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 1, 2003

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]

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

The aggregate market value of the common stock of the registrant held by
non-affiliates of the registrant as of August 2, 2002 was $409.2 million.

The number of shares outstanding, as of April 11, 2003, of the registrant's
Class A Common Stock was 10,423,700 and of the registrant's Class B Common Stock
was 9,414,171.

Documents incorporated by reference:

Portions of the following documents are incorporated by reference:

Proxy Statement for 2003 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 1, 2003, the end of our latest fiscal year. The words
"Jo-Ann Stores, Inc.," "Jo-Ann Stores," "Jo-Ann Fabrics and Crafts," "Jo-Ann
etc," "Registrant," "Company," "we," "our," and "us" refer to Jo-Ann Stores,
Inc. and, unless the context requires otherwise, to our subsidiaries. Jo-Ann
Stores, Inc. is an Ohio corporation, founded in 1943. Our fiscal year ends on
the Saturday closest to January 31 and refers to the year in which the period
ends (e.g., fiscal 2003 refers to the period ended February 1, 2003).

ITEM 1. BUSINESS

We are the nation's largest fabric and craft specialty 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 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,
artificial and dried flowers, and finished seasonal merchandise. As of February
1, 2003, we operated 919 stores in 48 states (847 traditional stores and 72
superstores).

Our traditional stores average 14,400 square feet. Net sales per
traditional store were approximately $1.4 million in fiscal 2003. Our
superstores offer an expanded and more comprehensive product assortment than our
traditional stores. Our superstores average 45,400 square feet and in fiscal
2003, on a per-store basis, averaged $6.0 million in net sales per superstore or
generated more than four times the revenue and approximately 30 percent higher
sales per square foot than our traditional stores. We believe our superstores,
which accounted for 25 percent of total fiscal 2003 net sales, present
opportunities for future growth.

Over the past five 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. Major capital
expenditures during this period included:

- 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 65 of our 72 superstores.

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.

As a result of our SAP Retail implementation issues, coupled with the
increased debt levels and a decline in our operating margins, our strategy
shifted from accelerating the growth of our superstore concept to improving the
productivity of our existing asset base and realizing the benefits from our
completed infrastructure investments. At the end of fiscal 2001, we announced
the implementation of a three-year turnaround plan (the "Turnaround Plan"). A
number of charges were taken during fiscal 2001 and 2002 related to the
Turnaround Plan.

During fiscal 2002 and 2003, the Company made significant strides in
executing its Turnaround Plan and improving its operations. In fact, in the two
years since the announcement of the Turnaround Plan, we have exceeded all of the
financial goals we had established for the original

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three-year plan. In fiscal 2003, we achieved record earnings and have reduced
debt levels, net of cash, to approximately $100 million, our lowest level in
five years, as discussed further in Management's Discussion and Analysis of
Financial Condition and Results of Operations.

BUSINESS STRATEGY

As we complete our Turnaround Plan in fiscal 2004, we intend to further
improve our operating performance by growing same-store sales, improving gross
margins, and reducing interest expense through further 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 improve, we
are able to consistently supply the desired merchandise and our customers
respond favorably. We have significant opportunity to continue to leverage
improvements as we refine our operations going forward. The superstore, in
particular, has become a more significant component of our business, generating
25 percent of total net sales in fiscal 2003. We believe there is substantial
same-store sales growth opportunities to be achieved as we market and
merchandise the superstore concept more effectively.

Superstore Growth. Our strategy is to roll out our refined superstore
format across the nation. Based on our research, we believe that our superstore
is a "breakthrough" concept. Our research has demonstrated that our customers
actually have a better perception of the quality and pricing of our products
when they are presented in our superstore format. We believe that our 35,000
square foot superstore will give us a competitive advantage in the industry. Our
superstores provide a unique shopping experience by offering a full creative
selection - of sewing, crafting, framing, seasonal, floral and home accessories
- - all under one roof. In locations where we close a traditional store and
replace it with a superstore, we generate an average sales increase in the first
year of more than 300 percent. We have planned approximately 20 store openings
for fiscal 2004, the majority of which will be superstores.

Improve Gross Margins. We believe we can improve gross margins by refining
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 the level of 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. We also believe we have
further opportunities to reduce store shrink expense.

Reduce Interest Expense Through Debt Reduction. Our debt-to-capitalization
ratio at February 1, 2003 was 36.0 percent. Debt, net of cash, to capitalization
ratio at February 1, 2003 was 22.0 percent. This is significantly lower than our
debt-to-capitalization ratio at the end of fiscal 2002 of 49.0 percent. We are
focused on operational performance improvements and the generation of cash flow
for continued debt reduction as we return to new store growth. We have set a
debt-to-capitalization ratio goal of approximately 20 percent for fiscal 2004
and we believe that level can be maintained while growing our store base.
Improved inventory productivity contributed to the debt reduction we achieved in
fiscal 2003, 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 1, 2003:

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 geographical area. During fiscal 2003, we opened one
superstore. Our average net opening cost of a superstore is $2.1 million, which
includes leasehold improvements, furniture, fixtures and equipment, inventory
(net of payable support) and pre-opening expenses. Also during fiscal 2003,

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we opened two traditional stores, with an average square footage of
approximately 20,000 square feet. Our average net opening cost of a traditional
store is $1.0 million, which includes leasehold improvements, furniture,
fixtures and equipment, inventory (net of payable support) and pre-opening
expenses.

During fiscal 2004, we expect to open 20 new stores, the majority of which
will be superstores, relocate five traditional stores to the new superstore
format, and close approximately 40 traditional stores, approximately half of
which are related to the superstore openings. We have committed to leases for 21
of the 25 planned projects.

PRODUCT SELECTION

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

Softlines

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

- fashion and sportswear fabrics, used primarily in the construction of
garments for the customer seeking a unique, fashion forward look;

- special occasion fabrics used to construct evening wear, bridal and
special occasion outfits;

- craft fabrics, used primarily in the construction of quilts, craft and
seasonal projects for the home;

- juvenile designs for the construction of garments as well as blankets and
decor accessories;

- special-buy or fabrics representing extreme values for our customer;

- home decorating fabrics and accessories used in home related projects
such as window treatments, furniture and bed coverings. In addition to
the in-store assortment, we offer a special order capability for
additional designs;

- a wide array of notions, which represent items incidental to
sewing-related projects -- including cutting implements, threads,
zippers, trims, tapes, pins, elastics, buttons and ribbons as well as the
patterns necessary for most sewing projects.

- sewing-related accessories including lighting, organizers, and sewing
machines. Our high volume stores offer a wider selection of sewing
machines through leased departments with third parties from whom we
receive sublease income.

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Hardlines and Seasonal

Our company offers a broad assortment of hardlines merchandise for the
creative enthusiast. Our superstores offer the complete array of categories
while our traditional stores, due to their smaller size, merchandise edited
assortments, and in some cases, stock only those assortments necessary to serve
our core customer. We offer the following hardline selections:

- papercrafting components, such as albums, papers, stickers, stamps, and
books used in the popular home based activities of scrapbooking and card
making;

- craft materials, including items used for stenciling, jewelry making,
woodworking, wall decor, and kids crafting;

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

- yarn and accessories as well as needlecraft kits and supplies;

- a comprehensive assortment of books and magazines to provide inspiration
for our customer;

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

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

- home decor accessories including baskets, candles and accent collections
designed to complement our home decor fashions.

In addition to the basic categories described above, our stores regularly
feature seasonal products, which complement our core merchandising strategy. Our
seasonal offering spans all product lines and includes 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." A large percentage of our seasonal assortments represent
product designed exclusively for us.

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 fiscal 2003, 49 percent of superstore net sales were derived from
softlines and 51 percent from hardlines. Conversely, during fiscal 2003, 68
percent of traditional store net sales were derived from softlines and 32
percent from hardlines.

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 segment and 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

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advertising program with newspaper insert advertising. Our circulars and
newspaper inserts feature numerous products offered at competitive prices and
emphasize the wide selection of merchandise available in our stores.

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

We also reach our customers through our relationship with IdeaForest, an
on-line 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 domestic and international sources of supply available for
each category of product that we sell. During fiscal 2003, approximately 73
percent of our purchases were sourced domestically and 27 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 annual purchase
volume and the top ten suppliers represent less than 20 percent of our total
annual purchase volume. We currently utilize approximately 900 merchandise
suppliers, with the top 200 representing more than 80 percent of our purchasing
volume.

LOGISTICS

At the end of fiscal 2003, we operated two owned distribution centers which
ship products to all of our stores on a weekly basis. Based on purchase dollars,
approximately 82 percent of the products in our stores are shipped through our
distribution center network, with the remaining 18 percent of our purchases
shipped directly from our suppliers to our stores. Our primary distribution
center facility is located in Hudson, Ohio and supplies product to approximately
two-thirds of our store base and our Visalia, California distribution center,
which opened in April 2001, services the remaining one-third of our store base.

