10-Q

United States
Securities and Exchange Commission

WASHINGTON, D.C. 20549

Form 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended July 29, 2006

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

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

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

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

     Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: Common Shares, without par value, as of September 1, 2006: 24,293,547

Jo-Ann Stores, Inc.
Form 10-Q Index
For the Quarter Ended July 29, 2006

			Page Numbers
Part I.	Financial Information
	Item 1.	Financial Statements
		Consolidated Balance Sheets — July 29, 2006 (Unaudited), January 28, 2006 and July 30, 2005 (Unaudited)		1
		Unaudited Consolidated Statements of Operations for the Thirteen and Twenty-Six Weeks Ended July 29, 2006 and July 30, 2005		2
		Unaudited Consolidated Statements of Cash Flows for the Twenty-Six Weeks Ended July 29, 2006 and July 30, 2005		3
		Notes to Unaudited Consolidated Financial Statements		4
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		15
	Item 3.	Quantitative and Qualitative Disclosures about Market Risk		24
	Item 4.	Controls and Procedures		24
Part II.	Other Information
	Item 1.	Legal Proceedings		25
	Item 1A.	Risk Factors		25
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		25
	Item 3.	Defaults Upon Senior Securities		25
	Item 4.	Submission of Matters to a Vote of Security Holders		25
	Item 5.	Other Information		26
	Item 6.	Exhibits		26
	Signatures			27
EX-10.1
EX-10.2
EX-10.3
EX-10.4
EX-10.5
EX-10.6
EX-10.7
EX-10.8
EX-10.9
EX-31.1
EX-31.2
EX-32.1

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

Jo-Ann Stores, Inc.
Consolidated Balance Sheets

	(Unaudited)						(Unaudited)
	July 29,			January 28,			July 30,
	2006			2006			2005
	(Dollars in millions, except share and per share data)
Assets
Current assets:
Cash and cash equivalents	$	15.3		$	17.9		$	16.7
Inventories		511.3			514.7			574.0
Deferred income taxes		38.0			38.0			21.3
Prepaid expenses and other current assets		24.7			35.2			19.0
Total current assets		589.3			605.8			631.0
Property, equipment and leasehold improvements, net		340.6			331.7			252.6
Goodwill, net		—			—			27.1
Other assets		9.6			9.3			11.3
Total assets	$	939.5		$	946.8		$	922.0
Liabilities and Shareholders’ Equity
Current liabilities:
Accounts payable	$	166.5		$	146.6		$	199.2
Accrued expenses		64.9			94.1			51.2
Total current liabilities		231.4			240.7			250.4
Long-term debt		225.0			203.7			174.8
Deferred income taxes		23.2			23.2			27.6
Lease obligations and other long-term liabilities		84.2			79.8			54.7
Shareholders’ equity:
Preferred stock, no par value, 5,000,000 shares authorized, none issued		—			—			—
Common stock, stated value $0.05 per share; 150,000,000 authorized, issued 27,179,517; 27,050,507 and 26,485,584 shares, respectively		1.4			1.4			1.3
Additional paid-in capital		169.1			165.4			158.6
Retained earnings		248.8			276.6			298.7
		419.3			443.4			458.6
Treasury stock, at cost, 3,608,288; 3,675,439 and 3,723,989 shares, respectively		(43.6	)		(44.0	)		(44.1	)
Total shareholders’ equity		375.7			399.4			414.5
Total liabilities and shareholders’ equity	$	939.5		$	946.8		$	922.0

See notes to unaudited consolidated financial statements

1

Jo-Ann Stores, Inc.
Consolidated Statements of Operations
(Unaudited)

	Thirteen Weeks Ended						Twenty-Six Weeks Ended
	July 29,			July 30,			July 29,			July 30,
	2006			2005			2006			2005
	(Dollars in millions, except share and per share data)
Net sales	$	363.2		$	383.8		$	787.9		$	804.5
Cost of sales		190.9			199.0			417.6			414.9
Gross margin		172.3			184.8			370.3			389.6
Selling, general and administrative expenses		186.9			176.4			376.6			357.0
Store pre-opening and closing costs		2.6			4.0			8.1			8.9
Depreciation and amortization		12.3			10.1			23.9			20.6
Operating (loss) profit		(29.5	)		(5.7	)		(38.3	)		3.1
Interest expense, net		3.9			2.5			7.4			4.6
Loss before income taxes		(33.4	)		(8.2	)		(45.7	)		(1.5	)
Income tax benefit		(12.2	)		(3.1	)		(16.9	)		(0.6	)
Loss before cumulative effect of accounting change		(21.2	)		(5.1	)		(28.8	)		(0.9	)
Cumulative effect of change in accounting principle, net of tax		—			—			1.0			—
Net loss	$	(21.2	)	$	(5.1	)	$	(27.8	)	$	(0.9	)
Loss per common share — basic:
Loss before cumulative effect of accounting change	$	(0.90	)	$	(0.23	)	$	(1.23	)	$	(0.04	)
Cumulative effect of change in accounting principle		—			—			0.04			—
Net loss	$	(0.90	)	$	(0.23	)	$	(1.19	)	$	(0.04	)
Loss per common share — diluted:
Loss before cumulative effect of accounting change	$	(0.90	)	$	(0.23	)	$	(1.23	)	$	(0.04	)
Cumulative effect of change in accounting principle		—			—			0.04			—
Net loss	$	(0.90	)	$	(0.23	)	$	(1.19	)	$	(0.04	)
Weighted average shares outstanding (in thousands):
Basic		23,469			22,580			23,388			22,525
Diluted		23,469			22,580			23,388			22,525

See notes to unaudited consolidated financial statements

2

Jo-Ann Stores, Inc.
Consolidated Statements of Cash Flows
(Unaudited)

	Twenty-Six Weeks Ended
	July 29,			July 30,
	2006			2005
	(Dollars in millions)
Net cash flows provided by (used for) operating activities:
Net loss	$	(27.8	)	$	(0.9	)
Adjustments to reconcile net loss to net cash provided by (used for) operating activities:
Depreciation and amortization		23.9			20.6
Stock-based compensation expense		3.3			3.0
Cumulative effect of change in accounting principle		(1.0	)		—
Tax benefit on stock-based compensation plan awards		—			0.6
Amortization of deferred financing costs		0.5			0.4
Loss on disposal of fixed assets		0.4			0.4
Changes in operating assets and liabilities:
Decrease (increase) in inventories		3.4			(134.3	)
Decrease in prepaid expenses and other current assets		10.5			3.3
Increase in accounts payable		19.9			32.0
Decrease in accrued expenses		(29.8	)		(40.4	)
Increase in lease obligations, net		4.4			9.7
Increase in other long-term liabilities		—			1.0
Other, net		(0.6	)		(0.4	)
Net cash provided by (used for) operating activities		7.1			(105.0	)
Net cash flows used for investing activities:
Capital expenditures		(33.2	)		(35.6	)
Net cash used for investing activities		(33.2	)		(35.6	)
Net cash flows provided by financing activities:
Net change in revolving credit facility		21.3			74.8
Proceeds from stock-based compensation plans		1.7			2.6
Other, net		0.5			0.3
Net cash provided by financing activities		23.5			77.7
Net decrease in cash and cash equivalents		(2.6	)		(62.9	)
Cash and cash equivalents at beginning of period		17.9			79.6
Cash and cash equivalents at end of period	$	15.3		$	16.7
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest	$	7.2		$	4.4
Income taxes, net of refunds		4.4			27.1

See notes to unaudited consolidated financial statements

3

Notes to Consolidated Financial Statements (Unaudited)
Jo-Ann Stores, Inc.

Note 1 — Basis of Presentation

     Jo-Ann Stores, Inc. (the “Company”), an Ohio corporation, is the nation’s largest specialty retailer of fabrics and one of the largest specialty retailers of crafts operating 817 retail stores in 47 states at July 29, 2006. The 648 traditional stores and 169 superstores feature a variety of competitively priced merchandise used in sewing, crafting and home decorating projects, including fabrics, notions, yarn, crafts, frames, paper crafting material, artificial and dried flowers, home accents, finished seasonal and home décor merchandise.

     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 2007 refers to the year-ended February 3, 2007). Fiscal 2007 is a 53-week year.

     The consolidated interim financial statements include the accounts of the Company and its subsidiaries and have been prepared without audit, pursuant to the rules of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted pursuant to those rules and regulations, although the Company believes that the disclosures herein are adequate to make the information not misleading. Certain amounts in the fiscal 2006 year-end and interim financial statements have been reclassified in order to conform to the current year presentation. The financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year-ended January 28, 2006.

     Typical of most retail companies, the Company’s business is highly seasonal with the majority of revenues and operating profits generated in the second half of the fiscal year. Accordingly, earnings or losses for a particular interim period are not indicative of full year results. Due to the seasonal nature of the Company’s business, a comparable balance sheet as of July 30, 2005 has been provided. In the opinion of management, the consolidated financial statements contain all adjustments (consisting only of normal recurring accruals) necessary for a fair presentation of the financial position and results of operations for the interim periods presented.

Note 2 — Stock—Based Compensation

     The Company administers its stock-based compensation award programs utilizing the 1998 Incentive Compensation Plan (“1998 Plan”). This plan provides for the grant of stock options, restricted stock, and stock equivalent units to employees and non-employee directors. It also allows for the operation of an employee stock purchase program and a deferred stock program for non-employee directors. The number of shares available for future awards under the 1998 Plan as of July 29, 2006 was 1,198,966. The Company has several other stock-based compensation award plans (“stock plans”) that have terminated, thus no new awards may be granted, but past awards remain outstanding under those plans. A full description of the various plans is contained in Note 7 to the consolidated financial statements of the Company’s Annual Report on Form 10-K for the fiscal year-ended January 28, 2006.

     In fiscal 2004, the Company adopted the fair value method of accounting as outlined in Statement of Financial Accounting Standards (“SFAS”) No. 123, “Accounting for Stock-Based Compensation.”

4

     Effective January 29, 2006, the Company adopted SFAS No. 123 (revised 2004), “Share-Based Payment,” (“SFAS No. 123R”), which replaces 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, which is discussed below.

     Among other things, SFAS No. 123R changes the manner of accounting for forfeitures of stock-based awards. Previously, the Company had accounted for forfeitures as they occurred, which is no longer permitted. The Company now 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.

     Further, upon adoption, the Company estimated the forfeitures that are expected to occur on awards that were outstanding and reduced the previously recognized compensation expense for these awards. The after-tax amount of this reduction is presented on the statement of operations as a cumulative effect of a change in accounting principle. The Company estimated its forfeiture rates based on its historical experience during the preceding ten years and recorded a cumulative after-tax adjustment of $1.0 million, or $0.04 per diluted common share, in the first quarter of fiscal 2007.

     Prior to the adoption of SFAS No. 123R, the Company presented all tax benefits of deductions resulting from the exercise of stock options or the issuance of shares under other stock-based compensation programs as operating cash flows in the statement of cash flows. SFAS No. 123R requires that cash flows resulting from the tax benefits of deductions in excess of the compensation cost recognized for stock-based awards be classified as financing cash flows. The gross excess tax benefit classified as a financing cash inflow in the first half of fiscal 2007 was not significant.

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

	Thirteen Weeks Ended					Twenty-Six Weeks Ended
	July 29,		July 30,			July 29,		July 30,
Dollars in millions	2006		2005			2006		2005
Stock option compensation expense	$	0.7	$	0.7		$	1.3	$	1.5
Restricted stock award amortization		1.3		(0.4	)		2.0		1.5
	$	2.0	$	0.3		$	3.3	$	3.0

Stock Options

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

     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.

5

     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 fair value assumptions were as follows:

	Twenty-Six Weeks Ended
	July 29,	July 30,
	2006	2005
Weighted average fair value of options granted	$5.74	$12.85
Expected volatility of underlying stock	.465 to .584	.550 to .568
Risk-free interest rates	4.2% to 5.2%	3.5% to 4.2%
Expected life	2.2 to 5.2 years	4 years
Expected life — Employee Stock Purchase Program	6 months	6 months

     The following table summarizes activity, pricing and other information for the Company’s stock options for the twenty-six weeks ended July 29, 2006:

				Weighted-Average		Weighted-Average	Aggregate
	Number of			Exercise Price		Remaining	Intrinsic
	Options			Per Option		Contractual Term	Value a
Outstanding at January 28, 2006		2,051,912		$	15.66
Granted		175,500			13.86
Exercised		(44,800	)		11.77
Cancelled		(350,290	)		16.88
Outstanding at July 29, 2006		1,832,322		$	15.34	4.4 years	$	3,249,674
Expected to vest		1,740,008		$	15.41	4.3 years	$	3,156,723
Exercisable at July 29, 2006		1,091,553		$	14.48	3.4 years	$	2,717,864

(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 the first half of fiscal 2007 and fiscal 2006 was $0.1 million and $2.2 million, respectively.

Restricted Stock Awards

     The vesting periods for the restricted shares granted under the 1998 Plan are up to five years for employee restricted shares and up to six years for non-employee director restricted shares. The time-based and performance-based awards vest 50 percent at the end of three years, with the remaining 50 percent vesting at the end of the fourth year. The performance-based awards provide the potential to receive generally up to three times that amount in additional shares, dependent on the Company achieving certain net income performance criteria that are measured at the end of the third year. The expense for performance-based awards is recognized over the vesting period when the related criteria is probable of being achieved.

