Exhibit (e)(10)

                                ESCROW AGREEMENT


                  ESCROW AGREEMENT, dated as of September 13, 2004 (this "ESCROW
AGREEMENT"), by and among RAG SHOPS, INC., a Delaware corporation (the
"Company"), STANLEY BERENZWEIG ("SELLER"), and HUGHES HUBBARD & REED LLP, as
escrow agent (the "ESCROW AGENT").

                  WHEREAS, Seller and certain other stockholders of the Company
have entered into a Stock Purchase Agreement dated as of the date of this
Agreement (the "PURCHASE AGREEMENT") pursuant to which, among other things, (i)
Crafts Retail Acquisition Corp., a Delaware corporation ("SUB"), is concurrently
herewith acquiring shares of Common Stock (as defined therein) from Seller and
such other stockholders and (ii) Seller is entering into a Mutual Release with
the Company (the "MUTUAL RELEASE"); and

                  WHEREAS, concurrently herewith and in accordance with the
terms and conditions set forth in the Funding Agreement dated as of the date of
this Agreement (the "FUNDING AGREEMENT") between Seller and the Company, Sub is
depositing with the Escrow Agent $750,000 (the "ESCROW DEPOSIT") into an escrow
account established on behalf of Seller (the "ESCROW ACCOUNT"); and

                  WHEREAS, in accordance with the terms and conditions of the
Funding Agreement, Seller and the Company have agreed that the Company may from
time to time proceed against the Escrow Deposit in order to satisfy the
obligations of Seller to the Company pursuant to the Funding Agreement; and

                  WHEREAS, Escrow Agent is willing to establish the Escrow
Account on the terms and subject to the conditions hereinafter set forth.

                  NOW, THEREFORE, in consideration of the premises and the
representations, warranties, covenants and agreements set forth herein, the
parties agree as follows:

                  1. Appointment of Escrow Agent. The Company and Seller hereby
appoint Hughes Hubbard & Reed LLP as escrow agent under this Agreement, and the
Escrow Agent hereby accepts such appointment.

                  2. Deposit of the Escrow Fund. Concurrently herewith, Sub is
causing the Escrow Deposit to be delivered to the Escrow Agent in accordance
with the wire transfer instructions attached as Exhibit A (as the same may be
reduced by payment to the Company or Seller in accordance with the terms of this
Agreement, the "ESCROW FUND"), to be held and disposed of by the Escrow Agent in
accordance with this Agreement.

                  3. Investment of Funds.

                  (a) The Escrow Agent shall deposit the monies in the Escrow
Fund in an account with Citibank N.A. (or another bank or trust company having a
capital and surplus of at least $50,000,000). Such monies shall be invested in:
(i) securities issued or directly and fully


guaranteed or insured by the United States government or any agency or
instrumentality thereof having maturities of not more than 30 days from the date
of acquisition; (ii) certificates of deposit and Eurodollar time deposits with
maturities of 30 days or less from the date of acquisition, bankers' acceptances
with maturities not exceeding 30 days and overnight bank deposits, in each case
with any domestic commercial bank having capital and surplus in excess of
$50,000,000 and a Keefe Bank Watch Rating of AB or better; (iii) repurchase
obligations with a term of not more than seven days for underlying securities of
the types described in clauses (i) and (ii) above entered into with any
financial institution meeting the qualifications specified in clause (ii) above;
(iv) commercial paper having the highest rating obtainable from Moody's
Investors Service, Inc. or Standard & Poor's, a division of The McGraw Hill
Companies, and in each case maturing within six months after the date of
acquisition; and (v) money market funds substantially all the assets of which
consist of cash and securities and other obligations of the types described in
the preceding clauses (i) through (iv).

                  (b) All earnings on the Escrow Fund shall be the property of
Seller and shall be paid to Seller on a quarterly basis, regardless of the
existence of any pending Claim (as defined below) for so long as the Escrow
Agent is holding any portion of the Escrow Fund. Such earnings shall not be part
of the Escrow Fund.

                  (c) Contemporaneously with the execution and delivery of this
Agreement, the Company and Seller are each delivering a Form W-9 to the Escrow
Agent.

                  4.   Disposition of Escrow Fund.

                  4.1  Disposition of Escrow Fund to the Company.

                  (a) If the Company shall assert a claim against Seller for any
amount owing to the Company pursuant to Article IV of the Funding Agreement (a
"CLAIM"), the Company shall give written notice of such Claim (a "CLAIM NOTICE")
to Seller and the Escrow Agent. Each Claim Notice shall: (i) indicate that a
Claim is being asserted; (ii) indicate in reasonable detail the amount of all
Losses (as defined in the Funding Agreement) based upon, arising out of,
asserted against, resulting from, imposed on, in connection with, or otherwise
in respect of the Action (as defined in the Funding Agreement) referred to on
Schedule A to the Funding Agreement to which such Claim Notice relates (the
"CLAIM AMOUNT"); (iii) indicate the portion of the Escrow Fund payable to the
Company in connection with such Claim; and (iv) include a certification by the
Company that such Claim Notice has been delivered to Seller and the Escrow
Agent.