We transport product from our distribution centers to our stores utilizing
contract carriers. Merchandise is shipped directly from our distribution centers
to our stores using dedicated core carriers for approximately 90 percent of our
store base. For the remaining 10 percent of our chain, we transport product to
the stores using less than truckload carriers or through 3 regional "hubs" where
it is crossdocked for local delivery. We do not own either the regional hubs or
the local delivery vehicles.

STORE OPERATIONS

Site Selection. We believe that our store locations are integral to our
success. 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 strip shopping

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center, size of the location, age of the shopping center, co-tenants, proximity
to highway access, traffic patterns and ease of entry from the major roadways
framing the strip location.

Our expansion strategy is to give priority to adding stores in existing
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 minimize disruption to
our business and maximize sales during our peak Christmas selling season.

Store Management. Traditional stores generally have four full-time team
members and 10 to 15 part-time team members, while superstores typically have
approximately 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, customer satisfaction survey results, store shrink
rates and annual store profit.

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 primarily been staffed with individuals from
outside the Company 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. In
the past year, we installed broadband communication and new store controllers in
all of our traditional stores. The entire chain has now been upgraded with this
technology, resulting in a greatly enhanced customer checkout experience and a
better platform to further automate internal store communications.

Information obtained from item-level scanning through our point of sale
system enables us to identify important trends to 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 re-stock merchandise
and efficiently re-price sale items.

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

STATUS OF PRODUCT OR LINE OF BUSINESS

During fiscal 2003, 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 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 2003, no one store accounted for more than one
percent of our total net 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 specialty retailer serving
the retail sewing and crafting industry. Our stores compete with other specialty
fabric and craft retailers and selected mass merchants, including Wal-Mart, that
dedicate a portion of their selling space to a limited selection of fabrics and
craft supply items. We compete on the basis of product assortment, price,
convenience and customer service. We believe the combination of our product
assortment, customer service emphasis, systems technology and frequent
advertising provides us with a competitive advantage.

We have two national competitors in the fabric and craft specialty retail
industry, one in the fabric segment and one in the 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

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

RESEARCH AND DEVELOPMENT

During the three fiscal years ended February 1, 2003, 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 1, 2003, we had approximately 21,200 full and part-time
employees, of which 19,700 worked in our stores, 400 were employed in our Hudson
distribution center, 200 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 70 percent of our employees work part-time.

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

FOREIGN OPERATIONS AND EXPORT SALES

In fiscal 2003, we purchased approximately 27 percent of our products
directly from manufacturers located in foreign countries. These foreign
suppliers are located primarily in Hong Kong, China, and Taiwan. In addition,
many of our domestic suppliers purchase a portion of their products from foreign
suppliers. Because a large percentage of our products are manufactured or
sourced abroad, we are required to order these products further in advance than
would be the case if the products were manufactured domestically. If we
underestimate consumer demand, we may not be able to fully satisfy our customers
on a timely basis. If we overestimate consumer demand, we may be required to
hold goods in inventory for a longer period of time or to reduce selling prices
in order to clear excess inventory at the end of a selling season. We do not
have long-term contracts with any manufacturers.

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

OTHER AVAILABLE INFORMATION

We also make available, free of charge, on our Internet website at
www.joann.com, our annual reports on Form 10-K, quarterly reports on Form 10-Q,
current reports on Form 8-K and amendments to reports filed or furnished
pursuant to Section 13(a) or 15(d) of the Securities

9

Exchange Act of 1934 as soon as reasonably practicable after we file such
material, or furnish it to, the Securities and Exchange Commission.

ITEM 2. PROPERTIES

Our store support center and Hudson distribution center are located in a
1.4 million square foot facility on 105 acres in Hudson, Ohio. We own both the
facility and the real estate. The distribution center occupies 1.0 million
square feet and the remainder is used as our store support center, a superstore,
and office space we lease to another tenant. In addition, we own 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. Traditional store leases generally have initial terms of five
to ten years and renewal options for up to 20 years. Superstore leases generally
have initial terms of 10-15 years and renewal options generally ranging from 5-
20 years. Certain store leases contain escalation clauses and contingent rents
based on a percent of net sales in excess of defined minimums. During the fiscal
year ended February 1, 2003, we incurred $143.0 million of rental expense,
including common area maintenance, taxes and insurance for store locations.

As of February 1, 2003, the current terms of our store leases, assuming we
exercise all lease renewal options, were as follows:

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.

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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 the son of Betty Rosskamm. Mr. Rosskamm is also a Director of
Charming Shoppes Inc., a women's apparel retailer.

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

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

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

Valerie Gentile Sachs has been Executive Vice President, General Counsel
and Secretary of our Company since January 2003. Prior to joining our Company
she was the General Counsel of Marconi plc, of London, England, global company
serving the communications industry, from March 2002. Previously she was
Executive Vice President and General Counsel from April 2001 to March 2002, and
Vice President and General Counsel from November 2000 to April 2001 of Marconi
Communications, Inc., the operating company for Marconi in the Americas. From
December 1997 to November 2000 she was Vice President, General Counsel and
Secretary for

11

RELTEC Corporation, a network equipment and network services provider, RELTEC
Corporation went public in March 1998 and was acquired by Marconi in April 1999.

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 11, 2003
were 675 and 584, respectively.

The quarterly high and low closing stock prices for fiscal 2003 and 2002
are presented in the table below:

The Company did not pay dividends on its common stock during fiscal 2003
and fiscal 2002. The Company's dividend policy has been to retain earnings for
the operation and growth of its business. Payments of dividends, if any, in the
future will be determined by the Board of Directors in light of appropriate
business conditions.

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

12

ITEM 6. SELECTED FINANCIAL DATA

The following table presents our selected financial data for each of the
ten years ending February 1, 2003. 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.
The Company presents earnings before interest, taxes, depreciation and
amortization ("EBITDA") because management believes that EBITDA could be useful
for investors in assessing our operating performance and our performance
relative to our financial obligations. Additionally, EBITDA is a measure
commonly used and referred to by financial analysts because of its usefulness in
evaluating operating performance. EBITDA is a non-GAAP financial measurement and
should not be considered in isolation or as a substitute for other measures of
performance. Additionally, EBITDA may not be comparable to financial data as
defined or used by other companies. We have included a reconciliation of our
reported net income to EBITDA at the bottom of the table.

13

ITEM 6. SELECTED FINANCIAL DATA (CONTINUED)

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

(a) 53-week year.

(b) Same-store sales are defined as net sales from stores that have been open
one year or more. Net sales are included in the same-store sales calculation
on the first day of the first month following the one-year anniversary of a
store's opening. In conjunction with the expansion or relocation of our
stores, we exclude the net sales results from these stores in our same-store
sales calculation until the first day of the first month following the one
year anniversary of its expansion or relocation. Further, in a 53 week year,
net sales are compared to the comparable 53 weeks of the prior period.

(c) 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.

(d) Book value is calculated by dividing shareholders' equity by shares
outstanding, net of treasury shares.

(e) Return on average equity is calculated by dividing net income by the average
of the Company shareholders' equity as of the beginning and end of its
current fiscal year.

14

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

OVERVIEW

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

We are the nation's largest fabric and craft specialty 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 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,
artificial and dried flowers, and finished seasonal merchandise. As of February
1, 2003, we operated 919 stores in 48 states (847 traditional stores and 72
superstores).

Our traditional stores average 14,400 square feet. Net sales per
traditional store average $1.4 million. Our superstores offer an expanded and
more comprehensive product assortment than our traditional stores. Our
superstores average 45,400 square feet and in fiscal 2003, on a per-store basis,
averaged $6.0 million in net sales per superstore or generated more than four
times the revenue and approximately 30% higher sales per square foot than our
traditional stores. We believe our superstores, which accounted for 25% of
fiscal 2003 net sales, present opportunities for future growth.

Over the past five 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 growth. Major capital expenditures
during this period included:

- 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 65 of our 72 superstores.

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

As a result of the SAP Retail implementation issues, coupled with the
increased debt levels and a decline in our operating margins, our strategy
shifted from accelerating the growth of our superstore concept to improving the
productivity of our existing asset base and realizing the benefits from our
completed infrastructure investments. At the end of fiscal 2001, we announced
the implementation of our turnaround plan (the "Turnaround Plan"). A number of
charges (the "Turnaround Charges") were taken during fiscal 2002 and 2001
related to the Turnaround Plan. See the discussion below under "Turnaround
Charges and Litigation Settlement."

During fiscal 2002 and 2003, the Company made significant strides in
executing its Turnaround Plan and improving its operations. In fact, in the two
years since the announcement of the Turnaround Plan, we have exceeded all of our
financial goals we had established for the original three-year plan. In fiscal
2003, we achieved record earnings and have reduced debt levels, net of cash, to
less than $100 million, our lowest level in five years.

