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 February 2, 2008

Commission File No. 1-6695

JO-ANN STORES, INC.

(Exact name of Registrant as specified in its charter)

Ohio (State or other jurisdiction of incorporation or organization)	34-0720629 (I.R.S. Employer Identification No.)
5555 Darrow Road, Hudson, Ohio (Address of principal executive offices)	44236 (Zip Code)

Registrant’s telephone number, including area code:

(330) 656-2600

Securities registered pursuant to Section 12(b) of the Act:

Title of Each Class	Name of Each Exchange on Which Registered
Common Shares, Without Par Value Common Share Purchase Rights	New York Stock Exchange 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, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o	Accelerated filer þ	Non-accelerated filer o	Smaller reporting company o
	(Do not check if a smaller reporting company)

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 August 4, 2007 was $547.1 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 the registrant’s Common Shares outstanding, as of April 4, 2008, was 25,276,325.

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

Proxy Statement for 2008 Annual Meeting of Shareholders — Items 10, 11, 12, 13 and 14 of Part III.

PART I

Except as otherwise stated, the information contained in this report is given as of February 2, 2008, the end of our latest fiscal year. The words “Jo-Ann Stores, Inc.,” “Jo-Ann Stores,” “Jo-Ann Fabrics and Crafts,” “Jo-Ann Fabric and Craft Stores,” “Joann.com,” “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 2008 refers to the period ended February 2, 2008). Fiscal years consist of 52 weeks, unless noted otherwise.

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 Fabric and Craft stores and Jo-Ann stores) and website (www.Joann.com) feature a variety of competitively priced merchandise used in sewing, crafting and home decorating projects, including fabrics, notions, crafts, frames, paper crafting material, artificial floral, home accents, finished seasonal and home décor merchandise.

During the second quarter of fiscal 2008, we made a change in the way we reference our store formats. We now classify our stores as large-format and small-format, as opposed to the previous classification of superstore and traditional stores. As we continue to remodel our stores, the distinction between superstores and traditional stores would become less clear. The dividing line between the large-format and small-format classification is approximately 24,000 to 25,000 square feet of retail space. The most important distinction is whether or not stores in that range have been recently built or remodeled and contain a broad assortment of craft categories.

As of February 2, 2008, we operated 774 stores in 47 states (578 small-format stores and 196 large-format stores). Our small-format stores offer a complete selection of fabric and a convenience assortment of crafts, artificial floral, finished seasonal and home décor merchandise. They average approximately 14,700 square feet and generated net sales per store of approximately $1.5 million in fiscal 2008. We did not open any small-format stores in fiscal 2008. Our large-format stores offer an expanded and more comprehensive product assortment than our small-format stores. Our large-format stores also offer custom framing and educational programs that our small-format stores do not. They average approximately 38,000 square feet and generated net sales per store of approximately $4.9 million in fiscal 2008. We opened six large-format stores in fiscal 2008.

We provide a one-stop shopping experience for craft and sewing projects under one roof, 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 and weekly newspaper insert advertising programs.

We believe that our large-format stores are uniquely designed to offer a destination location for our customers. We offer approximately 79,000 stock-keeping units (“SKUs”) across two broad product categories: sewing and non-sewing 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, through enhanced forecasting and replenishment capabilities, and streamlined operations.

We believe stability in our sales and our industry is partially a function of recession-resistant characteristics. For example, according to a 2007 research study conducted by the Craft & Hobby Association, approximately 57 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 2008 was $23 in our large-format stores and $18 in our small-format stores. Industry sales, according to the Craft & Hobby Association’s 2007 research

1

study, were approximately $32 billion. 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 and Internet vendors and a variety of other retailers.

Recent Developments and Business Update

Fiscal 2008 was a year of transition as we began the implementation of our long-term strategic growth plan to position ourselves for profitable and sustainable growth over the long term. The long-term strategic growth plan addresses three major objectives:

•  Improve the customer shopping experience;

•  Enhance our marketing and merchandising offers; and

•  Refine our new store and remodel programs.

The above objectives were supported by dozens of initiatives and were enabled by the development of our people, enhancement of our information systems, enhanced efficiencies in our supply chain, and improved controls over inventory and selling, general and administrative expenses (“SG&A”).

By executing this strategy, we delivered solid results for fiscal year 2008 and positioned ourselves to deliver balanced and consistent financial improvements over the long term.

During fiscal year 2008:

•  We achieved same-store sales growth of 3.5 percent versus a same-store sales decrease of 5.9 percent last year;

•  We gained expense leverage in SG&A, as the percentage of net sales decreased 150 basis points from last year; and

•  Earnings per share for the year improved to $0.62 per diluted share, compared with a loss of $0.08 per diluted share in the prior year.

In addition to implementing our new strategic growth plan, during the fourth quarter of fiscal 2008, we completed the acquisition of the 62 percent of IdeaForest.com, Inc. (“IdeaForest”) that we previously did not own. IdeaForest was the operator of the Joann.com website.

During fiscal 2009 we plan to continue to execute our strategic plan and take advantage of competitive withdrawals from the fabric industry. The current economic environment has added a degree of uncertainty, but we expect to be insulated from a downturn to a certain extent due to the strong demographics of our shoppers and the steady performance of the sewing and craft industry in previous recessions.

As we continue to improve overall business results and achieve more consistent performance from new stores, we plan to accelerate new store openings and store remodels in future years.

Some key priorities we will pursue in fiscal year 2009 include:

•  The rollout of our new point of sale and store system package;

•  The rollout of our new human resource and workforce management applications;

•  Continued integration of our newly acquired Joann.com Internet business, to achieve better synergy with our retail stores; and

•  Continued efforts to update stores by remerchandising dozens of our small-format stores, over and above those we have scheduled for remodel.

2

Product Selection

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

	Fiscal Year-Ended
	February 2,			February 3,			January 28,
	2008			2007			2006
Principal product lines:
Sewing		50	%		50	%		56	%
Non-sewing		50	%		50	%		44	%
Total		100	%		100	%		100	%

Sewing

We offer a broad and comprehensive assortment of fabrics and sewing accessories in both our small-format and large-format stores. 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;

•  fleece fabrics in both prints and solids used for the construction of sportswear, blankets and craft projects for the home;

•  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.

Non-sewing

We offer a broad assortment of non-sewing merchandise for the creative enthusiast. Our large-format stores offer the complete array of categories while our small-format stores, due to their smaller size, carry edited down versions of the best items. We offer the following non-sewing selections in our large-format stores:

•  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;

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

3

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

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

•  floral products, including artificial flowers, dried flowers and artificial plants, sold separately or in ready-made 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 fit with 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. Seasonal product is brought in under the “Holiday Inspirations” private label.

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 starts earlier than that of other retailers and generally runs from September through December. In fiscal 2008, approximately 57 percent of our net sales occurred in the third and fourth quarters, and approximately 31 percent occurred in the fourth quarter alone.

During fiscal 2008, non-sewing and sewing net sales represented 60 percent and 40 percent of total net sales for our large-format stores, respectively. Non-sewing and sewing net sales represented 40 percent and 60 percent of total net sales for our small-format stores for the same period, respectively.

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 best customers through a robust direct mail and email program. This allows us to 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 weekly newspaper insert advertising, primarily in large-format store markets. Our direct mail and newspaper inserts showcase our sales events, feature numerous products offered at competitive prices, and showcase people interacting with product providing inspiration.

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.

Our grand opening program plays an integral role in the successful opening of each new store. 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, 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 Joann.com Internet business. During the fourth quarter of fiscal 2008 we completed the purchase of the 62 percent of IdeaForest.com, Inc. that we previously did not own for $23.6 million, including a note payable of approximately $9 million. In conjunction with the acquisition, we launched a site redesign of Joann.com. The improved website is more visually compelling, easier to navigate, includes features such as a community area to share ideas, as well as a place to review and rate products. This transaction provides us with the opportunity to integrate the online shopping experience with our stores ultimately improving the overall customer experience.

4

Purchasing

We have numerous domestic and international sources of supply available for each category of product that we sell. During fiscal 2008, approximately two-thirds of our purchases were sourced domestically and one-third was sourced internationally. Our domestic suppliers source internationally some of the products they sell to us. Although we have very few 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 three 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 575 merchandise suppliers, with the top 128 representing more than 80 percent of our purchasing volume.

Logistics

We operate three distribution centers in Hudson, Ohio, Visalia, California and Opelika, Alabama, all of which ship merchandise to our stores on a weekly basis. Based on purchase dollars, approximately 81 percent of the products in our stores are shipped through our distribution center network, with the remaining 19 percent of our purchases shipped directly from our suppliers to our stores. Approximately 50 percent of our store base is 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 95 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, but are not limited to, our existing store sales 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, but are not limited to, rental terms, the store location, position and visibility within the shopping center, size of the shopping center, co-tenants, proximity to highway access, traffic patterns, availability of convenient parking and ease of entry from the major roadways framing the location.

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 that we open. We typically open stores during the period from February through October to maximize sales and to minimize disruption to store operations during our fourth-quarter peak selling season.

Store Management.  Small-format stores generally have five full-time team members and 10 to 12 part-time team members, while large-format stores typically have approximately nine 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 and annual store controllable profit.

Small-format 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 small-format store is closed due to the opening of a large-format store, we generally retain its team members to staff the new large-format store. Large-format store team leader

5

positions primarily have been staffed with individuals from outside the Company who have previous experience in managing “big-box” retail concepts. We have a training program that is designed to develop and prepare more large-format store managers from within our organization. Each store is under the supervision of a district team leader who reports to a regional vice president.

The following table shows our stores by type and state on February 2, 2008:

	Small-		Large-					Small-		Large-
	format		format		Total			format		format		Total
Alabama		1		—		1	Nebraska		4		—		4
Alaska		4		2		6	Nevada		3		2		5
Arizona		6		10		16	New Hampshire		8		—		8
Arkansas		1		—		1	New Jersey		12		1		13
California		67		20		87	New Mexico		6		—		6
Colorado		9		5		14	New York		30		9		39
Connecticut		6		4		10	North Carolina		5		1		6
Delaware		2		1		3	North Dakota		4		—		4
Florida		32		18		50	Ohio		38		18		56
Georgia		6		5		11	Oklahoma		4		—		4
Idaho		9		—		9	Oregon		20		4		24
Illinois		24		11		35	Pennsylvania		34		9		43
Indiana		20		6		26	Rhode Island		—		1		1
Iowa		10		—		10	South Carolina		2		—		2
Kansas		6		2		8	South Dakota		1		—		1
Kentucky		3		—		3	Tennessee		—		4		4
Louisiana		4		—		4	Texas		28		10		38
Maine		4		1		5	Utah		6		4		10
Maryland		14		4		18	Vermont		4		—		4
Massachusetts		22		1		23	Virginia		21		—		21
Michigan		27		21		48	Washington		21		10		31
Minnesota		14		6		20	West Virginia		5		—		5
Missouri		10		2		12	Wisconsin		14		4		18
Montana		7		—		7	Total		578		196		774

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):

Total Stores

										Total
						In Operation at		Expanded		Square Footage
Fiscal Year	Opened		Closed			Year-End		or Relocated		at Year-End
2004		19		(46	)		892		—		15,377
2005		31		(72	)		851		2		15,453
2006		44		(57	)		838		2		16,198
2007		26		(63	)		801		1		16,215
2008		6		(33	)		774		1		15,932

Our new store opening costs depend on the building type, store size and general cost levels in the geographical area. During fiscal 2008, we opened six large-format stores with an average size of approximately 33,000 square feet. Our average net investment in a large-format store is approximately $1.5 million, which

6

includes leasehold improvements, furniture, fixtures and equipment, inventory (net of payable support) and pre-opening expenses. No small-format stores were opened in fiscal 2008.

During fiscal 2009, we expect to open approximately 13 to 15 new stores and close approximately 25 stores. We also plan to remodel approximately 25 to 30 stores.

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 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 the purpose of evaluating our advertising and promotions. 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 restock merchandise and efficiently reprice sale items.

We operate on SAP Retail. SAP Retail includes all of our core financial, merchandise and retail systems and links business processes on a single software platform. During fiscal 2008, we completed an upgrade to the current version of SAP Retail software. The software for the upgrades was purchased in the fourth quarter of fiscal 2007. The cost of the upgrade is included in property equipment and leasehold improvements on our consolidated balance sheets. In addition to the upgrades to our existing SAP Retail systems, we purchased additional SAP modules in the fourth quarter of fiscal 2007, which will be implemented over the next 6 to 9 months of fiscal 2009. The cost of the modules is included in construction in progress on our consolidated balance sheets.

Status of Product or Line of Business

During fiscal 2008, there was no public announcement nor is there a public announcement anticipated about either a new product line or line of business involving the investment of a material portion of our assets.

Trademarks

We do business under trademarks for “Jo-Ann^®,” “Joann.com^TM,” “Jo-Ann ETC^®,” “Jo-Ann Fabrics^®,” “Jo-Ann Fabric and Craft Stores^®,” “Jo-Ann Fabrics & Crafts^®,” “Jo-Ann Fabrics and Crafts^®” and we also own numerous trademarks relating to our private label products. We believe that our trademarks provide significant value to our business.

Seasonal Business

Our business exhibits seasonality that 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 2008, approximately 57 percent of our net sales occurred in the third and fourth quarters, and approximately 31 percent occurred in the fourth quarter alone.

7

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 2008, 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. 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. We compete on the basis of product assortment, price, convenience and customer service. We believe that the combination of our product assortment under one roof, quality sales events and knowledgeable and customer focused team members provides us with a competitive advantage.

There are three companies that we primarily compete with nationally in the fabric and craft specialty retail industry, one in the fabric segment (Hancock Fabrics, Inc.) one in the craft segment (Michaels Stores, Inc.) and one in the craft segment that also carries fabrics (Hobby Lobby). There is also a regional operator, A.C. Moore Arts & Crafts, Inc., which competes in the craft segment. The balance of our competition is comprised of smaller regional and local operators. We believe that we have several advantages over most of our smaller competitors, including:

•  purchasing power;

•  brand recognition as the number one resource for fabric related categories;

•  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 February 2, 2008, we have not incurred any material expense for research activities relating to the development of new products or services or the improvement of existing products or services.

Environmental Disclosure

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

Employees

As of February 2, 2008, we had approximately 21,707 full and part-time employees, of whom 20,125 worked in our stores, 433 were employed in our Hudson distribution center, 228 were employed in our Visalia distribution center, 188 were employed in our Opelika distribution center and 733 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

8

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, 2011. We believe that our relationship with our employees and the union are good.

Foreign Operations and Export Sales

In fiscal 2008, 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 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 with, 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 (which also serves as 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, free of charge, 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 6, 2007 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 February 2, 2008, 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 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

9

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. Our inability or the inability of our vendors to develop and introduce new products that interest 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. 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 that operates craft and framing stores, Hobby Lobby, a regional chain that operates craft stores, Hancock Fabrics, Inc., a national chain that operates fabric stores, and A.C. Moore Arts & Crafts, Inc., a regional chain that 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. This competition could result in the reduction of our prices and a loss of market share.

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. 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 suppliers may be unable to withstand a downturn in economic conditions. In addition, based on public information, Wal-Mart plans to eliminate fabric sales in its new and remodeled stores and Hancock Fabrics is currently in a Chapter 11 bankruptcy proceeding, both of which could negatively affect our fabric suppliers. Significant failures on the part of our key suppliers could have a material adverse effect on our operating results.

10

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

In fiscal 2008, we purchased approximately one-third of our products directly from manufacturers located in foreign countries. A majority of our foreign suppliers are located 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 products were manufactured domestically.

Foreign manufacturing is also subject to a number of other risks, including work stoppages; transportation delays and interruptions; product quality issues; employee rights issues; other social concerns; 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 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 are required to issue letters of credit to finance certain 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, rising fuel costs, the closing of anchor stores, new shopping centers and other retail developments, or changes in customer shopping preferences. To take advantage of customer traffic and the shopping preferences of our customers, we need to maintain or acquire stores in desirable locations. Competition for suitable store locations is intense and therefore we cannot assure that desirable store locations will continue to be available. 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.

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 inventory levels and related short-term financing needs have been seasonal, with the greatest requirements occurring primarily during our third fiscal 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.

Disruption to the transportation system, including 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 seasonal merchandise. We and some of our domestic vendors also depend on ocean transportation to bring imported products to the United States; thus, disruptions in the ocean transportation sector or at overseas and domestic

11

ports, or increased costs in the ocean transportation or ports sectors, could negatively impact our operating results.

The price of oil has fluctuated significantly in the last few years. Fuel price increases during the past year have increased our transportation costs for distribution to our stores, as well as our vendors’ transportation costs. Further fuel price increases 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 regulations

Our performance is dependent on attracting and retaining a large number of quality employees. Many of those employees 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, the costs of providing employee benefits, workers compensation costs and changing demographics. Changes that adversely impact our ability to attract and retain quality employees could adversely affect our performance. Changes in the federal or state minimum wage, living wage requirements or changes in other wage or workplace regulations, including, for example, health care mandate or employee leave regulations, could adversely affect our financial condition and operating results.

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, 2011. We believe that our relations with our employees and the union are good, but if a strike were to occur it could materially adversely affect our business, financial conditions and results of operations.

Operational Business Risks

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

Our continued success depends upon our ability to attract and retain qualified management, administrative and store personnel. Our inability to do so may have a material adverse effect on our business and prospects.

Failure to manage inventory effectively could negatively impact our operations

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 or discarded 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 could negatively impact our operations

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

12

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 could negatively impact our operations

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. 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 (proximity of our new stores or our competitor’s new stores to our existing stores), economic conditions, timing and effectiveness of promotional events, the effectiveness of our marketing, 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 will continue successfully to open stores or increase same-store sales, which could have an adverse impact on our results of operations.

Our failure to manage our new store growth could have a negative impact on our operations

Our growth is dependent, in large part, upon our ability to successfully add new stores (which primarily, but not exclusively, will be large-format stores) and close poorly performing stores (which primarily, but not exclusively, will be small-format stores). Our large-format stores accounted for 51 percent of our total fiscal 2008 net sales. Our growth strategy includes, but is not limited to, the development of additional large-format stores and an increasing percentage of our revenues coming from our large-format stores. The success of this strategy will depend upon a number of factors, summarized as follows:

Store specific risks

•  our ability to expand in 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;

13

•  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; 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 could 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 growth strategy. Not all of our recently opened stores are producing acceptable levels of sales and operating profit. Failure to achieve acceptable levels of sales and operating profit at new stores could negatively impact our 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, our other distribution centers may not be able to 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. Such delays could negatively impact our business.

The efficient operation of our business is dependent on our information systems. Our failure to maintain and upgrade our management information systems, including the successful and timely completion of significant pending projects, could negatively impact our operation.

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.

Rapid technological change impacts 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. We are in the process of implementing significant upgrades to our information systems, including the systems used in our stores, and we also are in

14

the process of installing new point-of-sale hardware in many of our stores. Failure to complete these projects successfully and in a timely manner could have a material negative effect on our operations.

Financing needs could restrict our operations

Our level of indebtedness could have negative consequences. For example, it could:

•  make it more difficult for us to satisfy our other 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 may have less debt; and

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

In addition, 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 finance our operations and capital needs, which could restrict our operations.

Our senior bank credit facility expires on April 30, 2009. Our inability to renegotiate a new senior bank credit facility could restrict our operations.

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 agreement 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 in the future. 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 operations, 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 2009. 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, completing a separate debt or equity offering or restructuring our existing capital structure. If adequate

15

financing is unavailable or is unavailable on acceptable terms, we may be unable to maintain, develop or enhance our operations, including through 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 result in financial obligations to third parties, fines, penalties, regulatory proceedings and private litigation with potentially large costs, and also 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.

We currently are certified as being in compliance with the Payment Card Industry Data Security Standard (“PCI DSS”), but must be re-certified on a regular basis with the next re-certification scheduled in August 2008. A company processing, storing, or transmitting payment card data must be PCI DSS compliant or risk losing its ability to process credit card payments and being audited and/or fined. Failure to maintain our PCI certification could result in our inability to accept credit card payments or subject us to penalties and thus could have a material negative effect on our 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. 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 involved in various litigation matters that arise in the ordinary course of our business, including liability claims, employment-related claims, contractual disputes and allegations that we have infringed 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 large-format store, 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 (the “facility”). On October 19, 2006, we completed a sale-leaseback transaction of this facility. We sold the facility to an independent third party for approximately $24.7 million, net of expenses borne by us in

16

connection with the sale. We leased the facility back from the purchaser and we are treating the lease as an operating lease.

The lease has an initial term of 20 years and will be automatically renewed for eight consecutive five-year renewal terms unless we provide notice of non-renewal prior to the commencement of any renewal term. A gain of $1.5 million in connection with the sale of the facility was deferred, and is being amortized as a reduction of rent expense over the minimum lease term of 20 years.

We opened our third distribution center in April 2006. We own both the facility and the real estate. 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 and generally have initial terms of 5 to 15 years with renewal options for up 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 February 2, 2008 we incurred $172.2 million of rental expense, including common area maintenance, taxes and insurance for store locations. Despite closing 271 stores over the last five years, as of February 2, 2008, we were only paying rent on one closed store location for which we have been unable to reach an early lease termination settlement with the landlord or sublease the property.

As of February 2, 2008, 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		24
2009		44
2010		32
2011		50
2012		38
2013		55
Thereafter		541
Total		784

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.

17

Executive Officers of the Registrant

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

Our executive officers are as follows:

Name	Age		Position
Darrell Webb		50	Chairman of the Board, President and Chief Executive Officer
Kenneth Haverkost		51	Executive Vice President, Store Operations
James Kerr		45	Executive Vice President, Chief Financial Officer
Travis Smith		35	Executive Vice President, Merchandising and Marketing

Darrell Webb has been our Chairman of the Board, President and Chief Executive Officer since July 2006. Previously, he was President of Fred Meyer, the 128-store super center division of The Kroger Company, a retail grocery chain, from 2002 until July 2006 and President of Kroger’s Quality Food Center Division from 1999 to 2002.

Kenneth Haverkost has been our Executive Vice President, Store Operations since October 2007. For the twenty-two years prior to assuming his current role, Mr. Haverkost held positions of increasing responsibility with Fred Meyer, the 128-store super center division of The Kroger Company. Immediately prior to joining us, Mr. Haverkost was Senior Vice President and Director of Store Operations of Fred Meyer.

James Kerr has been our Executive Vice President, Chief Financial Officer since July 2006. For the eight years prior to assuming his current role, Mr. Kerr was our Vice President, Controller and he also served as the Chief Accounting Officer from February through July 2006.

Travis Smith has been our Executive Vice President, Merchandising and Marketing since July 2006. For the eight years prior to assuming his current role, Mr. Smith held merchandising and marketing positions of increasing responsibility with Fred Meyer, the 128-store super center division of The Kroger Company. Immediately prior to joining us, Mr. Smith was Senior Vice President, General Merchandise of Fred Meyer.

PART II

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

Our common shares are traded on the New York Stock Exchange under the ticker symbol “JAS.” As of April 4, 2008, there were 744 shareholders of record. The closing price of the shares on April 4, 2008 was $16.66.

The quarterly high and low closing stock prices for fiscal 2008 and 2007 are presented in the table below:

	Common Shares
	High		Low
Quarter Ended Fiscal 2008:
February 2, 2008	$	21.00	$	9.03
November 3, 2007		26.53		17.30
August 4, 2007		34.75		23.33
May 5, 2007		31.30		21.22
Quarter Ended Fiscal 2007:
February 3, 2007	$	26.14	$	17.37
October 28, 2006		18.31		13.51
July 29, 2006		16.80		12.09
April 29, 2006		14.19		11.24

18

We did not pay cash dividends on our common shares during fiscal 2008 and fiscal 2007. Our dividend policy has been to retain earnings for operations and reinvestment into our business. Payments of dividends, if any, in the future will be determined by the Board of Directors in light of business conditions and other considerations.

See Part III, Item 12 for information regarding our 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
November 4 — December 1, 2007		618	$	16.64		1,026,881		1,123,119
December 2 — January 5, 2008		—		—		1,026,881		1,123,119
January 6 — February 2, 2008		48	$	11.88		1,026,929		1,123,071
Total		666	$	16.30		1,026,929		1,123,071

In December 1998, our Board of Directors authorized a discretionary program that allowed us 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 that were provided to us to satisfy minimum statutory tax withholding requirements.

STOCK PERFORMANCE GRAPH

The following graph compares the yearly changes in total shareholder return on our common shares with the total return of the S&P Composite — 500 Stock Index and the S&P Specialty Stores Index for the last five years. In each case, we assumed an initial investment of $100 on February 1, 2003. Each subsequent date on the chart represents the last day of the indicated fiscal year. We did not pay any dividends during such five-year period.

(1) Prior to the share reclassification on November 5, 2003, the return is based on the Class B common shares

19

Item 6.  Selected Financial Data

The following table presents our selected financial data for each of our five fiscal years ending February 2, 2008. The selected financial data for all fiscal years presented 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. We reclassified certain amounts in the financial statements for our four fiscal years ending February 3, 2007 to conform to the current year presentation.

	Fiscal Year-Ended (a)
	February 2,			February 3,			January 28,			January 29,			January 31,
	2008			2007			2006			2005			2004
	(Dollars in millions, except per share data)
Operating Results:
Net sales	$	1,878.8		$	1,850.6		$	1,882.8		$	1,812.4		$	1,734.1
Total net sales percentage increase (decrease)		1.5	%		(1.7	)%		3.9	%		4.5	%		3.1	%
Same-store sales percentage increase (decrease) (b)		3.5	%		(5.9	)%		(0.8	)%		3.2	%		3.6	%
Gross margin		872.4			859.8			859.2			862.1			810.6
Selling, general and administrative expenses		774.8			790.5			774.0			708.5			671.2
Store pre-opening and closing costs		8.4			11.1			23.4			18.5			13.3
Depreciation and amortization		51.8			49.2			42.2			43.0			39.0
Debt repurchase and share reclassification expenses (d)		—			—			—			4.2			5.5
Goodwill impairment		—			—			27.1			—			—
Operating profit (loss)		37.4			9.0			(7.5	)		87.9			81.6
Operating profit (loss) as a percent of net sales		2.0	%		0.5	%		(0.4	)%		4.8	%		4.7	%
Interest expense		12.5			15.6			12.8			13.7			16.5
Income (loss) before cumulative effect of accounting change		15.4			(2.9	)		(23.0	)		46.2			40.1
Cumulative effect of change in accounting principle, net of tax (c)		—			1.0			—			—			—
Net income (loss)	$	15.4		$	(1.9	)	$	(23.0	)	$	46.2		$	40.1
Net income (loss) as a percent of net sales		0.8	%		(0.1	)%		(1.2	)%		2.5	%		2.3	%
Per Share Data (e):
Income (loss) per common share — diluted:
Income (loss) before cumulative effect of accounting change	$	0.62		$	(0.12	)	$	(1.01	)	$	2.02		$	1.82
Cumulative effect of change in accounting principle		—			0.04			—			—			—
Net income (loss) — diluted	$	0.62		$	(0.08	)	$	(1.01	)	$	2.02		$	1.82
Weighted average shares outstanding — diluted (000’s)		24,950			23,519			22,716			22,887			22,003
Financial Position:
Cash and cash equivalents	$	25.4		$	18.4		$	17.9		$	79.6		$	17.4
Inventories		472.2			453.4			514.7			439.7			404.6
Inventory turnover		2.2	x		2.0	x		2.1	x		2.3	x		2.4	x
Current assets		547.8			543.8			605.8			562.9			467.4
Property, equipment and leasehold improvements, net		297.5			311.8			331.7			238.0			218.4
Total assets		869.4			866.3			946.8			839.3			719.8
Current liabilities		242.4			231.9			240.7			258.8			198.2
Long-term debt		100.0			125.3			203.7			100.0			113.7
Shareholders’ equity		440.0			409.8			399.4			408.9			340.8
Long-term debt to total capitalization		18.5	%		23.4	%		33.8	%		19.7	%		25.0	%
Long-term debt to total capitalization, net of cash		14.5	%		20.7	%		31.7	%		4.8	%		22.0	%

20

Item 6.  Selected Financial Data (Continued)

	Fiscal Year-Ended (a)
	February 2,		February 3,		January 28,		January 29,		January 31,
	2008		2007		2006		2005		2004
	(Dollars in millions, except per share data)
Per Share Data (e):
Book value (f)	$	17.97	$	17.18	$	17.09	$	18.10	$	15.61
Shares outstanding, net of treasury shares (000’s)		24,485		23,857		23,375		22,585		21,828
Other Financial Information:
Capital expenditures:
Cash	$	28.6	$	44.6	$	118.9	$	58.2	$	52.2
Cash — landlord reimbursement (g)		9.1		13.5		23.9		8.9		5.4
Total capital expenditures	$	37.7	$	58.1	$	142.8	$	67.1	$	57.6
Store Count:
Small-format stores		578		615		676		733		801
Large-format stores		196		186		162		118		91
Total		774		801		838		851		892
Store Square Footage (000’s) (h)
Small-format stores		8,477		9,034		9,810		10,608		11,492
Large-format stores		7,455		7,181		6,388		4,845		3,885
Total		15,932		16,215		16,198		15,453		15,377

(a)	All years include 52 weeks except for the fiscal year-ended February 3, 2007, which includes 53 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’s stores, the net sales results from these stores are excluded from 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 of the first 52 weeks are compared to the comparable 52 weeks of the prior period.
(c)	Effective January 29, 2006, the Company adopted Statement of Financial Accounting Standards (“SFAS”) No. 123 (revised 2004), “Share-Based Payment,” (“SFAS No. 123R”), which replaced SFAS No. 123, using the modified prospective method. SFAS No. 123R requires stock-based compensation to be measured using the fair value method of accounting. The adoption of the new standard resulted in a cumulative after-tax adjustment related to estimated forfeitures. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Note 1 — Significant Accounting Policies” and “Note 8 — Stock-Based Compensation” contained in the notes to the consolidated financial statements.
(d)	Debt repurchase and share reclassification expenses include expenses related to the early extinguishment of debt and costs associated with the reclassification of our former Class A and Class B common shares into a single class of common stock that was approved by shareholders on November 4, 2003. See “Note 6 — Financing” contained in the notes to consolidated financial statements.
(e)	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.
(f)	Book value is calculated by dividing shareholders’ equity by shares outstanding, net of treasury shares.
(g)	Capital expenditures reimbursed by the landlord represent the cost of assets acquired through the utilization of landlord lease incentives.
(h)	Total store square footage includes selling floor space and inventory storage areas.

21

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 2008 has 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 feature a variety of competitively priced merchandise used in sewing, crafting and home decorating projects, including fabrics, notions, crafts, frames, paper crafting material, artificial floral, home accents, finished seasonal and home décor merchandise.

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

•  Net sales.  We closely monitor our net sales, including net sales from stores open one year or more (“same-store sales”), by our two store formats, small-format stores and large-format stores. Net sales are compared to measure our overall sales growth and same-store sales are compared to 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 to 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 margins.  Our management uses gross margin to evaluate merchandising and operating effectiveness for the Company. Merchandise selection and future decisions are, in part, based on gross margin performance.

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

•  Inventory turnover.  We closely monitor our inventory investment, which is our single largest invested asset.

•  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.

An overview of our fiscal 2008 performance compared with fiscal 2007 (which includes 53 weeks with the exception of same-store sales percentage change, which is based on 52 weeks) performance follows:

•  Net sales increased 1.5 percent to $1.879 billion. Same-store sales increased 3.5 percent versus a 5.9 percent same-store sales decrease for last year. The increase in same-store sales was primarily driven by higher average ticket due to new product assortments, better in-stocks, more effective marketing and the benefit of competitive withdrawals in the sewing business.

•  Our gross margin rate, as a percentage of net sales, was consistent with the prior year. Our gross margins in our retail stores improved due to reduced clearance markdowns and improved effectiveness, but were essentially offset by the addition of sales from Joann.com, our Internet business, of which we now own 100% and which has a lower gross margin rate than our stores.

•  Our inventory turnover improved from 2.0 turns for fiscal 2007 to 2.2 turns for fiscal 2008.

22

•  Our debt to total capitalization ratio improved 490 basis points from 23.4 percent last year to 18.5 percent for fiscal 2008.

•  Our selling, general and administrative expenses (“SG&A”) as a percentage of net sales, excluding those expenses separately identified in the statement of operations, decreased 150 basis points from 42.7 percent last year to 41.2 percent this year. The decrease is primarily the result of our continued efforts to control expenses, as well as the impact of additional logistics costs incurred in the first quarter last year related to the opening of the Opelika, Alabama, distribution center, which did not recur in the current year. The additional sales from Joann.com, which has a lower expense structure than the retail stores, contributed to the improved leverage.

•  Store pre-opening and closing costs decreased $2.7 million to $8.4 million in fiscal 2008, due to a lower amount of store activity year-over-year.

•  Net income for the year was $15.4 million, or $0.62 income per diluted share, compared with a net loss of $1.9 million, or $0.08 loss per diluted share in fiscal 2007.

During fiscal year 2008 we opened six large-format stores and closed 32 small-format stores and one large-format store compared with last year when we opened 26 stores and closed 63 stores.

Executive Overview of Fiscal 2008

	Qtr 1			Qtr 2			Qtr 3			Qtr 4			Total
Net sales	$	424.2		$	388.5		$	480.2		$	585.9		$	1,878.8
Same-store sales percent change		1.8	%		7.0	%		2.4	%		3.3	%		3.5	%
Gross margin	$	200.6		$	177.4		$	230.5		$	263.9		$	872.4
Gross margin percent		47.3	%		45.7	%		48.0	%		45.0	%		46.4	%
Gross margin basis point change from prior year		70			(170	)		60			—			(10	)
Selling, general and administrative expenses	$	185.5		$	188.1		$	199.1		$	202.1		$	774.8
SG&A percent to sales		43.7	%		48.4	%		41.5	%		34.5	%		41.2	%
SG&A basis point change from prior year		(100	)		(310	)		(150	)		(140	)		(150	)
Net (loss) income	$	(1.7	)	$	(18.4	)	$	8.0		$	27.5		$	15.4
Net (loss) income percent to sales		(0.4	)%		(4.7	)%		1.7	%		4.7	%		0.8	%
Net (loss) income basis point change from prior year		120			110			170			40			90

In order to deliver balanced and consistent financial improvements over the long term, we outlined a new strategic growth plan for our company at the end of fiscal 2007, which included the following objectives:

•  improve the customer shopping experience in our stores;

•  enhance our marketing and merchandising offers; and

•  refine our store development program.

These objectives were supported by dozens of initiatives and were enabled by the development of our people, enhancement of our information systems, enhanced efficiencies in our supply chain, and improved controls over inventory and selling, general and administrative expenses.

The execution of our strategic growth plan resulted in solid results for fiscal year 2008:

•  We achieved same-store sales growth of 3.5 percent versus a same-store sales decrease of 5.9 percent last year;

•  We gained expense leverage in SG&A as the percentage of net sales decreased 150 basis points from last year; and

•  Earnings per share for the year improved to $0.62 per diluted share, compared with a loss of $0.08 per diluted share in the prior year.

23

This balanced and consistent improvement was reflected in our fourth quarter results as well.

Fourth quarter same-store sales increased 3.3 percent, representing our fourth consecutive quarter of positive same-store sales. The growth in sales was primarily driven by the fabric and sewing business and by improved in-stocks. Our craft sales were also up slightly compared to last year’s fourth quarter. Those increases were partially offset by a decrease in our seasonal categories.

Overall gross margin was flat for the quarter, due to the consolidation of the Joann.com business, which carries a lower margin than our retail stores. Excluding the effect of Joann.com, gross margin improved 50 basis points in the fourth quarter. The improvement was due to benefits from our global sourcing initiatives and from reduced clearance and promotional markdowns. Our decision to reduce purchases of seasonal merchandise was also timely and helped to avoid a serious impact on gross margin.

We ended the year with more inventory than planned due to the following:

•  the decision to delay the disposition of Christmas seasonal carryover, in order to capture more clearance sales through February; and

•  the receipt of certain spring seasonal import merchandise earlier than originally planned.

All of the Christmas carryover was either sold or donated as of the end of February in fiscal 2009.

In terms of expense management, we continue to make progress in reducing operating costs in a number of areas. Some of our largest savings during the year came from distribution centers, administrative overhead and certain insurance-related costs. While we have captured substantial savings over the past year, expense management continues to be an ongoing process and we expect to continue to identify new opportunities for savings.

Our six new stores and 26 remodels for fiscal year 2008 were all completed by the end of the third quarter. In fiscal year 2009, we expect to open 12 to 15 new stores that average slightly less than 30,000 square feet. We also plan to remodel 25 to 30 stores that average just under 20,000 square feet. As we continue to improve overall business results and deliver more consistent performance from new stores, we plan to accelerate new store openings in future years.

Looking ahead, the economic environment has added a degree of uncertainty for fiscal year 2009. However, we will continue to execute our strategic growth plan and continue to take advantage of competitive withdrawals from the fabric industry. We also expect to be insulated from an economic downturn to a certain extent by the strong demographics of our shoppers and the steady performance of the craft industry during previous recessions. We have planned fiscal year 2009 taking into consideration the current economic environment.

During fiscal 2009, we will continue to execute and refine the operational and merchandising initiatives we introduced in the previous year. We have also added a number of new initiatives for fiscal 2009 such as:

•  implementation of our new point-of-sale and store systems SAP Retail package, including new human resources and workforce management applications;

•  continued integration of our Joann.com Internet business, to achieve stronger synergy with our retail stores; and

•  remerchandising dozens of small-format stores, over and above those we have scheduled for remodels.

Recent Developments and Business Update

During the fourth quarter of fiscal 2008 we completed the purchase of the 62 percent of IdeaForest.com, Inc. (the operator of the Joann.com website) that we previously did not own for $23.6 million. Our current priority is to integrate this acquisition into the Company from an operational and a brand image perspective. We expect this transaction to be accretive to earnings for fiscal year 2009. In conjunction with the acquisition, we launched a site redesign of Joann.com. The improved website is more visually compelling, easier to navigate, includes features such as a community area to share ideas, as well as a place to review and rate

24

products. This transaction provides us with the opportunity to integrate the online shopping experience with our stores to help improve the customer experience.

Results of Operations

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

	Fiscal Year-Ended
	Feb 2, 2008			Feb 3, 2007			Jan 28, 2006
Net sales		100.0	%		100.0	%		100.0	%
Gross margin		46.4	%		46.5	%		45.6	%
Selling, general and administrative expenses		41.2	%		42.7	%		41.1	%
Store pre-opening and closing costs		0.4	%		0.6	%		1.2	%
Depreciation and amortization		2.8	%		2.7	%		2.3	%
Goodwill impairment		—			—			1.4	%
Operating profit (loss)		2.0	%		0.5	%		(0.4	)%

Comparison of the 52 Weeks Ended February 2, 2008 and the 53 Weeks Ended February 3, 2007

Net sales.  Net sales for fiscal 2008 increased 1.5 percent to $1.879 billion from $1.851 billion in the prior year. Same-store sales increased 3.5 percent compared with a same-store sales decrease of 5.9 percent for fiscal 2007. Our total store count at the end of the year was down 27 stores; however, the number of large-format stores in operation increased to 196 from 186 in fiscal 2007. The increase in the number of large-format stores during fiscal 2008 is the net result of six new stores and five small-format stores that were reclassified as large-format stores due to remodeling efforts during fiscal 2008, less the closing of one large-format store. Total store square footage decreased from 16.2 million square feet at the end of fiscal 2007 to 15.9 million square feet at the end of fiscal 2008.

Large-format stores net sales for fiscal 2008 increased 6.6 percent to $954.5 million from $895.5 million last year. Same-store sales for large-format stores increased 3.9 percent for fiscal 2008, versus a same-store sales decrease of 8.0 percent for the same period last year. The large-format store improvement was due to changes in our marketing program, improved store in-stocks and overall store conditions, which drove an increase in customer transactions and an increase in average ticket. Large-format stores accounted for approximately 51 percent of total net sales during fiscal 2008 compared with approximately 48 percent of total net sales for fiscal 2007.

Small-format stores net sales for fiscal 2008 decreased 4.5 percent to $912.4 million from $955.1 million in the prior year. Our same-store sales performance for small-format stores increased 3.0 percent for fiscal 2008 versus a same-store sales decrease of 4.1 percent for the same period last year. The increase in same-store sales for small-format stores was primarily due to increases in average ticket. Small-format stores accounted for approximately 49 percent of total net sales during fiscal 2008 as compared to 52 percent for the same period in the prior year.

On a category basis, our sewing businesses represented 50 percent of our fiscal 2008 sales volume, and increased approximately 5.6 percent on a same-store sales basis. The increase in our sewing businesses was driven by consistent growth throughout our fabric and sewing accessory categories.

On a category basis, our non-sewing businesses represented 50 percent of our fiscal 2008 sales volume and increased slightly on a same-store basis. We experienced positive sales results in our craft and party categories, which were mostly offset by lower sales of Christmas and floral seasonal merchandise.

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

25

portion of them from gross margin and include them within SG&A. As a percent of net sales, gross margin decreased slightly to 46.4 percent for fiscal 2008 from 46.5 percent in the prior year. Our gross margins in our retail stores improved due to reduced clearance markdowns and improved effectiveness, but were essentially offset by the addition of sales from Joann.com, our newly consolidated Internet business, which had a lower gross margin rate than our stores.

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 $774.8 million for fiscal 2008 versus $790.5 million in the prior year. Included in the prior year SG&A expenses was $4.4 million of separation costs related to our former chief executive officer and $3.5 million related to the recruitment and relocation of executive officers, as well as severance related to the elimination of positions at our store support center. As a percentage of net sales, SG&A expenses decreased to 41.2 percent in fiscal 2008 versus 42.7 percent in the prior year. The decrease as a percentage of net sales is primarily the result of our continued efforts to control expenses, as well as the impact of additional logistics costs incurred in the first quarter last year related to the opening of the Opelika, Alabama, distribution center, which did not recur in the current year. The additional sales from Joann.com, which has a lower expense structure than the retail stores, contributed to the improved leverage.

Stock-based compensation expense was $8.3 million for fiscal 2008, compared with $6.9 million in the prior year.

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 liquidator costs and other costs incidental to store closings.

Store pre-opening and closing costs decreased $2.7 million to $8.4 million in fiscal 2008, due to a decreased level of store activity. Pre-opening costs decreased $1.9 million during fiscal 2008 to $3.1 million from $5.0 million in fiscal 2007. During fiscal 2008, we opened six large-format stores, and we closed 32 small-format stores and one large-format store. Store closing costs decreased $0.8 million during fiscal 2008, to $5.3 million compared with $6.1 million in the prior year.

Depreciation and amortization.  Depreciation and amortization expense increased $2.6 million to $51.8 million in fiscal 2008 from $49.2 million in fiscal 2007. The increase is due to incremental depreciation associated with new stores.

Operating profit.  Operating profit was $37.4 million in fiscal 2008, compared with $9.0 million for fiscal 2007.

Operating profit for large-format stores was $63.0 million in fiscal 2008 versus $51.1 million in the prior year. Operating profit for small-format stores was $100.6 million in fiscal 2008 versus $95.5 million in fiscal 2007. Operating loss for our other segment was $126.2 million in fiscal 2008 versus $137.6 million in fiscal 2007. The improvement in large-format store operating profit was primarily driven by increased traffic as well as higher average ticket. The improvement in operating profit of the small-format stores was driven by the capture of volume from competitor store closures and category changes. The other segment includes unallocated corporate overhead in addition to the operating results on our Internet business. The improvement in operating loss of our other segment is primarily due to the result of our continued efforts to control expenses, as well as the impact of additional logistics costs incurred in the first quarter last year related to the opening of the Opelika, Alabama, distribution center, which did not recur in the current year.

Interest expense.  Interest expense for fiscal 2008 decreased $3.1 million to $12.5 million from $15.6 million in fiscal 2007. The decrease is attributable to lower average debt levels. Our average debt levels were $145 million in fiscal 2008 versus $199 million in the prior year.

26

Income taxes.  Our effective income tax rate for fiscal 2008 decreased to 38.1 percent from 56.1 percent in the prior year. The reduction in the effective tax rate is based primarily on the fact that we were in a book loss position in the prior year. 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 adopted Financial Accounting Standards Board (“FASB”) Interpretation No. 48 “Accounting for Uncertainty in Income Taxes — An Interpretation of FASB Statement No. 109” (“FIN 48”) at the beginning of fiscal year 2008. The interpretation prescribes a recognition threshold and a measurement attribute for the financial statement recognition and measurement of tax positions taken or expected to be taken in a tax return. For those benefits to be recognized, a tax position must be more-likely-than-not to be sustained upon examination by taxing authorities. The amount recognized is measured as the largest amount of benefit that is greater than 50 percent likely of being realized upon ultimate settlement. The adoption of FIN 48 resulted in a cumulative effect adjustment to reduce beginning retained earnings equal to $1.6 million, which was comprised of $1.1 million in taxes and $0.5 million in interest. Our unrecognized tax benefits upon adoption were $7.6 million, of which $4.9 million would affect the effective tax rate, if recognized within the consolidated statement of operations.

Comparison of Fiscal 2007 to Fiscal 2006

Net sales.  Net sales for fiscal 2007 decreased 1.7 percent to $1.851 billion from $1.883 billion in the prior year. Same-store sales decreased 5.9 percent compared with a same-store sales decrease of 0.8 percent for fiscal 2006. Our total store count at the end of the year was down 37 stores; however, the number of large-format stores in operation increased to 186 from 162 in fiscal 2006. The increase in the number of large-format stores during fiscal 2007 is the net result of 26 new stores less the closing of two large- format stores. Total store square footage increased slightly to 16.2 million square feet at the end of fiscal 2007. Large-format stores accounted for approximately 48 percent of total net sales during fiscal 2007 compared with approximately 43 percent of total net sales for fiscal 2006.

Large-format stores net sales for fiscal 2007 increased 10.8 percent to $895.5 million from $808.0 million for fiscal 2006. Same-store sales for large-format stores decreased 8.0 percent for fiscal 2007, versus a same-store sales decrease of .05 percent in fiscal 2006. Large-format stores accounted for approximately 48 percent of total net sales for fiscal 2007 as compared to 43 percent for the same period in the prior year.

Small-format stores net sales for fiscal 2007 decreased 11.1 percent to $955.1 million from $1,074.8 million in the prior year. Our same-store sales performance for small-format stores decreased 4.1 percent for fiscal 2007 versus a same-store sales decrease of 0.9 percent in the same period in the prior year. Small-format stores accounted for approximately 52 percent of total net sales for fiscal 2007 as compared to 57 percent for the same period in the prior year.

On a category basis, our non-sewing businesses represented 50 percent of our fiscal 2007 sales volume and decreased approximately 5.3 percent compared to the prior year on a same-store sales basis. The primary drivers of the decrease were continued softness in yarn, the planned reduction in our holiday inventory and negative results in home accents and candles due to space reductions as part of the merchandise assortment project completed in fiscal 2006. This decrease was partially offset by increases in paper crafting, jewelry and kids’ crafts during fiscal 2007 versus fiscal 2006.

Our sewing businesses represented 50 percent of our fiscal 2007 sales volume and decreased approximately 6.6 percent compared to the prior year on a same-store sales basis. The primary cause of the decrease was continued softness in fleece and home decorating fabric.

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 and include them within SG&A. As a percent of net sales, gross margin was 46.5 percent for fiscal 2007 compared with 45.6 percent in the prior year, an overall increase of 90 basis

27

points. The increase was due to a less promotional pricing strategy, due in part to better sell-through on our seasonal goods and reduced sales of clearance inventory primarily in the second half of the year.

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 $790.5 million for fiscal 2007 versus $774.0 million in the prior year. As a percentage of net sales, SG&A expenses increased to 42.7 percent in fiscal 2007 versus 41.1 percent in the prior year. The increase as a percentage of net sales was due to a decrease in same-store sales, increases in logistics costs related to the opening of a new distribution center, and increases in fixed store expenses, primarily caused by costs related to the new large-format stores and the larger year-over-year large-format store base. In fiscal 2007 we incurred $4.4 million of separation costs related to our former chief executive officer and $3.5 million related to the recruitment and relocation of executive officers, as well as severance related to our elimination of positions at our store support center.

Stock-based compensation expense was $6.9 million for fiscal 2007, compared with $2.8 million in the prior year. The reduced expense in fiscal 2006 was attributable to a reduced expectation regarding the level of performance-based shares that would be earned under the restricted stock program due to a decline in business conditions at that time. This resulted in the reversal of performance-based expense that had been previously recorded. In addition, stock-based compensation was credited in fiscal 2006 for expense that had been recognized related to unvested stock awards for executives who left our Company.

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 liquidator costs and other costs incidental to store closings.

Store pre-opening and closing costs decreased $12.3 million to $11.1 million in fiscal 2007, due to fewer store openings compared with the prior year. Pre-opening costs decreased $8.0 million during fiscal 2007 to $5.0 million from $13.0 million in fiscal 2006. Store closing costs decreased $4.3 million during fiscal 2007, to $6.1 million compared with $10.4 million in the prior year, although the year-over-year closings increased to 63 from 57. During fiscal 2007, we opened 26 large-format stores and closed 61 small-format and two large-format stores.

Depreciation and amortization.  Depreciation and amortization expense increased $7.0 million to $49.2 million in fiscal 2007 from $42.2 million in fiscal 2006. The increase was due to the new large-format store growth, as well as the opening of our new distribution center, which started to depreciate during the first quarter of fiscal 2007.

Operating profit (loss).  Operating profit was $9.0 million in fiscal 2007, compared with an operating loss of $7.5 million for fiscal 2006. Operating profit for large-format stores was $51.1 million in fiscal 2007 versus $38.7 million for fiscal 2006. Operating profit for small-format stores was $95.5 million in fiscal 2007 versus $107.4 million for fiscal 2006. Operating loss for our other segment was $137.6 million in fiscal 2007 versus $153.6 million for fiscal 2006. The improvement in large-format store operating profit was primarily driven by the increase in the number of large-format stores year-over-year. The decrease in small-format store operating profit was primarily driven by a decrease in the number of small-format stores year-over-year. In fiscal 2007 and 2006, the other segment included unallocated corporate overhead. The improvement in operating loss of our other segment is primarily due to the goodwill write off of $27.1 million that occurred in fiscal 2006 but did not recur in fiscal 2007.

