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                UNITED STATES SECURITIES AND EXCHANGE COMMISSION
                              Washington, DC 20549

                                    FORM 10-K

           [ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
                         SECURITIES EXCHANGE ACT OF 1934
                   For the fiscal year ended December 31, 1998
                                       OR
          [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
                         SECURITIES EXCHANGE ACT OF 1934
                    For the transition period from_________to

                        Commission file number 000-23157

                         A.C. MOORE ARTS & CRAFTS, INC.
             (Exact name of registrant as specified in its charter)

            Pennsylvania                               23-3527763
 (State or other jurisdiction of          (I.R.S. Employer Identification No.)
  incorporation or organization) 

             500 University Court, Blackwood, NJ         08012
          (Address of principal executive offices)     (Zip code)

       Registrant's telephone number, including area code: (609) 228-6700

        Securities registered pursuant to section 12(b) of the Act: None

           Securities registered pursuant to section 12(g) of the Act:
                           Common Stock, no par value
                                (Title of Class)

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (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 the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]

The aggregate market value of the voting stock held by non-affiliates of the
registrant is approximately $16,275,000.(1)

The number of shares of Common Stock outstanding as of March 16, 1999 was
7,405,000.

                       DOCUMENTS INCORPORATED BY REFERENCE

Portions of the definitive proxy statement for the 1999 Annual Meeting of
Shareholders are incorporated into Part III of this Form 10-K.
----------------
         (1) The aggregate dollar amount of the voting stock set forth equals
the number of shares of Common Stock outstanding, reduced by the number of
shares of Common Stock held by executive officers, and directors and
shareholders owning in excess of 10% of the registrant's Common Stock multiplied
by the closing price for the Common Stock on the Nasdaq National Market on March
16, 1999. The information provided shall in no way be construed as an admission
that any person whose holdings are excluded from this figure is an affiliate of
the registrant or that any person whose holdings are included in this figure is
not an affiliate of the registrant and any such admission is hereby disclaimed.
The information provided herein is included solely for record keeping purposes
of the Securities and Exchange Commission.

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                                     PART I

ITEM 1. BUSINESS.

General

         A.C. Moore ("the Company") is a rapidly growing operator of arts and
crafts superstores that offer a vast assortment of traditional and contemporary
arts and crafts merchandise for a wide range of customers. The Company's
business strategy is to provide the broadest and deepest selection of high
quality merchandise at the lowest prices in an inviting, attractive superstore
environment with superior customer service. The Company's objective is to become
the leading arts and crafts retailer in each of its markets. A.C. Moore opened
its first store in 1985 and since then has focused on developing and refining
its retail concept. The Company became a holding company in July 1997 by
incorporating in Pennsylvania and exchanging 4,300,000 shares of Common Stock
for all the capital stock of its operating subsidiary which was organized in
Delaware in 1984. As of December 31, 1998, the Company was operating 37
superstores in the mid-Atlantic and Northeast regions.

         A. C. Moore's prototype superstore ranges in size from 20,000 to 25,000
square feet, with approximately 80% devoted to selling space. A typical store
offers approximately 65,000 SKUs across 26 merchandise categories during the
course of a year, with more than 45,000 SKUs offered at any one time.
Merchandise is presented in a distinctive manner designed to maximize shopping
convenience and to reinforce themes and colors often associated with holidays,
seasonal events or specific merchandise categories. Completed arts and crafts
projects are prominently displayed in each department throughout the store to
stimulate new project ideas for customers and to enhance the shopping
environment.


Business Strategy

         The key elements of the Company's business strategy are as follows:

         Vast Merchandise Selection. The Company's merchandising strategy is to
offer the broadest and deepest selection of arts and crafts merchandise so that
customers can obtain everything necessary to create and finish any arts and
crafts project. The Company's key merchandise categories include silk and dried
flowers, floral arrangements and accessories, ribbon, wedding crafts, potpourri,
stitchery, yarn, jewelry crafts, kids crafts, art supplies, picture frames,
stamps, doll-making, seasonal items and a variety of unfinished wood crafts. The
Company believes its merchandise appeals to a wide range of recreational and
professional crafters of all ages across diverse economic backgrounds. The
Company actively seeks new merchandise by monitoring industry trends, working
with domestic and international vendors, attending trade shows and craft fairs
and regularly interacting with customers. The Company has designed its
merchandise distribution systems to ensure rapid replenishment and the highest
levels of in-stock positions. Each superstore receives merchandise daily from
vendors or the Company's distribution center, which during peak periods will
deliver a minimum of three and up to five times per week to the superstores.



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         Customer Friendly Superstores. The Company believes that its high level
of customer service and its attractive, easy-to-shop superstores are important
competitive advantages. To ensure prompt and personalized service, the Company
staffs its stores with a high ratio of store personnel to customers, including a
store manager, three associate managers and a staff of up to 60 full-time and
part-time sales associates. Store personnel, many of whom are arts and crafts
enthusiasts, assist customers with merchandise selection and project ideas. All
superstores are furnished with a customer service area, a counter for the free
arrangement of floral merchandise, eight to ten registers to ensure quick
customer checkout and a room in which classes are held up to seven days a week
for adults and children on a wide variety of craft skills. The Company's
superstores are typically located in power strip centers with convenient parking
and are easily accessible from main arteries.

         Price Leadership. The Company seeks to maintain the lowest prices on
all merchandise. Buyers and store managers actively monitor competitors' prices
to ensure that the Company maintains the lowest prices. The Company's policy to
beat any competitor's advertised price by 10% is clearly displayed in all
superstores. In addition, on a weekly basis, the Company advertises select items
at 20% to 40% off their everyday low prices. The Company believes that its
strategy of price leadership enhances customer loyalty and provides superior
value.

         Entrepreneurial Culture. Since inception, the Company has strived to
foster an ownership culture and merchandising creativity at all levels of the
organization. This culture allows A.C. Moore to have numerous merchandising
initiatives, which, if proven successful, can be implemented very quickly
throughout the Company. For example, each store manager is empowered to purchase
merchandise to meet the unique needs of the local customer base. Store managers
and associate managers earn incentive bonuses based upon annual increases in
store profitability, and in 1998, average compensation for store managers was
$96,000. The Company believes its focus on empowering and rewarding its
employees helps in recruiting, hiring and retaining talented personnel.

Growth Strategy

         The Company has developed an expansion plan to become the leading arts
and crafts retailer in each of its markets and plans to open at least 18
superstores in 1999 and 2000. The Company has no current plans to expand through
acquisitions, but may consider possible acquisitions in the future. The Company
is targeting its expansion in both existing and new markets within an
approximate 400-mile radius of the Company's southern New Jersey distribution
center. This area contains more than 25% of the United States' population.



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Merchandising

         The Company's typical superstore offers approximately 65,000 SKUs
across 26 merchandise categories during the course of a year, with more than
45,000 SKUs offered at any one time. The merchandise offered by the Company, by
major product category, is as follows:

         Floral and Accessories

                  Silk Flowers - includes a wide, seasonally changing assortment
of high quality silk flowers, hand wrapped flowers, polystems, potted plants and
green and flowering bushes.

                  Dried Flowers - includes baby's breath, eucalyptus and many
styles and colors of a seasonally changing assortment of bouquets of dried
flowers.

                  Floral Accessories - includes clay, brass, glass and ceramic
containers, assorted mosses, styrofoam shapes, wreaths and other components to
create floral displays.

                  Floral Arrangements - the Company's floral designers work with
customers to make any arrangement, free of charge, from silk or dried flowers
purchased from the Company. The superstores also carry a large assortment of
pre-made arrangements.

                  Ribbon - includes ribbon by the spool, lace, a large selection
of specialty ribbon sold by the yard and pre-made bows.

                  Wedding - includes wedding supplies, bridal headpieces, bridal
flowers, bouquet holders, ribbon roses and items used for christenings and baby
showers.

                  Potpourri - includes dried potpourri, potpourri oils, packaged
scents and a wide assortment of candles, ranging from tealights to five pound
three wick candles.

                  Candle Making - includes blocks of paraffin wax, wicks and
other materials necessary to make candles, as well as candle kits and brass and
glass candle holders.

                  Wicker - includes a wide assortment of wicker baskets in
various shapes and sizes.

         In each of 1998, 1997 and 1996, floral and accessories accounted for
approximately 27% of sales.



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         Traditional Crafts

                  Stitchery - includes a broad range of stitchery kits which
appeal to beginner and experienced stitchers, cross stitch supplies, stitchery
accessories, floss and sewing notions.

                  Yarn - includes acrylic, crochet cotton, cotton blends, rayon
and other blends, as well as a full assortment of hooks, needles and other
accessories.

                  Wood - includes a variety of unfinished wood products, such as
shelves, bird houses, clocks and other decorative pieces which can be finished
in various ways such as painting, staining or stenciling.

                  Cake and Candy Making - includes cake boards, bakeware, candy
molds, chocolate melts, cookie cutters, icing coloring and flavors and spices.

                  Miniatures - includes dollhouses and dollhouse furnishings,
such as room settings, wallpaper, flooring and lighting, as well as miniature
porcelains and ceramics.

                  Doll Making - includes bodies, heads and hair used to make
dolls and clothing for dolls, as well as teddy bears and other stuffed animals.

                  Kids Crafts - includes sand art, sidewalk chalk, bead art
supplies, children's stitchery kits, coloring and other books and children's
crafts similar to crafts done by adults.

                  Felt, Glitter - includes felt, glitter, pom-poms, chenille
stems and loupy, all of which are used in the creation of craft projects.

                  Books - includes a wide range of books to assist crafters in
all categories, such as how-to books for the beginner and books for the
experienced crafter.

         In 1998, 1997 and 1996, traditional crafts accounted for approximately
30%, 28% and 28% of sales, respectively.

         Art Supplies and Frames

                  Art Supplies - includes bottled and tube paints (oil, acrylic
and water based), pastels, brushes, tablets, canvas pieces, drawing pencils,
markers and art palettes.

                  Stamps and Stationery - includes decorative stamps, stamp
pads, fashion stickers, embossing tools, photo and memory albums, memory album
accessories, scissors, hole punchers and note and fashion papers.

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                  Stencils - includes decorative stencils, crayons and paints
for use on walls, wood, metal, clothing and other products.

                  Frames - includes frames of all types and sizes, including
empty frames and frames with glass, matting, posters and framing hardware.

         In 1998, 1997 and 1996, art supplies and frames accounted for
approximately 28%, 28% and 26% of sales, respectively.

         Fashion Crafts

                  Clothing - includes adult's and children's T-shirts and
sweatshirts to be decorated with fabric art, as well as related accessories.

                  Transfers - includes pictures which are ironed or sewn onto
clothing, most of which can be further embellished with glitter and fabric
paints.

                  Jewelry Making - includes jewelry making components such as
beads, sequins, rhinestones and findings, as well as the tools required to
complete the project.

         In 1998, 1997 and 1996, fashion crafts accounted for approximately 7%,
8% and 10% of sales, respectively.

         Seasonal Items

         Seasonal items include a wide range of merchandise used as decorations
for all major holidays and seasons, including the two most popular holiday
seasons, Christmas and Easter. Other holidays, such as Valentine's Day, St.
Patrick's Day and Halloween also result in significant sales of seasonal
merchandise.

