JO-ANN STORES INC - 10-K Annual Report

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

FOR THE FISCAL YEAR ENDED FEBRUARY 2, 2002

COMMISSION FILE NO. 1-6695
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JO-ANN STORES, INC.
(Exact name of Registrant as specified in its charter)

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

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

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

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

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

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

As of April 12, 2002, there were 10,001,176 shares of Class A Common Stock
and 8,813,511 shares of Class B Common Stock outstanding and the aggregate
market value of these Common Shares (based upon the closing price on April 11,
2002 of these shares on the New York Stock Exchange) of the Registrant held by
persons other than affiliates of the Registrant was approximately $278.7
million.

Documents incorporated by reference:

Portions of the following documents are incorporated by reference:

Proxy Statement for 2002 Annual Meeting of Shareholders -- Items 10, 11
and 12 of Part III.

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PART I

Except as otherwise stated, the information contained in this report is
given as of February 2, 2002, the end of our latest fiscal year. The words
"Jo-Ann Stores, Inc.," "Jo-Ann Stores," "Jo-Ann Fabrics and Crafts," "Jo-Ann
etc," "Registrant," "Company," "we," "our," and "us" refer to Jo-Ann Stores,
Inc. and, unless the context requires otherwise, to our subsidiaries. Our fiscal
year ends on the Saturday closest to January 31 and refers to the year in which
the period ends (e.g., fiscal 2002 ended February 2, 2002).

ITEM 1. BUSINESS

We are the largest national category-dominant retailer serving the retail
fabric and craft industry. We were founded as a single retail store in 1943 and
as of February 2, 2002 we operated 889 Jo-Ann Fabrics and Crafts traditional
stores in 49 states and 70 Jo-Ann etc superstores in 16 states. We serve the
approximately 76 percent of U.S. households that have engaged in crafts and
hobbies by offering a large variety of competitively priced, high quality
apparel, craft and home decorating fabrics, notions, crafts, seasonal and home
accessories and floral and framing products.

Our traditional stores primarily serve small and middle markets, and our
superstores serve selected markets where traditional store performance and area
demographics are favorable. Our traditional stores average approximately 14,300
square feet. Over the past five years we have strategically relocated certain
traditional stores, increasing average square footage per store approximately 13
percent and sales per square foot by approximately 20 percent. As a result, net
sales per traditional store have increased to $1.3 million over this period. In
November 1995, we opened our first large format "category killer" superstore
which offers an expanded and more comprehensive product assortment than our
traditional stores. Our superstores average approximately 46,000 square feet and
in fiscal 2002 generated more than four times the revenue and over 30 percent
higher sales per square foot than our traditional stores. We believe our
superstores, which accounted for over 23 percent of fiscal 2002 net sales,
present opportunities for future sales growth.

Historically, we have grown and increased market share principally through
existing store growth, new store openings and strategic acquisitions. In fiscal
2001, we experienced significant difficulties with the implementation of our
enterprise-wide system ("SAP Retail"). These difficulties impacted our ability
to stay in stock on key basic products while, at the same time, resulted in our
being overstocked on slower selling products. As a result, sales were negatively
affected and our operating performance suffered. These issues, coupled with a
weak retail environment, resulted in a same-store sales performance of 1.3
percent for fiscal 2001, our lowest same-store sales performance in six years.

As a result of our recent decline in earnings trends, significant debt and
inventory levels, and SAP Retail implementation issues, our strategy shifted
from accelerating the growth of our superstore concept to improving the
productivity of our existing asset base and realizing the benefits from our
completed infrastructure investments. Last year, we announced the implementation
of our turnaround plan. See "Turnaround Charges" discussed under Management's
Discussion and Analysis of Financial Condition and Results of Operations.

BUSINESS STRATEGY

We intend to improve our operating performance by growing same-store sales,
improving product margins, improving leverage of store and administrative
operating expenses and reducing interest expense through debt reduction. Key
elements of this business strategy are:

Grow Same-Store Sales. Both our traditional stores and superstores present
opportunities to improve same-store sales. Our focus in this effort is
maintaining improved inventory in-stocks, improved retail advertising,
merchandise driven initiatives and store optimization. SAP Retail together with
our improved distribution network structure, is providing excellent tools to
accomplish these goals. The past year demonstrated that as in-stocks improved,
we were able to supply the desired merchandise on a consistent basis and our
customers responded favorably. We feel we have significant opportunity to
continue to leverage improvements as we refine our operations moving forward.
The superstore, in particular, has become a much

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more significant component of our business, generating over 23 percent of total
sales in fiscal 2002. We feel there is substantial same-store sales growth to be
achieved as we advertise and merchandise this store concept more effectively.

Improve Merchandise Margins. We believe we can improve margins by
improving supply chain management and merchandising in our stores. We
continually examine our product sourcing opportunities to improve our
partnerships with our vendors or source through different channels. Further, SAP
Retail has provided substantial flexibility in assessing product performance and
we measure all of our product utilizing gross margin return on investment
("GMROI"). This process enables us to improve our product selection in our store
inventory mix and allows us to reduce non-performing product. SAP Retail also
provides the flexibility to target specific SKU item performance and placement
in the locations where maximum results can be obtained.

Improve Expense Leverage. We believe we can improve expense leverage by
improving the operation of our superstores and maintaining a diligent focus on
overall expense control. We completed a cost-reduction initiative in fiscal
2002, eliminating approximately 8 percent of our store support center payroll.
Store level expenses are tightly controlled, and as we improve our superstore
model, we expect to obtain additional leverage from these stores. Through the
use of improved technology, including the roll-out of broadband communication to
all of our stores in fiscal 2003, we expect to improve store productivity and
communication, thereby containing our expense leverage. Completion of our new
network distribution structure, with the opening of our Visalia, California
distribution center in April 2001, provides the ability to leverage distribution
expenses through improved direct delivery to our stores with less regional
"pool" points. We continue to examine opportunities to eliminate costs from our
operating structure.

Reduce Interest Expense Through Debt Reduction. Our debt-to-capitalization
ratio at February 2, 2002 was 49.0 percent. We are focused on operational
performance improvements and the generation of cash flow for debt reduction. No
new store growth is planned for fiscal 2003 and we will only proceed with growth
in fiscal 2004 if our operational performance has been restored to a level where
growth is warranted. We have set a debt-to-capitalization ratio goal of 30
percent to 35 percent within the next two years and we believe that level can be
maintained while growing our store base. Improved inventory productivity enabled
debt reduction during fiscal 2002 and we believe additional opportunity exists
to improve inventory turns and grow our sales base without necessarily
increasing our inventory investment.

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STORES

The following table shows our stores by type and state at February 2, 2002:

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

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

Our new store opening costs depend on the building type, store size and
general cost levels in the area. During fiscal 2002, we opened 12 superstores,
with an average square footage per store of approximately 41,300 square feet.
Our average net opening cost of these superstores was $1.2 million per store,
which included leasehold improvements, furniture, fixtures and equipment and
pre-opening expenses. The initial inventory investment, net of payables support,
associated with each new superstore in fiscal 2002 was $0.8 million.

During fiscal 2003, we do not expect to open any new stores. We expect to
relocate 6 traditional stores, and have committed to leases for 2 of these 6
planned projects.

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PRODUCT SELECTION

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

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

Historically, our traditional stores have carried a full selection of
softlines and a convenience assortment of hardlines. Our superstores offer a
competitive assortment of merchandise in all of our product lines and have a
more diversified sales mix. During fiscal 2002, 48 percent of superstore net
sales were derived from softlines and 52 percent from hardlines.

Softlines

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

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

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

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

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

- proprietary print designs which are unique to our stores;

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

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

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

Hardlines

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

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

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

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

- home accessories, including baskets, candles and potpourri;

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

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

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

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

During the Christmas selling season, a significant portion of floor and
shelf space is devoted to seasonal crafts, decorating and gift-making
merchandise. Due to the project-oriented nature of these items, our peak selling
season extends longer than that of other retailers and generally runs from
September through December. Accordingly, a fully developed seasonal
merchandising program, including inventory, merchandise layout and instructional
ideas, is implemented in every store during our third quarter of each fiscal
year. This program includes increasing inventory levels so that each store is
fully stocked during our peak-selling season.

During the fourth quarter of fiscal 2001, we commenced an inventory
productivity initiative (the "SKU Reduction Initiative"), which entailed a
thorough review of inventory investment and gross margin performance by item or
stock-keeping unit ("SKU"). This analysis identified approximately 10,000 active
items, greater than $50 million at cost, that were under performing and we
decided to discontinue. At the end of fiscal 2002, this initiative was
substantially completed.

We are committed to an ongoing, disciplined, detailed review of our product
mix. Although additional product may be targeted for reduction based on that
analysis, we believe that the extent of such reduction decisions will be more
comparable to what is the normal course of business practices in retailing.

MARKETING

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

During June 2000, we announced the formation of a strategic relationship
with IdeaForest, an on-line destination site for arts and crafts merchandise,
creative ideas, advice and supplies. As part of the strategic relationship,
IdeaForest, which operates as an independent entity, is responsible for all
content and technology support to the joann.com website. We provide product to
the site, with customer fulfillment and service being handled by IdeaForest.

PURCHASING

We have numerous competitive domestic and international sources of supply
available for each category of product that we sell. During fiscal 2002,
approximately 80 percent of our purchases were sourced

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domestically and 20 percent were sourced internationally. Although we have no
long-term purchase commitments with any of our suppliers, we strive to maintain
continuity with them. All purchases are centralized through our store support
center, allowing store team leaders and store team members to focus on customer
sales and service and enabling us to negotiate volume discounts, control product
mix and ensure quality. Currently, none of our suppliers represent more than
three percent of our purchasing volume and the top ten suppliers represent less
than 20 percent of our total purchasing volume. We currently utilize
approximately 1,000 suppliers, with the top 200 representing more than 80
percent of our purchasing volume.

LOGISTICS

At the end of fiscal 2002, we operated two owned distribution centers which
ship products to all of our stores on a weekly basis. Based on purchase dollars,
approximately 80 percent of the products in our stores are shipped through our
distribution center network, with the remaining 20 percent of our purchases
shipped directly from our suppliers to our stores. Our primary distribution
center facility is located in Hudson, Ohio and supplies product to approximately
640 stores, or 67 percent of our store base. Our Visalia, California
distribution center was opened in April 2001, and services more than 300 stores.
During the past three years we utilized a contract warehouse in southern
California to distribute peak seasonal product directly to our stores. The
contract warehouse was closed in September 2001.

We transport product from our distribution centers to our stores utilizing
contract carriers. Merchandise is shipped directly from our distribution centers
to our stores for approximately 86 percent of our store base. For the remaining
14 percent of our chain, we transport product to 4 regional "hubs" where it is
repacked for local delivery. We do not own either the regional hubs or the local
delivery vehicles. The opening of the Visalia distribution center enabled us to
reduce the percentage of our stores that were serviced through regional hubs
from 42 percent last year to 14 percent at the end of the current year.