15

RESULTS OF OPERATIONS

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

COMPARISON OF THE 52 WEEKS ENDED FEBRUARY 1, 2003 AND FEBRUARY 2, 2002

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

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

Gross margin. As you review our gross margin performance, we believe you
should consider the following important information related to charges recorded
in fiscal 2002 (which are discussed in further detail below under "Turnaround
Charges and Litigation Settlement"):

- During fiscal 2002, sales related to the SKU Reduction Initiative totaled
$34 million, recorded at zero gross margin. This negatively impacted the
fiscal 2002 gross margin rate by approximately 100 basis points (100
basis points equal one percent).

- During fiscal 2002, $2.6 million of the $19.7 million in Turnaround
Charges were recorded in cost of sales. This negatively impacted the
fiscal 2002 gross margin rate by approximately 20 basis points.

Gross margin for fiscal 2003 was $777.5 million compared with $693.1
million in fiscal 2002. As a percentage of net sales, fiscal 2003 gross margin
was 46.2% compared with 44.1% in the prior year, an increase of 210 basis
points. Turnaround Charges recorded in fiscal 2002 accounted for approximately
20 basis points of the improvement, while the absence of the SKU Reduction
Initiative sales accounted for another 100 basis points of the improvement. The
remaining margin rate improvement was largely driven by improvement in the store
shrink expense rate of approximately 150 basis points. Partially offsetting this
improvement were lower selling margins caused by the more challenging retail
environment in the third and fourth quarters of fiscal 2003, which necessitated
promotional pricing, particularly on seasonal goods, to be more aggressive
versus the year earlier period.

16

Selling, general and administrative expenses. Selling, general and
administrative ("SG&A") expenses include store and administrative payroll,
employee benefits, distribution costs, store occupancy costs, advertising
expenses and administrative expenses. As you review our SG&A performance, we
believe you should consider the following important information related to
charges recorded in fiscal 2002 (which is discussed in further detail below
under "Turnaround Charges and Litigation Settlement"):

- During fiscal 2002, $17.1 million of the $19.7 million in Turnaround
Charges were recorded in SG&A. This negatively impacted the SG&A rate by
approximately 110 basis points.

- During fiscal 2002, the settlement of certain California wage litigation
resulted in a charge of $6.5 million. This negatively impacted the SG&A
rate by approximately 40 basis points.

SG&A expenses were $642.9 million for fiscal 2003 versus $644.2 million in
fiscal 2002. As a percentage of sales, SG&A expenses decreased 280 basis points
to 38.2% of net sales versus 41.0% of net sales for fiscal 2002. The Turnaround
Charges recorded in fiscal 2002 discussed above accounted for 150 basis points
of the improvement. The remaining rate improvement was due to positive expense
leverage realized primarily in store expenses, with strong cost controls
complementing the favorable impact of improved same-store sales growth.

Depreciation and amortization. Depreciation and amortization expense for
fiscal 2003 decreased $3.2 million to $36.1 million from $39.3 million in fiscal
2002. This decrease is attributable to discontinuing goodwill amortization,
pursuant to the adoption of SFAS No. 142, which lowered amortization expense by
$0.7 million, and a slowdown in our capital expenditures.

Operating profit. Operating profit for fiscal 2003 was $98.5 million,
compared with $9.6 million for fiscal 2002. The fiscal 2002 operating profit was
impacted by the Turnaround Charges recorded. See the "Gross margin" and
"Selling, general and administrative expenses" discussions above.

Interest expense. Interest expense for fiscal 2003 was $26.0 million,
compared with $32.7 million in fiscal 2002, a decrease of $6.7 million.
Substantially all of this decrease is attributable to a decrease in average debt
levels. Our average debt levels during fiscal 2003 were $239 million compared
with $319 million during fiscal 2002. During fiscal 2003 we repurchased, in the
open market, $27.1 million of our 10 3/8% subordinated notes at a purchase price
of $28.3 million or 4.3% over par. The premium we paid on the purchase plus a
pro-rata portion of the capitalized deferred finance charges totaling $1.9
million pre-tax were written off and recorded in SG&A expense, as discussed
under "Liquidity and Capital Resources" below.

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

Extraordinary item. In the first quarter of fiscal 2002, we entered into a
new $365.0 million senior secured credit facility (the "Credit Facility").
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.

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 billion compared with
$1.483 billion 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 net 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.
17

By store format, our same-store sales performance for traditional stores
increased 5.1%. Approximately 70% of the increase was attributable to a higher
average ticket, with the remainder attributable to an increase in customer
traffic. Same-store sales for superstores increased 9.4%, approximately 65% of
which was attributable to an increase in customer traffic, with the remainder
attributable to a higher average ticket. Each of our major product categories
experienced positive same-store sales growth for the year.

We believe the improvement in same-store sales year over year is primarily
due 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
million in sales for the year, but were recorded at a zero gross margin. At the
end of fiscal 2002, we had completed our SKU Reduction Initiative.

Gross margin. As you review our gross margin performance, we believe you
should consider the following important information (which is discussed in
further detail below under "Turnaround Charges and Litigation Settlement"):

- Fiscal 2002 charges:

- Sales related to the SKU Reduction Initiative totaled $34 million,
recorded at zero gross margin. This negatively impacted the gross margin
rate by approximately 100 basis points.

- $2.6 million of the $19.7 million in Turnaround Charges were recorded in
cost of sales. This negatively impacted the gross margin rate by
approximately 20 basis points.

- During fiscal 2001, $23.0 million of the $29.7 million in Turnaround
Charges were recorded in cost of sales. This negatively impacted the
gross margin rate by approximately 160 basis points.

Gross margin for fiscal 2002 was $693.1 million compared with $645.1
million in fiscal 2001. As a percentage of net sales, fiscal 2002 gross margin
was 44.1% compared with 43.5% in the prior year, an increase of 60 basis points.
The SKU Reduction Initiative and Turnaround Charges recorded in fiscal 2002 and
2001, discussed above, accounted for 40 basis points of improvement. Higher
shrink expense incurred during fiscal year 2002 was more than offset by higher
realized store margin rates. Shrink expense, as a percentage of sales,
deteriorated 100 basis points from our shrink rates in fiscal 2001.

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.

Selling, general and administrative expenses. SG&A expenses include store
and administrative payroll, employee benefits, distribution costs, store
occupancy costs, advertising expenses and administrative expenses. As you review
our SG&A performance, we believe you should consider the following important
information (which is discussed in further detail below under "Turnaround
Charges and Litigation Settlement"):

- Fiscal 2002 charges:

- $17.1 million of the $19.7 million in Turnaround Charges were recorded
in SG&A. This negatively impacted the fiscal 2002 SG&A rate by
approximately 110 basis points.

- We recorded $6.5 million for the settlement of certain California
litigation. This negatively impacted the fiscal 2002 SG&A rate by
approximately 40 basis points.

18

- During fiscal 2001, $6.7 million of the $29.7 million in Turnaround
Charges were recorded in SG&A. This negatively impacted the fiscal 2001
SG&A rate by approximately 45 basis points.

SG&A expenses were $644.2 million for fiscal 2002 versus $589.2 million in
fiscal 2001. As a percentage of sales, SG&A expenses increased 130 basis points
to 41.0% of net sales in fiscal 2002 versus 39.7% of net sales for fiscal 2001.
Approximately 110 basis points of the deterioration in the SG&A rate to sales
was due to the Turnaround Charges and litigation settlement discussed above. In
addition, 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 $9.6 million,
compared with $17.6 million in fiscal 2001, a decrease of $8.0 million.
Operating profit for both fiscal 2002 and 2001 was impacted by the Turnaround
Charges and the litigation settlement. See the "Gross margin" and "Selling,
general and administrative expenses" discussions above.

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 average interest rate. Our average debt levels during fiscal
2002 were $319 million compared with $269 million during fiscal 2001. 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.

Equity and asset impairment losses of minority investment. 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. During fiscal 2001, we recorded equity losses
of $3.2 million related to this minority investment, $2.1 million of which was
recorded during the first three quarters of fiscal 2001.

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. Currently, IdeaForest's operations on an
annualized basis are not yet profitable, but the company is approaching a cash
flow breakeven level. We remain committed to an online presence and we will
continue to evaluate our options with IdeaForest as the company demonstrates
continued improvement in its operations.

Extraordinary Item. In the first quarter of fiscal 2002, we entered into
the Credit Facility, consisting of a $325.0 million revolving credit facility
and a $40.0 million term loan facility. The
19

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.