Interest expense.  Interest expense for fiscal 2007 increased $2.8 million to $15.6 million from $12.8 million in fiscal 2006. The increase was attributable to higher average debt levels as well as higher average borrowing costs. Our average debt levels were $199 million in fiscal 2007 versus $183 million in fiscal 2006 while our average borrowing costs were 7.1 percent in fiscal 2007 versus 6.7 percent in fiscal 2006.

28

Income taxes.  Our effective income tax rate for fiscal 2007 increased to 56.1 percent from 39.7 percent, before goodwill impairment, in fiscal 2006. The effective tax rate differed from the statutory rate primarily due to the impact of our book loss position, charitable contributions of retail inventory, state and local income taxes and federal income tax credits.

Cumulative effect of change in accounting principle.  Effective January 29, 2006, we adopted SFAS No. 123R, which, among other things, changes the method of accounting for forfeited share-based awards. Under the new standard, forfeitures are required to be estimated at the time of the award grant, rather than accounting for them as they occur. Prior to fiscal 2007, we had been expensing share-based awards without estimating forfeitures, and reduced the expense recognized as forfeitures actually occurred. Accordingly, as of the adoption date, we were required to reduce our previously recognized expense based on estimated forfeitures of existing awards, which had not yet vested. The amount of this reduction was presented on the statement of operations as a cumulative effect of change in accounting principle, net of tax. The cumulative adjustment increased fiscal 2007 net earnings by $1.0 million, or $0.04 per diluted common share.

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 2008, we had 16 stores that were open for one year or more where the store contribution was not cash flow positive. In addition, as of the end of fiscal 2008, we were paying rent on one closed store location where we had not yet obtained a sublease tenant or executed a lease termination.

Expenses recorded relating to store closings were $5.3 million, $6.1 million and $10.4 million in fiscal 2008, 2007 and 2006, 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.

The store closing reserve was $0.7 million and $0.8 million as of February 2, 2008 and February 3, 2007, respectively. The reserve is comprised of charges related to non-cancelable lease obligations and other costs.

Stock-Based Compensation

During fiscal 2008 we returned to a “pay-for-performance” approach to compensation, whereas during fiscal 2007 we focused on recruitment and retention of key management employees. The issuance of performance shares was based on the achievement of specific measurable performance criteria. In fiscal 2008, we granted 5,633 performance shares to operating officers and above, 172,435 time-based restricted shares and 660,173 non-qualified stock options to team members at the manager level and above. However, we did not grant any time-based restricted shares to our executive officers with the exception of 31,847 shares granted to a new executive officer in connection with his commencement of employment and which are included in the 172,435 shares mentioned above.

Liquidity and Capital Resources

Our capital requirements are primarily for capital expenditures in connection with infrastructure investments, new store openings, and working capital requirements for seasonal inventory builds and new store inventory purchases. Working capital requirements needed to finance our operations 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.

29

The following table provides cash flow related information for the three fiscal years ended February 2, 2008.

	2008			2007			2006
Net cash provided by (used for) operating activities	$	73.6		$	105.8		$	(31.5	)
Net cash used for investing activities		(49.4	)		(33.4	)		(142.8	)
Net cash (used for) provided by financing activities		(17.2	)		(71.9	)		112.6
Net increase (decrease) in cash and cash equivalents	$	7.0		$	0.5		$	(61.7	)
Ending cash and cash equivalents	$	25.4		$	18.4		$	17.9

Net Cash Provided By (Used For) Operating Activities

Net cash provided by operating activities was $73.6 million in fiscal 2008, compared with $105.8 million in fiscal 2007, a decrease of $32.2 million. The decrease was primarily attributable to the increase in inventories, net of accounts payable support, in fiscal 2008 as compared with the decrease in inventories, net of accounts payable support in fiscal 2007.

Inventories increased by $18.8 million, in fiscal 2008, compared with a decrease of $61.3 million in fiscal 2007. The increase in inventory is primarily due to a higher investment in basic categories to support our initiative to improve in-stocks and the timing of spring merchandise receipts. Inventory turns for fiscal 2008 were approximately 2.2, compared with 2.0 in fiscal 2007 and 2.1 in fiscal 2006. On a same-store basis, inventory levels in our small-format stores increased approximately four percent while large-format stores decreased approximately one percent.

Total operating assets and liabilities in fiscal 2008 decreased by $5.1 million, which is net of landlord lease incentives of $9.1 million. We negotiate landlord lease incentives as we build certain new large-format store locations. See the discussion under “Capital Expenditures” below.

Net cash provided for operating activities was $105.8 million in fiscal 2007, compared with net cash used for operating activities of $31.5 million in fiscal 2006, an increase of $137.3 million. The increase was generated by changes in operating assets and liabilities, which in fiscal 2007 represented a $49.1 million source of cash versus a $67.3 million use in cash in fiscal 2006.

During fiscal 2008, we received federal income tax refunds in the combined amount of $9.5 million due primarily to net operating loss carrybacks applied to prior years.

During fiscal 2007, the Internal Revenue Service concluded its examination of our returns for the fiscal 2003 through fiscal 2005 tax years. On December 18, 2006, we remitted requested payments to the IRS which totaled $14.6 million including interest of $2.3 million and no penalties.

Net Cash Used For Investing Activities

Net cash used for investing activities totaled $49.4 million in fiscal 2008, which was comprised of capital expenditures of $37.7 million and the initial cash purchase price of the acquisition of the remaining equity of Joann.com of $11.7 million (net of cash acquired). Net cash used for investing activities totaled $33.4 million in fiscal 2007, which was comprised of capital expenditures of $58.1 million, partially offset by proceeds of $24.7 million from the sale-leaseback of our distribution center in Visalia, California. Capital expenditures are discussed further under the caption “Capital Expenditures.” Cash used for investing activities in fiscal 2006 consisted entirely of capital expenditures.

Capital Expenditures

Capital expenditures estimated for fiscal 2009 and for the last three fiscal years consist of cash expenditures and cash expenditures reimbursed by our landlords. Capital expenditures primarily relate to the operation of the stores, including new store openings, distribution center construction and information technology. We also incur capital outlays for distribution center equipment and other non-store capital

30

investments. Landlord reimbursed capital expenditures represent the cost of assets acquired with landlord lease incentives. Capital expenditures are summarized as follows:

	2009
	Outlook		2008		2007		2006
Cash	$	50-$55	$	28.6	$	44.6	$	118.9
Cash — landlord-reimbursed		11.0		9.1		13.5		23.9
Total	$	61-$66	$	37.7	$	58.1	$	142.8

Capital expenditures for fiscal 2008 totaled $37.7 million. Store-related expenditures, including our large-format store openings, accounted for approximately 70 percent, or $26.4 million, of total capital spending in fiscal 2008. Expenditures related to technology accounted for approximately 23 percent, or $8.7 million, of total capital spending in fiscal 2008. During fiscal 2008, we opened six large-format stores and remodeled 26 stores.

Capital expenditures for fiscal 2007 totaled $58.1 million. Store-related expenditures, including those for our large-format store openings, accounted for approximately 74 percent of total capital spending in fiscal 2007. Expenditures related to the construction of our distribution center in Opelika, Alabama, which opened in April 2006, accounted for approximately six percent, or $4 million, of total capital spending in fiscal 2007. The total capital cost of this project was $48 million. During fiscal 2007, we opened 26 large-format stores.

Capital expenditures for fiscal 2006 totaled $142.8 million. Store related expenditures, including our large-format store openings, accounted for approximately 65 percent of total capital spending in fiscal 2006. Capital expenditures related to the construction of our distribution center in Opelika, Alabama accounted for approximately 30 percent of total capital spending in fiscal 2006. Capital spending on this project was $44 million for fiscal 2006.

We anticipate that capital expenditures in fiscal 2009 will be approximately $61 to $66 million or $50 to $55 million, net of landlord lease incentives received. We plan to open approximately 12 to 15 new stores. We also plan to remodel approximately 25 to 30 stores. Included in our capital spending plan is approximately $18 to $20 million allocated for information technology spending primarily as it relates to implementing the new SAP modules.

Sale-Leaseback Transaction

On October 19, 2006, we completed a sale-leaseback transaction of our distribution center located in Visalia, California (the “Facility”). We sold the Facility to an independent third party for approximately $24.7 million, net of expenses incurred by us in connection with the sale. We leased the Facility back from the purchaser and are treating the lease as an operating lease.

The lease has an initial term of 20 years and will be automatically renewed for eight consecutive five-year renewal terms unless we provide notice of non-renewal prior to the commencement of any renewal term. A gain of $1.5 million in connection with the sale of the Facility was deferred, and is being amortized as a reduction of rent expense over the minimum lease term of 20 years. Rent payments under the lease will be payable monthly in advance. During each of the first five years of the term of the lease, annual rent payments will total $1.8 million. Thereafter, the annual rent payments will increase by 6 percent for each subsequent five-year period (whether during the initial term or with respect to a renewal term), subject to either party’s right to have rent payments adjusted to a fair market rent, based on one or more appraisals, as necessary, in year 41. Total scheduled rent payments during the initial term of the lease will be approximately $38.8 million.

Net Cash (Used For) Provided By Financing Activities

Net cash used for financing activities was $17.2 million in fiscal 2008 compared with net cash used for financing activities of $71.9 million in fiscal 2007. Long-term debt at the end of fiscal 2008 was $100.0 million and consisted entirely of our 7.5 percent senior subordinated notes (the “Notes”). No borrowings were outstanding on our senior bank credit facility (the “Credit Facility”). Debt levels decreased $25.3 million

31

during fiscal 2008, compared with a net decrease of $78.4 million in the prior year. The decrease is due primarily to improved operating results, offset by increases in inventory and net capital investments, including the acquisition of the remaining equity of IdeaForest.com.

Net cash used for financing activities was $71.9 million in fiscal 2007 compared with net cash provided by financing activities of $112.6 million during fiscal 2006. Long-term debt at the end of fiscal 2007 was $125.3 million and consisted of $25.3 million on our senior bank credit facility and our $100.0 million 7.5 percent senior subordinated notes. Debt levels decreased $78.4 million during fiscal 2007, compared with a net increase of $103.7 million in the prior year. The decrease was primarily due to lower inventory levels and other working capital improvements. In addition, we used the proceeds from the sale-leaseback transaction, noted above, to pay down borrowings on our Credit Facility.

In November 2007, we amended our Credit Facility to allow for the acquisition of the remaining equity of IdeaForest.com. In February 2006, we amended our Credit Facility primarily to increase the commitment from $350 million to $425 million. The February 2006 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.

As of February 2, 2008, we had the ability to borrow up to an additional $231 million under our Credit Facility.

Common Share Repurchases

During fiscal 2008, we purchased 59,987 of our common shares at an aggregate price of $1.4 million, which represented shares repurchased from employees to satisfy minimum statutory tax withholding requirements in connection with the vesting of restricted shares. As of February 2, 2008, we were authorized to purchase up to an additional 1.1 million common shares under previous authorizations from our Board of Directors.

Sources of Liquidity

We have three principal sources of liquidity: cash from operations, cash and cash equivalents on hand and 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 2008, our long-term unsecured debt was rated “Caa2” by Moody’s Investor Services and “CCC” by Standard & Poor’s. Moody’s rates our outlook as stable while Standard & Poor’s rates our outlook as positive. In March 2007, Moody’s confirmed the “Caa2” rating and changed their outlook from negative to stable. In June 2007, Standard & Poor’s confirmed our “CCC” rating and changed their outlook from negative to stable. In October 2007, Standard and Poor’s again confirmed our “CCC” rating and changed their outlook from stable to positive. The change in outlook by Moody’s and Standard and Poor’s reflects their view that operating results have improved and the expectation that working capital, free cash flow and debt protection measures will continue to improve. 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 could 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 2008 represent $100.0 million outstanding under our 7.5 percent Notes. No borrowings were outstanding under our Credit Facility.

Senior Bank Credit Facility.  Our Credit Facility is a $425 million revolver led by Bank of America Retail Finance, Inc., that expires on April 30, 2009, which the Company expects to renew prior to its expiration. In November 2007, we amended our Credit Facility to allow for the acquisition of the remaining equity of

32

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

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 certain 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 Facility) that is maintained. At February 2, 2008, interest on our borrowings under the Credit Facility was at the bank’s base rate. 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 February 2, 2008, we had no borrowings outstanding under the Credit Facility and $44.3 million in letters of credit outstanding.

Our weighted average interest rate and weighted average borrowings under the Credit Facility and prior senior bank credit facility were 6.9 percent and $45.3 million during fiscal 2008 and 6.7 percent and $99.2 million during fiscal 2007.

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 consolidated net worth financial covenant if excess availability, as defined, is less than $35 million at any time. As of February 2, 2008, excess availability was $231.3 million, and at our peak borrowing level during fiscal 2008, the excess availability was $175.0 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 2008 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 financing 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 indenture. The Notes represent unsecured obligations that are subordinated to the Credit Facility and are fully and unconditionally guaranteed by certain of our wholly-owned subsidiaries.

The Note 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 February 2, 2008, we were in compliance with all covenants under the indenture.

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

Off-Balance Sheet Transactions

Our liquidity is not dependent on the use of off-balance sheet transactions other than letters of credit and operating leases, which are typical in a retail environment. In October 2006, we completed a sale-leaseback transaction of our distribution center located in Visalia, California. For more information regarding that transaction, see “Note 11 — Leases” contained in the notes to consolidated financial statements.

33

Contractual Obligations and Commitments

The following table summarizes our future cash outflows resulting from contractual obligations and commitments as of February 2, 2008:

	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 accrued interest(1)		33.8		7.5		22.5		3.8		—
Letters of credit(2)		44.3		44.3		—		—		—
Purchase commitments(3)		18.3		5.6		12.7		—		—
Operating leases		859.9		148.0		261.0		192.4		258.5
FIN 48 — Uncertain tax positions(4)		10.7		—		1.9		8.8		—
Promissory notes(5)		8.6		3.1		5.5		—		—
Total Contractual Cash Obligations	$	1,075.6	$	208.5	$	303.6	$	305.0	$	258.5

(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. See “Liquidity and Capital Resources — Sources of Liquidity” for further discussion of the Credit Facility.
(2)	Includes commercial letters of credit of $22.1 million and $22.2 million of standby letters of credit.
(3)	Purchase commitments include legally binding contracts such as firm commitments for significant inventory purchases. Purchase orders that are not binding agreements are excluded from the table.
(4)	The Company adopted FIN 48 at the beginning of fiscal year 2008.
(5)	Represents delayed payments in relation to the Joann.com acquisition.

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.

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

	Fiscal 2008												Fiscal 2007
	Qtr 1			Qtr 2			Qtr 3			Qtr 4			Qtr 1			Qtr 2			Qtr 3			Qtr 4
Net sales	$	424.2		$	388.5		$	480.2		$	585.9		$	424.7		$	363.2		$	461.9		$	600.8
Same-store sales percentage change		1.8	%		7.0	%		2.4	%		3.3	%		(3.9	)%		(8.4	)%		(5.4	)%		(6.0	)%
Gross margin	$	200.6		$	177.4		$	230.5		$	263.9		$	198.0		$	172.3		$	219.1		$	270.4
Gross margin percent to sales		47.3	%		45.7	%		48.0	%		45.0	%		46.6	%		47.4	%		47.4	%		45.0	%
Operating profit (loss)	$	0.1		$	(26.2	)	$	16.7		$	46.8		$	(8.8	)	$	(29.5	)	$	5.0		$	42.3
Operating profit (loss) percent to sales		0.0	%		(6.7	)%		3.5	%		8.0	%		(2.1	)%		(8.1	)%		1.1	%		7.0	%
Net (loss) income	$	(1.7	)	$	(18.4	)	$	8.0		$	27.5		$	(6.6	)	$	(21.2	)	$	0.1		$	25.8
Inventories		434.9			507.9			570.9			472.2			463.0			511.3			535.8			453.4
Long-term debt		117.8			159.0			202.0			100.0			190.0			225.0			200.3			125.3

34

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 our 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 weighted average 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 recent distribution center inventory cycle counts and 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 during the first three quarters of each fiscal year, and the shrink accrual recorded at February 2, 2008 is based on shrink results of these 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 a number 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.

Revenue Recognition

Retail sales, net of estimated returns, and excluding sales taxes, are recorded at the point of sale when payment is made and customers take possession of the merchandise in the stores, at the point of shipment of merchandise ordered through the Internet, or in the case of custom orders, when the product is delivered to the customer and any remaining balance due from the customer is collected. Deposits received for custom orders are deferred as a liability until the related product is delivered to the customer. Shipping and handling fees charged to customers are also recorded as retail sales with related costs recorded as cost of goods sold. Sales taxes are not included in retail sales because we act as a conduit for collecting and remitting sales taxes to the appropriate governmental authorities.

We allow for merchandise to be returned under most circumstances. Our current policy allows for our customers to receive an even exchange or full refund based upon the original method of payment when the returned purchase is accompanied with a receipt and the return is within 90 days of purchase.

Vendor Allowances

We receive vendor support in the form of cash payments or allowances through a variety of programs, including co-operative advertising, volume discounts, vendor compliance and defective merchandise. We have

35

agreements in place with each vendor setting forth the specific conditions for each allowance or payment. In accordance with Emerging Issues Task Force 02-16, “Accounting by a Customer (Including a Reseller) for Certain Consideration Received from a Vendor,” depending on the arrangement, we either recognize the allowance as a reduction of current costs or defer the payment over the period the related merchandise is sold. Payments that are a reimbursement of specific, incremental and identifiable costs incurred to promote vendors’ products are recorded as an offset against advertising expense.

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 recognized under the redemption method and is determined based on the historical redemption patterns of gift cards sold since fiscal 2002. Beginning in fiscal 2006, we began to recognize gift card breakage as a component of net sales in the consolidated statement of operations and in the fourth quarter of fiscal 2006, we recognized $3.2 million of pre-tax income. In fiscal 2008 and 2007, we recognized $1.1 million and $0.8 million, respectively, of pre-tax income related to gift card breakage.

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.

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 quarters of fiscal 2008, fiscal 2007 and fiscal 2006, we performed impairment tests as required by SFAS No. 144. As a result of the evaluation, we recorded impairments of $0.6 million, $4.1 million and $3.0 million, respectively, on assets of certain stores still in operation.

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 totaling $27.1 million exceeded its implied fair value and that a full impairment of goodwill existed.

Capitalized Software Costs

Costs associated with the acquisition or development of software for internal use are capitalized in Property, Equipment and Leasehold Improvements in our Consolidated Balance Sheets and are amortized over the expected useful life of the software, generally between three and five years. Subsequent additions, modifications or upgrades to internal-use software are capitalized only to the extent that they allow the software to perform a task it previously did not perform. Software maintenance and training costs are expensed in the period incurred.

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.

36

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, significant portions of which are self-insured. The ultimate cost of our workers’ compensation and general liability insurance accruals are recorded based on actuarial valuations and historical claims experience. 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. We maintain stop-loss coverage to limit the exposure to certain insurance-related risks. Certain of our workers’ compensation and general liability accruals are recorded at an estimate of their net present value; other liabilities are not discounted. Differences in our estimates and assumptions could result in an accrual 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.

37

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 in future years, as discussed further below.

Statement of Financial Accounting Standards No. 157, “Fair Value Measurement”

In September 2006, the FASB issued Statement No. 157, “Fair Value Measurements” (“SFAS 157”), which provides a definition of fair value, establishes a framework for measuring fair value and requires expanded disclosures about fair value measurements. SFAS 157 is effective for us in fiscal 2009. The provisions of SFAS 157 were applied prospectively effective February 3, 2008. The adoption of SFAS 157 did not have a material impact on our consolidated financial statements.

Statement of Financial Accounting Standards No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities”

In February 2007, the FASB issued Statement No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (“SFAS 159”). SFAS 159 allows entities the option to measure eligible financial instruments at fair value as of specified dates. Such election, which may be applied on an instrument by instrument basis, typically is irrevocable once elected. SFAS 159 is effective for us in fiscal 2009. In accordance with provisions within SFAS 159, adoption was elective. As such, we elected not to adopt SFAS 159.

Statement of Financial Accounting Standards No. 141 (revised 2007), “Business Combinations”

In December 2007, the FASB issued SFAS No. 141 (revised 2007), Business Combinations (“SFAS 141R”). SFAS 141R establishes principles and requirements for how an acquirer in a business combination recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed and any non-controlling interest in the acquiree at the acquisition date fair value. SFAS 141R significantly changes the accounting for business combinations in a number of areas including the treatment of contingent consideration, pre-acquisition contingencies, transaction costs, in-process research and development and restructuring costs. In addition, under SFAS 141R, changes in an acquired entity’s deferred tax assets and uncertain tax positions after the measurement period will impact income tax expense. SFAS 141R provides guidance regarding what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. SFAS 141R is effective for the Company in fiscal 2010 with early application prohibited. We do not expect the adoption of SFAS 141R to have a material impact on our consolidated financial statements.

Statement of Financial Accounting Standards No. 160, “Non-controlling Interests in Consolidated Financial Statements, an amendment of ARB No. 51”

In December 2007, the FASB issued SFAS No. 160, Non-controlling Interests in Consolidated Financial Statements, an amendment of ARB No. 51 (“SFAS 160”). SFAS 160 changes the accounting and reporting for minority interests, which will be recharacterized as non-controlling interests and classified as a component of equity. This new consolidation method significantly changes the accounting for transactions with minority interest holders. SFAS 160 is effective for fiscal years beginning after December 15, 2008 with early application prohibited. We will adopt SFAS 160 beginning in the first quarter of fiscal 2010 and do not expect the adoption of SFAS 160 to have a material 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 that term set forth in 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,”

38

“should,” “would,” “may,” and “could” are intended to identify such forward-looking statements. All statements that address operating performance, events or developments that we expect or anticipate will occur in the future are forward-looking statements. Our actual results, performance or achievements may differ materially 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, the items described in “Item 1A. Risk Factors” as well as 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, the availability of merchandise, changes in the competitive pricing for products, the impact of competitors’ store openings and closings, longer-term unseasonable weather or widespread severe weather, our ability 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 obtaining 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 indirectly 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 2008. 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 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 2008 average debt levels, would cause an increase or decrease to interest expense of $0.5 million.

39

Item 8.  Financial Statements and Supplementary Data

Jo-Ann Stores, Inc.

Index to Consolidated Financial Statements

	Page
Report of Independent Registered Public Accounting Firm		41
Consolidated Balance Sheets as of February 2, 2008 and February 3, 2007		42
Consolidated Statements of Operations for each of the three fiscal years in the period ended February 2, 2008		43
Consolidated Statements of Cash Flows for each of the three fiscal years in the period ended February 2, 2008		44
Consolidated Statements of Shareholders’ Equity for each of the three fiscal years in the period ended February 2, 2008		45
Notes to Consolidated Financial Statements		46

40

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 February 2, 2008 and February 3, 2007, and the related consolidated statements of operations, cash flows, and shareholders’ equity for each of the three years in the period ended February 2, 2008. 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 February 2, 2008 and February 3, 2007, and the consolidated results of its operations and its cash flows for each of the three years in the period ended February 2, 2008, in conformity with U.S. generally accepted accounting principles.

As discussed in Note 5 to the consolidated financial statements, the Company adopted Financial Accounting Standards Board Interpretation No. 48, “Accounting for Uncertainty in Income Taxes”, effective February 4, 2007. As discussed in Note 1 to the consolidated financial statements, the Company adopted Statement of Financial Accounting Standards No. 123(R), “Share-Based Payment,” effective January 29, 2006.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Jo-Ann Stores, Inc.’s internal control over financial reporting as of February 2, 2008, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated April 5, 2008 expressed an unqualified opinion thereon.

/s/  Ernst & Young LLP

Cleveland, Ohio

April 5, 2008

41

Jo-Ann Stores, Inc.

Consolidated Balance Sheets

	February 2,			February 3,
	2008			2007
	(Dollars in millions, except share and per share data)
Assets
Current assets:
Cash and cash equivalents	$	25.4		$	18.4
Inventories		472.2			453.4
Deferred income taxes		26.4			41.6
Prepaid expenses and other current assets		23.8			30.4
Total current assets		547.8			543.8
Property, equipment and leasehold improvements, net		297.5			311.8
Goodwill, net		11.8			—
Other assets		12.3			10.7
Total assets	$	869.4		$	866.3
Liabilities and Shareholders’ Equity
Current liabilities:
Accounts payable	$	145.3		$	147.5
Accrued expenses		97.1			84.4
Total current liabilities		242.4			231.9
Long-term debt		100.0			125.3
Long-term deferred income taxes		—			14.2
Lease obligations and other long-term liabilities		87.0			85.1
Commitments and contingencies (Note 10)
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 28,072,032 and 27,400,347, respectively		1.4			1.4
Additional paid-in capital		194.6			176.9
Retained earnings		288.5			274.7
		484.5			453.0
Treasury stock, at cost, 3,586,872 shares and 3,542,885 shares, respectively		(44.5	)		(43.2	)
Total shareholders’ equity		440.0			409.8
Total liabilities and shareholders’ equity	$	869.4		$	866.3

See notes to consolidated financial statements

42

Jo-Ann Stores, Inc.

Consolidated Statements of Operations

	Fiscal Year-Ended
	February 2,		February 3,			January 28,
	2008		2007			2006
	(Dollars in millions,
	except earnings per share data)
Net sales	$	1,878.8	$	1,850.6		$	1,882.8
Cost of sales (exclusive of depreciation and amortization shown separately below)		1,006.4		990.8			1,023.6
Gross margin		872.4		859.8			859.2
Selling, general and administrative expenses		774.8		790.5			774.0
Store pre-opening and closing costs		8.4		11.1			23.4
Depreciation and amortization		51.8		49.2			42.2
Goodwill impairment		—		—			27.1
Operating profit (loss)		37.4		9.0			(7.5	)
Interest expense, net		12.5		15.6			12.8
Income (loss) before income taxes		24.9		(6.6	)		(20.3	)
Income tax provision (benefit)		9.5		(3.7	)		2.7
Income (loss) before cumulative effect of accounting change		15.4		(2.9	)		(23.0	)
Cumulative effect of change in accounting principle, net of tax		—		1.0			—
Net income (loss)	$	15.4	$	(1.9	)	$	(23.0	)
Income (loss) per common share — basic:
Income (loss) before cumulative effect of accounting change	$	0.63	$	(0.12	)	$	(1.01	)
Cumulative effect of change in accounting principle		—		0.04			—
Net income (loss)	$	0.63	$	(0.08	)	$	(1.01	)
Income (loss) per common share — diluted:
Income (loss) before cumulative effect of accounting change	$	0.62	$	(0.12	)	$	(1.01	)
Cumulative effect of change in accounting principle				0.04			—
Net income (loss)	$	0.62	$	(0.08	)	$	(1.01	)

See notes to consolidated financial statements

43

Jo-Ann Stores, Inc.

Consolidated Statements of Cash Flows

	Fiscal Year-Ended
	February 2,			February 3,			January 28,
	2008			2007			2006
	(Dollars in millions)
Net cash flows from operating activities:
Net income (loss)	$	15.4		$	(1.9	)	$	(23.0	)
Adjustments to reconcile net income (loss) to net cash provided by (used for) operating activities:
Depreciation and amortization		51.8			49.2			42.2
Deferred income taxes		0.7			(3.0	)		(21.1	)
Stock-based compensation expense		8.3			6.9			2.8
Cumulative effect of change in accounting principle		—			(1.0	)		—
Amortization of deferred financing costs		0.9			0.9			0.9
Loss on disposal and impairment of fixed assets		1.6			5.6			6.9
Goodwill impairment		—			—			27.1
Changes in operating assets and liabilities:
(Increase) decrease in inventories		(18.8	)		61.3			(75.0	)
Decrease (increase) in prepaid expenses and other current assets		6.6			4.8			(12.9	)
(Decrease) increase in accounts payable		(2.2	)		0.9			(20.6	)
Increase (decrease) in accrued expenses		8.2			(10.3	)		2.5
(Decrease) increase in lease obligations, net		(2.6	)		3.6			34.8
Increase in other long-term liabilities		4.5			0.2			1.0
Other, net		(0.8	)		(11.4	)		2.9
Net cash provided by (used for) operating activities		73.6			105.8			(31.5	)
Net cash used for investing activities:
Capital Expenditures		(37.7	)		(58.1	)		(142.8	)
Net proceeds from sale-leaseback transaction		—			24.7			—
Payment for Acquisition, net of cash acquired		(11.7	)		—			—
Net cash used for investing activities		(49.4	)		(33.4	)		(142.8	)
Net cash flows (used for) provided by financing activities:
Net change in revolving credit facility		(25.3	)		(78.4	)		103.7
Proceeds from stock-based compensation plans		7.8			5.2			7.9
Other, net		0.3			1.3			1.0
Net cash (used for) provided by financing activities		(17.2	)		(71.9	)		112.6
Net increase (decrease) in cash and cash equivalents		7.0			0.5			(61.7	)
Cash and cash equivalents at beginning of year		18.4			17.9			79.6
Cash and cash equivalents at end of year	$	25.4		$	18.4		$	17.9
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest	$	12.5		$	15.2		$	12.8
Income taxes, net of refunds		(7.2	)		20.1			26.9

See notes to consolidated financial statements

44

Jo-Ann Stores, Inc.

Consolidated Statements of Shareholders’ Equity

							Common
	Net						Stock		Additional									Total
	Common			Treasury			Stated		Paid-In			Treasury			Retained			Shareholders’
	Shares			Shares			Value		Capital			Stock			Earnings			Equity
	(Shares in thousands)											(Dollars in millions)
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
Net loss		—			—			—		—			—			(1.9	)		(1.9	)
Total comprehensive loss																			(1.9	)
Exercise of stock options		223			(29	)		—		2.8			0.2			—			3.0
Tax benefit on equity compensation		—			—			—		0.3			—			—			0.3
Stock-based compensation		(42	)		—			—		6.9			—			—			6.9
Purchase of common stock		(8	)		8			—		—			(0.1	)		—			(0.1	)
Issuance of treasury shares		111			(111	)		—		0.9			0.7			—			1.6
Issuance of common stock — Associate Stock Ownership Plan		198			—			—		2.2			—			—			2.2
Cumulative effect of change in accounting principle — SFAS 123R (note 1)		—			—			—		(1.6	)		—			—			(1.6	)
Balance February 3, 2007		23,857			3,543			1.4		176.9			(43.2	)		274.7			409.8
Change in accounting principle - FIN 48 (note 5)		—			—			—		—			—			(1.6	)		(1.6	)
Adjusted balance at February 3, 2007		23,857			3,543			1.4		176.9			(43.2	)		273.1			408.2
Net income		—			—			—		—			—			15.4			15.4
Total comprehensive income																			15.4
Exercise of stock options		350			(16	)		—		5.6			0.1			—			5.7
Tax benefit on equity compensation		—			—			—		1.7			—			—			1.7
Stock-based compensation		203			—			—		8.3			—			—			8.3
Purchase of common stock		(60	)		60			—		—			(1.4	)		—			(1.4	)
Issuance of common stock — Associate Stock Ownership Plan		135			—			—		2.1			—			—			2.1
Balance, February 2, 2008		24,485			3,587		$	1.4	$	194.6		$	(44.5	)	$	288.5		$	440.0

See notes to consolidated financial statements

45

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 774 retail stores in 47 states at February 2, 2008. The 578 small-format and 196 large-format stores feature a variety of competitively priced merchandise used in sewing, crafting and home decorating projects, including fabrics, notions, crafts, frames, paper crafting material, artificial floral, home accents, finished seasonal and home décor merchandise.

The Company manages its business in operating segments that are reportable segments: large-format stores, small-format stores and other. See Note 12 — Segment Reporting for further detail.

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 2007 and 2006 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 2008 refers to the year-ended February 2, 2008). Fiscal 2007 was a 53-week year.

Cash and Cash Equivalents

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

Inventories

Inventories are stated at the lower of cost or market with cost determined on a weighted average 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 distribution center inventory cycle counts and store physical inventories to substantiate inventory balances.

The Company’s accrual for shrink is based on the actual historical shrink results of recent distribution center inventory cycle counts and 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 entire store physical inventory counts are taken in the first three quarters of each year and the shrink accrual recorded at February 2, 2008 is based on shrink results of these prior physical inventories. All store locations

46

Jo-Ann Stores, Inc.

Notes to Consolidated Financial Statements (Continued)

Note 1 — Significant Accounting Policies (Continued)

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 a number 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.

Property, Equipment and Leasehold Improvements

Property, equipment and leasehold improvements are stated at cost less accumulated depreciation and amortization. Depreciation and amortization are recorded 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:

	Fiscal Year
	2008			2007
	(Dollars in millions)
Land and buildings	$	68.4		$	66.5
Furniture, fixtures and equipment		460.1			436.6
Leasehold improvements		148.0			140.8
Construction in progress		11.5			12.2
		688.0			656.1
Less accumulated depreciation and amortization		(390.5	)		(344.3	)
Property, equipment and leasehold improvements, net	$	297.5		$	311.8

The Company capitalized interest of $0.4 million in fiscal 2007 relating to the construction of a new distribution center in Opelika, Alabama.

Software Development

The Company capitalized $6.5 million and $6.8 million in fiscal 2008 and fiscal 2007, respectively, for internal use software acquired from third parties. The capitalized amounts are included in property, equipment and leasehold improvements. The Company amortizes internal use software on a straight-line basis over periods ranging from three to five years beginning at the time the software becomes operational. Amortization expense was $2.1 million and $2.0 million in fiscal 2008 and fiscal 2007, respectively.

Goodwill

The goodwill carried on the Company’s balance sheet at February 2, 2008 represented the excess of purchase price and related costs over the preliminary fair value assigned to the net assets of IdeaForest.com, Inc. (“IdeaForest”). The Company acquired the equity of IdeaForest that it previously did not own in the fourth quarter of fiscal 2008. The fair value assigned to the net assets and related goodwill will be finalized no later

47

Jo-Ann Stores, Inc.

Notes to Consolidated Financial Statements (Continued)

Note 1 — Significant Accounting Policies (Continued)

than the end of the third quarter of fiscal 2009. The goodwill recorded was non-deductible for tax purposes. See Note 2 — Goodwill for further detail.

At the beginning of the fourth quarter of fiscal 2006, the Company conducted the annual impairment testing required by Statement of Financial Accounting Standards (“SFAS”) No. 142, “Goodwill and Other Intangible Assets,” 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 its 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.

Impairment of Long-Lived Assets

In accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” the Company evaluates long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of those assets may not be recoverable. Factors considered important that could trigger an impairment review include, but are not limited to, significant underperformance relative to historical or projected future operating results and significant changes in the manner of use of the assets or the Company’s overall business strategies. Potential impairment exists if the estimated undiscounted cash flow expected to result from the use of the assets is less than the carrying value of the asset. The amount of the impairment loss represents the excess of the carrying value of the asset over its fair value. Management estimates fair value based on a projected discounted cash flow method using a discount rate that is considered to be commensurate with the risk inherent in the Company’s current business model. Additional factors are taken into consideration, such as local market conditions, operating environment and other trends.

Based on management’s ongoing review of the performance of its stores and other facilities, the following impairment losses were recorded and are reflected in selling, general and administrative expenses (“SG&A”) on the consolidated statement of operations.

	Fiscal Year-Ended
	2008		2007		2006
	(Dollars in millions)
Segment
Large-format stores	$	0.4	$	3.8	$	2.6
Small-format stores		0.2		0.3		0.4
Total	$	0.6	$	4.1	$	3.0

Store Pre-Opening and Closing 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. See Note 4 — Store Closings for further detail.

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

48

Jo-Ann Stores, Inc.

Notes to Consolidated Financial Statements (Continued)

Note 1 — Significant Accounting Policies (Continued)

an exit or disposal plan. SFAS No. 146 also establishes that the liability should initially be measured and recorded at fair value. See Note 4 — Store Closings.

	Fiscal Year-Ended
	2008		2007		2006
	(Dollars in millions)
Store pre-opening costs	$	3.1	$	5.0	$	13.0
Store closing costs		5.3		6.1		10.4
	$	8.4	$	11.1	$	23.4

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, significant portions of which are self-insured. The ultimate cost of our workers’ compensation and general liability insurance accruals are recorded based on actuarial valuations and historical claims experience. 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. We maintain stop-loss coverage to limit the exposure to certain insurance-related risks. Certain of our workers’ compensation and general liability accruals are recorded at an estimate of their net present value; other liabilities are not discounted. Differences in our estimates and assumptions could result in an accrual requirement materially different from the calculated accrual. Historically, such differences have not been significant.

Accrued expenses consisted of the following:

	Fiscal Year
	2008		2007
	(Dollars in millions)
Accrued taxes	$	26.2	$	18.6
Accrued compensation		28.2		24.4
Accrued insurance-related reserves		23.7		22.8
Other accrued expenses		19.0		18.6
Total accrued expenses	$	97.1	$	84.4

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 February 2, 2008 in the high yield debt market was approximately 85 percent to par value. Accordingly, the fair value of the Notes was $85 million versus their carrying value of approximately $100 million.

In the normal course of business, the Company employs established policies and procedures to manage exposure to changes in interest rates. The Company’s objective in managing the exposure to interest rate changes is to limit the volatility and impact of interest rate changes on earnings and cash flows. This is accomplished through the debt structure set in place in 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.

49

Jo-Ann Stores, Inc.

Notes to Consolidated Financial Statements (Continued)

Note 1 — Significant Accounting Policies (Continued)

Income Taxes

The Company adopted Financial Accounting Standards Board (“FASB”) Interpretation No. 48 “Accounting for Uncertainty in Income Taxes — An Interpretation of FASB Statement No. 109” (“FIN 48”), at the beginning of fiscal year 2008. The interpretation suggests a recognition threshold and a measurement attribute for the financial statement recognition and measurement of tax positions taken or expected to be taken in a tax return. For those benefits to be recognized, a tax position must be more-likely-than-not to be sustained upon examination by taxing authorities. The amount recognized is measured as the largest amount of benefit that is greater than 50 percent likely of being realized upon ultimate settlement. The adoption of FIN 48 resulted in a transition adjustment reducing beginning retained earnings by $1.6 million, which was comprised of $1.1 million in taxes and $0.5 million in interest. The Company’s unrecognized tax benefits upon adoption were $7.6 million, of which $4.9 million would affect the effective tax rate, if recognized within the consolidated statement of operations.

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 are 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

Retail sales, net of estimated returns, and excluding sales taxes, are recorded at the point of sale when payment is made and customers take possession of the merchandise in stores, at the point of shipment of merchandise ordered through the Internet or, in the case of custom orders, when the product is delivered to the customer and any remaining balance due from the customer is collected. Deposits received for custom orders are deferred as a liability until the related product is delivered to the customer. Shipping and handling fees charged to customers are also recorded as retail sales with related costs recorded as cost of goods sold. Sales taxes are not included in retail sales as the Company acts as a conduit for collecting and remitting sales taxes to the appropriate governmental authorities.

The Company allows for merchandise to be returned under most circumstances. The current policy allows for customers to receive an even exchange or full refund based upon the original method of payment when the returned purchase is accompanied with a receipt and the return is within 90 days of purchase. The reserve for returns was $0.6 million at February 2, 2008 and $0.5 million at February 3, 2007, respectively. Returns historically have not had a material impact on the consolidated financial statements.

50

Jo-Ann Stores, Inc.

Notes to Consolidated Financial Statements (Continued)

Note 1 — Significant Accounting Policies (Continued)

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. Gift card breakage is recognized under the redemption method and is determined based on the historical redemption patterns of gift cards sold since fiscal 2002. Beginning in fiscal 2006, we began to recognize gift card breakage as a component of net sales in the consolidated statement of operations and in the fourth quarter of fiscal 2006, we recognized $3.2 million of pre-tax income. In fiscal 2008 and 2007, we recognized $1.1 million and $0.8 million of pre-tax income, respectively.

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 SG&A. Distribution network costs of $59.5 million, $68.6 million and $65.5 million were included in SG&A expenses for fiscal 2008, 2007 and 2006, respectively.

The Company receives vendor support including cash discounts, volume discounts, allowances and co-operative advertising. We have agreements in place with each vendor setting forth the specific conditions for each allowance or payment. In accordance with Emerging Issues Task Force 02-16, “Accounting by a Customer (Including a Reseller) for Certain Consideration Received from a Vendor,” depending on the arrangement, we either recognize the allowance as a reduction of current costs or defer the payment over the period the related merchandise is sold through cost of sales. Historically, vendor consideration has not had a significant impact on cost of sales or gross margin. Payments that are a reimbursement of specific, incremental and identifiable costs incurred to promote vendors’ products are recorded as an offset against advertising expense.

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 for our stores includes the “build-out” period of leases, when 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 other 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.

Advertising Costs

The Company expenses production costs of advertising the first time the advertising takes place. Advertising expense, net of co-operative advertising agreements was $67.8 million, $65.2 million and $66.1 million for fiscal 2008, 2007 and 2006, respectively. Included in prepaid and other current assets are $1.2 million and $1.3 million, respectively, at the end of fiscal 2008 and 2007 relating to prepayments of production costs for advertising.

51

Jo-Ann Stores, Inc.

Notes to Consolidated Financial Statements (Continued)

Note 1 — Significant Accounting Policies (Continued)

Earnings Per Share

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

	Fiscal Year-Ended
	2008		2007			2006
	(Dollars in millions, except per share data)
Income (loss) before cumulative effect of accounting change	$	15.4	$	(2.9	)	$	(23.0	)
Cumulative effect of change in accounting principle, net of tax		—		1.0			—
Net income (loss)	$	15.4	$	(1.9	)	$	(23.0	)
Weighted average shares outstanding (shares in thousands):
Basic		24,296		23,519			22,716
Incremental shares from assumed exercise of stock options		324		—			—
Incremental restricted shares		330		—			—
Diluted		24,950		23,519			22,716
Income (loss) per common share — basic:
Income (loss) before cumulative effect of accounting change	$	0.63	$	(0.12	)	$	(1.01	)
Cumulative effect of change in accounting principle		—		0.04			—
Net income (loss) per common share	$	0.63	$	(0.08	)	$	(1.01	)
Income (loss) per common share — diluted:
Income (loss) before cumulative effect of accounting change	$	0.62	$	(0.12	)	$	(1.01	)
Cumulative effect of change in accounting principle		—		0.04			—
Net income (loss) per common share	$	0.62	$	(0.08	)	$	(1.01	)

For fiscal 2008 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 year. An average of 707,303 stock options was 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.

For fiscal 2007 and 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 had an anti-dilutive effect.

Stock-Based Compensation

In accordance with SFAS No. 123 (revised 2004), “Share-Based Payment” (“SFAS No. 123R”), costs associated with stock-based compensation are measured using the fair value method of accounting. The Company estimates expected forfeitures as of the date the awards are granted and records compensation expense only for those awards that are ultimately expected to vest. Stock-based compensation expense is recognized over the vesting period of the awards.

52

Jo-Ann Stores, Inc.

Notes to Consolidated Financial Statements (Continued)

Note 1 — Significant Accounting Policies (Continued)

Cash flows resulting from the tax benefits of deductions in excess of the compensation cost recognized for stock-based awards are classified as financing cash flows.

The following table shows the expense recognized by the Company for stock-based compensation.

	Fiscal Year-Ended
	2008		2007		2006
	(Dollars in millions)
Stock option compensation expense(a)	$	2.9	$	3.3	$	2.5
Restricted stock award amortization		5.4		3.6		0.3
	$	8.3	$	6.9	$	2.8

^(a) Included within stock option compensation expense is expense related to the employee stock purchase plan (the Associate Stock Ownership Plan or “ASOP”). The associated expense is not significant.

The Company estimates the fair value of options granted using the Black-Scholes option-pricing model. The Black-Scholes model requires several assumptions, which management updates regularly based on historical trends and current market observations. The fair values of the options granted under the stock plans are determined at the date of grant. The Company does not pay dividends, thus, no dividend rate assumption is used.

The Company estimates expected volatility based on the historical volatility of the price of the common stock over the expected life of the awards. The Company believes its historical volatility is a reasonable expectation of future volatility. The Company also uses historical experience to estimate the expected life of stock-based compensation awards and employee terminations. The risk-free interest rate is based on applicable U.S. Treasury yields that approximate the expected life of stock-based awards granted.

The significant assumptions used to calculate the fair value of option grants were as follows:

	Fiscal Year-Ended
	2008	2007	2006
Weighted average fair value of options granted	$7.99	$5.69	$6.64
Expected volatility of underlying stock	.388 to .417	.418 to .584	.513 to .568
Risk-free interest rates	3.3% to 4.9%	4.2% to 5.2%	3.5% to 4.4%
Expected life	2.2 to 5.2 years	2.2 to 5.2 years	4 years
Expected life — Associate Stock Ownership Plan	6 months	6 months	6 months

See Note 8 — Stock-Based Compensation for further detail.

Recent Accounting Pronouncements

The following accounting pronouncements may have an impact on the Company’s results of operations or financial position in future years, as discussed further below.

Statement of Financial Accounting Standards No. 157, “Fair Value Measurement”

In September 2006, the FASB issued Statement No. 157, “Fair Value Measurements” (“SFAS 157”), which provides a definition of fair value, establishes a framework for measuring fair value and requires expanded disclosures about fair value measurements. SFAS 157 is effective for the Company in fiscal 2009. The provisions

53

Jo-Ann Stores, Inc.

Notes to Consolidated Financial Statements (Continued)

Note 1 — Significant Accounting Policies (Continued)

of SFAS 157 were applied prospectively effective February 3, 2008. The adoption of SFAS 157 did not have a material impact on the Company’s consolidated financial statements.

Statement of Financial Accounting Standards No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities”

In February 2007, the FASB issued Statement No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (“SFAS 159”). SFAS 159 allows entities the option to measure eligible financial instruments at fair value as of specified dates. Such election, which may be applied on an instrument by instrument basis, typically is irrevocable once elected. SFAS 159 is effective for the Company in fiscal 2009. In accordance with the provisions of SFAS 159, adoption was elective. As such, the Company elected not to adopt SFAS 159.

Statement of Financial Accounting Standards No. 141 (revised 2007), “Business Combinations”

In December 2007, the FASB issued SFAS No. 141 (revised 2007), Business Combinations (“SFAS 141R”). SFAS 141R establishes principles and requirements for how an acquirer in a business combination recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed and any non-controlling interest in the acquiree at the acquisition date fair value. SFAS 141R significantly changes the accounting for business combinations in a number of areas including the treatment of contingent consideration, pre-acquisition contingencies, transaction costs, in-process research and development and restructuring costs. In addition, under SFAS 141R, changes in an acquired entity’s deferred tax assets and uncertain tax positions after the measurement period will impact income tax expense. SFAS 141R provides guidance regarding what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. SFAS 141R is effective for the Company in fiscal 2010 with early application prohibited. The Company does not expect the adoption of SFAS 141R to have a material impact on its consolidated financial statements.

Statement of Financial Accounting Standards No. 160, “Non-controlling Interests in Consolidated Financial Statements, an amendment of ARB No. 51”

In December 2007, the FASB issued SFAS No. 160, Non-controlling Interests in Consolidated Financial Statements, an amendment of ARB No. 51 (“SFAS 160”). SFAS 160 changes the accounting and reporting for minority interests, which will be recharacterized as non-controlling interests and classified as a component of equity. This new consolidation method significantly changes the accounting for transactions with minority interest holders. SFAS 160 is effective for fiscal years beginning after December 15, 2008 with early application prohibited. The Company will adopt SFAS 160 beginning in the first quarter of fiscal 2010 and does not expect the adoption of SFAS 160 to have a material impact on its consolidated financial statements.

Note 2 — Goodwill

The entire amount of goodwill carried on the Company’s balance sheet at February 2, 2008 represented the excess of purchase price and related costs over the preliminary fair value assigned to the net assets of IdeaForest. The Company acquired the remaining equity of IdeaForest in the fourth quarter of fiscal 2008. The fair value assigned to the acquired net assets and related goodwill of $11.8 million will be finalized no later than the third quarter of fiscal 2009. The goodwill recorded was non-deductible for tax purposes. The acquisition of IdeaForest is included as part of the Company’s Other segment.

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

54

Jo-Ann Stores, Inc.

Notes to Consolidated Financial Statements (Continued)

Note 2 — Goodwill (Continued)

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 its 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.

Note 3  — Business Combinations

On November 5, 2007, the Company completed the acquisition of the 62 percent portion of IdeaForest that the Company previously did not own. IdeaForest was the operator of the Joann.com website. IdeaForest, which has been renamed Joann.com, Inc., is now a wholly owned subsidiary of the Company and is included as part of the Other segment.

Per the merger agreement, the purchase price was $23.6 million and was comprised of a gross cash payment of $14.6 million ($11.7 million net of cash acquired) which was due upon closing, severance payments of $0.3 million payable subsequent to closing and delayed payments of $8.7 million, subject to adjustment, as described in the agreement, over the three years following the closing. The delayed payments, before adjustment, are non-interest bearing and are payable in three installments as follows: $3.1 million in November 2008, $3.1 million in November 2009 and $2.5 in November 2010.

The acquisition was accounted for as a purchase business combination and, accordingly, the purchase price was allocated to identifiable tangible and intangible assets acquired and liabilities assumed, based upon their respective fair values, with the excess allocated to goodwill. The preliminary estimate of goodwill was approximately $11.8 million. The fair value assigned to the acquired net assets and related goodwill will be finalized no later than the third quarter of fiscal 2009. Results of operations of Joann.com, Inc. from the date of acquisition are included in the consolidated statements of operations of the Company.

The following table summarizes the preliminary fair values of the assets acquired and liabilities assumed as of November 5, 2007 for the IdeaForest acquisition:

	As of
	November 5,
	2007
	(Dollars in millions)
Cash	$	2.9
Inventories		0.8
Prepaid expenses and other current assets		0.5
Property, plant and equipment		1.4
Deferred income taxes		11.4
Goodwill		11.8
Accounts payable		(2.6	)
Accrued expenses		(2.6	)
Total acquisition cost	$	23.6

55

Jo-Ann Stores, Inc.

