10-K

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-K

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

SECURITIES EXCHANGE ACT OF 1934

For the fiscal year-ended January 28, 2006

Commission File No. 1-6695

JO-ANN STORES, INC.

(Exact name of Registrant as specified in its charter)

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

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

      Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.     Yes     o          No     þ

      Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.     Yes     o          No     þ

      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     þ          No     o

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

      Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act (Check one).

Large accelerated filer     o Accelerated filer     þ Non-accelerated filer     o          

      Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.):     Yes     o          No     þ

      The aggregate market value of the common stock of the registrant held by non-affiliates of the registrant as of July 29, 2005 was $547.3 million, based upon the closing sales price of the registrant’s common stock on that date as reported on the New York Stock Exchange. All executive officers and directors of the registrant have been deemed, solely for the purpose of the foregoing calculation, to be “affiliates” of the registrant.

      The number of common shares outstanding, as of March 31, 2006, of the registrant’s Common Stock were 23,935,437.

      Documents incorporated by reference: Portions of the following documents are incorporated by reference:

      Proxy Statement for 2006 Annual Meeting of Shareholders — Items 10, 11, 12 and 14 of Part III.

TABLE OF CONTENTS

PART I
	Item 1. Business
	Item 1A. Risk Factors
	Item 1B. Unresolved Staff Comments.
	Item 2. Properties
	Item 3. Legal Proceedings
	Item 4. Submission of Matters to a Vote of Security Holders
PART II
	Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
	Item 6. Selected Financial Data
	Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
	Item 7A. Quantitative and Qualitative Disclosures About Market Risk
	Item 8. Financial Statements and Supplementary Data
		Consolidated Balance Sheets
		Consolidated Statements of Operations
		Consolidated Statements of Cash Flows
		Consolidated Statements of Shareholders’ Equity
	Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
	Item 9A. Controls and Procedures
	Item 9B. Other Information
PART III
	Item 10. Directors and Executive Officers of the Registrant
	Item 11. Executive Compensation
	Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
	Item 13. Certain Relationships and Related Transactions
	Item 14. Principal Accountant Fees and Services
PART IV
	Item 15. Exhibits and Financial Statement Schedules
Index to Exhibits
SIGNATURES
EX-10.2 List of Executive Officers
EX-10.14 Fifth Amendment to Credit Agreement
EX-10.21 Letter
EX-10.22 Letter
EX-10.23 Compensation Committee of the Board of Directors
EX-21 List of Subsidiaries
EX-23 Consent of Independent Registered Public Account Firm
EX-24 Directors and Officers Power of Attorney
EX-31.1 Certification
EX-31.2 Certification
EX-32.1 Certification

PART I

      Except as otherwise stated, the information contained in this report is given as of January 28, 2006, 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 2006 refers to the period ended January 28, 2006).

Item 1.  Business

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

      As of January 28, 2006, we operated 838 stores in 47 states (684 traditional stores and 154 superstores). Our traditional stores offer a complete selection of fabrics and notions and a convenience assortment of crafts, floral, finished seasonal and home décor merchandise. Our traditional stores average approximately 14,650 square feet and generated net sales per store of approximately $1.6 million in fiscal 2006. Our superstores offer an expanded and more comprehensive product assortment than our traditional stores. Our superstores also offer custom framing and educational programs that our traditional stores do not. Our larger superstores, that were opened prior to fiscal 2003, average approximately 45,000 square feet and generated net sales per store of approximately $6.3 million in fiscal 2006. Our current superstore prototype averages 35,000 square feet. We opened 40 of these prototype superstores in fiscal 2006 and we had 83 of the prototype superstores in operation at January 28, 2006. Forty-three of the prototype superstores had been open at least one year, as of January 28, 2006, and averaged $5.0 million in net sales in fiscal 2006.

      We believe stability in our business and our industry is partially a function of recession-resistant characteristics. For example, according to a 2005 research study conducted by the Craft & Hobby Association, approximately 58 percent of all U.S. households participated in crafts and hobbies. While expenditures for such projects are generally discretionary in nature, our average sales ticket during fiscal 2006 was $23 in our superstores and $17 in our traditional stores. Industry sales, according to the Craft & Hobby Association’s 2005 research study, were approximately $31 billion, an 11 percent increase from 2002. Our market is highly fragmented and is served by multi-store fabric retailers, arts and crafts retailers, mass merchandisers, small local specialty retailers, mail order vendors and a variety of other retailers.

      We provide a solution-oriented shopping experience with employees who are encouraged to assist customers in creating and completing creative projects. Many of our store level employees are sewing and/or crafting enthusiasts, which we believe enables them to provide exceptional customer service. We believe our focus on service contributes to a high proportion of repeat business from our customers. A significant portion of our advertising budget is allocated to our direct mail program targeting approximately three to four million of our preferred customers on a regular basis.

      We believe that our superstores are uniquely designed to offer a destination location for our customers. We offer over 80,000 stock-keeping units (“SKUs”) across three broad product categories in our superstores: sewing, crafting and home decorating components. We manage our vast product selection with SAP Retail. Through the core SAP application and integration with peripheral processing systems, we continue to drive operational and execution improvements, to review and enhance forecasting and replenishment capabilities, and to streamline operations.

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Recent Developments and Business Update

      During fiscal 2006 a number of executive officers left the company. On November 21, 2005, we announced that we were separating the role of chairman from that of president and chief executive officer, and commenced a search for a president and chief executive officer. On February 28, 2006, we announced that in order to attract a broader pool of experienced candidates the new president and chief executive officer would also assume the chairman position and that our current chairman, president and chief executive officer, Alan Rosskamm, will step down from these positions and become an outside director upon the naming of his successor. An executive search firm has been retained and is conducting the search for a chairman, president and chief executive officer. Following the appointment of a new chief executive officer, we expect to complete searches for a chief financial officer and head merchant.

      Fiscal 2006 was a challenging year compared with the prior year, as the retail environment experienced softness throughout the year. The primary source of our softness was the home decorating portions of our business, such as finished seasonal, floral and home décor merchandise, as well as home decorating textiles. The quilting and apparel fabrics portions of our business have softened as well, particularly in the third and fourth quarters. Our sales performance for the year was extremely disappointing, and occurred despite an increased level of marketing events and advertising, as well as more aggressive promotional pricing. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for further discussion of our performance.

      We expect the current year, fiscal 2007, to be a year of transition as we implement our Repair Plan initiatives described below. We anticipate a challenging first half of the year, but we expect to be positioned for substantial improvement in our operational and financial performance in the second half of the year, as a result of the execution of our Repair Plan initiatives and significant merchandise assortment changes in our superstores. We believe that the execution of the Repair Plan will enable us to finish the year as a stronger, more disciplined organization with a much improved inventory position and lower outstanding debt balances.

      Each of the major Repair Plan initiatives is addressed below.

•  Inventory reduction. We are aggressively promoting clearance merchandise and those categories where we are carrying excess inventory. We also have taken steps to reduce the number of weeks of supply on-hand of many of our basic product categories and are reducing purchase commitments for fiscal 2007.

•  Adjustment of store merchandise assortments. We expect to reduce space and inventory investment in under-performing categories such as finished seasonal and home décor, while emphasizing better performing product categories, such as craft components.

•  Gross margin rate restoration. We expect to improve our overall advertising and marketing effectiveness, be more discrete with coupons, and take steps to reduce clearance through tighter purchasing disciplines. We also anticipate being more disciplined by eliminating excessive in-season promotional discounts.

•  Selling, general and administrative expense reduction. We are aggressively reviewing all areas of our business for opportunities to reduce and control expenses. The following are the major expense reduction and control opportunities.

• Advertising spending. Our fiscal 2007 budget is comparable to fiscal 2006. Increased costs per advertising event, driven by our increased number of superstore markets, will be offset by a reduced number of advertising events.

• Distribution center costs. Completion of our new distribution center in Opelika, Alabama, which began operations in April 2006, will improve efficiencies in the distribution and logistics network starting in the second-half of the year. Inventory purchases are being significantly reduced, inventory flow will be managed closer to need, and the addition of the third distribution center will reduce freight costs. We also expect to reduce outside storage costs and associated logistics inefficiencies as we sell-through excess inventory.

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• Workforce reduction. In mid-January 2006, we completed a workforce reduction of certain administrative personnel. A total of 75 positions were eliminated, consisting of terminations and eliminations of positions that we will not fill. In addition, we are aggressively challenging positions as employees leave the Company, and have identified additional positions that will not be filled.

      On February 23, 2006, we completed an amendment of our senior bank credit facility. We increased the senior bank credit facility from $350 million to $425 million. The term of the facility remains unchanged, extending through April 2009. The amendment, among other things, also improved advance rates on inventory during peak borrowing periods and modified the consolidated net worth covenant. The amendment is discussed further below under “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources.”

Product Selection

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

			Fiscal Year-Ended
			January 28,			January 29,			January 31,
			2006			2005			2004
Principal product line:
	Softlines			56	%		56	%		57	%
	Hardlines and seasonal			44	%		44	%		43	%
		Total		100	%		100	%		100	%

Softlines

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

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

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

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

•  juvenile designs for the construction of garments as well as blankets and décor accessories;

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

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

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

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

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Hardlines and Seasonal

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

•  yarn and accessories, as well as needlecraft kits and supplies;

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

•  craft materials, including items used for stenciling, jewelry making, decorative painting, wall décor, and kids crafting;

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

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

•  framed art, photo albums and ready-made frames and, in superstores, full service in-store framing departments;

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

•  home décor accessories including baskets, candles and accent collections designed to complement our home décor fashions.

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

      During the Christmas selling season, a significant portion of floor and shelf space is devoted to seasonal crafts, decorating and gift-making merchandise. Due to the project-oriented nature of these items, our peak selling season extends longer than that of other retailers and generally runs from September through December. In fiscal 2006, approximately 57 percent of our net sales occurred in the third and fourth quarter, and approximately 32 percent occurred in the fourth quarter alone.

      During fiscal 2006, 42 percent of superstore net sales were derived from softlines and 58 percent from hardlines. For our traditional stores, 62 percent of net sales were derived from softlines and 38 percent from hardlines during fiscal 2006.

Marketing

      Our marketing efforts are key to the ongoing success and growth of our stores. Our primary focus is on acquiring and retaining customers through an integrated direct and mass marketing program.

      We use our proprietary customer database to provide ongoing communication to our most frequent customers through a robust direct mail and email program. This allows us to cost efficiently and effectively reach our target market on a regular basis throughout the year. To drive customer acquisition, we supplement our direct mail advertising with newspaper insert advertising, primarily in superstore markets. Our direct mail and newspaper inserts showcase our exciting sales events, feature numerous products offered at competitive prices and broadcast the wide selection of merchandise available in our stores.

      As we market the Jo-Ann Stores concept, we also focus on developing long-term relationships with our customers. These efforts include providing knowledge and inspiration through in-store classes, demonstrations and project sheets.

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      Our grand opening program plays an integral role in the successful opening of each new superstore. We utilize our existing customer base to build awareness and excitement in each market around the opening of each new store. This is paired with newspaper inserts, popular in-store promotions and public relations efforts during the grand opening weekend to drive customer traffic. We continue to drive customer awareness and traffic after the grand opening through ongoing advertising efforts in the market.

      We also reach our customers through our relationship with IdeaForest, operator of joann.com, an on-line retailer of sewing and crafting merchandise, creative ideas, advice and supplies. We hold a minority investment in IdeaForest, which functions as an independent entity. In this relationship, we advise on product trends and make product available to IdeaForest, while technology support, customer fulfillment and service are handled by IdeaForest.

      Overall, our direct, mass, grand opening, in-store and on-line marketing efforts are focused on meeting our customers’ desires and building our brand image as we reposition our stores.

Purchasing

      We have numerous domestic and international sources of supply available for each category of product that we sell. During fiscal 2006, approximately two-thirds of our purchases were sourced domestically and one-third was sourced internationally. Our domestic suppliers source some of the products sold to us internationally. Although we have no material 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, our top supplier represents approximately four percent of our annual purchase volume and the top ten suppliers represent approximately 23 percent of our total annual purchase volume. We currently utilize approximately 700 merchandise suppliers, with the top 140 representing more than 80 percent of our purchasing volume.

Logistics

      At the end of fiscal 2006, we owned and operated two distribution centers, in Hudson, Ohio and Visalia, California, which ship merchandise to all of our stores on a weekly basis. We completed construction of our third distribution center during March 2006. This facility is located in Opelika, Alabama, and will support our existing stores and future growth in key southeastern states. We began shipping from this new distribution center in April 2006. Based on purchase dollars, approximately 84 percent of the products in our stores are shipped through our distribution center network, with the remaining 16 percent of our purchases shipped directly from our suppliers to our stores. Once the Opelika distribution center is fully operational, we expect that 50 percent of our store base will be supplied from the Hudson distribution center, 30 percent from our Visalia distribution center and 20 percent from our Opelika distribution center.

      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 remainder of our chain, we transport product to the stores using less than truckload carriers or through three regional “hubs” where product is cross-docked for local delivery. We do not own either the regional hubs or the local delivery vehicles.

Store Operations

      Site Selection. We believe that our store locations are integral to our success. New sites are selected through a coordinated effort of our real estate, finance and operations management teams. In evaluating the desirability of a potential store site, we consider both market demographics and site-specific criteria. Market criteria that we consider important include our traditional stores performance in that immediate market, distance to other Jo-Ann store locations, as well as 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, the store location, position and visibility within the shopping center, size of the shopping center, co-tenants,

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proximity to highway access, traffic patterns, availability of convenient parking and ease of entry from the major roadways framing the location.

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

      Costs of Opening Stores. Standard operating procedures are employed to efficiently open new stores and integrate them into our information management and distribution systems. We have developed a standardized floor plan, inventory layout, and marketing program for each store we open. We typically open stores during the period from February through October to maximize sales, and minimize disruption to store operations, during our fourth-quarter peak selling season.

      Store Management. Traditional stores generally have four full-time team members and 15 to 25 part-time team members, while superstores typically have approximately ten full-time team members and 35 to 45 part-time team members. Store team leaders are compensated with a base salary plus a bonus, which is tied to quarterly store sales, annual store controllable profit and annual store shrink rates.

      Traditional store team leaders are typically promoted from a group of top performing assistant managers, some of whom started as our customers. This continuity serves to solidify long-standing relationships between our stores and our customers. When a traditional store is closed due to the opening of a superstore, we generally retain its team members to staff the new superstore. Superstore team leader positions primarily have been staffed with individuals from outside the Company who have previous experience in managing “big-box” retail concepts. In fiscal 2005 the Company implemented “Superstore University,” designed to develop and prepare more superstore managers from within our organization. This comprehensive training program has proven to be highly successful. We believe that developing more of our future managers from within the organization is essential to our superstore growth strategy. Each store is under the supervision of a district team leader who reports to a regional vice president.

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Stores

      The following table shows our stores by type and state at January 28, 2006:

	Traditional		Superstore		Total
Alabama		1		—		1
Alaska		4		2		6
Arizona		11		6		17
Arkansas		1		—		1
California		82		11		93
Colorado		9		4		13
Connecticut		13		2		15
Delaware		2		1		3
Florida		39		14		53
Georgia		8		4		12
Idaho		9		—		9
Illinois		30		11		41
Indiana		23		5		28
Iowa		11		—		11
Kansas		6		2		8
Kentucky		4		—		4
Louisiana		5		—		5
Maine		5		—		5
Maryland		16		4		20
Massachusetts		24		—		24
Michigan		32		19		51
Minnesota		15		6		21
Missouri		11		2		13
Montana		7		—		7
Nebraska		5		—		5
Nevada		4		2		6
New Hampshire		8		—		8
New Jersey		12		1		13
New Mexico		6		—		6
New York		35		9		44
North Carolina		7		—		7
North Dakota		4		—		4
Ohio		49		12		61
Oklahoma		4		—		4
Oregon		23		2		25
Pennsylvania		39		9		48
Rhode Island		1		—		1
South Carolina		2		—		2
South Dakota		2		—		2
Tennessee		1		3		4
Texas		36		7		43
Utah		8		2		10
Vermont		4		—		4
Virginia		22		—		22
Washington		23		10		33
West Virginia		5		—		5
Wisconsin		16		4		20
Total		684		154		838

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

						Stores in				Total
	Stores		Stores			Operation at		Expanded or		Square
Fiscal Year	Opened		Closed			Year-End		Relocated		Footage
2002		12		(60	)		959		10		15,897
2003		3		(43	)		919		6		15,435
2004		19		(46	)		892		—		15,377
2005		31		(72	)		851		2		15,453
2006		44		(57	)		838		2		16,198

      Our new store opening costs depend on the building type, store size and general cost levels in the geographical area. During fiscal 2006, we opened 40 superstores which represented our 35,000 square foot prototype. Our average net investment in a superstore is approximately $2.0 million, which includes leasehold improvements, furniture, fixtures and equipment, inventory (net of payable support) and pre-opening expenses. Also, during fiscal 2006, we opened four traditional stores with an average square footage of approximately 25,000 square feet. Our average net opening cost of a traditional store is $1.3 million, which includes leasehold improvements, furniture, fixtures and equipment, inventory (net of payable support) and pre-opening expenses.

      During fiscal 2007, we expect to open approximately 21 new superstores and five traditional stores and close approximately 55 to 60 traditional stores, most of which are related to the superstore openings. We have committed to substantially all the leases for our fiscal 2007 planned openings.

Information Technology

      Our point-of-sale register transactions are polled nightly and our point-of-sale system interfaces with both our financial and merchandising systems. We utilize point-of-sale registers and scanning devices to record the sale of product at a SKU level at our stores. We also utilize handheld radio frequency devices for a variety of store tasks including price look-up, perpetual inventory exception counting, merchandise receiving, vendor returns and fabric sales processing. We have broadband communication and store controllers in all of our stores, resulting in an enhanced customer checkout experience and a better platform to further automate internal store communications. We believe this will enable us to provide higher levels of customer and associate satisfaction, while providing a platform that we can build on and leverage over the coming years.

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

      The Company operates on SAP retail. SAP retail merged all of our financial, merchandise and retail systems and linked business processes on a single software platform. In-stock positions and inventory turns have improved, primarily driven by our auto-replenishment and improved inventory management capabilities. During 2004, we upgraded our SAP application and continue to see additional operational efficiencies and further opportunities as a result of the integrated platform.

Status of Product or Line of Business

      During fiscal 2006, 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.

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Trademarks

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

Seasonal Business

      Our business exhibits seasonality which is typical for most retail companies, with much stronger sales in the second half of the year than in the first half of the year. Net earnings are highest during the months of September through December when sales volumes provide significant operating leverage. In fiscal 2006, approximately 57 percent of our net sales occurred in the third and fourth quarter, and approximately 32 percent occurred in the fourth quarter alone.

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 2006, no single store accounted for more than one percent of 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 nation’s largest specialty retailer of fabrics and one of the largest specialty retailers of crafts, serving customers in their pursuit of apparel and craft sewing, crafting, home decorating and other creative endeavors. Our stores compete with other specialty fabric and craft retailers and selected mass merchants, including Wal-Mart, that dedicate a portion of their selling space to a limited selection of fabrics and craft supply items. We compete on the basis of product assortment, price, convenience and customer service. We believe the combination of our product assortment, outstanding sales events, and knowledgeable and customer focused team members provides us with a competitive advantage.

      There are two public companies that we compete with nationally in the fabric and craft specialty retail industry, one in the fabric segment (Hancock Fabrics, Inc. — 443 stores and $403 million in revenues) and one in the craft segment (Michaels Stores, Inc. — 1,076 stores and $3.7 billion in revenues). There is also a public company competitor in the craft segment (A.C. Moore Arts & Crafts, Inc.) that is a rapidly growing regional operator of 109 stores with $539 million in revenues. The balance of our competition is comprised of regional and local operators. We believe that there are only three or four other competitors, in addition to those described above, with fabric or craft sales exceeding $100 million annually. We believe that we have several advantages over most of our smaller competitors, including:

•  purchasing power;

•  ability to support efficient nationwide distribution; and

•  the financial resources to execute our strategy going forward.

Research and Development

      During the three fiscal years ended January 28, 2006, 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.

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Environmental Disclosure

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

Employees

      As of January 28, 2006, we had approximately 24,060 full and part-time employees, of whom 22,240 worked in our stores, 480 were employed in our Hudson distribution center, 270 were employed in our Visalia distribution center, 100 were employed in our Opelika distribution center and 970 were employed at our store support center in Hudson. The number of part-time employees is substantially higher during our peak selling season. We believe our employee turnover is below average for retailers, primarily because our stores often are staffed with sewing and crafting enthusiasts. In addition, we provide an attractive work environment, employee discounts, flexible hours and competitive compensation packages within the local labor markets. Our ability to offer flexible scheduling is important in attracting and retaining these employees since approximately 75 percent of our employees work part-time.

      The United Steelworkers of America, Upholstery and Allied Industries Division currently represents employees who work in our Hudson, Ohio distribution center. Our current contract expires on May 5, 2007. We believe that our relations with our employees and the union are good.

Foreign Operations and Export Sales

      In fiscal 2006, we purchased approximately one-third of our products directly from manufacturers located in foreign countries. These foreign suppliers are located primarily in China and other Asian countries. In addition, many of our domestic suppliers purchase a portion of their products from foreign suppliers. Because a large percentage of our products are manufactured or sourced abroad, we are required to order these products further in advance than would be the case if the products were manufactured domestically. We do not have material long-term contracts with any manufacturers.

Other Available Information

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

      As required by Section 303A.12 of the Listed Company Manual of the New York Stock Exchange (the “NYSE”), our chief executive officer submitted to the NYSE his annual certification on July 7, 2005 stating that he was not aware of any violation by our Company of the corporate governance listing standards of the NYSE. In addition, we have filed, as exhibits to this annual report on Form 10-K for the year-ended January 28, 2006, the certifications of our principal executive officer and principal financial officer required under Sections 302 and 906 of the Sarbanes-Oxley Act of 2002.

Item 1A. Risk Factors

      Our business and financial performance is subject to various risks and uncertainties. There are many factors that affect our business and financial performance, some of which are beyond our control. In addition to the factors discussed elsewhere in this Report, the following risks and uncertainties could materially adversely affect our business, prospects, financial condition, and results of operations. Other factors not

10

presently known to us, or that we presently believe are not material, could also affect our business and financial performance.

Economic Risks

          Changes in economic conditions could have a material adverse effect on our business, revenue and profitability

      In general, our sales represent discretionary spending by our customers. Discretionary spending is affected by many factors, including, among other things, general business conditions, interest rates, the availability of consumer credit, taxation, weather and consumer confidence in future economic conditions. Our customers’ purchases of discretionary items, including our products, could decline during periods when disposable income is lower (for example, as a result of higher energy prices) or during periods of actual or perceived unfavorable economic conditions. If this occurs, our revenues and profitability will decline. In addition, our sales could be adversely affected by a downturn in the economic conditions in the markets in which we operate. A prolonged economic downturn could have a material adverse effect on our business, financial condition, and results of operations.

If customer interest in fabric and craft products declines, our revenues may decline

      The success of our business depends on our customers purchasing our fabric and craft products. Our products are not necessities and compete with numerous other leisure activities and other forms of entertainment. If our customers’ interest in fabric and craft products declines, that decline would result in the reduction of our revenues and have a negative impact on our business and prospects. The inability of the Company and our vendors to develop and introduce new products which excite our customers also could adversely affect our operating results. In addition, changes in demographic and societal trends could have a material adverse effect on our business and prospects.

Changes in interest rates could adversely impact profitability

      We are subject to market risk from exposure to changes in interest rates which affect our financing, investing and cash management activities. Changes in interest rates could have a negative impact on our profitability.

External Business Risks

Competition could negatively impact our operations

      Competition is intense in the retail fabric and craft industry. This competition could result in the reduction of our prices and a loss of market share. We must remain competitive in the areas of quality, price, selection, customer service and convenience. The location and atmosphere of retail stores are additional competitive factors in the retail business.

      Our primary competition is comprised of specialty fabric retailers and specialty craft retailers such as Michaels Stores, Inc., a national chain which operates craft and framing stores, Hobby Lobby, a regional chain which operates craft stores, Hancock Fabrics, Inc., a national chain which operates fabric stores, and A.C. Moore Arts & Crafts, Inc., a regional chain which operates craft stores in the eastern United States. We also compete with mass merchants, including Wal-Mart, that dedicate a portion of their selling space to a limited selection of fabrics, craft supplies and seasonal and holiday merchandise. Some of our competitors have stores nationwide, several operate regional chains and numerous others are local merchants. Some of our competitors, particularly the mass merchants, are larger and have greater financial resources than we do. Our sales are also impacted by store liquidations of our competitors. In addition, alternative methods of selling fabrics and crafts, such as over the Internet, could result in additional competitors in the future and increased price competition since our customers could more readily comparison shop. Moreover, we ultimately compete against alternative sources of entertainment and leisure activities of our customers that are unrelated to the fabric and crafts industry.

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Our suppliers may encounter business issues and not meet our needs

      Many of our suppliers are small companies that produce a limited number of items. Given their limited resources and lack of financial flexibility, many of these firms are susceptible to cash flow issues, production difficulties, quality control issues, and problems in delivering agreed-upon quantities on schedule. We cannot assure that we would be able, if necessary, to return products to these suppliers and obtain refunds of our purchase price or obtain reimbursement or indemnification from them if their products prove defective. These suppliers may be unable to withstand a downturn in economic conditions. Significant failures on the part of our key suppliers could have a material adverse effect on our operating results.

      In addition, many of these suppliers require extensive advance notice of our requirements in order to supply products in the quantities we desire. This long lead time requires us to place orders far in advance of the time when certain products will be offered for sale, exposing us to shifts in demand.

          Our dependence on foreign suppliers subjects us to possible delays in receipt of merchandise and to the risks involved in foreign operations

      In fiscal 2006, we purchased approximately one-third of our products directly from manufacturers located in foreign countries. A majority of our foreign suppliers are located in Hong Kong, China and Taiwan. In addition, many of our domestic suppliers purchase a portion of their products from foreign suppliers. Because a large percentage of our products are manufactured or sourced abroad, we are required to order these products further in advance than would be the case if products were manufactured domestically.

      Foreign manufacturing is also subject to a number of other risks, including work stoppages; transportation delays and interruptions; epidemics; political instability; economic disruptions; the imposition of tariffs, duties, quotas, import and export controls and other trade restrictions; 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 or revaluation of the Chinese currency, or other foreign currencies, could ultimately increase the prices that we pay for our products. All of our products manufactured overseas and imported into the United States are subject to duties collected by the United States Customs Service. We may be subjected to additional duties, significant monetary penalties, the seizure and the forfeiture of the products we are attempting to import, or the loss of import privileges if we or our suppliers are found to be in violation of U.S. laws and regulations applicable to the importation of our products. We also depend on letters of credit with respect to imports. Our inability to obtain letters of credit could have a material adverse effect on our business.

Our business depends on shopping center traffic and our ability to identify suitable store locations

      Our stores generally are located in strip shopping centers and “big box” shopping centers. Our sales are dependent in part on a high volume of shopping center traffic. Shopping center traffic may be adversely affected by, among other things, economic downturns, the closing of anchor stores, new shopping centers or other retail developments, or changes in customer shopping preferences. A decline in the popularity of shopping center shopping among our target customers could have a material adverse effect on customer traffic and reduce our sales and net earnings.

      To take advantage of customer traffic and the shopping preferences of our customers, we need to maintain or acquire stores in desirable locations and competition for suitable store locations is intense. We cannot assure that desirable store locations will continue to be available.

The seasonality of our sales may negatively impact our operating results

      Our business is seasonal, with a significant amount of sales and earnings occurring in the third and fourth fiscal quarters. Our best quarter in terms of sales and profitability historically has been the fourth quarter. In addition, excluding the effects of new store openings, our inventories and related short-term financing needs have been seasonal, with the greatest requirements occurring primarily during our third fiscal

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quarter as we increase our inventory in preparation for our peak selling season. Weak sales during the second half of the year will negatively impact our operating results and cash flow generation.

          Increases in transportation costs due to transportation industry challenges and rising fuel costs may negatively impact our operating results

      We rely upon various means of transportation, including shipments by air, sea and truck, to deliver products to our distribution centers from vendors and from our distribution centers to our stores. Labor shortages in the transportation industry could negatively affect transportation costs and our ability to supply our stores in a timely manner. In addition, long-term disruptions to the national and international transportation infrastructure that lead to delays or interruptions of service could adversely affect our business. In particular, our business is highly dependent on the trucking industry to deliver products to our distribution centers and our stores. Our operating results may be adversely affected if we are unable to secure adequate trucking resources to fulfill our delivery schedules to the stores, particularly as we deliver our fall and Christmas seasonal merchandise.