Turnaround Charges and Litigation Settlement

During the three years ended February 1, 2003, we recorded various charges
associated with a turnaround plan (the "Turnaround Plan") that we initiated in
fiscal 2001. These charges included store closing costs, inventory markdowns to
net realizable value in connection with the SKU Reduction Initiative and store
closings, and asset impairment losses for store fixtures and leaseholds.
Collectively, we have referred to these charges as the turnaround charges
("Turnaround Charges"). We also recorded a litigation settlement charge of $6.5
million in fiscal 2002.

Store Closing Charges. We review the productivity of our store base on an
ongoing basis and actively manage our real estate to preserve maximum
flexibility in lease terms. As a result, we have 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 approximately 250 stores in the last five years, we are paying
rent on just five store locations where we have not yet obtained a sublease
tenant or executed a lease termination.

In accordance with the applicable accounting literature (Emerging Issues
Task Force Issue ("EITF") 94-3, "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (Including Certain
Costs Incurred in a Restructuring)," Statement of Financial Accounting Standards
("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of" and Staff Accounting Bulletin No. 100,
"Restructuring and Impairment Charges,") we recorded pre-tax charges in
operating expenses of $17.1 million in fiscal 2002 and $6.7 million in fiscal
2001 for restructuring and asset impairment costs resulting from 148 identified
store closings associated with the Turnaround Plan. We also incurred expenses of
$0.5 million and $1.2 million, in fiscal 2002 and 2001, respectively, for store
closings unrelated to the Turnaround Plan.

As discussed in Note 1 -- Significant Accounting Policies, effective
December 31, 2002, we are required to account for the costs of store closings
under SFAS No. 146. In addition, we have adopted the new accounting requirements
related to asset impairment as required by SFAS No. 144, effective February 3,
2002.

Through the end of fiscal 2003, we have closed 120 of the stores identified
for closure as part of the Turnaround Plan. All of the remaining stores to be
closed, with the exception of eight store locations, are scheduled to close in
the next 24 months. These eight store locations will continue to be operated,
due to our inability to successfully negotiate an acceptable arrangement to exit
the lease. A total of $7.7 million for estimated lease obligations, associated
with the stores to be closed as part of the Turnaround Plan, were reversed in
the fourth quarter of fiscal 2003. The reversal related to stores where
estimates were revised, as well as the eight stores we could not close. We also
recorded an asset impairment charge in the fourth quarter of fiscal 2002 of $6.7
million for these eight stores and other store locations, representing the
difference between the asset carrying value and the future net discounted cash
flows estimated to be generated by those assets. The remainder of the store
closing charges in fiscal 2003, highlighted in the table below, represents lease
obligations and other costs associated with stores identified for closure in
fiscal 2004 that were not part of the Turnaround Plan.

The charges to the statement of operations for the three fiscal years ended
February 1, 2003 related to store closings are summarized below (dollars in
millions), and include charges for both store closings as part of our turnaround
initiatives, as well as store closings from normal operating activity.

20

Non-cancelable 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 anticipated sublease rental income.

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

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

In accordance with EITF 96-9 "Classification of Inventory Markdowns and
Other Costs Associated with a Restructuring," we also recorded in cost of goods
sold the markdown of certain inventory contained in the stores identified for
closing to its net realizable value. Inventory write-downs recorded were $2.4
million in fiscal 2003 and $2.6 million in fiscal 2002. The inventory reserve
remaining at February 1, 2003 is $2.4 million.

Summarized below is a reconciliation of the beginning and ending store
closing reserve balances for the three years ended February 1, 2003 (dollars in
millions):

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

21

performance by item (or SKU) utilizing analytical capabilities available under
SAP Retail. This analysis identified approximately 10,000 active items, totaling
more than $50 million at cost, that were under-performing and that we decided to
discontinue. In connection with this initiative, we recorded a $23.0 million
pre-tax charge to reserve for the portion of this product that we estimated
would be sold below cost. However, liquidating this inventory at reduced selling
prices put pressure on overall realized gross margins in fiscal 2002, since the
sales were recorded at a zero gross margin. The SKU Reduction Initiative was our
first step of an ongoing, disciplined, detailed review of our product mix. We
began clearance programs in the second quarter of fiscal 2002 designed to
eliminate this product. These clearance programs were completed by the end of
fiscal 2002.

Litigation Settlement. In August 2000, a former employee of the Company
filed a purported class action complaint against the Company, on behalf of the
Company's former and current California store management employees. The
complaint was filed in the Superior Court of California and alleged 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 in
October 2000 in the Superior Court of California. This case was settled in
fiscal 2002 for $6.5 million. The settlement was paid in the first quarter of
fiscal 2003.

LIQUIDITY AND CAPITAL RESOURCES

The following table provides cash flow related information for the three
fiscal years ended February 1, 2003.

Net Cash Provided By Operating Activities

Net cash provided by operating activities was $119.2 million in fiscal
2003, compared with $88.2 million in fiscal 2002, an increase of $31.0 million
driven by our strong operating performance. Cash flows from operating
activities, before changes in operating assets and liabilities, increased $100.9
million, substantially all of which was driven by the Company's improved results
of operations.

Inventories decreased $5.9 million in fiscal 2003, compared with a decrease
of $82.0 million in fiscal 2002. The large decrease in fiscal 2002 was
attributable to our successful execution of plans to reduce overall inventory
levels 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. We continued to improve our
inventory management in fiscal 2003, as we improved our inventory turns to
approximately 2.5 times, compared with 2.1 times in fiscal 2002 and 1.8 times in
fiscal 2001.

Accounts payable increased $6.8 million in fiscal 2003 compared with a
decrease of $40.9 million in fiscal 2002. The decrease in fiscal 2002 was due to
the significant reduction 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 represented
approximately 27% of our total annual purchases in fiscal 2003. Beginning in
late fiscal 2001, we changed our dating on import letters of credit to
approximately 10 days, or

22

"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 $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.

Net Cash Used For Investing Activities

Net cash used for investing activities for fiscal 2003 totaled $22.7
million compared with $66.5 million in fiscal 2002. Capital expenditures were
$22.7 million during fiscal 2003 versus $66.5 million in fiscal 2002 and are
discussed further below under the caption "Capital Expenditures."

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.

Capital Expenditures

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

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

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

We anticipate capital expenditures in fiscal 2004 of approximately $50
million. The bulk of this spending pertains to new store openings and continued
improvements in the existing store base. We plan to open approximately 20 stores
during fiscal 2004, the majority of them superstores.

Net Cash Used For Financing Activities

Net cash used for financing activities during fiscal 2003 was $54.4
million, primarily related to a $60.8 million net decrease in debt borrowings
resulting from the cash generated by our strong operating performance. During
fiscal 2003 we repurchased, in the open market, $27.1 million of our 10 3/8%
senior subordinated notes (the "Notes") at a purchase price of $28.3 million or
4.3% over par.

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

23

to our debt levels. The debt reduction was achieved primarily through our
inventory reduction efforts as described above under "Net Cash Provided By
Operating Activities."

Common Share Repurchases

During fiscal 2003, we purchased a total of 0.2 million of our common
shares at an aggregate price of $3.4 million, utilizing proceeds received from
stock option exercises. As of February 1, 2003, we are authorized to purchase up
to an additional 1.3 million shares of our common stock under previous
authorizations from our Board of Directors.

Sources of Liquidity

We have three principal sources of liquidity: cash from operations, cash
and cash equivalents on hand, and the Credit Facility. Our liquidity is not
currently dependent on the use of off-balance sheet transactions other than
letters of credit and operating leases, which are typical in a retail
environment. 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. At February 1, 2003, our interest on borrowings under our Credit
Facility was LIBOR plus 1.75%. 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.

Effective May 15, 2001, in connection with our financing under the Credit
Facility, the agent bank for the Credit Facility assumed assignment of our two
outstanding interest rate swap agreements. On May 16, 2001, the agent bank
terminated those interest rate swap agreements and established a new interest
rate swap with a fixed LIBOR 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.

As of February 1, 2003, we had borrowings outstanding of $40.0 million
under the Credit Facility at an interest rate of 3.5% (which excludes the impact
of the interest rate swap referred to above) and $47.7 million of letters of
credit outstanding.

The Company's weighted average interest rate (including the impact of the
interest rate swaps referred to above) and weighted average borrowings under the
Credit Facility, prior senior credit facility and other lines of credit were
7.9% and $104.7 million during fiscal 2003 and 7.2% and $169.0 million during
fiscal 2002. The increase in the average interest rate is due to the decrease in
borrowings, that, in turn, caused the current swap arrangement (priced at a
fixed LIBOR rate of

24

6.72% on a notional amount of $90 million) to have a more significant impact on
the average interest rate under the credit facility than in the prior year.

On May 5, 1999 we issued the $150.0 million, 10 3/8% Notes, due May 1,
2007. Interest on the 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.

