if excess availability is less than $35
million. As of April 7, 2001, excess availability exceeded $120 million. In
addition, capital expenditures under the Credit Facility are limited to $50
million per year, with any unused portion carried forward and available for
future use. The Credit Facility permits the repurchase of common shares of the
Company, the repurchase of senior subordinated notes, and the payment of cash
dividends (up to $5.0 million) in any fiscal year, subject to maintaining
certain levels of excess availability.

     The Company's weighted average interest rate and weighted average
borrowings under the prior senior credit facility and other lines of credit were
7.87% and $119.3 million during fiscal 2001, 6.24% and $161.1 million during
fiscal 2000, and 6.23% and $157.1 million during fiscal 1999.

     The Term Loan replaces a $40 million synthetic lease facility that the
Company used to finance the construction of its West Coast distribution center
located in Visalia, California. The synthetic lease facility was accounted for
as an operating lease, with interest payments capitalized until the facility
began operations. Accordingly, no asset or debt obligation related to the
construction of the distribution center is reflected on the accompanying
consolidated balance sheet at February 3, 2001. As a result of the termination
of the synthetic lease facility, the Company will record the appropriate assets
and debt obligation of $40 million in the first quarter of fiscal 2002.
Construction period interest, which totaled $0.8 million at February 3, 2001,
will be capitalized as part of the asset cost in the first quarter. The Term
Loan, while outstanding, reduces availability under the Credit Facility. There
is no penalty if the Company elects to prepay the Term Loan principal.

SENIOR SUBORDINATED NOTES

     On May 5, 1999, the Company issued $150.0 million of 10 3/8% senior
subordinated notes due May 1, 2007. Interest on the senior subordinated 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% 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 after May 1, 2003, in
accordance with certain call provisions. 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.

NOTE 8 -- COMMITMENTS AND CONTINGENCIES

     In the ordinary course of business, the Company is involved in various
legal proceedings, workers' compensation claims and product liability disputes.
The Company is of the opinion that the ultimate resolution of these matters will
not have a material adverse effect on the results of operations or the financial
position of the Company.

     During the fourth quarter of fiscal 2001, the Company recorded a $6.7
million charge to selling, general and administrative expenses related to 42
stores identified for closing in fiscal 2002. The expenses accrued consist
primarily of the cost of reducing store fixed assets and leasehold improvements
to net realizable value and accruing for any remaining closed store rent
liability under non-cancelable lease agreements.

                                        37
<PAGE>   39
                              JO-ANN STORES, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 9 -- CAPITAL STOCK

     The following table details the common stock ($0.05 stated value) activity
for fiscal 2001 and fiscal 2000:

<TABLE>
<CAPTION>
                                                   COMMON SHARES OUTSTANDING --
                                                         NET OF TREASURY
                                               ------------------------------------      SHARES
                                                CLASS A      CLASS B       TOTAL       IN TREASURY
                                               ---------    ---------    ----------    -----------
<S>                                            <C>          <C>          <C>           <C>
Balance at January 30, 1999..................  9,530,330    9,481,244    19,011,574     2,272,555
  Exercise of stock options..................    100,864       68,748       169,612            --
  Issuance of restricted stock awards........     39,000        3,250        42,250            --
  Issuance of common stock -- Associate Stock
     Ownership Plan..........................     60,049           --        60,049            --
  Cancellation of restricted stock awards....     (5,000)      (9,750)      (14,750)           --
  Purchase of common stock...................   (820,907)    (689,064)   (1,509,971)    1,509,971
  Issuance of treasury shares................     82,700        3,425        86,125       (86,125)
                                               ---------    ---------    ----------     ---------
Balance at January 29, 2000..................  8,987,036    8,857,853    17,844,889     3,696,401
  Exercise of stock options..................      7,838        2,588        10,426            --
  Issuance of restricted stock awards........     15,000          375        15,375            --
  Issuance of common stock -- Associate Stock
     Ownership Plan..........................    248,476           --       248,476            --
  Cancellation of restricted stock awards....    (25,000)      (4,875)      (29,875)           --
  Purchase of common stock...................         --      (13,818)      (13,818)       13,818
  Issuance of treasury shares................    131,546           --       131,546      (131,546)
                                               ---------    ---------    ----------     ---------
Balance at February 3, 2001..................  9,364,896    8,842,123    18,207,019     3,578,673
                                               =========    =========    ==========     =========
</TABLE>

     The Company's Class A common shares have voting rights while Class B common
shares have no voting rights. At February 3, 2001 and January 29, 2000, there
were 75,000,000 Class A common shares and 75,000,000 Class B common shares
authorized for issuance. At February 3, 2001 and January 29 2000, there were
5,000,000 shares of serial preferred stock, without par value, authorized for
issuance, none of which are outstanding.

SHAREHOLDERS' RIGHTS PLAN

     On October 31, 2000, 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 Class A and Class B common share outstanding. The
rights are exercisable only if a person or group buys or announces a tender
offer for 15% or more of the outstanding Class A common shares as defined in the
Rights Plan. When exercisable, each right initially entitles a holder to
purchase one Class A common share for $60.00, or under certain circumstances,
one Class A common share for $0.50. The rights, which do not have voting
privileges, expire in October 2010, but may be redeemed by the Board of
Directors prior to that time, 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 both Class A and Class B common shares, subject to
this agreement, was approximately 4.5 million shares as of February 3, 2001.

                                        38
<PAGE>   40
                              JO-ANN STORES, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 10 -- STOCK-BASED COMPENSATION PLANS

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 restricted stock and deferred stock program for
non-employee directors. Shares subject to awards under the 1998 Plan may be
Class A or Class B common shares. 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.