6

Restricted Stock — Time-Based Awards

     As of July 29, 2006, 760,694 shares of restricted stock were outstanding in which the restrictions lapse upon the achievement of continued employment over a specified period of time (time-based restricted stock awards).

     The following table summarizes activity for time-based restricted stock awards for the twenty-six weeks ended July 29, 2006:

				Weighted-
	Number of			Average Grant
	Shares			Date Fair Value
Outstanding at January 28, 2006		661,910		$	20.83
Granted		275,586			13.49
Vested		(26,401	)		17.46
Cancelled		(150,401	)		19.49
Outstanding at July 29, 2006		760,694		$	18.55

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

     During the first half of fiscal 2007 and fiscal 2006, the Company granted time-based restricted stock awards with weighted-average grant-date fair values of $13.49, and $30.01, respectively. As of July 29, 2006, there was $7.5 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 1.7 years. The total fair value of shares fully vested was $0.3 million during the first half of fiscal 2007. There were no shares that vested during the first half of fiscal 2006.

Restricted Stock — Performance-Based Awards

     The performance-based awards are issued only upon the achievement of specific measurable performance criteria. Performance can be achieved on three different levels, minimum (“Threshold”), midpoint (“Target”) or maximum (“Superior”). No expense was recognized in the first half of fiscal 2007 for performance awards based on the Company’s current and expected future performance. During the second quarter of fiscal 2006, an adjustment of $1.7 million was recognized to reduce previously booked expense for performance awards due to revised expectations of operating performance.

     The following table summarizes information about the performance-based restricted stock awards assuming the Superior performance level for the twenty-six weeks ended July 29, 2006:

				Weighted-
	Number of			Average Grant
	Shares			Date Fair Value
Outstanding at January 28, 2006		801,600		$	29.00
Cancelled		(126,950	)		29.06
Outstanding at July 29, 2006		674,650		$	29.04
Expected to Vest		—		$	—

     Based upon the Company’s current and expected performance, the Company does not expect to attain the Threshold performance level for either the fiscal 2006 or 2005 performance-based restricted stock

7

awards.

Employee Stock Purchase Program

     The employee stock purchase program (the Associate Stock Ownership Plan or “ASOP”) enables employees to subscribe to purchase shares of the Company’s common stock on offering dates at six-month intervals, at a purchase price equal to the lesser of 85 percent of the fair market value of the common stock on the first or last day of the offering period. The 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 the twenty-six weeks ended July 29, 2006 and July 30, 2005, stock purchase rights of 102,561 shares and 53,705 shares, respectively, were granted and exercised under the ASOP.

Note 3 — Earnings Per Share

     Basic (loss) earnings per common share are computed by dividing net (loss) income by the weighted average number of shares outstanding during the period. Diluted (loss) earnings per common share include the effect of the assumed exercise of dilutive stock-based awards under the treasury stock method.

     The following table presents information necessary to calculate basic and diluted (loss) earnings per common share (shares in thousands):

	Thirteen Weeks Ended				Twenty-Six Weeks Ended
	July 29,		July 30,		July 29,		July 30,
	2006		2005		2006		2005
Weighted average shares outstanding:
Basic common shares		23,469		22,580		23,388		22,525
Incremental shares from assumed exercise of stock options		—		—		—		—
Incremental restricted shares		—		—		—		—
Diluted common shares		23,469		22,580		23,388		22,525

     For the second quarter and first half of fiscal 2007, all outstanding stock options were excluded from the calculation of diluted net loss per common share, because they would have an anti-dilutive effect due to the Company’s net loss for both periods. For the second quarter, an average of 564,528 stock options had exercise prices below the average market price of the Company’s common shares and an average of 1,166,351 stock options had exercise prices above the average market price of the Company’s common shares. For the first half, an average of 493,379 stock options had exercise prices below the average market price of the Company’s common shares and an average of 1,302,901 stock options had exercise prices above the average market price of the Company’s common shares. As of July 29, 2006, the Company had 760,694 time-based restricted stock awards issued and not yet vested, which were excluded from the calculation of diluted common shares.

     For the second quarter and first half of fiscal 2006, all outstanding stock options were excluded from the calculation of diluted net loss per common share because they would have had an anti-dilutive effect due to the Company’s net loss for both periods. For the second quarter, an average of 2,117,927 stock options had exercise prices below the average market price of the Company’s common shares and an average of 114,137 stock options had exercise prices above the average market price of the Company’s common shares. For the first half, an average of 2,143,161 stock option awards had exercise prices below the average market price of the Company’s common shares and an average of 89,494 stock option awards had exercise prices above the average market price of the Company’s common shares. As of July 30, 2005, the Company had 526,430 time—

8

based restricted stock awards issued and not yet vested, which were excluded from the calculation of diluted common shares.

Note 4 — Shareholders’ Equity

     During the first half of fiscal 2007, shares outstanding increased by 196,000 as follows:

	Net Common			Treasury			Common Stock Stated		Additional Paid-In			Treasury
	Shares			Shares			Value		Capital			Stock
	(Shares in thousands)						(Dollars in millions)
Balance, January 28, 2006		23,375			3,675		$	1.4	$	165.4		$	(44.0	)
Exercise of stock options		44			(8	)		—		0.4			0.1
Purchase of common stock		(7	)		7			—		—			(0.1	)
Issuance of treasury shares		66			(66	)		—		0.4			0.4
Associate stock ownership plan		103			—			—		1.2			—
Stock-based compensation		(10	)		—			—		3.3			—
Cumulative effect of change in accounting principle		—			—			—		(1.6	)		—
Year-to-date activity		196			(67	)		—		3.7			0.4
Balance, July 29, 2006		23,571			3,608		$	1.4	$	169.1		$	(43.6	)

     As of July 29, 2006, the Company had 1,832,322 stock options outstanding and 760,694 restricted stock awards issued and not yet vested, none of which are included in shares outstanding.

Note 5 — Recent Accounting Pronouncements

     Financial Accounting Standards Board Interpretation No. 48, “Accounting for Uncertainty in Income Taxes — An Interpretation of FASB Statement No. 109”

     In July 2006, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes — An Interpretation of FASB Statement No. 109” (“FIN 48”). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with FASB Statement No. 109, “Accounting for Income Taxes.” FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition associated with tax positions. The provisions of FIN 48 are effective for fiscal years beginning after December 15, 2006. The Company is currently evaluating the impact that FIN 48 will have on its consolidated financial statements upon adoption.

9

Note 6 — Consolidating Financial Statements (Unaudited)

     The Company’s 7.5 percent senior subordinated notes and credit facility are fully and unconditionally guaranteed, on a joint and several basis, by the wholly-owned subsidiaries of the Company. The senior subordinated notes are subordinated to the Company’s credit facility.

     Summarized consolidating financial information of the Company (excluding its subsidiaries) and the guarantor subsidiaries as of July 29, 2006 and January 28, 2006 and for the thirteen and twenty-six weeks ended July 29, 2006 and July 30, 2005 are as follows:

Consolidating Balance Sheets
July 29, 2006

				Guarantor
	Parent			Subsidiaries			Eliminations			Consolidated
				(Dollars in millions)
Assets
Current assets:
Cash and cash equivalents	$	13.2		$	2.1		$	—		$	15.3
Inventories		209.7			301.6						511.3
Deferred income taxes		27.6			10.4						38.0
Prepaid expenses and other current assets		14.4			10.3						24.7
Total current assets		264.9			324.4			—			589.3
Property, equipment and leasehold improvements, net		152.9			187.7						340.6
Other assets		8.1			1.5						9.6
Investment in subsidiaries		50.0			—			(50.0	)		—
Intercompany receivable		411.9			—			(411.9	)		—
Total assets	$	887.8		$	513.6		$	(461.9	)	$	939.5
Liabilities and Shareholders’ Equity
Current liabilities:
Accounts payable	$	155.0		$	11.5		$	—		$	166.5
Accrued expenses		69.4			(4.5	)					64.9
Total current liabilities		224.4			7.0			—			231.4
Long-term debt		225.0			—						225.0
Deferred income taxes		6.5			16.7						23.2
Lease obligations and other long-term liabilities		56.2			28.0						84.2
Intercompany payable		—			411.9			(411.9	)		—
Shareholders’ equity:
Preferred stock		—			—						—
Common stock		1.4			—						1.4
Additional paid-in capital		169.1			—						169.1
Retained earnings		248.8			50.0			(50.0	)		248.8
		419.3			50.0			(50.0	)		419.3
Treasury stock, at cost		(43.6	)		—						(43.6	)
Total shareholders’ equity		375.7			50.0			(50.0	)		375.7
Total liabilities and shareholders’ equity	$	887.8		$	513.6		$	(461.9	)	$	939.5

10

Note 6 — Consolidating Financial Statements (Unaudited) — CONTINUED

Consolidating Balance Sheets
January 28, 2006

				Guarantor
	Parent			Subsidiaries			Eliminations			Consolidated
	(Dollars in millions)
Assets
Current assets:
Cash and cash equivalents	$	15.5		$	2.4		$	—		$	17.9
Inventories		194.2			320.5						514.7
Deferred income taxes		27.6			10.4						38.0
Prepaid expenses and other current assets		21.5			13.7						35.2
Total current assets		258.8			347.0			—			605.8
Property, equipment and leasehold improvements, net		155.2			176.5						331.7
Other assets		7.8			1.5						9.3
Investment in subsidiaries		62.7			—			(62.7	)		—
Intercompany receivable		397.8			—			(397.8	)		—
Total assets	$	882.3		$	525.0		$	(460.5	)	$	946.8
Liabilities and Shareholders’ Equity
Current liabilities:
Accounts payable	$	117.6		$	29.0		$	—		$	146.6
Accrued expenses		98.7			(4.6	)					94.1
Total current liabilities		216.3			24.4			—			240.7
Long-term debt		203.7			—						203.7
Deferred income taxes		6.5			16.7						23.2
Lease obligations and other long-term liabilities		56.4			23.4						79.8
Intercompany payable		—			397.8			(397.8	)		—
Shareholders’ equity:
Preferred stock		—			—						—
Common stock		1.4			—						1.4
Additional paid-in capital		165.4			—						165.4
Retained earnings		276.6			62.7			(62.7	)		276.6
		443.4			62.7			(62.7	)		443.4
Treasury stock, at cost		(44.0	)		—						(44.0	)
Total shareholders’ equity		399.4			62.7			(62.7	)		399.4
Total liabilities and shareholders’ equity	$	882.3		$	525.0		$	(460.5	)	$	946.8

11

Note 6 — Consolidating Financial Statements (Unaudited) — CONTINUED

Consolidating Statements of Operations
Thirteen Weeks Ended July 29, 2006 and July 30, 2005

	July 29, 2006
				Guarantor
	Parent			Subsidiaries			Eliminations			Consolidated
	(Dollars in millions)
Net sales	$	200.4		$	281.3		$	(118.5	)	$	363.2
Cost of sales		115.4			194.0			(118.5	)		190.9
Gross margin		85.0			87.3			—			172.3
Selling, general and administrative expenses		96.7			90.2						186.9
Store pre-opening and closing costs		1.0			1.6						2.6
Depreciation and amortization		6.2			6.1						12.3
Operating loss		(18.9	)		(10.6	)		—			(29.5	)
Interest expense, net		1.7			2.2						3.9
Loss before income taxes		(20.6	)		(12.8	)		—			(33.4	)
Income tax benefit		(7.5	)		(4.7	)					(12.2	)
Loss before equity loss		(13.1	)		(8.1	)		—			(21.2	)
Equity loss from subsidiaries		(8.1	)		—			8.1			—
Net loss	$	(21.2	)	$	(8.1	)	$	8.1		$	(21.2	)

	July 30, 2005
				Guarantor
	Parent			Subsidiaries		Eliminations			Consolidated
	(Dollars in millions)
Net sales	$	208.4		$	319.2	$	(143.8	)	$	383.8
Cost of sales		131.7			211.1		(143.8	)		199.0
Gross margin		76.7			108.1		—			184.8
Selling, general and administrative expenses		89.2			87.2					176.4
Store pre-opening and closing costs		2.9			1.1					4.0
Depreciation and amortization		5.0			5.1					10.1
Operating (loss) profit		(20.4	)		14.7		—			(5.7	)
Interest expense, net		0.9			1.6					2.5
(Loss) income before income taxes		(21.3	)		13.1		—			(8.2	)
Income tax (benefit) provision		(8.1	)		5.0					(3.1	)
(Loss) income before equity income		(13.2	)		8.1		—			(5.1	)
Equity income from subsidiaries		8.1			—		(8.1	)		—
Net (loss) income	$	(5.1	)	$	8.1	$	(8.1	)	$	(5.1	)

12

Note 6 — Consolidating Financial Statements (Unaudited) — CONTINUED

Consolidating Statements of Operations
Twenty-Six Weeks Ended July 29, 2006 and July 30, 2005