During fiscal 2003, we purchased $27.1 million face value of the Notes. The
purchases were made at an aggregate premium of 104.3% to par value. The $1.9
million pre-tax ($1.2 million after-tax) of aggregate losses include the premium
to par value and the write off of deferred costs and original issue discount and
are reflected in SG&A expenses. We have given notice to the indenture trustee
that, on May 1, 2003, we intend to redeem $41.5 million face value of the Notes
in accordance with the call provisions of the Notes' indenture.

Our total debt-to-capitalization ratio was 36.0% at February 1, 2003 and
49.0% at February 2, 2002. We have a goal to further reduce debt levels during
fiscal 2004 by utilizing cash provided by operating activities and cash on hand.

CONTRACTUAL OBLIGATIONS AND COMMITMENTS

The following tables summarize our future cash outflows resulting from
contractual obligations and commitments as of February 1, 2003:

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

(1) Includes commercial letters of credit of $28.6 million and $19.1 million of
standby letters of credit.

(2) The remaining cash payments include $1.0 million associated with lease
obligations for stores 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.

25

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 sourced approximately 27% of our purchases
internationally in fiscal 2003.

In the normal course of business, we employ established policies and
procedures to manage our exposure to changes in interest rates. Our objective in
managing the exposure to interest rate changes is to limit the volatility and
impact of interest rate changes on earnings and cash flows. Interest rate swaps
are primarily utilized to achieve this objective. We utilize interest rate swaps
to manage net exposure to interest rate changes related to our debt structure.
We estimate that a one-percent increase or decrease in interest rates, based on
fiscal 2003 average debt levels, would cause an increase or decrease to interest
expense of $0.3 million. This includes the impact resulting from our interest
rate swap arrangement, as discussed below.

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 of $40.0 million and a fixed LIBOR
rate of 6.80%. Effective May 15, 2001, the agent bank 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, we have reviewed and designated all of our interest rate swap
agreements as cash flow hedges and recognized the fair value of the 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 2003
and 2002, unrealized after tax net income (losses) of $0.4 million and ($3.0)
million, respectively, were recorded in other comprehensive income (loss). The
comprehensive loss for fiscal 2002 included a $1.7 million cumulative transition
adjustment, as of the date of adoption of SFAS No. 133. The pre-tax income
(loss) as a result of hedge ineffectiveness (income) expense for fiscal 2003 and
2002 was $(0.3) million and $1.0 million, respectively, 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

26

pervasive throughout our financial statements, but the accounting policies and
estimates we consider most critical are as follows:

Inventory Valuation

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

Our accrual for shrink is based on the actual historical shrink results of
our recent store physical inventories. These estimates are compared to actual
results as physical inventory counts are taken and reconciled to the general
ledger. Substantially all of our store physical inventory counts are taken in
the first three-quarters of each year and the shrink accrual recorded at
February 1, 2003 is based on shrink results of prior physical inventories. All
of our store locations that have been open one year or more are physically
inventoried once a year. We will continue to monitor and adjust our shrink rate
estimates based on the results of store physical inventories and shrink trends.

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.

Vendor allowances

The Company receives allowances from its vendors through a variety of
programs and arrangements, including cash discounts, purchase quantity
discounts, co-operative advertising and markdown reimbursement programs. Cash
and purchase discounts are recognized as a reduction of cost of goods sold when
the related inventory has been sold. Co-operative advertising allowances are
currently reported as a reduction of cost of sales as earned. Markdown
reimbursements are credited to cost of goods sold during the period in which the
related inventory is sold.

In November 2002, the EITF reached a consensus on EITF 02-16, "Accounting
by a Customer (including a Reseller) for Certain Consideration Received from a
Vendor". Among other conclusions reached, EITF 02-16 requires that consideration
received from a vendor be presumed to be a reduction of the cost of the vendor's
products or services. This presumption can be overcome if the consideration can
be shown to represent either a payment for assets or services delivered to the
vendor or a reimbursement of costs incurred by the reseller to sell the vendor's
products. Under the transition rules set forth in EITF 02-16 this treatment is
required for all agreements entered into or modified after December 31, 2002.
The Company does not expect that its adoption in fiscal 2004 will have a
material impact on its results of operations or financial position.

Valuation of Long-Lived Assets

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

27

In July 2001, the FASB issued SFAS No. 142, "Goodwill and Intangible
Assets" ("SFAS No. 142"). SFAS No. 142 establishes accounting standards for
intangible assets and goodwill. The Company adopted SFAS No. 142 on February 3,
2002. The Company performed the first of the required impairment tests of
goodwill and based upon the transition impairment test performed on recorded
goodwill, no impairment to goodwill exists. In the fourth quarter of fiscal
2003, the Company also performed the required annual impairment test of the
carrying amount of goodwill and determined that no goodwill impairment existed.
Application of the non-amortization provision of SFAS No. 142 reduced
amortization expense by approximately $0.7 million for the fiscal year ending
February 1, 2003. The prior fiscal year included amortization expense of $0.7
million.

In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" ("SFAS No. 144"). SFAS No. 144
supersedes SFAS No. 121 to supply a single accounting approach for measuring
impairment of long-lived assets, including a segment of a business accounted for
as a discontinued operation or those to be sold or disposed of other than by
sale. SFAS No. 144 was adopted in fiscal 2003. See the asset impairment
discussion contained above in "Turnaround Charges and Litigation Settlement".

Accrued Store Closing Costs

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

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

Accrued Expenses

We estimate certain material expenses in an effort to record those expenses
in the period incurred. Our most material estimates relate to compensation,
taxes and insurance related expenses, portions of which we are self-insured for.
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.

28

RECENT ACCOUNTING PRONOUNCEMENTS

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

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

In April 2002, the FASB issued SFAS No. 145, "Recission of FASB Statements
No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections" ("SFAS 145"). SFAS No. 145 concludes that debt extinguishments
should not be classified as an extraordinary item. SFAS No. 145 also requires
sale-leaseback accounting for certain lease modifications that have economic
effects that are similar to sale-leaseback transactions. SFAS No. 145 is
effective for fiscal years beginning after May 15, 2002. SFAS No. 145 did not
have a significant impact on the Company's results of operations or financial
position in fiscal 2003.

FASB Interpretation 45, Guarantor's Accounting and Disclosure Requirements for
Guarantees

In November 2002, the FASB issued Interpretation 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees". The interpretation
elaborates on the disclosures to be made in interim and annual financial
statements of a guarantor about its obligations under certain guarantees that it
has issued. It also clarifies that a guarantor is required to recognize, at the
inception of a guarantee, a liability for the fair value of the obligation
undertaken in issuing a guarantee. Initial recognition and measurement
provisions of the interpretation are applicable on a prospective basis to
guarantees issued or modified after December 31, 2002. The disclosure
requirements are effective for financial statements of interim or annual periods
ending after December 15, 2002. As of February 1, 2003, we did not have any
outstanding guarantees, other than subsidiary guarantees of parent debt as
disclosed in Note 14 to the consolidated financial statements.

SFAS No. 148, Accounting for Stock-Based Compensation -- Transition and
Disclosure

In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation -- Transition and Disclosure", SFAS 148 amends SFAS 123 to provide
alternative methods of transition for an entity that voluntarily changes to the
fair value based method of accounting for stock-based employee compensation. It
also amends the disclosure provisions of SFAS 123 to require prominent
disclosure about the effects on reported net income of an entity's accounting
policy decisions with respect to stock-based employee compensation. It also
amends APB Opinion No. 28, "Interim Financial Reporting", to require disclosure
about those effects in interim financial information. We have adopted the
disclosure requirements of SFAS 148 in this Form 10-K for the fiscal year ended
February 1, 2003.

CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS

Certain statements contained in this report that are not historical facts
are forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. Such forward-looking statements which reflects
the Company's current views of future events and financial performance, involve
certain risks and uncertainties. When used herein, the terms "anticipates,"
"plans," "estimates," "expects," "believes," and similar expressions as they
relate to us or future events or conditional verbs such as "will", "should",
"would", "may", and "could" are intended to identify such forward-looking
statements. Our actual results, performance or achievements may materially
differ from those expressed or implied in the forward-looking statements. Risks
and uncertainties that could cause or contribute to such material differences
include, but are not limited to, general economic conditions, changes in
customer demand, changes in trends in the fabric and craft industry,
seasonality, the availability of merchandise,
29

changes in the competitive pricing for products, the impact of our and our
competitors store openings and closings, fuel and energy costs, changes in
tariff and freight rates, consumer debt levels, and other capital market and
geo-political conditions. Additional discussion of some of these and other risks
and uncertainties is contained elsewhere under "Management's Discussion and
Analysis" and "Quantitative and Qualitative Disclosures About Market Risk". We
caution readers not to place undue reliance on these forward-looking statements
which are restricted as to the dates they were made. We assume no obligation to
update any of the forward-looking statements.

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.