      The price of oil has risen significantly in the last year. This increase and any future increases may result in an increase in our transportation costs for distribution to our stores, as well as our vendors’ transportation costs, which could decrease our operating profits.

          Our business could be negatively impacted by changes in the labor market and our cost of doing business could increase as a result of changes in federal, state or local regulation

      Our performance is dependent on attracting and retaining a large and growing number of quality associates. Many of those associates are in entry level or part-time positions with historically high rates of turnover. Our ability to meet labor needs while controlling our costs is subject to external factors such as unemployment levels, prevailing wage rates, minimum wage legislation, workers compensation costs and changing demographics. Changes that adversely impact our ability to attract and retain quality associates could adversely affect our performance. Unanticipated changes in the federal or state minimum wage or living wage requirements or changes in other wage or workplace regulations, including, for example, health care mandate regulations, could adversely affect our financial condition and operating results.

Operational Business Risks

          The loss of key executives and failure to attract qualified management could limit our growth and negatively impact our operations

      Our future success depends in large part on our ability to recruit and retain our senior management team. During fiscal 2006, we had significant turnover in our executive management personnel. Our chief financial officer, general counsel, executive vice president — merchandising and marketing, and our executive vice president — human resources all left the Company. In addition, we have commenced a search for a new chief executive officer and announced that our current chief executive officer will resign as a Company employee upon the selection of his successor. Searches also currently are underway for a new chief financial officer and a new head merchant, but it is unlikely that these positions will be filled until the new chief executive officer is selected. We named a replacement for our general counsel in November 2005. Our inability to promptly recruit and retain highly qualified individuals to fill the open executive positions could materially adversely impact the management and operation of our business, which would impact our financial condition and results of operations. In addition, our continued success depends upon our ability to attract and retain qualified management, administrative and store personnel to support our future growth. Our inability to do so may have a material adverse effect on our business and prospects.

          Our Repair Plan strategy execution may disrupt our business. In addition, the strategy may not be successful

      Beginning in the fourth quarter of fiscal 2006, we undertook a series of related initiatives (the “Repair Plan”) to make fundamental improvements in our business, profitability and cash flows. The Repair Plan

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strategy contains four major components: inventory reduction, adjustment of store merchandise assortments, gross margin rate restoration, and expense reduction. See “Recent Developments and Business Update” contained in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” below for further discussion. This Repair Plan strategy may lead to disruptions in our business. These disruptions could adversely affect our business operations and our financial performance. While we believe any disruptions would be short-term, we cannot assure that the impact (whether short-term or long-term) from these disruptions would not be material. In addition, if our Repair Plan strategy is not successful, or if we do not execute the strategy effectively, our business operations and financial performance could be adversely affected.

Failure to manage inventory effectively will negatively impact sales and earnings

      We strive to ensure the merchandise we offer remains fresh and compelling to our customers. However, due to the nature of our business, we purchase much of our inventory well in advance of each selling season. If we are not successful at predicting our sales trends and misjudge consumer preferences or demands, we will experience lower sales than expected and will have excess inventory that may need to be held for a long period of time, written down or sold at prices lower than expected in order to clear excess inventory at the end of a selling season. These actions would reduce our operating performance. Conversely, if we underestimate consumer demand, we may not be able to provide products to our customers to meet their demand. Shortages of key items could also have a material adverse impact on our business, financial condition and results of operations.

      In addition, inventory shrink (inventory theft or loss) rates can significantly impact our business performance and financial results. We devote substantial efforts to minimize inventory shrink. Failure to manage inventory shrink rates could materially adversely affect our business, financial condition and results of operations.

Failure to adequately maintain our perpetual inventory and automated replenishment systems

      We currently operate perpetual inventory, automated replenishment, and weighted average cost inventory systems. We believe these are necessary to adequately forecast, manage, and analyze our inventory levels, monitor our gross margin, and manage merchandise ordering quantities. If we fail to adequately support and maintain these systems, it could have a material adverse impact on our financial condition and results of operations.

Inability to provide new and improved product selection

      Our products appeal to a broad range of consumers whose preferences cannot be predicted with certainty and are subject to rapid change. Our success depends, in large part, upon our ability to anticipate, identify and respond to changing product trends and consumer demand in a timely manner. The retailing industry fluctuates according to changing tastes and seasons, and merchandise usually must be ordered well in advance, frequently before consumer tastes are evidenced by consumer purchases. In addition, in order to ensure sufficient quantities and selection of products, we are required to maintain substantial levels of inventory, especially prior to peak selling seasons when we build up our inventory.

      We cannot assure that we will be able to continue to offer an assortment of products that will appeal to our customers or that will satisfy consumer demands in the future. The failure to continue to identify and stock our stores with appealing products could result in reduced sales and thus have a material adverse effect on our business and financial performance.

Failure to grow sales may impact operations

      Our comparable same-store sales have fluctuated significantly in the past, on both an annual and a quarterly basis, and we expect them to continue to fluctuate in the future. A variety of factors affect our same-store sales results, including, among other things, fashion trends, the highly competitive retail store sales environment, new competing stores (ours or competitors in proximity to existing stores), economic

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conditions, timing and effectiveness of promotional events, changes in our merchandise mix, calendar shifts and weather conditions. Annual revenue growth is driven by the opening of new stores and increased same-store sales. We cannot provide assurance that we can continue to open stores or increase same-store sales.

          Our failure to manage our new store growth, and overall store transition strategy, would have a negative impact on our operations

      Our growth is dependent, in large part, upon our ability to successfully add new stores and close smaller traditional store locations. Our superstores accounted for 41 percent of our total fiscal 2006 net sales. Our growth strategy contemplates the development of additional superstores and an increasing percentage of our revenues coming from our superstores. The success of this strategy will depend upon a number of factors, summarized as follows:

Store specific risks

•  our ability to saturate existing markets and penetrate new markets;

•  the availability of desirable locations and the negotiation of acceptable leases for these sites;

•  the availability of management resources in a particular area;

•  the timely construction, fixturing, merchandising, and hiring and training of store personnel;

•  the closure of unsuccessful stores may result in the retention of liability for expensive leases;

General risks

•  our ability to generate sufficient cash flow from operations;

•  the availability of working capital;

•  our ability to obtain financing;

•  the expansion of our logistics systems to support new stores;

•  the maintenance or upgrade of our information processing systems and the integration of those systems at new stores;

•  a significant portion of our management’s time and energy may be consumed with issues unrelated to advancing our core business strategy, which could result in a deterioration of our operating results;

•  our suppliers may be unable to meet the increased demand of additional stores in a timely manner;

•  the inability to expand our existing distribution centers or use third-party distribution centers on a cost-effective basis to provide merchandise for sale by our new stores, and;

•  general economic conditions and specific retail economic conditions.

      Our failure to open new stores on a timely basis, obtain acceptance in markets in which we currently have limited or no presence, attract qualified management and personnel or appropriately adjust operational systems and procedures would have an adverse effect on our growth and profitability prospects. There can be no assurance that we will be able to successfully implement our store transition strategy. Not all of our superstores are producing acceptable levels of sales and operating profit. If our superstore strategy is not successful, this will negatively impact our effort to diversify into the crafts business and affect our sales growth and profitability capabilities.

          The loss of, or disruption in, or our inability to efficiently operate our distribution network could have a negative impact on our business

      We operate three distribution centers to support our business. If complications arise with any one facility or any facility is severely damaged or destroyed, the other distribution centers may not be able to

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support the resulting additional distribution demands. This may adversely affect our ability to receive and deliver inventory on a timely basis.

      The majority of our inventory is shipped directly from suppliers to our distribution centers where the inventory is then processed, sorted, picked, and shipped to our stores. We rely in large part on the orderly operation of this receiving and distribution process, which depends on adherence to shipping schedules and effective management of our distribution network. Although we believe that our receiving and distribution process is efficient and well positioned to support our expansion plans, we cannot assure that we have anticipated all issues or that events beyond our control, such as disruptions in operations due to fire or other catastrophic events, labor disagreements or shipping problems, will not result in delays in the delivery of merchandise to our stores. Moreover, our third distribution center, located in Opelika, Alabama recently started up operations. If we encounter significant start up problems at this center, such problems could have a material adverse effect on our business operations and financial performance.

          The efficient operation of our business is dependent on our information systems. Our failure to maintain and upgrade our management information systems could compromise our competitive position

      We depend on a variety of information systems for the efficient functioning of our business. In particular, we rely on our information systems to effectively process transactions, manage inventory, purchase, sell and ship goods on a timely basis and maintain cost-efficient operations. The failure of our information systems to perform as designed could disrupt our business and harm sales and profitability. Any material disruption or slowdown of our systems could cause information to be lost or delayed, which could have a negative impact on our business. We may experience operational problems with our information systems as a result of system failures, viruses, computer “hackers” or other causes. We cannot assure that our systems will be adequate to support future growth.

      In addition, costs and potential problems and interruptions associated with the implementation of new or upgraded systems and technology or with maintenance or adequate support of existing systems could also disrupt or reduce the efficiency of our operations. We also rely heavily on our information technology staff. If we cannot meet our staffing needs in this area, we may not be able to fulfill our technology or business initiatives while continuing to provide maintenance on existing systems.

      Excessive technological change affects the effectiveness of the adoption of, and could adversely affect the realization of business benefits from, technology. Conversely, not implementing sufficient technological changes could also compromise the operation of our business.

          Our existing indebtedness could restrict our operations, making us more vulnerable to adverse economic conditions

      We have and will continue to have a significant amount of debt. Our existing level of indebtedness could have negative consequences. For example, it could:

•  make it more difficult for us to satisfy our obligations;

•  reduce the availability of our cash flow from operations to fund working capital, capital expenditures, acquisitions and other general corporate requirements because we will have to dedicate a significant portion of our cash flow from operations to payments of our indebtedness;

•  limit our ability to borrow funds to pay for future working capital, capital expenditures, acquisitions and other general corporate requirements;

•  limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate;

•  place us at a disadvantage compared to our competitors that have less debt; and

•  make us more vulnerable to negative changes in economic and industry conditions.

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      Our ability to make payments on our indebtedness depends upon our ability to generate cash flow in the future. Our ability to generate that cash flow depends upon, among other things, our future operating performance and our ability to refinance indebtedness when necessary. To some extent, each of these factors depends upon economic, financial, competitive and other factors beyond our control. If we cannot generate enough cash from operations to make payments on our indebtedness, we will need to refinance our indebtedness, obtain additional financing, or sell assets. We do not anticipate any issues in generating sufficient cash flow, but we cannot assure that this will be the case, nor can we assure that we will be able to obtain acceptable financing to satisfy our debt obligations.

          We may not be able to finance future needs or adapt our business plan to changes because of restrictions placed on us by our senior bank credit facility and indenture

      The indenture governing our senior subordinated notes and our senior bank credit facility contain restrictive and financial covenants, which limit our ability to borrow money, make investments, redeem or make payments on our capital stock, incur liens and take other actions.

      We currently are in compliance with all of these covenants and do not foresee any issues in continuing to comply with these covenants. However, our ability to remain in compliance with these covenants and tests may be affected by unanticipated events or events beyond our control. If we fail to meet these tests or breach any of the covenants, the lenders under the senior bank credit facility or the holders of the notes could declare all amounts outstanding under their indebtedness, including accrued interest, to be immediately due and payable. A declaration of acceleration under the senior bank credit facility would constitute a default under the indenture, and a default under the indenture would constitute a default under the senior bank credit facility. We believe that we have sufficient credit availability to finance our operations and capital needs; however, we cannot assure that the operating and financial restrictions in our credit facilities will not adversely affect and limit or prohibit our ability to finance future acquisitions, or longer term capital needs.

          We could incur more debt

      Our management currently believes that the cash generated by operations, together with the borrowing availability under the senior bank credit facility, will be sufficient to meet our working capital needs during fiscal 2007. However, if we are unable to generate sufficient cash from operations, we may be required to adopt one or more alternatives to raise cash, such as incurring additional indebtedness, selling assets, raising additional debt or equity capital or restructuring. If adequate financing is unavailable or is unavailable on acceptable terms, we may be unable to maintain, develop or enhance our operations, including the opening of new stores, or the introduction of new products and services, to take advantage of future opportunities or respond to competitive pressures.

          Failure to adequately maintain the security of our electronic and other confidential information could materially adversely affect our financial condition and results of operations

      We are dependent upon automated information technology processes. Any failure to maintain the security of our data and our employees’ and customers’ confidential information, including via the penetration of our network security and the misappropriation of confidential information, could put us at a competitive disadvantage, result in deterioration in our employees’ and customers’ confidence in us, and thus have a material adverse impact on our business, financial condition and results of operations.

Failure to comply with various regulations may result in damage to our business

      Our policies and procedures are designed to comply with all applicable laws and regulations, including those imposed by the SEC and NYSE. With recent high profile business failures on accounting-related issues, additional legal and regulatory requirements such as the Sarbanes-Oxley Act have increased the complexity of the regulatory environment. Also, various aspects of our operations are subject to federal, state, local and foreign laws, rules and regulations, any of which may change from time to time. Additionally, we are regularly

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involved in various litigation matters that arise in the ordinary course of our business, including liability claims and allegations that we have infringed on third-party intellectual property rights.

      Litigation or regulatory developments could adversely affect our business operations and financial performance. Also, failure to comply with the various regulations may result in damage to our reputation, civil and criminal liability, fines and penalties, increased cost of regulatory compliance, and restatements of financial statements.

Other Factors

      The foregoing list of risk factors is not all inclusive. Other factors and unanticipated events could adversely affect our business. We do not undertake to revise or update these risks to reflect events or circumstances that occur after the date of this report.

Item 1B. Unresolved Staff Comments.

      None.

Item 2.  Properties

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

      We also operate 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.

      We opened our third Company-owned distribution center in April 2006. This 705,000 square foot facility is located on a 105-acre site in Opelika, Alabama.

      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 to 15 years and renewal options generally ranging from 5 to 20 years. Certain store leases contain escalation clauses and contingent rents based on a percent of net sales in excess of defined minimums. During the fiscal year ended January 28, 2006 we incurred $163.6 million of rental expense, including common area maintenance, taxes and insurance for store locations. As we pursue our transformation plan to replace traditional stores with superstores over time, we have been able to build flexibility by reducing the outstanding term of existing traditional store leases through splitting of renewal options or negotiating short-term renewals. Despite closing almost 280 stores over the last five years, as of January 28, 2006, we were only paying rent on 13 closed store locations where we have been unable to reach an early lease termination settlement with the landlord or sublease the property.

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      As of January 28, 2006, the current terms of our store leases, assuming we exercise all lease renewal options, were as follows:

		Number of
Fiscal Year Lease Terms Expire		Store Leases
Month-to-month			35
2007			66
2008			52
2009			30
2010			10
2011			39
Thereafter			651
	Total		883

Item 3.  Legal Proceedings

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

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

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

Executive Officers of the Registrant

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

      During fiscal 2006 a number of executive officers left the company. On November 21, 2005, we announced that we were separating the role of chairman from that of president and chief executive officer and commenced a search for a president and chief executive officer. On February 28, 2006, we announced that in order to attract a broader pool of experienced candidates the new president and chief executive officer would also assume the chairman position and that our current chairman, president and chief executive officer, Alan Rosskamm, will step down from these positions and become an outside director upon the naming of his successor. An executive search firm has been retained and is conducting the search for a chairman, president and chief executive officer. Following the appointment of a chief executive officer, we expect to complete searches for a chief financial officer and head merchant.

      Our executive officers are as follows:

Name	Age		Position
Alan Rosskamm		56	Chairman of the Board, President and Chief Executive Officer
David Holmberg		47	Executive Vice President, Operations

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

      David Holmberg has been Executive Vice President, Operations of our Company since November 2004. Prior to joining our Company, he was President of Cole License Businesses of Cole National Corporation, a retailer of eyewear and optometry services, from April 2001 to October 2004. Prior to that, he spent seven years with Zale Corporation, a specialty retailer of fine jewelry, advancing to President of Zale Canada Co. in 1999.

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PART II

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

      The Company’s common shares are traded on the New York Stock Exchange under the ticker symbol “JAS.” As of March 31, 2006, there were 744 common shareholders of record. The closing price of the shares on March 31, 2006 was $13.46.

      The quarterly high and low closing stock prices for fiscal 2006 and 2005 are presented in the table below:

	Common Shares
	High		Low
Fiscal 2006:
January 28, 2006	$	15.76	$	10.98
October 29, 2005		28.00		14.01
July 30, 2005		28.80		24.02
April 30, 2005		30.69		25.02
Fiscal 2005:
January 29, 2005	$	28.81	$	24.21
October 30, 2004		28.78		23.36
July 31, 2004		29.87		23.87
May 1, 2004		30.49		23.40

      The Company did not pay cash dividends on its common stock during fiscal 2006 and fiscal 2005. The Company’s dividend policy has been to retain earnings for operations and reinvestment into 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 the Company’s equity compensation plans.

	Purchases of Equity Securities by Jo-Ann Stores, Inc.
					Total Number of		Maximum Number of
					Shares Purchased as		Shares That May yet
	Total Number		Average		Part of Publicly		Be Purchased Under
	of Shares		Price Paid		Announced Plans or		the Plans or
	Purchased		per Share		Programs		Programs
October 30 – November 26, 2005		46	$	14.56		896,255		1,253,745
November 27 – December 31, 2005		2,382	$	12.25		898,637		1,251,363
January 1 – 28, 2006		—		—		898,637		1,251,363
Total		2,428	$	12.29		898,637		1,251,363

      In December 1998, the Company’s Board of Directors authorized a discretionary program that allowed the Company to buy back 2,150,000 common shares. That program does not have a stated expiration date. In the table above, the total number of shares purchased represents shares repurchased directly from the market, as well as shares repurchased from employees related to the lapse of restricted shares and exercise of employee stock options which were provided to the Company to satisfy related tax withholding requirements.

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Item 6.  Selected Financial Data

      The following table presents the Company’s selected financial data for each of the five years ending January 28, 2006. The selected financial data for fiscal years 2006, 2005, 2004 and 2003 was derived from the audited financial statements and should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” the consolidated financial statements and notes thereto. The Company reclassified certain amounts in the financial statements for the four years ending January 29, 2005 to conform to the current year presentation.

		Fiscal Year-Ended (a)
		January 28,			January 29,			January 31,			February 1,			February 2,
		2006			2005			2004			2003			2002 (1)
														(Unaudited)
		(Dollars in millions, except per share data)
Operating Results:
Net sales		$	1,882.8		$	1,812.4		$	1,734.1		$	1,682.0		$	1,570.3
	Total net sales percentage increase		3.9	%		4.5	%		3.1	%		7.1	%		5.9	%
	Same-store sales percentage (decrease) increase (b)		(0.8	)%		3.2	%		3.6	%		8.4	%		5.9	%
Gross margin			859.2			862.1			810.6			777.5			693.1
Selling, general and administrative expenses (c),(d)			797.4			727.0			684.5			639.7			644.2
Depreciation and amortization			42.2			43.0			39.0			37.9			40.6
Debt repurchase and share reclassification expenses (e)			—			4.2			5.5			1.9			1.0
Goodwill impairment			27.1			—			—			—			—
Operating (loss) profit			(7.5	)		87.9			81.6			98.0			7.3
	Operating (loss) profit as a percent of net sales		(0.4	)%		4.8	%		4.7	%		5.8	%		0.5	%
Interest expense			12.8			13.7			16.5			24.7			31.4
Net (loss) income		$	(23.0	)	$	46.2		$	40.1		$	45.4		$	(14.9	)
Net (loss) income as a percent of net sales			(1.2	)%		2.5	%		2.3	%		2.7	%		(0.9	)%
Per Share Data (f):
Net (loss) income — diluted		$	(1.01	)	$	2.02		$	1.82		$	2.10		$	(0.75	)
Average shares outstanding — diluted (000’s)			22,716			22,887			22,003			21,632			19,888
Financial Position:
Cash and cash equivalents		$	17.9		$	79.6		$	17.4		$	63.2		$	21.1
Inventories			514.7			439.7			404.6			363.1			369.0
Inventory turnover			2.1	x		2.3	x		2.4	x		2.5	x		2.1	x
Current assets			605.8			562.9			467.4			468.6			435.4
Property, equipment and leasehold improvements, net			331.7			238.0			218.4			203.2			224.6
Total assets			946.8			839.3			719.8			714.3			705.4
Current liabilities			240.7			258.8			198.2			205.8			205.4
Long-term debt			203.7			100.0			113.7			162.9			223.7
Shareholders’ equity			399.4			408.9			340.8			285.0			227.8
Long-term debt to total capitalization			33.8	%		19.7	%		25.0	%		36.4	%		49.5	%
Long-term debt to total capitalization, net of cash			31.7	%		4.8	%		22.0	%		25.9	%		47.1	%
Per Share Data (f):
Book value (g)		$	17.09		$	18.10		$	15.61		$	13.52		$	11.33
Shares outstanding, net of treasury shares (000’s)			23,375			22,585			21,828			21,079			20,106

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Item 6.  Selected Financial Data (Continued)

		Fiscal Year-Ended (a)
		January 28,		January 29,		January 31,		February 1,		February 2,
		2006		2005		2004		2003		2002 (1)
										(Unaudited)
		(Dollars in millions, except per share data)
Other Financial Information:
Capital expenditures:
	Cash	$	118.9	$	58.2	$	52.2	$	22.7	$	66.5
	Cash — landlord reimbursement (h)		23.9		8.9		5.4		0.5		3.2
	Total capital expenditures	$	142.8	$	67.1	$	57.6	$	23.2	$	69.7
Store Count:
Traditional stores			684		737		806		847		889
Superstores			154		114		86		72		70
Total			838		851		892		919		959
Store Square Footage (000’s) (i)
Traditional stores			10,023		10,721		11,646		12,165		12,684
Superstores			6,175		4,732		3,731		3,270		3,213
Total			16,198		15,453		15,377		15,435		15,897

(1)	The consolidated financial statements of the Company as of February 2, 2002 and for the year then ended were audited by auditors who have ceased operations. The report by the prior auditors should not be relied upon. See the discussion included in the prior year Form 10-K.
(a)	All years include 52 weeks.
(b)	Same-store sales are defined as net sales from stores that have been open one year or more. Net sales are included in the same-store sales calculation on the first day of the first month following the one-year anniversary of a store’s opening. In conjunction with the expansion or relocation of the Company stores, the net sales results from these stores are excluded in the same-store sales calculation until the first day of the first month following the one-year anniversary of its expansion or relocation. Further, in a 53-week year, net sales are compared to the comparable 53 weeks of the prior period.
(c)	Includes store pre-opening and closing costs which the Company reports separately in its consolidated statements of operations. See the consolidated financial statements and accompanying notes to consolidated financial statements included elsewhere in this Annual Report on Form 10-K.
(d)	Includes stock-based compensation expense which includes the expensing of stock options under Statement of Financial Accounting Standards (“SFAS”) No. 123, “Accounting for Stock-Based Compensation Expense,” which the Company adopted in the first quarter of fiscal 2004, and the amortization of the fair value of restricted stock granted to employees. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Note 7 — Stock-Based Compensation” contained in the notes to consolidated financial statements.
(e)	Debt repurchase and share reclassification expenses include expenses related to the early extinguishment of debt and costs associated with the share reclassification. See “Notes 5 — Financing and 12 — Share Reclassification” contained in the notes to consolidated financial statements.

^(f)  Shares outstanding, as well as average basic and diluted shares outstanding used to calculate earnings per share, reflect the impact of the increased shares outstanding as a result of the share reclassification that was approved by shareholders on November 4, 2003. Per share data reflects the impact of this share reclassification.

(g)	Book value is calculated by dividing shareholders’ equity by shares outstanding, net of treasury shares.
(h)	Capital expenditures reimbursed by the landlord represent the cost of assets acquired through the utilization of landlord lease incentives.

⁽ⁱ⁾  Total store square footage includes selling floor space and inventory storage areas.

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Item 7.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

      This discussion provides the reader with information that will assist in an overall understanding of our financial statements, changes in certain key indicators in those financial statements from year to year, the factors that account for those changes and how certain accounting principles have impacted our financial statements. This 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. In addition, the financial information presented for years prior to fiscal 2006 have been reclassified for certain amounts to conform to the current year presentation.

Overview

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

      We continue to transition our store base by replacing our existing traditional stores with superstores. During 2007 we expect to open 26 stores, 21 of which will be new superstore openings, compared with 40 superstore openings during fiscal 2006. Our research has demonstrated that our customers have a better perception of the quality and pricing of our products when they are presented in our superstore format. We believe that our prototype 35,000 square foot superstore gives us a competitive advantage in the industry. Our superstores provide a unique shopping experience by offering a full creative selection — sewing, crafting, framing, seasonal, floral and home décor accessories — all under one roof. On average, we close 1.1 traditional stores for every superstore that we open. Our superstores typically average over three times the revenues of the traditional stores they replace. In markets where we have opened multiple superstores, we have grown our revenues significantly and, we believe, expanded the market size and our market share.

      As of January 28, 2006, we operated 838 stores in 47 states (684 traditional stores and 154 superstores). Our traditional stores offer a complete selection of fabric and a convenience assortment of crafts, floral, finished seasonal and home décor merchandise. Our traditional stores average 14,650 square feet and generated net sales per store of approximately $1.6 million in fiscal 2006. Our superstores offer an expanded and more comprehensive product assortment than our traditional stores. Our superstores also offer custom framing and educational programs that our traditional stores do not. Our superstores that opened prior to fiscal 2003 average approximately 45,000 square feet and generated net sales per store of approximately $6.3 million in fiscal 2006. Our current superstore prototype is approximately 35,000 square feet. We opened 40 of these prototype superstores in fiscal 2006 and we currently have 83 of the prototype superstores in operation as of January 28, 2006. Forty-three of the prototype superstores have been open at least one year and averaged $5.0 million in net sales in fiscal 2006.

      We review and manage to a number of key indicators in evaluating financial performance, the most significant of which are:

•  Net sales, including same-store sales by our two store formats, traditional stores and superstores. Net sales measure our overall sales growth and same-store sales measure whether our existing stores continue to grow their sales volume. We also closely monitor per transaction average ticket value and customer transactions, both in total and by store format. These indicators help measure our effectiveness in attracting customers into our stores and the effectiveness of our product assortment, promotions and service on sales. We also measure our sales per square foot performance in both of our store formats and compare them with our immediate competitors.

•  Gross margin rate to sales. In addition, gross margin return on investment (“GMROI”) is used by our merchandising organization to evaluate the gross margin performance relative to the average inventory investment. Merchandise selection and future decisions are, in part, based on the GMROI performance.

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•  Selling, general and administrative expense as a rate to sales. We also compare operating margins to those of our competitors.

•  Inventory turnover. We closely monitor our inventory investment, which is our single largest invested asset. Increasing inventory turnover is critical to improving our working capital position and improving our overall GMROI.

•  Debt to total capitalization. We monitor our debt balances and leverage as a percent of total capitalization. We also monitor current and projected excess availability, as defined under our senior bank credit facility, in order to ensure that adequate flexibility is available to execute our operating plans.

Executive Overview of Fiscal 2006

      Fiscal 2006 was a challenging year compared with the prior year, as the retail environment experienced softness throughout the year. The primary source of our softness was the home decorating portions of our business, such as finished seasonal, floral and home décor merchandise, as well as home decorating textiles. The quilting and apparel fabrics portions of our business have softened as well, particularly in the third and fourth quarters. Our sales performance for the year was extremely disappointing, and occurred despite an increased level of marketing events and advertising, as well as more aggressive promotional pricing. Summarized below are key performance statistics, by quarter, which indicate the business performance deterioration as the year progressed.

	Qtr 1			Qtr 2			Qtr 3			Qtr 4			Total
Net sales	$	420.7		$	383.8		$	474.2		$	604.1		$	1,882.8
Same-store sales percent change		0.6	%		(0.5	)%		0.7	%		(3.0	)%		(0.8	)%
Gross margin	$	204.8		$	184.8		$	216.3		$	253.3		$	859.2
Gross margin percent		48.7	%		48.2	%		45.6	%		41.9	%		45.6	%
Gross margin basis point change from prior year		(40	)		(80	)		(220	)		(350	)		(200	)
Selling, general and administrative expenses	$	180.6		$	176.4		$	199.0		$	218.0		$	774.0
SG&A percent to sales		42.9	%		46.0	%		42.0	%		36.1	%		41.1	%
SG&A basis point change from prior year		170			230			140			250			190

      An overview of our fiscal 2006 performance follows:

•  Net sales increased 3.9 percent to $1.883 billion due to the impact of new superstore openings. Net sales from stores open one year or more (“same-store sales”) decreased 0.8 percent versus a 3.2 percent same-store sales increase for last year. Our average ticket increased 1.5 percent for fiscal 2006, but was more than offset by a decline in customer transactions.