Notes to Consolidated Financial Statements (Continued)

Note 4 — Store Closings

Store closing charges included within the consolidated statement of operations for fiscal years 2008, 2007 and 2006 are summarized below, and represent charges incurred to close stores related to the large-format store 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
	2008		2007		2006
	(Dollars in millions)
Store Closing Charges:
Non-cancelable lease obligations	$	1.3	$	0.7	$	2.3
Asset related charges		0.9		1.5		3.9
Other costs		3.1		3.9		4.2
Total	$	5.3	$	6.1	$	10.4

The store closing reserve was $0.7 million and $0.8 million as of February 2, 2008 and February 3, 2007, respectively. The reserve is comprised of miscellaneous liquidation costs.

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

Asset related charges include write-downs of fixed assets to their estimated fair value for stores closed, or scheduled to be closed. The asset related charges represent 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 miscellaneous store closing costs, including among other things, third-party inventory liquidator costs and costs related to fixtures, signage and register removal.

Note 5 — Income Taxes

The Company adopted Financial Accounting Standards Board (“FASB”) Interpretation No. 48 “Accounting for Uncertainty in Income Taxes — An Interpretation of FASB Statement No. 109” (“FIN 48”), at the beginning of fiscal year 2008. The interpretation suggests a recognition threshold and a measurement attribute for the financial statement recognition and measurement of tax positions taken or expected to be taken in a tax return. For those benefits to be recognized, a tax position must be more-likely-than-not to be sustained upon examination by taxing authorities. The amount recognized is measured as the largest amount of benefit that is greater than 50 percent likely of being realized upon ultimate settlement. The adoption of FIN 48 resulted in a transition adjustment reducing beginning retained earnings by $1.6 million, which was comprised of $1.1 million in taxes and $0.5 million in interest. The Company’s unrecognized tax benefits upon adoption were $7.6 million, of which $4.9 million would affect the effective tax rate, if recognized within the consolidated statement of operations.

During fiscal 2008, the Company made no material changes to tax related reserves under FIN 48. At the end of fiscal 2008, the Company’s unrecognized tax benefits are $7.8 million, of which $5.0 million would affect the effective tax rate, if recognized.

The Company records interest and penalties on uncertain tax positions as a component of the income tax provision. The total amount of interest and penalties accrued as of the date of adoption of FIN 48 was $2.6 million and as of the end of fiscal 2008 was increased to $2.9 million.

The Company files income tax returns in the U.S. and various state and local jurisdictions. For U.S. federal purposes, the Company is no longer subject to income tax examinations by taxing authorities for fiscal years

56

Jo-Ann Stores, Inc.

Notes to Consolidated Financial Statements (Continued)

Note 5 — Income Taxes (Continued)

prior to fiscal year 2006 and, for state and local purposes, with some exceptions due to longer statutes of limitations or the extensions of statutes of limitations, the Company is no longer subject to income tax examinations by taxing authorities for fiscal years prior to fiscal year 2004. The Company believes that, due to various factors, including the settlement of ongoing audits and the expiration or extension of underlying statutes of limitation, it is impractical to determine whether the total of uncertain tax positions will significantly increase or decrease within the next twelve months.

The Company adopted the provisions of FIN 48 on February 4, 2007. The Company recognized a $1.6 million debit to retained earnings as of February 4, 2007 to increase its reserve for unrecognized tax benefits as a result of the implementation of FIN 48. A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:

	Fiscal Year
	2008
	(Dollars in millions)
Balance at February 4, 2007	$	7.6
Increases related to prior year tax positions		—
Decreases related to prior year tax positions		—
Increases related to current year tax positions		1.0
Settlements		—
Lapse of statue of limitations		(0.8	)
Balance at February 2, 2008	$	7.8

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

	Fiscal Year-Ended
	2008		2007			2006
Current:
Federal	$	7.3	$	(3.3	)	$	20.4
State and local		1.5		2.6			3.4
		8.8		(0.7	)		23.8
Deferred		0.7		(3.0	)		(21.1	)
Income tax provision (benefit)	$	9.5	$	(3.7	)	$	2.7

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

	Fiscal Year-Ended
	2008			2007			2006
	(Dollars in millions)
Federal income tax at the statutory rate	$	8.7		$	(2.3	)	$	(7.1	)
Effect of:
Non-deductible goodwill impairment		—			—			9.5
State and local taxes		1.4			0.4			0.3
Settlement of federal tax liabilities from prior years		—			(1.1	)		—
Other, net		(0.6	)		(0.7	)		—
Income tax provision (benefit)	$	9.5		$	(3.7	)	$	2.7

57

Jo-Ann Stores, Inc.

Notes to Consolidated Financial Statements (Continued)

Note 5 — Income Taxes (Continued)

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The significant components of the Company’s deferred tax assets and liabilities are as follows:

	Fiscal Year
	Asset/(Liability)
	2008			2007
	(Dollars in millions)
Current
Deferred tax assets:
Inventory items	$	10.7		$	15.1
Lease obligations		0.6			0.9
Employee benefits		9.0			8.9
Federal net operating loss carryback		—			9.5
Other		6.1			7.2
Net current deferred tax asset	$	26.4		$	41.6
Non-current
Deferred tax assets:
Lease obligations	$	29.6		$	30.5
Equity investment		—			2.5
Employee benefits		8.0			6.7
Federal net operating loss carryforwards		11.1			—
State net operating loss carryforwards		3.0			1.1
Other		7.1			2.4
Valuation allowances		(1.7	)		(2.7	)
		57.1			40.5
Deferred tax liabilities:
Depreciation		(54.4	)		(54.1	)
Other		(0.6	)		(0.6	)
		(55.0	)		(54.7	)
Net non-current deferred tax asset (liability)	$	2.1		$	(14.2	)

The Company has approximately $33.4 million of federal net operating loss carryforwards and $49.9 million of state net operating loss carryforwards which expire in fiscal year 2020 through fiscal year 2028 and fiscal year 2009 through fiscal year 2028, respectively. Included in these amounts are $33.4 million of federal net operating loss carryforwards and $28.8 million of state net operating loss carryforwards acquired as part of the IdeaForest.com transaction. The acquired federal losses may be utilized to offset income realized by any member of the affiliated group in future years, up to an annual amount calculated in accordance with the loss carryover limitation rules under Section 382 of the Internal Revenue Code of 1986, as amended. The acquired California net operating loss carryforwards are also subject to limitation rules comparable to the Federal Section 382 limitations. The Company believes that it will be able to utilize the federal net operating losses included in the deferred tax asset and, accordingly, no valuation allowance has been recorded. The valuation allowance for state net operating loss carryovers was increased during the year to reflect the fact that the Company believes that it is more likely than not that all but $0.1 million of the acquired California net operating loss carryovers included in the deferred tax asset will not be realized prior to their expiration.

58

Jo-Ann Stores, Inc.

Notes to Consolidated Financial Statements (Continued)

Note 6 — Financing

Long-term debt consists of the following at the end of fiscal 2008 and 2007:

	Fiscal Year
	2008		2007
	(Dollars in millions)
Credit Facility	$	—	$	25.3
7.5 percent senior subordinated notes		100.0		100.0
Total Long-term debt	$	100.0	$	125.3

Secured Credit Facility

The Credit Facility as amended is a $425 million revolver led by Bank of America Retail Finance, Inc. that expires April 30, 2009, which the Company expects to renew prior to its expiration. In November 2007, the Company amended the Credit Facility to allow for the acquisition of the remaining equity of IdeaForest.com. In February 2006, the Company amended the Credit Facility primarily to increase the commitment from $350 million to $425 million. The February 2006 amendment, among other things, also improved advance rates on inventory during peak borrowing periods and modified the consolidated net worth covenant.

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 certain 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 February 2, 2008, interest on the Company’s borrowings under the Credit Facility was at the bank’s base rate. 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 February 2, 2008, the Company had no borrowings outstanding under the Credit Facility and $44.3 million in letters of credit outstanding.

The Company’s weighted average interest rate and weighted average borrowings under the Credit Facility and prior senior bank credit facility were 6.9 percent and $45.3 million during fiscal 2008 and 6.7 percent and $99.2 million during fiscal 2007.

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 February 2, 2008, excess availability was $231.3 million, and at the Company’s peak borrowing level during fiscal 2008, the excess availability was $175.0 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 February 2, 2008, the Company was 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 February 2, 2008 and February 3, 2007.

59

Jo-Ann Stores, Inc.

Notes to Consolidated Financial Statements (Continued)

Note 6 — Financing (Continued)

Senior Subordinated Notes

On February 26, 2004, the Company issued $100 million 7.5 percent Notes due 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 certain of the Company’s wholly-owned subsidiaries.

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 and issue guarantees of and pledges to secure indebtedness. In the event of a change in control, the Company would be required to offer to repurchase the Notes. The indenture defines various events of default, including cross-default provisions and defaults for any material judgments. Failure to comply with these restrictions and 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 February 2, 2008, the Company was in compliance with all covenants under its Note indenture. The entire amount of the Company’s $100.0 million long-term debt matures in fiscal year 2013.

Note 7 — Capital Stock

Shareholders’ Rights Plan

On February 26, 2007, 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 2.0 million shares are subject to this agreement as of February 2, 2008.

Note 8 — 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 common shares and stock options under these various stock-based compensation plans. 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 8 — Stock-Based Compensation (Continued)

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

Plan	Overview
1998 Incentive Compensation Plan (the “1998 Plan”)	Allows for the grant of stock appreciation rights, stock awards, stock options, stock purchase rights and incentive compensation awards (payable in shares or cash) 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 February 2, 2008, 1,661,585 stock options and 570,930 restricted shares were outstanding under the 1998 Plan. This plan terminates on June 3, 2008, but the termination will not affect awards that are outstanding under the plan at the termination date.
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 February 2, 2008, 12,900 stock options were outstanding under the Directors Stock Option Plan.
1994 Executive Incentive Plan (the “Executive Plan”)	Previously used to award restricted share 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 awards that are currently outstanding under the plan. At February 2, 2008, 21,850 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 awards that are currently outstanding under the plan. At February 2, 2008, 2,500 options were outstanding under the 1990 Plan.

Stock appreciation rights, stock awards, stock options, stock purchase rights and incentive compensation awards (payable in shares or cash) are available for grant to executive officers and employees under the 1998 Incentive Compensation Plan (“1998 Plan”), which expires on June 3, 2008. The Compensation Committee oversees the 1998 Plan, specifically approves all awards to executive officers and other senior management employees, and approves, on a program basis, grants to other employees. Stock options, time-based restricted shares and performance shares have been issued under this 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 as of fiscal 2008, non-employee director stock options are exercisable at their vesting date or upon termination if the non-employee director terminates service one year or more after the grant date. Both the employee and non-employee stock options generally expire seven years after the date of the grant, though some options granted in the past had ten-year expiration dates. Stock options

61

Jo-Ann Stores, Inc.

Notes to Consolidated Financial Statements (Continued)

Note 8 — Stock-Based Compensation (Continued)

granted under the 1998 Plan may become exercisable or expire under different terms as approved by the Compensation Committee of the Board of Directors.

Summarized below is stock option activity for the 1998 Plan, the 1990 Plan and the Directors Stock Option Plan:

The following table summarizes activity, pricing and other information for the Company’s stock options for fiscal 2008:

				Weighted-Average		Weighted-Average		Aggregate
	Number of			Exercise Price		Remaining		Intrinsic
	Options			per Option		Contractual Term		Value(a)
Outstanding at February 3, 2007		1,607,297		$	15.51
Granted		660,173			24.26
Exercised		(347,877	)		16.02
Cancelled		(242,608	)		20.90
Outstanding at February 2, 2008		1,676,985		$	18.06		4.4 years	$	1,672,019
Expected to vest		1,440,575		$	17.84		4.2 years	$	1,649,263
Exercisable at February 2, 2008		727,340		$	14.38		2.6 years	$	1,609,610

^(a) The intrinsic value of a stock option is the amount by which the fair value of the underlying stock exceeds the exercise price of the option.

The total intrinsic value of options exercised during fiscal 2008, 2007 and 2006 was $4.0 million, $1.3 million and $5.1 million, respectively.

Restricted Share Awards — Time-Based Awards

The vesting periods for the restricted shares and restricted stock units granted under the 1998 Plan during fiscal years 2006 — 2008 are up to four years for employee restricted shares, and one year for non-employee director restricted shares and restricted stock units. As of fiscal 2008, the restrictions lapse on restricted shares and restricted stock unit awards when a non-employee director terminates service one year or more after the grant date and a pro rata acceleration of the lapse of restrictions occurs when a director terminates service less than one year after such grants. All restrictions on restricted shares and restricted stock units terminate if the grantee remains in the continuous service of the Company throughout the vesting period

In fiscal 2006, the Compensation Committee of the Board of Directors approved an annual base award of restricted shares to certain of the Company’s employees that was coupled with performance awards. The base award grants, which are time-based awards and amounted to approximately 166,000 restricted shares, vest 50 percent at the end of three years, with the remaining 50 percent vesting at the end of the fourth year.

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

62

Jo-Ann Stores, Inc.

Notes to Consolidated Financial Statements (Continued)

Note 8 — Stock-Based Compensation (Continued)

As of February 2, 2008, 592,780 restricted shares were outstanding in which the restrictions lapse upon the achievement of continued employment over a specified period of time (time-based restricted share awards).

The following table summarizes activity for the 1998 Plan and the Executive Plan for time-based restricted stock awards for fiscal 2008:

				Weighted-
	Number of			Average Grant
	Shares			Date Fair Value
Outstanding at February 3, 2007		707,750		$	17.21
Granted		178,068			24.00
Vested		(212,422	)		22.77
Cancelled		(80,616	)		21.73
Outstanding at February 2, 2008		592,780		$	19.75

The fair value of restricted shares is determined based on the closing trading price of the Company’s shares on the grant date.

During fiscal 2008, 2007 and 2006, the Company granted time-based restricted share awards with weighted-average grant-date fair values of $24.00, $14.14 and $19.73, respectively. As of February 2, 2008, there was $4.4 million of total unrecognized compensation cost related to restricted awards expected to vest, which is expected to be recognized over a weighted-average period of 1.1 years. During fiscal 2008, 2007 and 2006, the total fair value of shares fully vested was $4.8 million, $0.5 million and $0.3 million, respectively.

Restricted Shares — Performance-Based Awards

The performance-based awards approved by the Compensation Committee of the Board of Directors during fiscal 2008 and 2006 are issued only upon the achievement of specific measurable performance criteria. Performance shares are awarded at plus or minus the target grant depending upon the level of achievement of the specified performance metric at the end of the fiscal year. In fiscal 2008, the Company granted performance shares to its officers at and above the Vice President level. The performance objective associated with the fiscal 2008 performance shares is based on the Company’s earnings per share during fiscal 2008, a one-year performance period, established as a range (Threshold, Target, Maximum). The threshold for earning any performance shares was set at earnings per share of $0.61 per share. Target had been set at $0.75 per share and maximum had been set at $0.91 per share. The achievement of the Target performance level for earnings per share would have resulted in the issuance of 97,100 shares. The expense for performance-based awards is recognized over the vesting period when the related criteria are probable of being achieved. Based upon the Company’s fiscal 2008 results, 5,633 performance shares were issued, which will vest in equal installments over a four-year period following the date of grant. Expense of $0.1 million was recognized during fiscal 2008 for these performance shares.

The performance-based awards approved in fiscal 2006 were dependent on the Company achieving certain net income performance criteria that are measured at the end of fiscal 2008. The threshold performance level was not attained for the fiscal 2006 performance-based restricted awards, and, therefore, none of these performance-based award shares were issued. No expense was recognized during fiscal 2007 and 2008 for these awards based on the Company’s performance.

63

Jo-Ann Stores, Inc.

Notes to Consolidated Financial Statements (Continued)

Note 8 — Stock-Based Compensation (Continued)

Shares Available to Grant

The total number of shares available for awards under the 1998 plan, other than those granted under the employee stock purchase program, are limited in any fiscal year to (1) four percent of the number of shares outstanding at the beginning of the fiscal year, plus (2) for each of the two prior fiscal years, the excess of four percent of the number of shares outstanding at the beginning of each such fiscal year over the number of share awards actually granted in each such fiscal year. The number of shares available for future awards under the 1998 Plan as of February 2, 2008 was 2,218,108. However, since the 1998 Plan expires on June 3, 2008, no further awards will be made under that Plan after that date. The Company will be seeking shareholder approval of a new plan at its 2008 Annual Meeting of Shareholders.

Employee Stock Purchase Program

The employee stock purchase program (the Associate Stock Ownership Plan or “ASOP”) enables all employees, except temporary and seasonal employees, to purchase shares of the Company’s common shares 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 shares 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 and the Company is, therefore, not required to file income tax returns or pay income taxes. 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 2008, 2007 and 2006, stock purchase rights of 134,942 shares, 197,850 shares and 132,787 shares, respectively, were granted and exercised under the ASOP. The 15 percent discount from market value granted to ASOP participants on the purchase of shares at the end of each accumulation period represents the Company’s non-cash contribution to the ASOP and is recognized as compensation expense. The stock-based compensation expense was not significant for any of the years presented. The ASOP will expire on June 3, 2008 along with the 1998 plan, and no offering period will commence after that date. The Company will be seeking shareholder approval of a new plan at its 2008 Annual Meeting of Shareholders.

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 their cash compensation into deferred stock units. Under this feature, non-employee directors make an irrevocable election prior to each calendar year whereby they can elect to convert a percentage (0 percent to 100 percent in 25 percent increments) of their cash compensation for the following calendar 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 2008, 2007 and 2006, 842 deferred stock units, 2,626 deferred stock units and 2,064 deferred stock units, respectively, were deferred under the deferred stock program.

Note 9 — Savings Plan Retirement 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 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. Effective January 2007, the match is made in cash and can be participant-directed. Prior to January 2007, employer contributions in the form of the

64

Jo-Ann Stores, Inc.

Notes to Consolidated Financial Statements (Continued)

Note 9 — Savings Plan Retirement and Postretirement Benefits (Continued)

Company’s common shares had 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 2008, 2007 and 2006 were $1.7 million, $1.8 million and $1.7 million, respectively. Holders of the common shares are entitled to vote their respective shares. The Company does not provide postretirement health care benefits for its employees.

The Company participates in a multi-employer pension plan for its union employees located at the Hudson Distribution Center. The Plan is administered by the United Steelworkers Union. The Plan is the “Steelworkers Pension Trust” and the Company contributed $0.6 million, $0.7 million and $0.9 million for fiscal years 2008, 2007 and 2006, respectively.

Note 10 — 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.

Note 11 — Leases

With the exception of one large-format store, all of the Company’s retail stores operate out of leased facilities. Our store leases generally have initial terms of five to fifteen years with renewal options for up to 20 years. The Company also leases certain computer and store equipment, with lease terms that are generally five years or less. Included in the future minimum rental payments is the operating lease for our distribution center located in Visalia, California. The lease has an initial term of 20 years.

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 $9.9 million of sublease income.

	Minimum
Fiscal Year-Ended	Rentals
(Dollars in millions)
2009	$	148.0
2010		138.3
2011		122.7
2012		103.8
2013		88.6
Thereafter		258.5
	$	859.9

65

Jo-Ann Stores, Inc.

Notes to Consolidated Financial Statements (Continued)

Note 11 — Leases (Continued)

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

Fiscal Year-Ended	2008			2007			2006
(Dollars in millions)
Minimum rent expense	$	146.4		$	143.1		$	141.5
Contingent rent expense		1.6			2.0			3.0
Sublease rent expense		(9.6	)		(10.9	)		(10.5	)
	$	138.4		$	134.2		$	134.0

Sale-Leaseback Transaction

On October 19, 2006, the Company completed a sale-leaseback transaction of its distribution center located in Visalia, California (the “Facility”). The Company sold the Facility to an independent third party for approximately $24.7 million, net of expenses incurred by the Company in connection with the sale. The Company leased the Facility back from the purchaser and the Company is treating the lease as an operating lease.

The lease has an initial term of 20 years and will be automatically renewed for eight consecutive five-year renewal terms unless the Company provides notice of non-renewal prior to the commencement of any renewal term. A gain of $1.5 million in connection with the sale of the Facility was deferred, and is being amortized as a reduction of rent expense over the minimum lease term of 20 years. Rent payments under the lease will be payable monthly in advance. During each of the first five years of the term of the lease, annual rent payments will total $1.8 million. Thereafter, the annual rent payments will increase by 6 percent for each subsequent five-year period (whether during the initial term or with respect to a renewal term), subject to either party’s right to have rent payments adjusted to a fair market rent, based on one or more appraisals, as necessary, in year 41. Total scheduled rent payments during the initial term of the lease will be approximately $38.8 million.

Note 12 — Segment Reporting

During the second quarter of fiscal 2008, the Company made a change in the way it references its store formats. The Company now classifies its stores as large-format and small-format, as opposed to the previous classification of superstore and traditional stores. As the store remodel program continues, the distinction between superstores and traditional stores would become less clear. The dividing line between the large-format and small-format classification is approximately 24,000 to 25,000 square feet of retail space. The most important distinction is whether or not stores in that range have been recently built or remodeled and contain a broad assortment of craft categories. At February 2, 2008, the Company operated 196 large-format stores and 578 small-format stores.

The Company has three reportable segments: large-format stores, small-format stores and other. The financial results of the Company’s Joann.com Internet business are included in the other segment. The small-format stores offer a selection of fabric and a convenience assortment of crafts, floral, finished seasonal and home décor merchandise. The large-format stores offer an expanded and more comprehensive product assortment than the small-format stores. The large-format stores also offer custom framing and educational programs that the small-format stores do not. The “other” segment includes unallocated corporate assets and overhead in addition to the operating results of the Joann.com Internet business. The segments are evaluated based on revenues and operating profit contribution to the total corporation. All income and expense items below operating profit are not allocated to the segments and are not disclosed.

66

Jo-Ann Stores, Inc.

Notes to Consolidated Financial Statements (Continued)

Note 12 — Segment Reporting (Continued)

As permitted under SFAS 131, “Disclosures about Segments of an Enterprise and Related Information,” certain information not routinely used in the management of these segments or information that is impractical to report is not shown. The Company does not report assets other than property equipment and leasehold improvements by segment because not all assets are allocated to segments for purposes of measurement by the Company’s chief operating decision maker. The accounting policies of the Company’s segments are consistent with those described in Note 1.

	Large-format		Small-format
	Stores		Stores		Other			Consolidated
Fiscal 2008
Net sales	$	954.5	$	912.4	$	11.9		$	1,878.8
Store pre-opening and closing costs		2.5		5.9		—			8.4
Depreciation and amortization		30.6		9.4		11.8			51.8
Operating profit (loss)		63.0		100.6		(126.2	)		37.4
Capital expenditures		10.0		16.6		11.1			37.7
Property, equipment and leasehold improvements, net		166.0		37.8		93.7			297.5
Fiscal 2007
Net sales	$	895.5	$	955.1	$	—		$	1,850.6
Store pre-opening and closing costs		5.6		5.5		—			11.1
Depreciation and amortization		28.4		9.4		11.4			49.2
Operating profit (loss)		51.1		95.5		(137.6	)		9.0
Capital expenditures		29.3		9.0		19.8			58.1
Property, equipment and leasehold improvements, net		181.7		39.0		91.1			311.8
Fiscal 2006
Net sales	$	808.0	$	1,074.8	$	—		$	1,882.8
Store pre-opening and closing costs		12.8		10.6		—			23.4
Depreciation and amortization		21.8		10.0		10.4			42.2
Operating profit (loss)		38.7		107.4		(153.6	)		(7.5	)
Capital expenditures		69.9		12.0		60.9			142.8
Property, equipment and leasehold improvements, net		171.1		41.9		118.7			331.7

67

Jo-Ann Stores, Inc.

Notes to Consolidated Financial Statements (Continued)

Note 13 — Quarterly Financial Information (Unaudited)

Summarized below are the unaudited results of operations by quarter for fiscal 2008 and 2007:

	First			Second			Third		Fourth
Fiscal 2008	Quarter			Quarter			Quarter		Quarter
(Dollars in millions, except per share data)
Net sales	$	424.2		$	388.5		$	480.2	$	585.9
Gross margin		200.6			177.4			230.5		263.9
Net (loss) income		(1.7	)		(18.4	)		8.0		27.5
Net (loss) income per common share:
Basic	$	(0.07	)	$	(0.76	)	$	0.33	$	1.12
Diluted		(0.07	)		(0.76	)		0.32		1.10

	First			Second			Third		Fourth
Fiscal 2007	Quarter			Quarter			Quarter		Quarter
(Dollars in millions, except per share data)
Net sales	$	424.7		$	363.2		$	461.9	$	600.8
Gross margin		198.0			172.3			219.1		270.4
(Loss) income before cumulative effect of accounting change		(7.6	)		(21.2	)		0.1		25.8
Net (loss) income		(6.6	)		(21.2	)		0.1		25.8
Net (loss) income per common share:
(Loss) income per common share — basic:
(Loss) income before cumulative effect of accounting change	$	(0.32	)	$	(0.90	)	$	0.00	$	1.09
Net (loss) income		(0.28	)		(0.90	)		0.00		1.09
(Loss) income per common share — diluted:
(Loss) income before cumulative effect of accounting change		(0.32	)		(0.90	)		0.00		1.05
Net (loss) income		(0.28	)		(0.90	)		0.00		1.05

68

Jo-Ann Stores, Inc.

Notes to Consolidated Financial Statements (Continued)

Note 14 — 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 certain 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 fiscal years 2008, 2007 and 2006 is as follows:

	February 2, 2008												February 3, 2007
Consolidating				Guarantor												Guarantor
Balance Sheets	Parent			Subsidiaries			Eliminations			Consolidated			Parent			Subsidiaries		Eliminations			Consolidated
	(Dollars in millions)
Assets
Current assets:
Cash and cash equivalents	$	(1.0	)	$	26.4					$	25.4		$	(8.8	)	$	27.2				$	18.4
Inventories		208.5			263.7						472.2			200.8			252.6					453.4
Deferred income taxes		20.1			6.3						26.4			35.2			6.4					41.6
Prepaid expenses and other current assets		17.8			6.0						23.8			20.7			9.7					30.4
Total current assets		245.4			302.4			—			547.8			247.9			295.9		—			543.8
Property, equipment and leasehold improvements, net		142.8			154.7						297.5			149.6			162.2					311.8
Goodwill, net		11.8			—						11.8			—			—					—
Other assets		12.8			(0.5	)					12.3			9.2			1.5					10.7
Investment in subsidiaries		70.9			—			(70.9	)		—			50.3			—		(50.3	)		—
Intercompany receivable		355.5			—			(355.5	)		—			358.1			—		(358.1	)		—
Total assets	$	839.2		$	456.6		$	(426.4	)	$	869.4		$	815.1		$	459.6	$	(408.4	)	$	866.3
Liabilities and Shareholders’ Equity
Current liabilities:
Accounts payable	$	151.6		$	(6.3	)				$	145.3		$	144.2		$	3.3				$	147.5
Accrued expenses		96.5			0.6						97.1			82.8			1.6					84.4
Total current liabilities		248.1			(5.7	)		—			242.4			227.0			4.9		—			231.9
Long-term debt		100.0			—						100.0			125.3			—					125.3
Long-term deferred income taxes		(5.2	)		5.2						—			(1.5	)		15.7					14.2
Lease obligations and other long-term liabilities		56.3			30.7						87.0			54.5			30.6					85.1
Intercompany payable		—			355.5			(355.5	)		—			—			358.1		(358.1	)		—
Shareholders’ equity:
Preferred stock		—			—						—			—			—					—
Common stock		1.4			—						1.4			1.4			—					1.4
Additional paid-in capital		194.6			—						194.6			176.9			—					176.9
Retained earnings		288.5			70.9			(70.9	)		288.5			274.7			50.3		(50.3	)		274.7
		484.5			70.9			(70.9	)		484.5			453.0			50.3		(50.3	)		453.0
Treasury stock, at cost		(44.5	)		—						(44.5	)		(43.2	)		—					(43.2	)
Total shareholders’ equity		440.0			70.9			(70.9	)		440.0			409.8			50.3		(50.3	)		409.8
Total liabilities and shareholders’ equity	$	839.2		$	456.6		$	(426.4	)	$	869.4		$	815.1		$	459.6	$	(408.4	)	$	866.3

69

Jo-Ann Stores, Inc.

Notes to Consolidated Financial Statements (Continued)

Note 14 — Consolidating Financial Statements (Continued)

	Fiscal Year-Ended
	February 2, 2008										February 3, 2007
Consolidating Statement				Guarantor										Guarantor
of Operations	Parent			Subsidiaries		Eliminations			Consolidated		Parent			Subsidiaries			Eliminations			Consolidated
	(Dollars in millions)
Net sales	$	1,024.6		$	1,405.2	$	(551.0	)	$	1,878.8	$	1,029.3		$	1,387.8		$	(566.5	)	$	1,850.6
Cost of sales (exclusive of depreciation and amortization shown separately below)		612.4			945.0		(551.0	)		1,006.4		605.8			951.5			(566.5	)		990.8
Gross margin		412.2			460.2		—			872.4		423.5			436.3			—			859.8
Selling, general and administrative expenses		383.9			390.9					774.8		395.4			395.1						790.5
Store pre-opening and closing costs		4.0			4.4					8.4		4.5			6.6						11.1
Depreciation and amortization		25.8			26.0					51.8		24.7			24.5						49.2
Operating (loss) profit		(1.5	)		38.9		—			37.4		(1.1	)		10.1			—			9.0
Interest expense, net		5.5			7.0					12.5		6.5			9.1						15.6
(Loss) income before income taxes		(7.0	)		31.9		—			24.9		(7.6	)		1.0			—			(6.6	)
Income tax (benefit) provision		(1.8	)		11.3					9.5		(2.1	)		(1.6	)					(3.7	)
(Loss) income before equity income (loss) and cumulative effect		(5.2	)		20.6		—			15.4		(5.5	)		2.6			—			(2.9	)
Equity income (loss) from subsidiaries		20.6			—		(20.6	)		—		2.6			—			(2.6	)		—
Income (loss) before cumulative effect		15.4			20.6		(20.6	)		15.4		(2.9	)		2.6			(2.6	)		(2.9	)
Cumulative effect of accounting change, net of tax		—			—					—		1.0			—						1.0
Net income (loss)	$	15.4		$	20.6	$	(20.6	)	$	15.4	$	(1.9	)	$	2.6		$	(2.6	)	$	(1.9	)

	Fiscal Year-Ended January 28, 2006
				Guarantor
Consolidating Statement of Operations	Parent			Subsidiaries			Eliminations			Consolidated
	(Dollars in millions)
Net sales	$	1,041.5		$	1,452.5		$	(611.2	)	$	1,882.8
Cost of sales (exclusive of depreciation and amortization shown separately below)		622.8			1,012.0			(611.2	)		1,023.6
Gross margin		418.7			440.5			—			859.2
Selling, general and administrative expenses		369.7			404.3						774.0
Store pre-opening and closing costs		14.9			8.5						23.4
Depreciation and amortization		21.0			21.2						42.2
Goodwill impairment		—			27.1						27.1
Operating profit (loss) profit		13.1			(20.6	)		—			(7.5	)
Interest expense, net		5.0			7.8						12.8
Income (loss) before income taxes		8.1			(28.4	)		—			(20.3	)
Income tax provision (benefit)		3.2			(0.5	)					2.7
Income (loss) before equity loss		4.9			(27.9	)		—			(23.0	)
Equity loss from subsidiaries		(27.9	)		—			27.9			—
Net loss	$	(23.0	)	$	(27.9	)	$	27.9		$	(23.0	)

70

Jo-Ann Stores, Inc.

Notes to Consolidated Financial Statements (Continued)

Note 14 — Consolidating Financial Statements (Continued)

	Fiscal Year-Ended
	February 2, 2008											February 3, 2007
Consolidating Statements of				Guarantor											Guarantor
Cash Flows	Parent			Subsidiaries			Eliminations		Consolidated			Parent			Subsidiaries			Eliminations		Consolidated
	(Dollars in millions)
Net cash provided by operating activities	$	55.7		$	17.9		$	—	$	73.6		$	54.8		$	51.0		$	—	$	105.8
Net cash flows used for investing activities:
Capital expenditures		(19.0	)		(18.7	)		—		(37.7	)		(22.2	)		(35.9	)		—		(58.1	)
Payment for Acquisition, net of cash acquired		(11.7	)		—			—		(11.7	)		—			—			—		—
Net proceeds from sale-leaseback transaction		—			—			—		—			—			24.7			—		24.7
Net cash used for investing activities		(30.7	)		(18.7	)		—		(49.4	)		(22.2	)		(11.2	)		—		(33.4	)
Net cash flows used for financing activities:
Net change in revolving credit facility		(25.3	)		—			—		(25.3	)		(78.4	)		—			—		(78.4	)
Dividends paid		—			—			—		15.0			(15.0	)
Proceeds from stock-based compensation plans		7.8			—			—		7.8			5.2			—			—		5.2
Other, net		0.3			—			—		0.3			1.3			—			—		1.3
Net cash used for financing activities		(17.2	)		—			—		(17.2	)		(56.9	)		(15.0	)		—		(71.9	)
Net (decrease) increase in cash and cash equivalents		7.8			(0.8	)		—		7.0			(24.3	)		24.8			—		0.5
Cash and cash equivalents at beginning of year		(8.8	)		27.2			—		18.4			15.5			2.4			—		17.9
Cash and cash equivalents at end of year	$	(1.0	)	$	26.4		$	—	$	25.4		$	(8.8	)	$	27.2		$	—	$	18.4

	Fiscal Year-Ended January 28, 2006
				Guarantor
Consolidating Statements of Cash Flows	Parent			Subsidiaries			Eliminations		Consolidated
	(Dollars in millions)
Net cash provided by (used for) operating activities	$	(101.1	)	$	69.6		$	—	$	(31.5	)
Net cash flows used for investing activities:
Capital expenditures		(72.6	)		(70.2	)		—		(142.8	)
Net cash used for investing activities		(72.6	)		(70.2	)		—		(142.8	)
Net cash flows provided by financing activities:
Net change in revolving credit facility		103.7			—			—		103.7
Proceeds from stock-based compensation plans		7.9			—			—		7.9
Other, net		1.0			—			—		1.0
Net cash provided by financing activities		112.6			—			—		112.6
Net decrease in cash and cash equivalents		(61.1	)		(0.6	)		—		(61.7	)
Cash and cash equivalents at beginning of year		76.6			3.0			—		79.6
Cash and cash equivalents at end of year	$	15.5		$	2.4		$	—	$	17.9

71

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

None.

Item 9A.  Controls and Procedures

Disclosure Controls and Procedures — We maintain disclosure controls and procedures that are designed to provide reasonable assurance that information required to be disclosed in our 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 the management of Jo-Ann Stores, Inc. (the “Management”), including our Principal Executive Officer and our Principal Financial Officer, 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.

In connection with the preparation of this Annual Report on Form 10-K, as of February 2, 2008, an evaluation was performed under the supervision and with the participation of our Management, including the Principal Executive Officer and Principal Financial Officer, 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). Based upon that evaluation, our Principal Executive Officer and our Principal Financial Officer have concluded that our disclosure controls and procedures were effective at the reasonable assurance level as of the end of the period covered by this Annual Report on Form 10-K.

Management’s Annual Report on Internal Control over Financial Reporting — Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) under the Exchange Act. Our internal control system is designed to provide reasonable assurance to our 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 our internal control over financial reporting as of February 2, 2008. 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, we concluded that, as of February 2, 2008, our 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. Ernst & Young LLP, an independent registered public accounting firm, has audited the effectiveness of our internal control over financial reporting as of February 2, 2008, and their report appears on the next page.

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

72

Report of Independent Registered Public Accounting Firm

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

We have audited Jo-Ann Stores, Inc.’s internal control over financial reporting as of February 2, 2008, 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 included in the accompanying Management’s Annual Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on 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, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, 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, Jo-Ann Stores, Inc. maintained, in all material respects, effective internal control over financial reporting as of February 2, 2008, 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 February 2, 2008 and February 3, 2007, and the related consolidated statements of operations, cash flows, and shareholders’ equity for each of the three years in the period ended February 2, 2008 and our report dated April 5, 2008 expressed an unqualified opinion thereon.

/s/  Ernst & Young LLP

Cleveland, Ohio

April 5, 2008

73

Item 9B.  Other Information

Upon recommendation of our Corporate Governance Committee, our Board of Directors approved Director Indemnification Agreements with each of our non-management directors (Scott Cowen, Joseph DePinto, Ira Gumberg, Patricia Morrison, Frank Newman, David Perdue, Beryl Raff, Alan Rosskamm and Tracey Travis), which agreements were entered into on April 14, 2008. The purpose of these agreements is to ensure that each of our non-management directors receives the maximum indemnification protection permitted under Ohio law. The agreements clarify the procedures to follow if a non-management director is entitled to indemnification, provide for the advancement of legal defense costs, allow the non-management director to recover enforcement costs if he or she is required to take action to enforce his or her indemnification rights, and obligate us to use commercially reasonable efforts to maintain D&O insurance coverage generally at a level that is substantially comparable in scope and amount to that currently provided. We must maintain this coverage for the duration of the non-management director’s service on our Board of Directors and for at least six years thereafter. Either party may terminate the agreement on 60 days’ notice.

PART III

Item 10.  Directors, Executive Officers and Corporate Governance

Information required by this Item 10 as to our directors is incorporated herein by reference to the information set forth under the caption “Election of Directors — Nominees and Continuing Directors” in our definitive proxy statement for our 2008 Annual Meeting of Shareholders to be held on June 11, 2008 (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 our fiscal year.

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

Information required by this Item 10 as to our executive officers 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.

Our Code of Business Conduct and Ethics (the “Code”) is applicable to our directors, officers (including our principal executive officer and principal financial officer) and employees. The Code is posted on our website at www.Joann.com. We intend to disclose on our website any amendment to, or waiver of, any provision of the Code that would be required to be disclosed under the rules of the Securities and Exchange Commission or the New York Stock Exchange.

Item 11.  Executive Compensation

The information required by this Item 11 is incorporated herein by reference to the information set forth under the captions “Director Compensation,” “Executive Compensation,” “Compensation Discussion and Analysis” and “Compensation Committee Report” 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 captions “Principal Shareholders” and “Equity Compensation Plan Information” in the Proxy Statement.

74

Item 13.  Certain Relationships and Related Transactions, and Director Independence

Betty Rosskamm (a member of one of our original founding families and the mother of Alan Rosskamm, a current member of the Board of Directors), Alma Zimmerman, (a member of one of our original founding families and who is now deceased), and the Company are parties to an agreement, dated October 30, 2003, as amended on February 22, 2007, 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 Company. Each of the Rosskamms and the Zimmermans are permitted to sell an unlimited number of shares to each other free of our right of first refusal.

Additional information required by this Item 13 is incorporated herein by reference to the information set forth under the captions “Certain Relationships and Related Transactions” and “Corporate Governance and Board Matters — Board Independence” in the Proxy Statement.

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 captions “Principal Accounting Firm Fees” and “Audit Committee Pre-Approval of Audit and Permitted Non-Audit Services” in the Proxy Statement.

75

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 40 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 77 through 79 of this Form 10-K, are filed as part of this Form 10-K.

76

Index to Exhibits

Exhibit
Number			Exhibit Description
	3	.1	Amended and Restated Articles of Incorporation of Jo-Ann Stores, Inc.
	3	.2	Amended and Restated Code of Regulations
	4	.1	Indenture between the Company 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 Exhibit 4.4 to the Company’s Form 10-K filed with the Commission on April 15, 2004 and incorporated herein by reference)
	4	.2	Third Amended and Restated Rights Agreement, dated as of February 26, 2007, by and between Jo-Ann Stores, Inc. and National City Bank, as Rights Agent (filed as Exhibit 4.1 to the Company’s Form 8-A/A filed with the Commission on March 2, 2007 and incorporated herein by reference)
	10	.1	Jo-Ann Stores, Inc. Supplemental Retirement Benefit Plan, as amended (filed as Exhibit 10.3 to the Company’s Form 10-Q filed with the Commission on December 13, 2007 and incorporated herein by reference)*
	10	.2	Schedule to Jo-Ann Stores, Inc. Supplemental Retirement Benefit Plan, effective as of November 13, 2007 (filed as Exhibit 10.4 to the Company’s Form 10-Q filed with the Commission on December 13, 2007 and incorporated herein by reference)*
	10	.3	Employment Agreement dated October 21, 2005 between the Company and Alan Rosskamm (filed as Exhibit 10.1 to the Company’s Form 8-K filed with the Commission on October 26, 2005 and incorporated herein by reference)*
	10	.4	Employment Agreement dated October 21, 2005 between the Company and David Holmberg (filed as Exhibit 10.2 to the Company’s Form 8-K filed with the Commission on October 26, 2005 and incorporated herein by reference)*
	10	.5	Fabri-Centers of America, Inc. 1990 Employees Stock Option and Stock Appreciation Rights Plan, as amended (filed as Exhibit 10.8 to the Company’s Form 10-K filed with the Commission on May 2, 2003 and incorporated herein by reference)*
	10	.6	Jo-Ann Stores, Inc. (formerly Fabri-Centers of America, Inc.) 1998 Incentive Compensation Plan, as amended, dated November 13, 2007 (filed as Exhibit 10.6 to the Company’s Form 10-Q filed with the Commission on December 13, 2007 and incorporated herein by reference)*
	10	.7	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 Exhibit 10.10 to the Company’s Form 10-K filed with the Commission on April 15, 2004 and incorporated herein by reference)*
	10	.8	Amendment to the Second Amended and Restated Agreement dated February 22, 2007 among and between Jo-Ann Stores, Inc., Betty Rosskamm, and Joan Wittenberg, Sandra Zucker and Larry Zimmerman (the successors to Alma Zimmerman, a member of one of the Company’s original founding families and who is now deceased) (filed as Exhibit 10.8 to the Company’s Form 10-K filed with the Commission on April 19, 2007 and incorporated herein by reference)*
	10	.9	Credit Agreement dated as of April 24, 2001 among the Company, 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 Exhibit 10.9 to the Company’s Form 10-K filed with the Commission on April 19, 2007 and incorporated herein by reference)
	10	.10	First Amendment to Credit Agreement dated as of April 24, 2001 (filed as Exhibit 10.10 to the Company’s Form 10-K filed with the Commission on April 19, 2007 and incorporated herein by reference)
	10	.11	Second Amendment to Credit Agreement dated as of March 17, 2003 (filed as Exhibit 10.13 to the Company’s Form 10-K filed with the Commission on April 15, 2004 and incorporated herein by reference)

77

Exhibit
Number			Exhibit Description
	10	.12	Third Amendment to Credit Agreement dated as of February 18, 2004 (filed as Exhibit 10.14 to the Company’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 Exhibit 10.15 to the Company’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 (filed as Exhibit 10.14 to the Company’s Form 10-K filed with the Commission on April 13, 2006 and incorporated herein by reference)
	10	.15	Sixth Amendment to Credit Agreement dated November 5, 2007 (filed as Exhibit 10.1 to the Company’s Form 10-Q filed with the Commission on December 13, 2007 and incorporated herein by reference)
	10	.16	Jo-Ann Stores, Inc. Deferred Compensation Plan, as amended on January 30, 2008*
	10	.17	Fabri-Centers of America, Inc. Executive Incentive Plan (filed as Exhibit 11 to the Company’s Form 10-K filed with the Commission on May 2, 2003 and incorporated herein by reference)*
	10	.18	Fabri-Centers of America, Inc. 1996 Stock Option Plan for Non-Employee Directors (filed as Exhibit 10.16 to the Company’s Form 10-K filed with the Commission on April 19, 2007 and incorporated herein by reference)*
	10	.19	Form of Restricted Stock Award Agreement of the Company (filed as Exhibit 10.1 to the Company’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 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 (filed as Exhibit 10.21 to the Registrant’s Form 10-K filed with the Commission on April 13, 2006 and incorporated herein by reference)*
	10	.22	Letter Agreement entered into on November 23, 2005 between the Registrant and David Holmberg regarding Mr. Holmberg’s employment with the Company (filed as Exhibit 10.22 to the Registrant’s Form 10-K filed with the Commission on April 13, 2006 and incorporated herein by reference)*
	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 (filed as Exhibit 10.23 to the Registrant’s Form 10-K filed with the Commission on April 13, 2006 and incorporated herein by reference)*
	10	.24	Letter Agreement entered into on June 29, 2006 between the Company and Darrell Webb regarding Mr. Webb’s employment with the Company (filed as Exhibit 10.1 to the Registrant’s Form 10-Q filed with the Commission on September 7, 2006 and incorporated herein by reference)*
	10	.25	Amended Employment Agreement dated February 19, 2008 between the Company and Darrell Webb*
	10	.26	Letter Agreement entered into on July 10, 2006 between the Company and Travis Smith regarding Mr. Smith’s employment with the Company (filed as Exhibit 10.3 to the Registrant’s Form 10-Q filed with the Commission on September 7, 2006 and incorporated herein by reference)*
	10	.27	Amended Employment Agreement dated February 19, 2008 between the Company and Travis Smith*
	10	.28	Letter Agreement entered into on July 27, 2006 between the Company and James Kerr regarding Mr. Kerr’s employment with the Company (filed as Exhibit 10.5 to the Registrant’s Form 10-Q filed with the Commission on September 7, 2006 and incorporated herein by reference)*
	10	.29	Amended Employment Agreement dated February 19, 2008 between the Company and James Kerr*
	10	.30	Split Dollar Insurance Agreement dated July 27, 2006 between the Company and James Kerr (filed as Exhibit 10.7 to the Registrant’s Form 10-Q filed with the Commission on September 7, 2006 and incorporated herein by reference)*
	10	.31	Split Dollar Insurance Agreement dated July 28, 2006 between the Company and David Holmberg (filed as Exhibit 10.8 to the Registrant’s Form 10-Q filed with the Commission on September 7, 2006 and incorporated herein by reference)*

78

Exhibit
Number			Exhibit Description
	10	.32	Lease Agreement, dated as of October 19, 2006, between BPVisalia LLC, as Landlord, and Jo-Ann Stores Supply Chain Management, Inc., as Tenant (incorporated by reference to Exhibit 10.1 of Form 8-K, filed with the Securities and Exchange Commission on October 25, 2006)
	10	.33	Split Dollar Insurance Agreement dated August 14, 2007 between the Company and Darrell Webb (filed as Exhibit 10.1 to the Registrant’s Form 8-K filed with the Commission on August 20, 2007 and incorporated herein by reference)*
	10	.34	Split Dollar Insurance Agreement dated August 14, 2007 between the Company and Travis Smith (filed as Exhibit 10.2 to the Registrant’s Form 8-K filed with the Commission on August 20, 2007 and incorporated herein by reference)*
	10	.35	Letter Agreement entered into on September 12, 2007 between the Company and David Holmberg regarding the termination of Mr. Holmberg’s employment with the Company (filed as Exhibit 10.5 to the Registrant’s Form 10-Q filed with the Commission on December 13, 2007 and incorporated herein by reference)*
	10	.36	Employment Agreement dated November 19, 2007 between the Company and Kenneth Haverkost (filed as Exhibit 10.2 to the Registrant’s Form 10-Q filed with the Commission on December 13, 2007 and incorporated herein by reference)*
	10	.37	Form of Director Indemnification Agreements
	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 Chief Financial Officer
	32	.1	Section 906 Certification of Principal Executive Officer and Principal Financial Officer

* Indicates a management contract or compensatory plan or arrangement

79

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.

April 17, 2008                                       

By:  /s/  Darrell Webb

Darrell Webb

President and Chief Executive Officer

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

Signature	Title
/s/  Darrell Webb Darrell Webb	Chairman of the Board, President, Chief Executive Officer and Director (Principal Executive Officer)
/s/  James Kerr James Kerr	Executive Vice President and Chief Financial 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/  Alan Rosskamm* Alan Rosskamm	Director
/s/  Tracey Travis* Tracey Travis	Director

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

April 17, 2008                                       

By:  /s/  James Kerr

James Kerr, Attorney-in-Fact

NOTE:  The Company did not request Mr. DePinto and Mr. Perdue to sign since they were elected to the Board subsequent to the conclusion of the fiscal year to which this Form 10-K relates.

80

EX-3.1

Exhibit 3.1

AMENDED AND RESTATED ARTICLES OF INCORPORATION
OF
JO-ANN STORES, INC.

     FIRST: The name of the Corporation is Jo-Ann Stores, Inc.

     SECOND: The place in the State of Ohio where its principle office is located is the Village of Hudson, County of Summit.

     THIRD: The purposes for which, and for any of which, it is formed are:

     a) To carry on the business of dealing in fabrics and in connection therewith to buy and sell, at wholesale or retail, import, export, manufacture, weave, produce, repair, adapt, prepare, use and otherwise deal in, rubber, cotton, wool, silk, flax, glass, synthetic and all other fibrous materials, goods and fabrics, and in goods and fabrics into which rubber, cotton, wool, silk, flax, glass, synthetic or any fibrous material enters as a component part.

     b) To develop, manufacture, repair, treat, finish, buy, sell, and generally deal in, in every manner, materials, articles and products of every kind and description, and to do all things necessary or incidental thereto, including owning, holding and dealing in, in every manner, all real and personal property necessary or incidental to the foregoing purposes.

     c) In general to carry on any other lawful business whatsoever in connection with the business of the Corporation or which is calculated, directly or indirectly, to promote the interests of the Corporation or to enhance the value of its properties, and to have and exercise all rights, powers and privileges which are now or may hereafter be conferred upon corporations by the laws of Ohio.

     The Corporation reserves the right at any time and from time to time to change substantially its purposes in any manner now or hereafter permitted by statute.

     FOURTH: The authorized number of shares of the Corporation is 155,000,000, consisting of 5,000,000 shares of Serial Preferred Stock without par value (''Serial Preferred Shares’’) and 150,000,000 Common Shares without par value (the ''Common Shares’’). The shares of each class shall have the express terms set forth in this Article Fourth.