     The following table summarizes award activity and the number of shares
available for future awards under the 1998 Plan at February 3, 2001:

<TABLE>
<CAPTION>
                                             STOCK       RESTRICTED
                                            OPTIONS        STOCK         TOTAL
                                           ----------    ----------    ----------
<S>                                        <C>           <C>           <C>
Available at January 31, 1998............                                      --
  Fiscal year 1999 calculated
     available...........................                                 750,666
  Granted................................    (431,600)    (59,000)       (490,600)
  Cancellations..........................          --       1,500           1,500
                                                                       ----------
Available at January 30, 1999............                                 261,566
  Fiscal year 2000 calculated
     available...........................                                 760,463
  Granted................................    (484,450)    (42,250)       (526,700)
  Cancellations..........................      50,000      14,750          64,750
                                                                       ----------
Available at January 29, 2000............                                 560,079
  Fiscal year 2001 calculated
     available...........................                                 713,796
  Granted................................  (1,552,250)    (15,375)     (1,567,625)
  Cancellations..........................     344,300       4,875         349,175
                                                                       ----------
Available at February 3, 2001............                                  55,425
                                                                       ==========
</TABLE>

  Employee stock option program

     The employee stock options granted under the 1998 Plan become exercisable
to the extent of one-fourth of the optioned shares for each full year of
continuous employment following the date of grant and generally expire ten years
after the date of the grant. Stock options granted under the 1998 Plan may
become exercisable under different terms as approved by the Compensation
Committee of the Board of Directors. During fiscal 2001, 1,136,000 shares were
granted, net of cancellations, which will become exercisable to the extent of
one-half of the optioned shares after the completion of three full years of
continuous employment following the date of grant, with the remaining one-half
becoming exercisable after the completion of the fourth full year of continuous
employment.

  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 rights to such restricted shares
terminate without any payment of consideration by the Company unless 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.

                                        39
<PAGE>   41
                              JO-ANN STORES, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 10 -- STOCK-BASED COMPENSATION PLANS (CONTINUED)

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

<TABLE>
<CAPTION>
                                     CLASS A COMMON SHARES     CLASS B COMMON SHARES
                                     ----------------------    ----------------------
                                                   WEIGHTED                  WEIGHTED
                                     RESTRICTED    AVERAGE     RESTRICTED    AVERAGE
                                       SHARES       GRANT        SHARES       GRANT
            FISCAL YEAR               GRANTED       PRICE       GRANTED       PRICE
            -----------              ----------    --------    ----------    --------
<S>                                  <C>           <C>         <C>           <C>
2001...............................    15,000       $ 6.74          375       $ 7.92
2000...............................    39,000        13.52        3,250        11.31
1999...............................    11,500        21.92       47,500        22.82
</TABLE>

  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% 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 2001 and fiscal 2000,
stock purchase rights of 248,476 and 60,049, respectively, were granted and
exercised under the ASOP.

  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% to 100% in 25% increments) of their
cash compensation for the following year to deferred stock units. One-half of
the cash compensation deferred is converted into Class A stock units and
one-half into Class B stock units. The conversion of cash compensation to
deferred stock units is based on the closing market price of Class A and Class B
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 2001, 3,552 Class A units and 3,997 Class B units 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 automatically grants stock options for 2,500
Class A common shares and 2,500 Class B common shares 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. There are 63,000 Class A common shares
and 63,000 Class B common shares authorized for future option grants under the
Directors Stock Option Plan at February 3, 2001.

                                        40
<PAGE>   42
                              JO-ANN STORES, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 10 -- STOCK-BASED COMPENSATION PLANS (CONTINUED)

OTHER PLANS

     In addition to the 1998 Plan, nonqualified stock options are also available
for, and 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.
The 1990 Plan also permits the granting of stock appreciation rights with
respect to all or part of the common stock subject to any option granted under
this plan. Vesting and expiration periods are identical to options issued under
the 1998 Plan. There are 1,026,759 Class A common shares and 401,953 Class B
common shares authorized for future option and stock appreciation right grants
under the 1990 Plan at February 3, 2001.

     In addition to the 1998 Plan, restricted shares of the Company's common
stock are available for, and have been awarded to, executive officers, senior
management and other key employees under the 1994 Executive Incentive Plan (the
"Executive Plan"). At February 3, 2001, 93,500 Class A and 2,000 Class B
restricted shares were outstanding under the Executive Plan and 359,500 Class A
and 451,000 Class B common shares are available for future awards.

     In March 2000, the Board of Directors authorized for issuance and
subsequently granted 319,000 Class B common shares for stock options. Stock
options granted under this authorization became exercisable and expire on the
same terms as stock options awarded under the provisions of the 1998 Plan.

     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"):

<TABLE>
<CAPTION>
                                          CLASS A OPTIONS          CLASS B OPTIONS
                                       ---------------------    ---------------------
                                                    WEIGHTED                 WEIGHTED     CLASS A
                                                    AVERAGE                  AVERAGE        AND
                                       NUMBER OF    EXERCISE    NUMBER OF    EXERCISE     CLASS B
                                        OPTIONS      PRICES      OPTIONS      PRICES      OPTIONS
                                       ---------    --------    ---------    --------    ---------
<S>                                    <C>          <C>         <C>          <C>         <C>
Outstanding at January 31, 1998......   879,020      $10.98     1,745,512     $13.73     2,624,532
  Granted............................    13,650       25.82       459,500      15.94       473,150
  Exercised..........................  (131,541)       9.28      (149,864)      9.74      (281,405)
  Canceled...........................   (10,550)       9.52       (65,551)     15.18       (76,101)
                                       --------                 ---------                ---------
Outstanding at January 30, 1999......   750,579       11.57     1,989,597      14.49     2,740,176
  Granted............................     7,500       16.50       491,950      11.18       499,450
  Exercised..........................  (100,864)       8.76       (68,748)      6.67      (169,612)
  Canceled...........................   (32,426)      13.28      (196,030)     15.89      (228,456)
                                       --------                 ---------                ---------
Outstanding at January 29, 2000......   624,789       11.99     2,216,769      13.87     2,841,558
  Granted............................    10,000        8.75     1,921,250       7.67     1,931,250
  Exercised..........................    (7,838)       7.76        (2,588)      6.47       (10,426)
  Canceled...........................  (150,562)      10.66      (703,337)     11.40      (853,899)
                                       --------                 ---------                ---------
Outstanding at February 3, 2001......   476,389      $12.41     3,432,094     $10.91     3,908,483
                                       ========      ======     =========     ======     =========
</TABLE>