         In 1998, 1997 and 1996, seasonal items accounted for approximately 8%,
9% and 9% of sales.



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Purchasing

         The Company's purchasing programs are designed to support its business
strategy of providing customers with the broadest and deepest selection of high
quality arts and crafts merchandise at the lowest prices and maintaining high
in-stock positions. In order to manage its inventory of approximately 65,000
SKUs, the Company has organized its product offerings into 26 merchandise
categories. The Company's 17 person corporate buying staff develops corporate
buying programs to establish the merchandise direction for the Company and
creates "planograms" to provide store managers with detailed descriptions and
illustrations of store layout and merchandise presentation. The Company's
product offering at a superstore is often enhanced by merchandise purchased by
that store's manager to meet the unique needs of the superstore's customer base.
The Company monitors these purchases through vendor master file controls.
In-store department managers are responsible for daily reordering of merchandise
and are monitored by store managers. Ordering occurs frequently, and the Company
seeks vendors who can deliver on a timely basis. Approximately 96% of
merchandise orders are placed through the Company's Electronic Data Interchange
("EDI") system, which allows for the automated reordering of merchandise from
most domestic vendors. Approximately 57% of orders are shipped directly from the
vendor to the Company's superstores. The remaining 43%, over 35% of which are
floral and seasonal items, are shipped from the Company's distribution center.
An early morning stocking crew unpacks deliveries and stocks merchandise before
the superstore opens.

         The Company purchases its inventory from more than 500 vendors
world-wide. The largest 25 suppliers accounted for approximately 45% of the
dollar volume of the Company's purchases in 1998, and the largest supplier,
SBAR'S, Inc. ("SBAR'S") accounted for approximately 19% of the dollar volume of
the Company's purchases in 1998. Approximately 11% of the Company's merchandise,
primarily floral and seasonal items, is imported directly from foreign
manufacturers or their agents, principally in the Far East. All of the Company's
overseas purchases are denominated in dollars.

         SBAR'S is a large distributor of arts and crafts merchandise, primarily
to independent arts and crafts retailers. SBAR'S maintains an inventory of many
of the items the Company purchases directly from other vendors, thereby allowing
the Company to obtain merchandise from SBAR'S which cannot be delivered by
vendors on a timely basis. SBAR'S maintains a product development and design
department which assists the Company in identifying craft trends, and the
Company often obtains from SBAR'S product samples and displays which are
utilized in the Company's superstores to generate customer interest. The Company
has developed a disciplined purchasing and ordering relationship with SBAR'S,
which includes daily reordering and two to five deliveries by SBAR'S per store
each week, depending on the size of the store and time of the year. SBAR'S has
equipped the Company's superstores with handheld scanners to aid in product
re-ordering. Merchandise purchased from SBAR'S typically has a high SKU count
but small dollar volume, requires greater volume purchases from a manufacturer
to obtain competitive pricing or involves a small number of SKUs from individual
vendors with whom it would be impractical for the Company to establish a direct
buying relationship. The Company does not have a purchase agreement or an
exclusive arrangement with SBAR'S, and ordering of merchandise typically occurs
through the issuance of individual purchase orders.



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         The Company's buying operation led by the Chief Operating Officer is
divided into two divisions. One division, headed by an Executive Vice President
assisted by three buyers, handles merchandising for all floral and seasonal
items. The other division, headed by a Senior Vice President assisted by seven
buyers, is responsible for merchandising all other items, which comprised
approximately 73% of net sales in 1998. Buyers and store management regularly
attend trade shows and craft fairs to monitor industry trends and to obtain new
craft ideas.

Superstore Format and Operations

         A.C. Moore's superstores are typically located in power strip centers
with convenient parking and are easily accessible from main traffic arteries.
The Company's prototype superstore ranges in size from 20,000 to 25,000 square
feet, with approximately 80% devoted to selling space and the remainder
consisting of delivery, storage, classroom and office areas. Superstores are
typically open from 9:30 am to 9:00 pm, Monday through Saturday and from 10:00
am to 6:00 pm on Sunday.

         Superstores are designed with a layout intended to lead customers
through the entire store in order to expose them to all 26 merchandise
categories. Merchandise is grouped to aid the customer in finding project
related items. Extensive use is made of the display shelving at both ends of
each aisle to present the best selling items. Generally, the center of the
superstore contains the floral area, which includes a counter for floral
arrangement and a ribbon center. Superstores also contain a customer service
area, eight to ten registers for quick customer checkout and a room for classes.

         Classes are regularly held on a wide variety of craft skills. Classes
are taught by sales associates as well as outside professionals. Typical classes
provide instruction on oil painting, cake decorating, advanced stamping, and on
making bows, children's beaded necklaces and memory albums. Classes are free of
charge unless there is an extensive use of materials.

         A major component of the Company's promotional strategy is its use of
in-store displays and samples. Because many customers browse for new craft
ideas, eye-catching displays of completed craft projects are effective at
motivating impulse purchases. These displays enhance the image of store
departments. Knowledgeable store personnel are available to describe displays in
detail to customers and to offer assistance on related arts and crafts projects.
The Company has three field design coordinators who are responsible for ensuring
high quality floral displays in all superstores.

         The Company's Senior Vice President, Store Operations is responsible
for store operations and is assisted by five Vice Presidents, each of whom is
responsible for seven to eight superstores. Each superstore employs
approximately 60 full and part-time sales associates and is managed by a store
manager, assisted by three associate store managers, each of whom is responsible
for approximately one-third of a superstore's selling space. New superstores are
opened by the Company's new store development team which consists of the Vice
President, New Store Development, a set-up-crew, and staff from the human
resources and planogram departments. The Company seeks to develop the management
capabilities of its managers through both Company training programs and
on-the-job training. In addition, store managers and associate store managers
attend several Company-sponsored conferences each year to refine and develop
their skills in merchandising, merchandise trends, store operations, finance,
interviewing, performance appraisals and general management. Training sessions
are also held for floral designers and classroom coordinators at various times
during the year.



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Distribution

         The Company's objective of maintaining high in-stock positions in all
merchandise categories in all superstore locations is supported by its
distribution system. Approximately 43% of the selling value of all merchandise
is delivered to stores from the Company's distribution center, 19% is delivered
by SBAR'S and the balance is drop-shipped by other vendors. Deliveries are made
from the Company's distribution center two or three times per week, depending on
superstore size, during eight months of the year and three to five times during
the peak selling season of September through December. The Company maintains its
own leased fleet of tractors and trailers. The Company has contracted with an
outside carrier to deliver to superstores for which deliveries will require an
overnight stay.

         The distribution center's mission is to support the Company's
superstores. The distribution center is used strategically to distribute
merchandise which is imported, cannot be delivered by a vendor on a timely basis
or in the small quantities demanded by the store ordering process or is bulky
and, therefore, difficult to store in the superstores. Also, the Company will
order merchandise in large quantities for delivery to the distribution center
when the vendor offers substantial volume discounts or other economic
incentives.

         The Company's 250,000 square foot distribution center and adjoining
10,000 square foot office complex in Blackwood, New Jersey is leased for a term
which expires in October, 2004 with an option to renew for six years.
Approximately one-sixth of the distribution center is used for order picking,
with the balance used for receiving and bulk stock storage. The distribution
center was expanded to its current size in 1998.

         In 1997, the Company completed the installation of a distribution
center management system. The system includes the use of handheld computers to
record all merchandise movement throughout the distribution center and to
instantly update inventory records through the use of radio frequency
communication. The Company believes that this system, which operates in a
paperless environment, enables the Company to enhance the tracking of inventory
in the distribution center, increases the efficiency of distribution center
personnel and helps ensure the distribution center's ability to maintain high
in-stock positions in each of the Company's superstores as the Company expands
its superstore base.



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Advertising and Promotion

         The Company creates its own advertising using photo art scanned into a
Macintosh system supported by Pagemaker(R) software. The Company advertises 52
weeks per year, typically in midweek editions of local and/or regional
newspapers. Approximately five times per year the Company runs multi-page
newspaper inserts in local and regional newspapers. In addition, prior to store
openings, the Company uses radio advertisements to develop customer awareness
and runs special pre-opening ads, normal advertising copy and/or grand opening
inserts in newspapers. In 1998, the Company's net advertising expenditures were
approximately 3% of net sales.

         The Company uses in-store displays and samples of completed arts and
crafts projects as a major component of its promotional strategy. Because many
customers browse for new craft ideas, eye-catching displays of completed craft
projects are effective at motivating impulse purchases. The Company also
promotes customer interest in crafting by offering classes on a wide variety of
craft skills.

         The Company believes that teachers, who often purchase arts and crafts
merchandise for in-school projects, are an important customer segment. To
generate goodwill, the Company offers teachers who join its Teachers Program a
10% discount on all regularly and sale priced merchandise. Over 378,000 discount
cards have been issued to teachers.

         The Company's "Crafty Kids Birthday Club" and "Teen Club" are intended
to develop future crafters as customers. Members of these clubs receive a
birthday card containing a $5.00 gift certificate each year through their
fifteenth birthday. These clubs have over 283,000 members.

Management Information Systems

         A.C. Moore operates its accounting, merchandising and distribution
center systems and all computer support functions on a multi-platform local area
network ("LAN"), currently with 200 local workstations and 100 remote
workstations. Each superstore has two personal computers linked to the main
office LAN by modem. Connection is made whenever information is sent from the
superstore, such as an order transmission, or for the download of updated
merchandise information. Various other critical functions, such as the annual
distribution center physical inventory and bar-coded tracking of distribution
center stock locations are supported by the LAN.

         In 1999 the Company expects to install a voice over frame relay
telecommunications system which will establish a virtual private network ("VPN")
with all of its stores. A VPN uses virtual connectivity to give all users the
look and feel of a private network with the flexibility and economics of a
public network.



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         The Company's management information and control system has been
designed to support the Company's key business objective of maintaining high
in-stock merchandise positions in all of the Company's superstores. The
internally developed system is based upon EDI with most of the Company's vendors
as well as with the Company's distribution center. Stores electronically
transmit their orders via modem to the corporate office where data is
electronically sorted, processed and transmitted to the appropriate vendor.
Orders are also fed automatically into the accounts payable system. This system
captures daily purchases by SKU. The information is then used to develop
planograms and is integrated into reports for the buyers and store managers. For
information related to the Company's Year 2000 readiness, please see Item 7,
"Management's Discussion and Analysis of Financial Condition and Results of
Operation - Year 2000" on page 28.

Competition

         The arts and crafts retailing business is highly competitive. The
Company currently competes against a diverse group of retailers, including
several national and regional chains of arts and crafts retailers (such as
publicly-held Michaels Stores and Rag Shops and privately-held Frank's Nursery
and Crafts), local merchants that specialize in one or more aspects of arts and
crafts and various mass merchandisers that typically dedicate a portion of their
selling space to a limited selection of arts and crafts items. These mass
merchandisers and some of the national chains have substantially greater
financial resources and operate more stores than the Company.

         The Company believes that the principal competitive factors in its
business are pricing, breadth of merchandise selection, in-stock merchandise
position and customer service. The Company believes that it is well positioned
to compete on each of these factors.

Employees

         As of December 31, 1998, the Company had 1,023 full-time and 1,713
part-time employees, 2,523 of whom worked at superstores, 116 at the
distribution center and 97 at the corporate offices. None of the Company's
employees is covered by a collective bargaining agreement, and the Company
considers its relationship with its employees to be good.