     When the Certificate of Amendment setting forth these amendments becomes effective under the Ohio General Corporation Law (the ''Effective Time’’), and without any further action on the part of the Corporation or its shareholders, each issued Class A Common Share without par value of the Corporation (''Class A Share’’) shall automatically be reclassified and converted into 1.15 fully paid and nonassessable Class B Common Shares without par value of the Corporation (''Class B Share’’), and each issued Class B Share shall remain outstanding. At the Effective Time, the Class B Shares shall be redesignated as Common Shares. Each certificate formerly representing Class A Shares shall automatically represent, from and after the Effective

A-1

Time and without any further action on the part of the Corporation or any holder thereof, the number of Common Shares into which such Class A Shares have been reclassified and converted. Each certificate formerly representing Class B Shares shall automatically represent, from and after the Effective Time and without any further action on the part of the Corporation or any holder thereof, one Common Share.

     After the Effective Time, each holder of any certificate or certificates formerly representing Class A Shares or Class B Shares, upon surrender of such certificate or certificates to the Corporation or its designated agent, shall receive a certificate or certificates representing the number of Common Shares into which such Class A Shares or Class B Shares have been reclassified and converted. The Corporation may impose reasonable conditions upon the exchange of certificates formerly representing Class A Shares or Class B Shares.

DIVISION A: Express Terms of Serial Preferred Shares

     1. The Serial Preferred Shares may be issued from time to time in one or more series. Each Serial Preferred Share of any one series shall be identical with each other share of the same series in all respects, except as to the date from which dividends thereon shall be cumulative by reason of different dates of issuance; and all Serial Preferred Shares of all series shall rank equally and shall be identical, except in respect of the terms that may be fixed by the Board of Directors as hereinafter provided. Subject to the provisions of Sections 2 through 7 of this Division A, which provisions shall apply to all Serial Preferred Shares of all series, the Board of Directors is hereby authorized to cause Serial Preferred Shares to be issued in one or more series and with respect to each such series, prior to the issuance thereof, to fix:

     (a) The designation of the series, which may be by distinguishing number, letter or title.

     (b) The number of shares of the series, which number the Board of Directors may increase or decrease, except where otherwise provided in the creation of the series.

     (c) The dividend rate of the series.

     (d) The dates on which dividends, if declared, shall be payable and the dates from which dividends shall be cumulative.

     (e) The redemption rights and price or prices, if any, for shares of the series.

     (f) The terms and amount of any sinking fund provided for the purchase or redemption of shares of the series.

     (g) Whether the shares of the series shall be convertible into Common Shares and, if so, the conversion rate or rates or price or prices and the adjustments thereof, if any, and all other terms and conditions upon which conversions may be made.

     (h) The amounts payable on shares of the series in the event of any voluntary or involuntary liquidation, dissolution or winding up of the affairs of the Corporation.

A-2

     (i) Restrictions (in addition to those set forth in Sections 6(b) and 6(c) of this Division A) on the issuance of shares of the same series or of any other class or series.

     The Board of Directors is authorized to adopt from time to time amendments to the Articles of Incorporation or Amended Articles of Incorporation of the Corporation fixing, with respect to each such series, the matters specified in clauses (a) through (i) of this Section 1.

     2. The holders of Serial Preferred Shares of each series, in preference to the holders of Common Shares and any other class of shares ranking junior to the Serial Preferred Shares, shall be entitled to receive, out of any funds legally available and when and as declared by the Board of Directors, cash dividends at the rate (and no more) for such series fixed in accordance with the provisions of Section 1 of this Division A, payable quarterly on the dates fixed for such series. Such dividends shall be cumulative, in the case of shares of each particular series, from and after the date or dates fixed with respect to such series. No dividends may be paid upon or declared and set apart for any of the Serial Preferred Shares for any quarterly dividend period unless at the same time a like proportionate dividend for the same quarterly dividend period, ratably in proportion to the respective annual dividend rates fixed therefor, shall be declared and paid or a sum sufficient for payment thereof set apart for the Serial Preferred Shares of all series.

     3. So long as any Serial Preferred Shares are outstanding, no dividend (except a dividend payable in Common Shares or in other shares of the Corporation ranking junior to the Serial Preferred Shares) shall be paid or declared or any distribution be made (except as aforesaid) in respect of the Common Shares or in respect of other shares of the Corporation ranking junior to the Serial Preferred Shares, nor shall any Common Shares or any other shares of the Corporation ranking junior to the Serial Preferred Shares be purchased, retired or otherwise acquired by the Corporation (except out of the proceeds of the sale of shares of Common Stock or other shares of the Corporation ranking junior to the Serial Preferred Shares received by the Corporation subsequent to January 28, 1984):

     (a) unless all accrued and unpaid dividends on the Serial Preferred Shares of all series, including the full dividends for the current quarterly dividend period, shall have been declared and paid or a sum sufficient for payment thereof set apart; and

     (b) unless redemption of Serial Preferred Shares of any series shall have been effected from, and any required payment shall have been made into, any sinking fund provided for shares of such series in accordance with the provisions of Section 1 of this Division A.

     4. (a) Subject to the express terms of each series and to the provisions of Section 6(b)(iii) of this Division A, the Corporation (i) may from time to time redeem all or any part of the Serial Preferred Shares of any series at the time outstanding at the option of the Board of Directors at the applicable redemption price for such series fixed in accordance with the provisions of Section 1 of this Division A, or (ii) shall from time to time make such redemptions of the Serial Preferred Shares as may be required to fulfill the requirements of any sinking fund provided for shares of such series at the applicable sinking fund redemption price fixed in accordance with the provisions of Section 1 of this Division A, together, in each case, with accrued and unpaid dividends to the redemption date.

A-3

     (b) Notice of every redemption shall be mailed by first class mail, postage prepaid, to the holders of record of the Serial Preferred Shares to be redeemed, at their respective addresses then appearing on the books of the Corporation, not less than 30 or more than 60 days prior to the date fixed for redemption. At any time before or after notice has been given as above provided, the Corporation may deposit the aggregate redemption price of the Serial Preferred Shares to be redeemed, together with accrued and unpaid dividends thereon to the redemption date, with any bank or trust company in Cleveland, Ohio, or New York, New York, having capital and surplus of more than $50,000,000, named in such notice, directed to be paid to the respective holders of the Serial Preferred Shares to be redeemed, in amounts equal to the redemption price of all Serial Preferred Shares so to be redeemed, together with accrued and unpaid dividends thereon to the redemption date, upon surrender of the share certificate or certificates held by such holders, and upon the giving of such notice and the making of such deposit such holders shall cease to be shareholders with respect to such shares, and after such notice shall have been given and such deposit shall have been made such holders shall have no claim against the Corporation or privileges with respect to such shares except only to receive such money from such bank or trust company without interest or the right to exercise, before the redemption date, any unexpired rights of conversion. In case less than all of the outstanding Serial Preferred Shares of any series are to be redeemed, the Corporation shall select by lot the shares so to be redeemed in such manner as shall be prescribed by its Board of Directors. If the holders of Serial Preferred Shares that shall have been called for redemption shall not, within six years after such deposit, claim the amount deposited for the redemption of their shares, any such bank or trust company shall, upon demand, pay over to the Corporation such unclaimed amounts and thereupon such bank or trust company and the Corporation shall be relieved of all responsibility in respect thereof and to such holders.

     (c) Any Serial Preferred Shares that are redeemed by the Corporation pursuant to the provisions of this Section 4 of this Division A and any Serial Preferred Shares that are purchased and delivered in satisfaction of any sinking fund requirements provided for shares of such series and any Serial Preferred Shares that are converted in accordance with their express terms shall be canceled and not reissued. Any Serial Preferred Shares otherwise acquired by the Corporation shall be restored to the status of authorized and unissued Serial Preferred Shares without serial designation.

     5. (a) The holders of Serial Preferred Shares of any series shall, in case of liquidation, dissolution or winding up of the affairs of the Corporation, be entitled to receive in full, out of the assets of the Corporation, including its capital, before any amount shall be paid or distributed among the holders of Common Shares or any other shares ranking junior to the Serial Preferred Shares, the amounts fixed with respect to shares of any such series in accordance with Section 1 of this Division A, plus in any such event an amount equal to all dividends accrued and unpaid thereon to the date of payment of the amount due pursuant to such liquidation, dissolution or winding up of the affairs of the Corporation. In case the net assets of the Corporation legally available therefor are insufficient to permit the payment upon all outstanding Serial Preferred Shares of all series of the full preferential amount to which the holders thereof are respectively entitled, then such net assets shall be distributed ratably upon outstanding Serial Preferred Shares of all series in proportion to the full preferential amount to which the holder of each such share is entitled. After payment to holders of Serial Preferred Shares of the full preferential amounts as

A-4

aforesaid, holders of Serial Preferred Shares as such shall have no right or claim to any of the remaining assets of the Corporation.

     (b) The merger or consolidation of the Corporation into or with any other corporation, or the merger of any other corporation into it, or the sale, lease or conveyance of all or substantially all of the property or business of the Corporation shall not be deemed to be a dissolution, liquidation or winding up of the Corporation for the purposes of this Section 5 of this Division A.

     6. (a) The holders of Serial Preferred Shares of all series shall be entitled to one vote for each such share upon all matters presented to shareholders; and, except as otherwise provided herein or required by law, the holders of Serial Preferred Shares of all series and the holders of Common Shares shall vote together as one class on all matters. If, and as often as, the Corporation shall be in default in the payment of the equivalent of six quarterly dividends (whether or not consecutive) on any series of Serial Preferred Shares at any time outstanding, whether or not earned or declared, the holders of Serial Preferred Shares of all series voting separately as a class and in addition to all other rights to vote for Directors shall thereafter be entitled to elect, as herein provided, two members of the Board of Directors of the Corporation; provided, however, that the special class voting rights provided for herein, when the same shall have become vested, shall remain so vested until all accrued and unpaid dividends on the Serial Preferred Shares of all series then outstanding shall have been paid, whereupon the holders of Serial Preferred Shares shall be divested of their special class voting rights in respect of subsequent elections of Directors, subject to the revesting of such special class voting rights in the event hereinabove specified in this Section 6(a). In the event of default entitling the holders of Serial Preferred Shares to elect two Directors as above specified, a special meeting of the shareholders for the purpose of electing such Directors shall be called by the Secretary of the Corporation upon written request of, or may be called by, the holders of record of at least 10% of the Serial Preferred Shares of all series at the time outstanding, and notice thereof shall be given in the same manner as that required for the annual meeting of shareholders; provided, however, that the Corporation shall not be required to call such special meeting if the annual meeting of shareholders shall be held within 90 days after the date of receipt of the foregoing written request from the holders of Serial Preferred Shares. At any meeting at which the holders of Serial Preferred Shares shall be entitled to elect Directors, the holders of not less than one-third of the outstanding Serial Preferred Shares of all series, present in person or by proxy, shall be sufficient to constitute a quorum and the vote of the holders of a majority of such shares so present at any such meeting at which there shall be a quorum shall be sufficient to elect the members of the Board of Directors that the holders of Serial Preferred Shares are entitled to elect as herein-before provided. The two Directors who may be elected by the holders of Serial Preferred Shares pursuant to the foregoing provisions shall be in addition to any other Directors then in office or proposed to be elected otherwise than pursuant to such provisions, and nothing in such provisions shall prevent any change otherwise permitted in the total number of Directors of the Corporation or require the resignation of any Directors elected otherwise than pursuant to such provisions.

     (b) The affirmative vote or consent of the holders of at least two-thirds of the then outstanding Serial Preferred Shares of all series, given in person or by proxy, either in writing or at a meeting called for the purpose at which the holders of Serial Preferred Shares of all series shall vote separately as a class, shall be necessary to effect any one or more of the following (but,

A-5

insofar as the holders of Serial Preferred Shares are concerned, such action may be effected with such vote or consent):

     (i) Any amendment, alteration or repeal of any of the provisions of these Amended and Restated Articles of Incorporation or of the Code of Regulations of the Corporation that affects adversely the voting powers, rights or preferences of the holders of Serial Preferred Shares; provided, however, that for the purpose of this clause (i) only, neither the amendment of these Amended and Restated Articles of Incorporation of the Corporation to authorize, or to increase the authorized or outstanding number of, Serial Preferred Shares or of any shares of any class ranking on a parity with or junior to the Serial Preferred Shares nor the increase by the shareholders or Board of Directors pursuant to the Code of Regulations of the number of Directors of the corporation shall be deemed to affect adversely the voting powers, rights or preferences of the holders of Serial Preferred Shares; and provided further that, if such amendment, alteration or repeal affects adversely the rights or preferences of one or more but not all then outstanding series of Serial Preferred Shares, only the affirmative vote or consent of the holders of at least two-thirds of the number of the then outstanding shares of the series so affected shall be required;

     (ii) The authorization, or the increase in the authorized number, of shares of any class ranking prior to the Serial Preferred Shares; or

     (iii) The purchase or redemption (whether for sinking fund purposes or otherwise) of less than all the then outstanding Serial Preferred Shares except in accordance with a purchase offer made to all holders of record of Serial Preferred Shares, unless all dividends on all Serial Preferred Shares then outstanding for all previous quarterly dividend periods shall have been declared and paid or funds therefore set apart and all accrued sinking fund obligations applicable to all Serial Preferred Shares shall have been complied with.

     (c) The affirmative vote or consent of the holders of at least a majority of the then outstanding Serial Preferred Shares of all series, given in person or by proxy, either in writing or at a meeting called for the purpose at which the holders of Serial Preferred Shares of all series shall vote separately as a class, shall be necessary (but insofar as the holders of Serial Preferred Shares are concerned, such action may be effected with such affirmative vote or consent) to authorize any shares ranking on a parity with the Serial Preferred Shares or an increase in the authorized number of Serial Preferred Shares.

     7. For the purposes of this Division A:

     (a) Whenever reference is made to shares ''ranking prior to the Serial Preferred Shares’’, such reference shall mean and include all shares of the Corporation in respect of which the rights of the holders thereof as to the payment of dividends or as to distributions in the event of a voluntary or involuntary liquidation, dissolution or winding up of the affairs of the Corporation are given preference over the rights of the holders of Serial Preferred Shares.

A-6

     (b) Whenever reference is made to shares ''on a parity with the Serial Preferred Shares’’, such reference shall mean and include all shares of the Corporation in respect of which the rights of the holders thereof as to the payment of dividends and as to distributions in the event of a voluntary or involuntary liquidation, dissolution or winding up of the affairs of the Corporation rank on an equality with the rights of the holders of Serial Preferred Shares.

     (c) Whenever reference is made to shares ''ranking junior to the Serial Preferred Shares’’, such reference shall mean and include all shares of the Corporation other than those defined under clauses (a) and (b) of this Section 7 as shares ''ranking prior to’’ or ''on a parity with’’ the Serial Preferred Shares.

DIVISION B: Express Terms of Common Shares

     The Common Shares shall be subject to the express terms of the Serial Preferred Shares and any series thereof. Each Common Share shall be equal to every other Common Share. The holders of Common Shares shall be entitled to one vote for each share held by them upon all matters presented to the shareholders.

     FIFTH: A Director or officer of the Corporation shall not be disqualified by his office from dealing or contracting with the Corporation as a vendor, purchaser, employee, agent or otherwise, nor shall any transaction, contract or other act of the Corporation be void or voidable or in any way affected or invalidated by reason of the fact that any Director or officer, or any firm in which such Director or officer is a member, or any corporation of which such Director or officer is a shareholder, Director or officer, is in any way interested in such transaction, contract or other act, provided the fact that such officer, Director, firm or corporation is so interested shall be disclosed or shall be known to the Board of Directors of such members thereof as shall be present at any meeting of the Board of Directors at which action upon any such transaction, contract or other act shall be taken; nor shall any such Director or officer be accountable or responsible to the Corporation for or in respect of any such transaction, contract or other act of the Corporation or for any gains or profits realized by him by reason of the fact that he or any firm of which he is a member or any corporation of which he is a shareholder, Director or officer is interested in such transaction, contract or other act; any such Director may be counted in determining the existence of a quorum at any meeting of the Board of Directors of the Corporation which shall authorize or take action in respect of any such transaction, contract or other act, and may vote thereat to authorize, ratify or approve any such transaction, contract or other act with like force and effect as if he or any firm of which he is a member or any corporation of which he is a shareholder, Director or officer were not interested in such transaction, contract or other act.

     SIXTH: No holder of any class of shares of the Corporation shall have any pre-emptive or preferential rights to subscribe to or purchase any shares of any class of stock of the Corporation, whether now or hereafter authorized and whether unissued or in the treasury, or any obligations convertible into shares of any class of stock of the Corporation, at any time issued or sold, or any rights to subscribe to or purchase any thereof.

A-7

     SEVENTH: The Board of Directors is hereby authorized to fix and determine and to vary the amount of working capital of the Corporation, to determine whether any, and, if any, what part of its surplus, however created or arising, shall be used or disposed of or declared in dividends, or paid to shareholders, and, without action by the shareholders, to use and apply such surplus, or any part thereof, at any time, or from time to time, in the purchase or acquisition of shares of any one class or combination of classes of shares, voting trust certificates for shares, bonds, debentures, notes, scrip, warrants, obligations, evidences of indebtedness of the Corporation or any other securities of the Corporation, to such extent or amount and in such manner and upon such price and other terms as the Board of Directors shall deem expedient.

     EIGHTH: Any and every statute of the State of Ohio hereafter enacted whereby the rights, powers or privileges of corporations or of the shareholders of corporations organized under the laws of the State of Ohio are increased or diminished or in any way affected, or whereby effect is given to the action taken by any number, less than all, of the shareholders of any such corporation, shall apply to the Corporation and shall be binding not only upon the Corporation but upon every shareholder of the Corporation to the same extent as if such statute had been in force at the date of the filing of these Amended and Restated Articles of Incorporation in the office of the Secretary of State. Notwithstanding the foregoing, the Ohio Control Share Acquisition Law found in Section 1701.831, and any subsequent amendments thereto, shall not apply to the Corporation.

     NINTH: Notwithstanding any provisions of the Ohio Revised Code now or hereafter in force otherwise requiring for any purpose the vote, consent, waiver or release of the holders of shares entitling them to exercise two-thirds, or any other proportion of the voting power of the Corporation or of any class or classes of shares thereof, such action, unless otherwise expressly required by statute or by these Amended and Restated Articles of Incorporation or the Code of Regulations of the Corporation, may be taken by the vote, consent, waiver or release of the holders of shares entitling them to exercise a majority of the voting power of the Corporation or of such class or classes.

     TENTH: FAIR PRICE OR 80% VOTE PROVISION

     1. Voting Requirement. Unless both the fair price requirement set forth in Section 2 and the other conditions set forth in Section 3 have been satisfied, the affirmative vote of the holders of 80% of all outstanding shares of the Corporation entitled to vote in elections of Directors, voting together as a single class, shall be required for the authorization or approval of any of the following transactions:

     (a) Merger or Consolidation. The merger or consolidation of the Corporation or any of its subsidiaries with or into an Interested Party (as hereinafter defined).

     (b) Disposition of Assets. The sale, lease, pledge, or other disposition, in one transaction or in a series of transactions from the Corporation or any of its subsidiaries to an Interested Party, or from an Interested Party to the Corporation or any of its subsidiaries, of assets having an aggregate fair market value (as hereinafter defined) of $1,000,000 or more.

A-8

     (c) Issuance or Transfer of Securities. The issuance, sale, or other transfer, in one transaction or in a series of transactions, by the Corporation or any of its subsidiaries to an Interested Party, or by an Interested Party to the Corporation or any of its subsidiaries, of securities for cash or other consideration having an aggregate fair market value of $1,000,000 or more.

     (d) Liquidation of Dissolution. The liquidation of dissolution of the Corporation proposed by an Interested Party.

     (e) Reclassification or Recapitalization. The reclassification of securities, recapitalization of the Corporation or other transaction that has the effect of increasing the proportionate share of any class of outstanding securities of the Corporation or any of its subsidiaries beneficially owned (as hereinafter defined) by an Interested Party or of otherwise diluting the position of any shareholder of the Corporation in comparison with the position of an Interested Party.

     (f) Other Transactions. Any other transactions or series of transactions that is similar in purpose or effect to those referred to in clauses (a) through (e) of this Section 1.

This voting requirement shall apply even though no vote, or a lesser percentage vote, may be required by law, by any other provision of these Amended and Restated Articles of Incorporation or otherwise. The term ''business combination’’, as used in this Article, means any of the transactions referred to in clauses (a) though (f) of this Section 1.

     2. Fair Price Requirement. The fair price requirement will be satisfied if the consideration to be received in the business combination by the holders of shares of the Corporation’s Common Stock and Serial Preferred Stock, and by the Corporation or any of its subsidiaries, as the case may be, meets the following tests:

     (a) Amount of Consideration to be Received by Shareholders. If any holder of the shares of the Corporation’s Common Stock or Serial Preferred Stock, other than an Interested Party, is to receive consideration in the business combination for any of the shares, the aggregate amount of cash and fair market value of any other consideration to be received per share may not be less than the sum of —

     (1) the greatest of (i) the highest per share price, including commissions, paid by the Interested Party for any shares of the same class or series during the two-year period ending on the date of the most recent purchase by the Interested Party of any such shares, (ii) the highest sales price reported for shares of the same class or series traded on a national securities exchange or in the over-the-counter market during the one-year period preceding the first public announcement of the proposed business transaction or (iii) in the case of Serial Preferred Stock, the amount of the per share liquidation preference; plus

     (2) interest on the per share price calculated at the rate of ten percent (10%) per annum, compounded annually from the date the Interested Party first became an Interested Party until the business combination is consummated, less the per share

A-9

amount of cash dividends payable to holders of record on record dates in the interim, up to the amount of such interest.

For purposes of this clause (a) per share amounts will be adjusted for any stock dividend, stock split or similar transaction.

     (b) Form of Consideration to be Received by Shareholders. The consideration to be received by holders of shares of the Corporation’s Common Stock or Serial Preferred Stock must be in cash or in the same form as was previously paid by the Interested Party for shares of the same class or series; if the Interested Party previously paid for such shares with different forms of consideration, the consideration to be received by the holders of the shares must be in cash or in the same form as was previously paid by the Interested Party for the largest number of shares previously acquired by it. The provisions of this clause (b) are not intended to diminish the aggregate amount of cash and fair market value of any other consideration that any holder of shares of the Corporation’s Common Stock or Serial Preferred Stock is otherwise entitled to receive upon the liquidation or dissolution of the Corporation, under the terms of any contract with the Corporation or an Interest Party, or otherwise.

     (c) Consideration to be Received by the Corporation or any of its Subsidiaries. If the Corporation or any of its subsidiaries is to receive consideration in the business combination, the consideration to be received must be fair to the Corporation or its subsidiaries, as determined by the continuing directors (as hereinafter defined).

     3. Other Conditions. The other conditions will be satisfied if, from the time the Interested Party became an Interested Party until the completion of the business combination, each of the following has at all times been and continues to be true:

     (a) Continuing Directors. The Corporation’s Board of Directors has included at least five continuing directors. The term ''continuing director,’’ used in this Article, means an individual who (i) either was a director of the Corporation at the time the Interested Party became an Interested Party or was subsequently nominated or elected by the other continuing directors and (ii) is not an affiliate or associate (as hereinafter defined) of the Interested Party. All actions required or permitted to be taken by the continuing directors under this Article shall be taken by the unanimous written consent of all continuing directors or by the vote of a majority of the continuing directors at a meeting convened upon such notice as would be required for a meeting of the full Board of Directors.

     (b) No Acquisition of Additional Shares. The Interested Party has not become the beneficial owner (as hereinafter defined) of any additional shares of Common Stock or Serial Preferred Stock of the Corporation, except (i) as part of the transaction that resulted in the Interested Party becoming an Interested Party, (ii) upon conversion of securities previously acquired by it or (iii) pursuant to a stock dividend or stock split.

     (c) No Special Benefits to the Interested Shareholder. The Interested Party has not received, directly or indirectly, the benefit (except proportionately as a shareholder) of any loan, advance, guaranty, pledge, or other financial assistance, tax credit or deduction or other benefit from the Corporation or any of its subsidiaries.

A-10

     (d) Proxy Statement. A proxy or information statement describing the business combination and complying with the requirements of the Securities Exchange Act of 1934, as amended, and the rules and regulations under it (or any subsequent provisions replacing that Act and the rules and regulations under it) has been mailed at least 30 days prior to the completion of the business combination to the holders of all outstanding shares of the Corporation entitled to vote in election of Directors, whether or not shareholder approval of the business combination is required. If deemed advisable by the continuing directors, the proxy or information statement shall contain a recommendation by the continuing directors as to the advisability (or inadvisability) of the business combination and/or an opinion by an investment banking firm, selected by the continuing directors and retained at the expense of the Corporation, as to the fairness (or unfairness) of the business combination to holders of shares of the Corporation’s Common Stock or Serial Preferred Stock other than the Interested Party.

     (e) No Omission or Reduction of Dividends. Except to the extent approved by the continuing directors, there has been no (i) failure to pay in full, when and as due, any dividends on the Corporation’s Serial Preferred Stock or (ii) failure to pay or reduction in the annual rate of dividends on the shares of the Corporation’s Common Stock, whether directly or indirectly through a reclassification, recapitalization or otherwise.

     (f) No Change in Business or Capital Structure. Except to the extent approved by the continuing directors, there has been no material change in (i) the nature of the business conducted by the Corporation and its subsidiaries or (ii) the capital structure of the Corporation, including but not limited to any change in the number of outstanding shares of Common Stock, the number and series of any outstanding shares of Serial Preferred Stock and the types and aggregate principal amount of any outstanding debt securities, except for changes resulting from the exercise of previously issued options, warrants or other rights, the conversion of previously issued shares, the issuance of previously authorized debt securities and the mandatory redemption of retirement of debt securities in accordance with their terms.

4. Definitions: As used in this Article TENTH:

     (a) ’’Affiliate’’; ''Associate’’. The terms ''affiliate’’ and ''associate’’ have the meanings ascribed to them in Rule 12b-2 of the General Rules and Regulations under the Securities Exchange Act of 1934, as in effect on May 4, 1984.

     (b) ’’Beneficial Ownership’’. A person or entity is deemed to ''beneficially own’’ shares if, directly or indirectly through any contract, understanding, arrangement, relationship or otherwise, that person or entity has or shares (i) the power to vote or to dispose, or to direct the voting or disposition, of the shares or (ii) the right to acquire the shares pursuant to any contract or arrangement, upon the exercise of any option, warrant or right, upon the conversion of any other shares, upon revocation of a trust or otherwise. The person or entity is also deemed to ''beneficially own’’ shares that are beneficially owned by affiliates and associates of that person or entity.

A-11

     (c) ’’Business Combination’’. The term ''business combination’’ has the meaning ascribed to it in Section 1 of this Article.

     (d) ’’Continuing Directors’’. The term ''continuing directors’’ has the meaning ascribed to it in clause (a) of Section 3 of this Article.

     (e) ’’Fair Market Value’’. The term ''fair market value’’ means (i), in the case of securities listed on a national securities exchange or on the National Association of Securities Dealers, Inc.’s National Market, the highest closing sales price reported during the 30-day period immediately preceding the date in question for securities of the same class or series traded on such exchange or market, or, if such securities are not listed on any exchange or such National Market, the highest closing bid quotation with respect to such securities during the 30-day period preceding the date in question on the National Association of Securities Dealers, Inc. Automatic Quotation System or any system then in use, or, if no quotations are available, the value determined by the continuing directors, and (ii) in the case of other securities and of consideration other than securities or cash, the value determined by the continuing directors.

     (f) ’’Interested Party’’. The term ''Interested Party’’ means any person or entity that, together with its affiliates and associates, is at the time of, or has been within the two-year period immediately prior to, the consummation of a business combination the beneficial owner of shares having at least 20% of the aggregate voting power of all outstanding shares of the Corporation entitled to vote in elections of Directors. The term ''Interested Party,’’ for purposes of the requirements and conditions of this Article, also includes the affiliates and associates of the Interested Party. Notwithstanding the foregoing, the Corporation and its subsidiaries, and any profit-sharing, employee stock ownership, employee pension, or other employee benefit plan of the Corporation or any subsidiary, are not deemed to be ''Interested Parties’’.

     5. No Effect on Fiduciary Obligations of Interested Party. Nothing contained in this Article shall be construed to relieve any Interested Party from any fiduciary obligations imposed by law.

     6. Amendment, Repeal, etc. Notwithstanding any other provision of these Amended and Restated Articles of Incorporation or the Code of Regulations of the Corporation (and notwithstanding the fact that a lesser percentage may be required by law, these Amended and Restated Articles of Incorporation or the Code of Regulations of the Corporation), the affirmative vote of the holders of 80% of the outstanding shares of the Corporation entitled to vote in elections of Directors, voting together as a single class, shall be required to amend or repeal, or adopt any provisions inconsistent with, this Article Tenth.

     ELEVENTH: These Amended and Restated Articles of Incorporation supersede the existing Articles of Incorporation of the Corporation and any and all subsequent amendments thereto.

A-12

EX-3.2

Exhibit 3.2

Jo-Ann Stores, Inc.
Amended and Restated Code of Regulations

ARTICLE I
SHAREHOLDERS

     SECTION 1. Annual Meeting. The annual meeting of the shareholders of the Company for the election of Directors, the consideration of reports to be laid before the meeting, and the transaction of such other business as may properly be brought before the meeting shall be held in the place described in the Articles of Incorporation as the place where the principal office of the Company is or is to be located, or at such other place either within or without the State of Ohio as may be designated by the Board of Directors, the Chairman of the Board, or the President and specified in the notice of the meeting, at 3:30 o’clock p.m., on the first Monday of June in each year, or at such other time and on such other date (not, however, earlier than May 1 or later than June 30 in any year) as the Board of Directors may determine.

     SECTION 2. Special Meetings. Special meetings of the shareholders of the Company may be held on any business day when called by the Chairman of the Board, the President, a Vice President, the Board of Directors acting at a meeting, a majority of the Directors acting without a meeting, or persons who hold fifty percent of all the shares outstanding and entitled to vote thereat. Upon request in writing delivered either in person or by registered mail to the President or the Secretary by any persons entitled to call a meeting of all shareholders, that officer shall forthwith cause to be given to the shareholders entitled thereto notice of a meeting to be held on a date not less than ten or more than sixty days after receipt of the request, as that officer may fix; if the notice is not given within thirty days after the delivery or mailing of the request, the persons calling the meeting may fix the time of the meeting and give notice thereof in the manner provided by law or as provided in these Regulations or cause the notice to be given by any designated representative. Each special meeting shall be called to convene between nine o’clock a.m. and four o’clock p.m., and shall be held at the principal office of the Company unless the meeting is called by the Directors, acting with our without a meeting, in which case the meeting may be held at any place either within or without the State of Ohio designated by the Board of Directors and specified in the notice of the meeting.

     SECTION 3. Notice of Meetings. Not less than ten or more than sixty days before the date fixed for a meeting of the shareholders, written notice stating the time, place, and purposes of the meeting shall be given by or at the direction of the Secretary, or any other person or persons required or permitted by these Regulations to give the notice. The notice shall be given by personal delivery or by mail to each shareholder entitled to notice of the meeting who is of record as of the day next preceding the day on which notice is given or, if a record date therefore is duly fixed, of record as of that date; if mailed, the notice shall be addressed to the shareholders at their respective addresses as they appear on the records of the Company. Notice of the time, place, and purposes of any meeting of the shareholders may be waived in writing, either before or after the holding of the meeting, by any shareholder, which writing shall be filed with or entered upon the records of the Company. Attendance of any shareholder at any meeting without protesting, prior to or at the commencement of the meeting, the lack of proper notice shall be deemed to be a waiver by him of notice of the meeting.

     SECTION 4. Quorum; Adjournment. Except as may be otherwise provided by law or by the Articles of Incorporation, at any meeting of the shareholders the holders of shares entitling them to exercise a majority of the voting power of the Company present in person or by proxy shall constitute a quorum for the meeting, except that no action required by law, the Articles, or these Regulations to be authorized or taken by a designated proportion of the shares of any particular class or of each class of the Company may be authorized or taken by a lesser proportion and except that the holders of a majority of the voting shares represented thereat, whether or not a quorum is present, may adjourn the meeting from time to time; if any meeting is adjourned, notice of adjournment need not be given if the time and place to which the meeting is adjourned are fixed and announced at the meeting.

     SECTION 5. Action Without a Meeting. Any action which may be authorized or taken at a meeting of the shareholders may be authorized or taken without a meeting with the affirmative vote or approval of, and in writing or writings signed by or on behalf of, all of the shareholders who would be entitled to notice of a meeting of the shareholders held for the purpose, which writing or writings shall be filed with or entered upon the records of the Company.

1

     SECTION 6. Proxies. Persons entitled to vote shares or to act with respect to shares may vote or act in person or by proxy. The person appointed as proxy need not be a shareholder. Unless the writing appointing a proxy otherwise provides, the presence at a meeting of the person who appointed a proxy shall not operate to revoke the appointment. Notice to the Company, in writing or in open meeting, of the revocation of the appointment of a proxy shall not affect any vote or act previously taken or authorized.

     SECTION 7. Approval and Ratification of Acts of Officers and Directors. Except as otherwise provided by the Articles of Incorporation or by law, any contract, act, or transaction, prospective or past, of the Company or of the Board of Directors or of any Director or officer may be approved or ratified by the affirmative vote in person or by proxy of the holders of record of a majority of the shares held by persons not interested in the contract, act, or transaction and entitled to vote in the election of Directors (without regard to voting powers which may thereafter exist upon a default, failure, or other contingency), which approval or ratification shall be as valid and binding as though affirmatively voted for or consented to by every shareholder of the Company.

     SECTION 8. Order of Business.

     (a) The Chairman of the Board, or such other officer of the Company as may be designated by the Board of Directors, will call meetings of the shareholders to order and will preside at the meetings. The presiding officer will determine the order of business at the meeting and have the authority to regulate the conduct of the meeting, including (i) limiting the persons (other than shareholders and their duly appointed proxies) who may attend the meeting and (ii) establishing rules of conduct and such other procedures as the presiding officer may deem appropriate for the orderly conduct of the meeting.

     (b) At an annual meeting of the shareholders, only such business as is properly brought before the meeting will be considered. To be properly brought before an annual meeting, business must be (i) specified in the notice of the meeting (or any supplement to that notice) given in accordance with Section 3 of this ARTICLE I, (ii) brought before the meeting by the presiding officer or by or at the direction of the Board of Directors, or (iii) properly requested by a shareholder to be brought before the meeting in accordance with subsection (c) of this Section 8.

     (c) For business to be properly requested by a shareholder to be brought before an annual meeting of the shareholders, the shareholder must (i) be a shareholder of the Company of record at the time of the giving of the notice of the annual meeting and at the time of the annual meeting, (ii) be entitled to vote at the annual meeting, and (iii) have given timely written notice of the business to the Secretary. To be timely, a shareholder’s notice must be delivered to or mailed and received by the Secretary at the principal executive offices of the Company not later than the close of business on the ninetieth calendar day, and not earlier than the opening of business on the one hundred twentieth calendar day, prior to the annual meeting; except that, if the first public announcement of the date of the annual meeting is not made at least one hundred days prior to the date of the annual meeting, notice by the shareholder will be timely if it is delivered or received not later than the close of business on the tenth calendar day after the first public announcement of the date of the annual meeting and not earlier than the opening of business on the one hundred twentieth calendar day prior to the annual meeting. A shareholder’s notice must set forth, as to each matter the shareholder proposes to bring before the annual meeting, (A) a description in reasonable detail of the business proposed to be brought before the meeting, (B) the name and address, as they appear on the Company’s books, of the shareholder proposing such business and of the beneficial owner, if any, on whose behalf the proposal is made, (C) the class and number of shares that are owned of record and beneficially by the shareholder and by any such beneficial owner, and (D) any material interest that the shareholder or any such beneficial owner may have in the business. This Section 8(c) will not affect any rights that the shareholder may have under Rule 14a-8 under the Securities Exchange Act of 1934, as amended, to request the inclusion of proposals in the Company’s proxy statement.

     (d) At a special meeting of the shareholders, only such business as is properly brought before the meeting will be conducted. To be properly brought before a special meeting, business must be (i) specified in the notice of the meeting (or any supplement to that notice) given in accordance with Section 2 or Section 3 of this ARTICLE I, or (ii) brought before the meeting by the presiding officer or by or at the direction of the Board of Directors.

2

     (e) The determination of whether any business sought to be brought before any annual meeting or special meeting of the shareholders is properly brought in accordance with this Section 8 will be made by the presiding officer of the meeting. If the presiding officer determines that any business is not properly brought before the meeting, he or she will so declare to the meeting, and the business will not be considered or acted upon.

ARTICLE II
BOARD OF DIRECTORS

     SECTION 1. Number; Election; Term of Office. The number of Directors may be fixed or changed (a) by the shareholders at any meeting of shareholders called to elect Directors at which a quorum is present, by the vote of a majority of the shares represented at the meeting and entitled to vote in the election of Directors, except that, if the Board of Directors has not, by the vote of a majority of the Directors then in office, approved the change in the number of Directors prior to the meeting, the vote of the holders of two-thirds of the shares outstanding and entitled to vote in the election of Directors will be required to approve the change, or (b) by the Board of Directors by the vote of a majority of the Directors then in office, except that, after the number of Directors has been fixed by the shareholders, the Directors may not increase or decrease the number of Directors by more than three; provided that the Directors may not increase or decrease the number of Directors in any class by more than one if the Directors in that class have a remaining term of more than one year pursuant to the proviso in the immediately succeeding sentence. Directors shall be elected at the annual meeting of shareholders to serve until the next annual meeting of shareholders and thereafter until their respective successors are elected; provided, that any Director previously elected to a class for a longer term before the annual meeting of shareholders held in 2007 shall hold office for the entire term for which he or she was originally elected. In case of any increase in the number of Directors after the annual meeting of shareholders held in 2007, any additional Directors elected to the Board of Directors shall hold office until the next annual meeting of shareholders and thereafter until their respective successors are elected.

     SECTION 2. Vacancies. In the event of the occurrence of any vacancy or vacancies in the Board of Directors, however caused, the remaining Directors, though less than a majority of the whole authorized number of Directors, may, by the vote of a majority of their number, fill any such vacancy for the balance of the unexpired term.

     SECTION 3. Nomination of Candidates for Election as Directors.

     (a) At a meeting of the shareholders at which Directors are to be elected, only persons properly nominated as candidates will be eligible for election as Directors. Candidates may be properly nominated either (i) by the Board of Directors or (ii) by any shareholder in accordance with subsection (b) of this Section 3.

     (b) For a shareholder properly to nominate a candidate for election as a Director at a meeting of the shareholders, the shareholder must (i) be a shareholder of the Company of record at the time of the giving of the notice of the meeting and at the time of the meeting, (ii) be entitled to vote at the meeting in the election of Directors, and (iii) have given timely written notice of the nomination to the Secretary. To be timely, a shareholder’s notice must be delivered to or mailed and received by the Secretary at the principal executive offices of the Company not later than the close of business on the ninetieth calendar day, and not earlier than the opening of business on the one hundred twentieth calendar day, prior to the meeting; except that, if the first public announcement of the date of the meeting is not made at least one hundred days prior to the date of the meeting, notice by the shareholder will be timely if it is delivered or received not later than the close of business on the tenth calendar day after the first public announcement of the date of the meeting and not earlier than the opening of business on the one hundred twentieth calendar day prior to the meeting. A shareholder’s notice must set forth, as to each candidate, all of the information about the candidate required to be disclosed in a proxy statement complying with the rules of the Securities and Exchange Commission used in connection with the solicitation of proxies for the election of the candidate as a Director. If the officer presiding at the meeting determines that one or more of the candidates has not been nominated in accordance with these procedures, he or she will so declare at the meeting, and the candidates will not be considered or voted upon at the meeting.

     SECTION 4. Organization Meeting. Immediately after each annual meeting of the shareholders, the newly elected Directors shall hold an organization meeting for the purpose of electing officers and transacting any other business. Notice of the organization meeting need not be given.

3

     SECTION 5. Regular Meetings. Regular meetings of the Board of Directors may be held at such times and places within or without the State of Ohio as may be provided for in bylaws or resolutions adopted by the Board of Directors and upon such notice, if any, as shall be so provided. Unless otherwise indicated in the notice of a regular meeting, any business may be transacted at that regular meeting.

     SECTION 6. Special Meetings. Special meetings (including “telephone” meetings) of the Board of Directors may be held at any time within or without the State of Ohio (or through use of telephone or other communications equipment if all persons participating can hear each other) upon call by the Chairman of the Board, the President, a Vice President, or any two Directors. Written notice of the time and place of each special meeting shall be given to each Director either by personal delivery or by mail, telegram, or cablegram at least two days before the meeting, which notice need not specify the purposes of the meeting, except that attendance of any Director at any special meeting (or participation in a meeting employing telephone or other communications equipment) without protesting, prior to or at the commencement of the meeting, the lack of proper notice shall be deemed to be a waiver by him of notice of the meeting and except that notice of a special meeting may be waived in writing, either before or after the holding of the meeting, by any Director, which writing shall be filed with or entered upon the records of the Company. Unless otherwise indicated in the notice of a special meeting, any business may be transacted at that special meeting.

     SECTION 7. Quorum; Adjournment. A quorum of the Board of Directors at an organization, regular, or special meeting shall consist of a majority of the Directors then in office, except that a majority of the Directors present at a meeting duly held, whether or not a quorum is present, may adjourn the meeting from time to time; if any meeting is adjourned, notice of adjournment need not be given if the time and place to which the meeting is adjourned are fixed and announced at the meeting. At each meeting of the Board of Directors at which a quorum is present, all questions and business shall be determined by a majority vote of those present except as in the Articles of Incorporation or these Regulations otherwise expressly provided.

     SECTION 8. Action Without a Meeting. Any action which may be authorized or taken at a meeting of the Board of Directors may be authorized or taken without a meeting with the affirmative vote or approval of, and in writings or writings signed by, all of the Directors, which writing or writings shall be filed with or entered upon the records of the Company.

     SECTION 9. Committees. The Board of Directors may at any time appoint from its members an Executive, Finance, or other committee or committees, consisting of such number of members, not less than three of the Board of Directors may deem advisable, together with such alternates as the Board of Directors may deem advisable, to take the place of any absent member or members at any meeting of the committee. Each member and each alternate shall hold office during the pleasure of the Board of Directors. Any committee shall act only in the intervals between meetings of the Board of Directors and shall have such authority of the Board of Directors as may, from time to time, be delegated by the Board of Directors, except the authority to fill vacancies in the Board of Directors or in any committee of the Board of Directors. Subject to these exceptions, any person dealing with the Company shall be entitled to rely upon any act or authorization of an act by any committee to the same extent as an act or authorization of the Board of Directors. Each committee shall keep full and complete records of all meetings and actions, which shall be open to inspection by the Directors. Unless otherwise ordered by the Board of Directors, any committee may prescribe its own rules for calling and holding meetings, including telephone meetings, and for its own method of procedure, and may act at a meeting, including a telephone meeting, by a majority of its members or without a meeting by a writing or writings signed by all of its members.

ARTICLE III
OFFICERS

     SECTION 1. Election and Designation of Officers. The Board of Directors shall elect a President, a Secretary, and a Treasurer and, in its discretion, may elect a Chairman of the Board, one or more Vice Presidents, one or more Assistant Secretaries, one or more Assistant Treasurers, and such other officers as the Board of Directors may deem necessary. The Chairman of the Board and the President shall be Directors, and no one of the other officers need be a Director. Any two or more offices may be held by the same person, but no officer shall execute, acknowledge, or

4

verify any instrument in more than one capacity if the instrument is required to be executed, acknowledged, or verified by two or more officers.

     SECTION 2. Term of Office; Vacancies. Each officer of the Company shall hold office until the next organization meeting of the Board of Directors and until his successor is elected or until his earlier resignation, removal from office, or death. The Board of Directors may remove any officer at any time with or without cause by a majority vote of the Directors then in office. Any vacancy in any office may be filled by the Board of Directors.

     SECTION 3. Chairman of the Board. The Chairman of the Board, if any, shall preside at all meetings of the Board of Directors, shall, unless that duty has been delegated by the Board of Directors to the President or another officer, preside at all meetings of shareholders, and shall have such authority and shall perform such other duties as may be determined by the Board of Directors.

     SECTION 4. President. The President shall preside at all meetings of the shareholders and at all meetings of the Board of Directors, except for meetings at which the Chairman of the Board, if any, presides in accordance with the preceding Section. Subject to directions of the Board of Directors and to the delegation by the Board of Directors to the Chairman of the Board of specific or general executive supervision, the President shall have general executive supervision over the property, business, and affairs of the Company. He may execute all authorized deeds, mortgages, bonds, contracts, and other obligations in the name of the Company and shall have such other authority and shall perform such other duties as may be determined by the Board of Directors.

     SECTION 5. Vice Presidents. The Vice Presidents shall, respectively, have such authority and perform such duties as may be determined by the Board of Directors.

     SECTION 6. Secretary. The Secretary shall keep the minutes of meetings of the shareholders and of the Board of Directors. He shall keep such books as may be required by the Board of Directors, shall give notices of meetings of the shareholders and of meetings of the Board of Directors required by law or by these Regulations or otherwise, and shall have such authority and shall perform such other duties as may be determined by the Board of Directors.

     SECTION 7. Treasurer. The Treasurer shall receive and have in charge all money, bills, notes, bonds, securities of other corporations, and similar property belonging to the Company and shall do with this property as may be ordered by the Board of Directors. He shall keep accurate financial accounts and hold them open for the inspection and examination of the Directors and shall have such authority and shall perform such other duties as may be determined by the Board of Directors.

     SECTION 8. Other Officers. The Assistant Secretaries and Assistant Treasurers, if any, and any other officers whom the Board of Directors may elect shall, respectively, have such authority and perform such duties as may be determined by the Board of Directors.

     SECTION 9. Delegation of Authority and Duties. The Board of Directors is authorized to delegate the authority and duties of any officers to any other officer and generally to control the actions of the officers and to require the performance of duties in addition to those mentioned herein.

ARTICLE IV
COMPENSATION OF AND TRANSACTIONS WITH
DIRECTORS, OFFICERS, AND EMPLOYEES

     SECTION 1. Directors and Members of Committees. Members of the Board of Directors and members of any committee of the Board of Directors shall, as such, receive such compensation, which may be either a fixed sum for attendance at each meeting of the Board of Directors or at each meeting of the committee or stated compensation payable at intervals, or shall otherwise be compensated as may be determined by or pursuant to authority conferred by the Board of Directors or any committee of the Board of Directors, which compensation may be in different amounts for various members of the Board of Directors or any committee. No member of the Board of Directors and no members of any committee of the Board of Directors shall be disqualified from being counted in the determination of a quorum or from acting at any meeting of the Board of Directors or of a committee of the Board of

5

Directors by reason of the fact that matters affecting his own compensation as a Director, member of a committee of the Board of Directors, officer, or employee are to be determined.

     SECTION 2. Officers and Employees. The compensation of officers and employees of the Company, or the method of fixing their compensation, shall be determined by or pursuant to authority conferred by the Board of Directors or any committee of the Board of Directors. Compensation may include pension, disability, and death benefits, and may be by way of fixed salary, on the basis of earnings of the Company, any combination thereof, or otherwise, as may be determined or authorized from time to time by the Board of Directors or any committee of the Board of Directors.

     SECTION 3. Transactions with Directors, Officers, and Employees. No contract, act, or transaction shall be void, or be voidable by the Company, for the reason that it is between the Company and one or more of the directors, officers, or employees of the Company or between the Company and another corporation, partnership, joint venture, trust, or other enterprise in which one or more of the directors, officers, or employees of the Company are directors, trustees, or officers or have a financial or personal interest or for the reason that one or more interested directors, officers, or employees of the Company participate in a vote at the meeting of the Board of Directors or a committee thereof which authorizes the contract, act, or transaction if, in any such case, the contract, act, or transaction is approved, ratified or authorized in the manner prescribed in these Regulations or by law.

ARTICLE V
INDEMNIFICATION

     SECTION 1. Third Party Actions. The Company shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending, or completed action, suit, or proceeding, whether civil, criminal, administrative, or investigative (other than an action or suit by or in the right of the Company), by reason of the fact that he is or was a director, officer, employee, or agent of the Company, or is or was serving at the request of the Company as a director, trustee, officer, employee, or agent of another corporation, partnership, joint venture, trust, or other enterprise, against expenses (including attorneys’ fees), judgments, fines, and amounts paid in settlement actually and reasonably incurred by him in connection with the action, suit, or proceeding if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interest of the Company and, with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful. The termination of any action, suit, or proceeding by judgment, order, settlement, or conviction, or upon a plea of nolo contendere or its equivalent, shall not, of itself, create a presumption that the person did not act in good faith and in a manner which he reasonably believed to be in or not opposed to the best interest of the Company or that, with respect to any criminal action or proceeding, he had reasonable cause to believe that his conduct was unlawful.

     SECTION 2. Derivative Actions. The Company shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending, or completed action or suit by or in the right of the Company to procure a judgment in its favor by reason of the fact that he is or was a director, officer, employee, or agent of the Company, or is or was serving at the request of the Company as a director, trustee, officer, employee, or agent of another corporation, partnership, joint venture, trust, or other enterprise, against expenses (including attorneys’ fees) actually and reasonably incurred by him in connection with the defense or settlement of the action or suit if he acted in good faith and in a manner he reasonably believed to be in or not opposed to be the best interests of the Company, except that no indemnification shall be made in respect of any claim, issue, or matter as to which that person shall have been finally adjudged to be liable for negligence or misconduct in the performance of his duty to the Company unless and only to the extent that the Court of Common Pleas or the court in which such action or suit was brought shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, that person is fairly and reasonably entitled to indemnity for such expenses as the Court of Common Pleas or the other court shall deem proper.

     SECTION 3. Rights After Successful Defense. To the extent that a director, trustee, officer, employee, or agent has been successful on the merits or otherwise in defense of any action, suit, or proceeding referred to in Section 1 or Section 2, or in the defense of any claim, issue, or matter therein, he shall be indemnified against expenses (including attorneys’ fees) actually and reasonably incurred by him in connection therewith.