STORE OPERATIONS

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

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

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

Store Management. Traditional stores have approximately three full-time
team members and 10 to 15 part-time team members, while superstores typically
have approximately 15 full-time team members and 35 to 40 part-time team
members. Store team leaders are compensated with a base salary plus a bonus
which is tied to quarterly store sales and annual store profit. The average
tenure of our store team leaders is approximately seven years.

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Traditional store team leaders are typically promoted from a group of top
performing sales team members, some of whom started as our customers. This
continuity serves to solidify long-standing relationships between our stores and
our customers. When a traditional store is closed due to the opening of a
superstore, we generally retain its team members to staff the new superstore.
Superstore team leaders have been staffed from within the Company or externally,
generally with individuals who have previous experience in managing "big-box"
retail concepts.

Each store is under the supervision of a district team leader who reports
to a regional vice president. Our human resource and field training departments
are responsible for recruiting and training new store team leaders. Our
prospective store team leaders are assigned to one of our existing stores as
management-trainees for several weeks where they receive in-depth on-the-job
training. In addition, quarterly training seminars are conducted for existing
store team leaders and orientation and training programs are conducted for new
sales team members.

INFORMATION TECHNOLOGY

We believe we employ industry leading information technology in our stores.
Our point of sale register transactions are polled nightly and our point of sale
system interfaces with both our financial and merchandising systems. We utilize
point of sale registers and scanning devices to record the sale of product at a
SKU level at the stores. We also utilize handheld radio frequency terminals for
a variety of store tasks including price look-up, perpetual inventory exception
counting, merchandise receiving, vendor returns and fabric sales processing.

Information obtained from item-level scanning through our point of sale
system enables us to identify important trends to assist in managing inventory
by facilitating the elimination of less profitable SKUs, increasing the in-stock
level of more popular SKUs, analyzing product margins and generating data for
advertising cost/benefit evaluations. We also believe that our point of sale
system allows us to provide better customer service by increasing the speed and
accuracy of register check out, enabling us to more rapidly restock merchandise
and efficiently re-price sale items.

In March 2000, we went live on the retail portion of SAP Retail. The
completion of the retail portion of this project merged all of our financial,
merchandise, and retail systems and linked business processes on a single
software platform. The total cost of SAP Retail was approximately $33.0 million
and is being amortized over five years.

During fiscal 2001, we experienced operating difficulties stemming from the
implementation of SAP Retail, as discussed further under "Turnaround Charges" in
Management's Discussion and Analysis of Financial Condition and Results of
Operations. During fiscal year 2002, we stabilized operations under SAP Retail
and the system is now being used to fine-tune our inventory management
capabilities. SAP Retail's auto replenishment features are helping improve our
in-stock positions in stores and distribution centers, while simultaneously
reducing safety stocks.

STATUS OF PRODUCT OR LINE OF BUSINESS

During fiscal 2002, there was no public announcement nor is there a public
announcement anticipated, about either a new product line or line of business
involving the investment of a material portion of our assets.

TRADEMARKS

We do business under the federally registered trademarks "Jo-Ann Fabrics
and Crafts" and "Jo-Ann etc." We believe that these names are significant to our
business.

SEASONAL BUSINESS

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

CUSTOMER BASE

We are engaged in the retail sale of merchandise to the general public and,
accordingly, no part of our business is dependent upon a single customer or a
few customers. During fiscal 2002, no one store accounted for more than one
percent of total sales.

BACKLOG OF ORDERS

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

COMPETITIVE CONDITIONS

We are the largest national category-dominant retailer serving the retail
fabric and craft industry. Our stores compete with other specialty fabric and
craft retailers and selected mass merchants that dedicate a portion of their
selling space to a limited selection of fabrics and craft supply items. We
compete on the basis of product assortment, price, convenience and customer
service. We believe the combination of our product assortment, customer service
emphasis, systems technology and frequent advertising provides us with a
competitive advantage.

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

- purchasing power;

- ability to support efficient nationwide distribution; and

- the financial resources to execute our strategy and capital investment
needs going forward.

RESEARCH AND DEVELOPMENT

During the three fiscal years ended February 2, 2002, we have not incurred
any material expense on research activities relating to the development of new
products or services or the improvement of existing products or services.

ENVIRONMENTAL DISCLOSURE

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

EMPLOYEES

As of February 2, 2002, we had approximately 22,100 full and part-time
employees, of which 20,700 worked in our stores, 532 were employed in our Hudson
distribution center, 163 were employed in our Visalia distribution center and
the balance were located at our store support center. The number of part-time
employees is substantially higher during the Christmas selling season. We
believe our employee turnover is below average for retailers primarily because
our stores are staffed with sewing and crafting enthusiasts. In addition, we
provide an attractive work environment, employee discounts, flexible hours and
competitive compensation packages within the local labor markets. Our ability to
offer flexible scheduling is important in attracting and retaining these
employees since over 60 percent of our employees work part-time.
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The United Steelworkers of America, Upholstery and Allied Industries
Division currently represents employees who work in our Hudson, Ohio
distribution center. Our current contract expires in May 2003. We believe that
our relations with our employees and the union are good.

FOREIGN OPERATIONS AND EXPORT SALES

In fiscal 2002, we purchased approximately 20 percent of our products
directly from manufacturers located in foreign countries. These foreign
suppliers are located primarily in Hong Kong and Taiwan. In addition, many of
our domestic suppliers purchase a portion of their products from foreign
suppliers. Because a large percentage of our products are manufactured or
sourced abroad, we are required to order these products further in advance than
would be the case if the products were manufactured domestically. If we
underestimate consumer demand, we may not be able to fully satisfy our customers
on a timely basis. If we overestimate consumer demand, we may be required to
hold goods in inventory for a longer period of time or to reduce selling prices
in order to clear excess inventory at the end of a selling season. We do not
have long-term contracts with any manufacturers, and none of our suppliers
manufacture products for us exclusively.

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

ITEM 2. PROPERTIES

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

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

The remaining properties that we occupy are leased retail store facilities,
located primarily in high-traffic shopping centers. All store leases are
operating leases, generally with initial terms of five to ten years and renewal
options for up to 20 years. Certain retail store leases contain escalation
clauses and contingent rents based on a percent of sales in excess of defined
minimums. During the fiscal year ended February 2, 2002, we incurred $149.0
million of rental expense and common area maintenance for store locations.

As of February 2, 2002, the current terms of our store leases, assuming we
exercise all lease renewal options, were as follows:

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ITEM 3. LEGAL PROCEEDINGS

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

On August 16, 2000, Sandy Lortz, a former employee of the Company, filed a
purported class action complaint (the "Lortz Complaint") against the Company, on
behalf of the Company's former and current California store management
employees. The Lortz Complaint was filed in the Superior Court of California and
alleged the Company violated certain California laws by erroneously treating its
store management employees as "exempt" employees who are not entitled to
overtime compensation. This case was consolidated with a similar class action
complaint filed on behalf of Regina Salas, filed on October 24, 2000 in the
Superior Court of California. A tentative settlement in this case was reached in
January 2002 and a pre-tax charge of $6.5 million ($4.0 million after-tax, or
$0.21 per diluted share) was recorded in the fourth quarter of fiscal 2002.

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

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

EXECUTIVE OFFICERS OF THE REGISTRANT

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

Our executive officers are as follows:

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

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

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

Michael Edwards has been Executive Vice President, Operations of our
Company since April 2001. Prior to joining our Company, he was Executive Vice
President, Merchandising and Chief Marketing Officer of West Marine, Inc. from
June 1999 to March 2001. He was Vice President, General Merchandise Manager of
Golfsmith LP from September 1998 to May 1999. Prior to that, Mr. Edwards was
with CompUSA from 1990 to 1998 where he served as Senior Vice President of
Merchandising and Vice President of Operations during his tenure.

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

PART II

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

The Company's Class A and Class B common shares are traded on the New York
Stock Exchange under the ticker symbols JAS.a and JAS.b, respectively. The
number of Class A and Class B common shareholders of record as of April 12, 2002
were 701 and 627, respectively.

The quarterly high and low closing stock prices for fiscal 2002 and 2001
are presented in the table below:

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ITEM 6. SELECTED FINANCIAL DATA

The following table presents our selected financial data for each of the
ten years ending February 2, 2002. The selected financial data was derived from
the audited financial statements and should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," the consolidated financial statements and notes thereto and other
financial data that we have filed with the Securities and Exchange Commission.

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ITEM 6. SELECTED FINANCIAL DATA (CONTINUED)

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(a) 53-week year.

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

(c) Excludes unusual charges as follows:

Fiscal 2002 -- $26.2 million; $6.5 million, for the settlement of California
wage litigation, and $19.7 million for 106 store closings as part of the
Company's Turnaround Plan.

Fiscal 2001 -- $29.7 million; $6.7 million, for 42 store closings and $23.0
million for a SKU reduction initiative, both as part of the Company's
Turnaround Plan.

Fiscal 1999 -- $25.1 million in non-recurring charges related to the
Company's acquisition of House of Fabrics, Inc.

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

(e) Calculated based on income from continuing operations.

13

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

INTRODUCTION

For an understanding of the significant factors that influenced our
performance during the past three fiscal years, the following discussion should
be read in conjunction with the audited consolidated financial statements and
notes to the consolidated financial statements presented in this Form 10-K.

We are the nation's largest fabric and craft retailer, serving customers in
their pursuit of apparel and craft sewing, crafting, home decorating, and other
creative endeavors. Our retail stores (operating as Jo-Ann Fabrics and Crafts
traditional stores and Jo-Ann etc superstores) feature a variety of
competitively priced merchandise from fabrics and notions used in crafting,
quilting, apparel sewing, and home decorating projects, to craft components,
silk and dried flowers, and finished seasonal merchandise. As of February 2,
2002, we operated 959 stores in 49 states (889 traditional stores and 70
superstores).

Our traditional stores average approximately 14,300 square feet. Over the
past five years, we have strategically relocated certain traditional stores,
increasing average square footage per store approximately 13% and sales per
square foot by approximately 20%. As a result, net sales per traditional store
have increased to approximately $1.3 million over this period. Our superstores
offer an expanded and more comprehensive product assortment than our traditional
stores. Our superstores average approximately 46,000 square feet and in fiscal
2002, on a per-store basis, generated more than four times the revenue and over
30% higher sales per square foot than our traditional stores. We believe our
superstores, which accounted for over 23% of fiscal 2002 net sales, present
opportunities for future sales growth.