Trademarks

         The Company uses the "A.C. Moore" name as a tradename and as a service
mark in connection with the sale of its merchandise. The Company's "A.C. Moore"
logo has been federally registered as a service mark.



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Cautionary Statement Relating to Forward Looking Statements

         Certain oral statements made by management of the Company from time to
time and certain statements contained herein or in other periodic reports filed
by the Company with the Securities and Exchange Commission or incorporated by
reference herein or therein are "forward-looking statements" within the meaning
of Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934, as amended ("Exchange Act") with respect to results of
operations and the business of the Company. All such statements, other than
statements of historical facts, including those regarding market trends, the
Company's financial position, business strategy, projected costs, and plans and
objectives of management for future operations, are forward-looking statements.
In general, such statements are identified by the use of forward-looking words
or phrases including, but not limited to, "intended," "will," "should," "may,"
"expects," "expected," "anticipates," and "anticipated" or the negative thereof
or variations thereon or similar terminology. These forward-looking statements
are based on the Company's current expectations. Although the Company believes
that the expectations reflected in such forward looking statements are
reasonable, there can be no assurance that such expectations will prove to be
correct. These forward-looking statements represent the Company's current
judgment. The Company disclaims any intent or obligation to update its
forward-looking statements. Because forward-looking statements involve risks and
uncertainties, the Company's actual results could differ materially. Important
factors that could cause actual results to differ materially from the Company's
expectations ("Cautionary Statements") include those that are discussed below.
All subsequent written and oral forward-looking statements attributable to the
Company or persons acting on behalf of the Company are expressly qualified in
their entirety by the Cautionary Statements.

         Risks Associated With Expansion. The Company's strategy to increase its
net sales and earnings will depend in large part on its ability to open new
superstores and to operate them on a profitable basis. The Company opened 12
superstores in 1998 and anticipates opening at least 6 superstores in 1999 and
12 superstores in 2000, in both existing and new geographic markets. The opening
of additional superstores in an existing market could result in lower net sales
from the Company's existing superstores in that market. Opening superstores in
new geographic markets may present competitive and merchandising challenges that
are different from those currently faced by the Company in its existing
geographic markets. The Company may incur higher costs related to advertising
and distribution in connection with entering new markets. If the Company opens
superstores that do not perform to the Company's expectations or if superstore
openings are delayed, the Company's results of operations and financial
condition could be materially adversely affected. The success of the Company's
planned expansion will be dependent upon many factors, including the
identification of suitable markets, the availability and leasing of suitable
sites on acceptable terms, the availability of acceptable financing, the hiring,
training and retention of qualified management and other store personnel and
general economic conditions. The Company's expansion will place significant
demands on the Company's management, resources, operations and existing
information systems, and the Company must ensure the continuing adequacy of its
financial controls, operating procedures and information systems. Also, the
Company's continued growth will depend on its ability to increase sales in its
existing superstores. The Company has experienced a decline in its comparable
store sales growth rate in recent years. There can be no assurance that the
Company will be successful in any of these areas, and, as a result, there can be
no assurance that the Company will achieve its planned expansion or that new
superstores will be effectively integrated into the Company's existing
operations or will be profitable.



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         Dependence on Key Personnel. The success of the Company and its growth
strategy is dependent upon the active involvement of senior management
personnel, particularly John E. ("Jack") Parker, its President and Chief
Executive Officer. The loss of the services of Mr. Parker or other members of
senior management could have a materially adverse effect on the Company. The
Company has not entered into employment agreements with any members of its
senior management team nor does it maintain any key man life insurance on them.
The Company's success in the future will also be dependent upon its ability to
attract and retain other qualified personnel, including store managers.

         Small Store Base. As of December 31, 1998 the Company operated a chain
of only 37 superstores. The results achieved to date by the Company's relatively
small store base may not be indicative of the results of the larger number of
superstores which the Company intends to operate in existing or new markets.
Because the Company's current and planned superstores are located in the
mid-Atlantic and Northeast regions, the effect on the Company of adverse events
in these regions (such as weather or unfavorable regional economic conditions)
may be greater than if the Company's superstores were more geographically
dispersed. Furthermore, due to the Company's relatively small store base, one or
more unsuccessful new superstores, or a decline in sales at an existing
superstore, will have a more significant effect on the Company's results of
operations than would be the case if the Company had a larger store base.

         Quarterly Fluctuations. The Company's business is affected by the
seasonality pattern common to most retailers. Due to the importance of the fall
selling season, which includes Halloween, Thanksgiving and Christmas, the fourth
calendar quarter has historically contributed, and is expected to continue to
contribute, a substantial majority of the Company's operating income for the
entire year. As a result, any factors negatively affecting the Company during
the fourth quarter of any year, including adverse weather and unfavorable
economic conditions, would have a materially adverse effect on the Company's
results of operations for the entire year. The Company's quarterly results of
operations also may fluctuate based upon such factors as the timing of certain
holiday seasons, the number and timing of new superstore openings, the amount of
superstore pre-opening expenses, the amount of net sales contributed by new and
existing superstores, the mix of products sold, the timing and level of
markdowns, competitive factors, weather and general economic conditions.



                                       13
<PAGE>

         Competition. The arts and crafts retailing business is highly
competitive. The Company currently competes against a diverse group of
retailers, including several national and regional chains of arts and crafts
retailers, a substantial number of local merchants that specialize in one or
more aspects of arts and crafts and various mass merchandisers that typically
dedicate a portion of their selling space to a limited selection of arts and
crafts items. These mass merchandisers and some of the national chains have
substantially greater financial resources and operate more stores than the
Company.

         Risks Associated With Merchandising. The Company's success depends, in
large part, on its ability to anticipate and respond, in a timely manner, to
changing merchandise trends and consumer demands. Accordingly, any delay or
failure by the Company in identifying and responding to changing merchandise
trends could adversely affect consumer acceptance of the merchandise in the
Company's superstores. In addition, the Company makes decisions regarding
merchandise well in advance of each of the seasons in which such merchandise
will be sold. Significant deviations from projected demand for products would
have a materially adverse effect on the Company's results of operations and
financial condition, either from lost sales due to insufficient inventory or
lower margins due to the need to mark down excess inventory.

         Dependence on SBAR'S. SBAR'S is the Company's largest supplier of
merchandise to the Company who accounted for approximately 19% of the dollar
volume of the Company's purchases in 1998. The Company's future success is
dependent upon its ability to maintain a continuing good relationship with
SBAR'S and its other principal suppliers. The Company does not have any purchase
agreements or exclusive arrangements with SBAR'S or any other vendors, and
ordering of merchandise typically occurs through the issuance of individual
purchase orders. The failure to maintain such relationships could have a
materially adverse effect on the Company's results of operations, financial
condition and planned store expansion.

         Risks Associated with Sourcing and Obtaining Merchandise from Foreign
Sources. The Company in recent years has placed increased emphasis on obtaining
floral and seasonal items from overseas vendors, with approximately 11% of all
merchandise being purchased from overseas vendors in 1998. A change in the
competitiveness of a particular country's exports, whether due to a change in
trade regulations, currency fluctuations or other reasons is likely to increase
the cost of items purchased by the Company overseas or make such items
unavailable with a possible resulting materially adverse effect on the Company's
results of operations and financial condition.

         Inventory Risk. The Company depends upon in-store department managers
to reorder merchandise. The failure of the Company's staff to accurately respond
to inventory requirements could adversely affect consumer acceptance of the
merchandise in the Company's stores and thereby negatively impact sales which
could have a materially adverse effect on the Company's results of operations
and financial condition. In addition, as do most other retailers, the Company
conducts a physical inventory in the stores once a year, and quarterly results
are based on an estimated gross margin and accrual for estimated inventory
shrinkage.



                                       14
<PAGE>

         Future Capital Needs. The Company currently intends to finance the
opening of new superstores with a portion of the proceeds from its initial
public offering, cash flow from operations and borrowings. The Company plans to
open 6 superstores in 1999 and 12 superstores in 2000. The Company expects that
the average cash investment, including pre-opening expenses, required to open a
superstore will be approximately $1,250,000. There can be no assurance that the
actual cost of opening a superstore will not be significantly greater than that
expected by the Company. The Company may be required to seek additional debt
and/or equity financing in order to fund its continued expansion. There can be
no assurance that such additional financing will be available on terms
acceptable to the Company, if at all. In addition, the Company's ability to
incur additional indebtedness or issue equity or debt securities could be
limited by covenants in present and future loan agreements and debt instruments.




                                       15
<PAGE>

EXECUTIVE OFFICERS OF THE REGISTRANT

          The executive officers of the Company are currently as follows:
<TABLE>
<CAPTION>
                  Name                      Age                        Position
                  ----                      ---                        --------
<S>                                          <C>    <C>                                                 
John E. (Jack) Parker.................       57     President, Chief Executive Officer and Director

Rex A. Rambo..........................       57     Executive Vice President, Chief Operating Officer

Patricia A. Parker....................       56     Executive Vice President, Merchandising and Director

Leslie H. Gordon......................       55     Executive Vice President, Treasurer and Chief Financial
                                                       Officer

Janet Parker-Vandenberg...............       36     Senior Vice President, Merchandising
</TABLE>

         Mr. Parker is a co-founder of the Company and has been President, Chief
Executive Officer and a director of the Company since its inception. From 1959
to 1984, Mr. Parker worked for the F.W. Woolworth Company ("Woolworth") in
various management positions, most recently as President and Chief Executive
Officer of the U.S. General Merchandise Group where he had responsibility for
more than 1,000 stores, including the entire domestic chain of Woolworth retail
stores. Mr. Parker is the husband of Patricia A. Parker and the father of Janet
Parker-Vandenberg.

         Mr. Rambo has been Executive Vice President and Chief Operating Officer
of the Company since December 1997. From December 1996 to December 1997, Mr.
Rambo served as Executive Vice President, Strategic Development, Merchandising
and Marketing of the Company. In 1995 and 1996, Mr. Rambo was Executive Vice
President, Merchandising and Marketing of Michaels Stores, Inc., an arts and
crafts retailer. From 1992 to 1995, Mr. Rambo served in various management
capacities with Montgomery Ward & Co. and its affiliates, first, from 1992 to
1994 as a Vice President of Montgomery Ward and most recently as President and
Chief Operating Officer of Montgomery Ward's subsidiary Lechmere, Inc., a
retailer of electronics and other home products. In July 1997, Lechmere, Inc.
filed a petition in bankruptcy under Chapter 11. From 1963 to 1992, Mr. Rambo
worked for Sears, Roebuck and Co. in various management capacities, including
National Marketing Manager.

         Ms. Parker has been Executive Vice President, Merchandising of the
Company since September 1990. From 1985 to 1990, she served as a Vice President
of the Company. Ms. Parker is responsible for purchasing all floral and seasonal
merchandise and the Company's import purchasing program. Ms. Parker is the wife
of Jack Parker.

         Mr. Gordon has been Executive Vice President, Treasurer and Chief
Financial Officer of the Company since February 1999. From March 1996 to January
1999 Mr. Gordon served as Senior Vice President, Treasurer and Chief Financial
Officer of the Company. From 1992 to 1995, Mr. Gordon was Senior Vice President,
Finance of C & J Clark America, Inc., a shoe manufacturer, wholesaler and
retailer. From 1986 to 1992, Mr. Gordon served as Senior Vice President, Finance
of SILO, Inc., an electronics retailer.