•  Our gross margin rate, as a percentage of sales, declined by 200 basis points, to 45.6 percent of net sales in fiscal 2006 versus 47.6 percent for fiscal 2005. Gross margin rate deterioration has occurred across all product categories in our business and was more significant during the third and fourth quarters. This is due to a more price-focused environment, an increased level of coupon-assisted sales, and an increased level of promotional and clearance activity compared to a year ago, in an effort to sell-through excess inventories.

•  Our selling, general and administrative expenses (“SG&A”) as a percentage of sales, excluding those expenses separately identified in the statement of operations, increased 190 basis points from 39.2 percent last year to 41.1 percent this year. The reduced leverage stemmed from essentially flat same-store sales performance, coupled with higher advertising spending, logistics costs, and increases in store expenses, primarily caused by the fixed costs related to the year-over-year increase in the superstore base, as well as normal inflationary increases in operating expenses.

SG&A includes stock-based compensation expense of $2.8 million in fiscal 2006, compared with $7.7 million in the prior year. The reduced expense is attributable to a reduced expectation regarding

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the level of performance-based shares that may be earned under the restricted stock program, based on our operating performance, resulting in the reversal of performance-based expense that had been previously recorded. In addition, stock-based compensation was credited for expense that had been recognized related to unvested stock awards for executives who left our Company.

•  Store pre-opening and closing costs increased $4.9 million to $23.4 million in fiscal 2006, due to the increased level of real estate activity year-over-year.

•  During the fourth quarter, we recorded a charge of $27.1 million to write-off the balance of goodwill that we had carried on our books related to a previous acquisition. During the fourth quarter of fiscal 2006, we conducted our annual impairment testing. As a result of the evaluation, we determined that the carrying amount of the goodwill exceeded its implied fair value and that a full impairment of goodwill existed. This impairment conclusion was reached considering our market capitalization, declining business trends in our industry, deteriorating performance, particularly in our seasonally significant fourth quarter, and our assessment of the Company’s near-term future performance.

•  Net loss for the year was $23.0 million, or $1.01 loss per diluted share, compared with net income of $46.2 million, or $2.02 per diluted share in fiscal 2005. As described above, results for fiscal 2006 include a non-cash and non-tax deductible charge of $27.1 million for goodwill impairment. Results for fiscal 2005 include debt repurchase costs which reduced pre-tax income by $4.2 million.

      During fiscal year 2006 we opened 40 of our 35,000 square foot prototype superstores and four traditional stores. We closed 57 traditional stores during fiscal 2006.

Recent Developments and Business Update

      During fiscal 2006 a number of executive officers left our company. On November 21, 2005, we announced that we were separating the role of chairman from that of president and chief executive officer and commenced a search for a president and chief executive officer. On February 28, 2006, we announced that in order to attract a broader pool of experienced candidates the new president and chief executive officer would also assume the chairman position and that our current chairman, president and chief executive officer, Alan Rosskamm, will step down from these positions and become an outside director upon the naming of his successor. An executive search firm has been retained and is conducting the search for a chairman, president and chief executive officer. Following the appointment of a chief executive officer, we expect to complete searches for a chief financial officer and head merchant.

      We expect fiscal 2007 to be a year of transition as we implement our Repair Plan initiatives described below. We anticipate a challenging first half of the year, but we expect to be positioned for substantial improvement in our operational and financial performance in the second half of the year, as a result of the execution of our Repair Plan initiatives and significant merchandise assortment changes in our superstores. We believe that the execution of the Repair Plan will enable us to finish the year as a stronger, more disciplined organization with a much improved inventory position and lower outstanding debt balances.

      Each of the major Repair Plan initiatives is addressed below.

•  Inventory reduction. We are aggressively promoting clearance merchandise and those categories where we are carrying excess inventory. We also have taken steps to reduce the number of weeks of supply on-hand of many of our basic product categories, and are reducing purchase commitments for fiscal 2007.

•  Adjustment of store merchandise assortments. We expect to reduce space and inventory investment in under-performing categories such as finished seasonal and home décor, while emphasizing better performing product categories, such as craft components.

•  Gross margin rate restoration. We expect to improve our overall advertising and marketing effectiveness, be more discrete with coupons, and take steps to reduce clearance through tighter purchasing disciplines. We also anticipate being more disciplined by eliminating excessive in-season promotional discounts.

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•  Selling, general and administrative expense reduction. We are aggressively reviewing all areas of our business for opportunities to reduce and control expenses. The following are the major expense reduction and control opportunities.

• Advertising spending. Our fiscal 2007 budget is comparable to fiscal 2006. Increased costs per advertising event, driven by our increased number of superstore markets, will be offset by a reduced number of advertising events.

• Distribution center costs. Completion of our new distribution center in Opelika, Alabama, which began operations in April 2006, will improve efficiencies in the distribution and logistics network starting in the second-half of the year. Inventory purchases are being significantly reduced, inventory flow will be managed closer to need, and the addition of the third distribution center will reduce freight costs. We also expect to reduce outside storage costs and associated logistics inefficiencies as we sell-through excess inventory.

• Workforce reduction. In mid-January 2006, we completed a workforce reduction of certain administrative personnel. A total of 75 positions were eliminated, consisting of terminations and eliminations of positions that we will not fill. In addition, we are aggressively challenging positions as employees leave the Company, and have identified additional positions that will not be filled.

      On February 23, 2006, we completed an amendment of our senior bank credit facility (the “Credit Facility”). We increased the Credit Facility from $350 million to $425 million. The term of the Credit Facility remains unchanged, extending through April 2009. The amendment, among other things, also improved advance rates on inventory during peak borrowing periods and modified the consolidated net worth covenant. The amendment is discussed further below under “Liquidity and Capital Resources.”

Results of Operations

      The following table sets forth the financial information through operating (loss) 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.

		Fiscal Year-Ended
		Jan 28, 2006			Jan 29, 2005			Jan 31, 2004
Net sales			100.0	%		100.0	%		100.0	%
Gross margin			45.6	%		47.6	%		46.7	%
Selling, general and administrative expenses			41.1	%		39.2	%		38.7	%
Store pre-opening and closing costs			1.2	%		1.0	%		0.8	%
Depreciation and amortization			2.3	%		2.4	%		2.2	%
Debt repurchase and share reclassification expenses			—			0.2	%		0.3	%
Goodwill impairment			1.4	%		—			—
	Operating (loss) profit		(0.4	)%		4.8	%		4.7	%

Comparison of Fiscal 2006 to Fiscal 2005

      Net sales. Net sales for fiscal 2006 increased 3.9 percent to $1.883 billion from $1.812 billion in the prior year. Same-store sales decreased 0.8 percent compared with a same-store sales increase of 3.2 percent for fiscal 2005. We operated fewer stores in fiscal 2006 versus a year ago. Our total store count at the end of the year was down 13 stores; however, the number of superstores in operation increased to 154 from 114 in fiscal 2005. Total store square footage increased from 15.453 million square feet at the end of fiscal 2005, to 16.198 million square feet at the end of fiscal 2006. Superstores accounted for approximately 41 percent of total net sales during fiscal 2006 compared with approximately 33 percent of total net sales for fiscal 2005.

      By store format, our same-store sales performance for traditional stores decreased 0.9 percent versus a same-store sales increase of 3.5 percent for fiscal 2005. Same-store sales for superstores decreased

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0.4 percent versus a same-store sales increase of 2.6 percent for the prior year. In both store formats, lower customer transactions were the driver of the sales decline, offset slightly by a higher average ticket.

      During the fourth quarter of fiscal 2006, we recognized $3.2 million of pre-tax income related to gift card breakage, which is included in net sales. This gift card breakage was determined based on the historical redemption patterns of our gift cards and represents the remaining balance of our liability for gift cards for which the likelihood of redemption by the customer is remote. The fourth quarter of fiscal year 2006 was the first period in which we recognized gift card breakage using this methodology which resulted in an adjustment for breakage income related to gift cards sold since fiscal 2002. We expect gift card breakage income to be less than $1 million for fiscal 2007.

      On a category basis, our hardlines business, defined as all of our non-sewing categories, represented 44 percent of our fiscal 2006 sales volume. The combined hardline categories increased 1.8 percent on a same-store sales basis. Within hardlines, our core craft categories continued to generate solid same-store sales increases. Key craft categories generating this growth were paper crafting, yarn, jewelry and kids’ crafts. However, the paper crafting and yarn categories rate of growth declined significantly during the fourth quarter. Tempering some of the growth in hardlines was the performance of our finished seasonal, home accents and floral categories. These categories were down approximately 4 percent on a same-store sales basis.

      Our softlines business, or sewing related categories, represented 56 percent of our fiscal 2006 sales volume, and decreased 3 percent on a same-store sales basis. The softness in this area was concentrated in home decorating textiles, although quilting and apparel fabrics have also softened, particularly in the third and fourth quarters.

      Gross margin. Gross margins may not be comparable to those of our competitors and other retailers. Some retailers include all of the costs related to their distribution network in cost of sales, while we exclude a portion of them from gross margin, including those costs instead within SG&A. As a percent of net sales, gross margin was 45.6 percent for fiscal 2006 compared with 47.6 percent in the prior year, an overall decrease of 200 basis points. The decrease is attributable to a more price-focused industry environment, our decision to price more promotionally to reduce inventory, an increased level of coupon related sales and higher markdowns related to clearance activity in the categories that have continued to perform poorly. Our gross margin rate deterioration has been experienced across all product categories in our business, and accelerated significantly in the third and fourth quarters.

      Selling, general and administrative expenses. SG&A expenses include store and administrative payroll, employee benefits, stock-based compensation, distribution costs, store occupancy costs, advertising expenses and administrative expenses. SG&A expenses, excluding other expenses separately identified in the statement of operations, were $774.0 million for fiscal 2006 versus $708.5 million in the prior year. As a percentage of net sales, SG&A expenses increased to 41.1 percent versus 39.2 percent for fiscal 2006. The loss of expense leverage for the year stemmed from the negative same-store sales performance, coupled with higher advertising spending, logistics costs and increases in store expenses, primarily caused by the fixed costs related to the year-over-year increase in the superstore base, as well as normal inflationary increases in operating expenses.

      Stock-based compensation expense includes the expensing of stock options under Statement of Financial Accounting Standards (“SFAS”) No. 123, “Accounting for Stock-Based Compensation Expense” and the amortization of the value of restricted stock granted to employees. Stock-based compensation expense was $2.8 million in fiscal 2006, compared with $7.7 million in the prior year. The reduced expense is attributable to a reduced expectation, based on our operating performance, regarding the level of performance-based shares that may be earned under the restricted stock program resulting in the reversal of performance-based expense of $2.4 million that had been previously recognized. In addition, stock based compensation was credited for $1.4 million of expense related to unvested stock awards that had been previously recognized for those executives who left the Company during fiscal 2006.

      We are a class action participant in the $3.0 billion VISA/ MasterCard antitrust litigation settlement. In the third quarter of fiscal 2006, we recorded $1.5 million of income to SG&A for the estimated portion of the

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settlement that we expect to receive during the second quarter of fiscal 2007. We also recorded a charge to SG&A of approximately $2.2 million related to the departure of a senior executive officer and severance for other personnel whose positions were eliminated during fiscal 2006 as part of the Repair Plan.

      Depreciation and amortization. Depreciation and amortization expense decreased $0.8 million to $42.2 million in fiscal 2006 from $43.0 million in fiscal 2005. Increases driven by recent store growth were offset as our SAP enterprise-wide system became fully depreciated early in fiscal 2006.

      Store pre-opening and closing costs. Pre-opening costs are expensed as incurred. These costs include lease costs recognized prior to the store opening, hiring and training costs for new employees and processing of initial merchandise. Store closing costs consist of lease termination costs, lease costs for closed locations, loss on disposal of fixtures and equipment, severance for employees, third-party inventory liquidation costs and other costs incidental to store closings.

      Store pre-opening and closing costs increased $4.9 million to $23.4 million in fiscal 2006, due to the increased level of real estate activity year-over-year. Store pre-opening costs increased $3.4 million during fiscal 2006 to $13.0 million from $9.6 million in fiscal 2005. Store closing costs increased $1.5 million during fiscal 2006, to $10.4 million compared with $8.9 million in the prior year, although the year-over-year closings decreased from 72 to 57. During fiscal 2006, we opened 40 superstores and four traditional stores, and we closed 57 traditional stores.

      Goodwill impairment. The goodwill balance represented the excess of the purchase price and related costs over the fair value assigned to the net assets acquired from House of Fabrics, Inc. in fiscal 1999. At the beginning of the fourth quarter of fiscal 2006, we conducted the annual impairment testing required by SFAS No. 142, “Goodwill and Other Intangible Assets” for fiscal 2006. As a result of the evaluation, we determined that the carrying amount of the goodwill exceeded its implied fair value and that a full impairment of goodwill existed. This impairment conclusion was reached considering our market capitalization, declining business trends in our industry, our deteriorating performance, particularly in our seasonally significant fourth quarter, and our assessment of near-term future performance. In the fourth quarter of fiscal 2006, we recorded a non-cash and non-tax deductible charge of $27.1 million, which represented a write-off of the goodwill. This charge was reported as a separate line item in the statement of operations included in the consolidated financial statements.

      Operating (loss) profit. Operating loss was $7.5 million in fiscal 2006, compared with operating profit of $87.9 million for fiscal 2005.

      Interest expense. Interest expense for fiscal 2006 decreased $0.9 million to $12.8 million from $13.7 million in fiscal 2005. The decrease is attributable to lower average borrowing costs, in part due to the unfavorable impact of an interest rate swap we had in place last year, offset by higher debt levels. Our average debt levels were $183 million this fiscal year versus $160 million last year.

      Income taxes. Our effective income tax rate, before goodwill impairment, for fiscal 2006 increased to 39.7 percent from 37.7 percent in the prior year. The increase in the effective tax rate is based primarily on the mix of income from different state jurisdictions, which tax at different rates. Our effective rate is subject to change based on the mix of income from different state jurisdictions, which tax at different rates, as well as the change in status or outcome of uncertain tax positions. We evaluate our effective rate on a quarterly basis and update our estimate of the full-year effective rate as necessary.

Comparison of Fiscal 2005 to Fiscal 2004

      Net sales. Net sales for fiscal 2005 increased 4.5 percent to $1.812 billion from $1.734 billion in the prior year. Same-store sales increased 3.2 percent compared with a same-store sales increase of 3.6 percent for fiscal 2004. We operated fewer stores in fiscal 2005 versus the prior year. Our total store count at the end of fiscal 2005 was down 41 stores, or 4.6 percent from the prior year; however, the number of superstores in operation at the end of fiscal 2005 increased to 114 from 86 in fiscal 2004. Total store square footage increased slightly from fiscal 2004, to 15.453 million square feet at the end of fiscal 2005. Superstores accounted for approximately 33 percent of total net sales during fiscal 2005 compared with approximately 27 percent of total net sales for fiscal 2004.

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      By store format, our same-store sales performance for traditional stores increased 3.5 percent for fiscal 2005 versus a same-store sales increase of 3.7 percent in the prior year. Same-store sales for superstores increased 2.6 percent for fiscal 2005 versus a same-store sales increase of 3.1 percent for the prior year. In both store formats, we saw an increase in average ticket partially offset by a slight decline in customer transactions for the full fiscal year. Our strategy to be less promotional, which has benefited our realized selling margins, had a larger negative impact on superstore sales than traditional store sales because of our dual vehicle advertising strategy (direct mail and newspaper inserts) in superstores.

      By product category, the businesses that performed well during fiscal 2005 were our sewing and crafting categories, led by strong performances in the fleece, paper crafting and yarn businesses. Our sewing and crafting businesses, excluding home decorating textiles, represented 61 percent of our total year net sales, and were up approximately 6.6 percent on a same-store sales basis on improved margin rates. Product categories that are tied more closely to home décor experienced softness during fiscal 2005. Our home decorating textile category was down approximately 1.9 percent on a same-store sales basis for the year. Our toughest category of the business continued to be finished seasonal. Same-store sales of finished seasonal goods decreased approximately 8.3 percent.

      Gross margin. Gross margins may not be comparable to those of our competitors and other retailers. Some retailers include all of the costs related to their distribution network in cost of sales, while we exclude a portion of them from gross margin, including those costs instead within SG&A expenses. As a percent of net sales, gross margin was 47.6 percent for fiscal 2005 compared with 46.7 percent in the prior year, an overall increase of 90 basis points. Our strategy to be less promotional was successful in improving our realized selling margins. This strategy primarily benefited the selling margins in superstores, where we run multiple advertising vehicles. In addition, we were able to improve gross margins by improving our product sourcing opportunities.

      During the third quarter of fiscal 2005, we recorded a $1.7 million charge which was paid in the fourth quarter in connection with a voluntary “prior disclosure” made to U.S. Customs, which lowered our fiscal 2005 gross margin rate by 10 basis points. Over a five-year period encompassing fiscal years 2000 through 2004, we had inadvertently failed to adequately assess anti-dumping duty on certain candles imported from China. The failures resulted from certain products being inaccurately classified at the time of import.

      Selling, general and administrative expenses. SG&A expenses include store and administrative payroll, employee benefits, stock-based compensation, distribution costs, store occupancy costs, advertising expenses and administrative expenses. SG&A expenses, excluding other expenses separately identified in the statement of operations, were $708.5 million for fiscal 2005 versus $671.2 million in the prior year. As a percentage of net sales, SG&A expenses increased to 39.2 percent in fiscal 2005 versus 38.7 percent for the prior year with most of the increase for the full year attributable to increased advertising costs, distribution costs and higher administrative costs.

      Stock-based compensation expense includes the expensing of stock options under SFAS No. 123, “Accounting for Stock-Based Compensation Expense” and the amortization of the value of restricted stock granted to employees. Stock-based compensation expense was $7.7 million in fiscal 2005, compared with $6.4 million in the prior year.

      Depreciation and amortization. Depreciation and amortization expense increased $4.0 million to $43.0 million in fiscal 2005 from $39.0 million in fiscal 2004, due to the increased level of capital expenditures.

      Store pre-opening and closing costs. Pre-opening costs are expensed as incurred and relate to the costs incurred prior to a new store opening, which includes lease costs recognized prior to the store opening, hiring and training costs for new employees and processing of initial merchandise. Store closing costs consist of lease termination costs, lease costs for closed locations, loss on disposal of fixtures and equipment, severance for employees, third-party inventory liquidation costs and other costs incidental to store closings.

      Store pre-opening and closing costs increased $5.2 million to $18.5 million in fiscal 2005, due to the increased level of real estate activity year-over-year. Store pre-opening costs were flat between years. Store closing costs increased $5.2 million during fiscal 2005, to $8.9 million compared with $3.7 million in the

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prior year. As a percentage of sales, store pre-opening and closing costs for fiscal 2005 increased to 1.0 percent from 0.8 percent in the prior year. During fiscal 2005, we opened 29 superstores and two traditional stores, and we closed 72 traditional stores.

      Debt repurchase and share reclassification expenses. Debt repurchase and share reclassification expenses for fiscal 2005 were $4.2 million versus $5.5 million in the prior year. The fiscal 2005 expense represents the premium paid to repurchase $64.4 million of our 10.375 percent senior subordinated notes during the first quarter at an aggregate premium of 103.4 percent to par value and write-off of the related deferred financing costs.

      During fiscal 2004 we redeemed or repurchased approximately $58.5 million of our senior subordinated notes at an aggregate premium of 105.4 percent to par value, and we recorded a $4.3 million pre-tax charge for debt repurchase expenses including the cash premium paid to par value and the write-off of deferred finance charges and original issue discount. Share reclassification expenses associated with the reclassification of our former Class A and Class B common shares into a single class of common stock totaled $1.2 million in fiscal 2004.

      During the first quarter of fiscal 2005, we completed certain capital financing initiatives, which are discussed further below under “Liquidity and Capital Resources.”

      Operating profit. Operating profit was $87.9 million in fiscal 2005, compared with $81.6 million for fiscal 2004.

      Interest expense. Interest expense for fiscal 2005 decreased $2.8 million to $13.7 million from $16.5 million in fiscal 2004. The decrease is attributable to a decrease in our average debt levels between years, and a lower all-in borrowing rate. Our average debt levels were $160 million in fiscal year 2005 versus $174 million in the prior year.

      Income taxes. Our effective income tax rate for fiscal 2005 decreased to 37.7 percent from 38.4 percent in the prior year. The reduction in the effective tax rate is primarily based on an anticipated higher realization of certain jobs tax credits. Our effective rate is subject to change based on the mix of income from different state jurisdictions, which tax at different rates, as well as the change in status or outcome of uncertain tax positions. We evaluate our effective rate on a quarterly basis and update our estimate of the full-year effective rate as necessary.

Store Closing Charges

      As discussed in Note 1 — Significant Accounting Policies, we account for the costs of store closings in accordance with the provisions of SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities.” We account for asset impairment in accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” 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 of the end of fiscal 2006, we had only 15 stores where the store contribution was not cash flow positive. In addition, as of the end of fiscal 2006, we were paying rent on just 13 closed store locations where we had not yet obtained a sublease tenant or executed a lease termination.

      Expenses recorded related to store closings were $10.4 million, $8.9 million and $3.7 million in fiscal 2006, 2005 and 2004, respectively. These charges are included in the line item “Store pre-opening and closing costs” in the statements of operations included in the consolidated financial statements.

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      Summarized below is a reconciliation of the beginning and ending store closing reserve balances for the three fiscal years ended January 28, 2006:

		Non-
		cancelable
		Lease			Asset			Other
		Obligations			Impairments			Costs			Total
		(Dollars in millions)
Balance at February 1, 2003		$	3.5		$	—		$	0.9		$	4.4
Amounts charged to expense			(0.1	)		2.1			1.7			3.7
Utilization:
	Cash		(1.6	)		—			(1.3	)		(2.9	)
	Non-Cash		—			(2.1	)		(0.3	)		(2.4	)
Balance at January 31, 2004			1.8			—			1.0			2.8
Amounts charged to expense			1.4			2.5			5.0			8.9
Utilization:
	Cash		(2.7	)		—			(5.2	)		(7.9	)
	Non-Cash		—			(2.5	)		—			(2.5	)
Balance at January 29, 2005			0.5			—			0.8			1.3
Amounts charged to expense			2.3			3.7			4.4			10.4
Utilization:
	Cash		(2.5	)		—			(4.3	)		(6.8	)
	Non-Cash		(0.3	)		(3.7	)		—			(4.0	)
Balance at January 28, 2006		$	—		$	—		$	0.9		$	0.9

      Non-cancelable lease obligations are accounted for in accordance with SFAS No. 146, “Accounting for Costs Associated with Exit and or Disposal Activities” which requires certain lease costs to be expensed as incurred.

      Asset impairments include write-downs of store fixed assets to estimated fair value 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 third-party inventory liquidation and fixtures, signage and register removal.

Liquidity and Capital Resources

      Our capital requirements are primarily for capital expenditures in connection with new store openings, the construction of our third distribution center, other infrastructure investments, and working capital requirements for seasonal inventory builds and new store inventory purchases. Working capital requirements fluctuate during the year and reach their highest levels during the third fiscal quarter as we increase our inventory in preparation for our peak selling season during the months of September through December. These requirements are funded through a combination of internally generated cash flows from operations, credit extended by suppliers and borrowings under our credit facility.

      The following table provides cash flow related information for the three fiscal years ended January 28, 2006.

	2006			2005			2004
Net cash (used for) provided by operating activities	$	(31.5	)	$	141.9		$	51.7
Net cash used for investing activities		(142.8	)		(67.1	)		(51.1	)
Net cash provided by (used for) financing activities		112.6			(12.6	)		(46.4	)
Net (decrease) increase in cash and cash equivalents	$	(61.7	)	$	62.2		$	(45.8	)
Ending cash and cash equivalents	$	17.9		$	79.6		$	17.4

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Net Cash (Used For) Provided By Operating Activities

      Net cash used for operating activities was $31.5 million in fiscal 2006, compared with net cash provided of $141.9 million in fiscal 2005, a decrease of $173.4 million. The decrease was generated by changes in operating assets and liabilities, which in fiscal 2006 represented a $69.1 million use of cash versus a $35.8 million source of cash in fiscal 2005. Cash flows from operating activities, before changes in operating assets and liabilities, were $37.6 million in fiscal 2006 versus $106.1 million generated in fiscal 2005. The decrease in cash flows from operating activities, before changes in operating assets and liabilities, was caused primarily by our net loss in fiscal 2006.

      Inventories, net of payable support, were a net use of cash of $95.6 million in fiscal 2006, compared with a $10.1 million source of cash in fiscal 2005. Total inventories increased $75.0 million, or 17.1 percent year-over-year. Approximately 50 percent of this increase was in support of our store growth plans, with the remaining 50 percent representing increased inventory levels in same-stores and our distribution centers. Inventory levels in our traditional stores were up approximately 7 percent, on a same-store basis, and approximately 14 percent in our superstores. With respect to same-store inventory level increases, much of the increase was a result of increased levels of basic goods in support of certain merchandising initiatives and occurred primarily in yarn, paper crafting and fleece. The growth in those categories softened significantly in the third and fourth quarter, resulting in an excess inventory position. We are working on selling through this excess inventory as part of our Repair Plan initiative. See our earlier discussion under “Recent Developments and Business Update.” Inventory turns for fiscal 2006 were approximately 2.1 times, compared with 2.3 times in fiscal 2005 and 2.4 times in fiscal 2004.

      The total decrease in operating assets and liabilities in fiscal 2006 of $69.1 million benefited from the receipt of $23.9 million of landlord lease incentives, which we negotiate as we build-out certain new superstore locations. See the discussion under “Capital Expenditures” below.

      Net cash provided by operating activities was $141.9 million in fiscal 2005, compared with $51.7 million in fiscal 2004, an increase of $90.2 million. The increase was generated by changes in operating assets and liabilities, which in 2005 represented a $35.8 million source of cash versus a $49.0 million use of cash in 2004. Cash flows from operating activities, before changes in operating assets and liabilities, were $106.1 million in fiscal 2005 versus $100.7 million generated in fiscal 2004.

Net Cash Used For Investing Activities

      Net cash used for investing activities for fiscal 2006 totaled $142.8 million compared with $67.1 million used in fiscal 2005 and consisted entirely of capital expenditures for both years. Capital expenditures are discussed further below under the caption “Capital Expenditures.”

      Net cash used for investing activities in fiscal 2005 totaled $67.1 million compared with $51.1 million in fiscal 2004.

Capital Expenditures

      Capital expenditures estimated for fiscal 2007 and for the last three fiscal years consist of cash expenditures and cash expenditures reimbursed by the landlord. Capital expenditures primarily relate to the operation of the stores, including new store openings, distribution center construction, maintenance capital and information technology. We also incur capital outlays for distribution center equipment and other non-store capital investments. Landlord reimbursed capital expenditures represent the cost of assets acquired with landlord lease incentives. Capital expenditures are summarized as follows:

	2007
	Outlook		2006		2005		2004
Cash		$50-$55	$	118.9	$	58.2	$	52.2
Cash — landlord reimbursed		15		23.9		8.9		5.4
Total		$65-$70	$	142.8	$	67.1	$	57.6

      Capital expenditures for fiscal 2006 totaled $142.8 million. Store related expenditures, including our superstore openings, accounted for approximately 65 percent of total capital spending in fiscal 2006.

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Expenditures related to the construction of our new distribution center in Opelika, Alabama accounted for approximately 30 percent of total capital spending in fiscal 2006. During fiscal 2006, we opened 40 superstores and four traditional stores and closed 57 traditional stores. We have completed construction of the Opelika distribution center. The total capital cost of this project is estimated to be $48 to $50 million. The facility opened in April 2006. Capital spending on this project was $44 million for fiscal 2006.

      Capital expenditures for fiscal 2005 totaled $67.1 million. Store related expenditures, including our superstore openings, accounted for over 75 percent of total capital spending in fiscal 2005.

      Capital expenditures for fiscal 2004 totaled $57.6 million. Store related expenditures, including 19 new store openings, represented over 80 percent of the capital spending. During the year, we opened 16 superstores, converted four larger traditional stores to the superstore format and opened three larger traditional stores.

      We anticipate capital expenditures in fiscal 2007 of approximately $65 to $70 million. We plan to reduce the number of new store openings from 44 stores in fiscal 2006 to 26 stores (21 of which we expect will be superstores) in fiscal 2007, and defer other discretionary capital spending. Our capital spending plan, net of landlord lease incentives received, for fiscal 2007 is approximately $50 to $55 million.