                                        41
<PAGE>   43
                              JO-ANN STORES, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 10 -- STOCK-BASED COMPENSATION PLANS (CONTINUED)

<TABLE>
<CAPTION>
                                         CLASS A OPTIONS          CLASS B OPTIONS
                                      ---------------------    ----------------------
                                                   WEIGHTED                  WEIGHTED     CLASS A
                                                   AVERAGE                   AVERAGE        AND
                                      NUMBER OF    EXERCISE    NUMBER OF     EXERCISE     CLASS B
                                       OPTIONS      PRICES      OPTIONS       PRICES      OPTIONS
                                      ---------    --------    ----------    --------    ---------
<S>                                   <C>          <C>         <C>           <C>         <C>
Exercisable at:
  February 3, 2001..................   444,889      $12.05      1,194,538     $14.13     1,639,427
  January 29, 2000..................   572,289       11.18      1,176,669      13.34     1,748,958
  January 30, 1999..................   652,554       10.52      1,010,720      11.90     1,663,274
Weighted average fair value of
  options granted during fiscal:
  2001..............................  $   5.44                 $     3.76
  2000..............................      6.80                       4.59
  1999..............................     10.38                       6.20
</TABLE>

     The following table summarizes the status of stock options outstanding and
exercisable at February 3, 2001:

<TABLE>
<CAPTION>
                        CLASS A                                  CLASS A
                  OPTIONS OUTSTANDING                      OPTIONS EXERCISABLE
-------------------------------------------------------   ----------------------
                                             WEIGHTED
                                 WEIGHTED     AVERAGE                   WEIGHTED
                  RANGE OF       AVERAGE     REMAINING                  AVERAGE
  NUMBER          EXERCISE       EXERCISE   CONTRACTUAL     NUMBER      EXERCISE
OUTSTANDING        PRICES         PRICES       LIFE       EXERCISABLE    PRICES
-----------   ----------------   --------   -----------   -----------   --------
<S>           <C>                <C>        <C>           <C>           <C>
  144,939     $  6.16 to $7.66    $ 6.55     2.1 years      144,939      $ 6.55
  176,250     $ 7.67 to $18.44    $10.08     4.1 years      161,750      $ 9.98
  155,200     $18.45 to $29.06    $20.53     3.3 years      138,200      $20.25
  -------                                                   -------
  476,389     $ 6.16 to $29.06    $12.41     3.2 years      444,889      $12.05
  =======                                                   =======
</TABLE>

<TABLE>
<CAPTION>
                        CLASS B                                  CLASS B
                  OPTIONS OUTSTANDING                      OPTIONS EXERCISABLE
-------------------------------------------------------   ----------------------
                                             WEIGHTED
                                 WEIGHTED     AVERAGE                   WEIGHTED
                  RANGE OF       AVERAGE     REMAINING                  AVERAGE
  NUMBER          EXERCISE       EXERCISE   CONTRACTUAL     NUMBER      EXERCISE
OUTSTANDING        PRICES         PRICES       LIFE       EXERCISABLE    PRICES
-----------   ----------------   --------   -----------   -----------   --------
<S>           <C>                <C>        <C>           <C>           <C>
 1,867,755    $  4.37 to $7.75    $ 7.56     8.5 years       202,755     $ 6.88
   925,039    $ 7.76 to $14.31    $11.89     7.4 years       465,098     $11.85
   639,300    $14.32 to $26.66    $19.28     5.7 years       526,685     $18.94
 ---------                                                 ---------
 3,432,094    $ 4.37 to $26.66    $10.91     7.7 years     1,194,538     $14.13
 =========                                                 =========
</TABLE>

     The Company applies the provisions of Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees," and related interpretations
in accounting for stock options granted under the Plans. Accordingly, no
compensation cost has been recognized for the Plans. Had compensation cost for
the Plans been determined based on the fair value at the grant dates for awards
under these Plans consistent with SFAS No. 123, "Accounting for Stock-Based
Compensation," the Company's net income (loss) and net

                                        42
<PAGE>   44
                              JO-ANN STORES, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 10 -- STOCK-BASED COMPENSATION PLANS (CONTINUED)

income (loss) per share would have been restated to the pro forma amounts shown
in the table below (millions of dollars, except per share data):

<TABLE>
<CAPTION>
         FISCAL YEARS ENDED                  2001                 2000                 1999
         ------------------           ------------------    -----------------    -----------------
                                         AS        PRO         AS        PRO        AS        PRO
                                      REPORTED    FORMA     REPORTED    FORMA    REPORTED    FORMA
                                      --------    ------    --------    -----    --------    -----
<S>                                   <C>         <C>       <C>         <C>      <C>         <C>
Net income (loss)...................   $(13.6)    $(16.1)    $25.6      $23.8     $13.4      $11.7
Net income (loss) per common share:
  Basic.............................   $(0.75)    $(0.89)    $1.41      $1.31     $0.71      $0.62
  Diluted...........................    (0.75)     (0.89)     1.38       1.31      0.67       0.60
</TABLE>

     The pro forma disclosures presented are not representative of the future
effects on net income and net income per share.

     For purposes of computing the pro forma disclosures above, the fair values
of the options granted under the Plans were determined at the date of grant
separately for Class A and Class B option grants using the Black-Scholes option
pricing model. The significant assumptions used to calculate the fair value of
Class A and Class B option grants were: risk-free interest rates ranging from
5.8% to 6.4% for Class A and 4.6% to 6.6% for Class B, expected volatility
ranging from 34.5% to 38.0% for Class A and 31.7% to 38.0% for Class B, expected
lives ranging from 3.2 to 10.0 years for Class A and 3.8 to 6.6 years for Class
B and no expected dividends for either class of shares.

NOTE 11 -- 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% of annual compensation
or the statutory maximum. The Company makes a 50% 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 2001, 2000 and 1999 were $1.0 million, $1.2
million and $1.0 million, respectively. Plan assets included 617,929 shares of
Class A common shares and 240,189 shares of Class B common shares at February 3,
2001.

     The Company does not provide postretirement health care benefits for its
employees.

NOTE 12 -- LEASES

     With the exception of one superstore, all of the Company's retail stores
operate out of leased facilities. All store leases are operating leases,
generally for periods up to 10 years with renewal options for up to 20 years.
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.