                                       16
<PAGE>

         Ms. Parker-Vandenberg has been Senior Vice President, Merchandising of
the Company since 1994. From 1990 to 1994, Ms. Parker-Vandenberg served as Vice
President of Administration of the Company, and from 1985 to 1990, she was the
Company's Accounting Manager. Ms. Parker-Vandenberg is the daughter of Jack and
Patricia A. Parker.


ITEM 2. PROPERTIES.

         As of March 15, 1999, the Company operated nine superstores in
Pennsylvania, eight superstores in New York, seven superstores in New Jersey,
six superstores in Massachusetts, two superstores in Delaware, two superstores
in Maryland, and one superstore in each of Connecticut, New Hampshire and Rhode
Island, all of which are leased. In addition, the Company has four superstores
(one each in New Jersey and Connecticut and two in Massachusetts) under lease,
three of which the Company plans to open in 1999 and one of which the Company
plans to open in 2000. Most superstore leases have an average initial term of
ten years, with three five year renewal options, and provide for predetermined
escalations in future minimum annual rent or additional rent contingent upon
store sales levels. The pro rata portion of scheduled rent escalations has been
included in other long-term liabilities in the Company's balance sheet.

         The Company selects superstore sites on the basis of various factors,
including physical location, demographics, anchor and other tenants, location
within the center, parking and available lease terms. The Company looks for
co-tenants that generate a high rate of shopping traffic, such as specialty
value-oriented women's retailers, leading chain supermarkets, discount chains,
home improvement centers, book superstores and domestics superstores. The
Company believes its superstores are attractive to developers because they
attract high rates of customer traffic and generate above average net sales per
square foot. The Company's superstore site selection process is headed by the
Chief Operating Officer.

         The Company's 250,000 square foot distribution center and adjoining
10,000 square foot office complex in Blackwood, New Jersey is leased for a term
which expires in October, 2004 with an option to renew for six years.
Approximately one-sixth of the distribution center is used for order picking,
with the balance used for receiving and bulk stock storage. The distribution
center was expanded to its current size in 1998.




                                       17
<PAGE>

ITEM 3. LEGAL PROCEEDINGS.

         From time to time, the Company is involved in litigation arising in the
ordinary course of its business. None of the pending litigation, in the opinion
of management, is likely to have a materially adverse effect on the Company's
results of operations or financial condition. The Company maintains general
liability insurance in amounts deemed adequate by management.


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

          No matters were submitted to a vote of security holders during the
fourth quarter of fiscal 1998, through the solicitation of proxies or otherwise.


                                     PART II

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

          The Company's common stock is traded on the NASDAQ National Market
under the symbol ACMR. The following table shows the quarterly range of high and
low sales prices of the common stock on the NASDAQ National Market since October
9, 1997, the date the Company's Common Stock became publicly traded:

             Quarter Ended           High              Low
                 1998                ----              ---
                 ----
               March 31,            19 1/4            10 1/2
               June 30,             19 7/8            15 1/2
             September 30,          16 3/4             4 7/8
             December 31,           10 1/2             5
                 1997
                 ----
              December 31           18 1/2            10 7/8

          As of March 16, 1999, there were approximately 89 stockholders of
record.

         From its inception in 1985 until immediately prior to completion of its
initial public offering, the Company was subject to taxation under Subchapter S
of the Internal Revenue Code of 1986 (the "Code"). As a result, the net income
of the Company, for federal and certain state income tax purposes, was taxable
directly to the Company's shareholders during that time rather than to the
Company. To provide funds for tax obligations payable by its shareholders on
account of the Company's taxable income in 1996 and as distributions of
earnings, the Company made aggregate distributions to its shareholders of $7.0
million during 1997. The funds distributed to shareholders, reduced by the
amounts used to pay tax obligations on account of the Company's taxable income,
were loaned to the Company contemporaneously with their distribution to provide
working capital to the Company. In connection with its conversion from S
Corporation to C Corporation status, the Company distributed $256,000 to the
Company's shareholders. This distribution represented the shareholders'
proportionate interest in the Company's earnings which had not been distributed
to the shareholders prior to the Company's conversion to a C Corporation.

                                       18
<PAGE>

         The Company does not intend to pay any cash dividends as it intends to
retain its earnings to finance the expansion of its business. Future dividends,
if any, will depend upon the Company's results of operations, financial
condition, cash requirements and other factors deemed relevant by the Board of
Directors. Furthermore, the Company's credit agreement prohibits the payment of
cash dividends by the Company without the bank's consent.

         The Company filed a Registration Statement on Form S-1 with the
Securities and Exchange Commission (Commission file number 333-32859) for the
sale of Common Stock in the Company's initial public offering (the "Offering").
The Company registered 3,105,000 shares of Common Stock, including 405,000
shares of Common Stock for sale upon exercise of an option granted to the
underwriters to cover over-allotments. The effective date of the Registration
Statement was October 8, 1997. The Offering commenced on October 9, 1997 and was
terminated after the sale of all securities registered. The management
underwriters for the Offering were BT Alex. Brown Incorporated and Janney
Montgomery Scott, Inc. The aggregate price to the public of the 3,105,000 shares
of Common Stock registered was $46,575,000. The Company completed the Offering,
selling all 3,105,000 shares of Common Stock registered for the aggregate
offering price of $46,575,000.

         The Company incurred the following expenses in connection with the
issuance and distribution of its Common Stock in the Offering:

          Underwriting  Discounts and Commissions .............  $3,260,250
          Expenses paid to or for Underwriters ................          --
          Other Expenses ......................................     724,375
                                                                 ----------
                          Total  Expenses .....................  $3,984,625
                                                                 ==========

         All payments of expenses were direct or indirect payments to persons
other than directors or officers of the Company or their associates, persons
owning ten percent or more of any class of equity securities of the Company, or
affiliates of the Company.



                                       19
<PAGE>

         The Company used the net proceeds of the Offering ($42,590,375 after
deducting total expenses set forth above) for the following purposes:

          Repayment of outstanding bank indebtedness .........     $13,198,902
          Repayment of subordinated shareholder loans ........      14,800,000
          Repayment of S Corporation  Distribution ...........         256,000
          Working Capital ....................................      10,441,473
          Temporary investment in marketable securities ......       3,894,000
                                                                   -----------
          Net  Proceeds ......................................     $42,590,375
                                                                   ===========


                                       20
<PAGE>


ITEM 6.  SELECTED FINANCIAL DATA.

         The selected Financial data for the five years ended December 31, 1998
should be read in conjunction with the Company's consolidated financial
statements and notes thereto and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" appearing elsewhere herein.
<TABLE>
<CAPTION>
                                                                               Year Ended December 31,
                                                         ---------------------------------------------------------------------
                                                             1998           1997          1996          1995         1994
                                                             ----           ----          ----          ----         ----
<S>                                                         <C>           <C>           <C>            <C>         <C>   
OPERATING DATA:
Net sales............................................      $187,005       $138,056      $109,319     $100,106      $86,376

Income from operations...............................         5,830          7,781         6,943        7,248        5,209

Net income...........................................         3,935          3,992         6,306        6,409        4,580

Net income per share, diluted........................          0.52           0.79          1.46         1.48         1.07

Pro forma net income(1)..............................            --          4,431         3,817        3,840        2,695

Pro forma diluted net income per share(1)............            --           0.87          0.88         0.89         0.63

Weighted average shares outstanding .................     7,517,000      5,078,000     4,326,000    4,326,000    4,300,000

Stores open, end of year.............................            37             25            17           16           16

Comparable store sales increase......................            3%             4%            5%           8%           2%

Average sales per store..............................        $6,329         $6,728        $6,586       $6,245       $6,161

Sales per total square foot..........................           302            326           320          303          302

BALANCE SHEET DATA:
Working capital......................................       $42,721        $40,974       $20,597      $20,224      $16,937

Total assets.........................................        82,357         66,067        37,799       34,571       30,720

Long-term debt, excluding current portion............         1,568              -        17,748       16,105       16,881

Shareholders' equity.................................        51,171         47,086         7,492        7,756        3,915
</TABLE>
--------------
(1)  Prior to the Company's initial public offering completed on October 9, 1997
     the Company elected to be taxed under the S Corporation provisions of the
     Internal Revenue Code. Under these provisions, the shareholders of the
     Company included their pro rata share of income or loss in their individual
     returns. The pro forma information has been computed as if the Company was
     subject to federal and all applicable state corporate income taxes for each
     year presented, assuming the tax rate that would have applied had the
     Company been taxed as a C Corporation


                                       21
<PAGE>

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

         The following discussion of the Company's historical results of
operations and its liquidity and capital resources should be read in conjunction
with the selected financial data and the consolidated financial statements of
the Company and related notes thereto appearing elsewhere in this report.

Overview

         A.C. Moore Arts & Crafts, Inc. (the "Company") is a rapidly growing
operator of arts and crafts superstores that offers a vast assortment of
traditional and contemporary arts and crafts merchandise for a wide range of
customers.

         In 1995, the Company implemented a plan to build its infrastructure to
position the Company for rapid future growth. By the end of 1996, the Company
had recruited experienced senior retail executives in the areas of operations,
merchandising and finance, made key additions in other areas such as buying,
information systems, human resources and real estate, leased a new 130,000
square foot distribution center and office complex, developed its automated
ordering system to electronically link the Company with most vendors, and
developed a real estate program to accommodate the Company's expansion plan. In
1996, the Company opened one new superstore. In 1997 and 1998, the Company
continued the implementation of its expansion strategy by opening a total of 20
new superstores and achieved a sales growth in the existing store base of 3% in
1998 and 4% in 1997. Newer superstores, on average, do not generate the volume
levels of older stores. As a result, average sales per store in 1998 of $6.3
million is lower than the average sales per store of $6.7 million in 1997, and
sales per square foot of $302 in 1998 is lower than sales per square foot of
$326 in 1997.

         The Company plans to open at least 18 new superstores in 1999 and 2000,
all within 400 miles of its southern New Jersey distribution center. This area
contains more than 25% of the United States' population. In 1998 the
distribution center was expanded by 130,000 square feet to provide additional
space to support the expanding store base.

         The Company successfully completed an initial public offering on
October 9, 1997 by issuing 3,105,000 shares of common stock including shares
issued upon the exercise of an underwriters' option and received $42.6 million
in net proceeds. The Company retired all outstanding bank debt and shareholder
loans totaling $28.0 million with the proceeds.