Net Cash Provided By (Used For) Financing Activities

      Net cash provided by financing activities was $112.6 million in fiscal 2006 compared with net cash used for financing activities of $12.6 million during fiscal 2005. Long-term debt at the end of fiscal 2006 was $203.7 million and consisted of $103.7 million on our Credit Facility and $100.0 million of 7.5 percent senior subordinated notes (the “Notes”). Debt levels increased $103.7 million during fiscal 2006, compared with a net decrease of $13.7 million in the prior year, primarily due to increases in inventory and working capital requirements. In February 2006, we amended our Credit Facility primarily to increase the commitment from $350 million to $425 million. The amendment, among other things, also improved advance rates on inventory during peak borrowing periods and modified the consolidated net worth covenant. See “Sources of Liquidity” below for further discussion of the Credit Facility.

      Net cash used for financing activities was $12.6 million during fiscal 2005 compared with $46.4 million during fiscal 2004. Long-term debt at the end of fiscal 2005 was $100 million, our lowest year-end debt level in seven years. Debt levels decreased $13.7 million during fiscal 2005, compared with a net decrease of $49.2 million in the prior year. During the first quarter of fiscal 2005, we completed two capital financing initiatives. In February 2004, we issued $100 million of 7.5 percent Notes, which enabled us to repurchase the remaining $64.4 million of our 10.375 percent senior subordinated notes that were outstanding at the beginning of the year at an aggregate premium of 103.4 percent to par value. In April 2004, we amended our Credit Facility, extending the term until April 30, 2009 and reducing the commitment to $350 million. See “Sources of Liquidity” below for further discussion of these financing initiatives.

      As of January 28, 2006, we had the ability to borrow up to an additional $163 million under our Credit Facility.

      Net cash used for financing activities was $46.4 million during fiscal 2004 and primarily related to a $49.2 million decrease in debt borrowings resulting from cash generated by strong operating performance. During fiscal 2004, we redeemed or repurchased in the open market, approximately $58.5 million of our 10.375 percent senior subordinated notes at an aggregate premium of 105.4 percent to par value. These purchases were made utilizing excess cash on hand and borrowings under our Credit Facility.

Common Share Repurchases

      During fiscal 2006, we purchased 27,445 of our common shares at an aggregate price of $0.7 million, utilizing proceeds received from stock option exercises. As of January 28, 2006, 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.

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Sources of Liquidity

      We have three principal sources of liquidity: cash from operations, cash and cash equivalents on hand, and our Credit Facility.

      We believe that our Credit Facility, coupled with cash on hand and cash from operations, will be sufficient to cover our working capital, capital expenditure and debt service requirement needs for the foreseeable future.

      Our liquidity is based, in part, on our debt ratings. As of the end of fiscal 2006, our long-term unsecured debt was rated “B2” by Moody’s Investor Services and “B-” by Standard & Poor’s. Both Moody’s and Standard & Poor’s had us on a credit watch with a negative outlook. Standard and Poor’s lowered our unsecured debt rating in January from “B” to “B-,” and in April, from “B-” to “CCC,” and removed us from credit watch with a negative outlook. In February, Moody’s lowered our unsecured debt rating from “B2” to “B3,” maintaining the credit watch with a negative outlook. These downgrades are primarily due to the deterioration in our business performance over the past year, as well as the additional debt and lease leverage we have accumulated. In assessing our credit strength, both Moody’s and Standard & Poor’s consider our capital structure and financial policies, as well as our consolidated balance sheet and other financial information. Downgrades of our credit ratings would adversely impact, among other things, our future borrowing costs, access to capital markets and new store operating lease costs, although we anticipate no short-term effect under our current credit arrangements.

      Our current debt obligations as of the end of fiscal 2006 include $103.7 million in borrowings outstanding under our Credit Facility, and $100 million outstanding under our 7.5 percent senior subordinated notes.

      Senior Bank Credit Facility. Our Credit Facility is a $425 million revolver led by Bank of America Retail Finance, Inc. (formerly Fleet Retail Group, Inc.) that expires April 30, 2009. This facility’s most recent amendments are summarized below:

•  In February 2006, we amended the Credit Facility primarily to increase the commitment from $350 million to $425 million. The amendment, among other things, also improved advance rates on inventory during peak borrowing periods and modified the consolidated net worth covenant.

•  In April 2004, we extended the expiration date of the Credit Facility to April 30, 2009.

      The Credit Facility is secured by a first priority perfected security interest in our inventory, accounts receivable, property and other assets and is fully and unconditionally guaranteed by each of our wholly-owned subsidiaries. Interest on borrowings under the Credit Facility is calculated at the bank’s base rate or London Interbank Offered Rate (“LIBOR”) plus 1.25 percent to 2.00 percent, depending on the level of excess availability (as defined in the credit agreement) that is maintained. At the end of fiscal 2006, interest on our borrowings under the Credit Facility was both at the bank’s base rate and LIBOR plus 1.25 percent. The Credit Facility contains a sub-limit for letters of credit of $200 million. Deferred financing costs of $1.8 million, related to the unamortized portion of the deferred financing costs of the original financing, as well as the amendment fees, are being amortized over the term of the Credit Facility.

      As of January 28, 2006, we had borrowings outstanding of $103.7 million under the Credit Facility at an interest rate of 6.14 percent and $58.9 million in letters of credit outstanding.

      Our weighted average interest rate (including the impact of the $40 million interest rate swap that expired on April 30, 2005) and weighted average borrowings under the Credit Facility and prior senior bank credit facility were 5.8 percent and $83.2 million during fiscal 2006 and 6.7 percent and $57.3 million during fiscal 2005.

      The Credit Facility contains covenants that, among other things, restrict our ability to incur additional indebtedness or guarantee obligations, engage in mergers or consolidations, dispose of assets, make investments, acquisitions, loans or advances, engage in certain transactions with affiliates, conduct certain corporate activities, create liens, or change the nature of our business. We are restricted in our ability to prepay or modify the terms of other indebtedness, pay dividends and make other distributions when excess availability, as defined, falls below certain levels. Further, we are required to comply with a minimum

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consolidated net worth financial covenant if excess availability, as defined, is less than $35 million at any time. As of January 28, 2006, excess availability was $163.3 million, and at our peak borrowing level during fiscal 2006, the excess availability was $64.4 million. The Credit Facility also defines various events of default, including cross default provisions, defaults for any material judgments or a change in control. During fiscal 2006 we were in compliance with all covenants under the Credit Facility.

      Senior Subordinated Notes. On February 26, 2004, we issued $100 million 7.5 percent Notes due 2012. Interest on the Notes is payable on March 1 and September 1 of each year. Deferred debt costs recorded at issuance of $2.6 million are reflected in other long-term assets and are being amortized as interest expense over the term of the Notes utilizing the effective interest method. We have the option of redeeming the Notes at any time after March 1, 2008 in accordance with certain call provisions of the related Notes indenture. The Notes represent unsecured obligations that are subordinated to the Credit Facility and are fully and unconditionally guaranteed by each of our wholly-owned subsidiaries. Net proceeds from the fiscal 2005 placement of approximately $97.4 million were used to repurchase the balance of the 10.375 percent senior subordinated notes that remained outstanding and for general corporate purposes.

      The Notes indenture contains covenants that, among other things, restrict our ability to incur additional indebtedness, make restricted payments, engage in certain transactions with affiliates, create liens, sell assets, issue guarantees of and pledges securing indebtedness and require an offer to repurchase the Notes in the event of a change in control. The indenture defines various events of default, including cross default provisions and defaults for any material judgments. At January 28, 2006, we are in compliance with all covenants under the Notes indenture.

      Failure to comply with these restrictions and covenants could result in defaults under our Credit Facility and/or the Notes indenture. Any default, if not waived, could result in our debt becoming immediately due and payable.

      During fiscal 2005 and 2004, we purchased $64.4 million and $58.5 million, respectively, in face value of the 10.375 percent senior subordinated notes. The purchases were made at an aggregate premium of 103.4 percent and 105.4 percent, respectively, to par value. We recorded pre-tax charges of $4.2 million and $4.3 million, in fiscal years 2005 and 2004, respectively, primarily for the cash premium paid and the related write-off of applicable deferred debt costs. These charges are reflected in the debt repurchase and share reclassification expenses line item in the statement of operations.

Restricted Stock Program

      During fiscal 2005, we implemented changes in our long-term compensation for employees, which we believed would help us to attract and retain the best employees, and better align employee interests with those of our shareholders. A larger portion of annual grants to employees are now being made in restricted stock awards rather than stock options. The award of restricted stock offers employees the opportunity to earn shares of our stock over time, rather than options that provide employees the right to purchase stock at a set price. Stock options also continue to be awarded to new employees and employees who are promoted into certain management positions.

      In fiscal 2006 and 2005, the Compensation Committee of the Board of Directors approved an annual base award of restricted stock to certain of our employees that is intended to serve as a retention vehicle and is coupled with performance awards. The base and performance awards vest 50 percent at the end of three years, with the remaining 50 percent vesting at the end of the fourth year. The base award grants, which are time-based awards, amounted to approximately 166,000 restricted shares in fiscal 2006 and 205,000 restricted shares in fiscal 2005. The performance-based award provides the potential to receive generally up to three-times that amount in additional shares. The number of performance award shares ultimately received, if any, will depend on achieving certain earnings performance goals over the three-year time frame, which we currently do not believe can be achieved. The expense recognition for the value of restricted shares is based on the vesting period and an estimate regarding certain performance levels over the three-year measurement period. As of January 28, 2006, all stock-based compensation expense associated with performance-based awards, totaling $2.4 million, has been reversed due to our operating performance.

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      On November 18, 2005, the Compensation Committee of the Board of Directors approved a retention program which provided a guaranteed cash retention payment, in lieu of a bonus opportunity under the Management Incentive Plan, and awarded restricted stock and stock options under the 1998 Plan to key management employees. The restricted stock awards amounted to approximately 233,000 shares and will vest 50% on March 1, 2007 and 50% on March 1, 2008. The stock option awards amounted to approximately 390,000 shares and will vest 50% on March 1, 2009 and 50% on March 1, 2010.

Off-Balance Sheet Transactions

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

Contractual Obligations and Commitments

      The following table summarizes our future cash outflows resulting from contractual obligations and commitments as of January 28, 2006:

	Payments Due by Period (1)
			Less than						After
	Total		1 Year		1-3 Years		4-5 Years		5 Years
7.5 percent senior subordinated notes	$	100.0	$	—	$	—	$	—	$	100.0
7.5 percent senior subordinated notes interest(1)		48.8		7.5		22.5		15.0		3.8
Credit Facility — revolving facility		103.7		—		—		103.7		—
Letters of credit(2)		58.9		58.9		—		—		—
Operating leases		878.6		142.7		232.7		170.9		332.3
Total Contractual Cash Obligations	$	1,190.0	$	209.1	$	255.2	$	289.6	$	436.1

(1)

Interest is included as a contractual obligation on the 7.5 percent Notes only. The calculation of interest on the Credit Facility is dependent on the average borrowings during the year and a variable interest rate, which currently approximates 6.0 percent (set at 125 basis points over LIBOR). We did not include these amounts due to their subjectivity and estimation required. See “Liquidity and Capital Resources — Sources of Liquidity” for further discussion of the Credit Facility.

(2)

Includes commercial letters of credit of $32.9 million and $26.0 million of standby letters of credit.

Seasonality and Inflation

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

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

	Fiscal 2006												Fiscal 2005
	Qtr 1			Qtr 2			Qtr 3			Qtr 4			Qtr 1			Qtr 2			Qtr 3			Qtr 4
Net sales	$	420.7		$	383.8		$	474.2		$	604.1		$	404.9		$	371.0		$	448.3		$	588.2
Same-store sales percentage change		0.6	%		(0.5	)%		0.7	%		(3.0	)%		6.6	%		3.1	%		(0.9	)%		4.3	%
Gross margin	$	204.8		$	184.8		$	216.3		$	253.3		$	199.0		$	181.9		$	214.2		$	267.0
Gross margin percent to sales		48.7	%		48.2	%		45.6	%		41.9	%		49.1	%		49.0	%		47.8	%		45.4	%
Operating profit (loss)	$	8.8		$	(5.7	)	$	(1.7	)	$	(8.9	)	$	14.5		$	3.9		$	14.7		$	54.8
Operating profit (loss) percent to sales		2.1	%		(1.5	)%		(0.4	)%		(1.5	)%		3.6	%		1.1	%		3.3	%		9.3	%
Net income (loss)	$	4.2		$	(5.1	)	$	(4.1	)	$	(18.0	)	$	6.7		$	0.3		$	6.9		$	32.3
Inventories		446.4			574.0			654.1			514.7			420.1			508.4			530.2			439.7
Long-term debt		100.0			174.8			290.0			203.7			106.6			161.7			200.0			100.0

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

Critical Accounting Policies and Estimates

      Management strives to report the Company’s financial results in a clear and understandable manner. We follow generally accepted accounting principles in preparing our consolidated financial statements. These principles require us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, expenses and related disclosures of contingent assets and liabilities. We base our estimates on historical experience and on other assumptions that we believe to be relevant under the circumstances, the results of which form the basis for making judgments about carrying values of assets and liabilities that are not readily apparent from other sources. Actual results could differ from these estimates under different assumptions and/or conditions. We continually evaluate the information used to make these estimates as our business and the economic environment changes. The use of estimates is pervasive throughout our financial statements, but the accounting policies and estimates we consider most critical are as follows:

Inventory Valuation

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

      Our accrual for shrink is based on the actual historical shrink results of our recent store physical inventories. These estimates are compared to actual results as physical inventory counts are taken and reconciled to the general ledger. Substantially all of our store physical inventory counts are taken in the first three quarters of each year and the shrink accrual recorded at January 28, 2006 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 beyond our control, including changes in economic conditions and consumer buying trends.

Vendor Allowances

      All vendor consideration received, including cash discounts, volume discounts and co-operative advertising fees are included as a reduction of cost of sales. Cash discounts and volume discounts are

37

recognized in cost of sales when the related merchandise is sold. We recognize co-operative advertising fees under vendor agreements when the related merchandise is sold according to Emerging Issues Task Force Issue 02-16, “Accounting by a Customer (including a Reseller) for Certain Consideration Received from a Vendor,” and the execution of new or modifications of existing vendor agreements.

Gift Cards and Gift Card Breakage

      Proceeds from the sale of gift cards are recorded as a liability and recognized as net sales when redeemed by the holder. Gift card breakage represents the remaining balance of our liability for gift cards for which the likelihood of redemption by the customer is remote. This gift card breakage is determined based on the historical redemption patterns of gift cards. Beginning in fiscal 2006, we began to recognize gift card breakage as a component of net sales in the consolidated statement of operations. In the fourth quarter of fiscal 2006, we recognized $3.2 million of pre-tax income related to the recognition of gift card breakage. Fiscal 2006 was the first period in which we recognized gift card breakage under the redemption method which resulted in an adjustment for breakage income related to gift cards sold since fiscal 2002.

Valuation of Long-Lived Assets

      Long-lived assets and certain identifiable intangibles are 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 estimated net cash flows to be generated by those assets. If such assets are considered to be impaired, the impairment recognized is the amount by which the carrying amount of the assets exceeds the fair value of the assets.

      During the fourth quarter of fiscal 2006, we conducted the annual impairment testing required by SFAS No. 142, “Goodwill and Other Intangible Assets.” As a result of the evaluation, we determined that the carrying amount of our goodwill exceeded its implied fair value and that a full impairment of goodwill existed.

      During the fourth quarter of fiscal 2005 and 2004, we performed the required annual impairment tests of the carrying amount of goodwill and determined that no goodwill impairment existed.

      Under SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” 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. Assets to be disposed of are recorded at the lower of carrying value or estimated net realizable value. We conduct this review on an ongoing basis and record any required impairment charge. During the fourth quarter of fiscal 2006 and fiscal 2005, we performed impairment tests as required by SFAS No. 144. As a result of the evaluation, we recorded impairments of $3.0 million and $0.6 million, respectively, on assets of certain stores still in operation. There was no impairment recorded in fiscal 2004.

Store Closing Costs

      We account for store closing costs according to the requirements of 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.

Accrued Expenses

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

38

requirement materially different from the calculated accrual. Historically, such differences have not been significant.

Operating Leases

      Rent expense for our operating leases, which may have escalating rentals over the term of the lease, is recorded on a straight-line basis over the initial lease term and those renewal periods that are reasonably assured. The initial lease term includes the “build-out” period of our leases, where no rent payments are typically due under the terms of the lease. The difference between rent expense and rent paid is recorded as a deferred rent liability and is included in the consolidated balance sheets.

      Construction allowances and landlord incentives received from landlords are recorded as a deferred rent liability and amortized to rent expense over the initial term of the lease. Our statement of cash flows reflects the receipt of incentives as an increase in cash flows from operating activities.

Income Taxes

      We do business in various jurisdictions that impose income taxes. Management determines the aggregate amount of income tax expense to accrue and the amount currently payable based upon the tax statutes of each jurisdiction, pursuant to the asset and liability method. This process involves adjusting book income for items that are treated differently by the applicable taxing authorities. Deferred tax assets and liabilities are reflected on our balance sheet for temporary differences that will reverse in subsequent years. If different judgments had been made, our tax expense, assets and liabilities could have been different. Our current tax provision can be affected by our mix of income and identification or resolution of uncertain tax positions. Because income from different jurisdictions may be taxed at different rates, the shift in mix during a year or over years can cause the effective tax rate to change. We base our rate during the year on our best estimate of an annual effective rate, and update those estimates quarterly. We also regularly evaluate the status and likely outcome of uncertain tax positions.

      As a matter of course, we are regularly audited by federal and state tax authorities. We provide reserves for potential exposures when we consider it probable that a taxing authority may take a sustainable position on a matter contrary to our position. We evaluate these reserves, including interest thereon, on a quarterly basis to ensure that they have been appropriately adjusted for events, including audit settlements that may impact our ultimate payment for such exposures.

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.

Emerging Issues Task Force Issue 05-06: “Determining the Amortization Period for Leasehold Improvements”

      In June 2005, the Financial Accounting Standards Board’s (“FASB”) Emerging Issues Task Force (“EITF”) reached a consensus on Issue No. 05-06, “Determining the Amortization Period for Leasehold Improvements.” EITF 05-06 requires that leasehold improvements acquired in a business combination or purchased subsequent to the inception of a lease be amortized over the lesser of the useful life of the assets or a term that includes renewals that are reasonably assured at the date of the business combination or purchase. EITF 05-06 is effective for periods beginning after June 29, 2005. As this is consistent with our current policy, the adoption of EITF 05-06 did not have an impact on our consolidated financial statements.

FASB Interpretation No. 47, “Accounting for Contingent Asset Retirement Obligations”

      In March 2005, the FASB issued FASB Interpretation (“FIN”) No. 47, “Accounting for Conditional Asset Retirement Obligations.” FIN No. 47 provides guidance relating to the identification of and financial reporting for legal obligations to perform an asset retirement activity. The Interpretation requires recognition of a liability for the fair value of a conditional asset retirement obligation when incurred if the liability’s fair value can be reasonably estimated. FIN No. 47 also defines when an entity would have sufficient information to reasonably estimate the fair value of an asset retirement obligation. The provision is effective no later than

39

the end of fiscal years ending after December 15, 2005. The adoption of FIN No. 47 did not have a material impact on our consolidated financial statements.

Statement of Financial Accounting Standards No. 123 (Revised 2004), “Share-Based Payment”

      In December 2004, the FASB issued SFAS No. 123 (Revised 2004), “Share-Based Payment,” which is a revision of SFAS No. 123, “Accounting for Stock-Based Compensation.” SFAS No. 123R replaces SFAS No. 123, supersedes Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” and amends SFAS No. 95, “Statement of Cash Flows.” SFAS No. 123R requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements based on their fair values. SFAS No. 123R amends SFAS No. 95 to require that excess tax benefits be reported as a financing cash inflow rather than as a reduction of taxes paid.

      SFAS No. 123R was originally effective for public companies at the beginning of the first interim or annual period beginning after June 15, 2005. However, in April 2005, the Securities and Exchange Commission (“SEC”) announced the adoption of a new rule that amends the compliance dates for SFAS No. 123R. Accordingly, we will adopt SFAS No. 123R as of the beginning of our 2007 fiscal year which is January 29, 2006. We voluntarily adopted SFAS No. 123 at the beginning of fiscal 2004 and began expensing the fair value cost of stock awards in the statement of operations. Currently, we use the Black-Scholes option pricing model to estimate the fair value of stock options granted and are evaluating other option valuation models, including the Black-Scholes model, to determine which model we will utilize upon adoption of SFAS No. 123R. We plan to adopt SFAS No. 123R using the modified prospective method. We do not expect the adoption of SFAS No. 123R to have a material impact on our consolidated financial statements. In March 2005, the SEC issued Staff Accounting Bulletin No. 107, “Share Based Payments” (“SAB 107”) to provide public companies additional guidance in applying the provisions of SFAS No. 123R. Among other things, SAB 107 describes the SEC staff’s expectations in determining the assumptions that underlie the fair value estimates and discusses the interaction of SFAS No. 123R with certain existing SEC guidance.

FASB Staff Position FAS No. 123R-3, “Transition Election Related to Accounting for the Tax Effects of Share-Based Payment Awards”

      In November 2005, the FASB issued final FASB Staff Position (“FSP”) SFAS No. 123R-3, “Transition Election Related to Accounting for the Tax Effects of Share-Based Payment Awards.” The FSP provides an alternative method of calculating excess tax benefits (the APIC pool) from the method defined in SFAS No. 123R for share-based payments. A one-time election to adopt the transition method in this FSP is available to those entities adopting SFAS No. 123R using either the modified retrospective or modified prospective method. Up to one year from the initial adoption of SFAS No. 123R or effective date of the FSP is allowed to make this one-time election. However, until an entity makes its election, it must follow the guidance in SFAS No. 123R. FSP 123R-3 is effective upon initial adoption of SFAS No. 123R and will become effective for APIC the first quarter of fiscal 2007. We currently are evaluating the potential impact of calculating the APIC pool with this alternative method and have not determined which method we will adopt, nor the expected impact on our consolidated financial statements.

Cautionary Statement Concerning Forward-Looking Statements

      Certain statements contained in this report that are not historical facts are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements which reflect our 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, failure to manage new store growth and the store transition strategy, effective execution of the Repair Plan strategy, the availability of merchandise, changes in the competitive pricing for

40

products, the impact of competitors’ store openings and closings, longer-term unseasonable weather or wide spread severe weather, our inability to effectively manage our distribution network, our ability to recruit and retain highly qualified personnel, our ability to sell-through our inventory at acceptable prices, energy costs, increases in transportation costs, our indebtedness and limits on attaining additional financing, failure to maintain the security of our electronic and other confidential information, failure to comply with various laws and regulations, consumer confidence and debt levels, and other capital market and geo-political conditions. We caution readers not to place undue reliance on these forward-looking statements. We assume no obligation to update any of the forward-looking statements.

Item 7A.  Quantitative and Qualitative Disclosures About Market Risk

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

      We believe foreign currency exchange rate fluctuations do not contain significant market risk due to the nature of our relationships with our international vendors. All merchandise contracts are denominated in U.S. dollars and are subject to negotiation prior to our commitment for purchases. As a result, there is not a direct correlation between merchandise prices and fluctuations in the exchange rate. We sourced approximately one-third of our purchases internationally in fiscal 2006. Our international purchases are concentrated in China and other Asian countries.

      In the normal course of business, we employ established policies and procedures to manage our exposure to changes in interest rates. Our objective in managing the exposure to interest rate changes is to limit the volatility and impact of interest rate changes on earnings and cash flows. This is accomplished through the debt structure we set in place in early fiscal 2005, which consists of the fixed rate $100 million Notes and our variable rate Credit Facility, which is designed to be a working capital facility. We estimate that a one-percent increase or decrease in interest rates, based on fiscal 2006 average debt levels, would cause an increase or decrease to interest expense of $0.8 million.

      In the past, we also utilized interest rate swaps to achieve our objective of managing our exposure to interest rate changes. We utilized interest rate swaps to manage net exposure to interest rate changes related to our variable rate bank credit facilities. We had a $40.0 million interest rate swap with a fixed LIBOR of 6.72 percent that expired on April 30, 2005.

      In accordance with SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” we reviewed and designated our interest rate swap agreement as a cash flow hedge and recognized the fair value of our interest rate swap agreement on the balance sheet in accrued expenses. Changes in the fair value of this agreement is recorded in other comprehensive income (loss) and reclassified into earnings as the underlying hedged item affects earnings. During fiscal 2005 and fiscal 2004, unrealized after-tax net gains of $1.6 million and $1.0 million, respectively, were recorded in other comprehensive income (loss). The hedge ineffectiveness expense (income) for fiscal 2005 and 2004 was $0.4 million and $(0.7) million, respectively, and is reflected in interest expense.

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Item 8.  Financial Statements and Supplementary Data

Jo-Ann Stores, Inc.

Index to Consolidated Financial Statements

	Page
Report of Independent Registered Public Accounting Firm		43
Consolidated Balance Sheets as of January 28, 2006 and January 29, 2005		44
Consolidated Statements of Operations for each of the three fiscal years in the period ended January 28, 2006		45
Consolidated Statements of Cash Flows for each of the three fiscal years in the period ended January 28, 2006		46
Consolidated Statements of Shareholders’ Equity for each of the three fiscal years in the period ended January 28, 2006		47
Notes to Consolidated Financial Statements		48

42

Report of Independent Registered Public Accounting Firm

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. (the Company) as of January 28, 2006 and January 29, 2005, and the related consolidated statements of operations, cash flows, and shareholders’ equity for each of the three years in the period ended January 28, 2006. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

      We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (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 consolidated financial position of Jo-Ann Stores, Inc. at January 28, 2006 and January 29, 2005, and the consolidated results of its operations and its cash flows for each of the three years in the period ended January 28, 2006, in conformity with U.S. generally accepted accounting principles.

      We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of Jo-Ann Stores, Inc.’s internal control over financial reporting as of January 28, 2006, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 21, 2006 expressed an unqualified opinion thereon.

/s/ Ernst & Young LLP

Cleveland, Ohio

March 21, 2006

43

Jo-Ann Stores, Inc.

Consolidated Balance Sheets

		January 28,			January 29,
		2006			2005
		(Dollars in millions, except
		share and per share data)
Assets
Current assets:
	Cash and cash equivalents	$	17.9		$	79.6
	Inventories		514.7			439.7
	Deferred income taxes		38.0			21.3
	Prepaid expenses and other current assets		35.2			22.3
Total current assets			605.8			562.9
Property, equipment and leasehold improvements, net			331.7			238.0
Goodwill, net			—			27.1
Other assets			9.3			11.3
Total assets		$	946.8		$	839.3
Liabilities and Shareholders’ Equity
Current liabilities:
	Accounts payable	$	146.6		$	167.2
	Accrued expenses		94.1			91.6
Total current liabilities			240.7			258.8
Long-term debt			203.7			100.0
Deferred income taxes			23.2			27.6
Lease obligations and other long-term liabilities			79.8			44.0
Commitments and contingencies (Note 9)
Shareholders’ equity:
	Preferred stock, no par value, 5,000,000 shares authorized, none issued		—			—
	Common stock, stated value $0.05 per share; 150,000,000 authorized, issued 27,050,507 and 26,321,934, respectively		1.4			1.3
	Additional paid-in capital		165.4			151.8
	Retained earnings		276.6			299.6
			443.4			452.7
	Treasury stock, at cost, 3,675,439 shares and 3,737,407 shares, respectively		(44.0	)		(43.8	)
Total shareholders’ equity			399.4			408.9
Total liabilities and shareholders’ equity		$	946.8		$	839.3

See notes to consolidated financial statements

44

Jo-Ann Stores, Inc.

Consolidated Statements of Operations

		Fiscal Year-Ended
		January 28,			January 29,		January 31,
		2006			2005		2004
		(Dollars in millions,
		except earnings per share data)
Net sales		$	1,882.8		$	1,812.4	$	1,734.1
Cost of sales (exclusive of depreciation and amortization shown separately below)			1,023.6			950.3		923.5
	Gross margin		859.2			862.1		810.6
Selling, general and administrative expenses			774.0			708.5		671.2
Store pre-opening and closing costs			23.4			18.5		13.3
Depreciation and amortization			42.2			43.0		39.0
Debt repurchase and share reclassification expenses			—			4.2		5.5
Goodwill impairment			27.1			—		—
	Operating (loss) profit		(7.5	)		87.9		81.6
Interest expense, net			12.8			13.7		16.5
	(Loss) income before income taxes		(20.3	)		74.2		65.1
Income tax provision			2.7			28.0		25.0
Net (loss) income		$	(23.0	)	$	46.2	$	40.1
Basic net (loss) income per common share		$	(1.01	)	$	2.09	$	1.88
Diluted net (loss) income per common share		$	(1.01	)	$	2.02	$	1.82

See notes to consolidated financial statements

45

Jo-Ann Stores, Inc.