6

     SECTION 4. Other Determinations of Rights. Except in a situation governed by Section 3, any indemnification under Section 1 or Section 2 (unless ordered by a court) shall be made by the Company only as authorized in the specific case upon a determination that indemnification of the director, trustee, officer, employee, or agent is proper in the circumstances because he has met the applicable standard of conduct set forth in Section 1 or Section 2. The determination shall be made (a) by a majority vote, at a meeting of directors, of those directors who constitute a quorum and who were not and are not parties to or threatened with any such action, suit, or proceeding or (b) if such a quorum is not obtainable (or even if obtainable) and a majority of disinterested directors so directs, in a written opinion by independent legal counsel (compensated by the Company) or (c) by the affirmative vote in person or by proxy of the holders of record of a majority of the shares held by persons who were not and are not parties to or threatened with any such action, suit, or proceeding and entitled to vote in the election of directors, without regard to voting power which may thereafter exist upon a default, failure, or other contingency or (d) by the Court of Common Pleas or the court in which such action, suit, or proceeding was brought.

     SECTION 5. Advances of Expenses. Expenses (including attorneys’ fees) incurred in defending any action, suit, or proceeding referred to in Section 1 or Section 2 may be paid by the Company in advance of final disposition of the action, suit, or proceeding, as authorized by the Board of Directors in the specific case, upon receipt of an undertaking by or on behalf of the director, trustee, officer, employee, or agent to repay the amount unless it shall ultimately be determined that he is entitled to be indemnified by the Company.

     SECTION 6. Purchase of Insurance. The Company may purchase and maintain insurance on behalf of any person who is or was a director, officer, employee, or agent of the Company, or is or was serving at the request of the Company as a director, trustee, officer, employee, or agent of another corporation, partnership, joint venture, trust, or other enterprise, against any liability asserted against him and incurred by him in any capacity, or arising out of his status as such, whether or not the Company would have the power to indemnify him against liability under the provisions of this Article or of the Ohio General Corporation Law.

     SECTION 7. Mergers. In the case of a merger into this Company of a constituent corporation which, if its separate existence had continued, would have been required to indemnify directors, trustees, officers, employees, or agents in specified situation, any person who served as a director, officer, employee, or agent of the constituent corporation, or served at the request of the constituent corporation as a director, trustee, officer, employee, or agent of another corporation, partnership, joint venture, trust, or other enterprise, shall be entitled to indemnification by this Company (as the surviving corporation) to the same extent he would have been entitled to indemnification by the constituent corporation, if its separate existence had continued.

     SECTION 8. Non-Exclusivity; Heirs. The indemnification provided by this Article shall not be deemed exclusive of any other rights to which a person seeking indemnification may be entitled as a matter of law or under the Articles of Incorporation, these Regulations, any agreement, vote of shareholders or disinterested directors, any insurance purchased by the Company, or otherwise, both as to action in his official capacity and as to action in another capacity while holding an office, and shall continue as to a person who has ceased to be a director, trustee, officer, employee, or agent and shall inure to the benefit of the heirs, executors, and administrators of such a person.

ARTICLE VI
RECORD DATES

     For any lawful purpose, including, without limitation, the determination of the shareholders who are entitled to receive notice of or to vote at a meeting of the shareholders, the Board of Directors may fix a record date in accordance with the provisions of the Ohio General Corporation Law. The record date for the purpose of the determination of the shareholders who are entitled to receive notice of or to vote at a meeting of the shareholders shall continue to be the record date for all adjournments of the meeting unless the Board of Directors or the persons who shall have fixed the original record date shall cause notice thereof and of the date to which the meeting shall have been adjourned to be given to shareholders of record as of the newly fixed date in accordance with the same requirements as those applying to a meeting newly called. The Board of Directors may close the share transfer books against transfers of shares during the whole or any part of the period provided for in this Article, including the date of the meeting of the shareholders and the period ending with the date, if any, to which adjourned. If no record date is fixed therefore, the record date for determining the shareholders who are entitled to receive notice of or to vote at

7

a meeting of the shareholders shall be the date next preceding the day on which notice is given or the date next preceding the day on which the meeting is held, as the case may be.

ARTICLE VII
CERTIFICATES FOR SHARES

     SECTION 1. Form of Certificates and Signatures. Each holder of shares shall be entitled to one or more certificates, signed by the Chairman of the Board, the President, or a Vice President and by the Secretary, an Assistant Secretary, the Treasurer, or an Assistant Treasurer of the Company, which shall certify the number and class of shares held by him in the Company, but no certificate for shares shall be executed or delivered until the shares are fully paid. When a certificate is countersigned by an incorporated transfer agent or registrar, and the signature of any officer of the Company whose manual or facsimile signature is affixed to a certificate ceases to be that officer before the certificate is delivered, the certificate nevertheless shall be effective in all respects when delivered. The Board of Directors also may provide by resolution that some or all of any or all classes and series of shares of the Company shall be uncertificated shares to the extent permitted by the Ohio General Corporation Law.

     SECTION 2. Transfer of Shares. Shares of the Company shall be transferable upon the books of the Company by the holders thereof, in person, or by a duly authorized attorney, by a duly executed assignment and power of transfer, together with such proof of authenticity of the signatures to such assignment and power of transfer as the Company or its agents may reasonably require, and, if issued in certificated form, upon surrender and cancellation of certificates for a like number of shares of the same class or series.

     SECTION 3. Lost, Stolen, or Destroyed Certificates. The Company may issue a new certificate for shares in place of any certificate theretofore issued by it and alleged to have been lost, stolen, or destroyed; the Board of Directors may, however, in its discretion, require the owner, or his legal representatives, to give the Company a bond containing such terms as the Board of Directors may require to protect the Company or any person injured by the execution and delivery of a new certificate.

     SECTION 4. Transfer Agent and Registrar. The Board of Directors may appoint, or revoke the appointment of, transfer agents and registrars and may require all certificates for shares to bear the signatures of the transfer agents and registrars, or any of them.

ARTICLE VIII
AUTHORITY TO TRANSFER AND VOTE SECURITIES

     The Chairman of the Board, the President, any Vice President, the Secretary, the Treasurer of the Company, and each such officer are authorized to sign the name of the Company and to perform all acts necessary to effect a sale, transfer, assignment, or other disposition of any shares, bonds, other evidences of indebtedness or obligations, subscription rights, warrants, or other securities of another corporation owned by the Company and to issue the necessary powers of attorney; and each such officer is authorized, on behalf of the Company, to vote the securities, to appoint proxies with respect thereto, to execute consents, waivers, and releases with respect thereto, or to cause any such action to be taken.

ARTICLE IX
CORPORATE SEAL

     The Ohio General Corporation Law provides in effect that the absence of a corporate seal from any instrument executed on behalf of the Company does not affect the validity of the instrument; if in spite of that provision a seal is imprinted on or attached, applied, or affixed to an instrument by embossment, engraving, stamping, printing, typing, adhesion, or other means, the impression of the seal on the instrument shall be circular in form and shall contain the name of the Company and the words “corporate seal”.

8

ARTICLE X
AMENDMENTS

     These Regulations may be amended, or new Regulations may be adopted, by the shareholders at a meeting held for that purpose by the affirmative vote of the holders of shares entitling them to exercise a majority of the voting power on that proposal, or without a meeting by the written consent of the holders of shares entitling them to exercise two-thirds of the voting power on that proposal, except that, any amendment of the first sentence of Section 2, ARTICLE I, any amendment of Section 8, ARTICLE I, any amendment of the first sentence of Section 1, ARTICLE II, any amendment of Section 3, ARTICLE II, and any amendment of this ARTICLE X will require the affirmative vote of the holders of shares entitling them to exercise two-thirds of the voting power on that proposal, or without a meeting by the written consent of the holders of shares entitling them to exercise two-thirds of the voting power on that proposal, unless the Board of Directors, by the vote of a majority of the Directors then in office, approves the amendment. If the Regulations are amended or new Regulations are adopted without a meeting of the shareholders, the Secretary of the Company shall mail a copy of the amendment or the new Regulations to each shareholder who would have been entitled to vote thereon but did not participate in the adoption thereof.

9

EX-10.16

Exhibit 10.16

JO-ANN STORES, INC.

DEFERRED COMPENSATION PLAN

(as amended by the Board on January 30, 2008)

TABLE OF CONTENTS

		Page
ARTICLE I. TITLE AND DEFINITIONS			1
1.1.	Definitions		1
ARTICLE II. PARTICIPATION			6
2.1.	Requirements for Participation		6
2.2.	Affiliate Participation		6
ARTICLE III. CONTRIBUTION CREDITS			6
3.1.	Elections to Defer Compensation		6
3.2.	Irrevocability of Deferral Elections		7
3.3.	Company Contribution Credits		8
3.4.	Investment Elections		8
3.5.	Automatic Suspension of Deferrals		9
ARTICLE IV. DEFERRAL ACCOUNTS			9
4.1.	Deferral Accounts		9
4.2.	Company Discretionary Contribution Account		9
4.3.	Excess 401(k) Contribution Account		10
ARTICLE V. VESTING			10
5.1.	Deferral Account		10
5.2.	Company Discretionary Contribution Account		11
5.3.	Excess 401(k) Contribution Account		11
5.4.	Death, Disability or Age 65		11
ARTICLE VI. DISTRIBUTIONS			11
6.1.	Distribution of Company Contribution Account		11
6.2.	Distribution of Deferral Account		13
6.3.	Distribution Upon Death or Disability		15
6.4.	Hardship Distribution		16
6.5.	Inability to Locate Team Member		16
ARTICLE VII. ADMINISTRATION			17
7.1.	Advisory Committee		17
7.2.	Advisory Committee Action		17
7.3.	Powers and Duties of the Advisory Committee		17
7.4.	Construction and Interpretation		18
7.5.	Information		18
7.6.	Compensation, Expenses and Indemnity		18
7.7.	Quarterly Statements; Delegation of Administrative Functions		19
7.8.	Disputes		19

i 

		Page
ARTICLE VIII. MISCELLANEOUS			20
8.1.	Unsecured General Creditor		20
8.2.	Insurance Contracts or Policies		21
8.3.	Restriction Against Assignment		21
8.4.	Withholding		21
8.5.	Amendment, Modification, Suspension or Termination		21
8.6.	Governing Law		21
8.7.	Receipt or Release		22
8.8.	Payments on Behalf of Persons Under Incapacity		22
8.9.	Limitation of Rights and Employment Relationship		22
8.10.	Headings		22
8.11.	Trust Information		22

ii 

JO-ANN STORES, INC.
DEFERRED COMPENSATION PLAN

     WHEREAS, this Deferred Compensation Plan (“Plan”) was adopted by Jo-Ann Stores, Inc. (the “Company”), effective August 1, 2003, to provide nonqualified deferred compensation benefits for a select group of management or highly compensated employees of the Company and its affiliates; and

     WHEREAS, the terms of this Plan as amended and restated herein shall apply to all amounts deferred under the Plan, and the Plan shall be interpreted and applied at all times in accordance with Section 409A of the Internal Revenue Code of 1986, as amended, and guidance issued thereunder; and

     WHEREAS, no amounts deferred under the Plan shall be subject to “grandfathering” treatment, even if such amounts were deferred and vested under the Plan before January 1, 2005;

     NOW, THEREFORE, as of January 1, 2005 (except as otherwise specifically set forth herein), this Plan is hereby amended and restated to read as follows:

ARTICLE I.
TITLE AND DEFINITIONS

     1.1. Definitions. Whenever the following words and phrases are used in this Plan, with the first letter capitalized, they shall have the meanings specified below, except where context clearly indicates otherwise:

     (a) “Account” or “Accounts” shall mean the individual account or accounts maintained by the Advisory Committee to record the interest of a Team Member under this Plan. Account includes the Company Discretionary Contribution Account, the Excess 401(k) Contribution Account and the Deferral Account unless otherwise indicated. Each Team Member’s Account will be used solely as a measuring device to determine the amount to be paid to a Team Member under this Plan. The Account does not constitute, nor will it be treated as, property or a trust fund of any kind. All amounts at any time attributable to a Team Member’s Account will be, and remain, the sole property of the Company, subject to the terms of any Trust established hereunder.

     (b) “Advisory Committee” shall mean the individuals serving from time to time as the Advisory Committee as provided in Section 7.1

     (c) “Affiliate” shall mean each corporation or other entity with whom the Company would be considered a single employer under Code Sections 414(b) and 414(c), except that in applying Code Sections 1563(a)(1), (2) and (3) for purposes of determining a controlled group of corporations under Code Section 414(b), the language “at least 50 percent” shall be used instead of “at least 80 percent” in each place it appears in Code Sections 1563(a)(1), (2) and (3), and in applying Treas. Regs. Sec. 1.414(c)-2 for purposes of determining a controlled group of trades or businesses under Code Section 414(c), the language “at least 50 percent” shall be used instead of “at least 80 percent” in each place it appears in Treas. Regs. Sec. 1.414(c)-2.

     (d) “Base Salary” shall mean a Team Member’s base salary, excluding, for example, without limitation, bonuses, commissions, incentive and similar remuneration, reimbursements for business or personal expenses, other fringe benefits (cash or non-cash), insurance premiums or welfare benefits. Base Salary shall be determined prior to reduction for any salary contributions to a plan established pursuant to Section 125 of the Code or qualified pursuant to Section 401(k) of the Code.

     (e) “Beneficiary” or “Beneficiaries” shall mean the person or persons, including a trustee, personal representative or other fiduciary, last designated in writing by a Team Member in accordance with procedures established by the Advisory Committee to receive the benefits specified hereunder in the event of the Team Member’s death. No beneficiary designation shall become effective until it is filed with the Advisory Committee. Any designation shall be revocable at any time through a written instrument filed by the Team Member with the Advisory Committee with or without the consent of the previous Beneficiary. No designation of a Beneficiary other than the Team Member’s spouse shall be valid unless consented to in writing by such spouse. If there is no such designation or if there is no surviving designated Beneficiary, then the Team Member’s surviving spouse shall be the Beneficiary. If there is no surviving spouse to receive any benefits payable in accordance with the preceding sentence, the duly appointed and currently acting personal representative of the Team Member’s estate (which shall include either the Team Member’s probate estate or living trust) shall be the Beneficiary. In any case where there is no such personal representative of the Team Member’s estate duly appointed and acting in that capacity within ninety (90) days after the Team Member’s death (or such extended period as the Advisory Committee determines is reasonably necessary to allow such personal representative to be appointed, but not to exceed 180 days after the Team Member’s death), then Beneficiary shall mean the person or persons who can verify by affidavit or court order to the satisfaction of the Advisory Committee that they are legally entitled to receive the benefits specified hereunder. In the event any amount is payable under the Plan to a minor, payment shall not be made to the minor, but instead be paid: (1) to that person’s living parent(s) to act as custodian, (2) if that person’s parents are then divorced, and one parent is the sole custodial parent, to such custodial parent, or (3) if no parent of that person is then living, to a custodian selected by the Advisory Committee to hold the funds for the minor under the Uniform Transfers or Gifts to Minors Act in effect in the jurisdiction in which the minor resides. If no parent is living and the Advisory Committee decides not to select another custodian to hold the funds for the minor, then payment shall be made to the duly appointed and currently acting guardian of the estate for the minor or, if no guardian of the estate for the minor is duly appointed and currently acting within sixty (60) days after the date the amount becomes payable, payment shall be deposited with the court having jurisdiction over the estate of the minor. Payment by Company to any Beneficiary hereunder of all benefits owed hereunder shall terminate any and all liability of Company.

     (f) “Board of Directors” or “Board” shall mean the Board of Directors of the Company or any committee thereof authorized to act on behalf of the Board.

     (g) “Change in Control” of the Company shall be deemed to have occurred if:

2

     (1) any one person, or more than one person acting as a group, acquires ownership of stock of the Company that, together with stock held by such person or group, constitutes more than 50% of the total fair market value or total voting power of the stock of the Company;

     (2) any one person, or more than one person acting as a group, acquires (or has acquired during a 12-month period ending on the date of the most recent acquisition by such person or persons) ownership of stock of the Company possessing 30% or more of the total voting power of the stock of the Company;

     (3) a majority of members of the Company’s board of directors is replaced during any 12-month period by directors whose appointment or election is not endorsed by a majority of the members of the Company’s board of directors before the date of the appointment or election; or

     (4) any one person, or more than one person acting as a group, acquires (or has acquired during a 12-month period ending on the date of the most recent acquisition by such person or persons) assets from the Company that have a total gross fair market value equal to or more than 40% of the total gross fair market value of all of the assets of the Company immediately before such acquisition or acquisitions.

     (h) “Code” shall mean the Internal Revenue Code of 1986, as amended.

     (i) “Company” shall mean Jo-Ann Stores, Inc.

     (j) “Company Contribution Account” shall mean the Company Discretionary Contribution Account and the Excess 401(k) Contribution Account.

     (k) “Company Contribution Credits” shall mean the Company Discretionary Contribution Amount and the Excess 401(k) Contribution Amount.

     (l) “Company Discretionary Contribution Account” shall mean the bookkeeping account maintained by the Advisory Committee for each Team Member that is credited with an amount equal to: (1) the Company Discretionary Contribution Amount, if any, and (2) earnings and losses on such amounts pursuant to Section 4.2.

     (m) “Company Discretionary Contribution Amount” with respect to a Team Member shall mean such amount, if any, credited to the Team Member’s Account under the Plan by the Company, on a purely discretionary basis, for the benefit of Team Member for a Plan Year. Such amount may differ from Team Member to Team Member both in amount, if any, and as a percentage of Compensation.

     (n) “Compensation” shall mean Base Salary and Incentive Compensation Bonus.

     (o) “Deferral Account” shall mean the bookkeeping account maintained by the Advisory Committee for each Team Member that is credited with amounts equal to:

3

     (1) the portion of the Team Member’s Compensation that he or she elects to defer, and

     (2) earnings and losses on such amounts pursuant to Section 4.1.

     (p) “Deferred Amount” with respect to a Team Member shall mean such amount, if any, credited to the Team Member’s Account under the Plan pursuant to a Deferral Election Form.

     (q) “Deferral Election Form” shall mean a form provided by the Advisory Committee pursuant to which a Team Member may elect to defer Compensation in accordance with Section 3.1. The form and content of the Deferral Election Form may be revised from time to time consistent with the Plan, by or at the direction of the Advisory Committee or its designee.

     (r) “Disability” shall mean the Team Member incurs a Separation from Service on account of his or her inability to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment that can be expected to result in death or can be expected to last for a continuous period of not less than twelve (12) months.

     (s) “Earnings Rate” shall mean, for each Fund, an amount equal to the net gain or loss on the assets of such Fund during each month or other period as determined from time to time by the Advisory Committee or its designee, expressed as a percentage of the balance of the Fund at the beginning of the month or other period.

     (t) “Eligible Employee” shall mean a member of a select group of management and/or highly compensated employees of the Company or any of its Related Affiliates who is designated by the Advisory Committee in writing as eligible to participate under the Plan. Such designation is solely within the discretion of the Advisory Committee and may be changed at any time.

     (u) “Employer” shall mean the Company and any Affiliate.

     (v) “Excess 401(k) Contribution Account” shall mean the bookkeeping account maintained by the Advisory Committee for each Team Member that is credited with amounts equal to: (1) the Excess 401(k) Contribution Amount, and (2) any earning and losses on such amounts pursuant to Section 4.3.

     (w) “Excess 401(k) Contribution Amount” shall mean, with respect to each highly compensated Team Member (within the meaning of the Jo-Ann Stores, Inc. 401(k) Savings Plan), such amount, if any, credited to the Team Member by the Company, as provided in Section 3.3, under the Plan for the benefit of the Team Member for a Plan Year.

     (x) “Fund” or “Funds” shall mean one or more of the investment funds selected by the Advisory Committee and elected by a Team Member pursuant to Section 3.4, in which all or a portion of a Team Member’s Account may be deemed to be separately invested.

4

     (y) “Hardship Distribution” shall mean a distribution under Section 6.4 on account of an unforeseeable emergency. An “unforeseeable emergency” means a severe financial hardship to the Team Member resulting from an illness or accident of the Team Member, the Team Member’s spouse, the Team Member’s beneficiary, or the Team Member’s dependent (as defined in Code Section 152, without regard to subsections (b)(1), (b)(2) and (d)(1)(B)), the loss of the Team Member’s property due to casualty, or other similar extraordinary and unforeseeable circumstances arising as a result of events beyond the control of the Team Member.

     (z) “Incentive Compensation Bonus” shall mean any performance or incentive bonus earned as of the last day of the Plan Year under the Management Incentive Plan, or its successor plan, or the Field Incentive Plan, or its successor plan, provided a Team Member is an employee in good standing of the Company on the day such bonus is paid.

     (aa) “Payment Date” shall mean: (1) with respect to a distribution under Section 6.1, the last regularly scheduled pay day during February of the first calendar year beginning after the Team Member’s Separation from Service, and (2) with respect to a distribution under Section 6.2 with respect to deferrals for any Plan Year, the last regularly scheduled pay day during February of the calendar year elected by the Team Member with respect to such deferrals, provided that the Team Member may not elect any calendar year earlier than the second calendar year after the calendar year to which such deferrals relate.

     (bb) “Plan” shall mean this Jo-Ann Stores, Inc. Deferred Compensation Plan.

     (cc) “Plan Year” shall mean the period January 1 to December 31.

     (dd) “Related Affiliate” shall mean a trade or business, whether or not incorporated, which is a member of a controlled group of corporations, trades or businesses, as defined in Code Sections 414(b) and 414(c), of which the Company is a member.

     (ee) “Separation from Service” shall mean the Team Member has a termination of employment with the Employer. Whether a termination of employment has occurred shall be determined based on whether the facts and circumstances indicate the Team Member and the Employer reasonably anticipate that no further services will be performed by the Team Member for the Employer; provided, however, that a Team Member shall be deemed to have a termination of employment if the level of services he or she would perform for the Employer after a certain date permanently decreases to no more than twenty percent (20%) of the average level of bona fide services performed for the Employer (whether as an employee or independent contractor) over the immediately preceding 36-month period (or the full period of services to the Employer if the Team Member has been providing services to the Employer for less than 36 months). For this purpose, a Team Member is not treated as having a Separation from Service while he or she is on a military leave, sick leave, or other bona fide leave of absence, if the period of such leave does not exceed six (6) months, or if longer, so long as the Team Member has a right to reemployment with the Employer under an applicable statute or by contract.

5

     (ff) “Specified Employee” shall mean any Team Member who is an officer of the Company or any Related Affiliate.

     (gg) “Team Member” shall mean any Eligible Employee who becomes a participant in this Plan in accordance with Article II.

     (hh) “Trust” shall mean the irrevocable trust adopted by the Company to serve at its discretion as the funding medium for this Plan. This Trust is intended to qualify as a “rabbi trust” as described in Rev. Proc. 92-64.

     (ii) “Years of Service” shall be determined according to the meaning given the term under the Jo-Ann Stores, Inc. 401(k) Savings Plan, but shall include, except as otherwise provided herein, service with any Employer (as defined herein).

ARTICLE II.
PARTICIPATION

     2.1. Requirements for Participation. An Eligible Employee shall become a Team Member in the Plan on the first day of the calendar month following the date of his or her written designation by the Advisory Committee as eligible to participate in the Plan.

     2.2. Affiliate Participation. Any Related Affiliate may elect to participate in this Plan upon approval of the Company’s Board of Directors.

ARTICLE III.
CONTRIBUTION CREDITS

     3.1. Elections to Defer Compensation. A Team Member may elect to defer, in accordance with this Section 3.1 up to seventy-five percent (75%) of the Team Member’s Base Salary for a Plan Year and up to one hundred percent (100%) of the Team Member’s Incentive Compensation Bonus for a Plan Year, in separate elections. The amount deferred by a Team Member shall be limited in any Plan Year as necessary to satisfy Social Security Tax (including Medicare) and income tax withholding requirements. All elections to defer Compensation must be completed and timely filed in accordance with this Section 3.1 in order to be given effect.

     (a) Initial Election Period. Each Team Member may elect to defer Compensation by filing with the Advisory Committee, or its designee, a signed and completed Deferral Election Form, within thirty (30) days of the date he or she first becomes a Team Member; provided, however, that if the Team Member is or ever was a participant in this Plan or any other plan required by Code Section 409A to be aggregated with this Plan, this Section 3.1(a) shall not apply and the Team Member may not make a deferral election of Compensation until the following Plan Year in accordance with Section 3.1(b), unless:

     (1) he or she had not been eligible to participate in the Plan (or any other plan required by Code Section 409A to be aggregated with this Plan) at any time during the 24-month period ending on the date he or she again becomes a Team Member, or

6

     (2) he or she has been paid all amounts previously due under the Plan (and any other plan required by Code Section 409A to be aggregated with this Plan) and, on and before the date of the last such payment, was not eligible to continue to participate in the Plan (and any other plan required by Code Section 409A to be aggregated with this Plan) for periods after such payment.

A deferral election under this Section 3.1(a) will be effective only with respect to Compensation paid for services performed after such election. For this purpose, the amount of any Incentive Compensation Bonus payable to the Team Member for services rendered subsequent to the Team Member’s election will be determined by multiplying the Incentive Compensation Bonus by a fraction, the numerator of which is the number of calendar days remaining in the performance period after the election and the denominator of which is the total number of calendar days in the performance period. For purposes of this Section 3.1(a), the date of a Team Member’s election is the date the executed election form is received by the Advisory Committee or its designee.

     (b) Annual Election Period. The Advisory Committee shall designate an annual open enrollment period during which a Team Member may elect to defer Compensation for the subsequent Plan Year by filing with the Advisory Committee, or its delegate, a signed and completed Deferral Election Form, no later than the last day of such open enrollment period. In no event shall such open enrollment period end later than the December 31 preceding the Plan Year for which the deferral election is to be effective.

     3.2. Irrevocability of Deferral Elections.

     (a) Except as otherwise provided herein, once made for a Plan Year, a deferral election under Section 3.1(a) may not be revoked, changed or modified after the date of the election as provided in such section, and a deferral election under Section 3.1(b) may not be revoked, changed or modified after the applicable filing deadline specified in such section. Once made for a Plan Year, Base Salary and Incentive Compensation Bonus deferral elections will continue in effect for subsequent Plan Years unless revoked or modified for any subsequent Plan Year by filing a Deferral Election Form during an annual open enrollment period.

     (b) In the event a Team Member has a Separation from Service for any reason, then: (1) his or her deferral election under Section 3.1 with respect to Base Salary will terminate as of the date of such Separation from Service (but will be effective with respect to the last regular paycheck issued to such Team Member), regardless of whether the Team Member continues to receive Compensation, or other compensation, from any Employer thereafter; and (2) his or her deferral election under Section 3.1 with respect to Incentive Compensation Bonuses will remain in effect with respect to the bonus (if any) paid to him or her for the Plan Year in which such Separation from Service occurs.

     (c) If a Team Member has a Separation from Service for any reason and is rehired (whether or not as a Team Member) within the same Plan Year:

7

     (1) his or her deferral election under Section 3.1 with respect to Base Salary shall be automatically reinstated and shall remain in effect for the remainder of such Plan Year; and

     (2) his or her deferral election under Section 3.1 with respect to Incentive Compensation Bonuses shall be automatically reinstated and shall remain in effect for the performance period commencing in such Plan Year.

     (d) In the event a Team Member ceases to be a Team Member (other than on account of a Separation from Service) during any Plan Year, then his or her deferral election under Section 3.1 will terminate as of the last day of the Plan Year in which such change in status occurs.

     (e) Notwithstanding anything herein to the contrary, in the event a Team Member goes on an unpaid leave of absence, his or her deferral election under Section 3.1 with respect to Base Salary shall automatically cease when he or she commences the unpaid leave of absence; provided, however, that if he or she returns from the unpaid leave of absence during the same Plan Year, his or her deferral election under Section 3.1 with respect to Base Salary shall automatically resume immediately upon return from the leave of absence and shall continue in effect for the balance of the Plan Year. An Eligible Team Member’s deferral election under Section 3.1 shall remain in effect with respect to any Base Salary paid while on a leave of absence. A Team Member’s deferral elections under Section 3.1 with respect to Incentive Compensation Bonuses shall not be affected by his or her leave of absence.

     3.3. Company Contribution Credits.

     (a) Discretionary Contribution Credits(b) . In the Board’s sole discretion, it may credit a Team Member’s Account with a Company Discretionary Contribution Amount in any amount or percentage of Compensation it so desires for any Plan Year. The Board may credit Team Members with different Amounts, if any, for any Plan Year.

     (b) Excess 401(k) Contribution Credits. For all highly compensated Team Members (within the meaning of the Jo-Ann Stores, Inc. 401(k) Savings Plan) with at least ninety (90) days of service under such plan, the Board will credit a Team Member’s Account with an Excess 401(k) Contribution Amount in an amount determined by the Board in its sole discretion.

     3.4. Investment Elections.

     (a) The Team Member shall designate, on a form provided by the Advisory Committee, the Funds in which the Team Member’s Account will be deemed to be invested for purposes of determining the amount of earnings to be credited to that Account. In making the designation pursuant to this Section 3.4, the Team Member may specify that all or any portion of his or her Account be deemed to be invested, in whole percentage increments, in one or more of the Funds made available under the Plan from time to time by the Advisory Committee. On a form provided by the Advisory Committee, investment allocations may be changed daily in whole percentages while

8

employed or after termination. If a Team Member fails to elect a Fund under this Section 3.4, he or she shall be deemed to have elected a money market type of investment fund as selected by the Advisory Committee.

     (b) Although the Team Member may designate a Fund or Funds as provided in Section 3.4(a), the Advisory Committee shall not be bound to invest a Team Member’s Account in such Funds. Team Members shall have no ownership interests in any investments made by the Company.

     3.5. Automatic Suspension of Deferrals. In the event a Team Member receives a distribution from the Jo-Ann Stores, Inc. 401(k) Savings Plan (or any other plan or successor plan sponsored by an Employer) on account of hardship, which distribution is made pursuant to Treasury Regulations Section 1.401(k)-1(d)(3) and requires suspension of deferrals under other arrangements such as this Plan, the Team Member’s deferral elections under Section 3.1, if any, pursuant to which deferrals would otherwise be made during the six (6)-month period following the date of the distribution shall be cancelled.

ARTICLE IV.
DEFERRAL ACCOUNTS

     4.1. Deferral Accounts. The Advisory Committee shall establish and maintain a Deferral Account for each Team Member under the Plan. Each Team Member’s Deferral Account shall be further divided into separate subaccounts (“Fund subaccounts”), each of which corresponds to a Fund elected by the Team Member pursuant to Section 3.4(a). A Team Member’s Deferral Account shall be credited as follows:

     (a) On the third business day, or as soon as administratively possible thereafter, after amounts are deferred and withheld from a Team Member’s Compensation, the Advisory Committee, in accordance with the Team Member’s election under Section 3.4(a), shall credit the Fund subaccounts of the Team Member’s Deferral Account with an amount equal to the portion of the Team Member’s Compensation that the Team Member has elected to be deemed to be invested in such Fund.

     (b) Each business day, each Fund subaccount of a Team Member’s Deferral Account shall be credited with earnings or losses in an amount equal to that determined by multiplying the balance credited to such Fund subaccount as of the prior day plus contributions and less any distributions credited that day to the Fund subaccount by the Earnings Rate for the corresponding fund selected by the Team Member pursuant to Section 3.4(a).

     (c) In the event a Team Member elects a Payment Date under Section 1.1(aa)(2) for any Plan Year’s deferrals, all amounts attributed to the deferral of Compensation for such Plan Year shall be accounted for in a manner which allows separate accounting for the deferral of Compensation and investment gains and losses associated with such Plan Year’s deferral of Compensation.

     4.2. Company Discretionary Contribution Account. The Advisory Committee shall establish and maintain a Company Discretionary Contribution Account for each Team Member

9

under the Plan. Each Team Member’s Company Discretionary Contribution Account shall be further divided into separate investment Fund subaccounts corresponding to the investment fund elected by the Team Member pursuant to Section 3.4(a). A Team Member’s Company Discretionary Contribution Account shall be credited as follows:

     (a) On a date established at the Board’s discretion, the Advisory Committee shall credit the Fund subaccounts of the Team Member’s Company Discretionary Contribution Account with an amount equal to the Company Discretionary Contribution Amount, if any, applicable to that Team Member, in accordance with the Team Member’s election under Section 3.4(a).

     (b) Each business day, each investment fund subaccount of a Team Member’s Company Discretionary Contribution Account shall be credited with earnings or losses in an amount equal to that determined by multiplying the balance credited to such investment fund subaccount as of the prior day plus contributions and less distributions credited that day to the investment fund subaccount by the Earnings Rate for the corresponding Fund selected by the Team Member pursuant to Section 3.4(a).

     4.3. Excess 401(k) Contribution Account. The Advisory Committee shall establish and maintain an Excess 401(k) Contribution Account for each Team Member under the Plan. Each Team Member’s Excess 401(k) Contribution Account shall be further divided into separate investment fund subaccounts corresponding to the investment fund elected by the Team Member pursuant to Section 3.4(b). A Team Member’s Excess 401(k) Contribution Account shall be credited as follows:

     (a) No later than the date contributions would have to be made in order for such contributions to be deductible for a given year under a qualified 401(k) plan, the Advisory Committee shall credit the investment fund subaccounts of the Team Member’s Excess 401(k) Contribution Account with an amount equal to the Excess 401(k) Contribution Amount, if any, applicable to that Team Member, in accordance with the Team Member’s election under Section 3.4.

     (b) Each business day, each investment fund subaccount of a Team Member’s Excess 401(k) Contribution Account shall be credited with earnings or losses in an amount equal to that determined by multiplying the balance credited to such investment fund subaccount as of the prior day plus contributions and less distributions credited that day to the investment fund subaccount by the Earnings Rate for the corresponding Fund selected by the Company pursuant to Section 3.4.

ARTICLE V.
VESTING

     5.1. Deferral Account. A Team Member shall be 100% vested in his or her Deferral Account.

10

     5.2. Company Discretionary Contribution Account. Company Discretionary Contribution Amounts will vest according to a schedule determined and set forth by the Board at the time the contribution is credited.

     5.3. Excess 401(k) Contribution Account. Excess 401(k) Contribution Amounts will vest according to the following Schedule:

Years of Service	Percent Vested
1		0	%
2		33	%
3		67	%
4 or more		100	%

     5.4. Death, Disability or Age 65. Notwithstanding the foregoing, a Team Member’s Account will become fully vested in the event of his or her death, Disability or attainment of age sixty-five (65) prior to his or her Separation from Service.

ARTICLE VI.
DISTRIBUTIONS

     6.1. Distribution of Company Contribution Account. Except as otherwise provided in Section 6.3, a Team Member’s Company Contribution Account shall be distributed upon the Team Member’s Separation from Service as provided in this Section 6.1.

     (a) Form of Distribution. A Team Member may make an initial form of payment election under this Section 6.1(a) within the time periods applicable under Section 3.1(a) or (b) for making an initial deferral election for the first Plan Year of participation; provided, however, that in the event the Team Member has not made such an initial deferral election by the time a Company Discretionary Contribution Amount is to be credited to his or her Account pursuant to Section 4.2, the Team Member’s initial form of payment election under this Section 6.1(a) shall be made prior to the date such Amount is credited to the Team Member’s Company Contribution Account. Any distribution election made after such period shall be subject to Section 6.1(c). An election (or deemed election) under this Section 6.1(a) shall apply to the Team Member’s entire Company Contribution Account.

     (1) In the event the Team Member incurs a Separation from Service after ten (10) Years of Service and his or her Company Contribution Account is $50,000 or greater, such Account shall be paid to the Team Member in one of the following forms in accordance with the Team Member’s distribution election given effect under this Section 6.1:

     (A) A lump sum distribution;

     (B) Substantially equal quarterly installments over five (5) years;

11

     (C) Substantially equal quarterly installments over ten (10) years; or

     (D) Substantially equal quarterly installments over fifteen (15) years.

If a Team Member who is eligible to make an election as provided in this Section 6.1(a)(1) fails to make an election as provided above, the Team Member will be deemed to have elected distribution of his or her entire Company Contribution Account in substantially equal quarterly installments over ten (10) years.

     (2) In the case of a Team Member who incurs a Separation from Service prior to ten (10) Years of Service or a Team Member whose Company Contribution Account is less than $50,000, his or her Company Contribution Account shall be paid to the Team Member in a lump sum distribution.

     (3) Notwithstanding anything herein to the contrary, the form of payment election of any individual who has or will have a Company Contribution Account as of December 31, 2007 with respect to his or her Company Contribution Account shall be the last affirmative election made by such Team Member on or before December 31, 2007; provided, however, that in no event may any such election defer any amount otherwise payable during 2007 to 2008 or any later year or accelerate any amount otherwise payable during 2008 or any later year into 2007. If any such Team Member does not make an affirmative election on or before December 31, 2007, he or she shall be deemed to have elected payment of his or her entire Company Contribution Account in accordance with the default elections provided in this Section 6.1(a). Except as otherwise provided in this Section 6.1(a), any distribution election made after December 31, 2007 shall be subject to Section 6.1(c).

     (b) Timing of Payment.

     (1) Any distribution to be paid under this Section 6.1 in a lump sum payment shall be paid within the sixty (60)-day period commencing on the Team Member’s Payment Date or, if the Team Member is a Specified Employee, during the sixty (60)-day period commencing on the later of the Team Member’s Payment Date or the date that is six (6) months after the Team Member’s Separation from Service.

     (2) If the Team Member’s Account is to be distributed in the form of quarterly installments, the first such installment shall be made within the sixty (60)-day period commencing on the Team Member’s Payment Date or, if the Team Member is a Specified Employee, during the thirty (60)-day period commencing on the later of the Team Member’s Payment Date or the last day of the first Plan Year quarter which ends at least six (6) months after the Team Member’s Separation from Service. Subsequent installments shall be made within the thirty (60)-day period commencing on each subsequent February 1, April 1, July 1 or October 1, until the Team Member’s benefits are distributed in

12

full. The Team Member’s Company Contribution Account shall continue to be credited with earnings and losses pursuant to Article IV of the Plan until all amounts credited to his or her Company Contribution Account under the Plan have been distributed. Each year the installment amounts paid to Team Members will be determined by dividing the December 31 vested account balance from the year prior to Team Member’s Payment Date, by the number of total installments elected and undistributed.

     (c) Subsequent Elections as to Form of Distribution. A Team Member may change his or her form of payment election (or deemed form of payment election) under Section 6.1(a) at any time by making a new election (referred to in this subsection as a “subsequent election”) on a form (which may be electronic) approved by the Advisory Committee and filed with the Advisory Committee or its designee; provided, however, that such subsequent election shall be subject to the following restrictions:

     (1) A subsequent election made after December 31, 2007 may not take effect until at least twelve (12) months after the date on which such subsequent election is made;

     (2) Payment or initial payment of the Team Member’s Company Contribution Account pursuant to a subsequent election made after December 31, 2007 may not be made earlier than five (5) years from the date such payment would have been made absent the subsequent election, unless the distribution is made on account of the Team Member’s Disability or death;

     (3) For purposes of this Section 6.1 and Code Section 409A, the entitlement to quarterly installment payments is treated as the entitlement to a single payment; and

     (4) A Team Member may make only one (1) subsequent election under this Section 6.1(c).

If a Team Member’s distribution election does not satisfy the requirements of this Section 6.1(c) it will not be recognized or given effect by the Advisory Committee. In that event, distribution of the benefit will be made in accordance with the Team Member’s most recent distribution election which does satisfy the requirements of this Section 6.1(c).

     6.2. Distribution of Deferral Account.

     (a) Payment Date. Except as otherwise provided in Section 6.3, a Team Member’s Deferred Amount for any Plan Year shall be distributed upon the Payment Date selected by the Team Member within the time period applicable under Section 3.1(a) or (b) for making an initial deferral election for such Plan Year’s Deferred Amount. If any such Team Member does not make an affirmative election with respect to Deferred Amounts for a Plan Year during such time period, the Deferred Amount for that Plan Year will be paid according to Section 6.1 and the Team Member’s elections under Section 6.1.

13

     Notwithstanding anything herein to the contrary, the Payment Date with respect to any Deferred Amount as of December 31, 2007 shall be the last affirmative election made by the Team Member on or before December 31, 2007 with respect to such Deferred Amount; provided, however, that in no event may any such election defer any amount otherwise payable during 2007 to 2008 or any later year or accelerate any amount otherwise payable during 2008 or any later year into 2007. If the Team Member does not make an affirmative election with respect to such Deferred Amounts for any Plan Year on or before December 31, 2007, the Deferred Amount for that Plan Year will be paid according to Section 6.1 and the Team Member’s elections under Section 6.1.

     (b) Form of Distribution. A Team Member may make a separate form of payment election under this Section 6.2(b) with respect to Deferred Amounts for each separate Plan Year within the time period applicable under Section 3.1(a) or (b) for making an initial deferral election with respect to each such Plan Year’s Deferred Amounts.

     (1) In the case of a Team Member whose Deferred Amount for a Plan Year exceeds $25,000, such Deferred Amount shall be distributed in one of the following forms in accordance with the Team Member’s distribution election given effect under this Section 6.2(b):

     (A) A lump sum distribution; or

     (B) Quarterly installments over one (1) to five (5) years.

     (2) In the case of a Team Member whose Deferred Amount for a Plan Year does not exceed $25,000, such Deferred Amount shall be distributed in a lump sum amount.

     (c) Timing of Payment.

     (1) Any distribution to be paid under this Section 6.2 in a lump sum payment shall be paid within the sixty (60)-day period commencing on the Team Member’s Payment Date.

     (2) If the Team Member’s Deferred Amount is to be distributed in the form of quarterly installments, the first such installment shall be made within the sixty (60)-day period commencing on the Team Member’s Payment Date. Subsequent installments shall be made within the sixty (60)-day period commencing on the first day of each subsequent February 1, April 1, July 1 or October 1, until the Team Member’s benefits are distributed in full. The Team Member’s Deferred Amount shall continue to be credited with earnings and losses pursuant to Article IV of the Plan until all amounts credited to his or her Deferral Account under the Plan for such Plan Year have been distributed. Installment amounts paid to Team Members will be determined annually by dividing the December 31 vested account balance from the year prior to Team Member’s Payment Date, by the number of total installments elected and undistributed.

14

     (3) In the event a Team Member incurs a Separation from Service, other than by reason of death or Disability, at any time prior to the Payment Date for a Deferred Amount, such Deferred Amount shall be distributed in accordance with Section 6.1. In the event a Team Member incurs a Separation from Service, other than by reason of death or Disability, while a Deferred Amount is being paid in installments, such installments will continue to be paid in the normal course.

     (d) Subsequent Elections as to Time of Distribution.

     (1) A Team Member may change his or her Payment Date election under Section 6.2(a) with respect to the Deferred Amount for any Plan Year at any time by making a new election (referred to in this subsection as a “subsequent election”) on a form approved by the Advisory Committee and filed with the Advisory Committee or its designee; provided, however, that such subsequent election shall be subject to the following restrictions:

     (A) A subsequent election made after December 31, 2007 may not take effect until at least twelve (12) months after the date on which such subsequent election is made;

     (B) A subsequent election must be made not less than twelve (12) months before the date the payment is scheduled to be paid (or, if payment is to be made in installments, twelve (12) months before the date the first amount is scheduled to be paid);

     (C) Payment or initial payment of the Team Member’s Deferred Amount for any Plan Year pursuant to a subsequent election made after December 31, 2007 may not be made earlier than five (5) years from the date such payment would have been made absent the subsequent election, unless the distribution is made on account of the Team Member’s Disability or death; and

     (D) A Team Member may make a subsequent election under this Section 6.2(d) only twice with respect to the Deferred Amount for any one Plan Year.

If a Team Member’s distribution election does not satisfy the requirements of this Section 6.2(d), it will not be recognized or given effect by the Advisory Committee. In that event, distribution of the benefit will be made in accordance with the Team Member’s most recent election which does satisfy the requirements of this Section 6.2(d).

     6.3. Distribution Upon Death or Disability. If a Team Member dies or is determined to have a Disability before receiving his or her entire Account under the Plan, such Team Member, or his or her Beneficiary, as applicable, will receive the total undistributed Account in a lump sum within ninety (90) days after notification of such death or Disability; provided, however, that, where the Team Member is a Specified Employee, in no event will such lump

15

sum on account of Disability be paid earlier than six (6) months following his or her Separation from Service.

     6.4. Hardship Distribution. A Team Member shall be permitted to elect a Hardship Distribution from his or her vested Accounts prior to the Payment Date, subject to the following restrictions:

     (a) The election to take a Hardship Distribution shall be made by filing a form provided by and filed with the Advisory Committee prior to the end of any calendar month.

     (b) The Advisory Committee shall have made a determination that the requested distribution constitutes a Hardship Distribution in accordance with Section 1.1(y) of the Plan. The Advisory Committee will permit a Hardship Distribution only to the extent reasonably necessary to satisfy the unforeseeable emergency, plus amounts necessary to pay federal, state or local income taxes and penalties reasonably anticipated to result from the distribution, after taking into account the extent to which such need is or may be relieved through reimbursement or compensation by insurance, by liquidation of the Team Member’s or beneficiary’s assets (to the extent the liquidation of such assets would not itself cause severe financial hardship), or by cessation of deferrals under the Plan.

     (c) The amount determined by the Advisory Committee as a Hardship Distribution shall be paid in a single lump sum as soon as practicable after the end of the calendar month in which the Hardship Distribution election is made and approved by the Advisory Committee.

     (d) If a Team Member receives a Hardship Distribution, the Team Member’s deferral elections under Section 3.1, if any, for such Plan Year shall be immediately cancelled.

     (e) All Hardship Distributions shall be made on a pro rata basis from among a Team Member’s Accounts and Fund subaccounts for all Plan Years, unless the Advisory Committee approves an alternate method.

     (f) Notwithstanding anything in the Plan to the contrary, if the Company reasonably anticipates that its deduction with respect to any distribution under this Section 6.4 would not be permitted due to the application of Code Section 162(m); such payment shall be suspended to the extent a deduction would not be permitted until the earliest date at which it reasonably anticipates that the deduction of such distribution would not be barred by application of Code Section 162(m); provided, however, that the conditions of Section 6.4 are still satisfied as of such date.

     6.5. Inability to Locate Team Member. In the event that the Advisory Committee is unable to locate a Team Member or Beneficiary within two (2) years following the required Payment Date, the amount allocated to the Team Member’s Account shall be forfeited.

16

ARTICLE VII.
ADMINISTRATION

     7.1. Advisory Committee. The Chairman of the Board may appoint a committee to serve, at the pleasure of the Board, as the Advisory Committee. The number of members comprising such committee shall be determined by the Chairman of the Board, who may from time to time vary the number of members. A member of the Advisory Committee appointed pursuant to this Section 7.1 may resign by delivering a written notice of resignation to the Chairman of the Board. The Chairman of the Board may remove any member by delivering a notice of removal to such member.

     7.2. Advisory Committee Action. The Advisory Committee shall act at meetings by affirmative vote of a majority of the members of the Advisory Committee. A majority of the members of the Advisory Committee shall constitute a quorum in any meeting of the Advisory Committee. Any action permitted to be taken at a meeting may be taken without a meeting if, prior to such action, a written consent to the action is signed by all members of the Advisory Committee and such written consent is filed with the minutes of the proceedings of the Advisory Committee. A member of the Advisory Committee shall not vote or act upon any matter which relates solely to himself or herself as a Team Member. The Chairman or any other member or members of the Advisory Committee designated by the Chairman may execute any certificate or other written direction on behalf of the Advisory Committee.

     7.3. Powers and Duties of the Advisory Committee.

     (a) The Advisory Committee, on behalf of the Team Members and their Beneficiaries, shall enforce the Plan in accordance with its terms, shall be charged with the general administration of the Plan, and shall have all powers necessary to accomplish its purposes, including, but not by way of limitation, the following:

     (1) To select the Funds in accordance with Section 3.4 hereof;

     (2) To construe and interpret the terms and provisions of this Plan, to determine eligibility for and the amount of any benefit payable under the Plan, and to decide any dispute which may arise regarding the rights of Team Members (or their Beneficiaries) under this Plan;

     (3) To compute and certify to the amount and kind of benefits payable to Team Members and their Beneficiaries;

     (4) To maintain all records that may be necessary for the administration of the Plan;

     (5) To provide for the disclosure of all information and the filing or provision of all reports and statements to Team Members, Beneficiaries or governmental agencies as shall be required by law;

17

     (6) To make and publish such rules for the regulation of the Plan and procedures for the administration of the Plan as are not inconsistent with the terns hereof;

     (7) To appoint one or more Plan administrators or any other agent, and to delegate to them such powers and duties in connection with the administration of the Plan as the Advisory Committee may from time to time prescribe; and

     (8) To take all actions necessary or appropriate for the administration of the Plan.

     7.4. Construction and Interpretation. The Advisory Committee shall have full discretion to construe and interpret the terms and provisions of this Plan, which interpretations or construction shall be final and binding on all parties, including but not limited to the Company and any Affiliate and any Team Member or Beneficiary. The Advisory Committee shall administer such terms and provisions in a uniform and nondiscriminatory manner and in full accordance with any and all laws applicable to the Plan.

     7.5. Information. To enable the Advisory Committee to perform its functions, the Company shall supply full and timely information to the Advisory Committee on all matters relating to the Compensation of all Team Members, their death or other events which cause termination of their participation in this Plan, and such other pertinent facts as the Advisory Committee may require.

     7.6. Compensation, Expenses and Indemnity.

     (a) The members of the Advisory Committee shall serve without compensation for their services hereunder.

     (b) The Advisory Committee is authorized at the expense of the Company to employ such legal counsel as it may deem advisable to assist in the performance of its duties hereunder. Expenses and fees in connection with the administration of the Plan shall be paid by the Company. Such legal counsel may be the same legal counsel used by the Company for other matters.