                                        43
<PAGE>   45
                              JO-ANN STORES, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 12 -- LEASES (CONTINUED)

     The following is a schedule of future minimum rental payments under
non-cancelable operating leases:

<TABLE>
<CAPTION>
                                                              MINIMUM
                     FISCAL YEARS ENDED                       RENTALS
                     ------------------                       -------
(Millions of dollars)
<S>                                                           <C>
2002........................................................  $120.4
2003........................................................   107.2
2004........................................................    88.2
2005........................................................    73.2
2006........................................................    65.0
Thereafter..................................................   255.1
                                                              ------
                                                              $709.1
                                                              ======
</TABLE>

     Rent expense was as follows:

<TABLE>
<CAPTION>
               FISCAL YEARS ENDED                   2001      2000      1999
               ------------------                  ------    ------    ------
(Millions of dollars)
<S>                                                <C>       <C>       <C>
Minimum rentals..................................  $124.6    $112.4    $103.4
Contingent rentals...............................     2.3       2.4       1.8
Sublease rentals.................................    (4.8)     (4.1)     (2.8)
                                                   ------    ------    ------
                                                   $122.1    $110.7    $102.4
                                                   ======    ======    ======
</TABLE>

NOTE 13 -- FAIR VALUE OF 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 temporary cash investments and accounts payable are
considered to be representative of fair value because of the short maturity of
these instruments. The bid price of the 10 3/8% senior subordinated notes at
February 3, 2001 in the high yield debt market was $74.0. Accordingly, the fair
value of the 10 3/8% senior subordinated notes at February 3, 2001 was $111.0
million versus their carrying value of $150.0 million.

     The Company uses derivative financial instruments to reduce exposures to
market risks resulting from fluctuations in interest rates. The Company does not
enter into financial instruments for trading purposes. Management believes that
its use of these instruments to reduce risk is in the Company's best interest.

     On March 15, 1998, the Company entered into a five-year interest rate swap
agreement to hedge its interest rate exposure on the Company's prior senior
credit facility. The notional amount of this interest rate swap agreement is
$75.0 million, with a fixed LIBOR rate of 5.98%, reducing to $50.0 million on
March 15, 2001 until its expiration on March 15, 2003. The fair market value of
this interest rate swap as of February 3, 2001 was a net liability of $0.6
million. In May 2000, the Company entered into an interest rate swap agreement
to hedge its interest rate exposure on $40.0 million of variable rate debt. The
interest rate swap has a term of five years effective May 1, 2001, with a
notional amount of $40.0 million and a fixed LIBOR rate of 6.80%. The fair
market value of this interest rate swap agreement as of February 3, 2001 was a
net liability of $2.2 million.

     The interest rate swap agreements require the Company to pay a fixed
interest rate while receiving a floating interest rate based on LIBOR. These
interest rate swaps are an off-balance sheet liability of the Company as of
February 3, 2001. Beginning in the first quarter of fiscal 2002, the Company
will adopt the provisions of SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which requires the fair value of these
derivative financial instruments to be recorded on the balance sheet. As of
February 4,

                                        44
<PAGE>   46
                              JO-ANN STORES, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 13 -- FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
2001, upon adoption of this statement, the Company expects to recognize an after
tax charge to be classified as a cumulative effect of change in accounting
principle of $1.7 million.

NOTE 14 -- QUARTERLY FINANCIAL INFORMATION (UNAUDITED)

     Summarized below are the unaudited results of operations by quarter for
fiscal 2001 and 2000, as restated for the change from the LIFO inventory method
to the FIFO inventory method:

<TABLE>
<CAPTION>
                                                       FIRST     SECOND      THIRD     FOURTH
                    FISCAL 2001                       QUARTER    QUARTER    QUARTER    QUARTER
                    -----------                       -------    -------    -------    -------
(Millions of dollars, except per share data)
<S>                                                   <C>        <C>        <C>        <C>
Net sales...........................................  $325.4     $299.0     $362.5     $ 496.4
Gross margin........................................   152.3      135.9      172.4       184.5(a)
Net income (loss) before equity loss................     3.0       (9.0)       4.2        (5.3)(b)
Equity and asset impairment losses of minority
  investment........................................      --       (1.0)      (1.1)       (4.4)
Net income (loss)...................................     3.0      (10.0)       3.1        (9.7)(b)
Net income (loss) per common share:
  Basic.............................................  $ 0.17     $(0.55)    $ 0.17     $ (0.53)(b)
  Diluted...........................................    0.17      (0.55)      0.17       (0.53)(b)
</TABLE>

<TABLE>
<CAPTION>
                                                       FIRST     SECOND      THIRD     FOURTH
                    FISCAL 2000                       QUARTER    QUARTER    QUARTER    QUARTER
                    -----------                       -------    -------    -------    -------
(Millions of dollars, except per share data)
<S>                                                   <C>        <C>        <C>        <C>
Net sales...........................................  $295.7     $282.4     $347.1     $456.3
Gross margin........................................   138.2      130.8      169.5      194.7
Net income (loss)...................................     2.4       (5.3)       8.3       20.2
Net income (loss) per common share:
  Basic.............................................  $ 0.13     $(0.29)    $ 0.46     $ 1.13
  Diluted...........................................    0.13      (0.29)      0.45       1.11
</TABLE>

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

(a) Includes one-time charge of $23.0 million for the fourth quarter related to
    the SKU Reduction Initiative.

(b) Includes after tax one-time charge of $18.4 million, or $1.02 per share, for
    the fourth quarter related to stores identified for closing in fiscal 2002
    and the SKU Reduction Initiative.