                                       22
<PAGE>

Results of Operations

         The following table sets forth, for the periods indicated, selected
statement of operations data expressed as a percentage of net sales:
<TABLE>
<CAPTION>
                                                                         Year Ended December 31,
                                                          -------------------------------------------------------
                                                              1998                   1997               1996
                                                          --------------        ---------------     -------------
<S>                                                        <C>                   <C>                 <C>   
Net sales............................................            100.0%                100.0%              100.0%
Cost of sales........................................             63.5                  62.9                63.3
                                                          --------------        ---------------     -------------
Gross margin.........................................             36.5                  37.1                36.7
Selling, general and administrative expenses.........             32.2                  30.4                30.2
Pre-opening expense..................................              1.2                   1.1                 0.1
                                                          --------------        ---------------     -------------
Income from operations...............................              3.1                   5.6                 6.4
Interest (income) expense, net.......................             (0.2)                  0.3                 0.5
                                                          --------------        ---------------     -------------
Income before income taxes...........................              3.3                   5.3                 5.9
Income tax expense...................................              1.2                   2.4                 0.1
                                                          --------------        ---------------     -------------
                                                                                
Net income...........................................              2.1%                  2.9%                5.8%
                                                          ==============        ===============     =============

Pro forma income tax provision.......................            ---                     2.1                 2.3
                                                          --------------        ---------------     -------------
                                                                                
Pro forma net income.................................            ---                     3.2%                3.5%
                                                          ==============        ===============     =============
</TABLE>
1998 Compared to 1997

         Net Sales. Net sales increased $48.9 million, or 35.5%, to $187.0
million from $138.1 million in 1997. This increase resulted from (i) net sales
of $28.8 million from 12 new superstores opened during the period, (ii) net
sales of $15.7 million from superstores opened in 1997 not included in the
comparable store base, and (iii) a comparable store sales increase of $4.4
million, or 3%. Stores are added to the comparable store base at the beginning
of the fourteenth full month of operation.

         Gross Margin. Cost of sales includes the cost of merchandise, plus
certain distribution and purchasing costs. Cost of sales increased $31.9
million, or 36.7%, to $118.7 million in 1998 from $86.8 million in 1997. The
gross margin increased $17.1 million, or 33.3%, to $68.3 million in 1998 from
$51.2 million in 1997. The gross margin decreased to 36.5% of net sales in 1998
from 37.1% in 1997 mainly due to competitive discounting in the marketplace.

         Selling, General and Administrative Expenses. Selling, general and
administrative expenses include (a) direct store level expenses, including rent
and related operating costs, payroll, advertising, depreciation and other direct
costs, and (b) corporate level costs not directly associated with or allocable
to cost of sales including executive salaries, accounting and finance, corporate
information systems, office facilities and other corporate expenses. Selling,
general and administrative expenses increased $18.2 million, or 43.5%, in 1998
to $60.2 million from $42.0 million in 1997. Of the increase, $15.6 million was
attributable to the 12 superstores open during 1998 which were not open during
1997 and the superstores opened in 1997 not in the comparable store base. The
remainder of the increase is attributable to $1.2 million in operating expenses
in the comparable superstores and $1.4 million in corporate costs, principally
from the addition of corporate staff and infrastructure to support the growth of
the Company. As a percentage of sales, selling, general and administrative costs
increased to 32.5% of net sales in 1998 from 30.4% of net sales in 1997. This
increase is primarily due to the new stores, which, on average, have higher
operating costs as a percent of sales than older stores.



                                       23
<PAGE>

         Pre-Opening Expense. The Company has adopted the Financial Accounting
Standards Board Statement of Position 98-5 "Reporting on the Costs of Start-Up
Activities" and accordingly expenses store pre-opening expense as incurred. The
effect of the change was immaterial. Pre-opening expense for the 12 new
superstores opened in 1998 amounted to $2.2 million. In 1997 the Company opened
eight superstores and had pre-opening expense of $1.5 million.

         Interest Expense. Interest expense was $66,000 for 1998, a decrease of
$565,000 from 1997. This decrease was the result of minimal short-term bank
borrowings as compared with 1997. The Company was able to utilize the funds
obtained from the sale of common shares in October of 1997 to finance its
operating needs and capital expenditures.

         Interest Income. Interest income was $471,000 in 1998, an increase of
$269,000 from 1997. The increase was due to the investment of cash received from
the sale of common shares.

         Income Taxes. For 1998 the effective tax rate was 36.9%, 2.8% lower
than the pro forma effective tax rate of 39.7% in 1997. The reduction is due to
the organizational structures established effective with the sale of common
shares in October 1997 and in effect for the entire 1998 period.

1997 Compared to 1996

         Net Sales. Net sales increased $28.7 million, or 26.3%, to $138.1
million in 1997 from $109.3 million in 1996. This increase resulted from (i) net
sales of $23.7 million from eight new superstores opened during the period, (ii)
$400,000 from the superstore opened in 1996 not included in the comparable store
base, and (iii) a comparable store sales increase of $4.6 million, or 4%.

         Gross Margin. Cost of sales increased $17.6 million, or 25.5%, to $86.8
million in 1997 from $69.2 million in 1996. The gross margin increased $11.1
million, or 27.7%, to $51.2 million in 1997 from $40.1 million in 1996. The
gross margin increased to 37.1% of net sales in 1997 from 36.7% in 1996.

         Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $8.9 million, or 27.0%, in 1997 to $42.0
million from $33.0 million in 1996. Of the increase, $7.3 million was
attributable to the eight superstores open during 1997 which were not open
during 1996 and the one superstore opened in the first half of 1996 not in the
comparable store base. The remainder of the increase is attributable to $900,000
in operating expenses in the comparable superstores and $700,000 in corporate
costs, principally from the addition of corporate staff and infrastructure to
support the expected growth of the Company. As a percentage of sales, selling,
general and administrative costs increased to 30.4% of net sales in 1997 from
30.2% of net sales in 1996. This increase is primarily due to the new stores,
which, on average, have higher operating costs as a percent of sales than older
stores.



                                       24
<PAGE>

         Pre-Opening Expense. Pre-opening expense for the eight new superstores
opened in 1997 amounted to $1.5 million. In 1996, the Company opened one
superstore which had pre-opening expense of $140,000.

         Interest Expense. Interest expense was $631,000 for 1997, a decrease of
$69,000 from 1996. This decrease was due to the repayment of bank debt resulting
from the cash received from the sale of common shares in October 1997.

         Interest Income. Interest income was $202,000 in 1997, an increase of
$59,000 from 1996. The increase was due to the investment of cash received from
the sale of common shares.

         Income taxes. Prior to the Company's initial public offering on October
9, 1997 the Company elected to be taxed under the S Corporation provisions of
the Internal Revenue Service. Under these provisions, the shareholders of the
Company included their pro rata share of income or loss in their individual
returns. On October 9, 1997 the Company converted to C Corporation status and
the Company's earnings subsequent to that date reflect all applicable income
taxes. Effective with the termination of its S Corporation status, the Company
recognized deferred income taxes of $659,000 for cumulative temporary
differences between income for financial and tax reporting purposes.

Seasonality and Quarterly Results

         Due to the importance of the fall selling season, which includes
Halloween, Thanksgiving and Christmas, the fourth calendar quarter has
historically contributed, and is expected to continue to contribute, a
substantial majority of the Company's profitability for the entire year. As a
result, any factors negatively affecting the Company during the fourth quarter
of any year, including adverse weather and unfavorable economic conditions,
would have a materially adverse effect on the Company's results of operations
for the entire year.

         The Company's quarterly results of operations also may fluctuate based
upon such factors as the timing of certain holiday seasons, the number and
timing of new superstore openings, the amount of superstore pre-opening
expenses, the amount of net sales contributed by new and existing superstores,
the mix of products sold, the timing and level of markdowns, competitive
factors, weather and general economic conditions.



                                       25
<PAGE>

         Set forth below is certain summary information with respect to the
Company's operations for the most recent eight fiscal quarters:
<TABLE>
<CAPTION>
                                                           First          Second           Third            Fourth
                                                          Quarter         Quarter         Quarter          Quarter
                                                        ------------    ------------    ------------     -------------
                                                                   (in thousands except per share amounts)
<S>                                                     <C>             <C>              <C>              <C> 
Year ended December 31, 1998
      Net sales....................................         $38,219        $36,691         $41,783            $70,312
      Income (loss) from operations................             469           (370)           (394)             6,125
      Income (loss) before income taxes............             666           (267)           (339)             6,175
      Net income (loss)............................             406           (163)           (207)             3,899
      Net income (loss) per share, diluted.........            0.05          (0.02)          (0.03)               .53
      Weighted average shares outstanding..........           7,566          7,602           7,405              7,405

Year ended December 31, 1997
      Net Sales....................................         $27,252        $26,405         $31,295            $53,104
      Income (loss) from operations................             511            (78)            349              6,999
      Income (loss) before income taxes............             400           (247)             89              7,110
      Net income (loss)............................             393           (247)             89              3,757
      Net income (loss) per share, diluted.........            0.09          (0.06)           0.02               0.52
      Pro forma net income (loss)(1)...............             240           (148)             53              4,286
      Pro forma diluted net income (loss)
           per share...............................            0.06          (0.03)           0.01               0.60
      Weighted average shares outstanding..........           4,326          4,326           4,326              7,155
</TABLE>
--------------
     (1) The pro forma information has been computed as if the Company was
subject to federal and all applicable state corporate income taxes for each of
the periods presented, assuming the tax rate that would have applied had the
Company been taxed as a C Corporation.

Liquidity and Capital Resources

         The Company's cash needs are primarily for working capital to support
its inventory requirements and capital expenditures, pre-opening expenses and
beginning inventory for new superstores. Prior to the sale of common shares in
October 1997, the Company had financed its operations and new store openings
primarily with cash from operations, borrowing under bank financing agreements
and subordinated loans from its shareholders.


                                       26
<PAGE>

         In October 1997 the Company completed an initial public offering of
3,105,000 shares of its common stock, including shares issued upon exercise of
an underwriters' overallotment option in November 1997. Net proceeds to the
Company, after deducting underwriting commissions and discounts and expenses,
was $42.6 million. Approximately $28.0 million of the proceeds were used to
retire long-term debt, borrowings under the line of credit and the loans from
shareholders.

         At December 31, 1998 and 1997 the Company's working capital was $42.7
million and $41.0 million, respectively. During 1998, cash of $4.4 million was
used in operations, in 1997 cash of $1.5 million was generated by operations. In
1998 and 1997, $17.4 million and $11.8 million of cash, respectively, was used
to increase inventory levels to support both new and existing stores. In these
periods, part of the inventory increase was financed through increases in
accounts payable of $7.0 million and $7.2 million, respectively.

         Net cash used in investing activities during 1998 and 1997 was $4.6
million and $8.0 million, respectively. This use of cash was primarily the
result of new store openings. In 1997, the Company invested $4.0 million of
proceeds from the sale of shares into marketable securities. In 1999, the
Company expects to spend approximately $5.2 million on capital expenditures,
which includes approximately $2.1 million for new store openings, $2.0 million
for remodeling and systems in existing stores, and the remainder for warehouse
equipment and systems development.

         On March 11, 1998 the Company entered into a new four year financing
agreement with a bank which provides a $25 million revolving credit facility,
$15 million of which is available immediately with the remainder available in $5
million increments in 1999 and 2000 providing the Company is in compliance with
the agreement's covenants. In 1998 the Company utilized a portion of the credit
facility to finance the acquisition of various equipment purchases through a
series of five year capital leases.

         The Company believes the proceeds from the public offering, together
with cash generated from operations and available borrowings under the financing
agreement will be sufficient to finance its working capital and capital
expenditure requirements for at least the next 12 months.


Inflation

         Management does not believe that inflation has had a material effect on
its financial condition or results of operations during the past three years.