     (c) To the extent permitted by applicable state law, the Company shall indemnify and hold harmless the Advisory Committee and each member thereof, the Board of Directors and any delegate of the Advisory Committee who is an employee of the Company against any and all expenses, liabilities and claims, including legal fees to defend against such liabilities and claims arising out of their discharge in good faith of responsibilities under or incident to the Plan, other than expenses and liabilities arising out of willful misconduct. This indemnity shall not preclude such further indemnities as may be available under insurance purchased by the Company or provided by the Company under any bylaw, agreement or otherwise, as such indemnities are permitted under state law.

18

     7.7. Quarterly Statements; Delegation of Administrative Functions.

     (a) Under procedures established by the Advisory Committee, a Team Member shall receive a statement with respect to such Team Member’s Accounts on a quarterly basis.

     (b) The Advisory Committee may delegate administrative duties under the Plan to any one or more persons or companies selected by the Advisory Committee.

     7.8. Disputes.

     (a) Claim.

     A person who believes that he or she is being denied a benefit to which he or she is entitled under this Plan (hereinafter referred to as “Claimant”) must file a written request for such benefit with the Advisory Committee or its designee, setting forth his or her claim. The request must be addressed to the Advisory Committee, or its designee, at its then principal place of business. If such claim is not filed within one (1) year of the Team Member’s Separation from Service, neither the Plan nor the Company or any Affiliate shall have any obligation to pay the disputed benefit and the Claimant shall have no further rights under the Plan.

     (b) Claim Decision.

     Upon receipt of a claim, the Advisory Committee, or its designee, shall advise the Claimant that a reply will be forthcoming within ninety (90) days (or forty-five (45) days in the event of a claim involving a Disability determination) and shall, in fact, deliver such reply within such period. The Advisory Committee or its designee may, however, extend the reply period for an additional ninety (90) days (or thirty (30) days in the event of a claim involving a Disability determination), provided the Advisory Committee determines that the extension is necessary due to matters beyond the Plan’s control and the Claimant is notified of the extension before the end of the initial 90-day (or, as applicable, 45-day) period and the date by which the Advisory Committee expects to render a decision.

     If the claim is denied in whole or in part, the Advisory Committee or its designee shall inform the Claimant in writing, using language calculated to be understood by the Claimant, setting forth: (i) the specified reason or reasons for such denial; (ii) the specific reference to pertinent provisions of this Plan on which such denial is based; (iii) a description of any additional material or information necessary for the Claimant to perfect his or her claim and an explanation of why such material or such information is necessary; (iv) appropriate information as to the steps to be taken if the Claimant wishes to submit the claim for review; and (v) the time limits for requesting a review under subsection (c).

19

     (c) Request For Review.

     Within sixty (60) days (or one hundred eighty (180) days in the case of a claim involving a Disability determination) after the receipt by the Claimant of the written opinion described above, the Claimant may request in writing that the Advisory Committee review the determination of the Advisory Committee or its designee. Such request must be addressed to the Secretary of the Company, at its then principal place of business. The Claimant or his or her duly authorized representative may, but need not, review the pertinent documents and submit issues and comments in writing for consideration by the Advisory Committee. If the Claimant does not request a review within such sixty (60) day (or, as applicable, one hundred eighty (180) day) period, he or she shall be barred and estopped from challenging the Advisory Committee’s, or its designee’s, determination.

     (d) Review of Decision.

     Within sixty (60) days (or forty-five (45) days in the event of a claim involving a Disability determination) after the Advisory Committee’s receipt of a request for review, after considering all materials presented by the Claimant, the Advisory Committee will inform the Claimant in writing, in a manner calculated to be understood by the Claimant, the decision setting forth the specific reasons for the decision containing specific references to the pertinent provisions of this Plan on which the decision is based. If special circumstances require that the sixty (60) day (or, as applicable, forty-five (45) day) time period be extended, the Advisory Committee will so notify the Claimant and will render the decision as soon as possible, but no later than one hundred twenty (120) days (or ninety (90) days in the event of a claim involving a Disability determination) after receipt of the request for review.

     (e) Legal Action.

     A Claimant’s compliance with the foregoing provisions of this Section 7.8 is a mandatory prerequisite to a Claimant’s right to commence any legal action with respect to any claim for benefits under this Plan.

ARTICLE VIII.
MISCELLANEOUS

     8.1. Unsecured General Creditor. Team Members and their Beneficiaries, heirs, successors, and assigns shall have no legal or equitable rights, claims, or interest in any specific property or assets of the Company. No assets of the Company shall be held in any way as collateral security for the fulfilling of the obligations of the Company under this Plan. Any and all of the Company’s assets shall be, and remain, the general unpledged, unrestricted assets of the Company. The Company’s obligation under the Plan shall be merely that of an unfunded and unsecured promise of the Company to pay money in the future, and the rights of the Team Members and Beneficiaries shall be no greater than those of unsecured general creditors. It is

20

the intention of the Company that this Plan be unfunded for purposes of the Code and for purposes of Title I of the Employee Retirement Income Security Act of 1974, as amended.

     8.2. Insurance Contracts or Policies. Amounts payable hereunder may be provided through insurance contracts or policies, the premiums for which are paid by the Company from its general assets, and which contracts or policies are issued by an insurance company or similar organization. In order to become a Team Member under the Plan, an Eligible Team Member may be required to complete such insurance application forms and insurance application worksheets and to undergo such medical examinations as requested by the Advisory Committee in connection with the acquisition of any such insurance contract or policy.

     8.3. Restriction Against Assignment. The Company shall pay all amounts payable hereunder only to the person or persons designated by the Plan and not to any other person or corporation. No part of a Team Member’s Accounts shall be liable for the debts, contracts, or engagements of any Team Member, his or her Beneficiary, or successors in interest, nor shall a Team Member’s Accounts be subject to execution by levy, attachment, or garnishment or by any other legal or equitable proceeding, nor shall any such person have any right to alienate, anticipate, sell, transfer, commute, pledge, encumber, or assign any benefits or payments hereunder in any manner whatsoever. If any Team Member, Beneficiary or successor in interest is adjudicated bankrupt or purports to anticipate, alienate, sell, transfer, commute, assign, pledge, encumber or charge any distribution or payment from the Plan, voluntarily or involuntarily, the Advisory Committee, in its discretion, may cancel such distribution or payment (or any part thereof) to or for the benefit of such Team Member, Beneficiary or successor in interest in such manner as the Advisory Committee shall direct.

     8.4. Withholding. There shall be deducted from each payment made under the Plan or any other compensation payable to the Team Member (or Beneficiary) all taxes which are required to be withheld by the Company in respect to such payment or this Plan. The Company shall have the right to reduce any payment (or compensation) by the amount of cash sufficient to provide the amount of said taxes.

     8.5. Amendment, Modification, Suspension or Termination. The Board may amend, modify, suspend or terminate the Plan in whole or in part, except that no amendment, modification, suspension or termination shall have any retroactive effect to reduce any amounts allocated to a Team Member’s Accounts or to accelerate the payment of any Account, except as otherwise permitted by law.

     Notwithstanding the preceding, the Company may, by action of its Board of Directors, within the thirty (30) days preceding or twelve (12) months following a Change in Control, partially terminate the Plan and distribute benefits to all affected Team Members within twelve (12) months after such action, provided that all plans sponsored by the service recipient immediately after the Change in Control (which are required to be aggregated with this Plan pursuant to Code Section 409A) are also terminated and liquidated with respect to each affected Team Member.

     8.6. Governing Law. This Plan shall be construed, governed and administered in accordance with the laws of the State of Ohio, except where pre-empted by federal law.

21

     8.7. Receipt or Release. Any payment to a Team Member or the Team Member’s Beneficiary in accordance with the provisions of the Plan shall, to the extent thereof, be in full satisfaction of all claims against the Advisory Committee and the Company. The Advisory Committee may require such Team Member or Beneficiary, as a condition precedent to such payment, to execute a receipt and release to such effect.

     8.8. Payments on Behalf of Persons Under Incapacity. In the event that any amount becomes payable under the Plan to a person who, in the sole judgment of the Advisory Committee, is considered by reason of legal, physical or mental condition to be unable to give a valid receipt therefore, the Advisory Committee may direct that such payment be made to any person found by the Advisory Committee, in its sole judgment, to have assumed the care of such person. Any payment made pursuant to such determination shall constitute a full release and discharge of the Advisory Committee and the Company.

     8.9. Limitation of Rights and Employment Relationship. Neither the establishment of the Plan nor any modification thereof, nor the creating of any fund or account, nor the payment of any benefits shall be construed as giving to any Team Member, or Beneficiary or other person any legal or equitable right against the Company or any Affiliate except as provided in the Plan; and in no event shall the terms of employment of any Employee or Team Member be modified or in any way be affected by the provisions of the Plan.

     8.10. Headings. Headings and subheadings in this Plan are inserted for convenience of reference only and are not to be considered in the construction of the provisions hereof.

     8.11. Trust Information. The Company has established the Trust for the purposes of this Plan. Pursuant to the Trust and to the direction of the Advisory Committee, the Trustee shall enter into any necessary or reasonable contracts for purposes of holding and investing the assets maintained under the Plan.

     This Plan is amended and restated by resolution adopted by the Compensation Committee of the Board of Directors on this 13th day of November, 2007, to be effective as of January 1, 2005 (except as otherwise specified herein).

JO-ANN STORES, INC.
By:	/s/ Darrell Webb
	Name:	Darrell Webb
	Title:	Chairman of the Board

22

EX-10.25

Exhibit 10.25

AGREEMENT

     THIS AGREEMENT (“Agreement”) is made as of the 19^th day of February, 2008, between JO-ANN STORES, INC., an Ohio corporation (the “Company”), and Darrell Webb (“Executive”).

     The Company is entering into this Agreement (in substitution for and in lieu of the employment agreement entered into by the parties dated July 24, 2006; “Prior Agreement”) in recognition of the importance of Executive’s services to the continuity of management of the Company and based upon its determination that it will be in the best interests of the Company to encourage Executive’s continued attention and dedication to Executive’s duties as a general matter and in the potentially disruptive circumstances of a possible Change of Control of the Company. (As used in this Agreement, the term “Change of Control” and certain other capitalized terms have the meanings ascribed to them in Section 17 at the end of this Agreement.)

     The Company and Executive agree, effective as of the date first set forth above (the “Effective Date”), as follows:

     1. Severance Benefits upon Certain Separations from Service Occurring Before a Change of Control. If, before the occurrence of a Change of Control, Executive has a Separation from Service with the Company by the Company without Cause, or by Executive for Good Reason, Executive shall be entitled to the following as Severance Benefits:

          (a) The Company shall pay Executive an amount equal to two (2) times Executive’s Base Salary payable in consecutive bi-weekly installments over the twenty-four (24) months following the Separation from Service at the same times and in the same amounts as if Executive had not incurred a Separation from Service and had continued to earn Executive’s Base Salary over that twenty-four (24) month period. Each such installment shall be a “Payment” for purposes of this Section 1(a). The Payments shall be paid over the following payment periods:

(i) First Payment Period. The First Payment Period shall begin on the first bi-weekly payroll date following the Separation from Service and shall end on the last bi-weekly payroll date of the sixth (6^th) calendar month following the calendar month in which the Separation from Service occurs. The Company shall pay a Payment to Executive on each bi-weekly payroll date during the First Payment Period; provided, however, in no event shall the aggregate amount paid to Executive during the First Payment Period exceed two (2) times the lesser of: (A) the Executive’s annualized compensation based upon the annual rate of pay paid to Executive for services to the Company for the calendar year preceding the calendar year in which the Separation from Service occurs (adjusted for any increase during that year that was expected to continue indefinitely but for the Separation from

Service), or (B) the maximum amount that may be taken into account under Section 401(a)(17) of the Internal Revenue Code for the calendar year in which the Separation from Service occurs.

     In the event any amount that would have been paid during the First Payment Period cannot be paid because it would exceed the limitation provided in the preceding paragraph, such excess amount shall be paid in a lump sum on the first bi-weekly payroll date of the Second Payment Period (in addition to any amount that would be paid on such bi-weekly payroll date in the Second Payment Period as provided in Section 1(a)(ii) below).

(ii) Second Payment Period. The Second Payment Period shall commence on the first bi-weekly payroll date following the end of the First Payment Period and shall end on the last bi-weekly payroll date preceding the date that is twenty-four (24) months following the Executive’s Separation from Service. The Company shall pay a Payment to Executive on each bi-weekly payroll date in the Second Payment Period.

          (b) The Company shall continue to provide Executive with group term life insurance for two (2) years following the Termination Date, except that the Company may stop providing group term life insurance earlier if and when Executive accepts full time employment with a subsequent employer and that employer provides Executive with group term life insurance coverage. The group term life insurance benefits to be provided by the Company pursuant to this paragraph shall be provided to Executive at the same cost to Executive, and at the same coverage level, as is applicable to continuing executives in comparable positions from time to time during the period the benefits are continued.

          (c) The initial 100,000 stock options granted to Executive in connection with his initial employment will become fully exercisable as of the date the Executive’s employment with the Company is terminated (to the extent that such options remain outstanding as of the termination date), and all restrictions and conditions applicable to the initial 100,000 restricted shares granted to Executive in connection with his initial employment will be deemed to have been satisfied as of the date of the Executive’s termination. With respect to all subsequent equity awards, the provisions of the granting instruments and relevant Company plans shall be applicable.

          (d) The Executive shall be entitled to continue his medical and dental insurance in accordance with the Consolidated Omnibus Budget Reconciliation Act of 1985 (“COBRA”), provided the Executive timely elects such coverage and satisfies all other eligibility requirements under COBRA. If the Executive elects COBRA coverage, the Executive shall pay the full COBRA premium at his own expense.

          (e) On the first bi-weekly payroll date during the Second Payment Period, the Company shall pay Executive the sum of Forty-Three Thousand Two Hundred Dollars ($43,200) in addition to any other amounts due at that time to Executive pursuant to other provisions of this Agreement,

2

          (f) If the Separation from Service occurs during a fiscal year in which a bonus was earned under any Company sponsored bonus plan, the Executive will be entitled to a pro-rata portion of that fiscal year’s bonus based on the attainment of the performance metrics. This pro-rata bonus will be paid at its normal time at the end of the performance period.

     2. Change of Control Severance Benefits upon Certain Separations from Service Occurring After a Change of Control. If, after the occurrence of a Change of Control, Executive has a Separation from Service with the Company by the Company without Cause, or by Executive for Good Reason, Executive shall be entitled to the following as Change of Control Severance Benefits:

          (a) The Company shall make a lump sum cash payment to Executive, not later than ten (10) business days after the Separation from Service, in an amount equal to three (3) times the sum of (i) Executive’s Base Salary plus (ii) the greater of (A) Executive’s average cash bonus earned over the three (3) full fiscal years of the Company ended before the Separation from Service, or (B) Executive’s target annual bonus established for the bonus plan year in which the Separation from Service occurs. If Executive has been employed by the Company for fewer than three (3) but at least one (1) full fiscal year of the Company ended before the Separation from Service, the average of the bonuses earned in the two (2) full fiscal years of the Company ended before the Separation from Service, or the amount of the bonus earned in the one full fiscal year of the Company ended before the Separation from Service, as the case may be, shall be substituted for the average referred to in (A) above.

          (b) If the Separation from Service occurs after the end of a bonus year under any Company sponsored bonus plan and before the bonus with respect to that bonus year has been paid, the Company shall pay to Executive, not later than ten (10) business days after the Separation from Service, an amount equal to the bonus for that bonus year to which Executive would have been entitled had the bonus plan for that bonus year remained in effect without any change and had Executive remained in the employ of the Company through the date on which bonuses for that bonus year were paid.

          (c) The Company shall make a lump sum cash payment to Executive, not later than ten (10) business days after the Separation from Service, in an amount equal to the greater of (i) Executive’s unpaid targeted annual bonus, established for the bonus year in which the Separation from Service occurs, multiplied by a fraction, the numerator of which is the number of days Executive was employed by the Company in the bonus year through the Separation from Service, and the denominator of which is 365, or (ii) the bonus amount specifically guaranteed to Executive for that bonus year under any other agreement between the Company and Executive.

          (d) The Company shall continue to provide Executive with group term life insurance for three (3) years following the Termination Date, except that the Company may stop providing group term life insurance earlier if and when Executive accepts full time employment with a subsequent employer and that employer provides Executive with group term life insurance coverage. The group term life insurance benefits to be provided by the Company pursuant to this paragraph shall be provided to Executive at the same cost to Executive, and at the same coverage

3

level, as is applicable to continuing executives in comparable positions from time to time during the period the benefits are continued.

          (e) All stock options granted to Executive then outstanding will become fully exercisable as of the date of the Change of Control, and all restrictions and conditions applicable to restricted stock granted to Executive will be deemed to have been satisfied as of the date of the Change of Control.

          (f) The Executive shall be entitled to continue his medical and dental insurance in accordance with COBRA, provided the Executive timely elects such coverage and satisfies all other eligibility requirements under COBRA. If the Executive elects COBRA coverage, the Executive shall pay the full COBRA premium at his own expense.

          (g) On the first bi-weekly payroll date during the Second Payment Period, in addition to any other amounts due at that time to Executive pursuant to other provisions of this Agreement, the Company shall pay Executive the sum of Sixty-Four Thousand Seven Hundred and Ninety-Nine Dollars ($64,799).

     3. Earned but Unpaid Base Salary and Accrued Paid Time Off Pay Payable Upon Any Separation from Service; Treatment of Long-Term Incentive Awards. Upon Executive’s Separation from Service for any reason and at any time, the Company shall pay to Executive (or, where appropriate, to Executive’s Beneficiary), not later than ten (10) days after the Separation from Service, (a) all earned but unpaid Base Salary through the Separation from Service, and (b) an amount equal to the aggregate dollar value of all paid time off earned but not taken by Executive (“Accrued Paid Time Off Pay”) before the Separation from Service. In addition, upon such Separation from Service, all outstanding long-term incentive awards shall be subject to the treatment provided under the applicable long-term incentive plan of the Company except as explicitly provided otherwise in this Agreement.

     4. Separation from Service Due to Retirement, Disability, or Death. If Executive has a Separation from Service due to Retirement, Disability, or death while this Agreement remains in effect (whether before or after the occurrence of a Change of Control), neither Executive nor Executive’s Beneficiaries will be entitled to Severance Benefits or Change of Control Severance Benefits under either of Sections 1 or 2 but Executive or Executive’s Beneficiaries, as appropriate, will be entitled to the payments provided for in Section 3 and to such benefits as may be provided under the terms of the Company’s disability, retirement, survivor’s benefits, insurance, and other applicable plans and programs of the Company then in effect.

     5. Separation from Service for Cause or by Executive other than for Good Reason. If Executive has a Separation from Service by the Company for Cause or by Executive other than for Good Reason while this Agreement remains in effect (whether before or after the occurrence of a Change of Control) and Section 6 does not apply, neither Executive nor Executive’s Beneficiaries will be entitled to Severance Benefits or Change of Control Severance

4

Benefits under either of Sections 1 or 2 but Executive or Executive’s Beneficiaries, as appropriate, will be entitled to the payments provided for in Section 3 and the Company shall pay to Executive such other amounts to which Executive is entitled under any compensation plans of the Company, at the time such payments are due. Except as provided in this Section 5, the Company shall have no further obligations to Executive under this Agreement.

     6. Special Provision Applicable only if Executive has a Separation from Service both in Advance of and in Contemplation of a Change of Control. If Executive has a Separation from Service by the Company (a) in contemplation of and not more than six (6) full calendar months before the occurrence of a Change of Control, and (b) under circumstances such that if the Separation from Service had occurred immediately after that Change of Control Executive would have been entitled to Change of Control Severance Benefits under Section 2 above, then the Company shall pay and provide to Executive all of the amounts and benefits specified in Section 2, reduced by such amounts and such benefits, if any, that the Company has otherwise paid and provided to Executive pursuant to Section 1 above. The Company shall make any cash payment required pursuant to this Section 6 within ten (10) days of the occurrence of the Change of Control.

     7. Change of Control Ignored if Employment Continues for More than Two Years Thereafter. If Executive’s employment continues for more than two (2) years following the occurrence of any Change of Control, that particular Change of Control will be deemed never to have occurred for purposes of this Agreement.

     8. Term of Agreement This Agreement shall be effective as of the Effective Date (without interruption from the prior Agreement) and shall continue in effect hereafter until a Separation from Sevice occurs pursuant to one of Sections 1, 2, 4, or 5, with due consideration of Sections 3, 6 and 7 hereof. The parties may, by mutual agreement, at any time and from time to time modify or terminate the term of this Agreement under this Section 8.

     9. Excise Tax.

     If there is any conflict between the provisions of this Section 9 and any other provision of this Agreement regarding payments to be made or benefits to be provided to Executive under this Agreement following a Change of Control, the provisions of this Section 9 shall govern.

          9.1. Acknowledgement. The Company and Executive acknowledge that, following a Change of Control, one or more payments or distributions to be made by the Company to or for the benefit of Executive (whether paid or payable or distributed or distributable pursuant to the terms of this Agreement, under some other plan, agreement, or arrangement, or otherwise, and including, without limitation, any income recognized by Executive upon exercise of an option granted by the Company to acquire Common Shares issued by the Company) (a “Payment”) may be determined to be an Excess Parachute Payment that is not deductible by the Company for federal income tax purposes and with respect to which Executive will be subject to an excise tax because of Sections 280G and 4999, respectively, of the Code (hereinafter referred to respectively as “Section 280G” and “Section 4999”).

5

          9.2. Procedure. If Executive’s employment is terminated after a Change of Control occurs, the Accounting Firm, which, subject to any inconsistent position asserted by the Internal Revenue Service, shall make all determinations required to be made under this Section 9, shall determine (a) the maximum amount of Parachute Payments that Executive may receive without becoming subject to the excise tax imposed by Section 4999 and without the Company suffering a loss of deduction under Section 280G (this maximum amount being the “280G Limit”) and (b) whether, if all Payments were made without regard to this Section 9, any Payment would be an Excess Parachute Payment. The Accounting Firm shall communicate its determination, together with detailed supporting calculations, to the Company and to Executive within 30 days after the Termination Date or such earlier time as is requested by the Company. The Company and Executive shall cooperate with each other and the Accounting Firm and shall provide necessary information so that the Accounting Firm may make all such determinations. The Company shall pay all of the fees of the Accounting Firm for services performed by the Accounting Firm as contemplated in this Section 9.

          9.3. Reduction or Gross Up if Payments Would Constitute Excess Parachute Payments. If any Payment would, if made without regard to this Section 9, constitute an Excess Parachute Payment, either (a) the payments to be made to Executive under this Agreement without regard to this Section 9 shall be reduced as provided in Section 9.4, or (b) the Company shall make all of the payments to be made to Executive under all of the provisions of this Agreement other than this Section 9 and, in addition, the Company shall make the Gross Up Payments specified in Section 9.5.

          9.4. Reduction in Payments if Aggregate Parachute Payments Would Otherwise not Exceed 110% of 280G Limit. If the aggregate value of all Parachute Payments does not exceed 110% of the 280G Limit, the payments to be made to Executive under this Agreement shall be reduced, but not below zero, by such amount so that the aggregate value of the Parachute Payments actually made to Executive will be One Dollar ($1.00) less than the 280G Limit.

          9.5 Gross Up Payment if Aggregate Parachute Payments Exceed 110% of 280G Limit. If the aggregate value of all Parachute Payments exceeds 110% of the 280G Limit and Executive is therefore subject to the excise tax under Section 4999 on Excess Parachute Payments received (the “Excise Tax”), the Company shall, in addition to making all other Payments to Executive, make additional payments (“Gross Up Payments”) to Executive, from time to time and at the same time as Parachute Payments are made to Executive, in such lump sum amount or amounts as are sufficient, from time to time, to place Executive in the same net after tax position that Executive would have been in if (a) Executive had to bear (without any Gross Up Payment under this Section 9.5) the Excise Tax with respect to 10% of all Parachute Payments received by Executive, (b) the Excise Tax did not otherwise apply to any Payments, and (c) Executive had not incurred any interest charges or penalties with respect to the imposition of any portion of the Excise Tax; provided, however, that such Gross Up Payments shall be paid on or before the last day of the calendar year following the calendar year in which the Executive remits the Excise Tax. For purposes of this Section 9, all payments received by Executive from the Company (whether under this Agreement or otherwise and including all Gross Up Payments received by Executive) shall be deemed to be subject to Federal and state tax

6

at the highest marginal tax rates applicable to Executive in the year in which the Gross Up Payment is made.

          9.6 Imposition of Excise Tax Following Reduction of Payments Prescribed by Section 9.4. If, notwithstanding a reduction of payments to Executive under this Agreement as contemplated by Section 9.4, it is ultimately determined by a court or pursuant to a final determination by the Internal Revenue Service that any payment received by Executive is an Excess Parachute Payment and Executive is therefore obligated to pay Excise Tax with respect to any Payments, the Company shall make Gross Up Payments to Executive from time to time, in such lump sum amount or amounts as are sufficient, from time to time, to place Executive in the same net after tax position that Executive would have been in if no such Payments constituted Excess Parachute Payments subject to the Excise Tax, the reduction of Parachute Payments prescribed by Section 9.4 had been made exactly as intended (i.e., to the extent but only to the extent necessary to avoid the Excise Tax), and Executive had not incurred any interest charges or penalties with respect to the imposition of any Excise Tax.

          9.7 Imposition of Additional Excise Tax Following Payment of Gross Up Prescribed by Section 9.5. If the Internal Revenue Service determines that any Payment gives rise, directly or indirectly, to liability on the part of Executive for the Excise Tax (and/or any penalties and/or interest with respect to any Excise Tax) in excess of the amount, if any, previously determined by the Accounting Firm, the Company shall make further additional cash payments to Executive not later than the due date of any payment indicated by the Internal Revenue Service with respect to these matters, in such amounts as are necessary to put Executive in the same position, after payment of all federal and state taxes (whether income taxes, Excise Taxes, or other taxes) and any and all penalties and interest with respect to any such taxes, as Executive would have been in if the Accounting Firm had anticipated the later determination by the Internal Revenue Service and the Company had made appropriate Gross Up Payments to the extent contemplated by Section 9.5 in the first instance.

          9.8 Potential Contest by the Company of Internal Revenue Service Determination. If the Company desires to contest any determination by the Internal Revenue Service with respect to the amount of Excise Tax, Executive shall, upon receipt from the Company of an unconditional written undertaking to indemnify and hold Executive harmless (on an after tax basis) from any and all adverse consequences that might arise from the contesting of that determination, cooperate with the Company in that contest at the Company’s sole expense. Nothing in this Section 9.8 shall require Executive to incur any expense other than expenses with respect to which the Company has paid to Executive sufficient sums so that after the payment of the expense by Executive and taking into account the payment by the Company with respect to that expense and any and all taxes that may be imposed upon Executive as a result of Executive’s receipt of that payment, the net effect is no cost to Executive. Nothing in this Section 9.8 shall require Executive to extend the statute of limitations with respect to any item or issue in Executive’s tax returns other than, exclusively, the Excise Tax. If, as the result of the contest of any assertion by the Internal Revenue Service with respect to Excise Tax, Executive receives a refund of Excise Tax previously paid and/or any interest with respect thereto, Executive shall promptly pay to the Company such amount as will leave Executive, net of the repayment and all tax effects, in the same position, after all taxes and interest, that he would have been in if the refunded Excise Tax had never been paid.

7

     10. Outplacement Assistance. Following a Separation from Service in which Severance Benefits or Change of Control Severance Benefits are payable hereunder, the Company shall provide Executive with outplacement services obtained by the Company at its cost and commensurate with the outplacement services typically provided by the Company to Executives who left the employ of the Company before the Effective Date of this Agreement, until Executive obtains subsequent employment or self-employment; provided, however, that such outplacement shall not continue beyond the last day of the second calendar year following the calendar year in which the Executive’s Termination Date or “Separation from Service” occurs.

     11. The Company’s Payment Obligation.

          11.1 Payment Obligations Absolute. 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 Executive 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 Executive or from whomsoever may be entitled thereto, for any reasons whatsoever.

          11.2 No Mitigation. Executive 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 group term life insurance coverage.

          11.3 Source of Payments and Benefits. 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 payments under this Agreement and other similar agreements), and Executive shall have the rights of an unsecured general creditor of the Company with respect thereto.

     12. Legal Remedies.

          12.1 Payment of Legal Fees. Unless prohibited by law, the Company shall pay all legal fees, costs of arbitration and/or litigation, prejudgment interest, and other expenses incurred in good faith by Executive as a result of the Company’s refusal to provide the Severance Benefits or Change of Control Severance Benefits to which Executive deems Executive 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 Executive 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 Executive had no reasonable grounds for the position propounded by Executive in the arbitration and/or litigation (which determination need not be made simply because Executive fails to succeed in the arbitration and/or litigation).

8

          12.2 Arbitration. Subject to the following sentences, 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 three (3) arbitrators sitting in a location selected by Executive within fifty (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 Executive’s alleged violation of the prohibition on competition or any other restriction contained in Section 14 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 Section 14, judgment may be entered on the award of the arbitrator in any court having proper jurisdiction.

     13. Withholding. The Company shall be entitled to withhold from any amounts payable under this Agreement all taxes as legally shall be required (including, without limitation, any United States federal income, FICA and Medicare taxes, and any other state, city, or local taxes).

     14. Noncompetition.

          14.1 Prohibition on Competition. Without the prior written consent of the Company, during the term of this Agreement, and, if Severance Benefits are paid hereunder, thereafter during the eighteen (18) month period beginning on the Termination Date or if Change of Control Severance Benefits are paid hereunder, thereafter through the second (2^nd) anniversary of the Termination Date, Executive shall not, as an employee, an officer, or as a director, engage directly or indirectly in any business or enterprise that engages to any significant extent within the United Sates of America in the sale at retail or direct marketing to consumers of fabric and craft components. Notwithstanding the foregoing, Executive 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.

          14.2 Disclosure of Information. Executive acknowledges that Executive has and has had access to and knowledge of certain confidential and proprietary information of the Company, which is essential to the performance of Executive’s duties as an employee of the Company. Executive will not, during or after the term of Executive’s employment by the Company, in whole or in part, disclose such information to any person, firm, corporation, association, or other entity for any reason or purpose whatsoever, nor shall Executive make use of any such information for his own purposes.

          14.3 Covenants Regarding Other Employees. During the term of this Agreement and thereafter during any period during which Executive is subject to the restriction set forth in Section 14.1, Executive shall not attempt to induce any employee of the Company to terminate his or her employment with the Company or accept employment with any competitor of the Company and Executive shall not interfere in any similar manner with the business of the Company.

     15. Successors and Assignment.

          15.1 Successors to the Company. 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

9

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 and shall entitle Executive to notify the Company that, unless the failure is remedied within thirty (30) days after delivery of the notice from Executive, Executive’s employment will terminate as of the thirty-first (31st) day after the delivery of the notice. If any such notice is given and the failure is not so remedied, Executive will be entitled to receive the same payments and benefits from the Company, and on the same schedule, as if the Company had undergone a Change of Control on the date of the succession and Executive had thereupon terminated his employment for Good Reason.

          15.2 Assignment by Executive. This Agreement shall inure to the benefit of and be enforceable by Executive and each of Executive’s personal or legal representatives, executors, administrators, successors, heirs, distributes, devisees, and legatees. If Executive dies while any amount would still be payable to Executive hereunder had Executive continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement, to Executive’s Beneficiary. If Executive has not named a Beneficiary, then such amounts shall be paid to Executive’s devisee, legatee, or other designee, or if there is no such designee, to Executive’s estate.

     16. Miscellaneous.

          16.1 Employment Status. Except as may be provided under any other agreement between Executive and the Company, the employment of Executive by the Company is “at will,” and, prior to the effective date of a Change of Control, may be terminated by either Executive or the Company at any time, subject to applicable law.

          16.2 Entire Agreement. This Agreement sets forth the entire agreement between the parties with respect to severance benefits to be provided upon any termination of Executive’s employment and supersedes any and all prior employment, retention, and/or change of control agreements between Executive and the Company, including, without limitation, the Prior Agreement.

          16.3 Beneficiaries. Executive may designate one or more persons or entities as the primary and/or contingent Beneficiaries of any Severance Benefits or Change of Control Severance Benefits owing to Executive under this Agreement. Such designation must be in the form of a signed writing acceptable to the Committee. Executive may make or change such designation at any time.

          16.4 Severability. In the event any provision of this Agreement shall be held illegal or invalid for any reason, the illegality or invalidity shall not affect the remaining parts of the Agreement, and the Agreement shall be construed and enforced as if the illegal or invalid provision had not been included.

          16.5 Modification. No provision of this Agreement may be modified, waived, or discharged unless such modification, waiver, or discharge is agreed to in writing and signed by Executive and by an authorized representative of the Company, or by the respective parties’ legal representatives and successors.

10

          16.6 Applicable Law. 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.

     17. Definitions. Whenever used in this Agreement, the following capitalized terms shall have the meanings set forth below:

          17.1 “Accounting Firm” means the independent auditors of the Company for the Fiscal Year preceding the year in which the Change of Control occurred and such firm’s successor or successors; provided, however, if such firm is unable or unwilling to serve and perform in the capacity contemplated by this Agreement, the Company shall select another national accounting firm of recognized standing to serve and perform in that capacity under this Agreement, except that such other accounting firm shall not be the then independent auditors for the Company or any of its affiliates (as defined in Rule 12b-2 promulgated under the Securities Exchange Act of 1934, as amended).

          17.2 “280G Limit” has the meaning assigned to it in Section 9.2.

          17.3 “Base Salary” means an amount equal to Executive’s base annual salary at the highest rate payable at any time before the date of a Separation from Service. For this purpose, Base Salary shall not include bonuses, long-term incentive compensation, or any remuneration other than base annual salary.

          17.4 “Beneficial Owner” shall have the meaning ascribed to such term in Rule 13d-3 of the General Rules and Regulations under the Exchange Act.

          17.5 “Beneficiary” means the persons or entities designated or deemed designated by Executive pursuant to Section 15.2 herein.

          17.6 “Board” means the Board of Directors of the Company.

          17.7 “Cause” shall mean the occurrence of any one or more of the following:

          (a) The willful and continued failure by Executive to substantially perform his normal duties (other than any such failure resulting from Executive Disability), after a written demand for substantial performance is delivered to Executive that specifically identifies the manner in which the Committee believes that Executive has not substantially performed his duties, and Executive has failed to remedy the situation within thirty (30) business days of receiving such notice;

          (b) Executive’s conviction for committing an act of fraud, embezzlement, theft, or other criminal act constituting a felony; or

          (c) The willful engaging by Executive in gross negligence materially and demonstrably injurious to the Company. However, no act, or failure to act on Executive’s part shall be considered “willful” unless done, or omitted to be done, by Executive not in good faith and without reasonable belief that his action or omission was not in or not opposed to the best interest of the Company.

11

          17.8 Change of Control. A “Change of Control” for purposes of Section 2(e) shall be deemed to have occurred if at any time or from time to time while this Agreement is in effect:

          (a) Any person (other than the Company, any of its Subsidiaries, any member of either of the Founding Families, any employee benefit plan or employee stock ownership plan of the Company, or any person organized, appointed, or established by the Company for or pursuant to the terms of any such plan), alone or together with any of its affiliates, becomes the beneficial owner of fifteen percent (15%) or more (but less than fifty percent (50%)) of the Voting Shares then outstanding;

          (b) Any person (other than the Company, any of its Subsidiaries, any employee benefit plan or employee stock ownership plan of the Company, or any person organized, appointed, or established by the Company for or pursuant to the terms of any such plan), alone or together with any of its affiliates, becomes the beneficial owner of fifty percent (50%) or more of the Voting Shares then outstanding;

          (c) Any person commences or publicly announces an intention to commence a tender offer or exchange offer the consummation of which would result in the person becoming the beneficial owner of fifteen percent (15%) or more of the Voting Shares then outstanding;

          (d) At any time during any period of twenty-four (24) consecutive months, individuals who were directors at the beginning of the 24-month period no longer constitute a majority of the members of the Board of the Company, unless the election, or the nomination for election by the Company’s shareholders, of each director who was not a director at the beginning of the period is approved by at least a majority of the directors who (i) are in office at the time of the election or nomination, and (ii) were directors at the beginning of the period;

          (e) A record date is established for determining shareholders entitled to vote upon (i) a merger or consolidation of the Company with another corporation in which those persons who are shareholders of the Company immediately before the merger or consolidation are to receive or retain less than sixty percent (60%) of the stock of the surviving or continuing corporation, (ii) a sale or other disposition of all or substantially all of the assets of the Company, or (iii) the dissolution of the Company;

          (f) (i) The Company is merged or consolidated with another corporation and those persons who were shareholders of the Company immediately before the merger or consolidation receive or retain less than sixty percent (60%) of the stock of the surviving or continuing corporation, (ii) there occurs a sale or other disposition of all or substantially all of the assets of the Company, or (iii) the Company is dissolved; or

          (g) Any person who proposes to make a “control share acquisition” of the Company, within the meaning of Section 1701.01(Z) of the Ohio General Corporation Law, submits or is required to submit an acquiring person statement to the Company.

Notwithstanding anything herein to the contrary, if an event described in clause (b), clause (d), or clause (f) above occurs, the occurrence of that event will constitute an irrevocable Change of Control. Furthermore, notwithstanding anything herein to the contrary, if an event described in

12

clause (c) occurs, and the Board either approves such offer or takes no action with respect to such offer, then the occurrence of that event will constitute an irrevocable Change of Control. On the other hand, notwithstanding anything herein to the contrary, if an event described in clause (a), clause (e), or clause (g) above occurs, or if an event described in clause (c) occurs and the Board does not either approve such offer or take no action with respect to such offer as described in the preceding sentence, and a majority of those members of the Board who were Directors prior to such event determine, within the 90-day period beginning on the date such event occurs, that the event should not be treated as a Change of Control, then, from and after the date that determination is made, that event will be treated as not having occurred. If no such determination is made, a Change of Control resulting from any of the events described in the immediately preceding sentence will constitute an irrevocable Change of Control on the 91st day after the occurrence of the event.

     A “Change of Control” for all other purposes of the Agreement shall be deemed to have occurred if at any time or from time to time while this Agreement is in effect:

(i)	any one person, or more than one person acting as a group, acquires ownership of stock of the Company that, together with stock held by such person or group, constitutes more than fifty percent (50%) of the total fair market value or total voting power of the stock of the Company;
(ii)	a majority of members of the Company’s board of directors is replaced during any twelve (12)-month period by directors whose appointment or election is not endorsed by a majority of the members of the Company’s board of directors before the date of the appointment or election; or
(iii)	any one person, or more than one person acting as a group, acquires (or has acquired during a twelve (12)-month period ending on the date of the most recent acquisition by such person or persons) assets from the Company that have a total gross fair market value equal to or more than fifty percent (50%) of the total gross fair market value of all of the assets of the Company immediately before such acquisition or acquisitions.

          17.9 “Change of Control Severance Benefits” means those payments and benefits that may become payable pursuant to Section 2 above.

          17.10 “Code” means the United States Internal Revenue Code of 1986, as amended.

          17.11 “Committee” means the Compensation Committee of the Board, or any other committee appointed by the Board to perform the functions of the Compensation Committee.

          17.12 “Company” means Jo-Ann Stores, Inc., an Ohio corporation, and its successors.

13

          17.13 “Disability” means permanent and total disability, within the meaning of Code Section 22(e)(3), as determined by the Committee in the exercise of good faith and reasonable judgment, upon receipt of and in reliance on sufficient competent medical advice from one (1) or more individuals, selected by the Committee, who are qualified to give professional medical advice, provided, however, that Executive must be entitled to disability benefits under the Company sponsored disability plans or programs.

          17.14 “Employer” means the Company and each corporation or other entity with whom the Company would be considered a single employer under Code Sections 414(b) and 414(c), except that in applying Code Sections 1563(a)(1), (2) and (3) for purposes of determining a controlled group of corporations under Code Section 414(b), the language “at least 50 percent” shall be used instead of “at least 80 percent” in each place it appears in Code Sections 1563(a)(1), (2) and (3), and in applying Treas. Regs. Sec. 1.414(c)-2 for purposes of determining a controlled group of trades or businesses under Code Section 414(c), the language “at least 50 percent” shall be used instead of “at least 80 percent” in each place it appears in Treas. Regs. Sec. 1.414(c)-2.

          17.15 “Excess Parachute Payment” has the meaning assigned to that term in Q/A-3 (note that although initial capital letters are used on this term in this Agreement, the Q/As do not use initial caps for this term).

          17.16 “Exchange Act” means the United States Securities Exchange Act of 1934, as amended.

          17.17 “Excise Tax” has the meaning assigned to that term in Section 9.5.

          17.18 “Founding Families” means the families consisting of Betty and Martin Rosskamm and Alma and Justine Zimmerman and their respective issue.

          17.19 “Good Reason” (after a Change of Control) means, without Executive’s express written consent, the occurrence, after the occurrence of a Change of Control, of any one or more of the following:

          (h) Any material reduction in Executive’s base compensation and short-term and long-term incentive compensation opportunities (to the extent such short-term and long-term incentive compensation opportunities are a regular and substantial part of Executive’s base compensation) below the amount in effect immediately before the Change of Control or, if higher, the amount in effect before any reduction in Executive’s base compensation and short-term and long-term incentive compensation opportunities made in contemplation of the Change of Control.

          (i) Any material reduction in Executive’s duties, responsibilities, or position with respect to the Company from the duties, responsibilities, or position as in effect immediately before the Change of Control or as in effect immediately before any reduction in any such item made in contemplation of the Change of Control.

14

          (j) Any shift of Executive’s principal place of employment with the Company to a location that is more than fifty (50) miles (by straight line measurement) from the site of the Company’s headquarters in Hudson, Ohio at the relevant time.

Executive shall have a Separation from Service for Good Reason (after a Change of Control) only if: (i) Executive provides written notice to the Company within ninety (90) days after the initial occurrence of an above event describing in detail the event and stating that Executive’s employment will terminate upon a specified date in such notice (the “Good Reason Termination Date”), which date is not earlier than thirty (30) days after the date such notice is provided to the Company (the “Notice Delivery Date”) and not later than ninety (90) days after the Notice Delivery Date, and (ii) the Company does not remedy the event prior to the Good Reason Termination Date.

          17.20 “Good Reason” (before a Change of Control) means, without Executive’s express written consent, a material reduction in Executive’s Base Salary other than a reduction that is in the same proportion as the reduction of the base salaries of every other executive officer of the Company in connection with an across-the-board reduction of executive base salaries. Executive shall have a voluntary Separation from Service for Good Reason (before a Change of Control) only if: (a) Executive provides written notice to the Company within ninety (90) days after the initial occurrence of an above event describing in detail the event and stating that Executive’s employment will terminate upon a specified date in such notice (the “Good Reason Termination Date”), which date is not earlier than thirty (30) days after the date such notice is provided to the Company (the “Notice Delivery Date”) and not later than ninety (90) days after the Notice Delivery Date, and (b) the Company does not remedy the event prior to the Good Reason Termination Date.

          17.21 “Gross Up Payment” has the meaning assigned to that term in Section 9.5 above.

          17.22 “Payment” has the meaning assigned to that term in Section 9.1 above (except as otherwise provided in Section 1(a)).

          17.23 “Parachute Payment” has the meaning assigned to that term in Q/A-2 but without reference to subsection (4) of Q/A-2 (with the effect that a payment otherwise meeting the definition of “Parachute Payment” will be referred to as a Parachute Payment even if the total of all such Parachute Payments is less than three times Executive’s base amount (as defined in Q/A-34) (note that although initial capital letters are used on this term in this Agreement, the Q/As do not use initial caps for this term).

          17.24 “Person” shall have the meaning ascribed to such term in Section 3(a)(9) of the Exchange Act and used in Sections 13(d) and 14(d) thereof, including a “group” as defined in Section 13(d).

          17.25 “Q/As” means the entire series of Questions and Answers set forth in Section 1.280G-1 of the Treasury Regulations issued under Section 280G of the Code (which

15

Section of regulations is presented in Question and Answer format); references to particular Question and Answers will be, for example, to “Q/A-1.”

          17.26 “Retirement” means a voluntary Separation from Service by the Executive other than for Good Reason after Executive has either (a) attained age fifty-five (55) and has completed at least ten (10) full years of continuous service with the Company, or (b) has attained age sixty-five (65) (without regard to length of service).

          17.27 “Separation from Service” means Executive has a termination of employment with the Employer. Whether a termination of employment has occurred shall be determined based on whether the facts and circumstances indicate the Executive and Employer reasonably anticipate that no further services will be performed by the Executive for Employer; provided, however, that Executive shall be deemed to have a termination of employment if the level of services he would perform for Employer after a certain date permanently decreases to no more than twenty percent (20%) of the average level of bona fide services performed for Employer (whether as an employee or independent contractor) over the immediately preceding thirty-six (36)-month period (or the full period of services to Employer if Executive has been providing services to Employer for less than thirty-six (36) months). For this purpose, Executive is not treated as having a Separation from Service while he is on a military leave, sick leave, or other bona fide leave of absence, if the period of such leave does not exceed six (6) months, or if longer, so long as Executive has a right to reemployment with Employer under an applicable statute or by contract.

          17.28 “Severance Benefits” means those payments and benefits that may become payable before the occurrence of a Change of Control pursuant to Section 1 above.

          17.29 “Termination Date” means the date on which any Separation of Service of the Executive becomes effective.

[REMAINDER OF THIS PAGE INTENTIONAL LEFT BLANK]

16

IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first written above.

JO-ANN STORES, INC.
By:	/s/ Beryl Raff
	Chair, Compensation Committee of the Board of
	Directors
EXECUTIVE
	/s/ Darrell Webb
	Darrell Webb

17

EX-10.27

Exhibit 10.27

AGREEMENT

     THIS AGREEMENT (“Agreement”) is made as of the 19^th day of February, 2008, between JO-ANN STORES, INC., an Ohio corporation (the “Company”), and Travis Smith (“Executive”).

     The Company is entering into this Agreement (in substitution for and in lieu of the employment agreement entered into by the parties dated July 31, 2006; “Prior Agreement”) in recognition of the importance of Executive’s services to the continuity of management of the Company and based upon its determination that it will be in the best interests of the Company to encourage Executive’s continued attention and dedication to Executive’s duties as a general matter and in the potentially disruptive circumstances of a possible Change of Control of the Company. (As used in this Agreement, the term “Change of Control” and certain other capitalized terms have the meanings ascribed to them in Section 17 at the end of this Agreement.)

     The Company and Executive agree, effective as of the date first set forth above (the “Effective Date”), as follows:

1. Severance Benefits upon Certain Separations from Service Occurring Before a Change of Control. If, before the occurrence of a Change of Control, Executive has a Separation from Service with the Company by the Company without Cause, or by Executive for Good Reason, Executive shall be entitled to the following as Severance Benefits:

     (a) The Company shall pay Executive an amount equal to Executive’s Base Salary for eighteen (18) months payable in consecutive bi-weekly installments at the same times and in the same amounts as if Executive had not incurred a Separation from Service and had continued to earn Executive’s Base Salary over that eighteen (18) month period. Each such installment shall be a “Payment” for purposes of this Section 1(a). The Payments shall be paid over the following payment periods:

     (i) First Payment Period. The First Payment Period shall begin on the first bi-weekly payroll date following the Separation from Service and shall end on the last bi-weekly payroll date of the sixth (6^th) calendar month following the calendar month in which the Separation from Service occurs. The Company shall pay a Payment to Executive on each bi-weekly payroll date during the First Payment Period; provided, however, in no event shall the aggregate amount paid to Executive during the First Payment Period exceed two (2) times the lesser of: (A) the Executive’s annualized compensation based upon the annual rate of pay paid to Executive for services to the Company for the calendar year preceding the calendar year in which the Separation from Service occurs (adjusted for any increase during that year that was expected to continue indefinitely but for the Separation from Service), or (B) the maximum amount that may be taken into account under Section 401(a)(17) of the Internal Revenue Code for the calendar year in which the Separation from Service occurs.

     In the event any amount that would have been paid during the First Payment Period cannot be paid because it would exceed the limitation provided in the preceding paragraph, such excess amount shall be paid in a lump sum on the first bi-weekly payroll date of the Second Payment Period (in addition to any amount that would be paid on such bi-weekly payroll date in the Second Payment Period as provided in Section 1(a)(ii) below).

     (ii) Second Payment Period. The Second Payment Period shall commence on the first bi-weekly payroll date following the end of the First Payment Period and shall end on the last bi-weekly payroll date preceding the date that is eighteen (18) months following the Executive’s Separation from Service. The Company shall pay a Payment to Executive on each bi-weekly payroll date in the Second Payment Period.

     (b) The Company shall continue to provide Executive with group term life insurance for eighteen (18) months following the Termination Date, except that the Company may stop providing group term life insurance earlier if and when Executive accepts full time employment with a subsequent employer and that employer provides Executive with group term life insurance coverage. The group term life insurance benefits to be provided by the Company pursuant to this paragraph shall be provided to Executive at the same cost to Executive, and at the same coverage level, as is applicable to continuing executives in comparable positions from time to time during the period the benefits are continued.

     (c) The initial 50,000 stock options granted to Executive in connection with his initial employment will become fully exercisable as of the date the Executive’s employment with the Company is terminated (to the extent that such options remain outstanding as of the termination date), and all restrictions and conditions applicable to the initial 40,000 restricted shares granted to Executive in connection with his initial employment will be deemed to have been satisfied as of the date of the Executive’s termination. With respect to all subsequent equity awards, the provisions of the granting instruments and relevant Company plans shall be applicable.

     (d) The Executive shall be entitled to continue his medical and dental insurance in accordance with the Consolidated Omnibus Budget Reconciliation Act of 1985 (“COBRA”), provided the Executive timely elects such coverage and satisfies all other eligibility requirements under COBRA. If the Executive elects COBRA coverage, the Executive shall pay the full COBRA premium at his own expense.

     (e) On the first bi-weekly payroll date during the Second Payment Period, the Company shall pay Executive the sum of Forty-Six Thousand Three Hundred Sixty-Seven Dollars ($46,367) in addition to any other amounts due at that time to Executive pursuant to the other provisions of this Agreement.