                                        45
<PAGE>   47
                              JO-ANN STORES, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 15 -- CONSOLIDATING FINANCIAL STATEMENTS

     The Company's 10 3/8% 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. Summarized consolidating
financial information of the Company (excluding its subsidiaries) and the
guarantor subsidiaries as of and for the years ended February 3, 2001 is as
follows:

<TABLE>
<CAPTION>
                                                                FEBRUARY 3, 2001                       JANUARY 29, 2000
                                                      ------------------------------------   ------------------------------------
                                                                GUARANTOR                              GUARANTOR
            CONSOLIDATING BALANCE SHEETS              PARENT   SUBSIDIARIES   CONSOLIDATED   PARENT   SUBSIDIARIES   CONSOLIDATED
            ----------------------------              ------   ------------   ------------   ------   ------------   ------------
                                                                                 (Millions of dollars)
<S>                                                   <C>      <C>            <C>            <C>      <C>            <C>
ASSETS
Current assets:
  Cash and temporary cash investments...............  $ 13.8     $   3.7         $ 17.5      $ 16.9     $   4.5         $ 21.4
  Inventories.......................................   181.9       269.1          451.0       203.8       238.7          442.5
  Prepaid expenses and other current assets.........    25.0        12.3           37.3        23.7        10.3           34.0
                                                      ------     -------         ------      ------     -------         ------
Total current assets................................   220.7       285.1          505.8       244.4       253.5          497.9
Property, equipment and leasehold improvements,
  net...............................................    74.6       115.6          190.2        78.7       116.0          194.7
Goodwill, net.......................................      --        27.2           27.2          --        36.3           36.3
Other assets........................................    17.9         1.1           19.0        17.9         0.1           18.0
Intercompany........................................   387.1      (387.1)            --       390.4      (390.4)            --
                                                      ------     -------         ------      ------     -------         ------
Total assets........................................  $700.3     $  41.9         $742.2      $731.4     $  15.5         $746.9
                                                      ======     =======         ======      ======     =======         ======

LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
  Accounts payable..................................  $127.3     $  36.7         $164.0      $145.9     $   3.7         $149.6
  Accrued expenses..................................    85.3       (25.8)          59.5        81.8       (23.3)          58.5
                                                      ------     -------         ------      ------     -------         ------
Total current liabilities...........................   212.6        10.9          223.5       227.7       (19.6)         208.1
Long-term debt......................................   240.0          --          240.0       245.2          --          245.2
Deferred income taxes...............................    14.2         8.3           22.5        12.5         9.9           22.4
Other long-term liabilities.........................     4.6         2.8            7.4         1.5        10.3           11.8
Shareholders' equity:
  Common stock......................................     1.1          --            1.1         1.0          --            1.0
  Additional paid-in capital........................    99.2          --           99.2        97.9          --           97.9
  Unamortized restricted stock awards...............    (1.2)         --           (1.2)       (2.1)         --           (2.1)
  Retained earnings.................................   167.9        19.9          187.8       186.5        14.9          201.4
                                                      ------     -------         ------      ------     -------         ------
                                                       267.0        19.9          286.9       283.3        14.9          298.2
  Treasury stock, at cost...........................   (38.1)         --          (38.1)      (38.8)         --          (38.8)
                                                      ------     -------         ------      ------     -------         ------
Total shareholders' equity..........................   228.9        19.9          248.8       244.5        14.9          259.4
                                                      ------     -------         ------      ------     -------         ------
Total liabilities and shareholders' equity..........  $700.3     $  41.9         $742.2      $731.4     $  15.5         $746.9
                                                      ======     =======         ======      ======     =======         ======
</TABLE>

                                        46
<PAGE>   48
                              JO-ANN STORES, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 15 -- CONSOLIDATING FINANCIAL STATEMENTS (CONTINUED)

<TABLE>
<CAPTION>
                                                                             FISCAL YEARS ENDED
                                              --------------------------------------------------------------------------------
                                                         FEBRUARY 3, 2001                          JANUARY 29, 2000
                                              --------------------------------------    --------------------------------------
                                                         GUARANTOR                                 GUARANTOR
   CONSOLIDATING STATEMENTS OF OPERATIONS     PARENT    SUBSIDIARIES    CONSOLIDATED    PARENT    SUBSIDIARIES    CONSOLIDATED
   --------------------------------------     ------    ------------    ------------    ------    ------------    ------------
                                                                           (Millions of dollars)
<S>                                           <C>       <C>             <C>             <C>       <C>             <C>
Net sales...................................  $815.7       $667.6         $1,483.3      $759.1       $622.4         $1,381.5
Cost of sales...............................   486.9        351.3            838.2       412.7        335.6            748.3
                                              ------       ------         --------      ------       ------         --------
Gross margin................................   328.8        316.3            645.1       346.4        286.8            633.2
Selling, general and administrative
  expenses..................................   302.4        286.8            589.2       300.1        233.7            533.8
Depreciation and amortization...............    17.1         21.2             38.3        17.0         15.0             32.0
                                              ------       ------         --------      ------       ------         --------
Operating profit............................     9.3          8.3             17.6        29.3         38.1             67.4
Interest expense............................    29.0           --             29.0        26.2           --             26.2
                                              ------       ------         --------      ------       ------         --------
Income (loss) before income taxes...........   (19.7)         8.3            (11.4)        3.1         38.1             41.2
Income tax provision (benefit)..............    (7.6)         3.3             (4.3)        1.9         13.7             15.6
                                              ------       ------         --------      ------       ------         --------
Net income (loss) before equity loss........   (12.1)         5.0             (7.1)        1.2         24.4             25.6
Equity and asset impairment losses of
  minority investment.......................    (6.5)          --             (6.5)         --           --               --
                                              ------       ------         --------      ------       ------         --------
Net income (loss)...........................  $(18.6)      $  5.0         $  (13.6)     $  1.2       $ 24.4         $   25.6
                                              ======       ======         ========      ======       ======         ========
</TABLE>

                                        47
<PAGE>   49
                              JO-ANN STORES, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 15 -- CONSOLIDATING FINANCIAL STATEMENTS (CONTINUED)