Over the past four years, we have invested heavily in our infrastructure,
primarily in the areas of superstore growth and systems and logistics. Although
this infrastructure spending resulted in higher debt levels and interest
expense, it was required in order to improve our operating efficiency and to
build the necessary platform for continued store growth. Recent major capital
expenditures include:

- implementation of our fully integrated enterprise-wide system ("SAP
Retail") - completed in fiscal 2001;

- construction and opening of our Visalia, California distribution center,
our second owned distribution center, completed in fiscal 2002; and

- the opening of 69 superstores over the last five years, 12 of which were
opened during fiscal 2002.

TURNAROUND CHARGES

In fiscal 2001, we experienced significant difficulty with the
implementation of SAP Retail, impacting our ability to stay in stock on key
basic products while, at the same time, being overstocked on slower selling
products. As a result, sales were negatively affected and our operating
performance suffered. These issues, coupled with a weak retail environment,
resulted in a same-store sales performance of 1.3% for fiscal 2001, our lowest
same-store sales performance in six years.

As a result of our recent decline in earnings trends, significant debt and
inventory levels, and SAP Retail implementation issues, our strategy shifted
from accelerating the growth of our superstore concept to improving the
productivity of our existing asset base and realizing the benefits from our
completed infrastructure investments. Last year, we announced the implementation
of our turnaround plan (the "Turnaround Plan"), which encompassed the following
key objectives for fiscal 2002:

- slowing new store growth to maximize free cash flow and reduce debt;

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

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

14

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

In accordance with current accounting literature (Emerging Issues Task
Force Issue ("EITF") 94-3, "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (Including Certain
Costs Incurred in a Restructuring)," Statement of Financial Accounting Standards
("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of" and Staff Accounting Bulletin No. 100,
"Restructuring and Impairment Charges,") we recorded a $6.7 million pre-tax
($4.1 million after-tax) charge to operating expenses during the fourth quarter
of fiscal 2001 and $17.1 million pre-tax ($10.6 million after-tax) charge to
operating expenses during the third quarter of fiscal 2002 for restructuring and
asset impairment costs resulting from 148 identified store closings associated
with the Turnaround Plan.

In accordance with EITF 96-9 "Classification of Inventory Markdowns and
Other Costs Associated with a Restructuring," we also recorded a $2.6 million
pre-tax charge ($1.6 million after-tax) to cost of goods sold during the third
quarter of fiscal 2002 to reflect the markdown of certain inventory contained in
the stores identified for closing to its net realizable value. Further, we
recorded a $23.0 million pre-tax charge ($14.3 million after-tax) to cost of
goods sold during the fourth quarter of fiscal 2001 to reflect the markdown of
certain inventory to its net realizable value, identified as part of the SKU
Reduction Initiative.

In total, the turnaround charges (the "Turnaround Charges") were $19.7
million pre-tax ($12.2 million after-tax), or $0.67 per diluted share in fiscal
2002 and $29.7 million pre-tax ($18.4 million after-tax), or $1.02 per diluted
share in fiscal 2001. These charges are described more fully below. Please read
Note 2 to the consolidated financial statements for other important information
about the Turnaround Charges.

STORE CLOSING CHARGES -- Beginning in the fourth quarter of fiscal 2001, we
undertook a comprehensive review of our existing store base. We evaluated all of
our stores based on return on investment parameters and decided to close those
stores that were under-performing relative to our required performance levels.
During the fourth quarter of fiscal 2001, we identified 42 traditional stores
for closing during fiscal 2002. In the third quarter of fiscal 2002, we
announced a charge for 102 traditional store closings and either the downsizing
or buyout of four superstores. We accrued closing costs of $6.7 million pre-tax
in the fourth quarter of fiscal 2001 and $19.7 million pre-tax in the third
quarter of fiscal 2002. The store closing charges taken in these quarters
include asset write-downs associated with the identified stores and the
estimated closing costs for stores that are expected to be closed in the next
twelve months.

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

SKU REDUCTION INITIATIVE -- During the fourth quarter of fiscal 2001, we
commenced the SKU Reduction Initiative which entailed a thorough review of our
inventory investment and gross margin performance by item or SKU, utilizing
analytical capabilities afforded us under SAP Retail. This analysis identified
approximately 10,000 active items, greater than $50 million at cost, that were
under-performing and that we decided to discontinue. We began clearance programs
in the second quarter of fiscal 2002 designed to eliminate this product.

As explained above, we recorded a $23.0 million pre-tax charge to reserve
for the portion of this product that we estimated would be sold below cost in
the fourth quarter of fiscal 2001. However, liquidating this inventory at
reduced selling prices put pressure on overall realized gross margins in fiscal
2002, since the sales were recorded at a zero gross margin.

Our ongoing strategy is to fund improved fill rates for our most productive
items by eliminating investment in less-productive inventory. The SKU Reduction
Initiative was an important first step in this inventory productivity
initiative.
15

We believe the review process we completed in the fourth quarter of fiscal
2001 for the SKU Reduction Initiative was thorough. We are committed to an
ongoing, disciplined, detailed review of our product mix. Although additional
product may be targeted for reduction based on that analysis, we believe that
the extent of such reduction decisions will be more comparable to what is the
normal course of business practices in retailing.

During fiscal 2002, we focused our attention on the productivity of our
existing store base, improved our inventory management processes, and managed
our capital spending tightly in order to maximize our free cash flow to reduce
debt levels. We believe we have been successful in this endeavor.

OTHER NON-RECURRING CHARGES

In addition to the Turnaround Charges discussed above, we recorded two
additional charges during fiscal 2002 and 2001 which were non-recurring in
nature.

CALIFORNIA LITIGATION SETTLEMENT -- On August 16, 2000, Sandy Lortz, a
former employee of the Company, filed a purported class action complaint (the
"Lortz Complaint") against the Company, on behalf of the Company's former and
current California store management employees. The Lortz Complaint was filed in
the Superior Court of California and alleged the Company violated certain
California laws by erroneously treating its store management employees as
"exempt" employees who are not entitled to overtime compensation. This case was
consolidated with a similar class action complaint filed on behalf of Regina
Salas, filed on October 24, 2000 in the Superior Court of California. A
tentative settlement in this case was reached in January 2002 and a pre-tax
charge of $6.5 million ($4.0 million after-tax), or $0.21 per diluted share was
recorded in the fourth quarter of fiscal 2002.

MINORITY INVESTMENT IN IDEAFOREST.COM -- On June 6, 2000, we announced the
formation of a strategic relationship with IdeaForest, an on-line destination
site for arts and crafts merchandise, creative ideas, advice and supplies. As
part of the strategic relationship, IdeaForest, which operates as an independent
entity, is responsible for all content and technology support to the joann.com
website. We provide product to the site, with customer fulfillment and service
being handled by IdeaForest. We invested $6.5 million in IdeaForest, which,
combined with our contribution of strategic assets, entitled us to a 28.5%
ownership interest. In addition, we have the ability to increase our future
ownership percentage through the vesting and exercise of warrants. Our
investment in IdeaForest is accounted for using the equity method. During fiscal
2001, we recorded equity losses of $3.2 million related to this minority
investment.

During the fourth quarter of fiscal 2001, we reduced the carrying value of
our investment in IdeaForest to zero, which resulted in a $3.3 million charge.
Our decision to reduce the carrying value of our investment to zero was
predicated on operating projections prepared by IdeaForest that resulted in the
their cash balance being reduced to near zero before cash flow positive
operating status was achieved. We remain committed to an online presence and
IdeaForest is currently operating its business in line with its planned
projections.

16

RESULTS OF OPERATIONS

As discussed above, our reported results were impacted by the Turnaround
Charges and other non-recurring charges recorded by the Company during fiscal
2002 and fiscal 2001. The following table shows the pro forma effect of
non-comparable items on fiscal years 2002 and 2001.

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

(a) $19.7 million related to Turnaround Charges, $2.6 million in cost of sales
and $17.1 million in selling, general and administrative expenses, see
"Turnaround Charges" previously discussed for further explanation.

(b) $6.5 million related to California litigation settlement, see "Other
Non-Recurring Charges" previously discussed for further explanation.

(c) $29.7 million related to Turnaround Charges, see "Turnaround Charges"
previously discussed for further explanation.

(d) $6.5 million related to a $3.2 million IdeaForest equity loss and write-off
of the carrying value of the investment in IdeaForest, see "Other
Non-Recurring Charges" previously discussed for further explanation.

17

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

To provide a more meaningful comparison of operating performance between
fiscal years, the following discussion excludes the impact of the non-comparable
items.

COMPARISON OF THE 52 WEEKS ENDED FEBRUARY 2, 2002 AND THE 53 WEEKS ENDED
FEBRUARY 3, 2001

Our results for fiscal 2002 demonstrated strong progress on our Turnaround
Plan initiatives.

Net sales. Net sales for fiscal 2002 were $1,570.3 million compared with
$1,483.3 million in fiscal 2001, an increase of $87.0 million, or 5.9%. Fiscal
2001 was a 53-week year. Excluding the 53rd week, sales increased 7.5% over
fiscal 2001. Same-store sales increased $82.8 million or 5.9% for fiscal 2002
over fiscal 2001. Same-store sales increased 1.3% for fiscal 2001 over fiscal
2000. The remainder of the sales increase was due to the increase in the number
of superstores in operation. We operated 70 superstores at February 2, 2002
compared to 58 superstores at February 3, 2001.

By store format, our same-store sales performance for traditional stores
increased 5.1%. This was driven by a 3.5% increase in the average ticket with
the balance of the increase driven by increased customer traffic. Same-store
sales for superstores increased 9.4%, driven by a 6.2% increase in customer
traffic with the balance of the increase driven by an increase in the average
ticket. Each of our major product categories experienced positive same-store
sales growth for the year.

Management attributes the improvement in same-store sales year over year to
an improved inventory in-stock position in our stores. Sales performance was
particularly strong in our hardlines and home decor categories. Clearance sales
associated with the SKU Reduction Initiative contributed approximately $34.0
million in sales for the year, but were recorded at a zero gross margin. At the
end of fiscal 2002, we had substantially completed our SKU Reduction Initiative.

Gross margin. Gross margin for fiscal 2002 was $695.7 million compared
with $668.1 million in fiscal 2001. As a percentage of net sales, fiscal 2002
gross margin was 44.3% compared with 45.0% in the prior year, a decrease of 70
basis points. Of this decrease, approximately 100 basis points is attributable
to the $34.0 million in zero gross margin sales from the SKU Reduction
Initiative. Excluding these sales, a more normalized margin rate for the year
was 45.3%, a slight improvement from a year ago. Higher shrink expense incurred
during the year was more than offset by higher realized store margin rates.

The shrink expense increase resulted from a deterioration in our shrink
rate versus the prior year, consistent with the trend identified in the first
half of the year and disclosed in our quarterly Form 10-Q filings throughout
fiscal 2002. Our store shrink accrual rates are adjusted based upon the
performance of annual physical inventories taken throughout the year. Physical
inventories are concentrated in the nine months between January and September.
At the end of the fourth quarter, we had inventoried, reconciled and recorded
the inventory results of all our stores. Shrink expense for the fiscal year was
$18.3 million, or 100 basis points as a percentage of sales, worse than our
shrink expense for last year.