     (f) If the Separation from Service occurs during a fiscal year in which a bonus was earned under any Company sponsored bonus plan, the Executive will be entitled to a pro-rata portion of that fiscal year’s bonus based on the attainment of the performance

2

metrics. This pro-rata bonus will be paid at its normal time at the end of the performance period.

2. Change of Control Severance Benefits upon Certain Separations from Service Occurring After a Change of Control. If, after the occurrence of a Change of Control, Executive has a Separation from Service with the Company by the Company without Cause, or by Executive for Good Reason, Executive shall be entitled to the following as Change of Control Severance Benefits:

     (a) The Company shall make a lump sum cash payment to Executive, not later than ten (10) business days after the Separation from Service, in an amount equal to three (3) times the sum of (i) Executive’s Base Salary plus (ii) the greater of (A) Executive’s average cash bonus earned over the three (3) full fiscal years of the Company ended before the Separation from Service, or (B) Executive’s target annual bonus established for the bonus plan year in which the Separation from Service occurs. If Executive has been employed by the Company for fewer than three (3) but at least one (1) full fiscal year of the Company ended before the Separation from Service, the average of the bonuses earned in the two (2) full fiscal years of the Company ended before the Separation from Service, or the amount of the bonus earned in the one full fiscal year of the Company ended before the Separation from Service, as the case may be, shall be substituted for the average referred to in (A) above.

     (b) If the Separation from Service occurs after the end of a bonus year under any Company sponsored bonus plan and before the bonus with respect to that bonus year has been paid, the Company shall pay to Executive, not later than ten (10) business days after the Separation from Service, an amount equal to the bonus for that bonus year to which Executive would have been entitled had the bonus plan for that bonus year remained in effect without any change and had Executive remained in the employ of the Company through the date on which bonuses for that bonus year were paid.

     (c) The Company shall make a lump sum cash payment to Executive, not later than ten (10) business days after the Separation from Service, in an amount equal to the greater of (i) Executive’s unpaid targeted annual bonus, established for the bonus year in which the Separation from Service occurs, multiplied by a fraction, the numerator of which is the number of days Executive was employed by the Company in the bonus year through the Separation from Service, and the denominator of which is 365, or (ii) the bonus amount specifically guaranteed to Executive for that bonus year under any other agreement between the Company and Executive.

     (d) The Company shall continue to provide Executive with group term life insurance for three (3) years following the Termination Date, except that the Company may stop providing group term life insurance earlier if and when Executive accepts full time employment with a subsequent employer and that employer provides Executive with group term life insurance coverage. The group term life insurance benefits to be provided by the Company pursuant to this paragraph shall be provided to Executive at the same cost to Executive, and at the same coverage level, as is applicable to continuing executives in comparable positions from time to time during the period the benefits are continued.

3

     (e) All stock options granted to Executive then outstanding will become fully exercisable as of the date of the Change of Control, and all restrictions and conditions applicable to restricted stock granted to Executive will be deemed to have been satisfied as of the date of the Change of Control.

     (f) The Executive shall be entitled to continue his medical and dental insurance in accordance with the Consolidated Omnibus Budget Reconciliation Act of 1985 (“COBRA”), provided the Executive timely elects such coverage and satisfies all other eligibility requirements under COBRA. If the Executive elects COBRA coverage, the Executive shall pay the full COBRA premium at his own expense.

     (g) On the first bi-weekly payroll date during the Second Payment Period, the Company shall pay Executive the sum of Ninety Two Thousand Seven Hundred and Thirty Five Dollars ($92,735) in addition to any other amounts due at that time to Executive pursuant to other provisions of this Agreement.

3. Earned but Unpaid Base Salary and Accrued Paid Time Off Pay Payable Upon Any Separation from Service; Treatment of Long-Term Incentive Awards. Upon Executive’s Separation from Service for any reason and at any time, the Company shall pay to Executive (or, where appropriate, to Executive’s Beneficiary), not later than ten (10) days after the Separation from Service, (a) all earned but unpaid Base Salary through the Separation from Service, and (b) an amount equal to the aggregate dollar value of all paid time off earned but not taken by Executive (“Accrued Paid Time Off Pay”) before the Separation from Service. In addition, upon such Separation from Service, all outstanding long-term incentive awards shall be subject to the treatment provided under the applicable long-term incentive plan of the Company except as explicitly provided otherwise in this Agreement.

4. Separation from Service Due to Retirement, Disability, or Death. If Executive has a Separation from Service due to Retirement, Disability, or death while this Agreement remains in effect (whether before or after the occurrence of a Change of Control), neither Executive nor Executive’s Beneficiaries will be entitled to Severance Benefits or Change of Control Severance Benefits under either of Sections 1 or 2 but Executive or Executive’s Beneficiaries, as appropriate, will be entitled to the payments provided for in Section 3 and to such benefits as may be provided under the terms of the Company’s disability, retirement, survivor’s benefits, insurance, and other applicable plans and programs of the Company then in effect.

5. Separation from Service for Cause or by Executive other than for Good Reason. If Executive has a Separation from Service by the Company for Cause or by Executive other than for Good Reason while this Agreement remains in effect (whether before or after the occurrence of a Change of Control) and Section 6 does not apply, neither Executive nor Executive’s Beneficiaries will be entitled to Severance Benefits or Change of Control Severance Benefits under either of Sections 1 or 2 but Executive or Executive’s Beneficiaries, as appropriate, will be entitled to the payments provided for in Section 3 and the Company shall pay to Executive such other amounts to which Executive is entitled under any compensation plans of the Company, at the time such payments are due. Except as provided in this Section 5, the Company shall have no further obligations to Executive under this Agreement.

6. Special Provision Applicable only if Executive has a Separation from Service both in Advance of and in Contemplation of a Change of Control. If Executive has a Separation

4

from Service by the Company (a) in contemplation of and not more than six (6) full calendar months before the occurrence of a Change of Control, and (b) under circumstances such that if the Separation from Service had occurred immediately after that Change of Control Executive would have been entitled to Change of Control Severance Benefits under Section 2 above, then the Company shall pay and provide to Executive all of the amounts and benefits specified in Section 2, reduced by such amounts and such benefits, if any, that the Company has otherwise paid and provided to Executive pursuant to Section 1 above. The Company shall make any cash payment required pursuant to this Section 6 within ten (10) days of the occurrence of the Change of Control.

7. Change of Control Ignored if Employment Continues for More than Two Years Thereafter. If Executive’s employment continues for more than two (2) years following the occurrence of any Change of Control, that particular Change of Control will be deemed never to have occurred for purposes of this Agreement.

8. Term of Agreement

     This Agreement shall be effective as of the Effective Date (without interruption from the Prior Agreement) and shall continue in effect hereafter until a Separation from Service occurs pursuant to one of Sections 1, 2, 4, or 5, with due consideration of Sections 3, 6 and 7 hereof. The parties may, by mutual agreement, at any time and from time time modify or terminate the term of this Agreement under this Section 8.

9. Excise Tax.

     If there is any conflict between the provisions of this Section 9 and any other provision of this Agreement regarding payments to be made or benefits to be provided to Executive under this Agreement following a Change of Control, the provisions of this Section 9 shall govern.

     9.1. Acknowledgement. The Company and Executive acknowledge that, following a Change of Control, one or more payments or distributions to be made by the Company to or for the benefit of Executive (whether paid or payable or distributed or distributable pursuant to the terms of this Agreement, under some other plan, agreement, or arrangement, or otherwise, and including, without limitation, any income recognized by Executive upon exercise of an option granted by the Company to acquire Common Shares issued by the Company) (a “Payment”) may be determined to be an Excess Parachute Payment that is not deductible by the Company for federal income tax purposes and with respect to which Executive will be subject to an excise tax because of Sections 280G and 4999, respectively, of the Code (hereinafter referred to respectively as “Section 280G” and “Section 4999”).

     9.2. Procedure. If Executive’s employment is terminated after a Change of Control occurs, the Accounting Firm, which, subject to any inconsistent position asserted by the Internal Revenue Service, shall make all determinations required to be made under this Section 9, shall determine (a) the maximum amount of Parachute Payments that Executive may receive without becoming subject to the excise tax imposed by Section 4999 and without the Company suffering a loss of deduction under Section 280G (this maximum amount being the “280G Limit”) and (b) whether, if all Payments were made without regard to this Section 9, any Payment would be an Excess Parachute Payment. The Accounting Firm shall communicate its determination, together

5

with detailed supporting calculations, to the Company and to Executive within 30 days after the Termination Date or such earlier time as is requested by the Company. The Company and Executive shall cooperate with each other and the Accounting Firm and shall provide necessary information so that the Accounting Firm may make all such determinations. The Company shall pay all of the fees of the Accounting Firm for services performed by the Accounting Firm as contemplated in this Section 9.

     9.3. Reduction or Gross Up if Payments Would Constitute Excess Parachute Payments. If any Payment would, if made without regard to this Section 9, constitute an Excess Parachute Payment, either (a) the payments to be made to Executive under this Agreement without regard to this Section 9 shall be reduced as provided in Section 9.4, or (b) the Company shall make all of the payments to be made to Executive under all of the provisions of this Agreement other than this Section 9 and, in addition, the Company shall make the Gross Up Payments specified in Section 9.5.

     9.4. Reduction in Payments if Aggregate Parachute Payments Would Otherwise not Exceed 110% of 280G Limit. If the aggregate value of all Parachute Payments does not exceed 110% of the 280G Limit, the payments to be made to Executive under this Agreement shall be reduced, but not below zero, by such amount so that the aggregate value of the Parachute Payments actually made to Executive will be One Dollar ($1.00) less than the 280G Limit.

     9.5. Gross Up Payment if Aggregate Parachute Payments Exceed 110% of 280G Limit. If the aggregate value of all Parachute Payments exceeds 110% of the 280G Limit and Executive is therefore subject to the excise tax under Section 4999 on Excess Parachute Payments received (the “Excise Tax”), the Company shall, in addition to making all other Payments to Executive, make additional payments (“Gross Up Payments”) to Executive, from time to time and at the same time as Parachute Payments are made to Executive, in such lump sum amount or amounts as are sufficient, from time to time, to place Executive in the same net after tax position that Executive would have been in if (a) Executive had to bear (without any Gross Up Payment under this Section 9.5) the Excise Tax with respect to 10% of all Parachute Payments received by Executive, (b) the Excise Tax did not otherwise apply to any Payments, and (c) Executive had not incurred any interest charges or penalties with respect to the imposition of any portion of the Excise Tax; provided, however, that such Gross Up Payments shall be paid on or before the last day of the calendar year following the calendar year in which the Executive remits the Excise Tax. For purposes of this Section 9, all payments received by Executive from the Company (whether under this Agreement or otherwise and including all Gross Up Payments received by Executive) shall be deemed to be subject to Federal and state tax at the highest marginal tax rates applicable to Executive in the year in which the Gross Up Payment is made.

     9.6. Imposition of Excise Tax Following Reduction of Payments Prescribed by Section 9.4. If, notwithstanding a reduction of payments to Executive under this Agreement as contemplated by Section 9.4, it is ultimately determined by a court or pursuant to a final determination by the Internal Revenue Service that any payment received by Executive is an Excess Parachute Payment and Executive is therefore obligated to pay Excise Tax with respect to any Payments, the Company shall make Gross Up Payments to Executive from time to time, in such lump sum amount or amounts as are sufficient, from time to time, to place Executive in the same net after tax position that Executive would have been in if no such Payments constituted

6

Excess Parachute Payments subject to the Excise Tax, the reduction of Parachute Payments prescribed by Section 9.4 had been made exactly as intended (i.e., to the extent but only to the extent necessary to avoid the Excise Tax), and Executive had not incurred any interest charges or penalties with respect to the imposition of any Excise Tax.

     9.7. Imposition of Additional Excise Tax Following Payment of Gross Up Prescribed by Section 9.5. If the Internal Revenue Service determines that any Payment gives rise, directly or indirectly, to liability on the part of Executive for the Excise Tax (and/or any penalties and/or interest with respect to any Excise Tax) in excess of the amount, if any, previously determined by the Accounting Firm, the Company shall make further additional cash payments to Executive not later than the due date of any payment indicated by the Internal Revenue Service with respect to these matters, in such amounts as are necessary to put Executive in the same position, after payment of all federal and state taxes (whether income taxes, Excise Taxes, or other taxes) and any and all penalties and interest with respect to any such taxes, as Executive would have been in if the Accounting Firm had anticipated the later determination by the Internal Revenue Service and the Company had made appropriate Gross Up Payments to the extent contemplated by Section 9.5 in the first instance.

     9.8. Potential Contest by the Company of Internal Revenue Service Determination. If the Company desires to contest any determination by the Internal Revenue Service with respect to the amount of Excise Tax, Executive shall, upon receipt from the Company of an unconditional written undertaking to indemnify and hold Executive harmless (on an after tax basis) from any and all adverse consequences that might arise from the contesting of that determination, cooperate with the Company in that contest at the Company’s sole expense. Nothing in this Section 9.8 shall require Executive to incur any expense other than expenses with respect to which the Company has paid to Executive sufficient sums so that after the payment of the expense by Executive and taking into account the payment by the Company with respect to that expense and any and all taxes that may be imposed upon Executive as a result of Executive’s receipt of that payment, the net effect is no cost to Executive. Nothing in this Section 9.8 shall require Executive to extend the statute of limitations with respect to any item or issue in Executive’s tax returns other than, exclusively, the Excise Tax. If, as the result of the contest of any assertion by the Internal Revenue Service with respect to Excise Tax, Executive receives a refund of Excise Tax previously paid and/or any interest with respect thereto, Executive shall promptly pay to the Company such amount as will leave Executive, net of the repayment and all tax effects, in the same position, after all taxes and interest, that he would have been in if the refunded Excise Tax had never been paid.

7

10. Outplacement Assistance. Following a Separation from Service in which Severance Benefits or Change of Control Severance Benefits are payable hereunder, the Company shall provide Executive with outplacement services obtained by the Company at its cost and commensurate with the outplacement services typically provided by the Company to Executives who left the employ of the Company before the Effective Date of this Agreement, until Executive obtains subsequent employment or self-employment; provided, however, that such outplacement shall not continue beyond the last day of the second calendar year following the calendar year in which the Executive’s Termination Date or “Separation from Service” occurs.

11. The Company’s Payment Obligation.

     11.1. Payment Obligations Absolute. 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 Executive 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 Executive or from whomsoever may be entitled thereto, for any reasons whatsoever.

     11.2. No Mitigation. Executive 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 group term life insurance coverage.

     11.3. Source of Payments and Benefits. 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 payments under this Agreement and other similar agreements), and Executive shall have the rights of an unsecured general creditor of the Company with respect thereto.

12. Legal Remedies.

     12.1. Payment of Legal Fees. Unless prohibited by law, the Company shall pay all legal fees, costs of arbitration and/or litigation, prejudgment interest, and other expenses incurred in good faith by Executive as a result of the Company’s refusal to provide the Severance Benefits or Change of Control Severance Benefits to which Executive deems Executive 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 Executive 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 Executive had no reasonable grounds for the position propounded by Executive in the arbitration and/or litigation (which determination need not be made simply because Executive fails to succeed in the arbitration and/or litigation).

8

     12.2. Arbitration. Subject to the following sentences, 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 three (3) arbitrators sitting in a location selected by Executive within fifty (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 Executive’s alleged violation of the prohibition on competition or any other restriction contained in Section 14 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 Section 14, judgment may be entered on the award of the arbitrator in any court having proper jurisdiction.

13. Withholding. The Company shall be entitled to withhold from any amounts payable under this Agreement all taxes as legally shall be required (including, without limitation, any United States federal income, FICA and Medicare taxes, and any other state, city, or local taxes).

14. Noncompetition.

     14.1. Prohibition on Competition. Without the prior written consent of the Company, during the term of this Agreement, and, if Severance Benefits are paid hereunder, thereafter during the eighteen (18) month period beginning on the Termination Date or if Change of Control Severance Benefits are paid hereunder, thereafter through the second (2^nd) anniversary of the Termination Date, Executive shall not, as an employee, an officer, or as a director, engage directly or indirectly in any business or enterprise that engages to any significant extent within the United Sates of America in the sale at retail or direct marketing to consumers of fabric and craft components. Notwithstanding the foregoing, Executive 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.

     14.2. Disclosure of Information. Executive acknowledges that Executive has and has had access to and knowledge of certain confidential and proprietary information of the Company, which is essential to the performance of Executive’s duties as an employee of the Company. Executive will not, during or after the term of Executive’s employment by the Company, in whole or in part, disclose such information to any person, firm, corporation, association, or other entity for any reason or purpose whatsoever, nor shall Executive make use of any such information for his own purposes.

     14.3. Covenants Regarding Other Employees. During the term of this Agreement and thereafter during any period during which Executive is subject to the restriction set forth in Section 14.1, Executive shall not attempt to induce any employee of the Company to terminate his or her employment with the Company or accept employment with any competitor of the Company and Executive shall not interfere in any similar manner with the business of the Company.

15. Successors and Assignment.

     15.1. Successors to the Company. 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

9

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 and shall entitle Executive to notify the Company that, unless the failure is remedied within thirty (30) days after delivery of the notice from Executive, Executive’s employment will terminate as of the thirty-first (31st) day after the delivery of the notice. If any such notice is given and the failure is not so remedied, Executive will be entitled to receive the same payments and benefits from the Company, and on the same schedule, as if the Company had undergone a Change of Control on the date of the succession and Executive had thereupon terminated his employment for Good Reason.

     15.2. Assignment by Executive. This Agreement shall inure to the benefit of and be enforceable by Executive and each of Executive’s personal or legal representatives, executors, administrators, successors, heirs, distributes, devisees, and legatees. If Executive dies while any amount would still be payable to Executive hereunder had Executive continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement, to Executive’s Beneficiary. If Executive has not named a Beneficiary, then such amounts shall be paid to Executive’s devisee, legatee, or other designee, or if there is no such designee, to Executive’s estate.

16. Miscellaneous.

     16.1. Employment Status. Except as may be provided under any other agreement between Executive and the Company, the employment of Executive by the Company is “at will,” and, prior to the effective date of a Change of Control, may be terminated by either Executive or the Company at any time, subject to applicable law.

     16.2. Entire Agreement. This Agreement sets forth the entire agreement between the parties with respect to severance benefits to be provided upon any termination of Executive’s employment and supersedes any and all prior employment, retention, and/or change of control agreements between Executive and the Company, including, without limitation, the Prior Agreement.

     16.3. Beneficiaries. Executive may designate one or more persons or entities as the primary and/or contingent Beneficiaries of any Severance Benefits or Change of Control Severance Benefits owing to Executive under this Agreement. Such designation must be in the form of a signed writing acceptable to the Committee. Executive may make or change such designation at any time.

     16.4. Severability. In the event any provision of this Agreement shall be held illegal or invalid for any reason, the illegality or invalidity shall not affect the remaining parts of the Agreement, and the Agreement shall be construed and enforced as if the illegal or invalid provision had not been included.

     16.5. Modification. No provision of this Agreement may be modified, waived, or discharged unless such modification, waiver, or discharge is agreed to in writing and signed by Executive and by an authorized representative of the Company, or by the respective parties’ legal representatives and successors.

10

     16.6. Applicable Law. 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.

17. Definitions. Whenever used in this Agreement, the following capitalized terms shall have the meanings set forth below:

     17.1. “Accounting Firm” means the independent auditors of the Company for the Fiscal Year preceding the year in which the Change of Control occurred and such firm’s successor or successors; provided, however, if such firm is unable or unwilling to serve and perform in the capacity contemplated by this Agreement, the Company shall select another national accounting firm of recognized standing to serve and perform in that capacity under this Agreement, except that such other accounting firm shall not be the then independent auditors for the Company or any of its affiliates (as defined in Rule 12b-2 promulgated under the Securities Exchange Act of 1934, as amended).

     17.2. “280G Limit” has the meaning assigned to it in Section 9.2.

     17.3. “Base Salary” means an amount equal to Executive’s base annual salary at the highest rate payable at any time before the date of a Separation from Service. For this purpose, Base Salary shall not include bonuses, long-term incentive compensation, or any remuneration other than base annual salary.

     17.4. “Beneficial Owner” shall have the meaning ascribed to such term in Rule 13d-3 of the General Rules and Regulations under the Exchange Act.

     17.5. “Beneficiary” means the persons or entities designated or deemed designated by Executive pursuant to Section 15.2 herein.

     17.6. “Board” means the Board of Directors of the Company.

     17.7. “Cause” shall mean the occurrence of any one or more of the following:

          (a) The willful and continued failure by Executive to substantially perform his normal duties (other than any such failure resulting from Executive Disability), after a written demand for substantial performance is delivered to Executive that specifically identifies the manner in which the Committee believes that Executive has not substantially performed his duties, and Executive has failed to remedy the situation within thirty (30) business days of receiving such notice;

          (b) Executive’s conviction for committing an act of fraud, embezzlement, theft, or other criminal act constituting a felony; or

          (c) The willful engaging by Executive in gross negligence materially and demonstrably injurious to the Company. However, no act, or failure to act on Executive’s part shall be considered “willful” unless done, or omitted to be done, by Executive not in good faith and without reasonable belief that his action or omission was not in or not opposed to the best interest of the Company.

11

     17.8 Change of Control. A “Change of Control” for purposes of Section 2(e) shall be deemed to have occurred if at any time or from time to time while this Agreement is in effect:

          (a) Any person (other than the Company, any of its Subsidiaries, any member of either of the Founding Families, any employee benefit plan or employee stock ownership plan of the Company, or any person organized, appointed, or established by the Company for or pursuant to the terms of any such plan), alone or together with any of its affiliates, becomes the beneficial owner of fifteen percent (15%) or more (but less than fifty percent (50%)) of the Voting Shares then outstanding;

          (b) Any person (other than the Company, any of its Subsidiaries, any employee benefit plan or employee stock ownership plan of the Company, or any person organized, appointed, or established by the Company for or pursuant to the terms of any such plan), alone or together with any of its affiliates, becomes the beneficial owner of fifty percent (50%) or more of the Voting Shares then outstanding;

          (c) Any person commences or publicly announces an intention to commence a tender offer or exchange offer the consummation of which would result in the person becoming the beneficial owner of fifteen percent (15%) or more of the Voting Shares then outstanding;

          (d) At any time during any period of twenty-four (24) consecutive months, individuals who were directors at the beginning of the 24-month period no longer constitute a majority of the members of the Board of the Company, unless the election, or the nomination for election by the Company’s shareholders, of each director who was not a director at the beginning of the period is approved by at least a majority of the directors who (i) are in office at the time of the election or nomination, and (ii) were directors at the beginning of the period;

          (e) A record date is established for determining shareholders entitled to vote upon (i) a merger or consolidation of the Company with another corporation in which those persons who are shareholders of the Company immediately before the merger or consolidation are to receive or retain less than sixty percent (60%) of the stock of the surviving or continuing corporation, (ii) a sale or other disposition of all or substantially all of the assets of the Company, or (iii) the dissolution of the Company;

          (f) (i) The Company is merged or consolidated with another corporation and those persons who were shareholders of the Company immediately before the merger or consolidation receive or retain less than sixty percent (60%) of the stock of the surviving or continuing corporation, (ii) there occurs a sale or other disposition of all or substantially all of the assets of the Company, or (iii) the Company is dissolved; or

          (g) Any person who proposes to make a “control share acquisition” of the Company, within the meaning of Section 1701.01(Z) of the Ohio General Corporation Law, submits or is required to submit an acquiring person statement to the Company.

Notwithstanding anything herein to the contrary, if an event described in clause (b), clause (d), or clause (f) above occurs, the occurrence of that event will constitute an irrevocable Change of

12

Control. Furthermore, notwithstanding anything herein to the contrary, if an event described in clause (c) occurs, and the Board either approves such offer or takes no action with respect to such offer, then the occurrence of that event will constitute an irrevocable Change of Control. On the other hand, notwithstanding anything herein to the contrary, if an event described in clause (a), clause (e), or clause (g) above occurs, or if an event described in clause (c) occurs and the Board does not either approve such offer or take no action with respect to such offer as described in the preceding sentence, and a majority of those members of the Board who were Directors prior to such event determine, within the 90-day period beginning on the date such event occurs, that the event should not be treated as a Change of Control, then, from and after the date that determination is made, that event will be treated as not having occurred. If no such determination is made, a Change of Control resulting from any of the events described in the immediately preceding sentence will constitute an irrevocable Change of Control on the 91st day after the occurrence of the event.

     A “Change of Control” for all other purposes of the Agreement shall be deemed to have occurred if at any time or from time to time while this Agreement is in effect:

          (i) any one person, or more than one person acting as a group, acquires ownership of stock of the Company that, together with stock held by such person or group, constitutes more than fifty percent (50%) of the total fair market value or total voting power of the stock of the Company;

          (ii) a majority of members of the Company’s board of directors is replaced during any twelve (12)-month period by directors whose appointment or election is not endorsed by a majority of the members of the Company’s board of directors before the date of the appointment or election; or

          (iii) any one person, or more than one person acting as a group, acquires (or has acquired during a twelve (12)-month period ending on the date of the most recent acquisition by such person or persons) assets from the Company that have a total gross fair market value equal to or more than fifty percent (50%) of the total gross fair market value of all of the assets of the Company immediately before such acquisition or acquisitions.

     17.9. “Change of Control Severance Benefits” means those payments and benefits that may become payable pursuant to Section 2 above.

     17.10. “Code” means the United States Internal Revenue Code of 1986, as amended.

     17.11. “Committee” means the Compensation Committee of the Board, or any other committee appointed by the Board to perform the functions of the Compensation Committee.

     17.12. “Company” means Jo-Ann Stores, Inc., an Ohio corporation, and its successors.

     17.13. “Disability” means permanent and total disability, within the meaning of Code Section 22(e)(3), as determined by the Committee in the exercise of good faith and reasonable judgment, upon receipt of and in reliance on sufficient competent medical advice from one (1) or more individuals, selected by the Committee, who are qualified to give professional medical

13

advice, provided, however, that Executive must be entitled to disability benefits under the Company sponsored disability plans or programs.

     17.14. “Employer” means the Company and each corporation or other entity with whom the Company would be considered a single employer under Code Sections 414(b) and 414(c), except that in applying Code Sections 1563(a)(1), (2) and (3) for purposes of determining a controlled group of corporations under Code Section 414(b), the language “at least 50 percent” shall be used instead of “at least 80 percent” in each place it appears in Code Sections 1563(a)(1), (2) and (3), and in applying Treas. Regs. Sec. 1.414(c)-2 for purposes of determining a controlled group of trades or businesses under Code Section 414(c), the language “at least 50 percent” shall be used instead of “at least 80 percent” in each place it appears in Treas. Regs. Sec. 1.414(c)-2.

     17.15. “Excess Parachute Payment” has the meaning assigned to that term in Q/A-3 (note that although initial capital letters are used on this term in this Agreement, the Q/As do not use initial caps for this term).

     17.16. “Exchange Act” means the United States Securities Exchange Act of 1934, as amended.

     17.17. “Excise Tax” has the meaning assigned to that term in Section 9.5.

     17.18. “Founding Families” means the families consisting of Betty and Martin Rosskamm and Alma and Justine Zimmerman and their respective issue.

     17.19. “Good Reason” (after a Change of Control) means, without Executive’s express written consent, the occurrence, after the occurrence of a Change of Control, of any one or more of the following:

     (a) Any material reduction in Executive’s base compensation and short-term and long-term incentive compensation opportunities (to the extent such short-term and long-term incentive compensation opportunities are a regular and substantial part of Executive’s base compensation) below the amount in effect immediately before the Change of Control or, if higher, the amount in effect before any reduction in Executive’s base compensation and short-term and long-term incentive compensation opportunities made in contemplation of the Change of Control.

     (b) Any material reduction in Executive’s duties, responsibilities, or position with respect to the Company from the duties, responsibilities, or position as in effect immediately before the Change of Control or as in effect immediately before any reduction in any such item made in contemplation of the Change of Control.

     (c) Any shift of Executive’s principal place of employment with the Company to a location that is more than fifty (50) miles (by straight line measurement) from the site of the Company’s headquarters in Hudson, Ohio at the relevant time.

Executive shall have a Separation from Service for Good Reason (after a Change of Control) only if: (i) Executive provides written notice to the Company within ninety (90) days after the

14

initial occurrence of an above event describing in detail the event and stating that Executive’s employment will terminate upon a specified date in such notice (the “Good Reason Termination Date”), which date is not earlier than thirty (30) days after the date such notice is provided to the Company (the “Notice Delivery Date”) and not later than ninety (90) days after the Notice Delivery Date, and (ii) the Company does not remedy the event prior to the Good Reason Termination Date.

     17.20. “Good Reason” (before a Change of Control) means, without Executive’s express written consent, a material reduction in Executive’s Base Salary other than a reduction that is in the same proportion as the reduction of the base salaries of every other executive officer of the Company in connection with an across-the-board reduction of executive base salaries. Executive shall have a voluntary Separation from Service for Good Reason (before a Change of Control) only if: (a) Executive provides written notice to the Company within ninety (90) days after the initial occurrence of an above event describing in detail the event and stating that Executive’s employment will terminate upon a specified date in such notice (the “Good Reason Termination Date”), which date is not earlier than thirty (30) days after the date such notice is provided to the Company (the “Notice Delivery Date”) and not later than ninety (90) days after the Notice Delivery Date, and (b) the Company does not remedy the event prior to the Good Reason Termination Date.

     17.21. “Gross Up Payment” has the meaning assigned to that term in Section 9.5 above.

     17.22. “Payment” has the meaning assigned to that term in Section 9.1 above (except as otherwise provided in Section 1(a)).

     17.23. “Parachute Payment” has the meaning assigned to that term in Q/A-2 but without reference to subsection (4) of Q/A-2 (with the effect that a payment otherwise meeting the definition of “Parachute Payment” will be referred to as a Parachute Payment even if the total of all such Parachute Payments is less than three times Executive’s base amount (as defined in Q/A-34) (note that although initial capital letters are used on this term in this Agreement, the Q/As do not use initial caps for this term).

     17.24. “Person” shall have the meaning ascribed to such term in Section 3(a)(9) of the Exchange Act and used in Sections 13(d) and 14(d) thereof, including a “group” as defined in Section 13(d).

     17.25. “Q/As” means the entire series of Questions and Answers set forth in Section 1.280G-1 of the Treasury Regulations issued under Section 280G of the Code (which Section of regulations is presented in Question and Answer format); references to particular Question and Answers will be, for example, to “Q/A-1.”

     17.26. “Retirement” means a voluntary Separation from Service by the Executive other than for Good Reason after Executive has either (a) attained age fifty-five (55) and has completed at least ten (10) full years of continuous service with the Company, or (b) has attained age sixty-five (65) (without regard to length of service).

15

     17.27. “Separation from Service” means Executive has a termination of employment with the Employer. Whether a termination of employment has occurred shall be determined based on whether the facts and circumstances indicate the Executive and Employer reasonably anticipate that no further services will be performed by the Executive for Employer; provided, however, that Executive shall be deemed to have a termination of employment if the level of services he would perform for Employer after a certain date permanently decreases to no more than twenty percent (20%) of the average level of bona fide services performed for Employer (whether as an employee or independent contractor) over the immediately preceding thirty-six (36)-month period (or the full period of services to Employer if Executive has been providing services to Employer for less than thirty-six (36) months). For this purpose, Executive is not treated as having a Separation from Service while he is on a military leave, sick leave, or other bona fide leave of absence, if the period of such leave does not exceed six (6) months, or if longer, so long as Executive has a right to reemployment with Employer under an applicable statute or by contract.

     17.28. “Severance Benefits” means those payments and benefits that may become payable before the occurrence of a Change of Control pursuant to Section 1 above.

     17.29. “Termination Date” means the date on which any Separation of Service of the Executive becomes effective.

     IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first written above.

JO-ANN STORES, INC.
By:	/s/ Darrell Webb
	President and Chief Executive Officer
EXECUTIVE
/s/ Travis Smith
Travis Smith

16

EX-10.29

Exhibit 10.29

AGREEMENT

     THIS AGREEMENT (“Agreement”) is made as of the 19^th day of February, 2008, between JO-ANN STORES, INC., an Ohio corporation (the “Company”), and James Kerr (“Executive”).

     The Company is entering into this Agreement (in substitution for and in lieu of the employment agreement entered into by the parties dated July 27, 2006; “Prior Agreement”) in recognition of the importance of Executive’s services to the continuity of management of the Company and based upon its determination that it will be in the best interests of the Company to encourage Executive’s continued attention and dedication to Executive’s duties as a general matter and in the potentially disruptive circumstances of a possible Change of Control of the Company. (As used in this Agreement, the term “Change of Control” and certain other capitalized terms have the meanings ascribed to them in Section 17 at the end of this Agreement.)

     The Company and Executive agree, effective as of the date first set forth above (the “Effective Date”), as follows:

1. Severance Benefits upon Certain Separations from Service Occurring Before a Change of Control. If, before the occurrence of a Change of Control, Executive has a Separation from Service with the Company by the Company without Cause, or by Executive for Good Reason, Executive shall be entitled to the following as Severance Benefits:

     (a) The Company shall pay Executive an amount equal to Executive’s Base Salary for eighteen (18) months payable in consecutive bi-weekly installments at the same times and in the same amounts as if Executive had not incurred a Separation from Service and had continued to earn Executive’s Base Salary over that eighteen (18) month period. Each such installment shall be a “Payment” for purposes of this Section 1(a). The Payments shall be paid over the following payment periods:

     (i) First Payment Period. The First Payment Period shall begin on the first bi-weekly payroll date following the Separation from Service and shall end on the last bi-weekly payroll date of the sixth (6^th) calendar month following the calendar month in which the Separation from Service occurs. The Company shall pay a Payment to Executive on each bi-weekly payroll date during the First Payment Period; provided, however, in no event shall the aggregate amount paid to Executive during the First Payment Period exceed two (2) times the lesser of: (A) the Executive’s annualized compensation based upon the annual rate of pay paid to Executive for services to the Company for the calendar year preceding the calendar year in which the Separation from Service occurs (adjusted for any increase during that year that was expected to continue indefinitely but for the Separation from Service), or (B) the maximum amount that may be taken into account under Section 401(a)(17) of the Internal Revenue Code for the calendar year in which the Separation from Service occurs.

     In the event any amount that would have been paid during the First Payment Period cannot be paid because it would exceed the limitation provided in the preceding paragraph, such excess amount shall be paid in a lump sum on the first bi-weekly payroll date of the Second Payment Period (in addition to any amount that would be paid on such bi-weekly payroll date in the Second Payment Period as provided in Section 1(a)(ii) below).

     (ii) Second Payment Period. The Second Payment Period shall commence on the first bi-weekly payroll date following the end of the First Payment Period and shall end on the last bi-weekly payroll date preceding the date that is eighteen (18) months following the Executive’s Separation from Service. The Company shall pay a Payment to Executive on each bi-weekly payroll date in the Second Payment Period.

     (b) The Company shall continue to provide Executive with group term life insurance for eighteen (18) months following the Termination Date, except that the Company may stop providing group term life insurance earlier if and when Executive accepts full time employment with a subsequent employer and that employer provides Executive with group term life insurance coverage. The group term life insurance benefits to be provided by the Company pursuant to this paragraph shall be provided to Executive at the same cost to Executive, and at the same coverage level, as is applicable to continuing executives in comparable positions from time to time during the period the benefits are continued.

     (c) With respect to all equity awards, the provisions of the granting instruments and relevant Company plans shall be applicable.

     (d) The Executive shall be entitled to continue his medical and dental insurance in accordance with the Consolidated Omnibus Budget Reconciliation Act of 1985 (“COBRA”), provided the Executive timely elects such coverage and satisfies all other eligibility requirements under COBRA. If the Executive elects COBRA coverage, the Executive shall pay the full COBRA premium at his own expense.

     (e) On the first bi-weekly payroll date during the Second Payment Period, the Company shall pay Executive the sum of Forty-Six Thousand Three Hundred Sixty-Seven Dollars ($46,367) in addition to any other amounts due at that time to Executive pursuant to other provisions of this Agreement.

     (f) If the Separation from Service occurs during a fiscal year in which a bonus was earned under any Company sponsored bonus plan, the Executive will be entitled to a pro-rata portion of that fiscal year’s bonus based on the attainment of the performance metrics. This pro-rata bonus will be paid at its normal time at the end of the performance period.

2. Change of Control Severance Benefits upon Certain Separations from Service Occurring After a Change of Control. If, after the occurrence of a Change of Control,

2

Executive has a Separation from Service with the Company by the Company without Cause, or by Executive for Good Reason, Executive shall be entitled to the following as Change of Control Severance Benefits:

     (a) The Company shall make a lump sum cash payment to Executive, not later than ten (10) business days after the Separation from Service, in an amount equal to two (2) times the sum of (i) Executive’s Base Salary plus (ii) the greater of (A) Executive’s average cash bonus earned over the three (3) full fiscal years of the Company ended before the Separation from Service, or (B) Executive’s target annual bonus established for the bonus plan year in which the Separation from Service occurs. If Executive has been employed by the Company for fewer than three (3) but at least one (1) full fiscal year of the Company ended before the Separation from Service, the average of the bonuses earned in the two (2) full fiscal years of the Company ended before the Separation from Service, or the amount of the bonus earned in the one full fiscal year of the Company ended before the Separation from Service, as the case may be, shall be substituted for the average referred to in (A) above.

     (b) If the Separation from Service occurs after the end of a bonus year under any Company sponsored bonus plan and before the bonus with respect to that bonus year has been paid, the Company shall pay to Executive, not later than ten (10) business days after the Separation from Service, an amount equal to the bonus for that bonus year to which Executive would have been entitled had the bonus plan for that bonus year remained in effect without any change and had Executive remained in the employ of the Company through the date on which bonuses for that bonus year were paid.

     (c) The Company shall make a lump sum cash payment to Executive, not later than ten (10) business days after the Separation from Service, in an amount equal to the greater of (i) Executive’s unpaid targeted annual bonus, established for the bonus year in which the Separation from Service occurs, multiplied by a fraction, the numerator of which is the number of days Executive was employed by the Company in the bonus year through the Separation from Service, and the denominator of which is 365, or (ii) the bonus amount specifically guaranteed to Executive for that bonus year under any other agreement between the Company and Executive.

     (d) The Company shall continue to provide Executive with group term life insurance for two (2) years following the Termination Date, except that the Company may stop providing group term life insurance earlier if and when Executive accepts full time employment with a subsequent employer and that employer provides Executive with group term life insurance coverage. The group term life insurance benefits to be provided by the Company pursuant to this paragraph shall be provided to Executive at the same cost to Executive, and at the same coverage level, as is applicable to continuing executives in comparable positions from time to time during the period the benefits are continued.

     (e) All stock options granted to Executive then outstanding will become fully exercisable as of the date of the Change of Control, and all restrictions and conditions applicable to restricted stock granted to Executive will be deemed to have been satisfied as of the date of the Change of Control.

3

     (f) The Executive shall be entitled to continue his medical and dental insurance in accordance with the Consolidated Omnibus Budget Reconciliation Act of 1985 (“COBRA”), provided the Executive timely elects such coverage and satisfies all other eligibility requirements under COBRA. If the Executive elects COBRA coverage, the Executive shall pay the full COBRA premium at his own expense.

     (g) On the first bi-weekly payroll date during the Second Payment Period, the Company shall pay Executive the sum of Sixty One Thousand Eight Hundred and Twenty Three Dollars ($61,823) in addition to any other amounts due at that time to Executive pursuant to other provisions of this Agreement.

3. Earned but Unpaid Base Salary and Accrued Paid Time Off Pay Payable Upon Any Separation from Service; Treatment of Long-Term Incentive Awards. Upon Executive’s Separation from Service for any reason and at any time, the Company shall pay to Executive (or, where appropriate, to Executive’s Beneficiary), not later than ten (10) days after the Separation from Service, (a) all earned but unpaid Base Salary through the Separation from Service, and (b) an amount equal to the aggregate dollar value of all paid time off earned but not taken by Executive (“Accrued Paid Time Off Pay”) before the Separation from Service. In addition, upon such Separation from Service, all outstanding long-term incentive awards shall be subject to the treatment provided under the applicable long-term incentive plan of the Company except as explicitly provided otherwise in this Agreement..

4. Separation from Service Due to Retirement, Disability, or Death. If Executive has a Separation from Service due to Retirement, Disability, or death while this Agreement remains in effect (whether before or after the occurrence of a Change of Control), neither Executive nor Executive’s Beneficiaries will be entitled to Severance Benefits or Change of Control Severance Benefits under either of Sections 1 or 2 but Executive or Executive’s Beneficiaries, as appropriate, will be entitled to the payments provided for in Section 3 and to such benefits as may be provided under the terms of the Company’s disability, retirement, survivor’s benefits, insurance, and other applicable plans and programs of the Company then in effect.

5. Separation from Service for Cause or by Executive other than for Good Reason. If Executive has a Separation from Service by the Company for Cause or by Executive other than for Good Reason while this Agreement remains in effect (whether before or after the occurrence of a Change of Control) and Section 6 does not apply, neither Executive nor Executive’s Beneficiaries will be entitled to Severance Benefits or Change of Control Severance Benefits under either of Sections 1 or 2 but Executive or Executive’s Beneficiaries, as appropriate, will be entitled to the payments provided for in Section 3 and the Company shall pay to Executive such other amounts to which Executive is entitled under any compensation plans of the Company, at the time such payments are due. Except as provided in this Section 5, the Company shall have no further obligations to Executive under this Agreement.

6. Special Provision Applicable only if Executive has a Separation from Service both in Advance of and in Contemplation of a Change of Control. If Executive has a Separation from Service by the Company (a) in contemplation of and not more than six (6) full calendar months before the occurrence of a Change of Control, and (b) under circumstances such that if the Separation from Service had occurred immediately after that Change of Control Executive would have been entitled to Change of Control Severance Benefits under Section 2 above, then

4

the Company shall pay and provide to Executive all of the amounts and benefits specified in Section 2, reduced by such amounts and such benefits, if any, that the Company has otherwise paid and provided to Executive pursuant to Section 1 above. The Company shall make any cash payment required pursuant to this Section 6 within ten (10) days of the occurrence of the Change of Control.

7. Change of Control Ignored if Employment Continues for More than Two Years Thereafter. If Executive’s employment continues for more than two (2) years following the occurrence of any Change of Control, that particular Change of Control will be deemed never to have occurred for purposes of this Agreement.

8. Term of Agreement

This Agreement shall be effective as of the Effective Date (without interruption from the Prior Agreement) and shall continue in effect hereafter until a Separation from Service occurs pursuant to one of Sections 1, 3, 4, or 5, with due consideration of Sections 3, 6 and 7 hereof. The parties may, by mutual agreement, at any time and from time to time modify or terminate the term of this Agreement under this Section 8.

9. Excise Tax.

     If there is any conflict between the provisions of this Section 9 and any other provision of this Agreement regarding payments to be made or benefits to be provided to Executive under this Agreement following a Change of Control, the provisions of this Section 9 shall govern.

     9.1. Acknowledgement. The Company and Executive acknowledge that, following a Change of Control, one or more payments or distributions to be made by the Company to or for the benefit of Executive (whether paid or payable or distributed or distributable pursuant to the terms of this Agreement, under some other plan, agreement, or arrangement, or otherwise, and including, without limitation, any income recognized by Executive upon exercise of an option granted by the Company to acquire Common Shares issued by the Company) (a “Payment”) may be determined to be an Excess Parachute Payment that is not deductible by the Company for federal income tax purposes and with respect to which Executive will be subject to an excise tax because of Sections 280G and 4999, respectively, of the Code (hereinafter referred to respectively as “Section 280G” and “Section 4999”).

     9.2. Procedure. If Executive’s employment is terminated after a Change of Control occurs, the Accounting Firm, which, subject to any inconsistent position asserted by the Internal Revenue Service, shall make all determinations required to be made under this Section 9, shall determine (a) the maximum amount of Parachute Payments that Executive may receive without becoming subject to the excise tax imposed by Section 4999 and without the Company suffering a loss of deduction under Section 280G (this maximum amount being the “280G Limit”) and (b) whether, if all Payments were made without regard to this Section 9, any Payment would be an Excess Parachute Payment. The Accounting Firm shall communicate its determination, together with detailed supporting calculations, to the Company and to Executive within 30 days after the Termination Date or such earlier time as is requested by the Company. The Company and Executive shall cooperate with each other and the Accounting Firm and shall provide necessary information so that the Accounting Firm may make all such determinations. The Company shall

5

pay all of the fees of the Accounting Firm for services performed by the Accounting Firm as contemplated in this Section 9.

     9.3. Reduction or Gross Up if Payments Would Constitute Excess Parachute Payments. If any Payment would, if made without regard to this Section 9, constitute an Excess Parachute Payment, either (a) the payments to be made to Executive under this Agreement without regard to this Section 9 shall be reduced as provided in Section 9.4, or (b) the Company shall make all of the payments to be made to Executive under all of the provisions of this Agreement other than this Section 9 and, in addition, the Company shall make the Gross Up Payments specified in Section 9.5.

     9.4. Reduction in Payments if Aggregate Parachute Payments Would Otherwise not Exceed 110% of 280G Limit. If the aggregate value of all Parachute Payments does not exceed 110% of the 280G Limit, the payments to be made to Executive under this Agreement shall be reduced, but not below zero, by such amount so that the aggregate value of the Parachute Payments actually made to Executive will be One Dollar ($1.00) less than the 280G Limit.

     9.5. Gross Up Payment if Aggregate Parachute Payments Exceed 110% of 280G Limit. If the aggregate value of all Parachute Payments exceeds 110% of the 280G Limit and Executive is therefore subject to the excise tax under Section 4999 on Excess Parachute Payments received (the “Excise Tax”), the Company shall, in addition to making all other Payments to Executive, make additional payments (“Gross Up Payments”) to Executive, from time to time and at the same time as Parachute Payments are made to Executive, in such lump sum amount or amounts as are sufficient, from time to time, to place Executive in the same net after tax position that Executive would have been in if (a) Executive had to bear (without any Gross Up Payment under this Section 9.5) the Excise Tax with respect to 10% of all Parachute Payments received by Executive, (b) the Excise Tax did not otherwise apply to any Payments, and (c) Executive had not incurred any interest charges or penalties with respect to the imposition of any portion of the Excise Tax; provided, however, that such Gross Up Payments shall be paid on or before the last day of the calendar year following the calendar year in which the Executive remits the Excise Tax. For purposes of this Section 9, all payments received by Executive from the Company (whether under this Agreement or otherwise and including all Gross Up Payments received by Executive) shall be deemed to be subject to Federal and state tax at the highest marginal tax rates applicable to Executive in the year in which the Gross Up Payment is made.

     9.6. Imposition of Excise Tax Following Reduction of Payments Prescribed by Section 9.4. If, notwithstanding a reduction of payments to Executive under this Agreement as contemplated by Section 9.4, it is ultimately determined by a court or pursuant to a final determination by the Internal Revenue Service that any payment received by Executive is an Excess Parachute Payment and Executive is therefore obligated to pay Excise Tax with respect to any Payments, the Company shall make Gross Up Payments to Executive from time to time, in such lump sum amount or amounts as are sufficient, from time to time, to place Executive in the same net after tax position that Executive would have been in if no such Payments constituted Excess Parachute Payments subject to the Excise Tax, the reduction of Parachute Payments prescribed by Section 9.4 had been made exactly as intended (i.e., to the extent but only to the extent necessary to avoid the Excise Tax), and Executive had not incurred any interest charges or penalties with respect to the imposition of any Excise Tax.

6

     9.7. Imposition of Additional Excise Tax Following Payment of Gross Up Prescribed by Section 9.5. If the Internal Revenue Service determines that any Payment gives rise, directly or indirectly, to liability on the part of Executive for the Excise Tax (and/or any penalties and/or interest with respect to any Excise Tax) in excess of the amount, if any, previously determined by the Accounting Firm, the Company shall make further additional cash payments to Executive not later than the due date of any payment indicated by the Internal Revenue Service with respect to these matters, in such amounts as are necessary to put Executive in the same position, after payment of all federal and state taxes (whether income taxes, Excise Taxes, or other taxes) and any and all penalties and interest with respect to any such taxes, as Executive would have been in if the Accounting Firm had anticipated the later determination by the Internal Revenue Service and the Company had made appropriate Gross Up Payments to the extent contemplated by Section 9.5 in the first instance.

     9.8. Potential Contest by the Company of Internal Revenue Service Determination. If the Company desires to contest any determination by the Internal Revenue Service with respect to the amount of Excise Tax, Executive shall, upon receipt from the Company of an unconditional written undertaking to indemnify and hold Executive harmless (on an after tax basis) from any and all adverse consequences that might arise from the contesting of that determination, cooperate with the Company in that contest at the Company’s sole expense. Nothing in this Section 9.8 shall require Executive to incur any expense other than expenses with respect to which the Company has paid to Executive sufficient sums so that after the payment of the expense by Executive and taking into account the payment by the Company with respect to that expense and any and all taxes that may be imposed upon Executive as a result of Executive’s receipt of that payment, the net effect is no cost to Executive. Nothing in this Section 9.8 shall require Executive to extend the statute of limitations with respect to any item or issue in Executive’s tax returns other than, exclusively, the Excise Tax. If, as the result of the contest of any assertion by the Internal Revenue Service with respect to Excise Tax, Executive receives a refund of Excise Tax previously paid and/or any interest with respect thereto, Executive shall promptly pay to the Company such amount as will leave Executive, net of the repayment and all tax effects, in the same position, after all taxes and interest, that he would have been in if the refunded Excise Tax had never been paid.

10. Outplacement Assistance. Following a Separation from Service in which Severance Benefits or Change of Control Severance Benefits are payable hereunder, the Company shall provide Executive with outplacement services obtained by the Company at its cost and commensurate with the outplacement services typically provided by the Company to Executives who left the employ of the Company before the Effective Date of this Agreement, until Executive obtains subsequent employment or self-employment; provided, however, that such outplacement shall not continue beyond the last day of the second calendar year following the calendar year in which the Executive’s Termination Date or “Separation from Service” occurs.