Consolidated Statements of Cash Flows

			Fiscal Year-Ended
			January 28,			January 29,			January 31,
			2006			2005			2004
			(Dollars in millions)
Net cash flows from operating activities:
	Net (loss) income		$	(23.0	)	$	46.2		$	40.1
	Adjustments to reconcile net (loss) income to net cash (used for) provided by operating activities:
		Depreciation and amortization		42.2			43.0			39.0
		Deferred income taxes		(21.1	)		(6.3	)		4.1
		Stock-based compensation expense		2.8			7.7			6.4
		Tax benefit on stock-based compensation plan awards		1.8			4.9			2.4
		Amortization of deferred financing costs		0.9			2.0			1.5
		Loss on disposal and impairment of fixed assets		6.9			4.4			2.9
		Loss associated with purchase of senior subordinated notes		—			4.2			4.3
		Goodwill impairment		27.1			—			—
	Changes in operating assets and liabilities:
		Increase in inventories		(75.0	)		(35.1	)		(41.5	)
		(Increase) decrease in prepaid expenses and other current assets		(12.9	)		1.2			(6.3	)
		(Decrease) increase in accounts payable		(20.6	)		45.2			(7.9	)
		Increase in accrued expenses		2.5			15.4			0.2
		Increase in lease obligations, net		34.8			8.9			4.7
		Increase in other long-term liabilities		1.0			0.9			0.2
		Other, net		1.1			(0.7	)		1.6
Net cash (used for) provided by operating activities				(31.5	)		141.9			51.7
Net cash flows used for investing activities:
	Capital expenditures			(142.8	)		(67.1	)		(57.6	)
	Proceeds from sale of equity investment			—			—			6.5
Net cash used for investing activities				(142.8	)		(67.1	)		(51.1	)
Net cash flows provided by (used for) financing activities:
	Proceeds from issuance of 7.5% senior subordinated notes, net			—			97.4			—
	Purchase of 103/8 % senior subordinated notes			—			(66.6	)		(61.7	)
	Net change in revolving credit facility			103.7			(49.3	)		9.3
	Proceeds from stock-based compensation plans			7.9			10.0			6.6
	Other, net			1.0			(4.1	)		(0.6	)
Net cash provided by (used for) financing activities				112.6			(12.6	)		(46.4	)
Net (decrease) increase in cash and cash equivalents				(61.7	)		62.2			(45.8	)
Cash and cash equivalents at beginning of year				79.6			17.4			63.2
Cash and cash equivalents at end of year			$	17.9		$	79.6		$	17.4
Supplemental disclosures of cash flow information:
	Cash paid during the year for:
		Interest	$	12.8		$	11.2		$	17.5
		Income taxes, net of refunds		26.9			23.6			8.0

See notes to consolidated financial statements

46

Jo-Ann Stores, Inc.

Consolidated Statements of Shareholders’ Equity

									Common										Accumulated
			Net						Stock		Additional								Other			Total
			Common			Treasury			Stated		Paid-In		Treasury			Retained			Comprehen-			Shareholders’
			Shares			Shares			Value		Capital		Stock			Earnings			sive Loss			Equity
			(Shares in thousands)						(Dollars in millions)
Balance, February 1, 2003				21,079			3,806		$	1.3	$	113.3	$	(40.4	)	$	213.3		$	(2.6	)	$	284.9
	Net income			—			—			—		—		—			40.1			—			40.1
	Change in fair value of derivatives, net of $0.6 million tax provision			—			—			—		—		—			—			1.0			1.0
		Total comprehensive income																					41.1
	Exercise of stock options			418			—			—		4.0		—			—			—			4.0
	Tax benefit on equity compensation			—			—			—		2.4		—			—			—			2.4
	Stock-based compensation			150			—			—		6.4		—			—			—			6.4
	Purchase of common stock			(75	)		75			—		—		(1.6	)		—			—			(1.6	)
	Issuance of treasury shares			106			(106	)		—		0.7		0.7			—			—			1.4
	Issuance of common stock — Associate Stock Ownership Plan			150			—			—		2.2		—			—			—			2.2
Balance, January 31, 2004				21,828			3,775			1.3		129.0		(41.3	)		253.4			(1.6	)		340.8
	Net income			—			—			—		—		—			46.2			—			46.2
	Change in fair value of derivatives, net of $1.0 million tax provision			—			—			—		—		—			—			1.6			1.6
		Total comprehensive income																					47.8
	Exercise of stock options			768			(119	)		—		7.0		0.6			—			—			7.6
	Tax benefit on equity compensation			—			—			—		4.9		—			—			—			4.9
	Stock-based compensation			(36	)		—			—		7.7		—			—			—			7.7
	Purchase of common stock			(119	)		119			—		—		(3.3	)		—			—			(3.3	)
	Issuance of treasury shares			38			(38	)		—		0.8		0.2			—			—			1.0
	Issuance of common stock — Associate Stock Ownership Plan			106			—			—		2.4		—			—			—			2.4
Balance, January 29, 2005				22,585			3,737			1.3		151.8		(43.8	)		299.6			—			408.9
	Net loss			—			—			—		—		—			(23.0	)		—			(23.0	)
		Total comprehensive loss																					(23.0	)
	Exercise of stock options			630			—			0.1		5.4		—			—			—			5.5
	Tax benefit on equity compensation			—			—			—		1.8		—			—			—			1.8
	Stock-based compensation			(35	)		—			—		2.8		—			—			—			2.8
	Purchase of common stock			(27	)		27			—		—		(0.7	)		—			—			(0.7	)
	Issuance of treasury shares			89			(89	)		—		1.2		0.5			—			—			1.7
	Issuance of common stock — Associate Stock Ownership Plan			133			—			—		2.4		—			—			—			2.4
Balance, January 28, 2006				23,375			3,675		$	1.4	$	165.4	$	(44.0	)	$	276.6		$	—		$	399.4

See notes to consolidated financial statements

47

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 838 retail stores in 47 states at January 28, 2006. The 684 traditional and 154 superstores feature a variety of competitively priced merchandise used in sewing, crafting and home decorating projects, including fabrics, notions, crafts, frames, paper crafting material, artificial and dried flowers, home accents, finished seasonal and home décor merchandise.

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

Basis of Presentation

      The consolidated financial statements include the accounts of the Company and its subsidiaries. All significant intercompany accounts and transactions have been eliminated. Certain amounts in the fiscal 2005 and 2004 financial statements have been reclassified to conform to 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 2006 refers to the year-ended January 28, 2006).

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 the Company’s store physical inventory counts are taken in the first three quarters of each year and the shrink accrual recorded at January 28, 2006 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 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.

48

Jo-Ann Stores, Inc.

Notes to Consolidated Financial Statements (Continued)

Note 1 — Significant Accounting Policies (Continued)

Property, Equipment and Leasehold Improvements

      Property, equipment and leasehold improvements are stated at cost less accumulated depreciation and amortization. Depreciation and amortization are 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 the lesser of 10 years or over the remaining life of the lease. Maintenance and repair expenditures are charged to expense as incurred and improvements and major renewals are capitalized.

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

	Fiscal Year
	2006			2005
Land and buildings	$	62.2		$	58.4
Furniture, fixtures and equipment		385.5			333.9
Leasehold improvements		125.5			102.7
Construction in progress		57.9			13.8
		631.1			508.8
Less accumulated depreciation and amortization		(299.4	)		(270.8	)
Property, equipment and leasehold improvements, net	$	331.7		$	238.0

      During fiscal 2006 the Company capitalized interest of $0.7 million related to the construction of a new distribution center in Opelika, Alabama.

Software Development

      The Company capitalized $1.9 million and $2.5 million in fiscal 2006 and fiscal 2005, 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

      The goodwill carried on the Company’s balance sheet at January 29, 2005 represented the excess of purchase price and related costs over the fair value assigned to the net assets acquired from House of Fabrics, Inc. in fiscal 1999. The goodwill recorded was non-deductible for tax purposes. A deferred tax adjustment made in fiscal year 2005 related to the House of Fabrics acquisition increased goodwill by $0.6 million.

      In fiscal 2003 the Company adopted Financial Accounting Standards Board (“FASB”) Statement of Financial Accounting Standards (“SFAS”) No. 142, “Goodwill and Other Intangible Assets.” In accordance with SFAS No. 142, goodwill is not amortized but is subject to impairment testing using fair value based approaches. This impairment testing is required to be performed at least annually.

      During the fourth quarter of fiscal 2006, the Company conducted the annual impairment testing required by SFAS No. 142. As a result of the evaluation, the Company determined that the carrying amount of the reporting unit’s goodwill exceeded its implied fair value and that a full impairment of goodwill existed. The Company recorded an impairment charge of $27.1 million in the fourth quarter of fiscal 2006. See Note 2 — Goodwill.

      During the fourth quarter of fiscal 2005 and 2004, the Company performed the required annual impairment tests under SFAS No. 142 and determined no goodwill impairment existed.

49

Jo-Ann Stores, Inc.

Notes to Consolidated Financial Statements (Continued)

Note 1 — Significant Accounting Policies (Continued)

Impairment of Long-Lived Assets

      Under SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” 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. Assets to be disposed of are recorded at the lower of carrying value or estimated net realizable value. We conduct this review on an ongoing basis and record any required impairment charge. During the fourth quarter of fiscal 2006 and fiscal 2005, the Company performed impairment tests as required by SFAS No. 144. As a result of the evaluation, impairments of $3.0 million and $0.6 million, respectively, were recorded on assets of certain stores still in operation. There was no impairment recorded in fiscal 2004. See Note 11 — Quarterly Financial Information.

      The carrying values of long-lived assets for stores identified for closure are reduced to their estimated fair value. See Note 3 — Store Closings for details related to the results of impairment testing performed.

Store Closing Costs

      The Company accounts for store closing costs according to the requirements of 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. See Note 3 — Store Closings.

Accrued Expenses

      Certain material expenses are estimated to enable recording of those expenses in the period incurred. The most material estimates relate to compensation, taxes and insurance related expenses, for portions of which the Company is self-insured. 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 consist of the following (dollars in millions):

	Fiscal Year
	2006		2005
Accrued taxes	$	28.4	$	29.6
Accrued compensation		18.7		21.5
Accrued insurance		20.2		15.7
Other accrued expenses		26.8		24.8
	$	94.1	$	91.6

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 due to the short maturity of these instruments. The price of the 7.5 percent senior subordinated notes (the “Notes”) at January 28, 2006 in the high yield debt market was 87.0 percent to par value. Accordingly, the fair value of the Notes was $87.0 million versus their carrying value of $100 million.

50

Jo-Ann Stores, Inc.

Notes to Consolidated Financial Statements (Continued)

Note 1 — Significant Accounting Policies (Continued)

      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. This is accomplished through the debt structure set in place in early fiscal 2005, which consisted of the fixed rate Notes and the variable rate senior bank credit facility (the “Credit Facility”), which is designed to be a working capital facility. In the past, the Company also utilized interest rate swaps to achieve this objective. The Company utilized interest rate swaps to manage net exposure to interest rate changes related to the Company’s variable rate bank credit facilities. The interest rate swap agreements required the Company to pay a fixed interest rate while receiving a floating interest rate based on London Interbank Offered Rate (“LIBOR”). The Company does not enter into financial instruments for trading purposes. The Company had a $40.0 million interest rate swap with a fixed LIBOR rate of 6.72 percent that expired on April 30, 2005.

      The Company had reviewed and designated the previous interest rate swap agreement as a cash flow hedge and recognized the fair value of its interest rate swap agreement on the balance sheet in accrued expenses, in accordance with SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” as amended. Changes in the fair value of the agreement are recorded in other comprehensive income (loss) and reclassified into earnings as the underlying hedged item affects earnings. During fiscal 2005, unrealized after-tax net gains of $1.6 million was recorded in other comprehensive income (loss). The hedge ineffectiveness expense (income) for fiscal 2005 and 2004 was $0.4 million and $(0.7) million, respectively, and is reflected in interest expense.

Income Taxes

      The Company does business in various jurisdictions that impose income taxes. The aggregate amount of income tax expense to accrue and the amount currently payable is based upon the tax statutes of each jurisdiction, pursuant to the asset and liability method. This process involves adjusting book income for items that are treated differently by the applicable taxing authorities. Deferred tax assets and liabilities are reflected on the balance sheet for temporary differences that will reverse in subsequent years. Deferred tax assets and liabilities are measured using tax rates expected to apply to taxable income in the years in which those temporary differences are estimated 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. The current tax provision can be affected by the mix of income and identification or resolution of uncertain tax positions. Because income from different jurisdictions may be taxed at different rates, the shift in mix during a year or over years can cause the effective tax rate to change. The rate is based on the best estimate of an annual effective rate, and those estimates are updated quarterly. The Company also regularly evaluates the status and likely outcome of uncertain tax positions.

      As a matter of course, the Company is regularly audited by federal, state and local tax authorities. Reserves are provided for potential exposures when it is considered probable that a taxing authority may take a sustainable position on a matter contrary to the Company’s position. The Company evaluates these reserves, including interest thereon, on a quarterly basis to ensure that they have been appropriately adjusted for events, including audit settlements that may impact the ultimate payment for such exposure.

Revenue Recognition

      The Company recognizes revenue at the time of sale of merchandise to its customers in compliance with Staff Accounting Bulletin No. 104, “Revenue Recognition in Financial Statements.” The Company allows for merchandise to be returned under most circumstances. The Company currently has a reserve for returns of $0.5 million at January 28, 2006. Returns historically have not had a material impact on the consolidated financial statements.

51

Jo-Ann Stores, Inc.

Notes to Consolidated Financial Statements (Continued)

Note 1 — Significant Accounting Policies (Continued)

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

      Proceeds from the sale of gift cards are recorded as a liability and recognized as net sales when redeemed by the holder. Gift card breakage represents the remaining balance of the Company’s liability for gift cards for which the likelihood of redemption by the customer is remote. This gift card breakage is determined based on the historical redemption patterns of gift cards. Beginning in fiscal 2006, the Company began to recognize gift card breakage as a component of net sales in the consolidated statement of operations. In the fourth quarter of fiscal 2006, the Company recognized $3.2 million of pre-tax income related to the recognition of gift card breakage. Fiscal 2006 was the first period in which the Company recognized gift card breakage under the redemption method which resulted in an adjustment for breakage income related to gift cards sold since fiscal 2002.

Cost of Sales

      Inbound freight and duties related to import purchases and internal transfer costs are considered to be direct costs of the Company’s merchandise and accordingly are recognized when the related merchandise is sold as cost of sales. Purchasing and receiving costs, warehousing costs and other costs of the Company’s distribution network are considered to be period costs not directly attributable to the value of merchandise and accordingly, are expensed as incurred as selling, general and administrative expenses (“SG&A”). Distribution network costs of $65.5 million, $58.5 million and $51.5 million were included in SG&A expenses for fiscal 2006, 2005 and 2004, respectively.

      All vendor consideration, including cash discounts, volume discounts and co-operative advertising fees are included as a reduction of cost of sales. Cash discounts and volume discounts are recognized in cost of sales when the related merchandise is sold. The Company recognizes co-operative advertising fees under vendor agreements when the related merchandise is sold in accordance with Emerging Issues Task Force (“EITF”) Issue 02-16, “Accounting by a Customer (including a Reseller) for Certain Consideration Received from a Vendor.” Historically, vendor consideration has not had a significant impact to the trend of cost of sales or gross margin.

Operating Leases

      Rent expense for operating leases, which may have escalating rentals over the term of the lease, is recorded on a straight-line basis over the initial lease term and those renewal periods that are reasonably assured. The initial lease term includes the “build-out” period of leases, where no rent payments are typically due under the terms of the lease. The difference between rent expense and rent paid is recorded as a deferred rent liability and is included in the consolidated balance sheets.

      Construction allowances and landlord incentives received from landlords are recorded as a deferred rent liability and amortized to rent expense over the initial term of the lease. The Company’s statement of cash flows reflects the receipt of incentives as an increase in cash flows from operating activities.

Store Pre-Opening Costs

      Store pre-opening costs are expensed as incurred and relate to the costs incurred prior to a new store opening, which includes the hiring and training costs for new employees, processing costs of initial merchandise and rental expense for the period prior to the store opening for business. Store pre-opening costs were $13.0 million, $9.6 million and $9.6 million in fiscal 2006, 2005 and 2004, respectively.

52

Jo-Ann Stores, Inc.

Notes to Consolidated Financial Statements (Continued)

Note 1 — Significant Accounting Policies (Continued)

Advertising Costs

      The Company expenses production costs of advertising the first time the advertising takes place. Advertising expense was $66.1 million, $50.1 million and $47.7 million for fiscal 2006, 2005 and 2004, respectively.

Earnings Per Share

      Basic and diluted (loss) earnings per common share are calculated in accordance with SFAS No. 128, “Earnings per Share.” Basic (loss) earnings per common share are computed by dividing net (loss) income by the weighted average number of shares outstanding during the year. Diluted (loss) earnings per common share include the effect of the assumed exercise of dilutive stock-based awards (comprised of stock options and restricted shares) under the treasury stock method. Basic and diluted (loss) earnings per common share are as follows:

			Fiscal Year-Ended
			2006			2005		2004
			(Dollars in millions,
			except per share data)
Net (loss) income			$	(23.0	)	$	46.2	$	40.1
Weighted average shares (shares in thousands):
	Basic			22,716			22,155		21,372
		Incremental shares from assumed exercise of stock options		—			624		564
		Incremental restricted shares		—			108		67
	Diluted			22,716			22,887		22,003
Basic net (loss) income per common share			$	(1.01	)	$	2.09	$	1.88
Diluted net (loss) income per common share			$	(1.01	)	$	2.02	$	1.82

      For fiscal year 2006, all outstanding stock options were excluded from the calculation of diluted net loss per common share due to the Company’s net loss, because they would have an anti-dilutive effect. For fiscal 2006, an average of 1,715,808 stock options had exercise prices below the average market price of the Company’s common shares and an average of 469,441 stock options had exercise prices above the average market price of the Company’s common shares. As of January 28, 2006, the Company had 661,910 restricted stock awards issued and not yet vested, which were excluded from the calculation of diluted net loss per common share.

      For fiscal 2005 and 2004 the above calculation of the diluted net income per common share reflects the impact of stock options that had exercise prices below the average market price of the Company’s common shares for the respective years. For fiscal 2005 and 2004, an average of 66,000 stock options and 175,000 stock options, respectively, were not included in the computation of diluted net income per common share because the exercise price of the stock options exceeded the average market price and would have been anti-dilutive.

Stock-Based Compensation

      At the beginning of fiscal 2004, the Company adopted the fair value recognition provisions of SFAS No. 123, “Accounting for Stock-Based Compensation.” Under the modified prospective method of adoption selected by the Company under the provisions of SFAS No. 148, “Accounting for Stock-Based Compensation-Transition and Disclosure, an Amendment of FASB Statement No. 123,” compensation cost

53

Jo-Ann Stores, Inc.

Notes to Consolidated Financial Statements (Continued)

Note 1 — Significant Accounting Policies (Continued)

recognized in fiscal year 2004 was the same as that which would have been recognized had the recognition provisions of SFAS No. 123 been applied from its original effective date.

      The following table shows the expense recognized by the Company for stock-based compensation under SFAS No. 123 and SFAS No. 148.

	Fiscal Year-Ended
	2006		2005		2004
Stock option compensation expense	$	2.5	$	3.4	$	5.7
Restricted stock award amortization		0.3		4.3		0.7
	$	2.8	$	7.7	$	6.4

      The reduced expense in fiscal 2006 compared with fiscal 2005 is attributable to a reduced expectation regarding the level of performance-based shares that may be earned under the restrictive stock program based on the Company’s operating performance, resulting in a reversal of $2.4 million of performance-based expense that previously had been recorded. In addition, stock-based compensation expense in fiscal 2006 was credited for $1.4 million for expense reversals related to unvested stock awards that had been recognized for those executives who have left the Company. See Note 7 — Stock-Based Compensation.

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

	Fiscal Year-Ended
	2006		2005		2004
Weighted average fair value of options granted		$6.64		$14.16		$9.61
Expected volatility of underlying stock		.513 to .568		.594 to .653		.570 to .660
Risk-free interest rates		3.5% to 4.4%		2.4% to 3.7%		2.4% to 3.6%
Expected life		4 years		4 years		4 – 5.5  years
Expected life — Employee Stock Purchase Program		6 months		6 months		6 months

Recent Accounting Pronouncements

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

Emerging Issues Task Force Issue 05-06: “Determining the Amortization Period for Leasehold Improvements”

      In June 2005, the EITF reached a consensus on Issue No. 05-06, “Determining the Amortization Period for Leasehold Improvements.” EITF 05-06 requires that leasehold improvements acquired in a business combination or purchased subsequent to the inception of a lease be amortized over the lesser of the useful life of the assets or a term that includes renewals that are reasonably assured at the date of the business combination or purchase. EITF 05-06 is effective for periods beginning after June 29, 2005. Since this was consistent with the Company’s existing policy, the adoption of EITF 05-06 did not have an impact on the Company’s consolidated financial statements.

FASB Interpretation No. 47, “Accounting for Contingent Asset Retirement Obligations”

      In March 2005, the FASB issued FASB Interpretation (“FIN”) No. 47, “Accounting for Conditional Asset Retirement Obligations.” FIN No. 47 provides guidance relating to the identification of and financial reporting for legal obligations to perform an asset retirement activity. The Interpretation requires recognition of a

54

Jo-Ann Stores, Inc.

Notes to Consolidated Financial Statements (Continued)

Note 1 — Significant Accounting Policies (Continued)

liability for the fair value of a conditional asset retirement obligation when incurred if the liability’s fair value can be reasonably estimated. FIN No. 47 also defines when an entity would have sufficient information to reasonably estimate the fair value of an asset retirement obligation. The provision is effective no later than the end of fiscal years ending after December 15, 2005. The adoption of FIN No. 47 did not have a material impact on the Company’s consolidated financial statements.

Statement of Financial Accounting Standards No. 123 (Revised 2004), “Share-Based Payment”

      In December 2004, the FASB issued SFAS No. 123 (Revised 2004), “Share-Based Payment,” which is a revision of SFAS No. 123, “Accounting for Stock-Based Compensation.” SFAS No. 123R replaces SFAS No. 123, supersedes Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” and amends SFAS No. 95, “Statement of Cash Flows.” SFAS No. 123R requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements based on their fair values. SFAS No. 123R amends SFAS No. 95 to require that excess tax benefits be reported as a financing cash inflow rather than as a reduction of taxes paid.

      SFAS No. 123R was originally effective for public companies at the beginning of the first interim or annual period beginning after June 15, 2005. However, in April 2005, the Securities and Exchange Commission (“SEC”) announced the adoption of a new rule that amends the compliance dates for SFAS No. 123R. Accordingly, the Company will adopt SFAS No. 123R as of the beginning of the Company’s 2007 fiscal year which is January 29, 2006. The Company voluntarily adopted SFAS No. 123 at the beginning of fiscal 2004 and began expensing the fair value cost of stock awards in the statement of operations. Currently, the Company uses the Black-Scholes option pricing model to estimate the fair value of stock options granted. The Company is evaluating various option valuation models, including the Black-Scholes model, to determine which model the Company will utilize upon adoption of SFAS No. 123R. The Company plans to adopt SFAS No. 123R using the modified prospective method. The Company does not expect the adoption of SFAS No. 123R to have a material impact on the Company’s consolidated financial statements.

      In March 2005, the SEC issued Staff Accounting Bulletin No. 107, “Share Based Payments” (“SAB 107”) to provide public companies additional guidance in applying the provisions of SFAS No. 123R. Among other things, SAB 107 describes the SEC staff’s expectations in determining the assumptions that underlie the fair value estimates and discusses the interaction of SFAS No. 123R with certain existing SEC guidance.

FASB Staff Position FAS No. 123R-3, “Transition Election Related to Accounting for the Tax Effects of Share-Based Payment Awards”

      In November 2005, the FASB issued final FASB Staff Position (“FSP”) SFAS No. 123R-3, “Transition Election Related to Accounting for the Tax Effects of Share-Based Payment Awards.” The FSP provides an alternative method of calculating excess tax benefits (the APIC pool) from the method defined in SFAS No. 123R for share-based payments. A one-time election to adopt the transition method in this FSP is available to those entities adopting SFAS No. 123R using either the modified-retrospective or modified-prospective method. Up to one year from the initial adoption of SFAS No. 123R or the effective date of the FSP is allowed to make this one-time election. However, until an entity makes its election, it must follow the guidance in SFAS No. 123R. FSP 123R-3 is effective upon initial adoption of SFAS No. 123R and will become effective for APIC the first quarter of fiscal 2007. The Company is currently evaluating the potential impact of calculating the APIC pool with this alternative method and has not determined which method the Company will adopt, nor the expected impact on the Company’s consolidated financial statements.

55

Jo-Ann Stores, Inc.

Notes to Consolidated Financial Statements (Continued)

Note 2 — Goodwill

      The goodwill carried on the Company’s books represented the excess of purchase price and related costs over the fair value assigned to the net assets acquired from House of Fabrics, Inc. in fiscal 1999. The goodwill recorded was non-deductible for tax purposes.

      At the beginning of the fourth quarter of fiscal 2006, the Company conducted the annual impairment testing required by SFAS No. 142 for fiscal 2006. As a result of the evaluation, the Company determined that the carrying amount of the goodwill exceeded its implied fair value and that a full impairment of goodwill existed. This impairment conclusion was reached considering the market capitalization of the Company, declining business trends, softness in the industry, deteriorating Company performance particularly in our seasonally significant fourth quarter, and the Company’s assessment of near-term future performance. Accordingly, during the fourth quarter of fiscal 2006, the Company recorded a non-cash and non-tax deductible charge of $27.1 million, which represented a write-off of the goodwill. This charge was reported as a separate line item in the statement of operations included in the consolidated financial statements.

      During the fourth quarter of fiscal 2005 and 2004, the Company performed the required annual impairment tests under SFAS No. 142, “Goodwill and Other Intangible Assets” and determined no goodwill impairment existed.

Note 3 — Store Closings

      The charges to the consolidated statement of operations for the three fiscal years ended January 28, 2006 related to store closings are summarized below, and include charges for store closings related to the superstore growth strategy and store performance. These charges are included in the line item “Store pre-opening and closing costs” in the statements of operations included in the consolidated financial statements.

		Fiscal Year-Ended
		2006		2005		2004
		(Dollars in millions)
Store Closing Charges:
	Non-cancelable lease obligations	$	2.3	$	1.4	$	(0.1	)
	Asset impairment		3.7		2.5		2.1
	Other costs		4.4		5.0		1.7
Total		$	10.4	$	8.9	$	3.7

      Non-cancelable lease obligations, as discussed in Note 1, are accounted for in accordance with SFAS No. 146.

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

      Other costs represent other miscellaneous store closing costs, including among other things, costs related to third-party inventory liquidation and fixtures, signage and register removal.

56

Jo-Ann Stores, Inc.

Notes to Consolidated Financial Statements (Continued)

Note 3 — Store Closings (Continued)

      Summarized below is a reconciliation of the beginning and ending store closing reserve balances for the three fiscal years ended January 28, 2006:

		Non-cancelable
		Lease			Asset			Other
		Obligations			Impairments			Costs			Total
		(Dollars in millions)
Balance at February 1, 2003		$	3.5		$	—		$	0.9		$	4.4
Amounts charged to expense			(0.1	)		2.1			1.7			3.7
Utilization:
	Cash		(1.6	)		—			(1.3	)		(2.9	)
	Non-Cash		—			(2.1	)		(0.3	)		(2.4	)
Balance at January 31, 2004			1.8			—			1.0			2.8
Amounts charged to expense			1.4			2.5			5.0			8.9
Utilization:
	Cash		(2.7	)		—			(5.2	)		(7.9	)
	Non-Cash		—			(2.5	)		—			(2.5	)
Balance at January 29, 2005			0.5			—			0.8			1.3
Amounts charged to expense			2.3			3.7			4.4			10.4
Utilization:
	Cash		(2.5	)		—			(4.3	)		(6.8	)
	Non-Cash		(0.3	)		(3.7	)		—			(4.0	)
Balance at January 28, 2006		$	—		$	—		$	0.9		$	0.9

Note 4 — Income Taxes

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

		Fiscal Year-Ended
		2006			2005			2004
Current:
	Federal	$	20.4		$	30.7		$	18.7
	State and local		3.4			3.6			2.2
			23.8			34.3			20.9
Deferred			(21.1	)		(6.3	)		4.1
Income tax provision		$	2.7		$	28.0		$	25.0

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

		Fiscal Year-Ended
		2006			2005			2004
Federal income tax at the statutory rate		$	(7.1	)	$	26.0		$	22.8
Effect of:
	Non-deductible goodwill impairment		9.5			—			—
	State and local taxes		0.3			2.4			1.8
	Other, net		—			(0.4	)		0.4
Income tax provision		$	2.7		$	28.0		$	25.0

57

Jo-Ann Stores, Inc.