Selling, general and administrative expenses. Selling, general and
administrative ("SG&A") expenses were $620.6 million in fiscal 2002 compared
with $582.5 million in fiscal 2001. As a percentage of sales, SG&A

18

expenses increased 20 basis points, to 39.5%, compared with 39.3% in fiscal
2001. SG&A expense leverage was negatively impacted primarily by higher
distribution expenses due to the opening of our second distribution center in
Visalia, California. The opening of this distribution center necessitated
operating a three distribution center network for approximately the first eight
months of fiscal 2002 until our contract facility in Rancho Cucamonga,
California was closed in September. The start-up costs of our Visalia
distribution center, coupled with the duplicative cost of running a three
distribution center network for eight months, added approximately $3.0 million
in distribution expenses in fiscal 2002.

Depreciation and amortization. Depreciation and amortization expense for
fiscal 2002 was $39.3 million compared with $38.3 million in fiscal 2001, an
increase of $1.0 million. The increase in depreciation expense was primarily due
to two additional months of depreciation related to SAP Retail, which we began
depreciating in April 2000.

Operating profit. Operating profit for fiscal 2002 was $35.8 million,
compared with $47.3 million in fiscal 2001, a decrease of $11.5 million.

Interest expense. Interest expense for fiscal 2002 was $32.7 million
compared with $29.0 million in fiscal 2001, an increase of $3.7 million. The
increase is primarily due to the impact of higher average borrowings partially
offset by a lower effective interest rate. Average borrowings on the revolver
for fiscal 2002 increased $5.5 million, to $122.9 million from $117.4 million in
the prior year. The increase in average borrowings is due primarily to the
unwind of a synthetic lease facility used to finance our Visalia distribution
center and a change in import letters of credit terms from 120 days to "sight",
as discussed under "Liquidity and Capital Resources" below.

Income taxes. Our effective income tax rate was 38.0% for both fiscal 2002
and fiscal 2001.

Extraordinary Item. In April 2001, we entered into a four-year $365.0
million senior secured credit facility (the "Credit Facility"), consisting of a
$325.0 million revolving credit facility and a $40.0 million term loan facility.
The Credit Facility replaced our prior senior credit and synthetic lease
facilities. Deferred finance charges written-off under the prior senior credit
facility totaled $0.6 million after-tax, or $0.03 per diluted share, and were
recorded as an extraordinary item. See the discussion under "Liquidity and
Capital Resources -- Sources of Liquidity" below.

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

Our operating results for fiscal 2001 were disappointing. Sales performance
suffered due to a weak economic environment experienced in the second half of
fiscal 2001, that was exacerbated by out-of-stock problems that we encountered
as a result of difficulties in successfully transitioning our business to SAP
Retail. We went live with SAP Retail in the first quarter of fiscal 2001 after a
two-year installation period. As a result of the sales softness, our operating
performance deteriorated from the prior year.

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

Gross margin. Gross margin for fiscal 2001 was $668.1 million compared
with $633.2 million in fiscal 2000. As a percentage of net sales, fiscal 2001
gross margin was 45.0% compared with 45.8% in the prior year, a decrease of 80
basis points. This was caused primarily by lower realized gross margins on the
softlines side of our business, due to fourth quarter clearance markdowns in our
apparel and craft fabric categories.

Selling, general and administrative expenses. SG&A expenses were $582.5
million in fiscal 2001 compared with $533.8 million in fiscal 2000. As a
percentage of sales, SG&A expenses increased 70 basis points, to

19

39.3%, compared with 38.6% in fiscal 2000. The expense increase, as a percentage
of sales, was due to a loss in store expense leverage, primarily in store
payroll as modest same-store sales increases were not sufficient to offset
inflationary pressure in the average wage rate we paid to our store team
members.

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

Operating profit. Operating profit for fiscal 2001 was $47.3 million,
compared with $67.4 million in fiscal 2000, a decrease of $20.1 million.

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

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

LIQUIDITY AND CAPITAL RESOURCES

The following table provides cash flow related information for the three
fiscal years ended February 2, 2002.

NET CASH PROVIDED BY OPERATING ACTIVITIES

Net cash provided by operating activities was $88.2 million in fiscal 2002,
compared with $39.0 million in fiscal 2001, an increase of $49.2 million driven
by improvements in working capital. Most notably, inventories, net of payables
support, decreased $41.1 million.

Inventories decreased $82.0 million, compared with an increase of $8.5
million in the prior year. The large decrease in fiscal 2002 is attributable to
the Company successfully executing its plans to reduce overall inventory levels
by fiscal year-end through a combination of the SKU Reduction Initiative, store
closings, and better utilization of the forecasting and replenishment
capabilities aided by the installation of SAP Retail in the prior year.

Accounts payable decreased $40.9 million in fiscal 2002, due to the
significant drop in inventory levels and as a result of payment changes we
initiated under our import letter of credit arrangements. We utilize letters of
credit in the procurement of imported product for resale, which represents
approximately 20% of our total annual purchases. Beginning in late fiscal 2001,
we changed our dating on import letters of credit to approximately 10 days, or
"sight" terms, from our historic terms of 120 days, in exchange for more
favorable discount terms from our vendors. This resulted in an approximately
$30.0 million decrease in accounts payable and a corresponding increase in the
Company's debt outstanding.

Net cash provided by operating activities was $39.0 million in fiscal 2001,
compared with $27.7 million in fiscal 2000, an increase of $11.3 million. Cash
generated by operations in fiscal 2001, before working capital items and
excluding non-comparable items, totaled $47.1 million, a decrease of $24.7
million from the

20

$71.8 million generated during fiscal 2000. Cash provided by working capital
changes more than offset this decrease, primarily due to an improved level of
payables support in fiscal 2001 and a lack of build in inventories.

Settlement of House of Fabrics Tax Liability

During fiscal 2001, we reached a final settlement on a contingent income
tax liability (discussed in Note 4 to the consolidated financial statements)
assumed during the acquisition of House of Fabrics. On October 20, 2000, this
issue was settled with the Internal Revenue Service ("IRS") for $19.6 million
($14.7 million of tax liability and $4.9 million of accrued interest). Of this
total settlement, $16.1 million of the liability was paid in fiscal 2000 in the
form of a deposit payment (cash bond) to the IRS. The remaining $3.5 million was
paid during fiscal 2001 at the time of the settlement.

Net Cash Used For Investing Activities

Net cash used for investing activities for fiscal 2002 totaled $66.5
million compared with $40.7 million in fiscal 2001. Capital expenditures were
$66.5 million during fiscal 2002 versus $35.9 million in fiscal 2001 and are
discussed further below under the caption "Capital Expenditures."

Net cash used for investing activities for fiscal 2001 totaled $40.7
million compared with $66.0 million in fiscal 2000. Capital expenditures were
$35.9 million during fiscal 2001 versus $67.4 million in fiscal 2000. In
addition, we invested $6.5 million in IdeaForest.com, as we discussed previously
under "Minority Investment in IdeaForest.com."

Capital Expenditures

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

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

During fiscal 2001, we reinvested $35.9 million into our business, of which
$26.2 million represented new stores and upgrades through the relocation or
remodeling of our existing store base. We opened 16 superstores and two
traditional stores, relocated six and closed 37 smaller or under-performing
traditional stores.

We spent $4.0 million in fiscal 2001 on capitalizable systems technology,
of which $3.0 million related to the installation of SAP Retail. This software
replaced substantially all of our existing financial and merchandising systems.
We became operational on SAP Retail in March 2000. The total cost of this
two-year project, including expenses, was approximately $33.0 million and is
being depreciated over five years.

We also spent $3.3 million in fiscal 2001 on capital projects for our
distribution network, including, the preparation of our Hudson distribution
center for seasonal product handling.

We anticipate capital expenditures in fiscal 2003 of $15 to $20 million.
The bulk of this spending pertains to store operations and store information
technology improvements. During fiscal 2003, capital spending will be kept to a
minimum and no new stores are planned, as we continue to focus on operational
enhancements and cash flow for debt reduction.

21

NET CASH (USED FOR) PROVIDED BY FINANCING ACTIVITIES

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

Net cash used for financing activities during fiscal 2001 was $2.2 million,
primarily related to a decrease in debt borrowings of $5.2 million.

Common Share Repurchases

During fiscal 2000, we purchased a total of 1.5 million common shares at an
aggregate price of $20.0 million. During fiscal 2001 and 2002, we avoided share
repurchase opportunities in order to focus on debt reduction. As of February 2,
2002, we are authorized to purchase up to an additional 1.5 million shares under
previous authorizations from our Board of Directors. However, we have no plans
to repurchase additional shares at the present time.

Sources of Liquidity

We have three principal sources of liquidity: cash from operations, cash
and temporary cash investments, and the Credit Facility. Our liquidity is not
currently dependent on the use of off-balance sheet transactions other than
normal operating leases. We believe that our Credit Facility, coupled with cash
on hand and cash from operations, will be sufficient to cover our working
capital, capital expenditure and debt service requirement needs for the
foreseeable future.

In April 2001, we entered into the Credit Facility which replaced our prior
senior credit and synthetic lease facilities. The Credit Facility expires on
April 30, 2005. The Credit Facility consists of a $365.0 million credit facility
providing for $325.0 million in revolving loans and a $40.0 million term loan,
both secured by a first priority perfected security interest in our inventory,
accounts receivable, property and other assets. The Credit Facility is fully and
unconditionally guaranteed by each of our subsidiaries. Interest on borrowings
under the Credit Facility is calculated at the bank's base rate or London
Interbank Offered Rate ("LIBOR") plus 1.75% to 2.25%, depending on the level of
excess availability (as defined in the Credit Agreement) that is maintained. The
Credit Facility contains a sub-limit for letters of credit of $150.0 million.
Proceeds from the Credit Facility were used to repay all outstanding borrowings
under our prior senior credit facility and synthetic lease facility.

The term loan portion of the Credit Facility replaces a $40.0 million
synthetic lease facility that we used to finance the construction of our West
Coast distribution center. The synthetic lease facility was accounted for as an
operating lease, with interest payments capitalized until the facility began
operations. As a result of the unwind of the synthetic lease facility, we
recorded the appropriate assets and debt obligation of $40.0 million on our
balance sheet in the first quarter of fiscal 2002.

As of February 2, 2002, we had outstanding borrowings of $73.7 million
under the Credit Facility at a weighted average interest rate of 8.7% and $31.2
million of letters of credit outstanding.

The Company's weighted average interest rate and weighted average
borrowings under the Credit Facility, prior senior credit facility and other
lines of credit were 7.2% and $169.0 million during fiscal 2002 and 7.9% and
$119.3 million during fiscal 2001.