	July 29, 2006
				Guarantor
	Parent			Subsidiaries			Eliminations			Consolidated
	(Dollars in millions)
Net sales	$	435.6		$	581.5		$	(229.2	)	$	787.9
Cost of sales		250.7			396.1			(229.2	)		417.6
Gross margin		184.9			185.4			—			370.3
Selling, general and administrative expenses		191.4			185.2						376.6
Store pre-opening and closing costs		3.6			4.5						8.1
Depreciation and amortization		12.2			11.7						23.9
Operating loss		(22.3	)		(16.0	)		—			(38.3	)
Interest expense, net		3.2			4.2						7.4
Loss before income taxes		(25.5	)		(20.2	)		—			(45.7	)
Income tax benefit		(9.4	)		(7.5	)					(16.9	)
Loss before equity loss & cumulative effect		(16.1	)		(12.7	)		—			(28.8	)
Equity loss from subsidiaries		(12.7	)		—			12.7			—
Loss before cumulative effect		(28.8	)		(12.7	)		12.7			(28.8	)
Cumulative effect of accounting change, net of tax		1.0			—			—			1.0
Net loss	$	(27.8	)	$	(12.7	)	$	12.7		$	(27.8	)

	July 30, 2005
				Guarantor
	Parent			Subsidiaries		Eliminations			Consolidated
	(Dollars in millions)
Net sales	$	439.0		$	666.1	$	(300.6	)	$	804.5
Cost of sales		273.3			442.2		(300.6	)		414.9
Gross margin		165.7			223.9		—			389.6
Selling, general and administrative expenses		180.9			176.1					357.0
Store pre-opening and closing costs		6.3			2.6					8.9
Depreciation and amortization		9.8			10.8					20.6
Operating (loss) profit		(31.3	)		34.4		—			3.1
Interest expense, net		1.8			2.8					4.6
(Loss) income before income taxes		(33.1	)		31.6		—			(1.5	)
Income tax (benefit) provision		(12.6	)		12.0					(0.6	)
(Loss) income before equity income		(20.5	)		19.6		—			(0.9	)
Equity income from subsidiaries		19.6			—		(19.6	)		—
Net (loss) income	$	(0.9	)	$	19.6	$	(19.6	)	$	(0.9	)

13

Note 6 — Consolidating Financial Statements (Unaudited) — CONTINUED

Consolidating Statements of Cash Flows
Twenty-Six Weeks Ended July 29, 2006 and July 30, 2005

	July 29, 2006
				Guarantor
	Parent			Subsidiaries			Eliminations		Consolidated
	(Dollars in millions)
Net cash (used for) provided by operating activities	$	(19.9	)	$	27.0		$	—	$	7.1
Net cash flows used for investing activities:
Capital expenditures		(5.9	)		(27.3	)				(33.2	)
Net cash used for investing activities		(5.9	)		(27.3	)		—		(33.2	)
Net cash flows provided by financing activities:
Net change in revolving credit facility		21.3			—					21.3
Proceeds from stock-based compensation plans		1.7			—					1.7
Other, net		0.5			—					0.5
Net cash provided by financing activities		23.5			—			—		23.5
Net decrease in cash and cash equivalents		(2.3	)		(0.3	)		—		(2.6	)
Cash and cash equivalents at beginning of period		15.5			2.4			—		17.9
Cash and cash equivalents at end of period	$	13.2		$	2.1		$	—	$	15.3

	July 30, 2005
				Guarantor
	Parent			Subsidiaries			Eliminations		Consolidated
	(Dollars in millions)
Net cash (used for) provided by operating activities	$	(121.6	)	$	16.6		$	—	$	(105.0	)
Net cash flows used for investing activities:
Capital expenditures		(18.8	)		(16.8	)				(35.6	)
Net cash used for investing activities		(18.8	)		(16.8	)		—		(35.6	)
Net cash flows provided by financing activities:
Net change in revolving credit facility		74.8			—					74.8
Proceeds from stock-based compensation plans		2.6			—					2.6
Other, net		0.3			—					0.3
Net cash provided by financing activities		77.7			—			—		77.7
Net decrease in cash and cash equivalents		(62.7	)		(0.2	)		—		(62.9	)
Cash and cash equivalents at beginning of period		76.6			3.0			—		79.6
Cash and cash equivalents at end of period	$	13.9		$	2.8		$	—	$	16.7

14

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

     This discussion is intended to provide 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 our Annual Report on Form 10-K. The financial information presented for the interim period of fiscal 2006 has been reclassified for certain amounts to conform to the fiscal 2007 presentation.

General Overview

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

     We continue to transition our store base by replacing our existing traditional stores with superstores. During fiscal 2007 we expect to open 26 stores, 21 of which will be new superstores, compared with 40 superstore openings during fiscal 2006. During the first half of fiscal 2007, we opened 15 superstores and five traditional stores and closed 40 traditional stores and one superstore. We believe that our prototype 35,000 square foot superstore gives us a competitive advantage in the industry. Our superstores provide a unique shopping experience by offering a full creative selection — sewing, crafting, framing, seasonal, floral and home décor accessories — all under one roof. On average, we close 1.1 traditional stores for every superstore that we open. Our superstores typically average over three times the revenues of the traditional stores they replace. In markets where we have opened multiple superstores, we have grown our revenues significantly and, we believe, expanded the market size and our market share.

     As of July 29, 2006, we operated 817 stores in 47 states (648 traditional stores and 169 superstores — 98 of which are the prototype superstore format). Our traditional stores offer a complete selection of fabric and a convenience assortment of crafts, floral, finished seasonal and home décor merchandise. Our traditional stores average approximately 14,650 square feet and generated net sales per store of approximately $1.6 million in fiscal 2006. Our superstores offer an expanded and more comprehensive product assortment than our traditional stores. Our superstores also offer custom framing and educational programs that our traditional stores do not. Our superstores that opened prior to fiscal 2003 average approximately 45,000 square feet and generated net sales per store of approximately $6.3 million in fiscal 2006. Our current superstore prototype is 35,000 square feet, and stores open at least one year generated net sales per store of approximately $5.0 million in fiscal 2006.

Executive Overview

     As anticipated, the second quarter was a challenging quarter as the fabric and crafts retail environment continues to be soft. However, we are making good progress on our Repair Plan initiatives, including inventory reduction and expense control. We believe that successful execution of these initiatives will enable us to finish the year as a stronger, more disciplined organization, with an improved merchandise assortment for our customers, a much improved inventory position, and a stronger balance sheet.

     The primary source of the ongoing softness we have been experiencing was in home decorating textiles and paper crafting, coupled with a continued decline in two categories of our business, yarn and fleece.

15

     During July, we filled our open executive management positions. Darrell Webb was appointed Chairman, President and Chief Executive Officer and Travis Smith was appointed Executive Vice President, Merchandising and Marketing. Both Mr. Webb and Mr. Smith come to us from Fred Meyer, the 128-store super center division of The Kroger Company. James Kerr, our past Vice President, Chief Accounting Officer, was promoted to Executive Vice President and Chief Financial Officer. Mr. Kerr has been with Jo-Ann for the past eight years in the Finance organization.

     Highlights of our second quarter performance are as follows:

•	Net sales decreased 5.4% to $363.2 million from $383.8 million in the prior year. Net sales from stores open one year or more (“same-store sales”) decreased 8.4% versus a 0.5% same-store sales decrease for the second quarter last year. The decline in same-store sales was a result of decreased customer transactions. Customer traffic has been relatively flat year-over-year, but the conversion rate is down, resulting in the transaction count decrease.
•	Our gross margin rate declined by 80 basis points, to 47.4% of net sales this quarter versus 48.2% for the second quarter last year. The decrease is attributable to steps we have taken to reduce inventory and is primarily due to higher markdowns related to clearance activity compared with the prior year.
•	Our selling, general and administrative expenses (“SG&A”), excluding those expenses separately identified in the statement of operations, increased 550 basis points to 51.5% of net sales from 46.0% of net sales in the second quarter last year. During the quarter, we recorded separation costs related to the former chief executive officer of $4.4 million. The loss of expense leverage stemmed from negative same-store sales performance, coupled with increases in logistic costs related to the opening of our distribution center in Opelika, Alabama and higher fixed cost store expenses, primarily resulting from new superstores and the larger year-over-year superstore base.
	SG&A includes stock-based compensation expense of $2.0 million, net of estimated forfeitures, in the second quarter of fiscal 2007, compared with $0.3 million in the second quarter last year. In the prior year quarter, an adjustment of $1.7 million was recognized to reduce previously recorded expense for performance awards due to revised expectations of operating performance.
•	Store pre-opening and closing costs decreased $1.4 million for the second quarter of fiscal 2007 to $2.6 million, compared with $4.0 million in the second quarter last year, primarily due to the timing of expenses related to store activity year-over-year.
•	Second quarter net loss was $21.2 million or $(0.90) per diluted share, versus a net loss of $5.1 million or $(0.23) per diluted share last year.

16

Results of Operations

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

	Percentage of Net Sales
	Thirteen						Twenty-Six Weeks
	Weeks Ended						Ended
	July 29,			July 30,			July 29,			July 30,
	2006			2005			2006			2005
Net sales		100.0	%		100.0	%		100.0	%		100.0	%
Gross margin		47.4	%		48.2	%		47.0	%		48.4	%
Selling, general and administrative expenses		51.5	%		46.0	%		47.8	%		44.4	%
Store pre-opening and closing costs		0.7	%		1.0	%		1.0	%		1.1	%
Depreciation and amortization		3.3	%		2.7	%		3.1	%		2.5	%
Operating (loss) profit		(8.1	)%		(1.5	)%		(4.9	)%		0.4	%

Comparison of the Thirteen Weeks Ended July 29, 2006 to July 30, 2005

     Net Sales. Net sales for the second quarter of fiscal 2007 decreased 5.4% to $363.2 million from $383.8 million in the prior year. Net sales in the second quarter included $0.2 million of income from the recognition of gift card breakage. The fourth quarter of fiscal 2006 was the first quarter in which we recognized gift card breakage. Same-store sales decreased 8.4% during the quarter versus a same-store sales decrease of 0.5% in the second quarter last year. Although our total store count at the end of the quarter decreased by 30 units from last year’s second quarter, the number of superstores in operation increased to 169 at the quarter end from 131 at the end of last year’s second quarter. Total store square footage increased approximately 3.2% over last year’s second quarter. Superstores accounted for 45% of total net sales for the second quarter of fiscal 2007, compared to approximately 39% of total net sales in the second quarter last year.

     The decline in sales was a result of decreased customer transactions. Customer traffic is relatively flat year-over-year, but the conversion rate is down, resulting in the transaction count decrease. By store format, our same-store sales performance for traditional stores decreased 6.8% versus a same-store sales decrease of 1.8% for the prior year second quarter. Same-store sales for superstores decreased 10.6% for the quarter versus a same-store sales increase of 2.2% for the prior year second quarter. Traditional stores same-store sales benefited from liquidation sales related to store closings which drove higher sales during the year-over-year periods. Superstores sales were impacted by the elimination of one newspaper insert that ran in superstore markets last year that was not repeated this year, as well as an adjustment of store merchandise assortments which more significantly impacted superstores.

     On a category basis, our hardlines, defined as all of our non-sewing categories, represented 46% of our second quarter sales volume and decreased approximately 9.3% on a same-store sales basis. The primary source of the decrease in this category was a significant decline in yarn sales, as well as the impact of an adjustment to store merchandise assortments and softening demand in paper crafting. Our softlines, or sewing related businesses, represented 54% of our second quarter sales volume and decreased approximately 7.7% on a same-store sales basis for the quarter. The decrease in softlines primarily was the result of weakening sales trends in home decorating textiles and fleece, which continue to be slowing categories.

     Gross Margin. Gross margins may not be comparable to those of our competitors and other retailers. For instance, some retailers include all of the costs related to their distribution network and/or

17

occupancy costs in cost of sales, while we exclude a portion of them from gross margin, including those costs instead within SG&A. As a percent of net sales, gross margin decreased 80 basis points to 47.4% for the second quarter of fiscal 2007 compared with 48.2% for the same quarter last year. The decrease is attributable to steps we have taken to reduce inventory and is primarily due to higher markdowns related to clearance activity, compared with the prior 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 $186.9 million in the second quarter compared with $176.4 million in the prior year second quarter. As a percentage of net sales, SG&A expenses increased 550 basis points to 51.5% of net sales, from 46.0% of net sales in the second quarter of last year. The loss of expense leverage for the quarter stemmed from the negative same-store sales performance, increases in logistics costs related to the opening of our new distribution center and increases in fixed store expenses, primarily caused by costs related to the new superstores and the larger year-over-year superstore base. During the quarter, we also recorded separation costs related to the former chief executive officer of $4.4 million.

     Under Statement of Financial Accounting Standards No. 123 (revised 2004), “Share-Based Payment,” (“SFAS No. 123R”), stock-based compensation includes the expensing of stock options and the amortization of the value of restricted stock granted to employees, net of estimated forfeitures. Stock-based compensation expense was $2.0 million, net of estimated forfeitures, for the second quarter of fiscal 2007, compared with $0.3 million in the same period last year. The reduced expense in the second quarter of fiscal 2006 is attributable to an adjustment of $1.7 million that was recognized to reduce previously booked expense for performance awards due to revised expectations of operating performance.

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

     Store pre-opening and closing costs decreased $1.4 million during the second quarter of fiscal 2007 to $2.6 million, compared with $4.0 million in the second quarter last year, primarily due to the timing of expenses related to store activity year-over-year. Store pre-opening costs decreased $1.9 million during the quarter to $0.9 million compared with $2.8 million in last year’s second quarter. Store closing costs increased $0.5 million during the quarter to $1.7 million compared with $1.2 million in last year’s second quarter.