                                       27
<PAGE>

Year 2000

         The Company's computer systems operate on a PC-based local area network
("LAN"). Each superstore has personal computers linked to the main office LAN by
modem. Management has evaluated the issues relating to the Year 2000 (Y2K) as it
may affect (a) the Company's operating and financial systems and other systems
such as its telephone system, and (b) future operating results, and has
determined that in most instances, the Company's systems are compliant with Year
2000 requirements. In those instances where hardware or software is not
compliant, the Company has determined a course of action which should be
complete by the end of the second quarter of 1999. The Company has determined
the cost of addressing the Y2K issue is immaterial and the changes required in
the Company's systems to become Y2K compliant are of a magnitude which is
unlikely to impact future operating performance. The Company does not separately
track internal direct costs associated with the utilization of its officers and
employees in its Year 2000 readiness efforts. The Company has surveyed all of
its significant vendors and has ascertained that in most cases those vendors are
already in compliance or have plans to be compliant by the middle of 1999.

         In evaluating the risks to the Company, the most serious risk would be
if a vendor does not become compliant with the Y2K requirements and, as a
result, is unable to ship needed inventory to the Company. Should this occur,
the Company does have the ability to resource product from other vendors.

         The Company is in the intermediate stage of developing contingency
plans to mitigate the potential disruptions that may result from the Y2K issue.
These plans may include identifying and securing alternate suppliers,
stockpiling of select products and other measures considered appropriate by
management. The Company expects to complete these plans by the middle of 1999.
Once developed and approved, contingency plans, and the related cost estimates,
if any, will be continually refined as additional information becomes available.

         Despite the Company's efforts to make its systems and facilities Year
2000 compliant, the ability of third party service providers, vendors and
certain other third parties, including governmental entities and utility
companies, to be Year 2000 compliant is beyond the Company's control.
Accordingly, the Company can give no assurances that the systems of other
parties on which the Company's systems or operations rely will be timely
converted or compatible with the Company's systems. The failure of these
entities to comply on a timely basis could have an adverse effect on the
Company.


ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.

         Not applicable.



                                       28
<PAGE>


ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

                         A.C. MOORE ARTS & CRAFTS, INC.

                                                                          Page
                                                                          ----
Report of Independent Accountants........................................  30

Consolidated Balance Sheets at December 31, 1998 and 1997................  31

Consolidated Statements of Income for each of the three years
         in the period ended December 31, 1998...........................  32

Statements of Changes in Shareholders' Equity for each of the
         three years in the period ended December 31, 1998...............  33

Consolidated Statements of Cash Flows for each of the three
         years in the period ended December 31,1998......................  34

Notes to Consolidated Financial Statements...............................  35



                                       29
<PAGE>



                        Report of Independent Accountants


To the Board of Directors and Shareholders of
A.C. Moore Arts & Crafts, Inc.

In our opinion, the consolidated financial statements listed in the accompanying
index present fairly, in all material respects, the financial position of A.C.
Moore Arts & Crafts, Inc. and its subsidiaries at December 31, 1998 and 1997,
and the results of their operations and their cash flows for each of the three
years in the period ended December 31, 1998, in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which 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, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.



PricewaterhouseCoopers LLP

Philadelphia, Pennsylvania
February 23, 1999





                                       30
<PAGE>

                         A.C. MOORE ARTS & CRAFTS, INC.
                           CONSOLIDATED BALANCE SHEETS
                             (dollars in thousands)
<TABLE>
<CAPTION>
                                                                                              December 31,
                                                                                    ----------------------------------
                                                                                         1998               1997
                                                                                    ---------------     --------------
<S>                                                                                 <C>                 <C>    
                                      ASSETS
Current assets:
     Cash and cash equivalents..................................................          $  9,475          $  15,835
     Marketable securities......................................................             3,894              4,004
     Accounts receivable........................................................               869                131
     Inventories................................................................            54,379             37,022
     Prepaid expenses and other current assets..................................             1,080                903
                                                                                    ---------------     --------------
                                                                                            69,697             57,895
Property and equipment, net.....................................................            12,059              7,655
Other assets....................................................................               601                517
                                                                                    ---------------     --------------
                                                                                         $  82,357          $  66,067
                                                                                    ===============     ==============

                       LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
     Current portion of capital leases..........................................          $    350            $    --
     Accounts payable to trade and others.......................................            20,176             12,479
     Accrued payroll and payroll taxes..........................................             2,888              2,353
     Accrued expenses...........................................................             3,562              2,089
                                                                                    ---------------     --------------
                                                                                            26,976             16,921
                                                                                    ---------------     --------------
Long-term liabilities:
     Capital leases.............................................................             1,568                 --
     Deferred taxes.............................................................               981                830
     Other long-term liabilities................................................             1,661              1,230
                                                                                    ---------------     --------------
                                                                                             4,210              2,060
                                                                                    ---------------     --------------
                                                                                            31,186             18,981
                                                                                    ---------------     --------------

Shareholders' equity:
     Preferred stock, no par value, 5,000,000 shares
     authorized, none issued....................................................                --                 --

     Common stock, no par value, 20,000,000 shares
     authorized, 7,405,000 shares outstanding at
     December 31, 1998 and December 31, 1997....................................            42,979             42,829
     Retained earnings..........................................................             8,192              4,257
                                                                                    ---------------     --------------
                                                                                            51,171             47,086
                                                                                    ---------------     --------------
                                                                                         $  82,357          $  66,067
                                                                                    ===============     ==============
</TABLE>
    The accompanying notes are an integral part of these financial statements


                                       31
<PAGE>

                         A.C. MOORE ARTS & CRAFTS, INC.
                        CONSOLIDATED STATEMENTS OF INCOME
                  (dollars in thousands except per share data)
<TABLE>
<CAPTION>
                                                                                     December 31,
                                                           -----------------------------------------------------------------
                                                                 1998                   1997                   1996
                                                           ------------------     -----------------     --------------------
<S>                                                        <C>                    <C>                   <C>    
Net sales............................................              $187,005              $138,056                 $109,319 
Cost of sales (including buying and
   distribution costs)...............................               118,727                86,827                   69,195 
                                                           ------------------     -----------------     --------------------
Gross margin.........................................                68,278                51,229                   40,124 
Selling, general and administrative expenses.........                60,214                41,971                   33,041 
Pre-opening expenses.................................                 2,234                 1,477                      140 
                                                           ------------------     -----------------     --------------------
Income from operations...............................                 5,830                 7,781                    6,943 
   Interest expense..................................                    66                   631                      700 
   Interest income...................................                  (471)                 (202)                    (143)
                                                           ------------------     -----------------     --------------------
Income before income taxes...........................                 6,235                 7,352                    6,386 
   Income tax expense................................                 2,300                 3,360                       80 
                                                           ------------------     -----------------     --------------------
Net income...........................................              $  3,935                $3,992                   $6,306 
                                                           ==================     =================     ====================

Basic net income per share...........................                 $0.53                 $0.80                    $1.47 
                                                           ==================     =================     ====================

Weighted average shares outstanding..................             7,405,000             4,982,000                4,300,000 
                                                           ==================     =================     ====================

Diluted net income per share.........................                 $0.52                 $0.79                    $1.46 
                                                           ==================     =================     ====================

Weighted average shares outstanding
   plus impact of stock options......................             7,517,000             5,078,000                4,326,000 
                                                           ==================     =================     ====================

Pro forma income and per share data (unaudited) 
  (Notes 2 and 3):
Income before income taxes, as reported..............                    --                $7,352                   $6,386 
   Pro forma income tax provision....................                    --                 2,921                    2,569 
                                                           ------------------     -----------------     --------------------
Pro forma net income.................................                    --                $4,431                   $3,817 
                                                           ==================     =================     ====================

Pro forma basic net income per share.................                    --                 $0.89                    $0.89 
                                                           ==================     =================     ====================

Pro forma diluted net income per share...............                    --                 $0.87                    $0.88 
                                                           ==================     =================     ====================
</TABLE>
    The accompanying notes are an integral part of these financial statements


                                       32
<PAGE>
                          A.C. MOORE ARTS & CRAFTS INC.
                  STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
                             (dollars in thousands)
<TABLE>
<CAPTION>
                                                                   Common              Retained
                                               Shares               Stock              Earnings             Total
                                            --------------     ----------------    -----------------     -------------
<S>                                         <C>                  <C>                <C>                  <C>      
Balance, December 31, 1995..............        4,300,000             $    200             $ 7,556          $  7,756 
Net income..............................                -                    -               6,306             6,306 
Distributions to shareholders...........                -                    -              (6,570)           (6,570)
                                            --------------     ----------------    -----------------     -------------
Balance, December 31, 1996..............        4,300,000                  200               7,292             7,492 
Net income..............................                -                    -               3,992             3,992 
Distributions to shareholders...........                -                    -              (7,027)           (7,027)
Proceeds from sale of common stock              3,105,000               42,590                  --            42,590 
Compensation expense related to
         stock options..................                -                   39                  --               39 
                                            --------------     ----------------    -----------------     -------------
Balance, December 31, 1997..............        7,405,000               42,829               4,257            47,086 
Net income .............................               --                   --               3,935             3,935 
Compensation expense related to
         stock options..................               --                  150                  --               150 
                                            --------------     ----------------    -----------------     -------------
Balance, December 31, 1998..............        7,405,000             $ 42,979             $ 8,192          $ 51,171 
                                            ==============     ================    =================     =============
</TABLE>

    The accompanying notes are an integral part of these financial statements



                                       33
<PAGE>

                         A.C. MOORE ARTS & CRAFTS, INC.
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                             (dollars in thousands)
<TABLE>
<CAPTION>
                                                                                Year Ended December 31,
                                                                --------------------------------------------------------
                                                                     1998                1997                 1996
                                                                ----------------    ----------------     ---------------
<S>                                                             <C>                 <C>                  <C>  
Cash flows from operating activities:
Net Income                                                            $  3,935           $   3,992            $  6,306 
Adjustments to reconcile net income to net cash
         provided by (used in) operating activities:
         Depreciation and amortization......................             2,202               1,461               1,145 
         Compensation expenses related to stock
         Options............................................               150                  39 
         Provisions for deferred income taxes...............               151                 830 
         Changes in assets and liabilities:
               Accounts receivable..........................              (738)                 31                  12 
               Inventories..................................           (17,357)            (11,767)             (1,596)
               Prepaid expenses and other current assets                  (177)               (542)                 31 
               Accounts payable and accrued expenses........             6,986               7,166                 656 
               Other long-term liabilities..................               431                 283                 112 
               Other........................................               (28)                (41)                (13)
                                                                ----------------    ----------------     ---------------
Net cash provided by (used in) operating activities.........            (4,445)              1,452               6,653 
                                                                ----------------    ----------------     ---------------
Cash flows (used in) investing activities:
         Capital expenditures...............................            (4,682)             (4,002)             (2,251)
         Proceeds from maturity of marketable
               securities...................................             4,004                  --                  -- 
         Investment in marketable securities................            (3,950)             (4,004)                 -- 
                                                                ----------------    ----------------     ---------------
Net cash (used in) investing activities.....................            (4,628)             (8,006)             (2,251)
                                                                ----------------    ----------------     ---------------
Cash flows from financing activities:
         Proceeds from sale of common stock.................                --              42,590                  -- 
         Proceeds from bank overdraft.......................             2,719                  --                  --
         Proceeds from short-term debt......................             3,606                  --                  --
         Repayment of short-term debt.......................            (3,606)                 --                  --
         Proceeds from shareholders' loans..................                --               3,705               3,500 
         Repayment of shareholders' loans...................                --             (14,800)                 -- 
         Repayment of capital leases........................                (6)             (8,510)               (776)
         Distributions to shareholders......................                --              (7,027)             (6,570)
                                                                ----------------    ----------------     ---------------
Net cash provided by (used in) financing activities.........             2,713              15,958              (3,846)
                                                                ----------------    ----------------     ---------------
Net increase (decrease) in cash.............................            (6,360)              9,404                 556 
Cash and cash equivalents at beginning of year..............            15,835               6,431               5,875 
                                                                ----------------    ----------------     ---------------
Cash and cash equivalents at end of year....................          $  9,475           $  15,835            $  6,431 
                                                                ================    ================     ===============
Cash paid during the year for:
         Interest...........................................          $     68           $     679            $    709 
                                                                ================    ================     ===============
         Income taxes.......................................          $  2,180           $   2,707            $     82 
                                                                ================    ================     ===============
</TABLE>
    The accompanying notes are an integral part of these financial statements