11. The Company’s Payment Obligation.

     11.1. Payment Obligations Absolute. 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 Executive or anyone else. All amounts payable by the Company hereunder shall be paid without

7

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 Executive or from whomsoever may be entitled thereto, for any reasons whatsoever.

     11.2. No Mitigation. Executive 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 group term life insurance coverage.

     11.3. Source of Payments and Benefits. 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 payments under this Agreement and other similar agreements), and Executive shall have the rights of an unsecured general creditor of the Company with respect thereto.

12. Legal Remedies.

     12.1. Payment of Legal Fees. Unless prohibited by law, the Company shall pay all legal fees, costs of arbitration and/or litigation, prejudgment interest, and other expenses incurred in good faith by Executive as a result of the Company’s refusal to provide the Severance Benefits or Change of Control Severance Benefits to which Executive deems Executive 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 Executive 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 Executive had no reasonable grounds for the position propounded by Executive in the arbitration and/or litigation (which determination need not be made simply because Executive fails to succeed in the arbitration and/or litigation).

     12.2. Arbitration. Subject to the following sentences, 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 three (3) arbitrators sitting in a location selected by Executive within fifty (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 Executive’s alleged violation of the prohibition on competition or any other restriction contained in Section 14 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 Section 14, judgment may be entered on the award of the arbitrator in any court having proper jurisdiction.

8

13. Withholding. The Company shall be entitled to withhold from any amounts payable under this Agreement all taxes as legally shall be required (including, without limitation, any United States federal income, FICA and Medicare taxes, and any other state, city, or local taxes).

14. Noncompetition.

     14.1. Prohibition on Competition. Without the prior written consent of the Company, during the term of this Agreement, and, if Severance Benefits are paid hereunder, thereafter during the eighteen (18) month period beginning on the Termination Date or if Change of Control Severance Benefits are paid hereunder, thereafter through the second (2^nd) anniversary of the Termination Date, Executive shall not, as an employee, an officer, or as a director, engage directly or indirectly in any business or enterprise that engages to any significant extent within the United Sates of America in the sale at retail or direct marketing to consumers of fabric and craft components. Notwithstanding the foregoing, Executive 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.

     14.2. Disclosure of Information. Executive acknowledges that Executive has and has had access to and knowledge of certain confidential and proprietary information of the Company, which is essential to the performance of Executive’s duties as an employee of the Company. Executive will not, during or after the term of Executive’s employment by the Company, in whole or in part, disclose such information to any person, firm, corporation, association, or other entity for any reason or purpose whatsoever, nor shall Executive make use of any such information for his own purposes.

     14.3. Covenants Regarding Other Employees. During the term of this Agreement and thereafter during any period during which Executive is subject to the restriction set forth in Section 14.1, Executive shall not attempt to induce any employee of the Company to terminate his or her employment with the Company or accept employment with any competitor of the Company and Executive shall not interfere in any similar manner with the business of the Company.

15. Successors and Assignment.

     15.1. Successors to the Company. 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 and shall entitle Executive to notify the Company that, unless the failure is remedied within thirty (30) days after delivery of the notice from Executive, Executive’s employment will terminate as of the thirty-first (31st) day after the delivery of the notice. If any such notice is given and the failure is not so remedied, Executive will be entitled to receive the same payments and benefits from the Company, and on the same schedule, as if the Company had undergone a Change of Control on the date of the succession and Executive had thereupon terminated his employment for Good Reason.

9

     15.2. Assignment by Executive. This Agreement shall inure to the benefit of and be enforceable by Executive and each of Executive’s personal or legal representatives, executors, administrators, successors, heirs, distributes, devisees, and legatees. If Executive dies while any amount would still be payable to Executive hereunder had Executive continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement, to Executive’s Beneficiary. If Executive has not named a Beneficiary, then such amounts shall be paid to Executive’s devisee, legatee, or other designee, or if there is no such designee, to Executive’s estate.

16. Miscellaneous.

     16.1. Employment Status. Except as may be provided under any other agreement between Executive and the Company, the employment of Executive by the Company is “at will,” and, prior to the effective date of a Change of Control, may be terminated by either Executive or the Company at any time, subject to applicable law.

     16.2. Entire Agreement. This Agreement sets forth the entire agreement between the parties with respect to severance benefits to be provided upon any termination of Executive’s employment and supersedes any and all prior employment, retention, and/or change of control agreements between Executive and the Company, including, without limitation, the Prior Agreement.

     16.3. Beneficiaries. Executive may designate one or more persons or entities as the primary and/or contingent Beneficiaries of any Severance Benefits or Change of Control Severance Benefits owing to Executive under this Agreement. Such designation must be in the form of a signed writing acceptable to the Committee. Executive may make or change such designation at any time.

     16.4. Severability. In the event any provision of this Agreement shall be held illegal or invalid for any reason, the illegality or invalidity shall not affect the remaining parts of the Agreement, and the Agreement shall be construed and enforced as if the illegal or invalid provision had not been included.

     16.5. Modification. No provision of this Agreement may be modified, waived, or discharged unless such modification, waiver, or discharge is agreed to in writing and signed by Executive and by an authorized representative of the Company, or by the respective parties’ legal representatives and successors.

     16.6. Applicable Law. 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.

17. Definitions. Whenever used in this Agreement, the following capitalized terms shall have the meanings set forth below:

     17.1. “Accounting Firm” means the independent auditors of the Company for the Fiscal Year preceding the year in which the Change of Control occurred and such firm’s successor or successors; provided, however, if such firm is unable or unwilling to serve and

10

perform in the capacity contemplated by this Agreement, the Company shall select another national accounting firm of recognized standing to serve and perform in that capacity under this Agreement, except that such other accounting firm shall not be the then independent auditors for the Company or any of its affiliates (as defined in Rule 12b-2 promulgated under the Securities Exchange Act of 1934, as amended).

     17.2. “280G Limit” has the meaning assigned to it in Section 9.2.

     17.3. “Base Salary” means an amount equal to Executive’s base annual salary at the highest rate payable at any time before the date of a Separation from Service. For this purpose, Base Salary shall not include bonuses, long-term incentive compensation, or any remuneration other than base annual salary.

     17.4. “Beneficial Owner” shall have the meaning ascribed to such term in Rule 13d-3 of the General Rules and Regulations under the Exchange Act.

     17.5. “Beneficiary” means the persons or entities designated or deemed designated by Executive pursuant to Section 15.2 herein.

     17.6. “Board” means the Board of Directors of the Company.

     17.7. “Cause” shall mean the occurrence of any one or more of the following:

     (a) The willful and continued failure by Executive to substantially perform his normal duties (other than any such failure resulting from Executive Disability), after a written demand for substantial performance is delivered to Executive that specifically identifies the manner in which the Committee believes that Executive has not substantially performed his duties, and Executive has failed to remedy the situation within thirty (30) business days of receiving such notice;

     (b) Executive’s conviction for committing an act of fraud, embezzlement, theft, or other criminal act constituting a felony; or

     (c) The willful engaging by Executive in gross negligence materially and demonstrably injurious to the Company. However, no act, or failure to act on Executive’s part shall be considered “willful” unless done, or omitted to be done, by Executive not in good faith and without reasonable belief that his action or omission was not in or not opposed to the best interest of the Company.

     17.8 Change of Control. A “Change of Control” for purposes of Section 2(e) shall be deemed to have occurred if at any time or from time to time while this Agreement is in effect:

     (a) Any person (other than the Company, any of its Subsidiaries, any member of either of the Founding Families, any employee benefit plan or employee stock ownership plan of the Company, or any person organized, appointed, or established by the Company for or pursuant to the terms of any such plan), alone or together with any of its affiliates, becomes the beneficial owner of fifteen percent (15%) or more (but less than fifty percent (50%)) of the Voting Shares then outstanding;

11

     (b) Any person (other than the Company, any of its Subsidiaries, any employee benefit plan or employee stock ownership plan of the Company, or any person organized, appointed, or established by the Company for or pursuant to the terms of any such plan), alone or together with any of its affiliates, becomes the beneficial owner of fifty percent (50%) or more of the Voting Shares then outstanding;

     (c) Any person commences or publicly announces an intention to commence a tender offer or exchange offer the consummation of which would result in the person becoming the beneficial owner of fifteen percent (15%) or more of the Voting Shares then outstanding;

     (d) At any time during any period of twenty-four (24) consecutive months, individuals who were directors at the beginning of the 24-month period no longer constitute a majority of the members of the Board of the Company, unless the election, or the nomination for election by the Company’s shareholders, of each director who was not a director at the beginning of the period is approved by at least a majority of the directors who (i) are in office at the time of the election or nomination, and (ii) were directors at the beginning of the period;

     (e) A record date is established for determining shareholders entitled to vote upon (i) a merger or consolidation of the Company with another corporation in which those persons who are shareholders of the Company immediately before the merger or consolidation are to receive or retain less than sixty percent (60%) of the stock of the surviving or continuing corporation, (ii) a sale or other disposition of all or substantially all of the assets of the Company, or (iii) the dissolution of the Company;

     (f) (i) The Company is merged or consolidated with another corporation and those persons who were shareholders of the Company immediately before the merger or consolidation receive or retain less than sixty percent (60%) of the stock of the surviving or continuing corporation, (ii) there occurs a sale or other disposition of all or substantially all of the assets of the Company, or (iii) the Company is dissolved; or

     (g) Any person who proposes to make a “control share acquisition” of the Company, within the meaning of Section 1701.01(Z) of the Ohio General Corporation Law, submits or is required to submit an acquiring person statement to the Company.

Notwithstanding anything herein to the contrary, if an event described in clause (b), clause (d), or clause (f) above occurs, the occurrence of that event will constitute an irrevocable Change of Control. Furthermore, notwithstanding anything herein to the contrary, if an event described in clause (c) occurs, and the Board either approves such offer or takes no action with respect to such offer, then the occurrence of that event will constitute an irrevocable Change of Control. On the other hand, notwithstanding anything herein to the contrary, if an event described in clause (a), clause (e), or clause (g) above occurs, or if an event described in clause (c) occurs and the Board does not either approve such offer or take no action with respect to such offer as described in the preceding sentence, and a majority of those members of the Board who were Directors prior to such event determine, within the 90-day period beginning on the date such event occurs, that the event should not be treated as a Change of Control, then, from and after the date that determination is made, that event will be treated as not having occurred. If no such

12

determination is made, a Change of Control resulting from any of the events described in the immediately preceding sentence will constitute an irrevocable Change of Control on the 91st day after the occurrence of the event.

     A “Change of Control” for all other purposes of the Agreement shall be deemed to have occurred if at any time or from time to time while this Agreement is in effect:

     (i) any one person, or more than one person acting as a group, acquires ownership of stock of the Company that, together with stock held by such person or group, constitutes more than fifty percent (50%) of the total fair market value or total voting power of the stock of the Company;

     (ii) a majority of members of the Company’s board of directors is replaced during any twelve (12)-month period by directors whose appointment or election is not endorsed by a majority of the members of the Company’s board of directors before the date of the appointment or election; or

     (iii) any one person, or more than one person acting as a group, acquires (or has acquired during a twelve (12)-month period ending on the date of the most recent acquisition by such person or persons) assets from the Company that have a total gross fair market value equal to or more than fifty percent (50%) of the total gross fair market value of all of the assets of the Company immediately before such acquisition or acquisitions.

     17.9. “Change of Control Severance Benefits” means those payments and benefits that may become payable pursuant to Section 2 above.

     17.10. “Code” means the United States Internal Revenue Code of 1986, as amended.

     17.11. “Committee” means the Compensation Committee of the Board, or any other committee appointed by the Board to perform the functions of the Compensation Committee.

     17.12. “Company” means Jo-Ann Stores, Inc., an Ohio corporation, and its successors.

     17.13. “Disability” means permanent and total disability, within the meaning of Code Section 22(e)(3), as determined by the Committee in the exercise of good faith and reasonable judgment, upon receipt of and in reliance on sufficient competent medical advice from one (1) or more individuals, selected by the Committee, who are qualified to give professional medical advice, provided, however, that Executive must be entitled to disability benefits under the Company sponsored disability plans or programs.

     17.14. “Employer” means the Company and each corporation or other entity with whom the Company would be considered a single employer under Code Sections 414(b) and 414(c), except that in applying Code Sections 1563(a)(1), (2) and (3) for purposes of determining a controlled group of corporations under Code Section 414(b), the language “at least 50 percent” shall be used instead of “at least 80 percent” in each place it appears in Code Sections 1563(a)(1), (2) and (3), and in applying Treas. Regs. Sec. 1.414(c)-2 for purposes of determining a controlled group of trades or businesses under Code Section 414(c), the language “at least 50

13

percent” shall be used instead of “at least 80 percent” in each place it appears in Treas. Regs. Sec. 1.414(c)-2.

     17.15. “Excess Parachute Payment” has the meaning assigned to that term in Q/A-3 (note that although initial capital letters are used on this term in this Agreement, the Q/As do not use initial caps for this term).

     17.16. “Exchange Act” means the United States Securities Exchange Act of 1934, as amended.

     17.17. “Excise Tax” has the meaning assigned to that term in Section 9.5.

     17.18. “Founding Families” means the families consisting of Betty and Martin Rosskamm and Alma and Justine Zimmerman and their respective issue.

     17.19. “Good Reason” (after a Change of Control) means, without Executive’s express written consent, the occurrence, after the occurrence of a Change of Control, of any one or more of the following:

     (a) Any material reduction in Executive’s base compensation and short-term and long-term incentive compensation opportunities (to the extent such short-term and long-term incentive compensation opportunities are a regular and substantial part of Executive’s base compensation) below the amount in effect immediately before the Change of Control or, if higher, the amount in effect before any reduction in Executive’s base compensation and short-term and long-term incentive compensation opportunities made in contemplation of the Change of Control.

     (b) Any material reduction in Executive’s duties, responsibilities, or position with respect to the Company from the duties, responsibilities, or position as in effect immediately before the Change of Control or as in effect immediately before any reduction in any such item made in contemplation of the Change of Control.

     (c) Any shift of Executive’s principal place of employment with the Company to a location that is more than fifty (50) miles (by straight line measurement) from the site of the Company’s headquarters in Hudson, Ohio at the relevant time.

Executive shall have a Separation from Service for Good Reason (after a Change of Control) only if: (i) Executive provides written notice to the Company within ninety (90) days after the initial occurrence of an above event describing in detail the event and stating that Executive’s employment will terminate upon a specified date in such notice (the “Good Reason Termination Date”), which date is not earlier than thirty (30) days after the date such notice is provided to the Company (the “Notice Delivery Date”) and not later than ninety (90) days after the Notice Delivery Date, and (ii) the Company does not remedy the event prior to the Good Reason Termination Date.

     17.20. “Good Reason” (before a Change of Control) means, without Executive’s express written consent, a material reduction in Executive’s Base Salary other than a reduction that is in the same proportion as the reduction of the base salaries of every other executive officer

14

of the Company in connection with an across-the-board reduction of executive base salaries. Executive shall have a voluntary Separation from Service for Good Reason (before a Change of Control) only if: (a) Executive provides written notice to the Company within ninety (90) days after the initial occurrence of an above event describing in detail the event and stating that Executive’s employment will terminate upon a specified date in such notice (the “Good Reason Termination Date”), which date is not earlier than thirty (30) days after the date such notice is provided to the Company (the “Notice Delivery Date”) and not later than ninety (90) days after the Notice Delivery Date, and (b) the Company does not remedy the event prior to the Good Reason Termination Date.

     17.21. “Gross Up Payment” has the meaning assigned to that term in Section 9.5 above.

     17.22. “Payment” has the meaning assigned to that term in Section 9.1 above (except as otherwise provided in Section 1(a)).

     17.23. “Parachute Payment” has the meaning assigned to that term in Q/A-2 but without reference to subsection (4) of Q/A-2 (with the effect that a payment otherwise meeting the definition of “Parachute Payment” will be referred to as a Parachute Payment even if the total of all such Parachute Payments is less than three times Executive’s base amount (as defined Q/A-34) (note that although initial capital letters are used on this term in this Agreement, the Q/As do not use initial caps for this term).

     17.24. “Person” shall have the meaning ascribed to such term in Section 3(a)(9) of the Exchange Act and used in Sections 13(d) and 14(d) thereof, including a “group” as defined in Section 13(d).

     17.25. “Q/As” means the entire series of Questions and Answers set forth in Section 1.280G-1 of the Treasury Regulations issued under Section 280G of the Code (which Section of regulations is presented in Question and Answer format); references to particular Question and Answers will be, for example, to “Q/A-1.”

     17.26. “Retirement” means a voluntary Separation from Service by the Executive other than for Good Reason after Executive has either (a) attained age fifty-five (55) and has completed at least ten (10) full years of continuous service with the Company, or (b) has attained age sixty-five (65) (without regard to length of service).

     17.27. “Separation from Service” means Executive has a termination of employment with the Employer. Whether a termination of employment has occurred shall be determined based on whether the facts and circumstances indicate the Executive and Employer reasonably anticipate that no further services will be performed by the Executive for Employer; provided, however, that Executive shall be deemed to have a termination of employment if the level of services he would perform for Employer after a certain date permanently decreases to no more than twenty percent (20%) of the average level of bona fide services performed for Employer (whether as an employee or independent contractor) over the immediately preceding thirty-six (36)-month period (or the full period of services to Employer if Executive has been providing services to Employer for less than thirty-six (36) months). For this purpose, Executive is not treated as having a Separation from Service while he is on a military leave, sick leave, or other

15

bona fide leave of absence, if the period of such leave does not exceed six (6) months, or if longer, so long as Executive has a right to reemployment with Employer under an applicable statute or by contract.

     17.28. “Severance Benefits” means those payments and benefits that may become payable before the occurrence of a Change of Control pursuant to Section 1 above.

     17.29. “Termination Date” means the date on which any Separation of Service of the Executive becomes effective.

     IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first written above.

JO-ANN STORES, INC.
By:	/s/ Darrell Webb
	President and Chief Executive Officer
EXECUTIVE
	/s/ James Kerr
	James Kerr

16

EX-10.37

Exhibit 10.37

INDEMNIFICATION AGREEMENT

          This Indemnification Agreement (this “Agreement”) is made as of the      day of       2008 by and between JO-ANN STORES, INC., an Ohio corporation (the “Company”), and       (the “Indemnitee”), a director of the Company.

RECITALS

          A. The Indemnitee is presently serving as a director of the Company, and the Company desires the Indemnitee to continue in that capacity. The Indemnitee is willing, subject to certain conditions (including, without limitation, the execution and performance of this Agreement by the Company), to continue in that capacity.

          B. The Company and Indemnitee are each aware of the exposure to litigation of officers, directors, employees, agents and representatives of the Company as such persons exercise their duties to the Company.

          C. In addition to the indemnification to which the Indemnitee is entitled under the Amended and Restated Code of Regulations of the Company (as such may be amended from time to time in the future) (the “Regulations”) or otherwise, the Company has obtained, at its sole expense, insurance protecting the Company and its directors and officers including the Indemnitee against certain losses arising out of actual or threatened actions, suits, or proceedings to which such persons may be made or threatened to be made parties. However, as a result of circumstances having no relation to, and beyond the control of, the Company and the Indemnitee, there can be no assurance that the Company will continue to be able to obtain appropriate directors and officers’ liability insurance on an economically acceptable basis.

          Accordingly, and in order to induce the Indemnitee to continue to serve in his or her present capacity, and in consideration of the foregoing premises and mutual covenants contained herein, the Company and the Indemnitee agree as follows:

1.	Continued Service. The Indemnitee shall continue to serve as a director of the Company so long as he or she is duly elected and qualified in accordance with the Regulations or until he or she resigns in writing in accordance with applicable law.
2.	Initial Indemnity.

(a) The Company shall indemnify the Indemnitee to the greatest extent permitted by Ohio law, including but not limited to the provisions of the Ohio Revised Code (“ORC”) and the Regulations as such may be amended from time to time, if or when he or she is a party or is threatened to be made a party to any threatened, pending, or completed action, suit or proceeding, whether civil, criminal, administrative, or investigative (other than an action by or in the right of the Company), by reason of the fact that he or she is or was a director, officer, employee or agent of the Company or is or was serving at the request of the Company as a director, trustee, officer, employee, member, manager or agent of another corporation (domestic or foreign, non-profit or for profit), limited liability company, partnership, joint venture, trust, or other enterprise, or by reason of any action alleged to have been taken or omitted in any such capacity, against any and all costs, charges, expenses (including, without limitation, fees and expenses of attorneys and/or others; all such costs, charges and expenses being herein jointly referred to as “Expenses”), judgments, fines and amounts paid in settlement, actually and reasonably incurred by the Indemnitee in connection therewith including any appeal of or from any judgment or decision, unless it is proved by clear and convincing evidence in a court of competent jurisdiction that the Indemnitee’s action or failure to act involved an act or omission undertaken with deliberate intent to cause injury to the Company or undertaken with reckless disregard for the best interests of the Company. In addition, with respect to any criminal action or proceeding, indemnification hereunder shall be made only if the Indemnitee had no reasonable cause to believe his or her conduct was unlawful. The

1

	termination of any action, suit or proceeding by judgment, order, settlement, or conviction, or upon a plea of nolo contendere or its equivalent, shall not, of itself, create a presumption that the Indemnitee did not satisfy the foregoing standard of conduct to the extent applicable thereto.
(b)	The Company shall indemnify the Indemnitee to the greatest extent permitted by Ohio law, including but not limited to the provisions of the ORC and the Regulations as such may be amended from time to time, if or when he or she is a party or is threatened to be made a party to any threatened, pending, or completed action, suit, or proceeding by or in the right of the Company to procure a judgment in its favor, by reason of the fact that the Indemnitee is or was a director, officer, employee or agent of the Company or is or was serving at the request of the Company as a director, trustee, officer, employee, member, manager or agent of another corporation, (domestic or foreign, nonprofit or for profit), limited liability company, partnership, joint venture, trust, or other enterprise, against any and all Expenses actually and reasonably incurred by the Indemnitee in connection with the defense or settlement thereof or any appeal of or from any judgment or decision, unless it is proved by clear and convincing evidence in a court of competent jurisdiction that the Indemnitee’s action or failure to act involved an act or omission undertaken with deliberate intent to cause injury to the Company or undertaken with reckless disregard for the best interests of the Company (unless a court of competent jurisdiction determines that the Indemnitee nonetheless, in view of all the circumstances of the case, is fairly and reasonably entitled to indemnity to the extent deemed proper by such court), except that no indemnification pursuant to this Section 2(b) shall be made in respect of any action or suit in which the only liability asserted against the Indemnitee is pursuant to Section 1701.95 of the ORC.
(c)	Any indemnification under Section 2(a) or 2(b) (unless ordered by a court) shall be made by the Company only as authorized in the specific case upon a determination that indemnification of the Indemnitee is proper in the circumstances because he or she has met the applicable standard of conduct set forth in Section 2(a) or 2(b). Such authorization shall be made (i) by the directors of the Company (the “Board”) by a majority vote of a quorum consisting of directors who were not and are not parties to or threatened with such action, suit, or proceeding, or (ii) if such a quorum of disinterested directors is not obtainable or if a majority of such quorum so directs, in a written opinion by independent legal counsel (designated for such purpose by the Board) (the “Independent Counsel”) which shall not be an attorney, or a firm having associated with it an attorney, who has been retained by or who has performed services for the Company, or any person to be indemnified, within the five years preceding such determination, or (iii) by the shareholders of the Company (the “Shareholders”), or (iv) by the court in which such action, suit, or proceeding was brought; except that, if a Change of Control has occurred after the act or failure to act by the Indemnitee which is the subject of the determination and before the authorization of the indemnification, such authorization shall be made by Independent Counsel selected by the Indemnitee. If the determination of entitlement is to be made by Independent Counsel selected by the Board, the Company shall promptly give written notice to Indemnitee advising him or her of the identity of the Independent Counsel so selected. If the determination of entitlement is to be made by Independent Counsel selected by the Indemnitee, the Indemnitee shall promptly give written notice to the Company advising it of the identity of the Independent Counsel so selected. The Indemnitee or the Company, as the case may be, may, within ten days after such written notice of selection shall have been given, deliver to the Company or the Indemnitee a written objection to such selection; provided, however, that such objection may be asserted only on the ground that the Independent Counsel so selected does not meet the requirements of “Independent Counsel” as defined in this Section of the Agreement, and the objection shall set forth with particularity the factual basis of such assertion. Absent a proper and timely objection, the person so selected shall act as Independent Counsel. If a written objection is made and substantiated, the Independent Counsel selected may not serve as Independent Counsel unless and until such objection is withdrawn or a court has ruled against such objection. If, within 30 days after submission by Indemnitee of a written request for indemnification, no Independent Counsel shall have been selected or an Independent Counsel shall have been selected but an objection thereto shall have been properly made and remained unresolved, either the Company or Indemnitee may petition the Summit County Court of Common Pleas of the State of Ohio or other court of competent jurisdiction for resolution of any

2

	objection that shall have been made to the selection of Independent Counsel and/or for the appointment as Independent Counsel of a person selected by the court or by such other person as the court shall designate, and the person with respect to whom all objections are so resolved or the person so appointed shall act as Independent Counsel for purposes of this Agreement. The Company shall pay any and all reasonable fees and expenses of Independent Counsel incurred by such Independent Counsel in connection with his or her duties pursuant to this Agreement. A “Change of Control” will be deemed to occur if a majority of the members of the Board at the time the authorization is made were not either (i) members of the Board at the time of the act or failure to act by the Indemnitee which is the subject of the determination or (ii) nominated for election or appointed as directors by the vote of a majority of such members.
(d)	To the extent that the Indemnitee has been successful on the merits or otherwise, including, without limitation, the dismissal of an action without prejudice, in defense of any action, suit, or proceeding referred to in Section 2(a) or 2(b), or in defense of any claim, issue, or matter therein, he or she shall be indemnified against Expenses actually and reasonably incurred by him in connection therewith.
(e)	Expenses actually and reasonably incurred by the Indemnitee in defending any such action, suit, or proceeding shall be paid by the Company as they are incurred in advance of the final disposition of such action, suit, or proceeding under the procedure set forth in Section 4(b).
(f)	For purposes of this Agreement, references to “other enterprises” shall include employee benefit plans; references to “fines” shall include any excise taxes assessed on the Indemnitee with respect to any employee benefit plan; references to “serving at the request of the Company” shall include any service which imposes duties on, or involves services by, the Indemnitee with respect to an employee benefit plan, its participants or beneficiaries; references to the masculine shall include the feminine; and references to the singular shall include the plural and vice versa.
(g)	No amendment to the Amended and Restated Articles of Incorporation of the Company (the “Articles”) or the Regulations shall deny, diminish, or encumber the Indemnitee’s rights to indemnity pursuant to this Agreement, except to the extent that such amendment is required by law to be given effect. No amendment to the Articles or the Regulations shall deny, diminish, or encumber the Indemnitee’s rights to indemnity pursuant to the Articles, the Regulations, the ORC, or any other applicable law as applied to any act or failure to act occurring in whole or in part prior to the date (the “Effective Date”) upon which the amendment was approved by the Shareholders, except to the extent that such amendment is required by law to be given effect. In the event that the Company shall purport to adopt any amendment to its Articles or Regulations or take any other action the effect of which is to deny, diminish, or encumber the Indemnitee’s rights to indemnity pursuant to the Articles, the Regulations, the ORC, or any such other law, such amendment shall apply only to acts or failures to act occurring entirely after the Effective Date thereof.

3. Additional Indemnification.

(a) Pursuant to ORC Section 1701.13(E)(6), without limiting any right which the Indemnitee may have pursuant to Section 2 hereof or any other provision of this Agreement or the Articles, the Regulations, the ORC, any policy of insurance, or otherwise, but subject to any limitation on the maximum permissible indemnity which may exist under applicable law at the time of any request for indemnity hereunder and subject to the following provisions of this Section 3, the Company shall indemnify the Indemnitee against any amount which he or she is or becomes obligated to pay relating to or arising out of any claim (including any pending, threatened or completed action, suit or proceeding to which he or she is or is threatened to be made a party) made against him because of any action alleged to have been taken or omitted to be taken, including any actual or alleged error, misstatement, or misleading statement, which he or she commits, suffers, permits, or acquiesces in while acting in his or her capacity as a director, officer, employee or agent of the Company or while serving at the request of the Company as a director, trustee, officer, employee,

3

member, manager or agent of another corporation (domestic or foreign, non-profit or for profit), limited liability company, partnership, joint venture, trust, or other enterprise. The payments which the Company is obligated to make pursuant to this Section 3 shall include, without limitation, judgments, fines, and amounts paid in settlement and any and all Expenses actually and reasonably incurred by the Indemnitee in connection therewith including any appeal of or from any judgment or decision; provided, however, that the Company shall not be obligated under this Section 3 to make any payment in connection with any claim against the Indemnitee:

(i)

to the extent of any fine or similar governmental imposition which the Company is prohibited by applicable law from paying which results from a final, nonappealable order; or

(ii)

to the extent based upon or attributable to the Indemnitee having            actually realized a personal gain or profit to which he or she was not legally entitled, including, without limitation, profit from the purchase and sale by the Indemnitee of equity securities of the Company which is recoverable by the Company pursuant to Section 16(b) of the Securities Exchange Act of 1934, or profit arising from transactions in publicly traded securities of the Company which were effected by the Indemnitee in violation of Section 10(b) of the Securities Exchange Act of 1934, or Rule 10b-5 promulgated thereunder.

(b)	A determination as to whether the Indemnitee shall be entitled to indemnification under this Section 3 shall be made in accordance with Section 4(a).
(c)	Expenses incurred by the Indemnitee in defending any claim to which this Section 3 applies shall be paid by the Company as they are actually and reasonably incurred in advance of the final disposition of such claim under the procedure set forth in Section 4(b).

4. Certain Procedures Relating to Indemnification.

(a)

For purposes of pursuing his or her rights to indemnification under Sections 2 or 3, unless the indemnification is to be authorized by Independent Counsel, the shareholders or a court in accordance with Section 2(c), the Indemnitee shall: (i) submit to the Board a sworn statement of request for indemnification substantially in the form of Exhibit 1 attached hereto and made a part hereof (the “Indemnification Statement”) stating that he or she is entitled to indemnification hereunder; and (ii) present to the Board reasonable evidence of all amounts for which indemnification is requested. Submission of an Indemnification Statement to the Board shall create a presumption that the Indemnitee is entitled to indemnification hereunder, and the Company shall, within 60 calendar days after submission of the Indemnification Statement, make the payments requested in the Indemnification Statement to or for the benefit of the Indemnitee, unless (i) within such 60-calendar-day period the Board shall resolve by vote of a majority of the directors at a meeting at which a quorum is present that the Indemnitee is not entitled to indemnification, (ii) such vote shall be based upon clear and convincing evidence (sufficient to rebut the foregoing presumption), and (iii) the Indemnitee shall have received within such period notice in writing of such vote, which notice shall disclose with particularity the evidence upon which the vote is based. The foregoing notice shall be sworn to by all persons who participated in the vote and voted to deny indemnification. The provisions of this Section 4(a) are intended to be procedural only and shall not affect the right of any Indemnitee to indemnification under Sections 2 or 3 so long as the Indemnitee follows the prescribed procedure and any determination by the Board that an Indemnitee is not entitled to indemnification and any failure to make the payments requested in the Indemnification Statement shall be subject to judicial review by any court of competent jurisdiction.

(b)

For purposes of obtaining payments of Expenses in advance of final disposition pursuant to the Section 2(e) or Section 3(c), the Indemnitee shall submit to the Company a sworn request for advancement of Expenses substantially in the form of Exhibit 2 attached hereto and made a part

4

	hereof (the “Undertaking”), stating that he or she has reasonably incurred actual Expenses in defending an action, suit or proceeding referred to in Section 2(a) or 2(b) or any claim referred to in Section 3, or pursuant to Section 11 hereof. Upon receipt of the Undertaking, the Company shall thereafter promptly pay such Expenses of the Indemnitee as are noticed to the Company in writing and in reasonable detail arising out of the matter described in the Undertaking. No security shall be required in connection with any Undertaking. The Company shall advance to the Indemnitee all reasonable costs and expenses incurred or to be incurred by the Indemnitee in connection with any action under Section 3(c) within 20 days of receipt by the Company of a written request for such advance.
(c)	Limitation on Indemnity. Notwithstanding anything contained herein to the contrary, the Company shall not be required hereby to indemnify the Indemnitee with respect to any action, suit, or proceeding that was initiated by the Indemnitee unless (i) such action, suit or proceeding was initiated by the Indemnitee to enforce any rights to indemnification arising hereunder, (ii) authorized by another agreement to which the Company is a party whether heretofore or hereafter entered, or (iii) otherwise ordered by the court in which the suit was brought.
(d)	Partial Indemnity. If the Indemnitee is entitled under any provision of this Agreement to indemnification by the Company for some or a portion of any Expenses, judgments, fines and amounts paid in settlement, but not for all of the total amount thereof, the Company will nevertheless indemnify the Indemnitee for the portion thereof to which the Indemnitee is entitled.

5

5. Notification and Defense of Claims.

(a)

The failure by the Indemnitee to timely notify the Company of any action, suit or proceeding referred to in Section 2(a) or 2(b) or any claim referred in Section 3 for which Indemnitee seeks or may seek indemnification or advancement of expenses under this Agreement, shall not relieve the Company from any liability hereunder unless, and only to the extent that, the Company did not otherwise learn of such action, suit, proceeding or claim and such failure results in forfeiture by the Company of substantial defenses, rights or insurance coverage.

(b)

The Company shall be entitled to participate in the defense of any action, suit or proceeding referred to in Section 2(a) or 2(b) or any claim referred to in Section 3 for which Indemnitee seeks or may seek indemnification or advancement of expenses under this Agreement or to assume the defense thereof, with counsel reasonably satisfactory to the Indemnitee; provided that if Indemnitee reasonably believes, after consultation with counsel selected by Indemnitee, that (a) the use of counsel chosen by the Company to represent Indemnitee would present such counsel with an actual or potential conflict, (b) the named parties in any such action, suit, proceeding or claim (including any impleaded parties) include both the Company and Indemnitee and Indemnitee shall conclude that there may be one or more legal defenses available to him that are different from or in addition to those available to the Company, or (c) any such representation by such counsel would be precluded under the applicable standards of professional conduct then prevailing, then Indemnitee shall be entitled to retain separate counsel (but not more than one law firm plus, if applicable, local counsel in respect of any particular action, suit, proceeding or claim) at the Company’s expense. The Company shall not be liable to Indemnitee under this Agreement for any amounts paid in settlement of any threatened or pending action, suit, proceeding or claim without the Company’s prior written consent. The Company shall not, without the prior written consent of the Indemnitee, effect any settlement of any threatened or pending action, suit, proceeding or claim to which the Indemnitee is, or could have been, a party unless such settlement solely involves the payment of money by persons other than the Indemnitee and includes a complete and unconditional release of the Indemnitee from all liability on any claims that are the subject matter of such action, suit, proceeding or claim. Neither the Company nor Indemnitee shall unreasonably withhold its consent to any proposed settlement; provided that Indemnitee may withhold consent to any settlement that does not provide a complete and unconditional release of Indemnitee.

6.

Liability Insurance and Funding. For the duration of Indemnitee’s service as a director and thereafter for six (6) years following the termination of Indemnitee’s service as a director (but in any event for so long as Indemnitee shall be subject to any pending or possible action, suit, proceeding or claim that gives rise to a right hereunder), the Company shall use commercially reasonable efforts (taking into account the scope and amount of coverage available relative to the cost thereof) to cause to be maintained in effect policies of directors’ and officers’ liability insurance providing coverage for directors and officers of the Company either that (a) is at least substantially comparable in scope and amount to that provided by the Company’s current policies of directors’ and officers’ liability insurance or (b) the annual premium cost of which is at least $650,000. The Company shall provide Indemnitee with a copy of all directors’ and officers’ liability insurance applications, binders, policies, declarations, endorsements and other related materials. All policies of directors’ and officers’ liability insurance obtained by the Company, shall name Indemnitee as an insured and shall provide Indemnitee the same rights and benefits, subject to the same limitations, as are accorded to the Company’s directors most favorably insured by such policy.

7.

Subrogation; Duplication of Payments.

(a) In the event of payment under this Agreement, the Company shall be subrogated to the extent of such payment to all of the rights of recovery of the Indemnitee, who shall execute all papers required and shall do everything that may be necessary to secure such rights, including the execution of such documents necessary to enable the Company effectively to bring suit to enforce such rights.

6

(b) The Company shall not be liable under this Agreement to make any payment in connection with any claim made against an Indemnitee to the extent that the Indemnitee has actually received payment (under any insurance policy, the Regulations or otherwise) of amounts otherwise payable hereunder.

8.	Shareholder Ratification. The Company may, at its option, propose at any future meeting of Shareholders that this Agreement be ratified by the Shareholders; provided, however, that the Indemnitee’s rights hereunder shall be fully enforceable in accordance with the terms hereof whether or not such ratification is sought or obtained.
9.	Fees and Expenses of Enforcement; Arbitration.

(a)

It is the intent of the Company that the Indemnitee not be required to incur expenses associated with the interpretation, enforcement or defense of his or her rights under this Agreement by litigation or otherwise because such expenses would substantially detract from the benefits intended to be extended to the Indemnitee hereunder. Accordingly, if it should appear to the Indemnitee that the Company has failed to comply with any of its obligations under this Agreement or if the Company or any other person takes any action to declare this Agreement void or unenforceable, or institutes any action, suit, or proceeding to deny, or to recover from, the Indemnitee the benefits intended to be provided to the Indemnitee hereunder, the Company irrevocably authorizes the Indemnitee from time to time to retain counsel of his or her choice, at the expense of the Company as hereafter provided, to advise and represent the Indemnitee in connection with any such interpretation, enforcement or defense, including the initiation or defense of any litigation or other legal action, whether by or against the Company or any director, officer, shareholder, or other person affiliated with the Company, in any jurisdiction. Regardless of the outcome thereof, the Company shall pay and be solely responsible for any and all expenses, including, without limitation, fees and expenses of attorneys and others, reasonably incurred by the Indemnitee pursuant to this Section 9, unless the court determines that each of the material assertions made by the Indemnitee as a basis for the litigation or other legal action were not made in good faith or were frivolous.

(b)

In lieu of initiating litigation to enforce its rights under this agreement, the Indemnitee may request that the dispute be resolved by means of arbitration. If arbitration is requested, such dispute or controversy shall be submitted by the parties to binding arbitration in the City of Cleveland, State of Ohio, before a single arbitrator agreeable to both parties. If the parties cannot agree on a designated arbitrator within fifteen (15) days after arbitration is requested in writing by either of them, the arbitration shall proceed in the City of Cleveland, State of Ohio, before an arbitrator appointed by the American Arbitration Association. In either case, the arbitration proceeding shall commence promptly under the commercial arbitration rules then in effect of that Association and the arbitrator agreed to by the parties or appointed by that Association shall be an attorney other than an attorney who has, or is associated with a firm having associated with it an attorney which has been retained by or performed services for the Company or Indemnitee at any time during the five (5) years preceding the commencement of arbitration. The award shall be rendered in such form that judgment may be entered thereon in any court having jurisdiction thereof. The prevailing party shall be entitled to prompt reimbursement of any costs and expenses (including, without limitation, reasonable attorney’s fees) incurred in connection with such legal action or arbitration provided that Indemnitee shall not be obligated to reimburse the Company unless the arbitrator who resolves the dispute determines the Indemnitee acted in bad faith in bringing such arbitration. The arbitrator’s fees and other arbitration costs shall be borne by the Company, unless the arbitrator determines that the Indemnitee acted in bad faith in bringing such arbitration and an alternative allocation of such fees and expenses is appropriate under the circumstances.

10. Merger or Consolidation. This Agreement shall be binding upon and inure to the benefit of the Company and any successor to the Company. If the Company shall be a constituent corporation in a

7

	consolidation, merger, or other reorganization, the Company, if it shall not be the surviving, resulting, or acquiring corporation therein, shall require as a condition thereto that the surviving, resulting, or acquiring corporation agree to assume all of the obligations of the Company hereunder and to indemnify the Indemnitee to the full extent provided herein. Whether or not the Company is the resulting, surviving, or acquiring corporation in any such transaction, the Indemnitee shall also stand in the same position under this Agreement with respect to the resulting, surviving, or acquiring corporation in which he or she would have stood with respect to the Company if its separate existence had continued.
11.	Indemnification for Expenses of a Witness. Notwithstanding any other provision of this Agreement, to the extent Indemnitee is, by reason of the fact that Indemnitee is or was a director of the Company or is or was serving at the request of the Company as a director, trustee, officer, employee, member, manager or agent of another corporation (domestic or foreign, non-profit or for profit), limited liability company, partnership, joint venture, trust, or other enterprise, a witness in any action, suit, proceeding or claim to which Indemnitee is not a party, he or she shall be indemnified against all expenses actually and reasonably incurred by him or on his or her behalf in connection therewith.
12.	Nonexclusively and Severability.

(a)	The rights to indemnification provided by this Agreement shall not be exclusive of any other rights of indemnification to which the Indemnitee may be entitled under the Articles, the Regulations, the ORC or any other statute, any insurance policy, agreement, or vote of shareholders or directors or otherwise, as to any actions or failures to act by the Indemnitee, and shall continue after he or she has ceased to be a director, officer, employee, or agent of the Company or other entity for which his or her service gives rise to a right hereunder, and shall inure to the benefit of his or her heirs, executors, and administrators; provided, however, that the Indemnitee hereby agrees that the provisions set forth in Sections 4 through 19 of this Agreement also shall apply to any rights of indemnification or advancement of expenses that Indemnitee may have under, and supersede, if necessary, provisions of the same subject matters set forth in, the Articles, the Regulations, the ORC or any other statute, insurance policy, agreement, or vote of shareholders or directors, or otherwise.
(b)	This Agreement shall inure to the benefit of and be enforceable by the Indemnitee’s personal or legal representatives, executors, administrators, heirs, distributees, legatees and other successors, but otherwise the rights to indemnification provided by this Agreement are personal to the Indemnitee and are non-transferable by Indemnitee, and no party other than the Indemnitee is entitled to indemnification under this Agreement.
(c)	If any provision of this Agreement or the application of any provision hereof to any person or circumstances is held invalid, unenforceable, or otherwise illegal, the remainder of this Agreement and the application of such provision to other persons or circumstances shall not be affected, and the provision so held to be invalid, unenforceable, or otherwise illegal shall be reformed to the extent (and only to the extent) necessary to make it enforceable, valid, and legal.

13.

Security. To ensure that the Company’s obligations pursuant to this Agreement can be enforced by Indemnitee, the Company may, at its option, establish a trust pursuant to which the Company’s obligations pursuant to this Agreement and other similar agreements can be funded.

14.

Notices. All notices and other communications hereunder shall be in writing and shall be personally delivered or sent by recognized overnight courier service (a) if to the Company, to the then-current principal executive offices of the Company (Attention: General Counsel) or (b) if to the Indemnitee, to the last known address of Indemnitee as reflected in the Company’s records. Either party may change its address for the delivery of notices or other communications hereunder by providing

8

	notice to the other party as provided in this Section 14. All notices shall be effective upon actual delivery by the methods specified in this Section 14.
15.	Prior Agreements. Subject to Section 12, this Agreement constitutes the entire agreement between the parties hereto with respect to the subject matter hereof and supersedes all prior agreements and understandings, oral, written and implied, between the parties hereto with respect to the subject matter hereof.
16.	Termination. This Agreement may be terminated by either party upon not less than sixty (60) days’ prior written notice delivered to the other party, but such termination shall not in any way diminish the obligations hereunder with respect to Indemnitee’s service as a Company director and activities prior to the effective date of the termination or the Company’s obligation to provide continuing insurance coverage for past service and activities pursuant to Section 6 hereof. In the case of termination by the Company, such termination must be pursuant to a resolution adopted by majority vote of the Board of Directors.
17.	Governing Law and Consent to Jurisdiction. This Agreement shall be governed by and construed in accordance with the laws of the State of Ohio, without giving effect to the principles of conflict of laws thereof. The Company and the Indemnitee each hereby irrevocably consents to the jurisdiction of the federal and state courts located in Summit County, Ohio for all purposes in connection with any action, suit, proceeding or claim which arises out of or relates to this Agreement and hereby waives any objections or defenses relating to jurisdiction with respect to any lawsuit or other legal proceeding initiated in or transferred to such courts.
18.	Modification. This Agreement and the rights and duties of the Indemnitee and the Company hereunder may be modified only by an instrument in writing signed by both parties hereto

9

19.	Headings; References. Descriptive headings of the several Sections of this Agreement are inserted for convenience only and will not control or affect the meaning or construction of any of the provisions of this Agreement. Unless otherwise expressly provided, references to Sections and Exhibits are to Sections of and Exhibits to this Agreement.
20.	Counterparts. This Agreement may be executed in any number of counterparts and each of such counterparts will for all purposes be deemed to be an original, and all counterparts together will constitute but one and the same instrument.

     IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as of the date first above written.

JO-ANN STORES, INC.
By:
	Title:
		Director

10

Exhibit 1

INDEMNIFICATION STATEMENT

STATE OF	)
	) SS
COUNTY OF	)

I, _______________________, being first duly sworn, do depose and say as follows:

          1. This Indemnification Statement is submitted pursuant to the Indemnification Agreement made as of ____________, 2008 between JO-ANN STORES, INC. (the “Company”), an Ohio corporation, and the undersigned.

          2. I am requesting indemnification against costs, charges, expenses (which may include fees and expenses of attorneys and/or others), judgments, fines, and amounts paid in settlement (collectively, “Liabilities”), which have been actually and reasonably incurred by me in connection with a claim referred to in Sections 2 or 3 of the aforesaid Indemnification Agreement.

          3 With respect to all matters related to any such claim, I am entitled to be indemnified as herein contemplated pursuant to the aforesaid Indemnification Agreement.

          4. Without limiting any other rights which I have or may have, I am requesting indemnification against Liabilities which have or may arise out of

	.
[Signature of Indemnitee]

     Subscribed and sworn to before me, a Notary Public in and for said County and State, this _________ day of ______________ , 2008.

[Seal]

          My commission expires ______________

11

Exhibit 2

UNDERTAKING

STATE OF	)
	) SS
COUNTY OF	)

          I, ____________, being first duly sworn do depose and say as follows:

          1. This Undertaking is submitted pursuant to the Indemnification Agreement made as of _________, 2008 between JO-ANN STORES, INC. (the “Company”), an Ohio corporation, and the undersigned.

          2. I am requesting payment of costs, charges, and expenses which I have reasonably incurred or will reasonably incur in defending an action, suit or proceeding referred to in Section 2(a) or 2(b) or any claim referred to in Section 3, or pursuant to Section 9 or Section 11 of the aforesaid Indemnification Agreement.

          3. The costs, charges, and expenses for which payment is requested are, in general, all expenses related to: _________.

          4. I hereby undertake to (a) repay all amounts paid pursuant hereto if it ultimately is determined that I am not entitled to be indemnified by the Company under the aforesaid Indemnification Agreement or otherwise and (b) reasonably cooperate with the Company concerning the action, suit, proceeding or claim.

[Signature of Indemnitee] 

     Subscribed and sworn to before me, a Notary Public in and for said County and State, this _________ day of _______________, 2008.

[Seal]

     My commission expires __________________

12

EX-21

Exhibit 21

JO-ANN STORES, INC.
LIST OF SUBSIDIARIES

	State or Country of	Percent owned by
Name	Incorporation	Registrant
Jo-Ann Stores Supply Chain Management, Inc.	Ohio		100	%
FCA of Ohio, Inc.	Ohio		100	%
House of Fabrics, Inc.	Delaware		100	%
Team Jo-Ann Stores, Inc.	Ohio		100	%
Fabric World of Cleveland, Inc.	Ohio		100	%
Jo-Ann. Com, Inc.	Delaware		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 April 5, 2008, with respect to the consolidated financial statements of Jo-Ann Stores, Inc. 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 February 2, 2008.

Form	Registration Number
S-8	033-60177	1994 Executive Incentive Plan
S-8	333-10093	1994 Executive Incentive Plan
S-8	333-72445	1998 Incentive Compensation Plan
S-8	333-128157	1998 Incentive Compensation Plan
S-8	333-11653	Employees’ Savings and Profit-Sharing Plan
S-8	033-60179	1990 Employees Stock Option and Stock Appreciation Rights 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-8	333-137187	Jo-Ann Stores, Inc. Savings Plan 401(k)

/s/ Ernst & Young LLP  

Cleveland, Ohio
April 16, 2008

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

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 Darrell Webb, 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 Darrell Webb, 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
/s/ Darrell Webb Darrell Webb	April 2, 2008
/s/ James Kerr James Kerr	April 2, 2008
/s/ Scott Cowen Scott Cowen	April 2, 2008
/s/ Ira Gumberg Ira Gumberg	April 2, 2008
/s/ Patricia Morrison Patricia Morrison	April 2, 2008
/s/ Frank Newman Frank Newman	April 2, 2008
/s/ Beryl Raff Beryl Raff	April 2, 2008
/s/ Alan Rosskamm Alan Rosskamm	April 2, 2008
/s/ Tracey Travis Tracey Travis	April 2, 2008

NOTE: The Company did not request Mr. DePinto and Mr. Perdue to sign since they were elected to the board subsequent to the conclusion of the fiscal year to which this 10K relates.

EX-31.1

EXHIBIT 31.1

CERTIFICATION BY CHIEF EXECUTIVE OFFICER

I, Darrell Webb, 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 most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) 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 17, 2008

/s/ Darrell Webb  

By: Darrell Webb 

President and Chief Executive Officer 

EX-31.2

EXHIBIT 31.2

CERTIFICATION BY CHIEF 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 most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) 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 17, 2008

/s/ James Kerr  

By: James Kerr 

Executive Vice President and Chief Financial 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 February 2, 2008, as filed with the Securities and Exchange Commission 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 17, 2008

/s/ Darrell Webb  

Darrell Webb 

President and Chief Executive Officer 

/s/ James Kerr  

James Kerr 

Executive Vice President and Chief Financial 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 Securities and Exchange Commission or its staff upon request.