     Depreciation and amortization. Depreciation and amortization expense in the second quarter increased $2.2 million to $12.3 million from $10.1 million, year-over-year. The increase is due to the new superstore growth, as well as the opening of our new distribution center.

     Interest expense. Interest expense in the second quarter of fiscal 2007 increased $1.4 million to $3.9 million from $2.5 million in the second quarter last year, primarily due to an increase in our average debt levels, as well as a higher borrowing rate on our bank credit facility. Our average debt levels during the second quarter of fiscal 2007 were $199 million, compared with $124 million during the prior year second quarter.

     Income taxes. Our effective income tax rate for the second quarter of fiscal 2007 was approximately 37% compared with approximately 38% for the same period in the prior year. Our effective tax rate is subject to change based on the mix of income from different state jurisdictions that tax at different rates, as well as the change in status or outcome of uncertain tax positions. We evaluate our effective rate on a quarterly basis and update our estimate of the full-year effective rate as necessary.

18

Comparison of the Twenty-Six Weeks Ended July 29, 2006 to July 30, 2005

     Net Sales. Net sales for the first half of fiscal 2007 decreased 2.1% to $787.9 million from $804.5 million in the prior year. Net sales in the first half of fiscal 2007 included $0.5 million of income from the recognition of gift card breakage. Same-store sales decreased 6.0% during the first half of fiscal 2007 versus a same-store sales increase of 0.1% last year. Superstores accounted for 45% of total net sales in the first half versus 39% of total net sales in the first half of last year.

     The decline in sales was a result of decreased customer transactions. Customer traffic was relatively flat year-over-year, but our conversion rate was down, resulting in the transaction decrease. By store format, our same-store sales performance for traditional stores decreased 3.9% year-to-date versus a same-store sales decrease of 1.1% in the prior year period. Same-store sales for superstores decreased 9.0% year-to-date versus a same-store sales increase of 2.5% in the prior year period.

     Part of the differential between traditional and superstores same-store sales is that traditional stores benefited from liquidation sales related to store closings, which drove higher sales in the year-over-year period. In addition, superstores sales were impacted by the elimination of three newspaper inserts that ran in the superstore markets last year that were not repeated this year, as well as an adjustment of store merchandise assortments which more significantly impacted superstores.

     On a category basis, our hardlines, defined as all of our non-sewing categories, represented 46% of our first-half sales volume and decreased approximately 5.9% on a same-store sales basis. The primary source of the decrease in this category was a significant decline in yarn sales, along with certain seasonal and home accent categories, as well as softening demand in paper crafting. Our softlines, or sewing related businesses, represented 54% of our first-half sales volume, and decreased approximately 6.0% on a same-store sales basis for the first half. The decrease in softlines primarily was the result of weakening sales trends in home decorating textiles and fleece, which continue to be slowing categories.

     Gross Margin. Gross margins may not be comparable to those of our competitors and other retailers. Some retailers include all of the costs related to their distribution network in cost of sales, while we exclude a portion of them from gross margin, including those costs instead within SG&A. As a percent of net sales, gross margin decreased 140 basis points to 47.0% for the first half of fiscal 2007 compared with 48.4% for the same period a year earlier. The decrease is attributable to steps we have taken to reduce inventory and is primarily due to higher markdowns related to clearance activity.

     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 $376.6 million for the first half of fiscal 2007 compared with $357.0 million in the prior year. As a percentage of net sales, SG&A expenses increased 340 basis points to 47.8% of net sales, from 44.4% of net sales last year. The loss of expense leverage stemmed from the negative same-store sales performance, increases in logistics costs related to the opening of our new distribution center and increases in fixed store expenses, primarily caused by costs related to the new superstores and the larger year-over-year superstore base. During the second quarter, we also recorded separation costs related to the former chief executive officer of $4.4 million.

     Under SFAS No. 123R, stock-based compensation includes the expensing of stock options and the amortization of the value of restricted stock granted to employees, net of estimated forfeitures. Stock-based compensation expense was $3.3 million, net of estimated forfeitures, for the first half of fiscal 2007, compared with $3.0 million in the same period last year.

19

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

     Store pre-opening and closing costs decreased $0.8 million year-to-date to $8.1 million, primarily due to the timing of expenses related to store activity year-over-year. Store pre-opening costs decreased $2.5 million during the first half to $3.4 million compared with $5.9 million in last year’s first half. Store closing costs increased $1.7 million during the first half to $4.7 million compared with $3.0 million in the same period of the prior year, as year-over-year closings increased from 23 to 41 in fiscal 2007. As a percentage of net sales, store pre-opening and closing costs totaled 1.0% of net sales compared with 1.1% last year.

     Depreciation and amortization. Depreciation and amortization increased $3.3 million to $23.9 million in the first half of fiscal 2007 from $20.6 million last year. The increase is due to the new superstore growth, as well as the opening of our new distribution center, which we started depreciating during the first quarter this year. Fiscal 2007 depreciation is estimated to be approximately $48 to $50 million, primarily as a result of incremental depreciation related to new stores and the opening of the new distribution center.

     Interest expense. Interest expense in the first half of fiscal 2007 increased $2.8 million to $7.4 million from $4.6 million in the same period in the prior year, primarily due to an increase in our average debt levels, as well as a higher borrowing rate on our bank credit facility. Our average debt levels year-to-date in fiscal 2007 were $203 million, versus $113 million last year.

     Income taxes. Our effective income tax rate for the first half of fiscal 2007 was approximately 37%. The effective income tax rate for fiscal 2006 was approximately 38%. Our effective tax rate is subject to change based on the mix of income from different state jurisdictions that tax at different rates, as well as the change in status or outcome of uncertain tax positions. We evaluate our effective rate on a quarterly basis and update our estimate of the full-year effective rate as necessary.

     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, we are required to estimate forfeitures at the time of the award grant, rather than account for them as they occur. 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 have not yet vested. The amount of this reduction is presented on the statement of operations as a cumulative effect of change in accounting principle, net of tax. The cumulative adjustment increased fiscal 2007 earnings by $1.0 million, or $0.04 per diluted common share.

Liquidity and Capital Resources

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

20

     The following table provides cash flow related information for the first half of fiscal 2007 and 2006:

Dollars in millions	2007			2006
Net cash provided by (used for) operating activities	$	7.1		$	(105.0	)
Net cash used for investing activities		(33.2	)		(35.6	)
Net cash provided by financing activities		23.5			77.7
Net decrease in cash and cash equivalents	$	(2.6	)	$	(62.9	)
Ending cash and cash equivalents	$	15.3		$	16.7

Net cash provided by (used for) operating activities

     Net cash provided by operations was $7.1 million in the first half of fiscal 2007 compared with net cash used for operating activities of $105.0 million in the first half of fiscal 2006; an increase of $112.1 million. The increase was generated by changes in operating assets and liabilities, which in the first half of fiscal 2007 represented a $7.8 million source of cash versus a $129.1 million use of cash in the same period last year. Cash flows from operating activities, before changes in operating assets and liabilities, were a $(0.7) million net use of cash in fiscal 2007 versus $24.1 million generated in fiscal 2006. The decrease in cash flows from operating activities, before changes in operating assets and liabilities, was caused primarily by our lower earnings in the first half of fiscal 2007.

     Inventories, net of payable support, were a $23.3 million source of cash in the first half of fiscal 2007, compared with a $102.3 million net use of cash in fiscal 2006. Total inventories decreased $62.7 million, or 10.9%, year-over-year. Inventory levels in our traditional stores and superstores are down approximately 13% on a same-store basis. Distribution center inventories are down $5 million, with reductions being partially offset by the opening of our new distribution center.

Net cash used for investing activities

     Net cash used for investing activities totaled $33.2 million in the first half of fiscal 2007 compared with $35.6 million in fiscal 2006 and consisted entirely of capital spending for both periods. Capital expenditures consist of cash expenditures and cash expenditures reimbursed by landlords. Landlord reimbursed capital expenditures represent the cost of assets acquired with landlord lease incentives. Capital expenditures are summarized as follows:

	Twenty-Six Weeks Ended
	July 29,		July 30,
Dollars in millions	2006		2005
Cash	$	22.3	$	29.8
Cash — landlord reimbursed		10.9		5.8
Total	$	33.2	$	35.6

     We continue to anticipate capital expenditures for the full fiscal year 2007 to be approximately $45 to $50 million, which is net of expected landlord allowances of approximately $15 million. During the first half of fiscal 2007, we opened 15 superstores and five traditional stores, expanded a traditional store into a superstore and closed 40 traditional stores and one superstore. Traditional store closings are related to superstore openings in traditional store markets, as well as normal performance related closings for stores that do not meet minimum performance requirements. Store related expenditures, including the 20 new store openings, represented the majority of the capital spending, net of the landlord allowances received. The remaining capital related primarily to the opening of the new distribution center.

21

     For the balance of the fiscal year, we expect to open five more superstores, four of which will open in the third quarter. We will close approximately 18 additional traditional stores between now and the end of the fiscal year.

     Our store count at the end of the second quarter was 648 traditional stores and 169 superstores, for a total store count of 817 stores.

Net cash provided by financing activities

     Net cash provided by financing activities was $23.5 million during the first half of fiscal 2007 compared with $77.7 million during the same period in fiscal 2006. Debt borrowings were $225 million at the end of the second quarter of fiscal 2007, which was an increase of $21.3 million from the beginning of the year and an increase of $50.2 million from the same period in the prior year. Our debt levels are projected to peak at the end of the third quarter, as they historically have, and then be paid down in the fourth quarter.

     As of July 29, 2006, we had the ability to borrow $121.8 million under our bank credit facility, subject to the borrowing base calculation, as defined. Our debt-to-capitalization ratio was 37.5% at July 29, 2006, 33.8% at January 28, 2006 and 29.7% at July 30, 2005.

Off-Balance Sheet Transactions

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

Business Outlook

     Previously, we had communicated that our outlook for the current year was for a difficult first half of the year, with year-over-year improvement in the back half of the year. Our current outlook is consistent with our previous communications. Based upon our operating and industry assumptions, along with the completion of the Repair Plan initiatives, we expect year-over-year improvement in our business performance in the second half of the year. The key considerations for understanding this outlook for the back half of fiscal 2007 include:

• Negative same-store sales performance, although we expect the decline to not be as significant as the first half of fiscal 2007;

• Gross margin rate improvement for the full year of 75 to 125 basis points. For the back half of the year, we expect year-over-year improvement in margin rates of 225 to 325 basis points, compared with the same period in fiscal 2006. Although a substantial improvement relative to fiscal 2006, this represents a return to pre-fiscal 2006 gross margin rates;

• Selling, general and administrative expenses increase of 95 to 125 basis points as a percentage of net sales from fiscal 2006. For the back half of the year, we expect year-over-year change in expense leverage of a 30 basis point improvement to a 20 basis point deterioration, compared with the same period in fiscal 2006;

• Capital spending for the full year of $45 to $50 million primarily related to the opening of the 26 new stores; and

22

• Strengthening of the balance sheet through inventory reduction of $45 to $50 million as of the end of the fiscal year, and a resulting debt reduction by fiscal year end of $40 to $50 million.

          Our actual results in the second half of the year are highly dependent on the same-store sales performance and gross margin rate we are ultimately able to achieve during the year.

Seasonality and Inflation

          Our business exhibits seasonality, which is typical for most retail companies. Our net 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.

          We believe that inflation has not had a significant effect on net sales or on our earnings performance. There can be no assurance, however, that our operating results will not be affected by inflation in the future.

Critical Accounting Policies

          Our condensed consolidated interim financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America. Preparation of these statements requires management to make judgments and estimates. Some accounting policies have a significant impact on amounts reported in these financial statements. A summary of significant accounting policies and a description of accounting policies that are considered critical may be found in our fiscal 2006 Annual Report on Form 10-K in the notes to the consolidated financial statements, Note 1 and the “Critical Accounting Policies and Estimates” section of Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Cautionary Statement Concerning Forward-Looking Statements

          Certain statements contained in this report that are not historical facts are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements, which reflect the Company’s current views of future events and financial performance, involve certain risks and uncertainties. When used herein, the terms “anticipates,” “plans,” “estimates,” “expects,” “believes,” and similar expressions as they relate to us or future or conditional verbs such as “will,” “should,” “would,” “may,” and “could” are intended to identify such forward-looking statements. Our actual results, performance or achievements may 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, 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 wide spread 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.

23

Item 3. Quantitative and Qualitative Disclosures About Market Risk

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

Item 4. Controls and Procedures

     As of the end of the period covered by this report, the Company conducted an evaluation, under the supervision and with the participation of the principal executive officer and principal financial officer of the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”)). Based on this evaluation, the principal executive officer and principal financial officer concluded that the Company’s disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms.

     There have been no changes in our internal control over financial reporting identified in connection with the evaluation required by Rule 13a-15(d) of the Exchange Act that occurred during our last fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

24

PART II. OTHER INFORMATION

Item 1. 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 1A. Risk Factors

     None.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Purchases of Equity Securities by Jo-Ann Stores, Inc.