Notes to Consolidated Financial Statements (Continued)

Note 4 — Income Taxes (Continued)

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

		Fiscal Year
		Asset/(Liability)
		2006			2005
Current
Deferred tax assets:
	Inventory items	$	23.8		$	17.4
	Lease obligations		0.7			0.9
	Employee benefits		9.1			0.8
	Other		4.4			2.2
Net current deferred tax asset		$	38.0		$	21.3
Non-current
Deferred tax assets:
	Lease Obligations	$	29.2		$	16.9
	Equity investment		2.5			2.5
	Employee benefits		3.1			1.9
	Other		0.3			2.6
	Valuation allowances		(2.7	)		(2.5	)
			32.4			21.4
Deferred tax liabilities:
	Depreciation		(55.1	)		(49.2	)
	Other		(0.5	)		0.2
			(55.6	)		(49.0	)
Net non-current deferred tax liability		$	(23.2	)	$	(27.6	)

      The Company has recorded valuation allowances for equity losses on a minority investment and state net operating loss carryforwards, which may not be realizable.

Note 5 — Financing

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

	Fiscal Year
	2006		2005
Senior bank credit facility	$	103.7	$	—
7.5 percent senior subordinated notes		100.0		100.0
Total Long-term debt	$	203.7	$	100.0

Secured Credit Facility

      The Credit Facility as amended is a $425 million revolver led by Bank of America Retail Finance, Inc. (formerly Fleet Retail Group, Inc.) that expires April 30, 2009. This facility’s most recent amendments are summarized below:

•  In February 2006, the Company amended the Credit Facility primarily to increase the commitment from $350 million to $425 million. The amendment, among other things, also improved advance rates on inventory during peak borrowing periods and modified the consolidated net worth covenant.

•  In April 2004, the Company extended the expiration date of the Credit Facility to April 30, 2009.

58

Jo-Ann Stores, Inc.

Notes to Consolidated Financial Statements (Continued)

Note 5 — Financing (Continued)

      The Credit Facility is secured by a first priority perfected security interest in the Company’s inventory, accounts receivable, property and other assets and is fully and unconditionally guaranteed by each of the Company’s wholly-owned subsidiaries. Interest on borrowings under the Credit Facility is calculated at the bank’s base rate or LIBOR plus 1.25 percent to 2.00 percent, depending on the level of excess availability (as defined in the credit agreement) that is maintained. At January 28, 2006, interest on the Company’s borrowings under the Credit Facility was both at the bank’s base rate and LIBOR plus 1.25 percent. The Credit Facility contains a sub-limit for letters of credit of $200 million. Deferred financing costs of $1.8 million, related to the unamortized portion of the deferred financing costs of the original financing, as well as the amendment fees, are being amortized over the term of the Credit Facility. As of January 28, 2006, the Company had borrowings outstanding of $103.7 million under the Credit Facility at an interest rate of 6.14 percent and $58.9 million in letters of credit outstanding.

      The Company’s weighted average interest rate (including the impact of the $40 million interest rate swap that expired on April 30, 2005) and weighted average borrowings under the Credit Facility and prior senior bank credit facility were 5.8 percent and $83.2 million during fiscal 2006 and 6.7 percent and $57.3 million during fiscal 2005.

      The Credit Facility contains covenants that, among other things, restrict the Company’s ability to incur additional indebtedness or guarantee obligations, engage in mergers or consolidations, dispose of assets, make investments, acquisitions, loans or advances, engage in certain transactions with affiliates, conduct certain corporate activities, create liens, or change the nature of its business. The Company is restricted in its ability to prepay or modify the terms of other indebtedness, pay dividends and make other distributions when excess availability, as defined, falls below certain levels. Further, the Company is required to comply with the modified minimum consolidated net worth financial covenant if excess availability, as defined, is less than $35 million at any time. As of January 28, 2006, excess availability was $163.3 million, and at the Company’s peak borrowing level during fiscal 2006, the excess availability was $64.4 million. The Credit Facility also defines various events of default, including cross default provisions, defaults for any material judgments or a change in control. At January 28, 2006, the Company is in compliance with all covenants under the Credit Facility.

      The fair value of the debt outstanding under the Company’s Credit Facility approximated carrying value at January 28, 2006 and January 29, 2005.

Senior Subordinated Notes

      On February 26, 2004, the Company issued $100 million 7.5 percent Notes due in fiscal 2013 on March 1, 2012. Interest on the Notes is payable on March 1 and September 1 of each year. Deferred debt costs recorded at issuance of $2.6 million are reflected in other long-term assets and are being amortized as interest expense over the term of the Notes utilizing the effective interest method. The Company has the option of redeeming the Notes at any time after March 1, 2008 in accordance with certain call provisions of the related Note indenture. The Notes represent unsecured obligations that are subordinated to the Credit Facility and are fully and unconditionally guaranteed by each of the Company’s wholly-owned subsidiaries. Net proceeds from the fiscal 2005 placement of approximately $97.4 million were used to repurchase the balance of the 10.375 percent senior subordinated notes that remained outstanding and for general corporate purposes.

      The Note indenture contains covenants that, among other things, restrict the Company’s ability to incur additional indebtedness, make restricted payments, engage in certain transactions with affiliates, create liens, sell assets, issue guarantees of and pledges securing indebtedness and require an offer to repurchase the Notes in the event of a change in control. The indenture defines various events of default, including cross default provisions and defaults for any material judgments. Failure to comply with these restrictions and

59

Jo-Ann Stores, Inc.

Notes to Consolidated Financial Statements (Continued)

Note 5 — Financing (Continued)

covenants could result in defaults under the Company’s Credit Facility and/or Note indenture. Any default, if not waived, could result in the Company’s debt becoming immediately due and payable. At January 28, 2006, the Company is in compliance with all covenants under its Note indenture.

      During fiscal 2005 and 2004, the Company purchased $64.4 million and $58.5 million, respectively, in face value of the 10.375 percent senior subordinated notes. The Company recorded pre-tax charges of $4.2 million and $4.3 million, in fiscal years 2005 and 2004, respectively, primarily for the cash premium paid and the related write-off of applicable deferred debt costs. These charges are reflected in the debt repurchase and share reclassification expenses line item on the statement of operations.

      Aggregate maturities of long-term debt for the next five fiscal years are: 2007 — $0.0; 2008 — $0.0; 2009 — $0.0; 2010 — $103.7 million; 2011 — $0.0 and thereafter — $100 million.

Note 6 — Capital Stock

Shareholders’ Rights Plan

      On November 4, 2003, the Company amended and restated its Shareholders’ Rights Plan (the “Rights Plan”). Under the Rights Plan, as amended and restated, one right is issued for each common share outstanding. The rights are exercisable only if a person or group buys or announces a tender offer for 15 percent or more of the outstanding common shares as defined in the Rights Plan. When exercisable, each right initially entitles a holder of common shares to purchase one common share for $52.17, or under certain circumstances, one common share for $0.43. The rights, which do not have voting privileges, expire at the close of business on October 31, 2010, but may be redeemed by the Board of Directors prior to that time, 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. Approximately 4.0 million shares are subject to this agreement as of January 28, 2006.

Note 7 — Stock-Based Compensation

      The Company has various stock-based compensation plans that it utilizes as long-term compensation for its board of directors, executive officers, senior management and other key employees. The Company issues stock under these various stock-award compensation plans and uses treasury shares to fund the Company’s match under its 401(k) savings plan. Stock-based compensation expense resulting from the issuance of restricted shares and stock options is recognized over the vesting period of the awards.

60

Jo-Ann Stores, Inc.

Notes to Consolidated Financial Statements (Continued)

Note 7 — Stock-Based Compensation (Continued)

      Summarized below are the various plans used by the Company in administering its stock-based compensation award programs.

Plan	Overview
1998 Incentive Compensation Plan (the “1998 Plan”)	Allows for the grant of stock options, restricted stock, and stock equivalent units to employees and non-employee directors. It also allows the operation of an employee stock purchase program and a deferred stock program for non-employee directors. At January 28, 2006, 1,727,963 stock options, 1,405,325 restricted shares, and 66,000 stock equivalent units were outstanding under the 1998 Plan.
1996 Stock Option Plan for Non-Employee Directors (the “Directors Stock Option Plan”)	Previously used to award stock options to non-employee directors. The plan is no longer used to grant stock options. At January 28, 2006, 58,950 stock options were outstanding under the Directors Stock Option Plan.
1994 Executive Incentive Plan (the “Executive Plan”)	Previously used to award restricted stock awards to executive officers, senior management and other key employees. This plan terminated on January 31, 2004. The termination of the plan does not affect shares that are currently outstanding under the plan. At January 28, 2006, 98,185 restricted shares were outstanding under the Executive Plan.
1990 Employee Stock Option and Stock Appreciation Rights Plan (the “1990 Plan”)	Previously used to award stock options to officers and key employees. This plan terminated on March 14, 2000. The termination of the plan does not affect shares that are currently outstanding under the plan. At January 28, 2006, 219,999 stock options were outstanding under the 1990 Plan.

1998 Plan

Stock Options

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

Restricted Stock Awards

      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 on such restricted shares terminate if the grantee remains in the continuous service of the Company throughout the vesting period. In fiscal 2006 and fiscal 2005, the Compensation Committee of the Board of Directors approved an annual base award of restricted stock to certain of the Company’s employees that is intended to serve as a retention vehicle and is coupled with performance awards. The base and performance awards vest 50 percent at the end of three years, with the remaining 50 percent vesting at the end of the fourth year.

61

Jo-Ann Stores, Inc.

Notes to Consolidated Financial Statements (Continued)

Note 7 — Stock-Based Compensation (Continued)

The base award grants, which are time-based awards, amounted to approximately 166,000 and 205,000 restricted shares for fiscal 2006 and fiscal 2005, respectively. The performance-based award provides the potential to receive generally up to three times that amount in additional shares. The number of performance award shares ultimately received, if any, will depend on the Company achieving certain net income performance criteria that are measured at the end of the third year. The Shares Available to Grant table reflects both the fiscal 2006 and fiscal 2005 restricted stock base award grant and the performance award assuming superior level is achieved. The expense recognition for the value of restricted shares is based on the vesting period and an estimate regarding certain performance levels over the three-year measurement period. During fiscal 2006, all stock-based compensation expense associated with performance-based awards totaling $2.4 million was reversed due to the Company’s operating performance.

Shares Available to Grant

      The total number of shares available for 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, and (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 share awards actually granted in each such fiscal year.

      The following table summarizes award activity for the three fiscal years and the number of shares available for future awards under the 1998 Plan as of January 28, 2006:

		Stock			Restricted
		Options			Stock			Total
Available at February 1, 2003									1,384,806
	Fiscal year 2004 incremental available								843,162
	Granted		(806,387	)		(11,500	)		(817,887	)
	Cancellations		124,313			3,450			127,763
Available at January 31, 2004									1,537,844
	Fiscal year 2005 incremental available								255,073
	Granted — Time-Based Awards		(142,200	)		(224,300	)		(366,500	)
	Granted — Performance-Based Awards		—			(616,350	)		(616,350	)
	Cancellations		156,430			121,500			277,930
Available at January 29, 2005									1,087,997
	Fiscal year 2006 incremental available								136,631
	Granted — Time-Based Awards		(493,950	)		(430,300	)		(924,250	)
	Granted — Performance-Based Awards		—			(499,200	)		(499,200	)
	Cancellations		102,748			312,499			415,247
Available at January 28, 2006									216,425

Employee Stock Purchase Program

      The employee stock purchase program (the Associate Stock Ownership Plan or “ASOP”) enables employees to subscribe to purchase shares of the Company’s 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 2006, 2005 and 2004, stock purchase rights of

62

Jo-Ann Stores, Inc.

Notes to Consolidated Financial Statements (Continued)

Note 7 — Stock-Based Compensation (Continued)

132,787 shares, 106,548 shares and 149,791 shares, respectively, were granted and exercised under the ASOP. The stock-based compensation expense was not significant for all the years presented.

Non-Employee Directors Deferred Stock Program

      The Company maintains a deferred stock program for non-employee directors. This program allows non-employee directors to elect to convert the retainer and meeting fee portion of their cash compensation into deferred stock units. Under this feature, non-employee directors make an irrevocable election prior to the Company’s annual shareholders’ meeting whereby they can elect to convert a percentage (0 percent to 100 percent in 25 percent increments) of their cash compensation for the following year to deferred stock units. The conversion of cash compensation to deferred stock units is based on the closing market price of the Company’s common shares on the date the cash compensation would have been payable if it were paid in cash. These deferred stock units are credited to an account of each non-employee director, although no stock is issued until the earlier of an elected distribution date, as selected by the non-employee director, or retirement. During fiscal 2006, 2005 and 2004, 2,064 deferred stock units, 1,105 deferred stock units and 864 deferred stock units, respectively, were deferred under the deferred stock program.

Award Activity

      On November 18, 2005, the Compensation Committee of the Board of Directors approved a retention program which provided a guaranteed cash retention payment, in lieu of a bonus opportunity under the Management Incentive Plan, and awarded restricted stock and stock options under the 1998 Plan to key management employees. The restricted stock awards amounted to approximately 233,000 shares and will vest 50 percent on March 1, 2007 and 50 percent on March 1, 2008. The stock option awards amounted to approximately 390,000 shares and will vest 50 percent on March 1, 2009 and 50 percent on March 1, 2010.

      Summarized below are stock option and restricted stock award activity for the 1998 Plan, the 1990 Plan, the Directors Stock Option Plan and the Executive Plan (collectively the “Plans”):

Stock Options

      The following is a summary of the Company’s stock option activity under the Plans:

	2006					2005					2004
				Weighted					Weighted					Weighted
				Average					Average					Average
	Shares			Price		Shares			Price		Shares			Price
Outstanding, beginning of year		2,293,797		$	14.09		3,077,917		$	12.42		2,881,419		$	10.37
Granted		493,950			14.72		142,200			27.89		806,387			17.97
Exercised		(629,972	)		8.77		(767,773	)		9.94		(478,973	)		9.30
Cancelled		(105,863	)		18.36		(158,547	)		14.20		(130,916	)		12.67
Outstanding, end of year		2,051,912		$	15.66		2,293,797		$	14.09		3,077,917		$	12.42
Exercisable, end of year		1,176,509		$	14.39		1,591,632		$	11.54		1,490,091		$	11.49

63

Jo-Ann Stores, Inc.

Notes to Consolidated Financial Statements (Continued)

Note 7 — Stock-Based Compensation (Continued)

      The following table summarizes the status of stock options outstanding and exercisable at January 28, 2006:

Options Outstanding							Options Exercisable
					Weighted
			Weighted		Average				Weighted
		Range of	Average		Remaining				Average
Number		Exercise	Exercise		Contractual		Number		Exercise
Outstanding		Prices	Price		Life		Exercisable		Price
	491,881	$2.50 to $12.25	$	8.30		4.2 years		475,006	$	8.17
	543,925	12.35 to 14.35		12.88		5.6 years		152,300		14.05
	502,082	14.50 to 19.85		16.94		3.9 years		273,398		16.88
	514,024	20.00 to 30.33		24.38		4.2 years		275,805		22.83
	2,051,912	$2.50 to $30.33	$	15.66		4.5 years		1,176,509	$	14.39

Restricted Stock — Time-Based Awards

      As of January 28, 2006, 661,910 shares of restricted stock were outstanding in which the restrictions lapse upon the achievement of continued employment over a specified period of time (time-based restricted stock awards).

      The following table summarizes information about time-based restricted stock awards:

	Number of Shares
Fiscal Year	2006			2005			2004
Outstanding, beginning of year		358,780			212,035			73,025
Granted		430,300			224,300			162,355
Exercised		(13,951	)		(14,375	)		(10,925	)
Cancelled		(113,219	)		(63,180	)		(12,420	)
Outstanding, end of year		661,910			358,780			212,035

      In fiscal 2006, 2005 and 2004, the Company granted time-based restricted stock awards with average per share fair values of $19.73, $27.84 and $18.45, respectively.

Restricted Stock — Performance-Based Awards

      The performance awards approved by the Compensation Committee of the Board of Directors are issued only upon the achievement of specific measurable performance criteria. Performance can be achieved on three different levels, minimum (“Threshold”), midpoint (“Target”) or maximum (“Superior”). The number of performance award shares earned shall be determined at the end of each performance period, generally three years, based on performance measurements determined by the Board of Directors and may result in an award of restricted stock at that time. Generally, performance award shares are subject to the performance criteria of compound annual growth in net income over the performance period, as adjusted for certain items (“Adjusted Net Income”) approved by the Compensation Committee of the Board of Directors. The purpose of these adjustments is to ensure a consistent year-to-year comparison of the specified performance measure.

      Performance share target awards for the fiscal 2006-2008 and fiscal 2005-2007 performance periods require Adjusted Net Income growth in line with the Company’s internal projections over the performance period. In the event Adjusted Net Income exceeds the target projection, additional shares up to the Superior Award may be granted. In the event Adjusted Net Income falls below the target projection, but equals or exceeds the Threshold Award performance level, a reduced number of shares as few as the Threshold Award may be granted. If Adjusted Net Income falls below the Threshold Award performance level, no performance

64

Jo-Ann Stores, Inc.

Notes to Consolidated Financial Statements (Continued)

Note 7 — Stock-Based Compensation (Continued)

award shares will be granted. In addition, 30,000 stock equivalent units in fiscal 2006 and 36,000 stock equivalent units in fiscal 2005, with predefined qualitative performance measures are included in the performance share awards assigned in 2006 and 2005, respectively.

      The following tables summarize information about the performance-based restricted stock awards:

	Estimated Future Awards Under 1998
	Incentive Plan per Performance Level
Fiscal 2006 Award(1)	Threshold			Target			Superior
Assigned		166,400			332,800			499,200
Cancelled		(35,300	)		(70,600	)		(105,900	)
Remaining, end of year — January 28, 2006		131,100			262,200			393,300

⁽¹⁾  The number of shares represents the award amounts payable beginning in fiscal 2009 if earned for the fiscal years 2006-2008.

	Estimated Future Awards Under 1998
	Incentive Plan per Performance Level
Fiscal 2005 Award(2)	Threshold			Target			Superior
Assigned		205,450			410,900			616,350
Cancelled		(26,800	)		(53,600	)		(80,400	)
Remaining, end of year — January 29, 2005		178,650			357,300			535,950
Cancelled		(42,550	)		(85,100	)		(127,650	)
Remaining, end of year — January 28, 2006		136,100			272,200			408,300

⁽²⁾  The number of shares represents the award amounts payable beginning in fiscal 2008 if earned for the fiscal years 2005-2007.

Based upon the Company’s current and expected performance, the Company expects that threshold performance level for both the fiscal 2006 and 2005 performance-based restricted stock awards will not be attained.

Note 8 — Savings Plan and Postretirement Benefits

      The Company sponsors the Jo-Ann Stores, Inc. 401(k) Savings Plan (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 six percent of the employee’s annual compensation, which was increased from four percent as of February 1, 2005. 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 2006, 2005 and 2004 were $1.7 million, $1.0 million and $1.0 million, respectively. As of January 28, 2006, plan assets included 930,684 common shares with a fair market value of $12.6 million. Holders of the common shares are entitled to vote their respective shares.

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

Note 9 — Commitments and Contingencies

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

65

Jo-Ann Stores, Inc.

Notes to Consolidated Financial Statements (Continued)

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 to 15 years and renewal options generally ranging from 5 to 20 years. The Company also leases certain computer and store equipment, with lease terms that are generally five years or less.

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

      The following is a schedule of future minimum rental payments under non-cancelable operating leases. Future minimum rental payments are reduced by $18.6 million of sublease income.

	Minimum
Fiscal Year-Ended	Rentals
(Dollars in millions)
2007	$	142.7
2008		127.7
2009		105.0
2010		91.8
2011		79.1
Thereafter		332.3
	$	878.6

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

Fiscal Year-Ended	2006			2005			2004
(Dollars in millions)
Minimum rentals	$	141.5		$	132.5		$	126.2
Contingent rentals		3.0			3.6			3.6
Sublease rentals		(10.5	)		(9.4	)		(8.6	)
	$	134.0		$	126.7		$	121.2

Note 11 — Quarterly Financial Information (Unaudited)

      Summarized below are the unaudited results of operations by quarter for fiscal 2006 and 2005:

		First		Second			Third			Fourth
Fiscal 2006		Quarter		Quarter			Quarter			Quarter
(Dollars in millions, except per share data)
Net sales		$	420.7	$	383.8		$	474.2		$	604.1
Gross margin			204.8		184.8			216.3			253.3
Net income (loss)			4.2		(5.1	)		(4.1	)		(18.0	)
Net income (loss) per common share:
	Basic	$	0.19	$	(0.23	)	$	(0.18	)	$	(0.78	)
	Diluted		0.18		(0.23	)		(0.18	)		(0.78	)

66

Jo-Ann Stores, Inc.

Notes to Consolidated Financial Statements (Continued)

Note 11 — Quarterly Financial Information (Unaudited) — (Continued)

      Net income for the fourth quarter of fiscal 2006 decreased approximately $29.4 million, net-of-tax, due to certain fourth quarter adjustments, which related to revisions of estimates affecting prior quarters, the goodwill impairment charge of $27.1 million, and certain severance costs. Net sales increased by $3.2 million as a result of the recognition of gift card breakage. Gross margin decreased by $2.8 million, pre-tax, as a result of adjustments to inventory shrink and clearance reserves. Selling, general and administrative expenses increased $4.2 million, pre-tax, as a result of adjustments made for store asset impairments ($3.0 million) and employee severance costs ($1.2 million). The Company recorded a non-cash charge of $27.1 million which represented a write-off of goodwill. See Note 2 — Goodwill.

		First		Second		Third		Fourth
Fiscal 2005		Quarter		Quarter		Quarter		Quarter
(Dollars in millions, except per share data)
Net sales		$	404.9	$	371.0	$	448.3	$	588.2
Gross margin			199.0		181.9		214.2		267.0
Net income			6.7		0.3		6.9		32.3
Net income per common share:
	Basic	$	0.31	$	0.01	$	0.31	$	1.44
	Diluted		0.30		0.01		0.30		1.40

      Net income in the fourth quarter of fiscal 2005 increased approximately $1.2 million, net-of-tax, due to a fourth quarter adjustment which related to revisions of estimates affecting prior quarters. Gross margin increased by $1.9 million, pre-tax, as a result of adjustments to store and distribution center inventory shrink reserves.

Note 12 — Share Reclassification

      On November 4, 2003, the Company announced that shareholders approved the reclassification of its Class A and Class B common shares into a single class of stock. Shareholders also approved certain other governance proposals. On November 5, 2003, shares of the single class of stock began trading on the New York Stock Exchange, under the symbol “JAS.”

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

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

67

Jo-Ann Stores, Inc.

Notes to Consolidated Financial Statements (Continued)

Note 13 — Consolidating Financial Statements

      The Company’s 7.5 percent Notes and Credit Facility are fully and unconditionally guaranteed, on a joint and several basis, by the wholly-owned subsidiaries of the Company. The 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 fiscal years ended January 28, 2006 is as follows:

		January 28, 2006												January 29, 2005
Consolidating					Guarantor												Guarantor
Balance Sheets		Parent			Subsidiaries			Eliminations			Consolidated			Parent			Subsidiaries		Eliminations			Consolidated
		(Dollars in millions)
Assets
Current assets:
	Cash and cash equivalents	$	15.5		$	2.4		$			$	17.9		$	76.6		$	3.0	$			$	79.6
	Inventories		194.2			320.5						514.7			159.6			280.1					439.7
	Deferred income taxes		27.6			10.4						38.0			16.5			4.8					21.3
	Prepaid expenses and other current assets		21.5			13.7						35.2			14.3			8.0					22.3
Total current assets			258.8			347.0			—			605.8			267.0			295.9		—			562.9
Property, equipment and leasehold improvements, net			155.2			176.5						331.7			106.9			131.1					238.0
Goodwill, net			—			—						—			—			27.1					27.1
Other assets			7.8			1.5						9.3			9.8			1.5					11.3
Investment in subsidiaries			62.7			—			(62.7	)		—			90.6			—		(90.6	)		—
Intercompany receivable			397.8			—			(397.8	)		—			295.4			—		(295.4	)		—
Total assets		$	882.3		$	525.0		$	(460.5	)	$	946.8		$	769.7		$	455.6	$	(386.0	)	$	839.3
Liabilities and Shareholders’ Equity
Current liabilities:
	Accounts payable	$	117.6		$	29.0					$	146.6		$	155.8		$	11.4				$	167.2
	Accrued expenses		98.7			(4.6	)					94.1			71.8			19.8					91.6
Total current liabilities			216.3			24.4			—			240.7			227.6			31.2		—			258.8
Long-term debt			203.7			—						203.7			100.0			—					100.0
Deferred income taxes			6.5			16.7						23.2			7.8			19.8					27.6
Lease obligations and other long-term liabilities			56.4			23.4						79.8			25.4			18.6					44.0
Intercompany payable			—			397.8			(397.8	)		—			—			295.4		(295.4	)		—
Shareholders’ equity:
	Preferred stock		—			—						—			—			—					—
	Common stock		1.4			—						1.4			1.3			—					1.3
	Additional paid-in capital		165.4			—						165.4			151.8			—					151.8
	Retained earnings		276.6			62.7			(62.7	)		276.6			299.6			90.6		(90.6	)		299.6
			443.4			62.7			(62.7	)		443.4			452.7			90.6		(90.6	)		452.7
	Treasury stock, at cost		(44.0	)		—						(44.0	)		(43.8	)		—					(43.8	)
Total shareholders’ equity			399.4			62.7			(62.7	)		399.4			408.9			90.6		(90.6	)		408.9
Total liabilities and shareholders’ equity		$	882.3		$	525.0		$	(460.5	)	$	946.8		$	769.7		$	455.6	$	(386.0	)	$	839.3

68

Jo-Ann Stores, Inc.

Notes to Consolidated Financial Statements (Continued)

Note 13 — Consolidating Financial Statements (Continued)

		Fiscal Year-Ended
		January 28, 2006												January 29, 2005
Consolidating Statement					Guarantor											Guarantor
of Operations		Parent			Subsidiaries			Eliminations			Consolidated			Parent		Subsidiaries		Eliminations			Consolidated
		(Dollars in millions)
Net sales		$	1,041.5		$	1,452.5		$	(611.2	)	$	1,882.8		$	986.9	$	1,293.0	$	(467.5	)	$	1,812.4
Cost of sales (exclusive of depreciation and amortization shown separately below)			622.8			1,012.0			(611.2	)		1,023.6			590.0		827.8		(467.5	)		950.3
	Gross margin		418.7			440.5			—			859.2			396.9		465.2		—			862.1
Selling, general and administrative expenses			369.7			404.3						774.0			349.4		359.1					708.5
Store pre-opening and closing costs			14.9			8.5						23.4			9.6		8.9					18.5
Depreciation and amortization			21.0			21.2						42.2			18.4		24.6					43.0
Debt repurchase expenses			—			—						—			4.2		—					4.2
Goodwill impairment			—			27.1						27.1			—		—					—
	Operating profit (loss)		13.1			(20.6	)		—			(7.5	)		15.3		72.6		—			87.9
Interest expense, net			5.0			7.8						12.8			0.9		12.8					13.7
	Income (loss) before income taxes		8.1			(28.4	)		—			(20.3	)		14.4		59.8		—			74.2
Income tax provision (benefit)			3.2			(0.5	)					2.7			5.5		22.5					28.0
	Income (loss) before equity (loss) income		4.9			(27.9	)		—			(23.0	)		8.9		37.3		—			46.2
Equity (loss) income from subsidiaries			(27.9	)		—			27.9			—			37.3		—		(37.3	)		—
Net (loss) income		$	(23.0	)	$	(27.9	)	$	27.9		$	(23.0	)	$	46.2	$	37.3	$	(37.3	)	$	46.2

		Fiscal Year-Ended January 31, 2004
				Guarantor
Consolidating Statement of Operations		Parent		Subsidiaries		Eliminations			Consolidated
		(Dollars in millions)
Net sales		$	950.3	$	1,153.2	$	(369.4	)	$	1,734.1
Cost of sales (exclusive of depreciation and amortization shown separately below)			567.5		725.4		(369.4	)		923.5
	Gross margin		382.8		427.8		—			810.6
Selling, general and administrative expenses			335.7		335.5					671.2
Store pre-opening and closing costs			6.4		6.9					13.3
Depreciation and amortization			15.3		23.7					39.0
Debt repurchase and share reclassification expenses			5.5		—					5.5
	Operating profit		19.9		61.7		—			81.6
Interest expense, net			5.1		11.4					16.5
	Income before income taxes		14.8		50.3		—			65.1
Income tax provision			7.2		17.8					25.0
	Income before equity income		7.6		32.5		—			40.1
Equity income from subsidiaries			32.5		—		(32.5	)		—
Net income		$	40.1	$	32.5	$	(32.5	)	$	40.1

69

Jo-Ann Stores, Inc.