30

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

JO-ANN STORES, INC.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

31

REPORT OF MANAGEMENT

We have prepared the accompanying consolidated financial statements and
related information included herein for the years ended February 1, 2003,
February 2, 2002 and February 3, 2001. The opinion of Ernst & Young LLP, the
Company's independent auditors, for the year ended February 1, 2003, on those
financial statements is included. The opinion of Arthur Andersen LLP, who have
ceased operations, the Company's former independent public accountants, for the
years ended February 2, 2002 and February 3, 2001, 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 Audit Committee meets periodically with management, our internal
auditors and our independent auditors to discuss the adequacy of financial
controls, the quality of financial reporting, and the nature, extent and results
of the audit effort. Both the internal auditors and independent auditors have
private and confidential access to the Audit Committee at all times.

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

32

REPORT OF INDEPENDENT AUDITORS

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

We have audited the accompanying consolidated balance sheet of Jo-Ann
Stores, Inc. and subsidiaries as of February 1, 2003, and the related
consolidated statements of operations, shareholders' equity and cash flows for
the fiscal year then ended. Our audit also included the financial statement
schedule for the fiscal year ended February 1, 2003 listed in Item 15(a). These
financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audit. The consolidated financial
statements and schedule of the Company as of February 2, 2002, and for each of
the fiscal years in the two year period ended February 2, 2002, were audited by
other auditors, who have ceased operations and whose reports dated March 7, 2002
expressed an unqualified opinion.

We conducted our audit 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 audit provides a reasonable basis
for our opinion.

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

/s/ Ernst & Young LLP

Cleveland, Ohio,
March 10, 2003.

33

REPORT OF FORMER INDEPENDENT PUBLIC ACCOUNTANTS

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

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

We have audited the accompanying consolidated balance 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.

/s/ Arthur Andersen LLP

Cleveland, Ohio,
March 7, 2002.

34

JO-ANN STORES, INC.

CONSOLIDATED BALANCE SHEETS

See notes to consolidated financial statements

35

JO-ANN STORES, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

See notes to consolidated financial statements

36

JO-ANN STORES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

See notes to consolidated financial statements

37

JO-ANN STORES, INC.

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

See notes to consolidated financial statements

38

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 919 retail stores in 48 states at February 1, 2003. The 847
traditional and 72 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 2002 and 2001 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 ("GAAP") requires management
to make estimates and assumptions that affect reported amounts of assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Since actual results may
differ from those estimates, the Company revises its estimates and assumptions,
as new information becomes available.

FISCAL YEAR

The Company's fiscal year ends on the Saturday closest to January 31.
Fiscal years consist of 52 weeks, unless noted otherwise. The fiscal year refers
to the year in which the period ends (e.g., fiscal 2003 refers to the year ended
February 1, 2003). Fiscal 2001 was a 53-week year.

CASH AND CASH EQUIVALENTS

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

INVENTORIES

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

The Company's accrual for shrink is based on the actual historical shrink
results of recent store physical inventories. These estimates are compared to
actual results as physical inventory counts are taken and reconciled to the
general ledger. Substantially all of our store physical inventory counts are
taken in the first three quarters of each year and the shrink accrual recorded
at February 1, 2003 is based on shrink results of prior physical inventories.
All store locations that have been open one year or longer are physically
inventoried once a year. The Company
39

JO-ANN STORES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 1 -- SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

continually monitors and adjusts the shrink rate estimates based on the results
of store physical inventories and shrink trends.

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

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

As part of the Turnaround Plan, the Company commenced a SKU Reduction
Initiative, which entailed a thorough review of the Company's inventory
investment and gross margin performance by item or SKU. This analysis identified
approximately 10,000 active items, totaling more than $50 million at cost, that
were under performing and that the Company decided to discontinue. In accordance
with EITF 96-9 "Classification of Inventory Markdowns and Other Costs Associated
with a Restructuring," the Company recorded a $23.0 million pre-tax charge to
cost of goods sold in the fourth quarter of fiscal 2001 to reflect the markdown
of this inventory to its net realizable value. Clearance programs were begun in
the second quarter of fiscal 2002 designed to eliminate this product. These
clearance programs were completed by the end of fiscal 2002.

PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS

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

SOFTWARE DEVELOPMENT

The Company capitalized $2.7 million and $0.6 million in fiscal 2003 and
fiscal 2002, respectively, for internal use software acquired from third
parties. The capitalized amounts are included in property, equipment and
leasehold improvements and are being amortized on a straight-line basis over
periods ranging from three to five years beginning at the time the software
becomes operational.

GOODWILL

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

40

JO-ANN STORES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 1 -- SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Effective February 3, 2002, the Company adopted Financial Accounting
Standards Board ("FASB") Statement of Financial Accounting Standard ("SFAS") No.
142, "Goodwill and Other Intangible Assets". In accordance with SFAS No. 142,
goodwill is no longer amortized but is subject to impairment testing, using fair
value-based approaches. Prior to the adoptions of SFAS No. 142, goodwill was
amortized using the straight-line method over an estimated using life of 40
years. As part of adopting this standard, the Company completed a transitional
impairment test as of February 3, 2002 for goodwill and determined that the
carrying value of the Company did not exceed its estimated fair value as
determined by utilizing various valuation techniques. In the fourth quarter of
fiscal 2003, the Company also performed the required annual impairment test of
the carrying amount of goodwill and determined that no goodwill impairment
existed. Application of the non-amortization provision of SFAS No. 142 reduced
amortization expense by approximately $0.7 million for fiscal 2003. Fiscal 2002
and 2001 included amortization expense of $0.7 million and $0.9 million,
respectively. Other intangible assets with definite useful lives are required to
continue to be amortized over their respective estimated useful lives. The
Company did not have other intangible assets at February 1, 2003.

IMPAIRMENT OF LONG-LIVED ASSETS

Under SFAS No. 142, goodwill and indefinite lived intangible assets are no
longer amortized, but must be reviewed at least annually (see above).

Effective February 3, 2002, the Company adopted SFAS No. 144, "Accounting
for the Impairment or Disposal of Long-Lived Assets ("SFAS No. 144). SFAS No.
144 supersedes SFAS No. 121, Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of, to supply a single accounting
approach for measuring impairment of long-lived assets, including definite lived
intangible assets, businesses accounted for as a discontinued operation, assets
to be sold and assets to be disposed of other than by sale. The initial adoption
of SFAS No. 144 did not have a significant impact on the Company's results of
operations or financial position. See Note 3 - Store Closings for details
related to the results of impairment testing performed during the fourth quarter
of fiscal 2003.

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

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. Historically, these expenses were accrued when the Company
committed to closing or relocating a store. The determination of the accrual was
dependent on the Company's ability to make estimates of costs to be incurred
post-closing. Future rental obligations 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

41

JO-ANN STORES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 1 -- SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

from the calculated accrual. The carrying values of long-lived assets for stores
identified for closure are reduced to estimated fair value.

In July 2002, the FASB issued SFAS No. 146 "Accounting for Costs Associated
with Exit or Disposal Activities." SFAS No.146 requires companies to recognize
costs associated with exit or disposal activities when they are incurred rather
than at the date of a commitment to an exit or disposal plan. SFAS No. 146 also
establishes that the liability should initially be measured and recorded at fair
value. SFAS No. 146 replaces EITF Issue No. 94-3 "Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring)." SFAS No. 146 is to be
applied prospectively to exit or disposal activities initiated after December
31, 2002. Under Issue 94-3, a liability for an exit cost was recognized at the
date of our commitment to an exit plan. Accordingly, SFAS 146 may affect the
timing of recognizing future exit and restructuring costs, if any, as well as
the amounts recognized. See Note 2 - Turnaround Charges and Litigation
Settlement.

ACCRUED EXPENSES

Certain material expenses are estimated in an effort to record those
expenses in the period incurred. The most material estimates relate to
compensation, taxes and insurance related expenses, portions of which the
Company is self-insured for. Workers' compensation and general liability
insurance accruals are recorded based on insurance claims processed as well as
historical claims experience for claims incurred, but not yet reported. These
estimates are based on historical loss development factors. Employee medical
insurance accruals are recorded based on medical claims processed as well as
historical medical claims experience for claims incurred but not yet reported.
Differences in the Company's estimates and assumptions could result in an
accrual requirement materially different from the calculated accrual. Accrued
expenses at fiscal 2003 consists of the following (dollars in millions):

FINANCIAL INSTRUMENTS

A financial instrument is cash or a contract that imposes an obligation to
deliver, or conveys a right to receive cash or another financial instrument. The
carrying values of cash and cash equivalents and accounts payable are considered
to be representative of fair value because of the short maturity of these
instruments. The price of the 10 3/8 percent senior subordinated notes (the
"Notes") at February 1, 2003 in the high yield debt market was 106.5 percent to
par value. Accordingly, the fair value of the 10 3/8 percent Notes was $130.9
million versus their carrying value of $122.9 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
42

JO-ANN STORES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 1 -- SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

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 2003 and fiscal 2002, unrealized after-tax net gains (losses) of
$0.4 million and ($3.0) million, respectively, were recorded in other
comprehensive income (loss). The fiscal 2002 after-tax net loss included a $1.7
million cumulative transition adjustment, as of the date of adoption of SFAS No.
133. The hedge ineffectiveness (income) expense for fiscal 2003 and 2002 was
$(0.3) million and $1.0 million, respectively, and is reflected in interest
expense.