					Total Number of		Maximum Number of
					Shares Purchased as		Shares that May Yet
					Part of Publicly		Be Purchased Under
	Total Number		Average Price Paid		Announced Plans or		the Plans or
	of Shares Purchased		per Share		Programs		Programs
April 30 — May 27, 2006		—	$	—		905,310		1,244,690
May 28 — July 1, 2006		—	$	—		905,310		1,244,690
July 2—29, 2006		234	$	13.52		905,544		1,244,456
Total		234	$	13.52		905,544		1,244,456

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

Item 3. Defaults Upon Senior Securities

     None.

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

a)	An Annual Meeting of Shareholders of the Company was held on June 14, 2006.
b)	Scott Cowen, Alan Rosskamm and Gregg Searle were elected to the Board of Directors in the class whose term of office expires in 2009.
c)	The nominees for Directors as listed in the proxy statement were elected with the following vote:

Nominee	Votes For		Votes Withheld
Scott Cowen		15,636,267		4,522,581
Alan Rosskamm		17,781,808		2,377,040
Gregg Searle		17,801,732		2,357,116

25

Item 5. Other Information

     The Company entered into substantially identical Split Dollar Insurance Agreements, dated July 27, 2006 and July 28, 2006, with James Kerr, Executive Vice President and Chief Financial Officer, and David Holmberg, Executive Vice President, Operations. Under those Agreements, the Company will pay the premiums on, and be the owner of, life insurance policies on the lives of Mr. Kerr and Mr. Holmberg. Mr. Kerr’s and Mr. Holmberg’s designated beneficiaries will have the right to receive $600,000 of the proceeds of those insurance policies upon their respective deaths and the Company will receive the balance of the proceeds, if any, and will retain all other rights of ownership of the life insurance policies. The Agreements will terminate automatically upon the termination of Mr. Kerr’s or Mr. Holmberg’s employment, as the case may be.

     The Compensation Committee of the Board of Directors established a “Maximum Supplemental Retirement Benefit Amount” of $600,000 for Mr. Kerr and Mr. Holmberg under the Company’s Supplemental Retirement Benefit Plan, effective as of July 27, 2006.

Item 6. Exhibits

     a) Exhibits

No.	Exhibit Description
10.1	Letter Agreement entered into on June 29, 2006 between the Company and Darrell Webb regarding Mr. Webb’s employment with the Company
10.2	Employment Agreement dated July 24, 2006 between the Company and Darrell Webb
10.3	Letter Agreement entered into on July 10, 2006 between the Company and Travis Smith regarding Mr. Smith’s employment with the Company
10.4	Employment Agreement dated July 31, 2006 between the Company and Travis Smith
10.5	Letter Agreement entered into on July 27, 2006 between the Company and James Kerr regarding Mr. Kerr’s employment with the Company
10.6	Employment Agreement dated July 27, 2006 between the Company and James Kerr
10.7	Split Dollar Insurance Agreement dated July 27, 2006 between the Company and James Kerr
10.8	Split Dollar Insurance Agreement dated July 28, 2006 between the Company and David Holmberg
10.9	Schedule to Jo-Ann Stores, Inc. Supplemental Retirement Benefit Plan, effective as of July 27, 2006.
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

26

SIGNATURES

Pursuant to the requirements 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.
DATE: September 7, 2006	/s/ Darrell Webb
	Darrell Webb,
	President and Chief Executive Officer
	/s/ James Kerr
	James Kerr,
	Executive Vice President and Chief Financial Officer

27

EX-10.1

Exhibit 10.1

June 27, 2006 — Revised

Darrell Webb

Dear Darrell:

I am delighted to offer you the position of Chairman, President, and CEO of Jo-Ann Stores, Inc. We have tremendous challenges ahead of us as we continue to repair the business and solidify our position as the premier fabric and craft retailer. Your vision and leadership are critical to us as we continue to serve and inspire creativity.

The following provides the terms and conditions of your employment offer:

1)	Your employment will commence on or before August 1, 2006.
2)	Your annual base salary will be $750,000 paid in bi-weekly installments of $28,846.15 with an annual review by the board of directors in March of each year.
3)	For FY08, you will participate in our Management Incentive Plan (MIP) which has a cash bonus of 100% of your base salary upon achieving the budgeted (target) financial performance for the fiscal year, as approved by the board of directors annually. You will be guaranteed a FY08 bonus of not less than 50% of earned salary for the year. For the current fiscal year ending January 31, 2007 your MIP bonus will be guaranteed at 100% of your actual base salary earned between your start date and the end of the fiscal year, and will be payable in March 2007.
4)	Beginning in fiscal year 2008, you will participate in the Jo-Ann Stores, Inc. long-term incentive plan at a level commensurate with your position relative to other executive officers. Annual grants under this plan are determined by the board of directors based on peer incentive compensation levels and the specific needs and circumstances of the Company. In addition, on the first Friday following your start date you will receive:

a)	A grant of 100,000 shares of Jo-Ann Stores, Inc. common stock These shares will vest 25% annually on the first four anniversaries of your start date.
b)	A grant of 100,000 non-qualified options to purchase shares of Jo-Ann Stores, Inc. common stock. These options will vest 25% annually on the first four anniversaries of your start date and be exercisable for seven years from date of issuance. These options will be priced at the closing price of Jo-Ann Stores common stock on the day of the grant.

Under the terms of the 1998 Incentive Compensation Plan, as amended, you would have 90 days to exercise all vested stock options in the event of your termination for any reason other

1

than death or disability and (1) year to exercise all vested stock options in the event of death or disability.

5)	We will provide a car allowance in the amount of $1,400 per month. This allowance is intended to cover all costs, which include, but is not limited to the purchase or lease price of a vehicle, insurance, registration, maintenance, gasoline, taxes, etc. The allowance will be included in your paycheck on the first pay period of the month. The car allowance, for tax purposes, is treated as ordinary income and will be taxed accordingly.
6)	You will be immediately eligible for twenty-seven days of Paid Time Off (PTO) annually.
7)	You will be eligible to participate in the Company’s Group Benefit Plan. Your benefits will become effective ninety (90) days from your start date. Please note that our medical plan carries a $25,000 per person limit for the first year of coverage.
8)	You will participate in our Salary Continuation plan. This plan pays you one hundred percent (100%) of your salary for up to ninety (90) days for any illness or disability.
9)	As a member of our Leadership Group, you will be required to participate in the Company’s Long-Term Disability plan. The plan pays you a benefit equal to sixty percent (60%) of your salary up to a maximum of $18,000 per month should you become disabled. Additionally, Jo-Ann will provide you with a supplemental long-term disability plan that will provide an additional maximum monthly benefit of up to $7,000 for a total monthly benefit of $25,000. This supplemental coverage is subject to all underwriting provisions of the insurance carrier.
10)	You will be eligible to participate in our Deferred Compensation Plan, provided you enroll within 30 days from your start date.
11)	You will be eligible to participate in the Company’s SERP after one (1) year of employment with a maximum benefit of $750,000 subject to the terms of the plan.
12)	You are also eligible to participate in all other benefits provided to senior officers including: an annual executive physical, tax and financial planning assistance, etc.
13)	We will reimburse you for reasonable attorney fees resulting from the review of these documents.
14)	In order to facilitate your relocation to the Cleveland, Ohio area, the Company will assume the full cost of moving your household goods. Our relocation representative will contact you to initiate this process upon your acceptance of this offer. In addition, should it be required, the Company will provide you with temporary accommodation for up to 90 days. Should it become necessary, the Company will also reimburse you for duplicate mortgage payments, including your tax liability, at a rate equal to the lower of the two mortgages, for a period of up to six months.

2

The Company will reimburse you for up to six (6) round trips between Portland and Cleveland during the period until your relocation is completed and for expenses associated with up to three (3) house-hunting trips for you and your wife. In addition, on your start date the Company will make a lump-sum payment to you of $150,000, less applicable taxes, to cover any incidental relocation costs not otherwise reimbursed.

15)

The Company will enter into a separate agreement with you covering severance in the event that your employment is terminated by the Company without cause or by you or the Company as a result of a Change in Control. This agreement will be substantially in the form attached hereto.

Darrell, I am excited to have you come on board as the new leader of Jo-Ann Stores, Inc. I am very confident that you will make an immediate impact.

Please confirm your agreement to accept this position by signing and returning one copy of this letter. Thank you.

Sincerely,

/s/ Alan Rosskamm  

Alan Rosskamm 

Chairman, President, and CEO 

Agreed to this on the 29^th day of June, 2006.

/s/ Darrell Webb  

Darrell Webb 

3

EX-10.2

Exhibit 10.2

AGREEMENT

THIS AGREEMENT (“Agreement”) is made as of the 24th day of July, 2006, between J0-ANN STORES, INC., an Ohio corporation (the “Company”), and DARRELL WEBB (“Executive”).

The Company is entering into this 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 Terminations Occurring Before a Change of Control. If, before the occurrence of a Change of Control, Executive’s employment with the Company is terminated (a) by the Company without Cause, or (b) 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 twenty-four (24) months payable in consecutive bi-weekly installments at the same times and in the same amounts as if Executive had remained in the employ of the Company and had continued to earn Executive’s Base Salary for such twenty-four (24) month period.

     (b) The Company shall continue to provide Executive with the welfare benefits of medical insurance, dental insurance, and group term life insurance for the twenty-four (24) months following the Termination Date, except that

     (i) the Company may stop providing medical insurance and dental insurance coverage earlier if and when Executive accepts full time employment with a subsequent employer that generally makes medical insurance available to its executives and Executive is eligible for that coverage with the subsequent employer; and

     (ii) 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.

     (iii) If the Termination Date occurs during a fiscal year in which a bonus was earned under any Company sponsored bonus plan, the Executive

1

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 fiscal year.

The 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.

2. Change of Control Severance Benefits Upon Certain Terminations Occurring After a Change of Control. If, after the occurrence of a Change of Control, Executive’s employment with the Company is terminated (a) by the Company without Cause, or (b) 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 business days after the Termination Date, in an amount equal to three times the sum of (i) Executive’s Base Salary plus (ii) the greater of (A) Executive’s average annual bonus earned over the three full fiscal years of the Company ended before the Termination Date, or (B) Executive’s target annual bonus established for the bonus plan year in which the Termination Date 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 Termination Date, the average of the bonuses earned in the two (2) full fiscal years of the Company ended before the Termination Date, or the amount of the bonus earned in the one full fiscal year of the Company ended before the Termination Date, as the case may be, shall be substituted for the average referred to in (A) above.

     (b) If the Termination Date 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 business days after the Termination Date, 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.

2

     (c) The Company shall make a lump sum cash payment to Executive, not later than ten business days after the Termination Date, in an amount equal to the greater of (i) Executive’s unpaid targeted annual bonus, established for the bonus year in which the Termination Date 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 Termination Date, and the denominator of which is 365, or (b) 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 the welfare benefits of medical insurance, dental insurance, and group term life insurance through the third anniversary of the Termination Date, except that

     (i) the Company may stop providing medical insurance and dental insurance coverage earlier if Executive accepts full time employment with a subsequent employer that generally makes medical insurance available to its executives and Executive is eligible for that coverage with the subsequent employer; and

     (ii) the Company may stop providing group term life insurance earlier if Executive accepts full time employment with a subsequent employer and that employer provides Executive with group term life insurance coverage.

     (e) The 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 in effect as of the Termination Date.

     (f) 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. Earned But Unpaid Base Salary and Accrued Paid Time Off Pay Payable Upon Any Termination of Employment; Treatment of Long-Term Incentive Awards. Upon any termination of Executive’s employment for any reason and at any time, the Company shall pay to Executive (or, where appropriate, to Executive’s Beneficiary), not later than ten days after the Termination Date, (a) all earned but unpaid Base Salary through the Termination Date, 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 Termination Date. In addition, upon any termination of Executive’s employment, 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. Termination Due to Retirement, Disability, or Death. If Executive’s employment is terminated due to Retirement, Disability, or death while this Agreement remains in effect (whether before or after the occurrence of a Change of

3

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 3and 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. Termination for Cause or by Executive other than for Good Reason. If Executive’s employment is terminated either 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 3and 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 is Terminated both in Advance of and in Contemplation of a Change of Control. If Executive is terminated by the Company (a) in contemplation of and not more than six full calendar months before the occurrence of a Change of Control, and (b) under circumstances such that if the termination 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 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 years following the occurrence of any Change of Control, that particular Change of Control will deemed never to have occurred for purposes of this Agreement.

8. Term of Agreement, Right to Severance Benefits Upon Determination by Company Not to Renew.

          8.1. Term. This Agreement shall be effective as of the Effective Date and shall thereafter apply to any termination of Executive’s employment occurring on or before July 31, 2009. Unless this Agreement is earlier terminated pursuant to its terms, on July 31, 2009 and on July 31 of each succeeding year thereafter (a “Renewal Date”), the term of this Agreement shall be automatically extended for an additional year unless either party has given notice to the other, at least one year in

4

advance of that Renewal Date, that the Agreement shall not apply to any termination of Executive’s employment occurring after that Renewal Date.

          8.2. Right to Severance Benefits. If the Company gives Executive notice that this Agreement shall not apply to any termination of Executive’s employment occurring after a particular Renewal Date, Executive shall have the right to terminate Executive’s employment at any time during the first three months of the final year during which this Agreement is thereafter scheduled to be effective (e.g., if the Company gives notice that the Agreement is not to apply to any termination after July 31, 2009, at any time during the months of August, September, and October 2008) and Executive shall thereupon be entitled to receive Severance Benefits to the same extent as if all of the conditions to Executive’s right to receive Severance Benefits under Section 2 had been satisfied.