Notes to Consolidated Financial Statements (Continued)

Note 13 — Consolidating Financial Statements (Continued)

		Fiscal Year-Ended
		January 28, 2006											January 29, 2005
Consolidating Statements of					Guarantor											Guarantor
Cash Flows		Parent			Subsidiaries			Eliminations		Consolidated			Parent			Subsidiaries			Eliminations		Consolidated
		(Dollars in millions)
Net cash (used for) provided by operating activities		$	(101.1	)	$	69.6		$	—	$	(31.5	)	$	117.5		$	24.4		$	—	$	141.9
Net cash flows used for investing activities:
	Capital expenditures		(72.6	)		(70.2	)		—		(142.8	)		(42.6	)		(24.5	)		—		(67.1	)
Net cash used for investing activities			(72.6	)		(70.2	)		—		(142.8	)		(42.6	)		(24.5	)		—		(67.1	)
Net cash flows provided by (used for) financing activities:
	Proceeds from issuance of 7.5% senior subordinated notes, net		—			—			—		—			97.4			—			—		97.4
	Purchase of 103/8 % senior subordinated notes		—			—			—		—			(66.6	)		—			—		(66.6	)
	Net change in revolving credit facility		103.7			—			—		103.7			(49.3	)		—			—		(49.3	)
	Proceeds from stock-based compensation plans		7.9			—			—		7.9			10.0			—			—		10.0
	Other, net		1.0			—			—		1.0			(4.1	)		—			—		(4.1	)
Net cash provided by (used for) financing activities			112.6			—			—		112.6			(12.6	)		—			—		(12.6	)
Net (decrease) increase in cash and cash equivalents			(61.1	)		(0.6	)		—		(61.7	)		62.3			(0.1	)		—		62.2
Cash and cash equivalents at beginning of year			76.6			3.0			—		79.6			14.3			3.1			—		17.4
Cash and cash equivalents at end of year		$	15.5		$	2.4		$	—	$	17.9		$	76.6		$	3.0		$	—	$	79.6

		Fiscal Year-Ended January 31, 2004
					Guarantor
Consolidating Statements of Cash Flows		Parent			Subsidiaries			Eliminations		Consolidated
		(Dollars in millions)
Net cash provided by operating activities		$	31.0		$	20.7		$	—	$	51.7
Net cash flows used for investing activities:
	Capital expenditures		(37.0	)		(20.6	)		—		(57.6	)
	Proceeds from sale of equity investment		6.5			—			—		6.5
Net cash used for investing activities			(30.5	)		(20.6	)		—		(51.1	)
Net cash flows used for financing activities:
	Purchase of 103/8 % senior subordinated notes		(61.7	)		—			—		(61.7	)
	Net change in revolving credit facility		9.3			—			—		9.3
	Proceeds from stock-based compensation plans		6.6			—			—		6.6
	Other, net		(0.6	)		—			—		(0.6	)
Net cash used for financing activities			(46.4	)		—			—		(46.4	)
Net (decrease) increase in cash and cash equivalents			(45.9	)		0.1			—		(45.8	)
Cash and cash equivalents at beginning of year			60.2			3.0			—		63.2
Cash and cash equivalents at end of year		$	14.3		$	3.1		$	—	$	17.4

70

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

      None.

Item 9A.  Controls and Procedures

      Disclosure Controls and Procedures — The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the Company’s reports under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s (“SEC”) rules and forms, and that such information is accumulated and communicated to management, including the Company’s Chief Executive Officer (“CEO”) and Chief Accounting Officer (“CAO”), as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, as the Company’s are designed to do, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

      In connection with the preparation of this Annual Report on Form 10-K, as of January 28, 2006, an evaluation was performed under the supervision and with the participation of the Company’s management, including the CEO and CAO, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act).

      Management’s Annual Report on Internal Control over Financial Reporting — Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) under the Exchange Act. The Company’s internal control system is designed to provide reasonable assurance to the Company’s management and Board of Directors regarding the preparation and fair presentation of published financial statements. All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.

      Management has assessed the effectiveness of the Company’s internal control over financial reporting as of January 28, 2006. In making its assessment of internal control over financial reporting, management used the criteria set forth by the Committee of Sponsoring Organizations (“COSO”) of the Treadway Commission in Internal Control — Integrated Framework.

      Based on management’s assessment of internal controls over financial reporting under the criteria established in Internal Control — Integrated Framework, the Company concluded that, as of January 28, 2006, the Company’s internal control over financial reporting was effective to provide reasonable assurance regarding the reliability of financial reporting and preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States. Management’s assessment of the effectiveness of the Company’s internal control over financial reporting as of January 28, 2006 has been audited by Ernst & Young LLP, an independent registered public accounting firm, and their report on management’s assessment appears below.

      Changes in Internal Control Over Financial Reporting — There were no changes in the Company’s internal control over financial reporting that occurred during the Company’s last fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

71

Report of Independent Registered Public Accounting Firm

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

      We have audited management’s assessment, included in the accompanying Management’s Annual Report on Internal Control over Financial Reporting, that Jo-Ann Stores, Inc. maintained effective internal control over financial reporting as of January 28, 2006, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Jo-Ann Stores, Inc.’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the company’s internal control over financial reporting based on our audit.

      We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

      A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

      Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

      In our opinion, management’s assessment that Jo-Ann Stores, Inc. maintained effective internal control over financial reporting as of January 28, 2006, is fairly stated, in all material respects, based on the COSO criteria. Also, in our opinion, Jo-Ann Stores, Inc. maintained, in all material respects, effective internal control over financial reporting as of January 28, 2006, based on the COSO criteria.

      We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Jo-Ann Stores, Inc. as of January 28, 2006 and January 29, 2005, and the related consolidated statements of operations, cash flows, and shareholders’ equity for each of the three years in the period ended January 28, 2006, and our report dated March 21, 2006 expressed an unqualified opinion thereon.

/s/ Ernst & Young LLP

Cleveland, Ohio

March 21, 2006

72

Item 9B. Other Information

      None.

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 2006 Annual Meeting of Shareholders to be held on June 14, 2006 (the “Proxy Statement”), which is expected to be filed with the Securities and Exchange Commission pursuant to Regulation 14A of the Securities Exchange Act of 1934 within 120 days after the end of the Company’s fiscal year.

      The information regarding the Audit Committee of our Board of Directors and the information regarding “audit committee financial experts” are incorporated herein by reference to the information set forth under the caption “Meetings and Committees of the Board of Directors — Audit Committee” in the Proxy Statement.

      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 under the caption “Section 16(a) Beneficial Ownership Reporting Compliance” in the Proxy Statement.

      The Company’s Code of Business Conduct and Ethics (the “Code”) is applicable to the Company’s directors, officers (including the Company’s principal executive officer and principal financial officer) and employees. The Code is posted on the Company’s website at www.joann.com. Any amendments to the Code will be posted on the website. In addition, any waivers of the Code for the directors or executive officers of the Company will be disclosed in a report on Form 8-K.

Item 11.  Executive Compensation

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

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

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

Equity Compensation Plan Information

					Number of Securities
					Remaining Available
					for Future Issuance
	Number of Securities to				Under Equity
	Be Issued upon		Weighted-Average		Compensation Plans
	Exercise of		Exercise Price of		(Excluding
	Outstanding Options,		Outstanding Options,		Securities Reflected
	Warrants and Rights		Warrants and Rights		in Column (a))
Plan category	(a)		(b)		(c)
Equity compensation plans approved by security holders		2,006,912	$	15.83		216,425
Equity compensation plans not approved by security holders(1)		45,000		7.75		—
Total		2,051,912	$	15.66		216,425

⁽¹⁾  On February 9, 2001, the Company registered 319,000 common shares to be issued in connection with options to purchase common shares pursuant to award agreements with certain employees. The options

73

were granted under the rules provided for in the 1998 Incentive Compensation Plan. As of January 28, 2006, 45,000 of the 319,000 securities registered remain to be issued.

Item 13.  Certain Relationships and Related Transactions

      Ira Gumberg, one of the Company’s Directors, is President and Chief Executive Officer and a principal shareholder of J.J. Gumberg Co., a real estate development and investment company. J.J. Gumberg, Co. manages numerous shopping centers, 11 of which contain stores of the Company. The owners of the various shopping centers managed by J.J. Gumberg Co. are separate legal entities (individually referred to as “shopping center entity”) in which Mr. Gumberg or his immediate family may have some investment interest. Four of the leases were entered into after Mr. Gumberg became a Director of the 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 by the Company during fiscal 2006, 2005 and 2004 to the shopping center entities for various stores under lease amounted to $2.0 million, $2.1 million and $1.6 million, respectively.

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

Item 14.  Principal Accountant Fees and Services

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

74

PART IV

Item 15.  Exhibits and Financial Statement Schedules

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

(1)  Financial Statements

The consolidated financial statements filed as part of this Form 10-K are located as set forth in the index on page 42 of this report.

(2)  Financial Statement Schedules

All schedules have been omitted because they are not applicable or the required information is included in the consolidated financial statements or notes thereto.

(3)  Exhibits

The exhibits listed in the Index to Exhibits, which appears on pages 76 through 77 of this Form 10-K, are filed as part of this Form 10-K.

75

Index to Exhibits

Exhibit
Number		Exhibit Description
	3.1	Amended and Restated Articles of Incorporation of Jo-Ann Stores, Inc. (filed as an Exhibit 3.1 to the Registrant’s Form 10-Q filed with the Commission on December 15, 2003 and incorporated herein by reference)
	3.2	Amended and Restated Code of Regulations (filed as an Exhibit 3.2 to the Registrant’s Form 10-Q filed with the Commission on December 15, 2003 and incorporated herein by reference)
	4.1	Second Amended and Restated Rights Agreement, dated November 4, 2003, between the Registrant and National City Bank, as Rights Agent (filed as an Exhibit 4.1 to the Registrant’s Form 10-K filed with the Commission on April 15, 2004 and incorporated herein by reference)
	4.2	Indenture between the Registrant and Jo-Ann Stores Supply Chain Management, Inc., Team Jo-Ann, Inc., FCA of Ohio, Inc., and House of Fabrics, Inc., as guarantors, and National City Bank, as trustee, relating to the 7.50% Senior Subordinated Notes due 2012, including the form of note (filed as an Exhibit 4.4 to the Registrant’s Form 10-K filed with the Commission on April 15, 2004 and incorporated herein by reference)
	10.1	Jo-Ann Stores, Inc. Supplemental Retirement Benefit Plan, as amended (filed as an Exhibit 10.5 to the Registrant’s Form 10-K filed with the Commission on May 2, 2003 and incorporated herein by reference)*
	10.2	List of Executive Officers who participate in the Registrant’s Supplemental Retirement Benefit Plan, as amended *
	10.3	Schedule to Jo-Ann Stores, Inc. Supplemental Retirement Benefit Plan, effective as of October 30, 2005 (filed as an Exhibit 10.1 to the Registrant’s Form 8-K filed with the Commission on November 1, 2005 and incorporated herein by reference)*
	10.4	Employment Agreement dated October 21, 2005 between the Registrant and Alan Rosskamm (filed as an Exhibit 10.1 to the Registrant’s Form 8-K filed with the Commission on October 26, 2005 and incorporated herein by reference)*
	10.5	Employment Agreement dated October 21, 2005 between the Registrant and David Holmberg (filed as an Exhibit 10.2 to the Registrant’s Form 8-K filed with the Commission on October 26, 2005 and incorporated herein by reference)*
	10.6	Fabri-Centers of America, Inc. 1990 Employees Stock Option and Stock Appreciation Rights Plan, as amended (filed as an Exhibit 10.8 to the Registrant’s Form 10-K filed with the Commission on May 2, 2003 and incorporated herein by reference)*
	10.7	Jo-Ann Stores, Inc. (formerly Fabri-Centers of America, Inc.) 1998 Incentive Compensation Plan, as amended (filed as an Exhibit 10.9 to the Registrant’s Form 10-K filed with the Commission on April 15, 2004 and incorporated herein by reference)*
	10.8	Agreement dated October 30, 2003 among Jo-Ann Stores, Inc., Betty Rosskamm and Alma Zimmerman, a member of one of the Company’s original founding families and who is now deceased (Second Amended and Restated) (filed as an Exhibit 10.10 to the Registrant’s Form 10-K filed with the Commission on April 15, 2004 and incorporated herein by reference)*
	10.9	Credit Agreement dated as of April 24, 2001 among the Registrant, as borrower, Fleet National Bank, as Issuing Bank, Fleet Retail Finance Inc., as Administrative Agent and Collateral Agent, Congress Financial Corporation, as Documentation Agent, GMAC Commercial Credit, LLC, National City Commercial Finance, Inc. and The CIT Group/ Business Credit, Inc., as Co-Agents, and Fleet Securities Inc., as Arranger and Syndication Agent (filed as an Exhibit 10.1 to the Registrant’s Form 10-Q filed with the Commission on June 19, 2001 and incorporated herein by reference)
	10.10	First Amendment to Credit Agreement dated as of April 24, 2001 (filed as an Exhibit 10.2 to the Registrant’s Form 10-Q filed with the Commission on June 19, 2001 and incorporated herein by reference)
	10.11	Second Amendment to Credit Agreement dated as of March 17, 2003 (filed as an Exhibit 10.13 to the Registrant’s Form 10-K filed with the Commission on April 15, 2004 and incorporated herein by reference)

76

Exhibit
Number		Exhibit Description
	10.12	Third Amendment to Credit Agreement dated as of February 18, 2004 (filed as an Exhibit 10.14 to the Registrant’s Form 10-K filed with the Commission on April 15, 2004 and incorporated herein by reference)
	10.13	Fourth Amendment to Credit Agreement dated April 16, 2004 (filed as an Exhibit 10.15 to the Registrant’s Form S-4 filed with the Commission on May 24, 2004 and incorporated herein by reference)
	10.14	Fifth Amendment to Credit Agreement dated February 23, 2006.
	10.15	Fabri-Centers of America, Inc. Executive Incentive Plan (filed as an Exhibit 11 to the Registrant’s Form 10-K filed with the Commission on May 2, 2003 and incorporated herein by reference)*
	10.16	Fabri-Centers of America, Inc. 1996 Stock Option Plan for Non-Employee Directors (filed as an Exhibit 10.11 to the Registrant’s Form 10-K filed with the Commission on May 4, 2001 and incorporated herein by reference)*
	10.17	Description of Executive Compensation Arrangements of the Registrant (incorporated herein by reference to Item 1.01 of Form 8-K, filed with the Commission on March 23, 2005)*
	10.18	Description of Executive Compensation Arrangements of the Registrant (incorporated herein by reference to Item 1.01 of Form 8-K, filed with the Commission on November 23, 2005)*
	10.19	Form of Restricted Stock Award Agreement of the Registrant (filed as an Exhibit 10.1 to the Registrant’s Form 8-K filed with the Commission on November 23, 2005 and incorporated herein by reference)*
	10.20	Form of Notice of Grant of Non-Qualified Stock Option (filed as an Exhibit 10.2 to the Registrant’s Form 8-K filed with the Commission on November 23, 2005 and incorporated herein by reference)*
	10.21	Letter Agreement entered into on November 22, 2005 between the Registrant and David Bolen regarding Mr. Bolen’s departure from the Company*
	10.22	Letter Agreement entered into on November 23, 2005 between the Registrant and David Holmberg regarding Mr. Holmberg’s employment with the Company*
	10.23	Letter Agreement entered into on February 28, 2006 between the Registrant and Alan Rosskamm regarding Mr. Rosskamm’s cessation of the Chairman, President and Chief Executive Officer positions upon the assumption of those roles by another individual.*
	14	Code of Business Conduct and Ethics (filed as an Exhibit 14 to the Registrant’s Form 10-K filed with the Commission on April 15, 2004 and incorporated herein by reference)
	21	Subsidiaries of Jo-Ann Stores, Inc.
	23	Consent of Ernst & Young LLP, Independent Auditors
	24	Power of Attorney
	31.1	Section 302 Certification By Chief Executive Officer
	31.2	Section 302 Certification By Principal Financial Officer
	32.1	Section 906 Certification of Principal Executive Officer and Principal Financial Officer

*  Indicates a management contract or compensatory plan or arrangement

77

SIGNATURES

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

Jo-Ann Stores, Inc.

By: /s/ Alan Rosskamm
   Alan Rosskamm
President and Chief Executive Officer April 13, 2006

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

Signature	Title
/s/ Alan Rosskamm Alan Rosskamm	Chairman of the Board and Director (Chief Executive Officer)
/s/ James Kerr* James Kerr	Vice President, Chief Accounting Officer (Principal Financial and Accounting Officer)
/s/ Scott Cowen* Scott Cowen	Director
/s/ Ira Gumberg* Ira Gumberg	Director
/s/ Patricia Morrison* Patricia Morrison	Director
/s/ Frank Newman* Frank Newman	Director
/s/ Beryl Raff* Beryl Raff	Director
/s/ Gregg Searle* Gregg Searle	Director
/s/ Tracey T. Travis* Tracey T. Travis	Director

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

*By: /s/ Alan Rosskamm
Alan Rosskamm, Attorney-in-Fact April 13, 2006

78 EX-10.2 2 l17624aexv10w2.htm EX-10.2 LIST OF EXECUTIVE OFFICERS

Exhibit 10.2

JO-ANN STORES, INC.

LIST OF EXECUTIVE OFFICERS WHO PARTICIPATE IN THE REGISTRANT’S 1979
SUPPLEMENTAL RETIREMENT BENEFIT PLAN, AS AMENDED

     David Holmberg

EX-10.2

EX-10.2

EX-10.14

Exhibit 10.14

FIFTH AMENDMENT TO CREDIT AGREEMENT

This Fifth Amendment to Credit Agreement (this “Fifth Amendment”) is made as of this 21st day of February, 2006 by and among

JO-ANN STORES, INC., an Ohio corporation, having a principal place of business at 5555 Darrow Road, Hudson, Ohio 44236, as Lead Borrower for the Borrowers, being

said JO-ANN STORES, INC., and

FCA of Ohio, Inc., an Ohio corporation, having a principal place of business at 5555 Darrow Road, Hudson, Ohio 44236, and

House of Fabrics, Inc., a Delaware corporation, having a principal place of business at 5555 Darrow Road, Hudson, Ohio 44236, and

Jo-Ann Stores Supply Chain Management, Inc., an Ohio corporation, having a principal place of business at 5555 Darrow Road, Hudson, Ohio 44236

each of the Lenders party to the Credit Agreement (defined below) (together with each of their successors and assigns, referred to individually as a “Lender” and collectively as the “Lenders”), and

BANK OF AMERICA, N.A. (f/k/a Fleet National Bank), as Issuing Bank, a national banking association having a place of business at 100 Federal Street, Boston, Massachusetts 02110; and

FLEET RETAIL GROUP, LLC (f/k/a Fleet Retail Finance Inc.), as Administrative Agent and Collateral Agent for the Lenders, a Delaware limited liability company, having its principal place of business at 40 Broad Street, Boston, Massachusetts 02109; and

WACHOVIA BANK, N.A. (f/k/a Congress Financial Corporation), as Documentation Agent; and

GMAC COMMERCIAL FINANCE LLC (f/k/a GMAC Commercial Credit LLC), NATIONAL CITY BUSINESS CREDIT, INC. (f/k/a National City Commercial Finance, Inc.) AND THE CIT GROUP/BUSINESS CREDIT, INC., as Co-Agents

in consideration of the mutual covenants herein contained and benefits to be derived herefrom.

W I T N E S S E T H

     A. Reference is made to the Credit Agreement (as amended and in effect, the “Credit Agreement”) dated as of April 24, 2001 by and among the Lead Borrower, the Borrowers, the Lenders, the Issuing Bank, the Agents, the Documentation Agent and the Co-Agents.

     B. The parties to the Credit Agreement desire to modify, amend and waive certain provisions of the Credit Agreement, as provided herein.

     Accordingly, the parties hereto agree as follows:

     1. Definitions. Capitalized terms used herein and not otherwise defined herein shall have the meanings assigned to such terms in the Credit Agreement.

     2. Amendments to Article I of the Credit Agreement. The provisions of Article I of the Credit Agreement are hereby amended as follows:

a.	The definition of “Appraisal Percentage” is hereby deleted in its entirety and the following substituted in its stead:
	“Appraisal Percentage” means the following percentages for the periods indicated:

Period	Appraisal Percentage
January 1 through September 14 of each year and November 16 through December 31 of each year	85%
September 15 through November 15 of each year	90%

b.	The definition of “Cash Control Event” is hereby amended by deleting “$50,000,000.00” in the first line thereof and substituting “$40,000,000.00” in its stead.
c.	The definition of “Consolidated Net Worth” is hereby amended by adding the following to the end thereof:
	“plus (f) the amount of any goodwill charged off during or subsequent to the Loan Parties’ Fiscal Year ending January 31, 2006.”
d.	The definition of “Inventory Advance Rate” is hereby deleted in its entirety and the following substituted in its stead:

Period	Inventory Advance Rate
January through March of each year	62.5%
April 1 through September 14 of each year and November 16 through December 31 of each year	65%
September 15 through November 15 of each year	74%

2

e.

The following new definition is hereby added to Article I to the Credit Agreement in appropriate alphabetical order:

“Consolidated Net Income” shall mean, with respect to the Loan Parties for any period, the net income (or loss) of the Loan Parties on a consolidated basis for such period taken as a single accounting period determined in accordance with GAAP, plus the amount of any goodwill of the Loan Parties charged off during such period (to the extent any such goodwill is included as an expense in the determination of Consolidated Net Income); provided, however, that there shall be excluded (i) the income (or loss) of a Person in which any Loan Party has a joint interest, except to the extent of the amount of dividends or other distributions actually paid to such Loan Party during such period, (ii) the income (or loss) of a Person accrued prior to the date it becomes a Subsidiary of a Loan Party or any of such Loan Party’s Subsidiaries or is merged into or consolidated with a Loan Party or any of its Subsidiaries or that Person’s assets are acquired by such Loan Party or any of its Subsidiaries, and (iii) the income of any direct or indirect Subsidiary of a Loan Party to the extent that the declaration or payment of dividends or similar distributions by that Subsidiary of that income is not at the time permitted by operation of the terms of its charter documents or any agreement, instrument, judgment, decree, order, statute, rule or governmental regulation applicable to that Subsidiary.

     3. Amendments to Article II. The provisions of Article II of the Credit Agreement are hereby amended as follows:

a.	The provisions of Section 2.01(a)(i) of the Credit Agreement are hereby amended by deleting the number “$350,000,000” appearing therein and substituting the number “$425,000,000” in its stead.
b.	The provisions of Section 2.02(a)(vi) are hereby deleted in their entirety and the following substituted in their stead:

(vi) Shrink (an Inventory Reserve): In an amount determined by the Administrative Agent based upon the Loan Parties’ historical Shrink rate.

c. The provisions of Section 2.05(b) of the Credit Agreement are hereby amended by deleting the number “$350,000,000” appearing therein and substituting the number “$425,000,000” in its stead.

     4. Amendment to Schedules. The Schedules to the Credit Agreement are hereby amended as follows:

3

a.	Schedule 1.1 is hereby deleted in its entirety and a new Schedule 1.1 in the form annexed hereto substituted in its stead.
b.	Schedule 6.11 is hereby deleted in its entirety and a new Schedule 6.11 in the form annexed hereto substituted in its stead.

              5. Conditions Precedent to Effectiveness. This Fifth Amendment shall not be effective until each of the following conditions precedent have been fulfilled to the satisfaction of the Administrative Agent:

a.	This Fifth Amendment shall have been duly executed and delivered by the Borrowers and the Lenders, shall be in full force and effect, and shall be in form and substance satisfactory to the Administrative Agent and the Lenders.
b.	All action on the part of the Borrowers necessary for the valid execution, delivery and performance by the Borrowers of this Fifth Amendment shall have been duly and effectively taken and evidence thereof satisfactory to the Administrative Agent shall have been provided to the Administrative Agent.
c.	The Borrowers shall have paid to the Agent, for the pro rata benefit of the Lenders who have increased their Commitments pursuant to this Fifth Amendment, an amendment fee in an amount equal to 0.20% of the amount of the increase in each such Lender’s Commitment. The amendment fee shall be fully earned and paid by the Borrower to the Agent in full on the effective date of this Fifth Amendment. The amendment fee shall not be subject to refund or rebate under any circumstances.
d.	The Borrowers shall have paid to the Administrative Agent all other amounts due under the Loan Documents as of the effective date of this Fifth Amendment.
e.	The Borrowers shall have provided such additional instruments and documents to the Administrative Agent as the Administrative Agent and Administrative Agent’s counsel may have reasonably requested.

6. Miscellaneous.

a.	Except as otherwise expressly provided herein, all provisions of the Credit Agreement and the other Loan Documents remain in full force and effect.
b.	This Fifth Amendment may be executed in several counterparts and by each party on a separate counterpart, each of which when so executed and delivered shall be an original, and all of which together shall constitute one instrument.
c.	This Fifth Amendment expresses the entire understanding of the parties with respect to the transactions contemplated hereby. No prior negotiations or discussions shall limit, modify, or otherwise affect the provisions hereof.

4

d.	Any determination that any provision of this Fifth Amendment or any application hereof is invalid, illegal or unenforceable in any respect and in any instance shall not effect the validity, legality, or enforceability of such provision in any other instance, or the validity, legality or enforceability of any other provisions of this Fifth Amendment.
e.	The Borrowers shall pay on demand all costs and expenses of the Agents, including, without limitation, reasonable attorneys’ fees in connection with the preparation, negotiation, execution and delivery of this Fifth Amendment.
f.	The Borrowers warrant and represent that the Borrowers have consulted with independent legal counsel of the Borrowers’ selection in connection with this Fifth Amendment and are not relying on any representations or warranties of the Agents, the Lenders or their counsel in entering into this Fifth Amendment.

5

IN WITNESS WHEREOF, the parties have duly executed this Fifth Amendment as of the day and year first above written.