                                       34
<PAGE>

                         A.C. MOORE ARTS & CRAFTS, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


1. Summary Of Significant Accounting Policies

Organization and basis of presentation. A.C. Moore Arts & Crafts, Inc. became a
holding company in July 1997 by incorporating in Pennsylvania and exchanging its
common stock for all of the capital stock of A.C. Moore Inc. held by its
shareholders. The consolidated financial statements include the accounts of A.C.
Moore Arts & Crafts, Inc. and its wholly owned subsidiaries (collectively the
"Company"). All intercompany accounts and transactions have been eliminated. As
of December 31, 1998, the Company operated a 37-store chain of retail arts and
crafts stores in the mid-Atlantic and northeast regions of the United States.

Cash and cash equivalents. Cash and cash equivalents are stated at cost, which
approximates market value. Cash equivalents include only securities having a
maturity of three months or less at the time of purchase.

Marketable securities. The Company's investments, consisting of corporate debt
securities, are classified as available-for-sale and are recorded at cost which
approximates fair market value. Fair market value is based upon quoted market
prices on the last day of the year. These securities mature in June, 1999.

Concentration of credit risk. Financial instruments, which potentially subject
the Company to concentrations of credit risk, are cash, cash equivalents and
marketable securities. The Company limits its credit risk by placing its
investments in highly rated, highly liquid funds.

Inventories. Inventories, which consist of general consumer merchandise held for
sale, are stated at the lower of cost or market. The cost of store inventories
is determined by the retail inventory method. Warehouse inventories are
determined on a first-in, first-out basis. The Company includes as inventoriable
costs certain indirect costs, principally purchasing, warehousing and
distribution.

Property and equipment. Property and equipment are stated at cost. Depreciation
is provided on a straight-line basis over the estimated useful lives of the
assets. Furniture, fixtures and equipment are depreciated over periods of five
to ten years and leasehold improvements are depreciated over the shorter of
their estimated useful lives or the term of the related lease. Maintenance and
repairs are charged to operations as incurred and major improvements are
capitalized. When property and equipment are retired or sold, the cost and
related accumulated depreciation are removed from the accounts and the net
amount, less any proceeds from disposal, is reflected in income. Amortization of
assets recorded under capital leases is included in depreciation expense.



                                       35
<PAGE>

Store pre-opening expenses. Direct incremental costs incurred to prepare a store
for opening are charged to expense as incurred.

Advertising costs. The costs incurred for advertising are expensed the first
time the advertising takes place and are offset by reimbursements received under
cooperative advertising programs with certain vendors. Net advertising expense
during 1998, 1997 and 1996 was $5,748,000, $4,083,000 and $2,985,000,
respectively.

Fair value of investments. The carrying amounts of cash, cash equivalents and
marketable securities, accounts receivable, other current assets, accounts
payable, accrued expenses and other liabilities approximate fair value because
of the short maturity of these instruments. The carrying amount of long-term
debt approximates fair value, as the interest rates on the debt approximate
rates currently available to the Company for debt with similar terms and
remaining maturities.

Use of estimates. The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities at
the date of the financial statements, and the amount of revenues and expenses
during the reporting period. Differences from those estimates, if any, are
recorded in the period they become known.

Stock option plan. The Company accounts for its employee stock options using the
intrinsic value method prescribed in Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" (APB 25). Compensation cost for stock
options is measured as the excess of the quoted market price of the Company's
stock at the date of grant over the amount an employee must pay to acquire the
stock.

Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for
Stock-Based Compensation", established accounting and disclosure requirements
using a fair-value based method of accounting for stock-based employee
compensation plans. The Company has elected to remain on its current method of
accounting under APB 25, and has adopted the disclosure requirements of SFAS 
No. 123.

2. Income Taxes and Pro Forma Income Taxes

Prior to the Company's initial public offering completed on October 9, 1997 the
Company elected to be taxed under the S Corporation provisions of the Internal
Revenue Code. Under these provisions, the shareholders of the Company included
their pro rata share of income or loss in their individual federal and state tax
returns. A portion of the distributions to shareholders was related to their
individual income tax liabilities resulting from S Corporation taxable earnings.
The Company's earnings subsequent to conversion to C Corporation status reflect
all applicable income taxes.

                                       36
<PAGE>

The Company utilizes the liability method of accounting for income taxes. Under
this method, deferred tax liabilities and assets are recognized for the expected
future tax consequences of temporary differences between the carrying amounts
and the tax bases of assets and liabilities. Effective with the termination of
its S Corporation status the Company recognized deferred income taxes of
$659,000 for cumulative temporary differences between income for financial and
tax reporting purposes. As of December 31, 1998 and 1997, the deferred tax
liability of $981,000 and $830,000 respectively comprised principally temporary
differences related to depreciation.

For the years ended December 31, 1997 and 1996, respectively, pro forma taxes
have been computed as if the Company was subject to all applicable federal and
state income taxes, assuming the tax rate that would have applied had the
Company been taxed as a C Corporation.

A reconciliation of income tax expense at the federal income tax rate to the
income tax provision is as follows:
<TABLE>
<CAPTION>
                                                                           Year Ended December 31,
                                                                 ---------------------------------------------
                                                                   1998              1997             1996
                                                                 ----------        ----------       ----------
                                                                                (in thousands)
<S>                                                               <C>              <C>              <C>    
    U.S. federal taxes at statutory rate.................           $2,120           $2,500           $2,171 
    State and local taxes, net...........................               32              355              393 
    Effect of S Corporation taxable earnings.............           --                 (212)          (2,489)
    Recognition of cumulative deferred income tax........           --                  659            --
    Non-deductible stock option expense..................               51               13            --
    Other................................................               97               45                5 
                                                                 ----------        ----------       ----------
    Income tax provision.................................           $2,300           $3,360              $80 
                                                                 ==========        ==========       ==========
</TABLE>

The income tax provision for 1998 and 1997 consists of the following:
<TABLE>
<CAPTION>
                                                                         1998                1997
                                                                       --------            ---------
<S>                                                                   <C>                  <C>    
              Current tax expense:
                   Federal  .....................................       $2,139               $2,035
                   State    .....................................           10                  495
                                                                       --------            ---------
                       Total current.............................        2,149                2,530
                                                                       --------            ---------

              Deferred tax expense:
                   Federal - current year........................          112                  128

                   Federal - prior years.........................           --                  659
                   State    .....................................           39                   43
                                                                       --------            ---------
                       Total deferred............................          151                  830
                                                                       --------            ---------
                       Total income tax provision................       $2,300               $3,360
                                                                       ========            =========
</TABLE>


                                       37
<PAGE>

For the year ended December 31, 1996 the Company, as an S Corporation for
federal and state tax purposes, provided current and deferred taxes in the
financial statements for the states of New Jersey and New York corporate-level
tax on S Corporations which rates were approximately 2%. The effective tax rates
differed from the statutory rates principally because of the effects of certain
permanent differences and apportionment ratios.

3. Earnings Per Share

The Company follows the provisions of SFAS No. 128, "Earnings Per Share" and the
Securities and Exchange Commission's Staff Accounting Bulletin 98.

The following is a reconciliation of the denominators of the basic and diluted
earnings per share computations:
<TABLE>
<CAPTION>
                                                   For the Years Ended December 31,
                                         --------------------------------------------------
                                            1998                 1997             1996
                                         ------------        -------------    -------------
                                                             (in thousands)
<S>                                      <C>                  <C>              <C>  
Basic...............................           7,405                4,982            4,300
Effect of dilutive options..........             112                   96               26
                                         ------------        -------------    -------------
Diluted.............................           7,517                5,078            4,326
                                         ============        =============    =============
</TABLE>
4. Accounts Payable to Trade and Others

         At December 31, 1998 accounts payable to trade and others includes
$2,719,000 of book overdrafts which represents outstanding checks at certain
banks in excess of funds on deposit at those banks. These accounts are
maintained as zero balance accounts and are covered as required from funds
available at other banks.

5. Property and Equipment

Property and equipment consists of:
<TABLE>
<CAPTION>
                                                                         December 31,
                                                                 ------------------------------
                                                                    1998               1997
                                                                 -----------        -----------
                                                                        (in thousands)
<S>                                                              <C>                <C>    
Furniture, fixtures and equipment........................           $16,531            $11,783
Leasehold improvements...................................               931                714
Equipment for future stores..............................                39                331
Capital leases...........................................             1,924             --
                                                                 -----------        -----------
                                                                     19,425             12,828
Less:  Accumulated depreciation and amortization.........             7,366              5,173
                                                                 -----------        -----------
                                                                    $12,059             $7,655
                                                                 ===========        ===========
</TABLE>


                                       38
<PAGE>

6. Leases

The Company leases its retail stores, administrative offices and warehouse
facilities under noncancelable operating leases. The lease for the
administrative offices and distribution center has an initial lease term of six
years with a six-year renewal option. Most store leases have an average initial
term of ten years, with three five year renewal options, and provide for
predetermined escalations in future minimum annual rent or additional rent
contingent upon store sales levels. The pro rata portion of scheduled rent
escalations has been included in other long-term liabilities in the accompanying
balance sheet. For the years 1998 and 1997 the amount of accrued rent expense
recognized over the amount paid were $431,000 and $285,000 respectively and has
been included in other long-term liabilities in the accompanying consolidated
balance sheet.

         Rent expense under operating leases consists of:
<TABLE>
<CAPTION>

                                                                       Year Ended December 31,
                                                                       -----------------------
                                                                1998              1997             1996
                                                                ----              ----             ----  
                                                                              (in thousands)
<S>                                                            <C>               <C>             <C>   
Minimum rentals.........................................       $8,218            $6,444          $4,815
Contingent payments....................................           188               232             244
                                                              -------            ------          ------
                                                               $8,406            $6,676          $5,059
                                                              =======            ======          ======
</TABLE>
In 1998, the Company entered into three leases for stores to open in 1999 and
2000.

Future minimum lease payments (including those for unopened stores) as of
December 31, 1998 for non-cancelable operating leases with terms in excess of
one year are as follows (in thousands):

        1999................................................      $10,915
        2000................................................       11,746
        2001................................................       11,811
        2002................................................       10,809
        2003................................................        9,996
        Thereafter..........................................       59,898
                                                                 -------- 
           Total minimum future rentals.....................     $115,175
                                                                 ========

Financing activities not affecting cash during 1998 included capital lease
obligations incurred in connection with equipment purchases of $1,924,000. These
leases require payments of principal and interest of $443,000 per year in each
of the next five years. Interest rates under these leases approximate 6.4%.