<TABLE>
<CAPTION>
                                                                                  FISCAL YEARS ENDED
                                                     ----------------------------------------------------------------------------
                                                               FEBRUARY 3, 2001                       JANUARY 29, 2000
                                                     ------------------------------------   -------------------------------------
                                                               GUARANTOR                               GUARANTOR
      CONSOLIDATING STATEMENTS OF CASH FLOWS         PARENT   SUBSIDIARIES   CONSOLIDATED   PARENT    SUBSIDIARIES   CONSOLIDATED
      --------------------------------------         ------   ------------   ------------   -------   ------------   ------------
                                                                                (Millions of dollars)
<S>                                                  <C>      <C>            <C>            <C>       <C>            <C>
Net cash flows from operating activities:
  Net income (loss)................................  $(18.6)     $  5.0         $(13.6)     $   1.2      $ 24.4        $  25.6
  Adjustments to reconcile net income (loss) to net
    cash provided by (used for) operating
    activities:
    Depreciation and amortization..................    17.1        21.2           38.3         17.0        15.0           32.0
    Deferred income taxes..........................    (1.6)       (2.6)          (4.2)        (6.4)       19.4           13.0
    Loss on disposal of fixed assets...............     0.7         1.0            1.7         (0.4)        1.6            1.2
    Equity and asset impairment losses of minority
      investment...................................     6.5          --            6.5           --          --             --
  Changes in operating assets and liabilities:
    (Increase) decrease in inventories.............    21.9       (30.4)          (8.5)         9.1       (47.6)         (38.5)
    (Increase) decrease in prepaid expenses and
      other current assets.........................     2.0        (1.0)           1.0        (47.4)       53.3            5.9
    Increase (decrease) in accounts payable........   (15.3)       29.7           14.4        (41.3)       40.5           (0.8)
    Increase (decrease) in accrued expenses........     3.5         0.4            3.9         41.7       (34.9)           6.8
    Settlement of income tax contingency...........      --        (3.5)          (3.5)          --       (16.1)         (16.1)
    Other, net.....................................     2.8         0.2            3.0          0.1        (1.5)          (1.4)
                                                     ------      ------         ------      -------      ------        -------
Net cash provided by (used for) operating
  activities.......................................    19.0        20.0           39.0        (26.4)       54.1           27.7
Net cash flows used for investing activities:
  Capital expenditures.............................   (13.4)      (22.5)         (35.9)       (32.4)      (35.0)         (67.4)
  Minority investment..............................    (6.5)         --           (6.5)          --          --             --
  Other, net.......................................      --         1.7            1.7         18.6       (17.2)           1.4
                                                     ------      ------         ------      -------      ------        -------
Net cash used for investing activities.............   (19.9)      (20.8)         (40.7)       (13.8)      (52.2)         (66.0)
Net cash flows provided by (used for) financing
  activities:
  Proceeds from issuance of senior subordinated
    notes, net.....................................      --          --             --        143.4          --          143.4
  Proceeds from long-term debt.....................    73.7          --           73.7        158.4          --          158.4
  Repayment of long-term debt......................   (78.9)         --          (78.9)      (245.7)         --         (245.7)
  Purchase of common stock.........................    (0.1)         --           (0.1)       (20.0)         --          (20.0)
  Proceeds and tax benefit from exercise of stock
    options........................................      --          --             --          1.9          --            1.9
  Issuance of treasury shares......................     1.0          --            1.0          1.2          --            1.2
  Other, net.......................................     2.1          --            2.1          0.1          --            0.1
                                                     ------      ------         ------      -------      ------        -------
Net cash provided by (used for) financing
  activities.......................................    (2.2)         --           (2.2)        39.3          --           39.3
                                                     ------      ------         ------      -------      ------        -------
Net increase (decrease) in cash....................    (3.1)       (0.8)          (3.9)        (0.9)        1.9            1.0
Cash and temporary cash investments at beginning of
  year.............................................    16.9         4.5           21.4         17.8         2.6           20.4
                                                     ------      ------         ------      -------      ------        -------
Cash and temporary cash investments at end of
  year.............................................  $ 13.8      $  3.7         $ 17.5      $  16.9      $  4.5        $  21.4
                                                     ======      ======         ======      =======      ======        =======
</TABLE>

                                        48
<PAGE>   50

  REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON THE FINANCIAL STATEMENT SCHEDULE

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, 2001. Our audits were made for the purpose of forming an opinion
on those financial statements taken as a whole. The schedule on page 50 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, 2001.

                                        49
<PAGE>   51

                                                                     SCHEDULE II

                              JO-ANN STORES, INC.
                       VALUATION AND QUALIFYING ACCOUNTS
                             (Millions of dollars)

<TABLE>
<CAPTION>
                                      BALANCE AT    CHARGED TO    CHARGED TO                  BALANCE AT
                                      BEGINNING     COSTS AND       OTHER                       END OF
                                      OF PERIOD      EXPENSES      ACCOUNTS     DEDUCTIONS      PERIOD
                                      ----------    ----------    ----------    ----------    ----------
<S>                                   <C>           <C>           <C>           <C>           <C>
February 3, 2001
Closed store reserve................     $4.4          $7.9(a)       $ --          $3.0          $9.3

January 29, 2000
Closed store reserve................      7.5           0.3            --           3.4           4.4

January 30, 1999
Closed store reserve................      3.8           3.2(b)        6.0(c)        5.5           7.5
</TABLE>

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

(a) Includes $6.7 million accrual for 42 stores identified for closing in fiscal
    2002.

(b) Includes $2.7 million of non-recurring charges related to the House of
    Fabrics acquisition.

(c) Liability recorded under purchase accounting related to the House of Fabrics
    acquisition.

                                        50
<PAGE>   52

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

     Not applicable.

                                    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 "Election of Directors -- Nominees to and Current Members of the Board
of Directors" in the Registrant's definitive proxy statement for its 2001 Annual
Meeting of Shareholders to be held on June 7, 2001 (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. 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" of the Securities Exchange Act of 1934.

     Information required by this Item 10 as to "Involvement in Certain Legal
Proceedings" is included under Item 3 "Legal Proceedings" contained in this Form
10-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 "Election of
Directors -- Compensation of Directors" and "Executive Compensation" in the
Proxy Statement.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     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.

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. Thirteen of these shopping centers contain stores of our company. Three
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 2001, 2000 and 1999 on these stores
amounted to $1.5 million, $1.3 million and $1.2 million, respectively.