INCOME TAXES

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

REVENUE RECOGNITION

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

43

JO-ANN STORES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 1 -- SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

STORE OPENING EXPENSES

Store opening expenses are charged to operations as incurred.

ADVERTISING COSTS

The Company expenses production costs of advertising the first time the
advertising takes place. Advertising expense was $39.7 million, $37.9 million
and $39.5 million for fiscal 2003, 2002 and 2001, 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 2003 include the effect
of the assumed exercise of dilutive stock options under the treasury stock
method. Stock options are antidilutive for fiscal 2002 and fiscal 2001 and
therefore are excluded from the calculation of diluted earnings per share. Basic
and diluted earnings per share are as follows:

STOCK-BASED COMPENSATION

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 its stock plans (see Note 8 -
Stock Based Compensation Plans).

44

JO-ANN STORES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 1 -- SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Accordingly, no compensation cost has been recognized for options granted under
the Company's stock plans. If the Company had determined compensation cost for
the stock options based on the fair value at the grant dates for awards under
the stock 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 stock 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 Company does not pay dividends, so no dividend rate
assumption was made. The significant assumptions used to calculate the fair
value of Class A and Class B option grants were as follows:

Assumptions utilized for the purchase of shares under the employee stock
purchase program (Class A shares) are as follows: risk-free interest rates
ranging from 1.5 percent to 2.2 percent, expected volatility ranging from .510
to .705, expected lives of six months and no expected dividends.

45

JO-ANN STORES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 2 -- PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS

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

NOTE 3 -- STORE CLOSINGS

The Company reviews the productivity of its store base on an ongoing basis
and actively manages its real estate to preserve maximum flexibility in its
lease terms. In accordance with the applicable accounting literature (Emerging
Issues Task Force Issue ("EITF") 94-3, "Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit an Activity (Including
Certain Costs Incurred in a Restructuring)," Statement of Financial Accounting
Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed Of" and Staff Accounting Bulletin No.
100, "Restructuring and Impairment Charges,") the Company recorded a $17.1
million pre-tax charge to operating expenses in fiscal 2002 and a $6.7 million
pre-tax charge to operating expenses in fiscal 2001 for restructuring and asset
impairment costs resulting from 148 identified store closings associated with
the Turnaround Plan. The Company also incurred expenses of $0.5 million and $1.2
million, in fiscal 2002 and 2001, respectively, for store closings unrelated to
the Turnaround Plan.

As discussed earlier under Note 1 -- Significant Accounting Policies, the
Company, effective December 31, 2002, is required to account for costs of store
closings under SFAS No. 146. In addition, the Company has adopted the new
accounting requirements related to asset impairment as required by SFAS No. 144,
effective February 3, 2002.

Through the end of fiscal 2003, the Company has closed 120 of the stores
identified for closure as part of the Turnaround Plan. All of the remaining
stores to be closed, with the exception of eight store locations, are scheduled
to close in the next 24 months. The eight store locations will continue to be
operated, due to the Company's inability to successfully negotiate an acceptable
arrangement to exit the lease. A total of $7.7 million for estimated lease
obligations of stores to be closed as part of the Turnaround Plan were reversed
in the fourth quarter of fiscal 2003. The reversal related to stores where
estimates were revised, as well as the eight stores we could not close. The
Company also recorded an asset impairment charge in the fourth quarter of fiscal
2002 of $6.7 million for these eight stores and other store locations,
representing the difference between the asset carrying value and the future net
discounted cash flows estimated to be generated by those assets. The remainder
of the store closing charges in fiscal 2003, highlighted in the table below,
represents lease obligations and other costs associated with stores identified
for closure in fiscal 2004 that were not part of the Turnaround Plan.

The charges to the statement of operations for the three fiscal years ended
February 1, 2003 related to store closings. The store closing charges are
summarized as follows (dollars in millions),

46

JO-ANN STORES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 3 -- STORE CLOSINGS (CONTINUED)

and include charges both as part of our turnaround initiatives, as well as store
closings from normal operating activity.

Non-cancelable 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 anticipated sublease rental income.

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

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

In accordance with EITF 96-9 "Classification of Inventory Markdowns and
Other Costs Associated with a Restructuring," the Company also recorded in cost
of goods sold the markdown of certain inventory contained in the stores
identified for closing to its net realizable value. Inventory write-downs
recorded were $2.3 million in fiscal 2003 and $2.6 million in fiscal 2002. The
inventory reserve remaining at February 1, 2003 is $2.7 million.

Summarized below is a reconciliation of the beginning and ending store
closing reserve balances for the three fiscal years ended February 1, 2003
(dollars in millions):

47

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:

48

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:

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

NOTE 5 -- FINANCING

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

49

JO-ANN STORES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 5 -- FINANCING (CONTINUED)

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. There is no penalty if the Company elects to prepay the term loan
principal, which is due on April 30, 2005. 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 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. 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 that the Company
had originally used to finance the construction of a distribution center in
Visalia, California.

As of February 1, 2003, the Company had borrowings outstanding of $40.0
million under the Credit Facility at an interest rate of 3.5% (which excludes
the impact of the interest rate swap referred to in Financial Instruments of
Note 1 - Significant Accounting Policies) and $47.7 million of letters of credit
outstanding. The Company pays quarterly commitment 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. 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. Excess availability under the Credit
Facility was $155.0 million on February 1, 2003.

The Company's weighted average interest rate (including the impact of the
interest rate swaps referred to in Financial Instruments of Note 1 - Significant
Accounting Policies) under the Credit Facility, prior senior credit facility and
other lines of credit were 7.9 percent during fiscal 2003, 7.2 percent during
fiscal 2002, and 7.9 percent during fiscal 2001.

SENIOR SUBORDINATED NOTES

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

50

JO-ANN STORES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 5 -- FINANCING (CONTINUED)

During fiscal 2003, the Company purchased $27.1 million face value of the
Notes. The purchases were made at an aggregate price of 104.3 percent to par
value. The $1.9 million of aggregate pre-tax loss includes the premium to par
value ($1.2 million) and the write off of deferred costs and original issue
discount ($0.7 million) are reflected in selling, general, and administrative
expenses.

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.

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

NOTE 7 -- CAPITAL STOCK

The following table details the common stock ($0.05 stated value) activity
for fiscal 2003 and fiscal 2002:

51

JO-ANN STORES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 7 -- CAPITAL STOCK (CONTINUED)

The Company's Class A common shares have voting rights while Class B common
shares have no voting rights.

SHAREHOLDERS' RIGHTS PLAN

On October 31, 2000, the Company amended and restated its Shareholders'
Rights Plan (the "Rights Plan"). Under the Rights Plan, as amended and restated,
one right is issued for each Class A and Class B common share outstanding. The
rights are exercisable only if a person or group buys or announces a tender
offer for 15 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 4.3 million shares as of February 1, 2003.

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 stock option program, 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.

52

JO-ANN STORES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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

The following table summarizes award activity and the number of shares
available for future awards under the 1998 Plan at February 1, 2003:

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
seven to ten years after the date of the grant. Stock options granted under the
Plan may become exercisable or expire under different terms as approved by the
Compensation Committee of the Board of Directors.

Restricted Stock Program

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

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

53

JO-ANN STORES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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

Employee Stock Purchase Program

The employee stock purchase program (the Associate Stock Ownership Plan or
"ASOP") was established in April 1999, and enables employees to subscribe to
purchase shares of common stock on offering dates at six-month intervals, at a
purchase price equal to the lesser of 85 percent of the fair market value of the
common stock on the first or last day of the offering period. The ASOP meets the
requirements of Section 423 of the Internal Revenue Code of 1986. The total
number of shares subject to stock purchase rights granted in any fiscal year for
the ASOP may not exceed 1,000,000 shares. During fiscal 2003, 2002 and 2001,
stock purchase rights of 218,275 shares, 296,483 shares and 248,476 shares,
respectively, were granted and exercised under the ASOP.

Non-Employee Directors Deferred Stock Program

On March 9, 2000, the Company established a deferred stock program for
non-employee directors. This program allows non-employee directors to elect to
convert the retainer and meeting fee portion of their cash compensation into
deferred stock units. Under this feature, non-employee directors make an
irrevocable election prior to the Company's annual 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 2003, 2002 and 2001, 487 Class A units,
3,410 Class A units and 3,552 Class A units, respectively, and 579 Class B
units, 5,036 Class B units 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.