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 pay all of

5

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 any portion of 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

6

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.

10. Outplacement Assistance. Following a termination of employment 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

7

the Effective Date of this Agreement until Executive obtains subsequent employment or self employment.

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 medical, dental and/or 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

8

mandatory arbitration (in lieu of litigation), conducted before a panel of three arbitrators sitting in a location selected by Executive within 50 miles from Hudson, Ohio, in accordance with the rules of the American Arbitration Association then in effect. Any dispute which arises with respect to 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 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 18 month period beginning on the Termination Date or if Change of Control Severance Benefits are paid hereunder, thereafter through the second 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 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 their 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 to 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.

9

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 30 days after delivery of the notice from Executive, Executive’s employment will terminate as of the 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 other than the offer letter being provided by the Company to Executive contemporaneously with this 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.

10

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 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 termination. 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:

11

     (a) The willful and continued failure by Executive to substantially perform his or her normal duties (other than any such failure resulting from Executive’s 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 or her duties, and Executive has failed to remedy the situation within 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 or her action or omission was in or not opposed to the best interest of the Company.

          17.8. Change of Control. A “Change of Control” 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 15% or more (but less than 50%) of the Common 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 50% or more of the Common 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 15% or more of the Common Shares then outstanding;

     (d) At any time during any period of 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;

12

     (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 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 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 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.

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

          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.

13

          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 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. “Exchange Act” means the United States Securities Exchange Act of 1934, as amended.

          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. “Excise Tax” has the meaning assigned to that term in Section 9.5.

          17.17. “Founding Families” means the families consisting of Betty and Martin Rosskamm and Alan and Justine Zimmerman and their respective issue.

          17.18. “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 reduction in Executive’s Base Salary 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 Salary made in contemplation of the Change of Control.

     (b) Any significant 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 significant reduction in Executive’s benefits package from the benefit package in effect immediately before the Change of Control or as in effect immediately before any reduction of the benefit package made in contemplation of the Change of Control.

     (d) Any reduction in Executive’s long-term incentive opportunity with the Company.

     (e) Any shift of Executive’s principal place of employment with the Company to a location that is more than 50 miles (by straight line measurement)

14

from the site of the Company’s headquarters in Hudson, Ohio at the Effective Time.

     (f) Any dissolution or liquidation of the Company.

Executive’s continued employment shall not constitute consent to, or a waiver of rights with respect to, any circumstance constituting Good Reason under this Section 17.18 unless the Company has given Executive written notice of the change and Executive has voluntarily agreed in a writing that specifically refers to this section of this Agreement to accept the change and to waive any possible reliance on that change as constituting Good Reason.

          17.19. “Good Reason” (before a Change of Control) means, without Executive’s express written consent, any 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.

          17.20. “Gross Up Payment” has the meaning assigned to that term in Section 9.5 above.

          17.21. “Payment” has the meaning assigned to that term in Section 9.1 above.

          17.22. “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).

          17.23. “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).

          17.24. “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.”

          17.25. “Retirement” means a voluntary termination of Executive’s employment other than for Good Reason after Executive has either (a) attained age 55 and has completed at least ten full years of continuous service with the Company, or (b) has attained age 65 (without regard to length of service).

15

          17.26. “Severance Benefits” means those payments and benefits that may become payable before the occurrence of a Change of Control pursuant to Section 1 above.

          17.27. “Termination Date” means the date on which any termination of Executive’s employment becomes effective.

16

IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first written above.

JO-ANN STORES, INC.
By	/s/ Thomas A. Williams
	Thomas A. Williams
	Vice President, Human Resources Jo-Ann Stores, Inc.
“EXECUTIVE”
/s/ Darrell Webb
Darrell Webb

17

EX-10.3

Exhibit 10.3

July 10, 2006

Travis Smith

Dear Travis:

I am delighted to offer you the position of Executive Vice President, Merchandising & Marketing of Jo-Ann Stores, Inc. We have tremendous challenges ahead of us as we continue to repair the business and solidify our position as the premier fabric and craft retailer. Your leadership and merchandising expertise are critical to us as we continue to serve and inspire creativity.

The following provides the terms and conditions of your employment offer:

1)	Your employment will commence on July 31, 2006.
2)	Your annual base salary will be $475,000 paid in bi-weekly installments of $18,269.23 with an annual review in February or March of each year.
3)	For FY08, you will participate in our Management Incentive Plan (MIP) which has a cash bonus of 50% of your base salary upon achieving the budgeted (target) financial performance for the fiscal year, as approved by the board of directors annually. You will be guaranteed a FY08 bonus of not less than 25% of earned salary for the year. For the current fiscal year ending January 31, 2007 your MIP bonus will be guaranteed at $200,000 and will be payable in March 2007.
4)	Beginning in fiscal year 2008, you will participate in the Jo-Ann Stores, Inc. long-term incentive plan at a level commensurate with your position relative to other executive officers. Annual grants under this plan are determined by the board of directors based on peer incentive compensation levels and the specific needs and circumstances of the Company. In addition, on the first Friday following your start date you will receive:

a)	A grant of 40,000 shares of Jo-Ann Stores, Inc. common stock These shares will vest 25% annually on the first four anniversaries of your start date.
b)	A grant of 50,000 non-qualified options to purchase shares of Jo-Ann Stores, Inc. common stock. These options will vest 25% annually on the first four anniversaries of your start date and be exercisable for seven years from date of issuance. These options will be priced at the closing price of Jo-Ann Stores common stock on the day of the grant.

5)	We will provide a car allowance in the amount of $1,300 per month. This allowance is intended to cover all costs, which include, but is not limited to the purchase or lease price of a vehicle, insurance, registration, maintenance, gasoline, taxes, etc. The allowance will be included in your paycheck on the first pay period of the month. The car allowance, for tax purposes, is treated as ordinary income and will be taxed accordingly.
6)	You will be immediately eligible for twenty-seven days of Paid Time Off (PTO) annually.
7)	You will be eligible to participate in the Company’s Group Benefit Plan. Your benefits will become effective ninety (90) days from your start date. Please note that our medical plan carries a $25,000 per person limit for the first year of coverage.
8)	You will participate in our Salary Continuation plan. This plan pays you one hundred percent (100%) of your salary for up to ninety (90) days for any illness or disability.
9)	As a member of our Leadership Group, you will be required to participate in the Company’s Long-Term Disability plan. The plan pays you a benefit equal to sixty percent (60%) of your salary up to a maximum of $18,000 per month should you become disabled. Additionally, Jo-Ann will provide you with a supplemental long-term disability plan that will provide an additional maximum monthly benefit of up to $7,000 for a total monthly benefit of $25,000. This supplemental coverage is subject to all underwriting provisions of the insurance carrier.
10)	You will be eligible to participate in our Deferred Compensation Plan, provided you enroll within 30 days from your start date.
11)	You will be eligible to participate in the Company’s SERP after one (1) year of employment with a maximum benefit of $600,000 subject to the terms of the plan.
12)	You are also eligible to participate in all other benefits provided to senior officers including: an annual executive physical, tax and financial planning assistance, etc.
13)	In order to facilitate your relocation to the Cleveland, Ohio area, the Company will assume the full cost of moving your household goods. Our relocation representative will contact you to initiate this process upon your acceptance of this offer. In addition, should it be required, the Company will provide you with temporary accommodation for up to 90 days. Should it become necessary, the Company will also reimburse you for duplicate mortgage payments, including your tax liability, at a rate equal to the lower of the two mortgages, for a period of up to six months.

The Company will reimburse you for up to six (6) round trips between Portland and Cleveland during the period until your relocation is completed and for expenses associated with up to three (3) house-hunting trips for you and your wife. In addition, on your start date the Company will make a lump-sum payment to you of $150,000, less applicable taxes, to cover any incidental relocation costs not otherwise reimbursed.

14) The Company will enter into a separate agreement with you covering severance in the event that your employment is terminated by the Company without cause or by you or the Company as a result of a Change in Control.

Travis, I am excited to have you come on board as the new leader of the Merchandise and Marketing team. I am very confident that you will make an immediate impact.

Please confirm your agreement to accept this position by signing and returning one copy of this letter. Thank you.

Sincerely,

/s/	Darrell Webb
Darrell Webb
Chairman, President, & CEO

Agreed to this on the 10^th day of July, 2006.

/s/	Travis Smith
Travis Smith

EX-10.4

Exhibit 10.4

AGREEMENT

THIS AGREEMENT (“Agreement”) is made as of the 31^st day of July, 2006, between J0-ANN STORES, INC., an Ohio corporation (the “Company”), and Travis Smith (“Executive”).

The Company is entering into this 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 Terminations Occurring Before a Change of Control. If, before the occurrence of a Change of Control, Executive’s employment with the Company is terminated (a) by the Company without Cause, or (b) 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 remained in the employ of the Company and had continued to earn Executive’s Base Salary for such eighteen (18) month period.

     (b) The Company shall continue to provide Executive with the welfare benefits of medical insurance, dental insurance, and group term life insurance for the eighteen (18) months following the Termination Date, except that

     (i) the Company may stop providing medical insurance and dental insurance coverage earlier if and when Executive accepts full time employment with a subsequent employer that generally makes medical insurance available to its executives and Executive is eligible for that coverage with the subsequent employer; and

     (ii) 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.

1

     (iii) If the Termination Date 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 fiscal year.

The 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.

2. Change of Control Severance Benefits Upon Certain Terminations Occurring After a Change of Control. If, after the occurrence of a Change of Control, Executive’s employment with the Company is terminated (a) by the Company without Cause, or (b) 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 business days after the Termination Date, in an amount equal to three times the sum of (i) Executive’s Base Salary plus (ii) the greater of (A) Executive’s average annual bonus earned over the three full fiscal years of the Company ended before the Termination Date, or (B) Executive’s target annual bonus established for the bonus plan year in which the Termination Date 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 Termination Date, the average of the bonuses earned in the two (2) full fiscal years of the Company ended before the Termination Date, or the amount of the bonus earned in the one full fiscal year of the Company ended before the Termination Date, as the case may be, shall be substituted for the average referred to in (A) above.

     (b) If the Termination Date 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 business days after the Termination Date, 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

2

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 business days after the Termination Date, in an amount equal to the greater of (i) Executive’s unpaid targeted annual bonus, established for the bonus year in which the Termination Date 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 Termination Date, and the denominator of which is 365, or (b) 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 the welfare benefits of medical insurance, dental insurance, and group term life insurance through the third anniversary of the Termination Date, except that

     (i) the Company may stop providing medical insurance and dental insurance coverage earlier if Executive accepts full time employment with a subsequent employer that generally makes medical insurance available to its executives and Executive is eligible for that coverage with the subsequent employer; and

     (ii) the Company may stop providing group term life insurance earlier if Executive accepts full time employment with a subsequent employer and that employer provides Executive with group term life insurance coverage.

     (e) The 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 in effect as of the Termination Date.

     (f) 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. Earned But Unpaid Base Salary and Accrued Paid Time Off Pay Payable Upon Any Termination of Employment; Treatment of Long-Term Incentive Awards. Upon any termination of Executive’s employment for any reason and at any time, the Company shall pay to Executive (or, where appropriate, to Executive’s Beneficiary), not later than ten days after the Termination Date, (a) all earned but unpaid Base Salary through the Termination Date, 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 Termination Date. In addition, upon any termination of Executive’s employment, 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. .

3

4. Termination Due to Retirement, Disability, or Death. If Executive’s employment is terminated 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 3and 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. Termination for Cause or by Executive other than for Good Reason. If Executive’s employment is terminated either 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 3and 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 is Terminated both in Advance of and in Contemplation of a Change of Control. If Executive is terminated by the Company (a) in contemplation of and not more than six full calendar months before the occurrence of a Change of Control, and (b) under circumstances such that if the termination 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 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 years following the occurrence of any Change of Control, that particular Change of Control will deemed never to have occurred for purposes of this Agreement.

8. Term of Agreement, Right to Severance Benefits Upon Determination by Company Not to Renew.

          8.1. Term. This Agreement shall be effective as of the Effective Date and shall thereafter apply to any termination of Executive’s employment occurring on or before July 31, 2009. Unless this Agreement is earlier terminated pursuant to its

4

terms, on July 31, 2009 and on July 31 of each succeeding year thereafter (a “Renewal Date”), the term of this Agreement shall be automatically extended for an additional year unless either party has given notice to the other, at least one year in advance of that Renewal Date, that the Agreement shall not apply to any termination of Executive’s employment occurring after that Renewal Date.

          8.2. Right to Severance Benefits. If the Company gives Executive notice that this Agreement shall not apply to any termination of Executive’s employment occurring after a particular Renewal Date, Executive shall have the right to terminate Executive’s employment at any time during the first three months of the final year during which this Agreement is thereafter scheduled to be effective (e.g., if the Company gives notice that the Agreement is not to apply to any termination after July 31, 2009, at any time during the months of August, September, and October 2008) and Executive shall thereupon be entitled to receive Severance Benefits to the same extent as if all of the conditions to Executive’s right to receive Severance Benefits under Section 2 had been satisfied.

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

5

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 any portion of 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

6

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.

10. Outplacement Assistance. Following a termination of employment in which Severance Benefits or Change of Control Severance Benefits are payable hereunder

7

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.