     Betty Rosskamm and Alma Zimmerman, two of our directors, and Justin
Zimmerman (Alma Zimmerman's spouse) and Jo-Ann Stores have entered into an
agreement, dated September 26, 1997, relating to their Jo-Ann Stores Class A and
Class B common shares. Under this agreement, Betty Rosskamm and her lineal
descendants and permitted holders, and Alma and Justin Zimmerman and their
lineal descendants and permitted holders, may each sell up to 200,000 Class A
common shares in any calendar year and may not sell more than 100,000 of those
shares in any 180-day period. Mrs. Rosskamm, and Mr. and Mrs. Zimmerman
collectively, may each sell up to 100,000 of their Class B common shares in any
60-day period. If either Mrs. Rosskamm or Mr. and Mrs. Zimmerman sell a number
of their Class A common shares in excess of the number permitted under the
agreement, they must first offer to sell those shares to the other family party
to the agreement, and then with the other family's permission, to the Company.
If either Mrs. Rosskamm or Mr. and Mrs. Zimmerman sell a number of their Class B
common shares in excess of the number permitted under the agreement, each family
must first offer to sell those shares to the Company.

                                        51
<PAGE>   53

                                    PART IV

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

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

<TABLE>
    <S>          <C>
    (1) and (2)  Financial Statements and Financial Statement Schedules

                 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 23 of this
                 report.

         (3)     Exhibits
</TABLE>

<TABLE>
<CAPTION>
EXHIBIT
NUMBER                         EXHIBIT DESCRIPTION
-------                        -------------------
<S>        <C>
3.1   (a)  Amended Articles of Incorporation of Fabri-Centers of
             America, Inc. (filed as an Exhibit to the Registrant's
             Form 10-Q filed with the Commission on September 11, 1995
             and incorporated herein by reference)
3.1   (b)  Certificate of Amendment to the Amended Articles of
             Incorporation (filed as an Exhibit to the Registrant's
             Form 10-K filed with the Commission on April 16, 1999 and
             incorporated herein by reference)
3.2        Regulations of Jo-Ann Stores, Inc., as amended (filed as an
             Exhibit to the Registrant's Form 8-K filed with the
             Commission on December 1, 1993 and incorporated herein by
             reference)
4.1        Form of Amended and Restated Rights Agreement, dated October
             31, 2000, between the Registrant and National City Bank,
             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 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 to the Registrant's Form S-4
             filed with the Commission on June 16, 1999 and
             incorporated herein by reference)
4.4        Registration Rights Agreement among the Registrant, FCA
             Financial, Inc., Fabri-Centers of South Dakota, Inc.,
             Fabri-Centers of California, Inc. FCA of Ohio, Inc., and
             House of Fabrics, Inc., and Merrill Lynch, Pierce, Fenner
             & Smith Incorporated, Goldman, Sachs & Co., and Banc One
             Capital Markets, Inc. relating to the 10 3/8% Senior
             Subordinated Notes due 2007 (filed as an exhibit to the
             Registrant's Form S-4 filed with the Commission on June
             16, 1999 and incorporated herein by reference)
10.1       Form of Split Dollar Life Insurance Agreement between the
             Registrant and certain of its officers (filed as an
             Exhibit to the Registrant's Form 8-K filed with the
             Commission on December 1, 1993 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       Split Dollar Life Insurance Agreement and Assignment between
             the Registrant and Alma Zimmerman dated September 22, 1984
             (filed as an Exhibit to the Registrant's Form 8-K filed
             with the Commission on December 1, 1993 and incorporated
             herein by reference)*
10.4       Split Dollar Life Insurance Agreements and Assignments
             between the Registrant and Betty Rosskamm dated October
             19, 1984 (filed as an Exhibit to the Registrant's Form 8-K
             filed with the Commission on December 1, 1993 and
             incorporated herein by reference)*
</TABLE>

                                        52
<PAGE>   54

<TABLE>
<CAPTION>
EXHIBIT
NUMBER                         EXHIBIT DESCRIPTION
-------                        -------------------
<S>        <C>
10.5       Fabri-Centers of America, Inc. 1979 Supplemental Retirement
             Benefit Plan as amended (filed as an Exhibit to the
             Registrant's Form 8-K filed with the Commission on
             December 1, 1993 and Incorporated herein by reference)*
10.6       List of Executive Officers who participate in the
             Registrant's 1979 Supplemental Retirement Plan, as amended
10.7       Fabri-Centers of America, Inc. Executive Incentive Plan
             dated March 19, 1980 as amended (filed as an Exhibit to
             the Registrant's Form 8-K filed with the Commission on
             December 1, 1993 and incorporated herein by reference)*
10.8       Form of Employment Agreement between the Registrant and
             certain Executive Officers (filed as an Exhibit to the
             Registrant's Form 8-K filed with the Commission on
             December 1, 1993 and incorporated herein by reference)*
10.9       List of Executive Officers who are parties to an Employment
             Agreement with the Registrant
10.10      Fabri-Centers of America, Inc. 1990 Employees Stock Option
             and Stock Appreciation Rights Plan, as amended (filed as
             an Exhibit to the Registrant's Form 8-K filed with the
             Commission on December 1, 1993 and incorporated herein by
             reference)*
10.11      Fabri-Centers of America, Inc. 1996 Stock Option Plan for
             Non-Employee Directors*
10.12      House of Fabrics, Inc. Non-Standardized 401(k) Plan (filed
             as an Exhibit to House of Fabrics, Inc.'s (commission file
             number 1-7927) Form 10-K filed with the Commission on May
             1, 1997 and incorporated herein by reference)*
10.13      Fabric-Centers of America, Inc. 1998 Incentive Compensation
             Plan (filed as an Exhibit to the Registrant's Proxy
             Statement for its Annual Meeting held on June 4, 1998
             filed with the Commission on Schedule 14A on May 8, 1998
             and incorporated herein by reference)*
10.14      Amended and Restated Agreement dated September 26, 1997
             among Fabri-Centers of America, Inc., Betty Rosskamm and
             Justin Zimmerman and Alma Zimmerman (filed as an Exhibit
             to the Registrant's Form 10-K filed with the Commission on
             April 16, 1999 and incorporated herein by reference)
10.15      Credit Agreement dated as of May 5, 1999 among the
             Registrant, as borrower, the Lending Institutions named
             therein, as Lenders, The First National Bank of Chicago,
             as Documentation Agent, Comerica Bank and National City
             Bank, as Co-Agents, and KeyBank National Association, as a
             Lender, the Swing Line Lender, the Issuing Bank and as
             Administrative Agent (filed as an Exhibit to the
             Registrant's Form S-4 filed with the Commission on June
             16, 1999 and incorporated herein by reference)
10.16      Amendment No. 1 dated as of December 14, 1999 to Credit
             Agreement dated as of May 5, 1999 Among the Registrant, as
             borrower, the Lending Institutions named therein, as
             Lenders, The First National Bank of Chicago, as
             Documentation Agent, Comerica Bank and National City Bank,
             as Co-Agents and KeyBank National Association, as a
             Lender, the Swing Line Lender, the Issuing Bank and as
             Administrative Agent (filed as an Exhibit to the
             Registrant's Form 10-Q filed with the Commission on
             December 14, 1999 and incorporated herein by reference)
10.17      Amendment No. 2 dated as of March 7, 2000 to Credit
             Agreement dated as of May 5, 1999 among the Registrant, as
             borrower, the Lending Institutions named therein, as
             Lenders, Bank One, NA, as Documentation Agent, Comerica
             Bank and National City Bank, as Co-Agents, and KeyBank
             National Association, as a Lender, the Swing Line Lender,
             the Issuing Bank and as Administrative Agent (filed as an
             Exhibit to the Registrant's Form 10-K filed with the
             Commission on April 28, 2000 and incorporated herein by
             reference)
</TABLE>