54

JO-ANN STORES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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

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 1, 2003, 11,000 Class A restricted shares were
outstanding under the Executive Plan and 360,000 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.

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"):

55

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 1, 2003:

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 2003, 2002 and 2001 were
$0.9 million, $1.0 million and $1.0 million, respectively. Plan assets included
742,825 shares of Class A common shares and 223,847 shares of Class B common
shares at February 1, 2003. Holders of the Class A common shares are entitled to
vote their respective shares.

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. Traditional store leases generally have
initial terms of five to ten years and renewal options for up to 20 years.
Superstore leases generally have initial terms of 10-15 years and renewal
options generally ranging from 5-20 years. 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
56

JO-ANN STORES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 10 -- LEASES

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:

NOTE 11 -- QUARTERLY FINANCIAL INFORMATION (UNAUDITED)

Summarized below are the unaudited results of operations by quarter for
fiscal 2003 and 2002:

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

57

JO-ANN STORES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 11 -- QUARTERLY FINANCIAL INFORMATION (UNAUDITED) (CONTINUED)

Net income in the fourth quarter was decreased by $4.0 million, net-of-tax,
due to the settlement of certain litigation. Selling, general and administrative
expenses increased $6.5 million due to this settlement. See Note
6 -- Commitments and Contingencies.

NOTE 12 -- 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. 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. Currently, IdeaForest's operations on an
annualized basis are not yet profitable, but the company is approaching a cash
flow breakeven level. The Company remains committed to an online presence and
will continue to evaluate its options with IdeaForest as the company
demonstrates continued improvement in its operations.

58

JO-ANN STORES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 13 -- 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 1, 2003 is as
follows:

59

JO-ANN STORES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 13 -- CONSOLIDATING FINANCIAL STATEMENTS (CONTINUED)

60

JO-ANN STORES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 13 -- CONSOLIDATING FINANCIAL STATEMENTS (CONTINUED)

61

JO-ANN STORES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

62

REPORT OF FORMER INDEPENDENT PUBLIC ACCOUNTANTS ON THE FINANCIAL STATEMENT
SCHEDULE

This is a copy of the report on the financial schedule previously issued by
Arthur Andersen LLP in connection with the Company's filing on Form 10-K for the
fiscal year ended February 2, 2002. This report on the financial statement
schedule has not been reissued by Arthur Andersen LLP in connection with this
filing on Form 10-K nor has Arthur Andersen LLP provided a consent to the
inclusion of its report on the financial statement schedule included on page 64
in this Form 10-K. For further discussion, see Exhibit 23.1.

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

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

Arthur Andersen LLP

Cleveland, Ohio,
March 7, 2002.

63

SCHEDULE II

JO-ANN STORES, INC.
VALUATION AND QUALIFYING ACCOUNTS
FISCAL YEAR ENDED 2003, 2002 AND 2001
(Dollars in millions)

64

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

Our financial statements for 2001 and 2002 were audited by Arthur Andersen
LLP. As a result of Arthur Andersen ceasing its operations, we changed our
auditors to Ernst & Young LLP on May 29, 2002. This change was reported in a
Current Report on Form 8-K dated May 29, 2002. The Company had no disagreements
with Arthur Andersen during fiscal 2001 or fiscal 2002.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Information required by this Item 10 as to the Directors of the Registrant
is incorporated herein by reference to the information set forth under the
caption "Nominees to and Current Members of the Board of Directors" in the
Registrant's definitive proxy statement for its 2003 Annual Meeting of
Shareholders to be held on June 10, 2003 (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".

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 "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.

EQUITY COMPENSATION PLAN INFORMATION

65

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

(1) On February 9, 2001, the Company registered 319,000 Class B common shares to
be issued in connection with options to purchase Class B common shares
pursuant to award agreements with certain employees. The options were
granted under the rules provided for in the 1998 Incentive Compensation
Plan. As of February 1, 2003, 225,000 of the 319,000 securities registered
remain to be issued.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Ira Gumberg, one of our Directors, is President and Chief Executive Officer
and a principal shareholder of J.J. Gumberg Co., which manages numerous shopping
centers. Twelve of these shopping centers contain stores of our Company. Two of
the leases were entered into after Mr. Gumberg became a Director of our Company,
and we believe such leases are on terms no less favorable to us than could have
been obtained from an unrelated party. The aggregate rent and related occupancy
charges paid during fiscal 2003, 2002 and 2001 on these stores amounted to $1.4
million, $1.3 million and $1.4 million, respectively.

Betty Rosskamm, Alma 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 Zimmerman and her 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 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 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 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.

ITEM 14. CONTROLS AND PROCEDURES

We maintain disclosure controls and procedures (as defined in Rules
13a-14(c) and 15d-14(c) promulgated by the Securities and Exchange Commission
under the Securities Exchange Act of 1934). Within the 90 days prior to the
filing of our Annual Report on Form 10-K, we carried out an evaluation, under
the supervision and with the participation of our management, including the
President and Chief Executive Officer along with the Chief Financial Officer
(Chief Accounting Officer), of the effectiveness of the design and operation of
our disclosure controls and procedures. Based upon that evaluation, our
President and Chief Executive Officer along with our Chief Financial Officer
concluded that our disclosure controls and procedures are effective in timely
alerting them to material information relating to the Company and its
consolidated subsidiaries required to be included in our periodic reports filed
with the SEC. There have been no significant changes in our internal controls or
in other factors that could significantly affect internal controls subsequent to
the date we carried out the evaluation.

66

PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

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

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

The consolidated financial statements and the related financial
statement schedule filed as part of this Form 10-K are located
as set forth in the index on page 31 of this report.

(3) Exhibits

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

* Indicates a management contract or compensatory plan or arrangement

(b) Reports on Form 8-K

Not Applicable

68

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, 2003
------------------------------------------
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:

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, 2003
------------------------------------------
Alan Rosskamm, Attorney-in-Fact

69

CERTIFICATION BY CHIEF EXECUTIVE OFFICER

I, Alan Rosskamm, certify that:

1. I have reviewed this Annual Report on Form 10-K of Jo-Ann Stores, Inc. (the
"Registrant");

2. Based on my knowledge, this Annual Report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this Annual Report;

3. Based on my knowledge, the financial statements, and other financial
information included in this Annual Report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
Registrant as of, and for, the periods presented in this Annual Report;

4. The Registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the Registrant and we have:

a) Designed such disclosure controls and procedures to ensure that material
information relating to the Registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this Annual Report is being
prepared;

b) Evaluated the effectiveness of the Registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
Annual Report (the "Evaluation Date"); and

c) Presented in this Annual Report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;

5. The Registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the Registrant's auditors and the audit committee
of Registrant's board of directors (or persons performing the equivalent
function):

a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the Registrant's ability to record,
process, summarize and report financial data and have identified for the
Registrant's auditors any material weaknesses in internal controls; and

b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the Registrant's internal
controls; and

6. The Registrant's other certifying officer and I have indicated in this Annual
Report whether or not there were significant changes in internal controls or
in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions
with regard to significant deficiencies and material weaknesses.

Dated: May 2, 2003

/s/ ALAN ROSSKAMM
--------------------------------------
Alan Rosskamm,
President and Chief Executive Officer

70

CERTIFICATION BY CHIEF FINANCIAL OFFICER

I, Brian P. Carney, certify that:

1. I have reviewed this Annual Report on Form 10-K of Jo-Ann Stores, Inc. (the
"Registrant");

2. Based on my knowledge, this Annual Report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this Annual Report;

3. Based on my knowledge, the financial statements, and other financial
information included in this Annual Report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
Registrant as of, and for, the periods presented in this Annual Report;

4. The Registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the Registrant and we have:

a) Designed such disclosure controls and procedures to ensure that material
information relating to the Registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this Annual Report is being
prepared;

b) Evaluated the effectiveness of the Registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
Annual Report (the "Evaluation Date"); and

c) Presented in this Annual Report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;

5. The Registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the Registrant's auditors and the audit committee
of Registrant's board of directors (or persons performing the equivalent
function):

a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the Registrant's ability to record,
process, summarize and report financial data and have identified for the
Registrant's auditors any material weaknesses in internal controls; and

b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the Registrant's internal
controls; and

6. The Registrant's other certifying officer and I have indicated in this Annual
Report whether or not there were significant changes in internal controls or
in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions
with regard to significant deficiencies and material weaknesses.

Dated: May 2, 2003

/s/ BRIAN P. CARNEY
--------------------------------------
Brian P. Carney,
Executive Vice President and Chief
Financial Officer

71

EXHIBIT INDEX