JO-ANN STORES, INC.
as Lead Borrower and Borrower
by	/s/ Donald R. Tomoff
Name:	Donald R. Tomoff
Title:	Vice President, Finance and Treasurer
FCA OF OHIO, INC.
as Borrower
by	/s/ Donald R. Tomoff
Name:	Donald R. Tomoff
Title:	Treasurer
HOUSE OF FABRICS, INC.
as Borrower
by	/s/ Donald R. Tomoff
Name:	Donald R. Tomoff
Title:	Treasurer
JO-ANN STORES SUPPLY CHAIN MANAGEMENT, INC.
as Borrower
by	/s/ Donald R. Tomoff
Name:	Donald R. Tomoff
Title:	Treasurer

6

FLEET RETAIL GROUP, LLC,
as Administrative Agent, as Collateral Agent, as Swingline Lender, and as Lender
By:	/s/ James J. Ward
	James Ward
	Managing Director
BANK OF AMERICA, N.A.,
as Issuing Bank
By:	/s/ James J. Ward
	James Ward
	Managing Director

7

WACHOVIA CAPITAL FINANCE CORPORATION (NEW ENGLAND), as Documentation Agent and Lender
By:	/s/ John Husson
Name:	John Husson
Title:	Director
GMAC COMMERCIAL FINANCE LLC
as Co-Agent and Lender
By:	/s/ Steven J. Brown
Name:	Steven J. Brown
Title:	Senior Vice President
NATIONAL CITY BUSINESS CREDIT, INC.
as Co-Agent and Lender
By:	/s/ Joseph L. Kwasny
Name:	Joseph L. Kwasny
Title:	Director
THE CIT GROUP/BUSINESS CREDIT, INC.
as Co-Agent and Lender
By:	/s/ Manuel Borges
Name:	Manuel Borges
Title:	Vice President
WELLS FARGO FOOTHILL, LLC
as Lender
By:	/s/ Donna Arenson
Name:	Donna Arenson
Title:	Assistant Vice President

8

COMERICA BANK
as Lender
By:	/s/ Timothy C. Griffin
Name:	Timothy C. Griffin
Title:	Vice President
GENERAL ELECTRIC CAPITAL CORPORATION
as Lender
By:	/s/ Brian P. Schwinn
Name:	Brian P. Schwinn
Title:	Duly Authorized Signatory
SIEMENS FINANCIAL SERVICES, INC.
as Lender
By:	/s/ Frank Amodio
Name:	Frank Amodio
Title:	Vice President — Credit
RZB FINANCE, LLC
as Lender
By:	/s/ Christoph Hoedl
Name:	Christoph Hoedl
Title:	Group Vice President
By:	/s/ John A. Valiska
Name:	John A. Valiska
Title:	First Vice President
US BANK N.A.
as Lender
By:	/s/ Jeffrey A. Kessler
Name:	Jeffrey A. Kessler
Title:	Vice President

9

KEY BANK NATIONAL ASSOCIATION
as Lender
By:	/s/ Nadine M. Eames
Name:	Nadine M. Eames
Title:	Vice President
WEBSTER BUSINESS CREDIT CORPORATION
as Lender
By:	/s/ Andrew D. Wierman
Name:	Andrew D. Wierman
Title:	Vice President
LASALLE BUSINESS CREDIT, LLC
as Lender
By:	/s/ Andrew Cerussi
Name:	Andrew Cerussi
Title:	Vice President

10

SCHEDULE 1.1
LENDERS AND COMMITMENTS

			Revolving
			Commitment			Commitment
Lender	Revolving Commitment		Percentage			Percentage
Fleet Retail Group, LLC	$	59,500,000		14.000	%		14.000	%
Wachovia Capital Financial Corporation (New England)	$	48,571,430		11.430	%		11.430	%
GMAC Commercial Finance LLC	$	42,500,000		10.000	%		10.000	%
The CIT Group/ Business Credit, Inc.	$	42,500,000		10.000	%		10.000	%
National City Business Credit, Inc.	$	42,500,000		10.000	%		10.000	%
Wells Fargo Foothill, LLC	$	30,357,143		7.143	%		7.143	%
General Electric Capital Corporation	$	30,357,143		7.143	%		7.143	%
Key Bank National Association	$	28,571,428		6.722	%		6.722	%
LaSalle Business Credit, Inc.	$	24,285,714		5.714	%		5.714	%
US Bank N.A.	$	20,000,000		4.706	%		4.706	%
Comerica Bank	$	15,785,714		3.714	%		3.714	%
Siemens Financial Services, Inc.	$	15,785,714		3.714	%		3.714	%
Webster Business Credit Corporation	$	12,142,857		2.857	%		2.857	%
RZB Finance, LLC	$	12,142,857		2.857	%		2.857	%
	$	425,000,000		100	%		100	%

SCHEDULE 6.11
FINANCIAL PERFORMANCE COVENANTS

The Lead Borrower and its Subsidiaries will not permit their Consolidated Net Worth to be less than the following at the end of the Fiscal Periods set forth below:

Fiscal Month Ending	Required Consolidated Net Worth
February, 2006	$	334,253,000	*
March, 2006	$	333,240,000	*
April, 2006	$	331,217,000	*
May, 2006	$	328,060,000	*
June, 2006	$	325,366,000	*
July, 2006	$	319,006,000	*
August, 2006	$	314,602,000	*
September, 2006	$	317,801,000	*
October, 2006	$	321,274,000	*
November, 2006	$	326,841,000	*
December, 2006	$	347,891,000	*
January, 2007	$	345,698,000	*

Fiscal Quarter Ending	Required Consolidated Net Worth
April, 2007 and each Fiscal Quarter ending thereafter	$345,698,000 plus 50% of the quarterly Consolidated Net Income of the Loan Parties earned in Fiscal Quarters ending on or after April 2007 on a cumulative basis (with no reduction for any net loss in any Fiscal Quarter)*

* plus, in each case, 100% of the net proceeds from any new equity issuances received from and after the Fiscal Month commencing February, 2006.

EX-10.21

Exhibit 10.21

Jo-Ann Stores, Inc.

November 22, 2005

Mr. David Bolen

Dear Dave:

The purpose of this letter is to set forth the agreement we have reached with respect to the termination of your employment with Jo-Ann Stores, Inc., as Executive Vice President, Merchandising and Marketing, and the payments and benefits to be made available to you in connection with your separation, and various related matters.

For purposes of this agreement the following definitions shall apply:

Transition Period:	The period of time between Sunday, October 2, 2005 and your last day worked
Separation Date:	Your last day worked as determined by the Company, but no later than December 31, 2005
Salary Continuation Period:	The 30 months succeeding December 31, 2005

We have agreed as follows:

1.	Your employment as EVP, Merchandising and Marketing, of Jo-Ann Stores will end no later than December 31, 2005, and you will cease to be an employee of Jo-Ann Stores as of the end of the business day on your Separation Date. Until the Separation Date, you will continue to be an active employee with regard to salary, benefits and expenses.
2.	Following your Separation Date, Jo-Ann Stores will make the following payments and will provide the following benefits to you:

(a)	Jo-Ann Stores will pay you an amount equal to your current base salary of $428,000 for 18 months payable in 39 bi-weekly installments as defined by your employment agreement dated July 30, 2001.
	In consideration of your acceptance of the terms of this agreement, the Company further agrees to pay you an additional $214,000 for 12 months payable in 26 biweekly installments commencing on the 19th month following the Separation Date and ending after the 30th month following the Separation Date.
(b)	You will not be eligible to participate in any payout under the FY2005, FY2006 or FY2007 Management Incentive Plan (MIP). Additionally, you will not be eligible to receive any incentives that may be awarded during the Transition Period.
(c)	Insurance:

1.	Jo-Ann Stores will provide to you continued coverage under the Jo-Ann Stores Benefit Plan through the earlier of (i) 30 months from your Separation Date, and (ii) the date you first become eligible for health and hospitalization insurance coverage provided by another employer. To the extent coverage for all Jo-Ann Stores’ employees is contributory; you agree to contribute to the cost of coverage on the same terms applicable to continuing employees of Jo-Ann Stores. The Consolidated Omnibus Budget Reconciliation Act (COBRA) of 1985 provides you with specific rights concerning the continuation of your medical coverage; alternative coverage under this paragraph does not extend the maximum coverage period under that statute. COBRA will be offered to you at the time of an appropriate triggering event.
2.	Your current group term life insurance coverage will continue through (i) the earlier of 30 months from your Separation Date, or (ii) the date on which you first become eligible for life insurance coverage provided by any other employer. To the extent coverage for Jo-Ann Stores employees is contributory; you agree to contribute to the cost of coverage on the same terms applicable to continuing employees of Jo-Ann Stores.
3.	Disability insurance will cease on your Separation Date. However, you do have the option to continue Long-Term Disability coverage if you currently have it. Further information will be sent to you upon request.
4.	Your rights under the Supplemental Life Insurance Program (Split Dollar) will cease as governed under the provisions of that plan, based on a termination of employment, effective as of the Separation Date.
5.	Your rights under the Supplemental Retirement Benefit Plan will cease as governed under the provisions of that plan based on a termination of employment and will be effective as of the Separation Date.

(d) We will pay all accrued and unused Paid Time Off contemporaneously with the first pay date after the Separation Date.

3.	By special consent of the Board of Directors, you will have 90 days from the Separation Date to exercise any stock options that were vested as of that Separation Date. No additional options will vest during this 90-day period. All restricted stock awards are cancelled as of your Separation Date and certificates must be retuned to the EVP, Human Resources within 10 days of that date.
4.	Jo-Ann Stores will continue to provide your car allowance through the earlier of 30 months from the Separation Date or the date on which you become eligible for a car or car allowance provided by any other employer.
5.	Jo-Ann Stores will provide you with Executive Level outplacement services at the Company’s expense through Ratliff and Taylor until you obtain subsequent employment.

6.	You agree that beyond your Separation Date, you will have no other demands for reimbursable expenses or claims of any kind against the Company, and the signing of this agreement and the terms hereunder satisfy all obligations Jo-Ann Stores has with you.
7.	This Agreement, during its first 18 months, shall inure to the benefit of and be enforceable by you and each of your personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees, and legatees. If you die while any amount would still be payable to you hereunder had you continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement, to your Beneficiary. If you have not named a Beneficiary, then such amounts shall be paid to your devisee, legatee, or other designee, or if there is no such designee, to you estate. You may designate one or more persons or entities as the primary and/or contingent Beneficiaries of any benefits owing to you under this Agreement. Such designation must be in the form of a signed writing acceptable to the Company. You may make or change such designation at any time.
8.	You further agree that in the event of you death after the initial 18 months of salary continuation, all obligations cease and no further payments on your behalf will be made to your beneficiaries or estate.
9.	Further, you agree that, if you secure employment, during the transition period or during the salary continuation period, you will immediately contact the EVP, Human Resources. Upon obtaining employment, the balance of any money that you may be eligible to receive may be paid in a lump sum amount. All other benefits, other than salary continuation, described in Item 2, Page 1 of this letter, will discontinue effective your first day of benefit eligibility with a new employer.
10.	You agree not to divulge to persons, other than designated employees of the Company, any confidential information gathered or learned in the scope of your employment with the Company. Confidential information includes, but is not limited to, information in oral, written or recorded form regarding business plans, trade or business secrets, Company financial records, performance results of stores, product categories or marketing vehicles, supplier contracts or relationships, contents of this Agreement or any other information of similar nature, unless to your attorneys, financial planners or family or in order to enforce the terms hereof. “Confidential Information” shall not include information which: (i) becomes available broadly to persons outside the Company other than as a result of disclosure by you; (ii) becomes available to you on a non-confidential basis from a source other than the Company, provided such source is not in breach of any confidentiality or similar agreement in disclosing such information to you; (iii) you are required to disclose pursuant to law, court order, or subpoena, provided you give the Company advance written notice of the required disclosure; or (iv) was known to you prior to your employment with the Company.
11.	To the extent that you have any doubt, either now or in the future, as to whether information you possess is confidential or personal, you should contact Alan Rosskamm, CEO, or his successor for clarification before divulging or using such information. You understand and agree that such information divulged to third parties or your unauthorized use of it would cause Jo-Ann Stores serious competitive harm and is a violation of this agreement.

12.

You agree to return immediately all Company credit cards, Company telephone credit cards, keys, key cards, discount cards, equipment except your Blackberry and laptop computer for which ownership shall be transferred to you, and all Jo-Ann Stores related documents, materials and property that you have in your possession and not to make or retain any copies thereof without authorization from the EVP, Human Resources.

13.

During the salary continuation period, you agree as follows:

(a)	You will not have any financial or other interests in nor become involved, directly as a proprietor, partner, shareholder, officer, employee, consultant, agent or in any other capacity, with any person, firm or legal entity engaged in any significant extent within the United States in the business of multi-unit retailing of fabrics and/or crafts. “Multi-unit retailing” is defined as in excess of five stores and “significant extent” is defined as any entity where revenues in fabrics and crafts exceed 5% of the total revenues of the entity. Additionally, you agree that for any entity where revenues are less than 5% of total revenues, you will not have a role in that entity that directly impacts the fabric and/or crafts business. The obligations of this paragraph shall extend to all subsidiaries, related and affiliated entities, franchises, partnerships, joint ventures and successors in interest or assigns of the persons, firms or legal entities in multi-unit retailing of fabrics and/or crafts resulting from a merger, acquisition, divestiture, change in control, name change or any other reason and shall not affect or extinguish any of the obligations of this paragraph.
(b)	You will not have any financial or other interests in nor become involved, either directly or indirectly or as a proprietor, partner, shareholder, officer, employee, consultant, agent or in any other capacity, with any person, firm or legal entity, in that portion of the entity that is involved in the sale in the continental United States of products to any of the persons, firm or legal entities engaged in multi unit retailing (as defined above) of fabrics and/or crafts without the express written consent and approval of Alan Rosskamm, CEO or his successor of Jo-Ann Stores, such consent may be granted or withheld at his sole discretion. The obligations of this paragraph shall extend to all subsidiaries related and affiliated entities, franchises, partnerships, joint ventures and successors in interest or assigns of the persons, firm or legal entities of any multi-unit retailer of fabrics and/or crafts. Any change in the persons, firms or legal entities of any multi-unit retailer of fabrics and/or crafts resulting from a merger, acquisition, divestiture, change in control, name change or any other reason and shall not affect or extinguish any of the obligations of this paragraph.
(c)	Notwithstanding the foregoing, we agree that you may purchase and hold for investment less than two percent (2%) of the shares of any corporation whose shares are regularly traded on a national securities exchange or in the over-the-counter market.
(d)	You will not recruit or solicit for employment any active Jo-Ann Stores’ employees or seek to induce any employee of Jo-Ann Stores to terminate his or her employment with Jo-Ann Stores.

14.	You agree to release and forever discharge the Company, its parent, and all its affiliated corporations and their directors, officers, agents and associates from any and all actions and causes of actions with respect to any aspect from your employment by, or separation of employment from, the Company, including, but not limited to, any claims under the Age Discrimination in Employment Act, or any other federal, state or local statute dealing with age, race, sex and other types of discrimination in employment. We agree that you have not released the Company with respect to claims necessary to enforce this agreement or claims put forth under the current Directors and Officers Insurance or indemnifications currently found in the Company’s charter or any rights vested under the Jo-Ann Stores Stock Option Plan.
15.	You agree to cease acting as an associate or agent of the Company as of the Separation Date and you further agree to indemnify and hold the Company harmless from any and all claims which arise from any such actions occurring after Separation Date. In addition, the Company holds you harmless from any and all claims of any kind or nature except acts of actual fraud, theft or embezzlement resulting from your employment or in your role as an agent of the Company. The Company agrees to maintain the current coverage of Directors and Officers insurance and indemnification under its charter for any claims which may arise from acts during your tenure.
16.	The Company’s obligation to make the payments and provide the benefits provided for herein shall be absolute and unconditional, and shall not be affected by any circumstances, including, without limitation, any offset, counterclaim, recoupment, defense, or other right which the Company may have against you or anyone else. All amounts payable by the Company hereunder shall be paid without notice or demand. Each and every payment made hereunder by the Company shall be final, and the Company shall not seek to recover all or any part of such payment from you or from whomsoever may be entitled thereto, for any reasons whatsoever, except as provided for in paragraph 20 of this agreement.
17.	The Company will require any successor (whether direct or indirect, by purchase, merger, consolidation, or otherwise) of all or substantially all of the business and/or assets of the Company to expressly assume and agree to perform the Company’s obligations under this Agreement in the same manner and to the same extent that the Company would be required to perform them if no such succession had taken place, Failure of the Company to obtain such assumption and agreement prior to the effective date of any such succession shall be a breach of this Agreement. All payments under this Agreement shall be made solely from the general assets of the Company (or from a grantor trust, if any, established by the Company for purposes of making payment under this Agreement and other similar agreements), and you shall have the rights of an unsecured general creditor of the Company with respect thereto.
18.	You shall not be obligated to seek other employment in mitigation of the amounts payable or benefits to be provided under any provision of this Agreement, and the obtaining of any such other employment shall in no event effect any reduction of the Company’s obligations to make the payments or provide any benefits as required under this Agreement, except to the limited extent provided above in cases where a subsequent employer provides medical insurance and/or group term life insurance coverage or an automobile benefit.

19.

To the extent not preempted by the laws of the United States, the laws of the State of Ohio, applicable to contracts made and to be performed wholly within that state, shall be the controlling law in all matters relating to this Agreement.

20.

It is further agreed that if either party breaks any of the promises made in this Agreement, it will be considered a breach that could result in the offending party being responsible for all damages that arise from any such breach. In addition, these damages could include the return or forfeiture of all Company funds and benefits provided under this Agreement. Damages could also include all attorneys’ fees and costs incurred by the non-breaking party because of the breach. In the event either party believes the other has breached any of the promises in this Agreement, each agrees to provide detailed written notice of that breach. Once notices are received the breaking party has 30 days to attempt to cure the breach and/or to respond to comments. We further agree that this Agreement will not be considered breached until the 30 day time period has passed to respond to written comments and take my corrective action which the breaking party deems could solve the alleged breach, if any. Notice(s) under this section should be sent by hand delivery or certified mail, return receipt requested to the following:

i. If to the Employee:	Mr. David Bolen
	(Address on file)
ii. If to the Company:	EVP, Human Resources
	Jo-Ann Stores, Inc.
	5555 Darrow Road
	Hudson, Ohio 44236

21.

Unless prohibited by law, the Company shall pay all legal fees, costs of arbitration and/or litigation, prejudgment interest, and other expenses incurred by you in good faith as a result of the Company’s refusal to provide the benefits to which you deem yourself to be entitled under this Agreement, as a result of the Company’s contesting the validity, enforceability, or interpretation of this Agreement, or as a result of any conflict between the parties pertaining to this Agreement, provided, however, that the Company shall be reimbursed by you for all such fees and expenses if, but only if, it is ultimately determined by a court of competent jurisdiction or by the arbitrators, as the case may be, that you had no reasonable grounds for the position propounded by you in the arbitration and/or litigation (which determination need not be made simply because you fail to succeed in the arbitration and/or litigation).

22.

Subject to the following, any dispute or controversy arising under or in connection with this Agreement shall be settled by mandatory arbitration (in lieu of litigation), conducted before a panel of thee arbitrators sitting in a location selected by you within 50 miles from Hudson, Ohio, in accordance with the rules of the American Arbitration Association then in effect. Any dispute which arises with respect to your alleged violation of the prohibition on competition or any other restriction contained in Paragraph 13 of this Agreement shall be settled by judicial proceedings (in any court of competent jurisdiction with respect to such dispute or claim). Except as provided above for claims or disputes under Paragraph 13 judgment may be entered on the award of the arbitrator in any court having proper jurisdiction.

23.	Neither party will make any statements, either orally, in writing or otherwise, or in any way disseminate or cause to be disseminated any information, concerning the other party or its affiliated persons or entities, or such other party’s business practices, character or methods of operation, which, in form or substance, harms, disparages, or otherwise casts an unfavorable light upon such other party’s reputation, standing in the business community, or standing in the community as a whole.
24.	You shall refer any prospective employers or others desiring a reference to the CEO or EVP, HR who will provide all prospective employers of, or others requesting a reference regarding, with a positive reference which highlights your progression through the Company and your tangible accomplishments. The Company shall utilize its best efforts to ensure that no employees other than the CEO or EVP HR respond to any reference inquiries and that all such inquiries are directed to the CEO or EVP HR.
25.	This Agreement may not be changed orally and contains the entire agreement of the parties and supersedes all prior understandings oral or written between you and the Company.

Dave, to make sure you understand the details and terms of this Agreement and that your decision to enter into this Agreement is voluntary, we advise you to consult with an attorney prior to signing this document and your signature below acknowledges that you have done so or voluntarily waived that right. If the details and terms are acceptable to you, please sign the bottom of this Agreement and return it to me no later than 21 days from the date of receipt of this Agreement.

By law, after you sign this Agreement, you have seven days from that date during which you may change you mind and revoke it. To revoke this Agreement, you must clearly communicate your decision to me at our corporate office within the seven-day period.

As discussed, the Company is under no duty or obligation to make this special allowance, and is doing so solely as consideration for your entering into this Agreement.

Sincerely,
JO-ANN STORES, INC.
By:		/s/ Alan Rosskamm
	Alan Rosskamm
	Chairman, President and CEO
Dated:		November 22, 2005
AGREED TO:
By:		/s/ David Bolen
	David Bolen
Dated:		November 22, 2005

EX-10.22

Exhibit 10.22

November 23, 2005

Mr. David Holmberg

Dear David:

I very much appreciate the talent, expertise and strength that you have brought to Jo-Ann Stores, Inc. I am counting on you to help me provide a strong bridge while we rebuild the leadership team.

As we have discussed, I will be hiring a President and CEO. David, you have contributed greatly since you arrived and we both anticipate and desire a long term relationship. However, I also understand that these are uncertain times for you and I want to give you peace of mind about your financial benefits should circumstances change at Jo-Ann Stores.

1. As the Company has decided to hire a President and CEO, we acknowledge that there is a risk that either you or the Company may conclude that your continued employment may not be in its best interest. Therefore:

a.	Should you decide to terminate your employment at any time between the sixth and the twelfth month anniversary of the start date of the new President, the Company agrees to pay your base salary for 24 months, in a lump sum, contingent on the execution of a complete letter agreement including a non-compete covenant and a non-solicitation covenant. We would anticipate that you would provide at least 30 days’ notice should you decide to trigger this agreement;
b.	You will not be eligible for the stock acceleration or payment of target incentive as detailed in your current employment agreement;
c.	The Company will also provide continuation of benefits (except long term disability) through the earlier of 24 months or the date you become benefit eligible with a new employer;
d.	The Company agrees to provide continued car allowance through the earlier of 24 months or your new employment date; and
e.	The Company will provide outplacement with a reputable firm.

2. Should the Company decide to terminate your employment at any time between the date of this letter and 24 months after the hire date of the new President, you will receive the same salary continuation and benefits as above, provided, however that if such termination by the Company occurs prior to November 30, 2006, both cash retention payments totaling $230,000, provided under the retention agreement dated November 18, 2005, will be guaranteed. Thereafter, your existing employment agreement would be in effect.

David, your continued dedication is important to Jo-Ann’s success. I am happy to provide this special incentive for you to remain with us through our transition and hopefully beyond.

Sincerely,
JO-ANN STORES, INC.
By:	/s/ Alan Rosskamm
	Alan Rosskamm CEO, President, Chairman of the Board
Dated:	November 23, 2005
AGREED	TO:
By:	/s/ David Holmberg
	David Holmberg
Dated:	November 23, 2005

EX-10.23

Exhibit 10.23

Compensation Committee
of the Board of Directors
Jo-Ann Stores, Inc.

February 28, 2006

Alan Rosskamm

re: Change in Status

Dear Alan:

As we have previously advised, the Board of Directors of Jo-Ann Stores, Inc. has determined to change its search for a new President and Chief Executive Officer to a search for a new Chairman, President and Chief Executive Officer. The purpose of this letter is to confirm that you will continue to serve as Chairman, President and Chief Executive Officer through the date on which those positions are assumed by another individual (the “Transition Date”), to acknowledge that you will cease to hold those positions from and after the Transition Date, and to set forth the compensation the Company will pay and provide to you both through and after the Transition Date.

1.	Continuing Employment. Until the Transition Date, the Agreement entered into between you and the Company on October 21, 2005 (the “Employment Agreement”) will continue in full force and effect. Until the Transition Date, your base salary and benefits will remain at their current levels.
2.	Transition. Effective on the Transition Date, without any further action on your part or on the part of the Company, you will cease to hold the positions of Chairman, President and Chief Executive Officer and your status will thereafter be that of an outside director of the Company.
3.	Compensation after Transition Date. Assuming you continue as Chairman, President and Chief Executive Officer through the Transition Date:

a.	Continuing Effectiveness of Employment Agreement. All of the terms of the Employment Agreement will apply, treating your change in status on that date as a termination by you for Good Reason (as defined in the Employment Agreement).
b.	Lump Sum Payment. The Company will pay to you, in a single lump sum payment to be made within 10 days of the Transition Date, the sum of $1,800,000, net of applicable withholding.
c.	Reimbursement of Legal Fees. The Company will reimburse you for up to $75,000 of legal fees actually incurred by you in connection with the transition upon presentation of invoices from your legal counsel to you.
d.	Waiver of Director’s Fees. In light of the continuation of base salary under the Employment Agreement, you hereby waive any right you might otherwise have to receive fees or stock or options commonly provided to outside directors for any period ending on or before the third anniversary of the Transition Date.
e.	Mutual Release. As a condition precedent to the payment of the compensation provided for in Sections 3a and 3b above, you and the Company will exchange mutual releases in form and substance satisfactory both to you and to the Company.

Alan Rosskamm
February 28, 2006
Page 2

4. Continued Rights with respect to Existing Stock Options and Restricted Stock. We confirm that, pursuant to the terms of the Company’s incentive compensation plan under which you have received both options to purchase Company Common Shares and restricted Company Common Shares, your service as an outside director after the Transition Date will constitute continuing service for purposes of the vesting and exercise of those shares and options.

Alan, the Board appreciates your long and dedicated service to the Company and your continuing professionalism through the difficult portions of this transition. To indicate your agreement to the foregoing, please countersign both original copies of this letter on the space provided below and return one fully executed copy to me for the Company’s records.

Best regards,

/s/ Frank Newman

Frank A. Newman

Chairman, Compensation Committee

Agreed in all respects on this 28^th day of February, 2006.

/s/ Alan Rosskamm

Alan Rosskamm

EX-21

Exhibit 21

JO-ANN STORES, INC.
LIST OF SUBSIDIARIES

	State or Country	Percent owned by
Name	of Incorporation	Registrant
Jo-Ann Stores Supply Chain Management, Inc.	Ohio		100	%
FCA of Ohio, Inc.	Ohio		100	%
House of Fabrics	Delaware		100	%
Team Jo-Ann, Inc.	Ohio		100	%
Jo-Ann Stores Asia, Limited	Hong Kong		100	%

EX-23

Exhibit 23

Consent of Independent Registered Public Accounting Firm

We consent to the incorporation by reference in the Registration Statements of Jo-Ann Stores, Inc. listed below of our reports dated March 21, 2006, with respect to the consolidated financial statements of Jo-Ann Stores, Inc. and Jo-Ann Stores, Inc. management’s assessment of the effectiveness of internal control over financial reporting and the effectiveness of internal control over financial reporting of Jo-Ann Stores, Inc., included in this Annual Report (Form 10-K) for the year ended January 28, 2006.

Form	Registration Number
S-8	333-72445	1998 Incentive Compensation Plan
S-8	333-128157	1998 Incentive Compensation Plan
S-8	333-10087	1990 Employees Stock Option and Stock Appreciation Rights Plan
S-8	333-10091	1996 Stock Option Plan for Non-Employee Directors
S-8	333-55278	Nonqualified Stock Option Awards to Certain Employees
S-8	333-55280	Jo-Ann Stores, Inc. Savings Plan 401(k)

/s/ Ernst & Young LLP

Cleveland, Ohio
April 10, 2006

EX-24

EXHIBIT 24

DIRECTORS AND OFFICERS
POWER OF ATTORNEY

Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549

RE:	Jo-Ann Stores, Inc.
	Commission File No. 1-6695
	1934 Act Filings on Form 10-K
	For Fiscal Year Ended January 28, 2006

Gentlemen:

The above Company is the issuer of securities registered under Section 12 of the Securities Exchange Act of 1934 (the “Act”). Each of the persons signing his or her name below confirms, as of the date appearing opposite his or her signature, that Alan Rosskamm, James Kerr, and each of them, are authorized on his or her behalf to sign and to submit to the Securities and Exchange Commission such filings on Form 10-K as are required by the Act. Each person so signing also confirms the authority of Alan Rosskamm, James Kerr, and each of them, to do and perform on his or her behalf, any and all acts and things requisite or necessary to assure compliance by the signing person with the Form 10-K filing requirements. The authority confirmed herein shall remain in effect as to each person signing his or her name below until such time as the Commission shall receive from such person a written communication terminating or modifying the authority.

	Date		Date
/s/ ALAN ROSSKAMM	April 13, 2006	/s/ PATRICIA MORRISON	April 13, 2006
Alan Rosskamm		Patricia Morrison
/s/ JAMES KERR	April 13, 2006	/s/ FRANK NEWMAN	April 13, 2006
James Kerr		Frank Newman
/s/ SCOTT COWEN	April 13, 2006	/s/ BERYL RAFF	April 13, 2006
Scott Cowen		Beryl Raff
/s/ IRA GUMBERG	April 13, 2006	/s/ GREGG SEARLE	April 13, 2006
Ira Gumberg		Gregg Searle
		/s/ TRACEY T. TRAVIS	April 13, 2006
		Tracey T. Travis

EX-31.1

EXHIBIT 31.1

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 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 report;
3)	Based on my knowledge, the financial statements, and other financial information included in this 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 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-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a)	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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 report is being prepared;
(b)	Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c)	Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d)	Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s fourth fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5) The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a)	All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b)	Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: April 13, 2006

/s/ Alan Rosskamm

By: Alan Rosskamm
President and Chief Executive Officer

EX-31.2

EXHIBIT 31.2

CERTIFICATION BY PRINCIPAL FINANCIAL OFFICER

I, James Kerr, 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 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 report;
3)	Based on my knowledge, the financial statements, and other financial information included in this 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 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-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a)	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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 report is being prepared;
(b)	Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c)	Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d)	Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s fourth fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5) The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a)	All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b)	Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: April 13, 2006

/s/ James Kerr

By: James Kerr
Vice President, Chief Accounting Officer

EX-32.1

EXHIBIT 32.1

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the filing of the Annual Report of Jo-Ann Stores, Inc. (the “Company”) on Form 10-K for the year-ended January 28, 2006, as filed with the Securities and Exchange Commission (the “SEC”) on or about the date hereof (the “Report”), each of the undersigned officers of the Company certifies pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to such officer’s knowledge:

(1)	The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2)	The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Dated: April 13, 2006

/s/ Alan Rosskamm

Alan Rosskamm
President and Chief Executive Officer

/s/ James Kerr

James Kerr
Vice President, Chief Accounting Officer

A signed original of this written statement has been provided to the Company and will be retained by the Company and furnished to the SEC or its staff upon request.