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

22

Our total debt-to-capitalization ratio was 49.0% at February 2, 2002 and
49.1% at February 3, 2001. We have a goal to further reduce debt levels during
fiscal 2003 utilizing cash provided by operating activities and holding capital
spending levels at $15 to $20 million.

CONTRACTUAL OBLIGATIONS AND COMMITMENTS

The following tables summarize our future cash outflows resulting from
financial contracts and commitments as of February 2, 2002:

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

(1) The remaining cash payments associated with our Turnaround Charges include
$9.6 million of lease obligations for stores closed or to be closed.

SEASONALITY AND INFLATION

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

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

DERIVATIVE FINANCIAL INSTRUMENTS AND MARKET RISK

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

We believe foreign currency exchange rate fluctuations do not contain
significant market risk due to the nature of our relationships with our
international vendors. All merchandise contracts are denominated in U.S. dollars
and are subject to negotiation prior to our commitment for purchases. As a
result, there is not a direct correlation between merchandise prices and
fluctuations in the exchange rate. We source approximately 20% of our purchases
internationally.

In the normal course of business, we employ established policies and
procedures to manage our exposure to changes in interest rates. Our objective in
managing the exposure to interest rate changes is to limit the volatility and
impact of interest rate changes on earnings and cash flows. Interest rate swaps
are primarily utilized to achieve this objective. We utilize interest rate swaps
to manage net exposure to interest rate changes related to our debt structure. A
one-percent increase or decrease in interest rates would cause an increase or
decrease to interest expense of $0.8 million. This includes the impact resulting
from the interest rate swap agreement the Company has in place.

On March 15, 1998, we entered into a five-year interest rate swap agreement
to hedge our interest rate exposure. The notional amount of this interest rate
swap was $50.0 million, with a fixed LIBOR of 5.98%. On September 5, 2000, we
entered into a separate interest rate swap agreement to further hedge our
interest rate exposure. The interest rate swap had a term of five years
effective May 1, 2001, with a notional amount

23

of $40.0 million and a fixed LIBOR rate of 6.80%. Effective May 15, 2001, the
agent for the Credit Facility assumed assignment of our two interest rate swap
agreements and on May 16, 2001, terminated those interest rate swap agreements
and established a new interest rate swap with a fixed LIBOR rate of 6.72% and
notional amount of $90.0 million, reducing to $40.0 million on May 1, 2003,
until its expiration on April 30, 2005.

Effective February 4, 2001, the Company adopted SFAS No. 133, "Accounting
for Derivative Instruments and Hedging Activities", as amended. In accordance
with SFAS No. 133, the Company has reviewed and designated all of its interest
rate swap agreements as cash flow hedges and now recognizes the fair value of
its interest rate swap agreements on the balance sheet. Changes in the fair
value of these agreements are recorded in other comprehensive loss and
reclassified into earnings as the underlying hedged item affects earnings.
During fiscal 2002, unrealized after tax net losses of $3.0 million were
recorded in other comprehensive loss, including a $1.7 million cumulative
transition adjustment, as of the date of adoption of SFAS No. 133. The hedge
ineffectiveness for fiscal 2002 was $1.0 ($0.6 after-tax) million and is
reflected in interest expense.

CRITICAL ACCOUNTING POLICIES

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

Inventory Valuation

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

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

Our accrual for shrink is based on the actual historical shrink results of
our most recent store physical inventories. These estimates are compared to
actual results as physical inventory counts are taken and reconciled to the
general ledger. Substantially all of our store physical inventory counts are
taken in the first three quarters of each year and the shrink accrual recorded
at February 2, 2002 is based on the shrink results of these physical
inventories. All of our store locations that have been open one year or more are
physically inventoried at least once a year. We experienced an increase in
historical shrink rates in fiscal 2002 compared with the prior year, and we
adjusted our shrink accrual to the higher realized shrink rates incurred. We
will continue to adjust our shrink rate estimates based on the results of future
store physical inventories and shrink trends.

Valuation of Long-Lived Assets

Long-lived assets and certain identifiable intangibles historically have
been reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable.
Recoverability of assets to be held and used is measured by a comparison of the
carrying amount of the assets to future net cash flows estimated by us to be
generated by those assets. If such assets are
24

considered to be impaired, the impairment to be recognized is the amount by
which the carrying amount of the assets exceeds the fair value of the assets.
There are no events or changes in circumstances of which we are aware indicating
that the carrying value of our long-lived assets may trigger an impairment
consideration, other than as discussed below under "Accrued Store Closing
Costs." As described below under "Recent Accounting Pronouncements," the
accounting treatment for goodwill and other intangible assets will change
significantly effective the beginning of fiscal 2003.

Accrued Store Closing Costs

We accrue costs related to stores closed or identified for closing, which
include future rental obligations, carrying costs, and other closing costs.
These expenses are accrued when we have committed to closing or relocating a
store and are calculated at the lesser of future rental obligations remaining
under the lease (less estimated sublease rental income) or the estimated lease
termination cost. The determination of the accrual is dependent on our ability
to make estimates of costs to be incurred post-closing and of sublease rental
income to be received from subleases. Differences in our estimates and
assumptions could result in an accrual requirement materially different from the
calculated accrual. The carrying values of long-lived assets for stores
identified for closure are reduced to estimated fair value.

Accrued Expenses

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

RECENT ACCOUNTING PRONOUNCEMENTS

In July 2001, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 141, "Business Combinations" ("SFAS No. 141"), which supersedes Accounting
Principles Board Opinion No. 16, "Business Combinations". The provisions of this
statement apply to all business combinations initiated after June 30, 2001. The
adoption of SFAS No. 141 does not have any effect on the Company's results of
operations or financial position.

In July 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets" ("SFAS No. 142"). SFAS No. 142 establishes accounting standards for
intangible assets and goodwill. The Company is required to adopt this standard
in fiscal 2003, which begins on February 3, 2002. SFAS No. 142 requires that
goodwill and intangible assets with indefinite useful lives no longer be
amortized, but rather tested for impairment at least annually, by applying a
fair value-based test. SFAS No. 142 will also require that intangible assets
with definite useful lives be amortized over their respective estimated useful
lives and reviewed for impairment in accordance with SFAS No. 144, "Accounting
for the Impairment or Disposal of Long-Lived Assets." Application of the
non-amortization provisions of SFAS No. 142 will result in a reduction in
amortization expense of approximately $0.7 million per year. We performed the
first of the required impairment tests of goodwill as of February 2, 2002, to
evaluate existing goodwill for impairment upon adoption of SFAS No. 142. Based
on the transition impairment tests performed on recorded goodwill, no impairment
to goodwill exists and we will not record a charge in fiscal 2003 in connection
with the adoption of this standard.

In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations" ("SFAS No. 143") and in August 2001, issued Statement
No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS
No. 144"). SFAS No. 143 requires the recognition of a liability for the
estimated cost of disposal as part of the initial cost of a long-lived asset.
SFAS No. 144 supersedes SFAS No. 121 to

25

supply a single accounting approach for measuring impairment of long-lived
assets, including a segment of a business accounted for as a discontinued
operation or those to be sold or disposed of other than by sale. The Company is
required to adopt SFAS No. 143 in fiscal 2004 and SFAS No. 144 in fiscal 2003.
The Company does not expect these statements to have a significant impact on the
Company's results of operations or financial position.

CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS

Certain statements contained in this report that are not historical facts
are forward-looking statements that are subject to certain risks and
uncertainties. When used herein, the terms "anticipates," "plans," "estimates,"
"expects," "believes," and similar expressions as they relate to us are intended
to identify such forward-looking statements. Our actual results, performance or
achievements may materially differ from those expressed or implied in the
forward-looking statements. Risks and uncertainties that could cause or
contribute to such material differences include, but are not limited to, general
economic conditions, changes in customer demand, changes in trends in the fabric
and craft industry, seasonality, the availability of merchandise, changes in the
competitive pricing for products, and the impact of our and our competitors
store openings and closings.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

26

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

JO-ANN STORES, INC.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

27

REPORT OF MANAGEMENT

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

We have prepared the accompanying consolidated financial statements and
related information included herein for the years ended February 2, 2002,
February 3, 2001 and January 29, 2000. The opinion of Arthur Andersen LLP, the
Company's independent public accountants, on those financial statements is
included. The primary responsibility for the integrity of the financial
information included in this annual report rests with management. This
information is prepared in accordance with accounting principles generally
accepted in the United States, based on our best estimates and judgments and
giving due consideration to materiality.

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

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

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

28

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

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

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

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

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Jo-Ann Stores, Inc. and
Subsidiaries as of February 2, 2002 and February 3, 2001 and the results of
their operations and their cash flows for each of the three fiscal years in the
period ended February 2, 2002 in conformity with accounting principles generally
accepted in the United States.

As explained in Note 11 to the consolidated financial statements, effective
February 4, 2001, the Company changed its method of accounting for derivative
instruments.

Arthur Andersen LLP

Cleveland, Ohio,
March 7, 2002.

29

JO-ANN STORES, INC.

CONSOLIDATED BALANCE SHEETS

See notes to consolidated financial statements

30

JO-ANN STORES, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

See notes to consolidated financial statements

31

JO-ANN STORES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

See notes to consolidated financial statements

32

JO-ANN STORES, INC.

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

See notes to consolidated financial statements
33

JO-ANN STORES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 -- SIGNIFICANT ACCOUNTING POLICIES

NATURE OF OPERATIONS

Jo-Ann Stores, Inc. (the "Company"), an Ohio corporation, is a fabric and
craft retailer with 959 retail stores in 49 states at February 2, 2002. The 889
traditional and 70 superstores feature a broad line of apparel, craft and home
decorating fabrics, notions, crafts, seasonal and home accessories and floral
and framing products.

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

BASIS OF PRESENTATION

The consolidated financial statements include the accounts of the Company
and its subsidiaries. All significant intercompany accounts and transactions
have been eliminated. Certain amounts in the fiscal 2001 and 2000 financial
statements have been reclassified in order to conform with the current year
presentation.

USE OF ESTIMATES

The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect reported amounts of assets and liabilities
at the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Since actual results may differ from those
estimates, the Company revises its estimates and assumptions, as new information
becomes available.

FISCAL YEAR

The Company's fiscal year ends on the Saturday closest to January 31.
Fiscal years consist of 52 weeks, unless noted otherwise. The fiscal year refers
to the year in which the period ends (e.g., fiscal 2002 ended February 2, 2002).
Fiscal 2001 was a 53-week year.