                                       39
<PAGE>

7. Financing Agreement

The Company has a financing agreement through April 1, 2002 with a bank which
provides a $25,000,000 revolving credit facility, $15,000,000 of which is
available immediately, an additional $5,000,000 is available on July 1, 1999 and
$5,000,000 which becomes available on July 1, 2000 providing the Company is in
compliance with the leverage and debt service ratios contained in the agreement.
The agreement is collateralized by all of the Company's assets and bears
elective interest rates which vary based upon the bank's prime rate or LIBOR.
Available amounts under this facility are reduced by amounts outstanding under
capital lease obligations with the bank. There were no amounts outstanding at
December 31, 1998 or 1997 under the revolving line of credit.

8. Loans From Shareholders - Subordinated

The loans from shareholders were repaid in their entirety with the proceeds from
the initial public offering. Such loans were non-interest bearing, payable to
the shareholders upon their written request for payment, and subject to the
subordination provisions.

9. Stock Incentive Plan and Stock Options

At December 31, 1998, under the Company's Employee, Director and Consultant
Stock Option Plan (the "1997 Plan"), the Company may grant up to 1,000,000
shares of common stock. Stock options expire ten years from the date of grant
and vest ratably over a three year period. Shares available for future grants
amounted to 493,000 at December 31, 1998 and 613,500 at December 31, 1997.

For 1998 and 1997, the Company's stock option activity is summarized below:
<TABLE>
<CAPTION>
                                                         1998                                1997
                                            --------------------------------     ------------------------------
                                                              Weighted                            Weighted
                                                              Average                             Average
                                                              Exercise                            Exercise
                                            Options           Price              Options          Price
                                            --------------    --------------     -------------    -------------
<S>                                         <C>               <C>                <C>              <C>
Outstanding at beginning of year                  386,500           $  9.00               -0-
Granted                                           152,150             15.21           444,500           $ 9.00
Forfeited                                          31,650              9.94            58,000             9.00
                                            --------------    --------------     -------------    -------------
Outstanding at end of year                        507,000           $ 10.80           386,500           $ 9.00
                                            ==============    ==============     =============    =============
Exercisable at end of year                        119,833           $  9.00               -0-
                                            ==============    ==============     =============
</TABLE>

Exercise prices for options outstanding as of December 31, 1998 ranged from
$9.00 to $15.375. The weighted average remaining contractual life of the options
is 8.8 years.



                                       40
<PAGE>

Had compensation cost for the Company's stock-based compensation plan been
determined based on the fair value at the grant date for awards under those
plans, consistent with the requirements of SFAS No. 123, net income and earnings
per share would have been reduced to the following pro-forma amounts:

                                                  1998                1997
                                             --------------      --------------
Net income        -- as reported               $ 3,935,000         $ 3,992,000
                  -- Pro forma                   3,341,000           3,864,000

Basic earnings per share   -- as reported    $         .53         $       .80
                           -- Pro forma                .45                 .78

Diluted earnings per share -- as reported    $         .52         $       .79
                           -- Pro forma                .45                 .76


The pro forma results may not be representative of the effects on reported
operations for future years. The fair value of the options was calculated using
a Black-Scholes options pricing model with the following weighted-average
assumptions: risk-free interest rate of 5.1% for 1998 and 6.4% for 1997; no
dividend yield; and a weighted average expected life of the options of seven
years. In accordance with the provisions of SFAS No. 123, for 1997 no expected
volatility was utilized in determining fair value, as the options were granted
prior to the Company becoming a public entity. For 1998 the expected stock price
volatility was 54.6%.

Effective September 15, 1997 options to purchase 444,500 shares of common stock
were granted under the 1997 Plan at an exercise price per share of $9.00 with an
exercise term of ten years. The estimated fair value of the shares on the
measurement date was $10.20. The Company will record aggregate compensation
expense of approximately $464,000 spread ratably over the three year vesting
period $150,000 in 1998 and $39,000 in 1997.

On February 28, 1995, in recognition of financial consulting services, the
Company granted a Board member an option to purchase 64,500 shares of common
stock, representing a 1.5% ownership interest in the Company. The option, which
expires February 28, 2005, has an exercise price of $4.66. The Company utilized
the Black-Scholes option-pricing model to estimate the fair value of the option.
The fair value of the option did not materially impact the results of operations
over the periods benefited.

10. Shareholder's Equity

In October 1997 the Company completed an initial public offering of 2,700,000
shares of its common stock. Net proceeds to the Company, after deducting
underwriting discounts and commissions and expenses, were $36,990,000.
Approximately $28,000,000 of the proceeds were used to retire long-term debt,
borrowings under a line of credit and loans from shareholders. In November 1997,
an additional 405,000 shares of common stock were sold pursuant to the
underwriters' over-allotment option, providing additional net proceeds to the
Company of approximately $5,600,000

                                       41
<PAGE>

The Company has authorized 5,000,000 shares of undesignated preferred stock. The
Company may issue preferred stock in one or more series by vote of its Board of
Directors having the dividend rights, dividend rates, conversion rights, voting
rights, terms of redemption, redemption prices and liquidation preferences
approved by the Board of Directors.


11. Commitments and Contingencies

There are no material commitments outstanding other than in the normal course of
business.

The Company is not a party to any material legal proceedings other than routine
litigation incidental to its business. In the opinion of management, the amount
of ultimate liability with respect to these actions will not materially affect
the financial position, operating results or cash flows of the Company.


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

         The Company had no changes in or disagreements with accountants on
accounting and financial disclosure of the type referred to in Item 304 of
Regulation S-K.


                                    PART III


ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

         The information concerning the directors of the Company is set forth in
the Proxy Statement to be delivered to shareholders in connection with the
Company's 1999 Annual Meeting of Shareholders (the "Proxy Statement") under the
heading "Election of Directors," which information is incorporated herein by
reference. The name, age and position of each executive officer of the Company
is set forth under the heading "Executive Officers of the Registrant" in Item 1
of this report, which information is incorporated herein by reference.



                                       42
<PAGE>

ITEM 11. EXECUTIVE COMPENSATION.

         The information concerning executive compensation is set forth in the
Proxy Statement under the heading "Executive Compensation," which information is
incorporated herein by reference.

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

             The information concerning security ownership of certain beneficial
owners and management is set forth in the Proxy Statement under the heading
"Principal Stockholders and Management Ownership," which information is
incorporated herein by reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

             The information concerning certain relationships and related
transactions is set forth in the Proxy Statement under the heading "Certain
Transactions," which information is incorporated herein by reference.

                                     PART IV

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

         (a) The following documents are filed as part of this Annual Report on 
             Form 10-K:

             (1) Financial Statements:

                 Report of Independent Accountants

                 Consolidated Balance Sheets at December 31, 1998 and 1997

                 Consolidated Statements of Income for each of the three years
                   in the period ended December 31, 1998

                 Statements of Changes in Shareholders' Equity for each of the
                   three years in the period ended December 31, 1998

                 Consolidated Statements of Cash Flows for each of the three
                   years in the period ended December 31,1998

                 Notes to Consolidated Financial Statements



                                       43
<PAGE>

             (2) Financial Statement Schedules:

                 No financial statement schedules are required to be filed as
part of this report.

             (3) Exhibits:

                 The exhibits filed as part of this report are listed under 
             exhibits at subsection (c) of this Item 14.

         (b) Current Reports on Form 8-K:

                 No report on Form 8-K was filed on behalf of the Registrant 
             during the last quarter of the period covered by this report.

         (c) Exhibits:

     Exhibit Number Description

       *3.1       Articles of Incorporation

       *3.2       Bylaws

     *+10.1       1997 Employee, Director and Consultant Stock Option Plan

     *+10.2       Form of Stock Option Award Agreement

       10.3       Loan Agreement, dated March 11, 1998, between the Company and
                  KeyBank National Association

     *+10.4       Correspondence reflecting option granted to Richard Lesser

      *10.5       Tax Indemnification Agreement, dated July 22, 1997, among the
                  Company, John E. Parker and William Kaplan

      *10.6       Lease, dated August 14, 1995, between Freeport 130 LLC and
                  A.C. Moore, Inc.

       10.7       Second Amendment to Lease, dated as of March 25, 1998, between
                  Freeport IBO LLC and A.C. Moore, Inc.

       21.1       Subsidiaries of the Company

       23.1       Consent of PricewaterhouseCoopers LLP

       27.1       Financial Data Schedule

-------------------
+  Management contract or compensatory plan or arrangement
*  Incorporated by reference to the Company's Registration Statement on Form S-1
   (#333-32859)


                                       44
<PAGE>

                                   SIGNATURES

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

                                            A.C. MOORE ARTS & CRAFTS, INC.

Date: March 23 , 1999                       By: /s/ John E. Parker       
                                                ------------------------------
                                                John E. Parker, President and
                                                Chief Executive Officer


              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>
<CAPTION>
              SIGNATURE                                   CAPACITY                            DATE
--------------------------------------  --------------------------------------------    ---------------
<S>                                     <C>                                             <C>    

 /s/ John E. Parker                     President, Chief Executive Officer, and          March 23, 1999
--------------------------------------  Director (Principal Executive Officer)
John E. Parker                          


 /s/ Leslie H. Gordon                   Senior Vice President and Chief Financial        March 23, 1999
--------------------------------------  Officer (Principal Financial and Accounting 
Leslie H. Gordon                        Officer)                                    
                                        


 /s/ William Kaplan                     Chairman of the Board                            March 23, 1999
--------------------------------------
William Kaplan


 /s/ Patricia A. Parker                 Director                                         March 23, 1999
--------------------------------------
Patricia A. Parker


 /s/ Richard Lesser                     Director                                         March 23, 1999
--------------------------------------
Richard Lesser


 /s/ Richard J. Bauer                   Director                                         March 23, 1999
--------------------------------------
Richard J. Bauer


 /s/ Richard J. Drake                   Director                                         March 23, 1999
--------------------------------------
Richard J. Drake
</TABLE>


                                       45
<PAGE>
                                  EXHIBIT INDEX



  Exhibit No.     Description
  -----------     ------------

       *3.1       Articles of Incorporation

       *3.2       Bylaws

     *+10.1       1997 Employee, Director and Consultant Stock Option Plan

     *+10.2       Form of Stock Option Award Agreement

       10.3       Loan Agreement, dated March 11, 1998, between the Company and
                  KeyBank National Association

     *+10.4       Correspondence reflecting option granted to Richard Lesser

      *10.5       Tax Indemnification Agreement, dated July 22, 1997, among the
                  Company, John E. Parker and William Kaplan

      *10.6       Lease, dated August 14, 1995, between Freeport 130 LLC and
                  A.C. Moore, Inc.

       10.7       Second Amendment to Lease, dated as of March 25, 1998, between
                  Freeport IBO LLC and A.C. Moore, Inc.

       21.1       Subsidiaries of the Company

       23.1       Consent of PricewaterhouseCoopers LLP

       27.1       Financial Data Schedule

-------------------
+  Management contract or compensatory plan or arrangement
*  Incorporated by reference to the Company's Registration Statement on Form S-1
   (#333-32859)


                                       46