                                        53
<PAGE>   55

<TABLE>
<CAPTION>
EXHIBIT
NUMBER                         EXHIBIT DESCRIPTION
-------                        -------------------
<S>        <C>
10.18      Amendment No. 3 dated as of March 22, 2000 to Credit
             Agreement dated as of May 5, 1999 among the Registrant, as
             borrower, the Lending Institutions named therein, as
             Lenders, Bank One, NA, as Documentation Agent, Comerica
             Bank and National City Bank, as Co-Agents, and KeyBank
             National Association, as a Lender, the Swing Line Lender,
             the Issuing Bank and as Administrative Agent (filed as an
             Exhibit to the Registrant's Form 10-K filed with the
             Commission on April 28, 2000 and incorporated herein by
             reference)
10.19      Amendment No. 4 dated as of December 11, 2000 to Credit
             Agreement dated as of May 5, 1999 among the Registrant, as
             borrower, the Lending Institutions named therein, as
             Lenders, Bank One, NA, as Documentation Agent, Comerica
             Bank and National City Bank, as Co-Agents, and KeyBank
             National Association, as a Lender, the Swing Line Lender,
             the Issuing Bank and as Administrative Agent (filed as an
             Exhibit to the Registrant's Form 10-Q filed with the
             Commission on December 12, 2000 and incorporated herein by
             reference)
12         Ratio of Earnings to Fixed Charges
18         Preferability letter of Arthur Andersen LLP regarding change
             in accounting policy relating to the change in inventory
             valuation methods, and filed herewith
21         Subsidiaries of Jo-Ann Stores, Inc.
23         Consent of Independent Public Accountants
24         Power of Attorney
</TABLE>

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

*Indicates a management contract or compensatory plan or arrangement

(b) Reports on Form 8-K

     Not applicable.

                                        54
<PAGE>   56

                                   SIGNATURES

     Pursuant to the requirements of Section 13 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.

<TABLE>
<S>                                               <C>
By: /s/ ALAN ROSSKAMM                             May 4, 2001
-----------------------------------------------
    Alan Rosskamm
    President and Chief Executive Officer
</TABLE>

     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:

<TABLE>
                   SIGNATURE                                             TITLE
------------------------------------------------  ---------------------------------------------------
<C>                                               <S>

               /s/ ALAN ROSSKAMM                  Chairman of the Board and Director (Chief Executive
------------------------------------------------  Officer)
                 Alan Rosskamm

              /s/ BRIAN P. CARNEY*                Executive Vice President and Chief Financial
------------------------------------------------  Officer (Chief Accounting Officer)
                Brian P. Carney

              /s/ BETTY ROSSKAMM*                 Director
------------------------------------------------
                 Betty Rosskamm

              /s/ ALMA ZIMMERMAN*                 Director
------------------------------------------------
                 Alma Zimmerman

                /s/ SCOTT COWEN*                  Director
------------------------------------------------
                  Scott Cowen

               /s/ FRANK NEWMAN*                  Director
------------------------------------------------
                  Frank Newman

                /s/ IRA GUMBERG*                  Director
------------------------------------------------
                  Ira Gumberg*

               /s/ GREGG SEARLE*                  Director
------------------------------------------------
                  Gregg Searle
</TABLE>

     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.

<TABLE>
<S>                                               <C>
             *By: /s/ ALAN ROSSKAMM
  -------------------------------------------     May 4, 2001
        Alan Rosskamm, Attorney-in-Fact
</TABLE>

                                        55
<PAGE>   57

                                EXHIBIT INDEX




EXHIBIT
NUMBER              EXHIBIT DESCRIPTION
-------             -------------------

4.1                 Form of Amended and Restated Rights Agreement, dated
                    October 31, 2000, between the Registrant and National City
                    Bank, as Rights Agent
10.2                List of Executive Officers who are parties to the Split
                    Dollar Life Insurance Agreement with the Registrant
10.6                List of Executive Officers who participate in the
                    Registrant's 1979 Supplemental Retirement Plan, as amended
10.9                List of Executive Officers who are parties to an Employment
                    Agreement with the Registrant
10.11               Jo-Ann Stores, Inc. (formerly Fabri-Centers of America,
                    Inc.) 1996 Stock Option Plan for Non-Employee Directors
12                  Ratio of Earnings to Fixed Charges
18                  Preferability Letter of Arthur Andersen LLP regarding
                    change in accounting policy relating to the change in
                    inventory valuation methods, and filed herewith
21                  Subsidiaries of Jo-Ann Stores, Inc.
23                  Consent of Independent Public Accountants
24                  Power of Attorney






                                      56