CASH AND TEMPORARY CASH INVESTMENTS

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

INVENTORIES

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

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

The Company's accrual for inventory shrink is based on the actual
historical shrink results of its most recent store physical inventories. These
estimates are compared to actual results as physical inventory counts

34

JO-ANN STORES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 1 -- SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

are taken and reconciled to the general ledger. Substantially all store physical
inventory counts are taken in the first three quarters of each year and the
shrink accrual recorded at February 2, 2002 is based on the shrink results of
these physical inventories. All store locations that have been open one year or
more are physically inventoried at least once a year. The Company experienced an
increase in historical shrink rates in fiscal 2002 compared with the prior year,
and adjusted its shrink accrual to the higher realized shrink rates incurred.
The Company will continue to adjust shrink rate estimates based on the results
of future store physical inventories and shrink trends.

PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS

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

SOFTWARE DEVELOPMENT

The Company capitalized $0.6 million and $3.5 million in fiscal 2002 and
fiscal 2001, respectively, for internal use software. The capitalized amounts
are included in property, equipment and leasehold improvements and are being
amortized on a straight-line basis over periods ranging from three to five years
beginning at the time the software becomes operational.

GOODWILL AND IMPAIRMENT OF LONG-LIVED ASSETS

Goodwill represents the excess of purchase price and related costs over the
fair value assigned to the net tangible assets acquired from House of Fabrics,
Inc. ("HOF"). Goodwill is amortized on a straight-line basis over 40 years and
is a non-deductible expense for tax purposes. Amortization expense was $0.7
million, $0.9 million and $1.0 million for fiscal 2002, 2001 and 2000,
respectively. During fiscal 2001, goodwill was reduced by $8.2 million due to
the settlement of an income tax contingency (as discussed in Note 4).

In July 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard ("SFAS") No. 142, "Goodwill and Other
Intangible Assets". SFAS No. 142 establishes accounting standards for intangible
assets and goodwill. The Company is required to adopt this standard in fiscal
2003, which begins on February 3, 2002. SFAS No. 142 requires that goodwill and
intangible assets with indefinite useful lives no longer be amortized, but
rather tested for impairment at least annually, by applying a fair value-based
test. SFAS No. 142 also requires that intangible assets with definite useful
lives be amortized over their respective estimated useful lives and reviewed for
impairment in accordance with SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." Application of the non-amortization provisions
of SFAS No. 142 will result in a reduction in amortization expense of
approximately $0.7 million per year.

The Company performed the first of the required impairment tests of
goodwill as of February 2, 2002, to evaluate existing goodwill for impairment
upon adoption of SFAS No. 142. Based on the transition impairment tests
performed on recorded goodwill, no impairment to goodwill exists and the Company
will not record a charge in fiscal 2003 in connection with the adoption of this
standard.

Long-lived assets and certain identifiable intangibles historically have
been reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable.
Recoverability of assets to be held and used is measured by a comparison of the
carrying amount
35

JO-ANN STORES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 1 -- SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

of the assets to future net cash flows estimated by the Company to be generated
by said assets. If such assets are considered to be impaired, the impairment to
be recognized is the amount by which the carrying amount of the assets exceeds
the fair value of the assets. Other than as discussed below under Accrued Store
Closing Costs, there were no long-lived assets that required recognition of an
impairment loss at February 2, 2002 or February 3, 2001.

ACCRUED STORE CLOSING COSTS

The Company accrues costs related to stores closed or identified for
closing, which include future rental obligations, carrying costs, and other
closing costs. These expenses are accrued when the Company commits to closing or
relocating a store. The determination of the accrual is dependent on the
Company's ability to make estimates of costs to be incurred post-closing. Future
rental obligations are calculated at the lesser of contractual obligations
remaining under the lease (less estimated sublease rental income) or the
estimated lease termination cost. Differences in estimates and assumptions could
result in an accrual requirement materially different from the calculated
accrual. The carrying values of long-lived assets for stores identified for
closure are reduced to estimated fair value.

ACCRUED EXPENSES

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

FINANCIAL INSTRUMENTS

Financial instruments held by the Company include cash and temporary cash
investments, accounts payable, debt obligations and interest rate swap
agreements. The carrying value of cash and temporary cash investments and
accounts payable is representative of fair value because of the short maturity
of these instruments. The carrying value of borrowings under the Credit Facility
approximates the fair value since the interest rate is variable and fluctuates
with market conditions. The fair value of the Company's senior subordinated
notes is based on market values in the high yield debt market.

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

For fair value disclosures of the Company's senior subordinated notes and
interest rate swap agreements, see Note 11 -- Fair Value of Financial
Instruments.

INCOME TAXES

The Company accounts for income taxes pursuant to the asset and liability
method. Under that method, deferred tax assets and liabilities are recognized
for the future tax consequences attributable to differences between financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases.
36

JO-ANN STORES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 1 -- SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in the tax rate is recognized in income or
expense in the period that the change is effective.

REVENUE RECOGNITION

The Company recognizes revenue at the time of sale of merchandise to its
customers in compliance with Staff Accounting Bulletin No. 101, "Revenue
Recognition in Financial Statements."

STORE OPENING EXPENSES

Store opening expenses are charged to operations as incurred.

ADVERTISING COSTS

The Company expenses production costs of advertising the first time the
advertising takes place. Advertising expense was $37.9 million, $39.5 million
and $32.6 million for fiscal 2002, 2001 and 2000, respectively.

EARNINGS PER SHARE

Basic and diluted earnings per share are calculated in accordance with SFAS
No. 128, "Earnings per Share." Basic earnings per common share are computed by
dividing net income (loss) by the weighted average number of shares outstanding
during the year. Diluted earnings per share for fiscal 2000 include the effect
of the assumed exercise of dilutive stock options under the treasury stock
method. Stock options are antidilutive for fiscal 2002 and fiscal 2001 and
therefore are excluded from the calculation of diluted earnings per share. Basic
and diluted weighted average shares are as follows:

NOTE 2 -- TURNAROUND PLAN CHARGES

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

In accordance with current accounting literature (Emerging Issues Task
Force Issue ("EITF") 94-3, "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (Including Certain
Costs Incurred in a Restructuring)," Statement of Financial Accounting Standards
("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of" and Staff Accounting Bulletin No. 100,
"Restructuring and Impairment Charges,") the Company recorded a

37

JO-ANN STORES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 2 -- TURNAROUND PLAN CHARGES (CONTINUED)

$6.7 million pre-tax ($4.1 million after-tax) charge to operating expenses
during the fourth quarter of fiscal 2001 and $17.1 million pre-tax ($10.6
million after-tax) charge to operating expenses during the third quarter of
fiscal 2002 for restructuring and asset impairment costs resulting from 148
identified store closings associated with the Turnaround Plan.

In accordance with EITF 96-9 "Classification of Inventory Markdowns and
Other Costs Associated with a Restructuring," the Company also recorded a $2.6
million pre-tax charge ($1.6 million after-tax) to cost of goods sold during the
third quarter of fiscal 2002 to reflect the markdown of certain inventory
contained in the stores identified for closing to its net realizable value.
Further, the Company recorded a $23.0 million pre-tax charge ($14.3 million
after-tax) to cost of goods sold during the fourth quarter of fiscal 2001 to
reduce the carrying amount of certain inventory to its net realizable value,
identified as part of the "SKU Reduction Initiative" (as defined below)
undertaken as part of the Turnaround Plan.

In total, the turnaround charges were $19.7 million pre-tax ($12.2 million
after-tax), or $0.67 per diluted share in fiscal 2002 (the "Turnaround Charges")
and $29.7 million pre-tax ($18.4 million after-tax), or $1.02 per diluted share
in fiscal 2001. The Turnaround Charges included $26.4 million for store closing
charges (the "Store Closing Charges") and $23.0 million for the SKU Reduction
Initiative. These charges are described more fully below.

STORE CLOSING CHARGE

As part of the Turnaround Plan, the Company undertook a comprehensive
review of its existing store base. The financial and operating performance of
each store within the entire store base was evaluated based on return on
investment parameters, and the decision was made to close those stores that were
under-performing relative to management's required performance levels. During
the fourth quarter of fiscal 2001, 42 traditional stores were identified for
closing during fiscal 2002. In the third quarter of fiscal 2002, the Company
recorded a second charge to close an additional 102 traditional stores and to
either downsize or buyout the remaining lease obligations of four superstores.
The store closing charges taken in these quarters include asset write-downs
associated with the identified stores, and the estimated closing costs for
stores whose closings are expected to be closed in the next twelve months.

Following is a summary of the significant components of the Store Closing
Charges (dollars in millions):

Noncancelable lease obligations include the lesser of the estimated buyout
or remaining lease obligations of the stores to be closed. Estimated continuing
lease obligations were reduced by any sublease rental income.

Asset write-offs include $8.5 million for fixed asset write-offs and $2.6
million for the reduction of certain inventory to its net realizable value upon
clearance.

The Store Closing Charges will require total cash payments of $15.3
million, which primarily consists of noncancelable lease obligations extending
through 2011. As of February 2, 2002, the remaining future cash payments total
$10.8 million.

Summarized below is a reconciliation of the beginning and ending Store
Closing Charges liability balances as of February 2, 2002 (dollars in millions).
The Company believes that the liability remaining at February 2, 2002 is
adequate to cover the remaining obligations associated with the Store Closing
Charges.
38

JO-ANN STORES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 2 -- TURNAROUND PLAN CHARGES (CONTINUED)

SKU REDUCTION INITIATIVE

During the fourth quarter of fiscal 2001, the Company commenced an
inventory productivity initiative (the "SKU Reduction Initiative") which
entailed a thorough review of inventory investment and gross margin performance
by item or stock keeping unit ("SKU"). This initiative resulted in the
identification of approximately 10,000 SKU's, or greater than $50 million of
inventory, at cost, that were under-performing and the Company made the decision
to discontinue. The Company began clearance programs in the second quarter of
fiscal 2002 to reduce this inventory to zero. These clearance programs were
substantially completed by the end of fiscal 2002.

The Company believes the review process completed in the fourth quarter of
fiscal 2001 for the SKU Reduction Initiative was thorough. Although additional
product may be targeted for reduction based on ongoing analysis, the Company
believes that the extent of such reduction decisions will be more comparable to
what is the normal course of business practices in retailing. The Company has
established appropriate reserves for product currently designated for clearance.
Such reserves are established based on the consideration of a variety of
factors, including, but not limited to, quantities of slow moving or carryover
seasonal merchandise on hand, historical recovery statistics and future
merchandising plans. The accuracy of the Company's estimates can be affected by
many factors, some of which are outside of the Company's control, including
changes in economic conditions and consumer buying trends. Historically, the
Company has not experienced significant differences in its estimates of recovery
compared with actual results.

NOTE 3 -- PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS

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

39

JO-ANN STORES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 4 -- INCOME TAXES

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

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

40

JO-ANN STORES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 4 -- INCOME TAXES (CONTINUED)

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

As of February 2, 2002, the Company had a net operating loss carry-forward
totaling $22.3 million available to offset future years' taxable income. These
losses expire in 2019. The Company has recorded valuation allowances for certain
deferred tax assets that may be unrealizable.