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 medical, dental and/or 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 arbitrators sitting in a location selected by Executive within 50 miles from Hudson, Ohio, in accordance with the rules of the American Arbitration Association then in effect. Any dispute which arises with respect to 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 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 18 month period beginning on the Termination Date or if Change of Control Severance Benefits are paid hereunder, thereafter through the second 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 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 their 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 to 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.

9

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 30 days after delivery of the notice from Executive, Executive’s employment will terminate as of the 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 other than the offer letter being provided by the Company to Executive contemporaneously with this 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.

10

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 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 termination. 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:

11

     (a) The willful and continued failure by Executive to substantially perform his or her normal duties (other than any such failure resulting from Executive’s 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 or her duties, and Executive has failed to remedy the situation within 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 or her action or omission was in or not opposed to the best interest of the Company.

          17.8. Change of Control. A “Change of Control” 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 15% or more (but less than 50%) of the Common 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 50% or more of the Common 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 15% or more of the Common Shares then outstanding;

     (d) At any time during any period of 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;

12

     (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 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 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 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.

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

          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.

13

          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 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. “Exchange Act” means the United States Securities Exchange Act of 1934, as amended.

          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. “Excise Tax” has the meaning assigned to that term in Section 9.5.

          17.17. “Founding Families” means the families consisting of Betty and Martin Rosskamm and Alan and Justine Zimmerman and their respective issue.

          17.18. “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 reduction in Executive’s Base Salary 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 Salary made in contemplation of the Change of Control.

     (b) Any significant 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 significant reduction in Executive’s benefits package from the benefit package in effect immediately before the Change of Control or as in effect immediately before any reduction of the benefit package made in contemplation of the Change of Control.

     (d) Any reduction in Executive’s long-term incentive opportunity with the Company.

     (e) Any shift of Executive’s principal place of employment with the Company to a location that is more than 50 miles (by straight line measurement)

14

from the site of the Company’s headquarters in Hudson, Ohio at the Effective Time.

     (f) Any dissolution or liquidation of the Company.

Executive’s continued employment shall not constitute consent to, or a waiver of rights with respect to, any circumstance constituting Good Reason under this Section 17.18 unless the Company has given Executive written notice of the change and Executive has voluntarily agreed in a writing that specifically refers to this section of this Agreement to accept the change and to waive any possible reliance on that change as constituting Good Reason.

          17.19. “Good Reason” (before a Change of Control) means, without Executive’s express written consent, any 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.

          17.20. “Gross Up Payment” has the meaning assigned to that term in Section 9.5 above.

          17.21. “Payment” has the meaning assigned to that term in Section 9.1 above.

          17.22. “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).

          17.23. “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).

          17.24. “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.”

          17.25. “Retirement” means a voluntary termination of Executive’s employment other than for Good Reason after Executive has either (a) attained age 55 and has completed at least ten full years of continuous service with the Company, or (b) has attained age 65 (without regard to length of service).

15

          17.26. “Severance Benefits” means those payments and benefits that may become payable before the occurrence of a Change of Control pursuant to Section 1 above.

          17.27. “Termination Date” means the date on which any termination of Executive’s employment becomes effective.

16

IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first written above.

JO-ANN STORES, INC.
By	/s/ Darrell Webb
	Darrell Webb
	President and CEO Jo-Ann Stores, Inc.
“EXECUTIVE”
/s/ Travis Smith
Travis Smith

EX-10.5

Exhibit 10.5

July 24, 2006

Jim Kerr

Dear Jim:

I am delighted to offer you the position of Executive Vice President, Chief Financial Officer of Jo-Ann Stores, Inc. All of my personal contacts with Board members and other members of Jo-Ann’s senior leadership team, have reiterated to me your ability and willingness to help lead Jo-Ann back to the prominence of being the premier fabric and craft retailer.

The following provides the terms and conditions of your employment offer:

1) Your promotion date will become effective immediately.

2) Your annual base salary will be increased to $300,000 paid in bi-weekly installments of $11,538.46 with an annual review in February or March of each year.

3) Your Target incentive under the Management Incentive Plan for FY08 will be increased to 50% of earned salary.

4) Beginning in fiscal year 2008, you will participate in the Jo-Ann Stores, Inc. long-term incentive plan at a level commensurate with your position relative to other executive officers. As you know, annual grants under this plan are determined by the board of directors based on peer incentive compensation levels and the specific needs and circumstances of the Company. In addition, on the first Friday following the effective date in your new position, you will receive:

a)	A grant of 10,000 shares of Jo-Ann Stores, Inc. common stock These shares will vest 50% after (3) three years and 50% after (4) years.
b)	A grant of 25,000 non-qualified options to purchase shares of Jo-Ann Stores, Inc. common stock. These options will vest 25% annually on the first four anniversaries of your start date and be exercisable for seven years from date of issuance. These options will be priced at the closing price of Jo-Ann Stores common stock on the day of the grant.

5)	Your car allowance will be increased to $1,300 per month.
6)	Your PTO will remain the same.

7) We will provide you with an allowance of up to $5,000 annually to be used for tax and financial planning purposes.

8) You will be eligible to participate in the Company’s SERP pending approval at the next Board of Directors Meeting, with a maximum benefit of $600,000 subject to the terms of the plan.

9) The Company will enter into a separate agreement with you covering severance in the event that your employment is terminated by the Company without cause or by you or the Company as a result of a Change in Control.

Jim, I am very excited to promote you to Executive Vice President and Chief Financial Officer for Jo-Ann Stores, Inc. I am very confident that you will continue to make an impact and I look forward to working with you.

Please confirm your agreement to accept this position by signing and returning one copy of this letter. Thank you.

Sincerely,

/s/ Darrell Webb  

Darrell Webb 

Chairman, President, & CEO 

Agreed to this on the 27^th day of July, 2006.

/s/ Jim Kerr  

Jim Kerr 

EX-10.6

Exhibit 10.6

AGREEMENT

THIS AGREEMENT (“Agreement”) is made as of the 27^th day of July, 2006, between J0-ANN STORES, INC., an Ohio corporation (the “Company”), and Jim Kerr (“Executive”).

The Company is entering into this 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 Terminations Occurring Before a Change of Control. If, before the occurrence of a Change of Control, Executive’s employment with the Company is terminated (a) by the Company without Cause, or (b) 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 remained in the employ of the Company and had continued to earn Executive’s Base Salary for such eighteen (18) month period.

     (b) The Company shall continue to provide Executive with the welfare benefits of medical insurance, dental insurance, and group term life insurance for the eighteen (18) months following the Termination Date, except that

     (i) the Company may stop providing medical insurance and dental insurance coverage earlier if and when Executive accepts full time employment with a subsequent employer that generally makes medical insurance available to its executives and Executive is eligible for that coverage with the subsequent employer; and

     (ii) 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.

1

     (iii) If the Termination Date 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 fiscal year.

The 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.

2. Change of Control Severance Benefits Upon Certain Terminations Occurring After a Change of Control. If, after the occurrence of a Change of Control, Executive’s employment with the Company is terminated (a) by the Company without Cause, or (b) 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 business days after the Termination Date, in an amount equal to two times the sum of (i) Executive’s Base Salary plus (ii) the greater of (A) Executive’s average annual bonus earned over the three full fiscal years of the Company ended before the Termination Date, or (B) Executive’s target annual bonus established for the bonus plan year in which the Termination Date 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 Termination Date, the average of the bonuses earned in the two (2) full fiscal years of the Company ended before the Termination Date, or the amount of the bonus earned in the one full fiscal year of the Company ended before the Termination Date, as the case may be, shall be substituted for the average referred to in (A) above.

     (b) If the Termination Date 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 business days after the Termination Date, 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 business days after the Termination Date, in an amount equal to the greater of (i) Executive’s unpaid targeted annual bonus, established for the bonus year in which the Termination Date 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 Termination Date, and the denominator of which is 365, or (b) the bonus amount specifically guaranteed to Executive for that bonus year under any other agreement between the Company and Executive.

2

     (d) The Company shall continue to provide Executive with the welfare benefits of medical insurance, dental insurance, and group term life insurance through the second anniversary of the Termination Date, except that

     (i) the Company may stop providing medical insurance and dental insurance coverage earlier if Executive accepts full time employment with a subsequent employer that generally makes medical insurance available to its executives and Executive is eligible for that coverage with the subsequent employer; and

     (ii) the Company may stop providing group term life insurance earlier if Executive accepts full time employment with a subsequent employer and that employer provides Executive with group term life insurance coverage.

     (e) The 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 in effect as of the Termination Date.

     (f) 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. Earned But Unpaid Base Salary and Accrued Paid Time Off Pay Payable Upon Any Termination of Employment; Treatment of Long-Term Incentive Awards. Upon any termination of Executive’s employment for any reason and at any time, the Company shall pay to Executive (or, where appropriate, to Executive’s Beneficiary), not later than ten days after the Termination Date, (a) all earned but unpaid Base Salary through the Termination Date, 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 Termination Date. In addition, upon any termination of Executive’s employment, 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. Termination Due to Retirement, Disability, or Death. If Executive’s employment is terminated 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 3and 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. Termination for Cause or by Executive other than for Good Reason. If Executive’s employment is terminated either by the Company for Cause or by

3

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 3and 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 is Terminated both in Advance of and in Contemplation of a Change of Control. If Executive is terminated by the Company (a) in contemplation of and not more than six full calendar months before the occurrence of a Change of Control, and (b) under circumstances such that if the termination 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 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 years following the occurrence of any Change of Control, that particular Change of Control will deemed never to have occurred for purposes of this Agreement.

8. Term of Agreement, Right to Severance Benefits Upon Determination by Company Not to Renew.

          8.1. Term. This Agreement shall be effective as of the Effective Date and shall thereafter apply to any termination of Executive’s employment occurring on or before July 27, 2009. Unless this Agreement is earlier terminated pursuant to its terms, on July 27, 2009 and on July 27 of each succeeding year thereafter (a “Renewal Date”), the term of this Agreement shall be automatically extended for an additional year unless either party has given notice to the other, at least one year in advance of that Renewal Date, that the Agreement shall not apply to any termination of Executive’s employment occurring after that Renewal Date.

          8.2. Right to Severance Benefits. If the Company gives Executive notice that this Agreement shall not apply to any termination of Executive’s employment occurring after a particular Renewal Date, Executive shall have the right to terminate Executive’s employment at any time during the first three months of the final year during which this Agreement is thereafter scheduled to be effective (e.g., if the Company gives notice that the Agreement is not to apply to any termination after July

4

31, 2009, at any time during the months of August, September, and October 2008) and Executive shall thereupon be entitled to receive Severance Benefits to the same extent as if all of the conditions to Executive’s right to receive Severance Benefits under Section 2 had been satisfied.

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 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

5

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 any portion of 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.

          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

6

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 termination of employment 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.

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

7

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 medical, dental and/or 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 arbitrators sitting in a location selected by Executive within 50 miles from Hudson, Ohio, in accordance with the rules of the American Arbitration Association then in effect. Any dispute which arises with respect to 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 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 18 month period beginning on the Termination Date or if Change of Control Severance Benefits are paid hereunder, thereafter through the second 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 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 their 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 to 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 30 days after delivery of the notice from Executive, Executive’s employment will terminate as of the 31st day after the delivery of the notice. If any such notice is given and the failure is not

9

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 other than the offer letter being provided by the Company to Executive contemporaneously with this 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

10

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 termination. 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 or her normal duties (other than any such failure resulting from Executive’s 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 or her duties, and Executive has failed to remedy the situation within 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,

11

by Executive not in good faith and without reasonable belief that his or her action or omission was in or not opposed to the best interest of the Company.

          17.8. Change of Control. A “Change of Control” 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 15% or more (but less than 50%) of the Common 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 50% or more of the Common 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 15% or more of the Common Shares then outstanding;

     (d) At any time during any period of 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 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 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

12

     (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 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.

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

          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 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. “Exchange Act” means the United States Securities Exchange Act of 1934, as amended.

13

          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. “Excise Tax” has the meaning assigned to that term in Section 9.5.

          17.17. “Founding Families” means the families consisting of Betty and Martin Rosskamm and Alan and Justine Zimmerman and their respective issue.

          17.18. “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 reduction in Executive’s Base Salary 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 Salary made in contemplation of the Change of Control.

     (b) Any significant 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 significant reduction in Executive’s benefits package from the benefit package in effect immediately before the Change of Control or as in effect immediately before any reduction of the benefit package made in contemplation of the Change of Control.

     (d) Any reduction in Executive’s long-term incentive opportunity with the Company.

     (e) Any shift of Executive’s principal place of employment with the Company to a location that is more than 50 miles (by straight line measurement) from the site of the Company’s headquarters in Hudson, Ohio at the Effective Time.

     (f) Any dissolution or liquidation of the Company.

Executive’s continued employment shall not constitute consent to, or a waiver of rights with respect to, any circumstance constituting Good Reason under this Section 17.18 unless the Company has given Executive written notice of the change and Executive has voluntarily agreed in a writing that specifically refers to this section of this Agreement to accept the change and to waive any possible reliance on that change as constituting Good Reason.

          17.19. “Good Reason” (before a Change of Control) means, without Executive’s express written consent, any reduction in Executive’s Base Salary other

14

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.