As part of the HOF acquisition, the Company assumed an income tax
contingency that was subsequently settled with the Internal Revenue Service
("IRS") in October 2000 for $19.6 million. Of the settlement, $16.1 million of
the liability was paid during fiscal 2000 in the form of a deposit payment (cash
bond) to the IRS. The remaining $3.5 million was paid during the third quarter
of fiscal 2001.

NOTE 5 -- FINANCING

SECURED CREDIT FACILITIES

In April 2001, the Company entered into a $365.0 million senior secured
credit facility (the "Credit Facility") which expires on April 30, 2005. The
Credit Facility consists of a $325.0 million revolving credit facility and a
$40.0 million term loan, both secured by a first priority perfected security
interest in the inventory, accounts receivable, property and other assets of the
Company. The Credit Facility is fully and unconditionally guaranteed by each of
the Company's subsidiaries. The Credit Facility contains a letter of credit
sub-limit of $150.0 million. Interest on borrowings under the Credit Facility is
calculated at the bank's

41

JO-ANN STORES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 5 -- FINANCING (CONTINUED)

base rate or London Interbank Offered Rate ("LIBOR") plus 1.75 percent to 2.25
percent, depending on the level of excess availability (as defined in the Credit
Agreement) that is maintained. The Credit Facility provided for the applicable
LIBOR margin to be set at 2.00 percent for the first 12 months of the term of
the facility. Proceeds from the Credit Facility were used to repay all
outstanding borrowings under the Company's prior $300.0 million senior credit
facility and a $40.0 million synthetic lease facility.

As of February 2, 2002, the Company had outstanding borrowings of $73.7
million under the Credit Facility at a weighted average interest rate of 8.7
percent and $31.2 million letters of credit outstanding. The Company pays
quarterly usage fees of between 1.25 percent and 2.25 percent per annum on
outstanding letters of credit under the Credit Facility. The Company also pays
quarterly fees of 0.375 percent per annum on the unused portion of the Credit
Facility.

The Credit Facility does not contain any financial covenant tests as long
as excess availability, as defined, is greater than $35.0 million. A minimum net
worth financial covenant test exists if excess availability is less than $35.0
million. Excess availability was $163.1 million on February 2, 2002. In
addition, capital expenditures under the Credit Facility are limited to $50.0
million per year, with any unused portion carried forward and available for use.
The Credit Facility permits the repurchase of common shares of the Company, the
repurchase of senior subordinated notes, and the payment of cash dividends (up
to $5.0 million) in any fiscal year, subject to maintaining certain levels of
excess availability.

The Company's weighted average interest rate and weighted average
borrowings under the Credit Facility, prior senior credit facility and other
lines of credit were 7.2 percent and $169.0 million during fiscal 2002, 7.9
percent and $119.3 million during fiscal 2001, and 6.5 percent and $161.1
million during fiscal 2000.

The term loan portion of the Credit Facility replaced a $40.0 million
synthetic lease facility that the Company had originally used to finance the
construction of a distribution center in Visalia, California. The synthetic
lease facility was accounted for as an operating lease, with interest payments
capitalized until the facility began operations. Accordingly, no asset or debt
obligation related to the construction of the distribution center is reflected
on the accompanying consolidated balance sheet at February 3, 2001. As a result
of the termination of the synthetic lease facility, the Company recorded the
appropriate assets and debt obligation of $40.0 million in the first quarter of
fiscal 2002. There is no penalty if the Company elects to prepay the term loan
principal, which is due on April 30, 2005.

SENIOR SUBORDINATED NOTES

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

NOTE 6 -- COMMITMENTS AND CONTINGENCIES

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

42

JO-ANN STORES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 6 -- COMMITMENTS AND CONTINGENCIES (CONTINUED)

On August 16, 2000, Sandy Lortz, a former employee of the Company, filed a
purported class action complaint (the "Lortz Complaint") against the Company, on
behalf of the Company's former and current California store management
employees. The Lortz Complaint was filed in the Superior Court of California and
alleged the Company violated certain California laws by erroneously treating its
store management employees as "exempt" employees who are not entitled to
overtime compensation. This case was consolidated with a similar class action
complaint filed on behalf of Regina Salas, filed on October 24, 2000 in the
Superior Court of California. A tentative settlement in this case was reached in
January 2002 and a pre-tax charge of $6.5 million ($4.0 million after-tax or
$0.21 per diluted share) was recorded in the fourth quarter of fiscal 2002.

NOTE 7 -- CAPITAL STOCK

The following table details the common stock ($0.05 stated value) activity
for fiscal 2002 and fiscal 2001:

The Company's Class A common shares have voting rights while Class B common
shares have no voting rights. At February 2, 2002 and February 3, 2001, there
were 75,000,000 Class A common shares and 75,000,000 Class B common shares
authorized for issuance. At February 2, 2002 and February 3, 2001, there were
5,000,000 shares of serial preferred stock, without par value, authorized for
issuance, none of which were outstanding.

SHAREHOLDERS' RIGHTS PLAN

On October 31, 2000, the Company amended and restated its Shareholders'
Rights Plan (the "Rights Plan"). Under the Rights Plan, as amended and restated,
one right is issued for each Class A and Class B

43

JO-ANN STORES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 7 -- CAPITAL STOCK (CONTINUED)

common share outstanding. The rights are exercisable only if a person or group
buys or announces a tender offer for 15 percent or more of the outstanding Class
A common shares as defined in the Rights Plan. When exercisable, each right
initially entitles a holder of Class A and Class B common shares to purchase one
Class A common share for $60.00, or under certain circumstances, one Class A
common share for $0.50. The rights, which do not have voting privileges, expire
in October 2010, but may be redeemed by the Board of Directors prior to that
time, under certain circumstances, for $0.005 per right. Until the rights become
exercisable, they have no effect on earnings per share.

RIGHT TO ACQUIRE SHARES

The Company is a party to an agreement with certain members of the two
founding families of the Company, whereby the Company has a right of first
refusal to acquire, at market prices, common shares disposed of by either of the
families. The total number of both Class A and Class B common shares, subject to
this agreement, was approximately 4.5 million shares as of February 2, 2002.

NOTE 8 -- STOCK-BASED COMPENSATION PLANS

1998 INCENTIVE COMPENSATION PLAN

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

The following table summarizes award activity and the number of shares
available for future awards under the 1998 Plan at February 2, 2002:

44

JO-ANN STORES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 8 -- STOCK-BASED COMPENSATION PLANS (CONTINUED)

Employee Stock Option Program

The employee stock options granted under the 1998 Plan generally become
exercisable to the extent of one-fourth of the optioned shares for each full
year of continuous employment following the date of grant and generally expire
ten years after the date of the grant. Stock options granted under the Plan may
become exercisable under different terms as approved by the Compensation
Committee of the Board of Directors. During fiscal year 2002, 180,000 stock
option awards were made to executive officers of the Company, other than the
chief executive officer, that were shorter in duration, with a seven year
expiration. These stock option awards vest in four years but are subject to
accelerated vesting when the Company achieves certain levels of financial
performance. By establishing option awards with shorter periods of duration and
accelerated vesting provisions, the Compensation Committee believes that the
value of such awards are more closely aligned to the near-term financial
performance and success of the Company, which is appropriate given the
turnaround initiatives established for the Company.

Restricted Stock Program

The vesting periods for the restricted shares granted under the 1998 Plan
are up to five years for employee restricted shares and up to six years for
non-employee director restricted shares. All rights to such restricted shares
terminate without any payment of consideration by the Company unless the grantee
remains in the continuous service of the Company throughout the vesting period.
Unearned compensation resulting from the issuance of restricted shares is being
amortized over the vesting periods, and the unamortized portion has been
reflected as a reduction of shareholders' equity.

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

Employee Stock Purchase Program

The employee stock purchase program (the Associate Stock Ownership Plan or
"ASOP") was established in April 1999, and enables employees to subscribe to
purchase shares of common stock on offering dates at six-month intervals, at a
purchase price equal to the lesser of 85 percent of the fair market value of the
common stock on the first or last day of the offering period. The ASOP meets the
requirements of Section 423 of the Internal Revenue Code of 1986. The total
number of shares subject to stock purchase rights granted in any fiscal year for
the ASOP may not exceed 1,000,000 shares. During fiscal 2002, 2001 and 2000,
stock purchase rights of 296,483, 248,476 and 60,049, respectively, were granted
and exercised under the ASOP.

Non-Employee Directors Deferred Stock Program

On March 9, 2000, the Company established a deferred stock program for
non-employee directors. This program allows non-employee directors to elect to
convert the retainer and meeting fee portion of their cash compensation into
deferred stock units. Under this feature, non-employee directors make an
irrevocable

45

JO-ANN STORES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 8 -- STOCK-BASED COMPENSATION PLANS (CONTINUED)

election prior to the Company's annual shareholder's meeting whereby they can
elect to convert a percentage (0 percent to 100 percent in 25 percent
increments) of their cash compensation for the following year to deferred stock
units. One-half of the cash compensation deferred is converted into Class A
stock units and one-half into Class B stock units. The conversion of cash
compensation to deferred stock units is based on the closing market price of
Class A and Class B common shares on the date the cash compensation would have
been payable if it were paid in cash. These deferred stock units are credited to
an account of each non-employee director, although no stock is issued until the
earlier of an elected distribution date, as selected by the non-employee
director, or retirement. During fiscal 2002 and 2001, 3,410 and 3,552 Class A
units, respectively, and 5,036 and 3,997 Class B units, respectively, were
deferred under the deferred stock program.

NON-EMPLOYEE DIRECTORS STOCK OPTION PLAN

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

OTHER PLANS

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

In addition to the 1998 Plan, restricted shares of the Company's common
stock are available for, and have been awarded to, executive officers, senior
management and other key employees under the 1994 Executive Incentive Plan (the
"Executive Plan"). At February 2, 2002, 91,500 Class A restricted shares were
outstanding under the Executive Plan and 358,500 Class A and 451,000 Class B
common shares are available for future awards.