          17.20. “Gross Up Payment” has the meaning assigned to that term in Section 9.5 above.

          17.21. “Payment” has the meaning assigned to that term in Section 9.1 above.

          17.22. “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).

          17.23. “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).

          17.24. “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.”

          17.25. “Retirement” means a voluntary termination of Executive’s employment other than for Good Reason after Executive has either (a) attained age 55 and has completed at least ten full years of continuous service with the Company, or (b) has attained age 65 (without regard to length of service).

          17.26. “Severance Benefits” means those payments and benefits that may become payable before the occurrence of a Change of Control pursuant to Section 1 above.

          17.27. “Termination Date” means the date on which any termination of Executive’s employment becomes effective.

15

     IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first written above.

JO-ANN STORES, INC.
By	/s/ Darrell Webb
	Darrell Webb
	President and CEO Jo-Ann Stores, Inc.

“EXECUTIVE”
 

/s/ Jim Kerr  

Jim Kerr 

EX-10.7

Exhibit 10.7

SPLIT DOLLAR INSURANCE AGREEMENT

     THIS AGREEMENT made this 27^th of July 2006, by and between JO-ANN STORES, INC., an Ohio corporation (the “Company”) and James Kerr (the “Employee”),

WITNESSETH:

     WHEREAS, the Employee has performed his duties in a capable and efficient manner and is a valued employee of the Company and has indicated his intention to continue such services, and the Company desires that he do so; and

     WHEREAS, in the continuation of such relationship, the parties desire to establish an arrangement in order to provide insurance protection for the benefit of the Employee;

     NOW, THEREFORE, in consideration of the services rendered and to be rendered by the Employee and of the mutual covenants contained herein, the parties hereto agree as follows:

     1. Purchases of Insurance. The Company shall maintain life insurance policies acquired by the Company on the life of the Employee (the “Policies”) from insurance companies selected by the Company (the “Insurance Companies”), shall pay the premiums on the policies when due, and shall be designated as sole owner of the policies subject to the conditions hereafter set forth.

     2. Allocation of Premiums Between Company and Employee. The Company will pay the entirety of the Premiums due on the Policies and shall annually furnish the Employee a statement of the amount of income reportable by the Employee for Federal and State income tax purposes, if any, as a result of its payment of such premiums.

     3. Payment of Proceeds. Upon the death of the Employee while this Agreement remains in effect, the proceeds of the Policies shall be paid as follows:

     (a) To the Employee’s beneficiary or beneficiaries designated in accordance with paragraph 4 hereof, the amount of Six Hundred Thousand ($600,000) Dollars.

     (b) To the Company, an amount equal to the balance, if any, of the proceeds of the Policies, and of any paid-up additional insurance purchased through dividend reinvestment, if any, after payment of the applicable amount to the Employee’s beneficiary or beneficiaries pursuant to subparagraph (a) of this

paragraph 3.

     4. Ownership. The Employee shall have the right to designate the beneficiary or beneficiaries to receive payment of any proceeds of the Policies which might become payable pursuant to the provisions of paragraph 3(a) hereof. Each and every other right of ownership of the Policies shall be reserved to the Company even though the exercise of such right or rights would adversely affect or extinguish the payment of any benefits pursuant to Paragraph 3(a) hereof or the existence thereafter of the right reserved to the Employee pursuant to the first sentence of this paragraph.

     5. Dividends. The Policies shall provide that the dividends, if any, payable with respect to the Policies may be applied as determined by the Company in its sole discretion.

     6. Termination. This Agreement may be terminated by either party hereto, with or without the consent of the other, upon the giving of notice of termination in writing. It shall terminate automatically upon termination of employment of the Employee with the Company for any reason whatsoever, including early retirement. In the event of termination, the Employee agrees, upon request to him by the Company, to join with the Company in executing such documents as may be necessary to designate the Company as sole owner and sole beneficiary of the Policies.

     7. Possession of Policy. The Company shall keep possession of the Policies. The Company agrees from time to time to make the Policies available to the Employee or to the Insurance Company for the purpose of endorsing.

     8. Borrowing. The Company shall have the right, without the consent of the Employee, to borrow the cash value of the Policies, if any, provided, however, that the Company shall not borrow from the Policies in any more than three of the first seven years and such amount borrowed from any Policy during the first seven years shall not exceed the annual premium of such policy.

     9. Plan Administrator. The Company shall be the Plan Administrator of the plan described herein for purposes of the Employee Retirement Income Security Act of 1974. The Company shall maintain records with respect to the Employee’s benefits hereunder, except for individual claim records which shall be maintained by the Insurance Companies. The Insurance Companies shall handle certain aspects in the administration of the plan including, but not limited to, the processing of individual claims, and the remittance of benefit payment. Payments from the plan shall be made to beneficiaries directly by the Insurance Companies in accordance with the terms of the Policies and the terms of this Agreement.

     10. Claims Procedure. The Company shall provide a procedure for handling beneficiaries’ claims for benefits. Such procedure shall be in accordance with regulations issued by the Secretary of Labor and shall:

-2-

     (a) provide adequate notice in writing to any beneficiary whose claim for benefits has been denied, setting forth the specific reasons for such denial, written in a manner calculated to be understood by such beneficiary; and

     (b) afford a reasonable opportunity to any beneficiary whose claim for benefits has been denied for a full and fair review by the appropriate named fiduciary of the decision denying the claim.

     11. Miscellaneous. The benefits payable under this Agreement shall be independent of, and in addition to, any other employment agreement that may exist from time to time between the parties hereto or any other compensation payable by the Company to an Employee, whether as salary, bonus or otherwise. This Agreement shall not be deemed to constitute a contract of employment between the parties hereto, nor shall any provision hereof restrict the right of the Company to terminate the employment of the Employee at any time.

     12. Amendment. This Agreement may be revoked or be amended by a writing signed by the Company and the Employee and attached hereto.

     13. Successors. This Agreement shall bind and shall inure to the sole benefit of the parties and their respective successors, assigns and legal representatives.

     14. Revocation of Prior Agreement. Upon execution of the Agreement all split dollar insurance agreements entered into by the parties hereto prior to the date hereof, if any, shall be null and void and the rights thereunder shall be extinguished.

     IN WITNESS WHEREOF, the parties have hereunto set their hands, the Company by its duly authorized officers on the day and year first above written.

JO-ANN STORES, INC.
By:	/s/ Darrell Webb	/s/ James Kerr
	Darrell Webb, Chairman of the Board,	Employee
	President and Chief Executive Officer
By:	/s/ David Goldston
	David Goldston
	Senior Vice President,
	General Counsel and Secretary

-3-

EX-10.8

Exhibit 10.8

SPLIT DOLLAR INSURANCE AGREEMENT

     THIS AGREEMENT made this 28^th of July 2006, by and between JO-ANN STORES, INC., an Ohio corporation (the “Company”) and David Holmberg (the “Employee”),

WITNESSETH:

     WHEREAS, the Employee has performed his duties in a capable and efficient manner and is a valued employee of the Company and has indicated his intention to continue such services, and the Company desires that he do so; and

     WHEREAS, in the continuation of such relationship, the parties desire to establish an arrangement in order to provide insurance protection for the benefit of the Employee;

     NOW, THEREFORE, in consideration of the services rendered and to be rendered by the Employee and of the mutual covenants contained herein, the parties hereto agree as follows:

     1. Purchases of Insurance. The Company shall maintain life insurance policies acquired by the Company on the life of the Employee (the “Policies”) from insurance companies selected by the Company (the “Insurance Companies”), shall pay the premiums on the policies when due, and shall be designated as sole owner of the policies subject to the conditions hereafter set forth.

     2. Allocation of Premiums Between Company and Employee. The Company will pay the entirety of the Premiums due on the Policies and shall annually furnish the Employee a statement of the amount of income reportable by the Employee for Federal and State income tax purposes, if any, as a result of its payment of such premiums.

     3. Payment of Proceeds. Upon the death of the Employee while this Agreement remains in effect, the proceeds of the Policies shall be paid as follows:

     (a) To the Employee’s beneficiary or beneficiaries designated in accordance with paragraph 4 hereof, the amount of Six Hundred Thousand ($600,000) Dollars.

     (b) To the Company, an amount equal to the balance, if any, of the proceeds of the Policies, and of any paid-up additional insurance purchased through dividend reinvestment, if any, after payment of the applicable amount to the Employee’s beneficiary or beneficiaries pursuant to subparagraph (a) of this

paragraph 3.

     4. Ownership. The Employee shall have the right to designate the beneficiary or beneficiaries to receive payment of any proceeds of the Policies which might become payable pursuant to the provisions of paragraph 3(a) hereof. Each and every other right of ownership of the Policies shall be reserved to the Company even though the exercise of such right or rights would adversely affect or extinguish the payment of any benefits pursuant to Paragraph 3(a) hereof or the existence thereafter of the right reserved to the Employee pursuant to the first sentence of this paragraph.

     5. Dividends. The Policies shall provide that the dividends, if any, payable with respect to the Policies may be applied as determined by the Company in its sole discretion.

     6. Termination. This Agreement may be terminated by either party hereto, with or without the consent of the other, upon the giving of notice of termination in writing. It shall terminate automatically upon termination of employment of the Employee with the Company for any reason whatsoever, including early retirement. In the event of termination, the Employee agrees, upon request to him by the Company, to join with the Company in executing such documents as may be necessary to designate the Company as sole owner and sole beneficiary of the Policies.

     7. Possession of Policy. The Company shall keep possession of the Policies. The Company agrees from time to time to make the Policies available to the Employee or to the Insurance Company for the purpose of endorsing.

     8. Borrowing. The Company shall have the right, without the consent of the Employee, to borrow the cash value of the Policies, if any, provided, however, that the Company shall not borrow from the Policies in any more than three of the first seven years and such amount borrowed from any Policy during the first seven years shall not exceed the annual premium of such policy.

     9. Plan Administrator. The Company shall be the Plan Administrator of the plan described herein for purposes of the Employee Retirement Income Security Act of 1974. The Company shall maintain records with respect to the Employee’s benefits hereunder, except for individual claim records which shall be maintained by the Insurance Companies. The Insurance Companies shall handle certain aspects in the administration of the plan including, but not limited to, the processing of individual claims, and the remittance of benefit payment. Payments from the plan shall be made to beneficiaries directly by the Insurance Companies in accordance with the terms of the Policies and the terms of this Agreement.

     10. Claims Procedure. The Company shall provide a procedure for handling beneficiaries’ claims for benefits. Such procedure shall be in accordance with regulations issued by the Secretary of Labor and shall:

-2-

     (a) provide adequate notice in writing to any beneficiary whose claim for benefits has been denied, setting forth the specific reasons for such denial, written in a manner calculated to be understood by such beneficiary; and

     (b) afford a reasonable opportunity to any beneficiary whose claim for benefits has been denied for a full and fair review by the appropriate named fiduciary of the decision denying the claim.

     11. Miscellaneous. The benefits payable under this Agreement shall be independent of, and in addition to, any other employment agreement that may exist from time to time between the parties hereto or any other compensation payable by the Company to an Employee, whether as salary, bonus or otherwise. This Agreement shall not be deemed to constitute a contract of employment between the parties hereto, nor shall any provision hereof restrict the right of the Company to terminate the employment of the Employee at any time.

     12. Amendment. This Agreement may be revoked or be amended by a writing signed by the Company and the Employee and attached hereto.

     13. Successors. This Agreement shall bind and shall inure to the sole benefit of the parties and their respective successors, assigns and legal representatives.

     14. Revocation of Prior Agreement. Upon execution of the Agreement all split dollar insurance agreements entered into by the parties hereto prior to the date hereof, if any, shall be null and void and the rights thereunder shall be extinguished.

     IN WITNESS WHEREOF, the parties have hereunto set their hands, the Company by its duly authorized officers on the day and year first above written.

JO-ANN STORES, INC.
By:	/s/ Darrell Webb	/s/ David Holmberg
	Darrell Webb, Chairman of the Board,	Employee
	President and Chief Executive Officer
By:	/s/ David Goldston
	David Goldston
	Senior Vice President, General Counsel and Secretary

-3-

EX-10.9

Exhibit 10.9

SCHEDULE

TO

JO-ANN STORES, INC.

SUPPLEMENTAL RETIREMENT BENEFIT PLAN

	MAXIMUM SUPPLEMENTAL
PARTICIPANT	RETIREMENT BENEFIT AMOUNT
David Holmberg	$	600,000
James Kerr	$	600,000

This Schedule is effective as of July 27, 2006, and supersedes any and all previous Schedules.

JO-ANN STORES, INC.
By:	/s/ Darrell Webb
	Darrell Webb, Chairman of the Board,
	President and Chief Executive Officer
By:	/s/ David Goldston
	David Goldston Senior Vice President, General Counsel and Secretary

EX-31.1

EXHIBIT 31.1

CERTIFICATION BY CHIEF EXECUTIVE OFFICER

I, Darrell Webb, certify that:

1) I have reviewed this quarterly report on Form 10-Q 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 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: September 7, 2006

By:	/s/ Darrell Webb
	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 quarterly report on Form 10-Q 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 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: September 7, 2006

By:	/s/ James Kerr
	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 Quarterly Report of Jo-Ann Stores, Inc. (the “Company”) on Form 10-Q for the quarter ended July 29, 2006, 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: September 7, 2006

/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.