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

46

JO-ANN STORES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 8 -- STOCK-BASED COMPENSATION PLANS (CONTINUED)

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

47

JO-ANN STORES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 8 -- STOCK-BASED COMPENSATION PLANS (CONTINUED)

The following table summarizes the status of stock options outstanding and
exercisable at February 2, 2002:

The Company applies the provisions of Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees," and related interpretations
in accounting for stock options granted under the Plans. Accordingly, no
compensation cost has been recognized for the Plans. Had compensation cost for
the Plans been determined based on the fair value at the grant dates for awards
under these Plans consistent with SFAS No. 123, "Accounting for Stock-Based
Compensation," the Company's net income (loss) and net income (loss) per share
would have been reduced to the pro forma amounts shown in the table below
(dollars in millions, except per share data):

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

For purposes of computing the pro forma disclosures above, the fair values
of the options granted under the Plans were determined at the date of grant
separately for Class A and Class B option grants using the Black-Scholes option
pricing model. The significant assumptions used to calculate the fair value of
Class A and Class B option grants were: risk-free interest rates ranging from
5.2 percent to 6.4 percent for Class A

48

JO-ANN STORES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 8 -- STOCK-BASED COMPENSATION PLANS (CONTINUED)

and 4.8 percent to 6.6 percent for Class B, expected volatility ranging from
36.9 percent to 46.0 percent for Class A and 32.3 percent to 46.0 percent for
Class B, expected lives ranging from 3.5 to 10.0 years for Class A and 4.1 to
6.6 years for Class B and no expected dividends for either class of shares.

NOTE 9 -- SAVINGS PLAN AND POSTRETIREMENT BENEFITS

The Company sponsors the Jo-Ann Stores, Inc. Savings Plan 401(k) (the
"Savings Plan"), which is a tax deferred savings plan whereby eligible employees
may elect quarterly to contribute up to the lesser of 15 percent of annual
compensation or the statutory maximum. The Company makes a 50 percent matching
contribution in the form of the Company's common stock, up to a maximum employee
contribution of four percent of the employee's annual compensation. Employer
contributions of the Company's common stock have been made through the issuance
of shares out of treasury or by purchasing shares on the open market. The amount
of the Company's matching contributions during fiscal 2002, 2001 and 2000 were
$1.0 million, $1.0 million and $1.2 million, respectively. Plan assets included
844,968 shares of Class A common shares and 270,695 shares of Class B common
shares at February 2, 2002.

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

NOTE 10 -- LEASES

With the exception of one superstore, all of the Company's retail stores
operate out of leased facilities. All store leases are operating leases,
generally for periods up to 10 years with renewal options for up to 20 years.
Certain leases contain escalation clauses and provide for contingent rents based
on a percent of sales in excess of defined minimums. In certain instances, the
Company is required to pay its pro rata share of real estate taxes and common
area maintenance expenses. The Company also leases certain computer and store
equipment, generally under five-year or less lease terms.

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

Rent expense was as follows:

49

JO-ANN STORES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 11 -- FAIR VALUE OF FINANCIAL INSTRUMENTS

A financial instrument is cash or a contract that imposes an obligation to
deliver, or conveys a right to receive cash or another financial instrument. The
carrying values of cash and temporary cash investments and accounts payable are
considered to be representative of fair value because of the short maturity of
these instruments. The bid price of the 10 3/8 percent senior subordinated notes
at February 2, 2002 in the high yield debt market was $84.0. Accordingly, the
fair value of the 10 3/8 percent senior subordinated notes was $126.0 million
versus their carrying value of $150.0 million.

In the normal course of business, the Company employs established policies
and procedures to manage exposure to changes in interest rates. The Company's
objective in managing the exposure to interest rate changes is to limit the
volatility and impact of interest rate changes on earnings and cash flows.
Interest rate swaps are primarily utilized to achieve this objective. Interest
rate swaps are utilized to manage net exposure to interest rate changes related
to the Company's debt structure. The interest rate swap agreements require the
Company to pay a fixed interest rate while receiving a floating interest rate
based on LIBOR. The Company does not enter into financial instruments for
trading purposes.

On March 15, 1998, the Company entered into a five-year interest rate swap
agreement to hedge its interest rate exposure. The notional amount of this
interest rate swap was $50.0 million, with a fixed LIBOR of 5.98 percent. On
September 5, 2000, the Company entered into a separate interest rate swap
agreement to further hedge its interest rate exposure. The interest rate swap
had a term of five years effective May 1, 2001, with a notional amount of $40.0
million and a fixed LIBOR rate of 6.80 percent. Effective May 15, 2001, the
agent for the Credit Facility assumed assignment of the Company's two
outstanding interest rate swap agreements and on May 16, 2001, terminated those
interest rate swap agreements and established a new interest rate swap with a
fixed LIBOR rate of 6.72 percent and a notional amount of $90.0 million,
reducing to $40.0 million on May 1, 2003, until its expiration on April 30,
2005.

Effective February 4, 2001, the Company adopted SFAS No. 133, "Accounting
for Derivative Instruments and Hedging Activities", as amended. In accordance
with SFAS No. 133, the Company has reviewed and designated all of its interest
rate swap agreements as cash flow hedges and now recognizes the fair value of
its interest rate swap agreements on the balance sheet. Changes in the fair
value of these agreements are recorded in other comprehensive income (loss) and
reclassified into earnings as the underlying hedged item affects earnings.
During fiscal 2002, unrealized after tax net losses of $3.0 million were
recorded in other comprehensive income (loss), including a $1.7 million
cumulative transition adjustment, as of the date of adoption of SFAS No. 133.
The hedge ineffectiveness for fiscal 2002 was $1.0 million ($0.6 million
after-tax) and is reflected in interest expense.

NOTE 12 -- QUARTERLY FINANCIAL INFORMATION (UNAUDITED)

Summarized below are the unaudited results of operations by quarter for
fiscal 2002 and 2001:

50

JO-ANN STORES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 12 -- QUARTERLY FINANCIAL INFORMATION (UNAUDITED) (CONTINUED)

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

(a)Includes after tax charge of $12.2 million, or $0.67 per share for the third
quarter related to store closings.

(b)Includes after tax charge of $4.0 million, or $0.21 per share for the fourth
quarter related to a wage litigation settlement.

(c)Includes pretax charge of $23.0 million for the fourth quarter related to the
SKU Reduction Initiative.

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

NOTE 13 -- MINORITY INVESTMENT

On June 6, 2000, the Company announced that it had entered into a strategic
relationship with IdeaForest.com, Inc. ("IdeaForest"), an on-line destination
site for arts and crafts merchandise, creative ideas, advice and supplies. As
part of the strategic relationship, IdeaForest, which operates as an independent
entity, is responsible for all content and technology support to the joann.com
website. The Company provides product to the site, with customer fulfillment and
service being handled by IdeaForest. The Company invested $6.5 million in
IdeaForest, which, combined with the Company's contribution of strategic assets,
entitled the Company to a 28.5 percent ownership interest. In addition, the
Company has the ability to increase its future ownership percentage through the
vesting and exercise of warrants. The investment in IdeaForest is accounted for
using the equity method. During fiscal 2001, the Company recorded equity losses
of $3.2 million related to this minority investment.

During the fourth quarter of fiscal 2001, the Company reduced the carrying
value of the its investment in IdeaForest to zero, which resulted in a $3.3
million charge. The decision to reduce the carrying value of the investment to
zero was predicated on operating projections prepared by IdeaForest that
resulted in its cash balance being reduced to near zero before cash flow
positive operating status was achieved. The Company remains committed to an
online presence and IdeaForest is currently operating its business in line with
its planned operating projections.

51

JO-ANN STORES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 14 -- CONSOLIDATING FINANCIAL STATEMENTS

The Company's 10 3/8 percent senior subordinated notes and Credit Facility
are fully and unconditionally guaranteed, on a joint and several basis, by the
wholly-owned subsidiaries of the Company. The senior subordinated notes are
subordinated to the Company's Credit Facility. Summarized consolidating
financial information of the Company (excluding its subsidiaries) and the
guarantor subsidiaries as of and for the years ended February 2, 2002 is as
follows:

52

JO-ANN STORES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 14 -- CONSOLIDATING FINANCIAL STATEMENTS (CONTINUED)

53

JO-ANN STORES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 14 -- CONSOLIDATING FINANCIAL STATEMENTS (CONTINUED)

54

JO-ANN STORES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 14 -- CONSOLIDATING FINANCIAL STATEMENTS (CONTINUED)

55

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON THE FINANCIAL STATEMENT SCHEDULE

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

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

Arthur Andersen LLP

Cleveland, Ohio,
March 7, 2002.

56

SCHEDULE II

JO-ANN STORES, INC.
VALUATION AND QUALIFYING ACCOUNTS
FISCAL YEARS ENDED 2002, 2001 AND 2000
(Dollars in millions)

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

(a)Includes $17.1 million accrual for 106 stores identified for closing, 27 of
which were closed in fiscal 2002 and 50 which are expected to close in fiscal
2003.

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

57

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

Not applicable.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Information required by this Item 10 as to the Directors of the Registrant
is incorporated herein by reference to the information set forth under the
caption "Nominees to the Board of Directors" in the Registrant's definitive
proxy statement for its 2002 Annual Meeting of Shareholders to be held on June
6, 2002 (the "Proxy Statement"), which is expected to be filed with the
Securities and Exchange Commission pursuant to Regulation 14A of the Securities
Exchange Act of 1934 within 120 days after the end of the Company's fiscal year.
Information required by this Item 10 as to the Executive Officers of the
Registrant is included under Item 4 of Part I of this Form 10-K as permitted by
Instruction 3 to Item 401(b) of Regulation S-K. Information required by Item 405
of Regulation S-K is incorporated herein by reference to the information set
forth in the Proxy Statement under the caption "Section 16(a) Beneficial
Ownership Reporting Compliance" of the Securities Exchange Act of 1934.

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

ITEM 11. EXECUTIVE COMPENSATION

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

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

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

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Ira Gumberg, one of our Directors, is President and Chief Executive Officer
and a principal shareholder of J.J. Gumberg Co., which manages numerous shopping
centers. Twelve of these shopping centers contain stores of our company. Two of
the leases were entered into after Mr. Gumberg became a Director of our Company,
and we believe such leases are on terms no less favorable to us than could have
been obtained from an unrelated party. The aggregate rent and related occupancy
charges paid during fiscal 2002, 2001 and 2000 on these stores amounted to $1.3
million, $1.4 million and $1.3 million, respectively.

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

58

PART IV

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

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

(1) and (2) Financial Statements and Financial Statement Schedules

The consolidated financial statements and the related
financial statement schedules filed as part of this Form
10-K are located as set forth in the index on page 26 of
this report.

(3) Exhibits

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

* Indicates a management contract or compensatory plan or arrangement

(b) Reports on Form 8-K

None

60

SIGNATURES

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

JO-ANN STORES, INC.

By: /s/ ALAN ROSSKAMM May 2, 2002
-------------------------------------------
Alan Rosskamm
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:

SIGNATURE TITLE
- ------------------------------------------------ ---------------------------------------------------

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

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

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

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

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

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

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

/s/ GREGG SEARLE* Director
- ------------------------------------------------
Gregg Searle

/s/ BERYL RAFF* Director
- ------------------------------------------------
Beryl Raff

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

*By: /s/ ALAN ROSSKAMM May 2, 2002
-------------------------------------------
Alan Rosskamm, Attorney-in-Fact

61

EXHIBIT INDEX