                  (b) The provisions of Section 5 shall apply if, within three
business days (as defined below) following receipt by the Escrow Agent of a
Claim Notice (the "CLAIM DISPUTE PERIOD"), the Escrow Agent receives from Seller
a written notice objecting to the payment of the portion of the Escrow Fund set
forth in the Claim Notice (a "CLAIM OBJECTION NOTICE"). A Claim Objection Notice
shall: (i) indicate Seller's estimate of the portion, if any, of the Escrow Fund
payable to the Company in connection with such Claim Notice; and (ii) include a
certification by Seller that it has been delivered to the Company and the Escrow
Agent. If the Escrow Agent shall receive a Claim Objection Notice prior to the
expiration of the Claim Dispute Period to which such Claim Notice relates, the
Escrow Agent shall nevertheless

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distribute to the Company the portion,  if any, f the Escrow Fund payable to the
Company,  as set forth in clause (i) of the prior sentence.  If the Escrow Agent
shall not receive a Claim Objection  Notice prior to the expiration of the Claim
Dispute  Period to which such Claim  Notice  relates,  the  Escrow  Agent  shall
distribute  to the Company the portion of the Escrow Fund payable to the Company
as set forth in the Claim Notice.  "BUSINESS DAY" means any day except Saturday,
Sunday  or any  other day on which  commercial  banks in New York,  New York are
authorized or required by law to remain closed.

                  4.2 Disposition of Escrow Fund to Seller.

                  (a) At any time after the second anniversary of the date of
this Agreement to the extent that there are no outstanding Claims, Seller may
give a written notice (a "PAYMENT NOTICE") to the Company and the Escrow Agent
requesting to be paid all amounts remaining in the Escrow Fund at the time of
such notice, together all interest earned by the Escrow Fund through and
including the date of such payment. Each Payment Notice shall: (i) indicate the
amount of the Escrow Fund payable to Seller pursuant to such Payment Notice; and
(ii) include a certification by Seller that such Payment Notice has been
delivered to the Company and the Escrow Agent.

                  (b) The provisions of Section 5 shall apply if, within three
business days following receipt by the Escrow Agent of a Payment Notice (the
"PAYMENT DISPUTE PERIOD"), the Escrow Agent receives from the Company a written
notice objecting to the payment of the portion of the Escrow Fund (including any
earnings thereon) set forth in the Payment Notice (a "PAYMENT OBJECTION
NOTICE"). A Payment Objection Notice shall: (i) indicate the Company's estimate
of the portion, if any, of the Escrow Fund payable to Seller in connection with
such Payment Notice; and (ii) include a certification by the Company that it has
been delivered to Seller and the Escrow Agent. If the Escrow Agent shall receive
a Payment Objection Notice prior to the expiration of the Payment Dispute Period
to which such Payment Notice relates, the Escrow Agent shall nevertheless
distribute to Seller the portion, if any, f the Escrow Fund payable to Seller,
as set forth in clause (i) of the prior sentence. If the Escrow Agent shall not
receive a Payment Objection Notice prior to the expiration of the Payment
Dispute Period to which such Payment Objection Notice relates, the Escrow Agent
shall distribute to Seller the portion of the Escrow Fund payable to Seller as
set forth in the Payment Notice (including any earnings thereon).

                  4.3 Method of Dispositions to the Company or Seller. Any
disposition of the Escrow Fund (including earnings thereon) to the Company or
Seller pursuant to this Agreement shall be made by check payable in immediately
available funds or by wire transfer to such account as may be designated in
writing from time to time by the recipient to the Escrow Agent.

                  5. Disposition of the Escrow Fund by Agreement of the Parties;
Conflicting Demands. The Escrow Agent may dispose of all or a portion of any of
the Escrow Fund in accordance with a written instruction signed by the Company
and Seller, whether such disposition is pursuant to the terms of the Funding
Agreement or otherwise. If conflicting or adverse claims or demands are made or
notices served upon the Escrow Agent with respect to any of the escrows provided
for herein, then the Escrow Agent may refrain from complying with any such claim
or demand so long as such disagreement shall continue. In so doing, the Escrow

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Agent shall not be or become liable for damages, losses, costs, expenses or
interest to any person (as defined below) for its failure to comply with such
conflicting or adverse demands. The Escrow Agent may continue to so refrain and
refuse to act until it shall have received certification satisfactory to it that
such conflicting or adverse claims or demands shall have been finally determined
by a court of competent jurisdiction that is not subject to further appeal or
other appellate review, or shall have been settled by agreement of the parties
to such controversy, in which case the Escrow Agent shall be notified thereof in
a written notice signed by all such parties. The Escrow Agent may seek the
advice of legal counsel in any dispute or question as to the construction of any
of the provisions of this Agreement or its duties hereunder, and it shall incur
no liability and shall be fully protected in respect of any action taken,
omitted or suffered by it in good faith in accordance with the opinion of such
counsel. The Escrow Agent may also elect to commence an interpleader or other
action for declaratory judgment for the purpose of having the respective rights
of the claimants adjudicated, and may deposit with the court all funds held
hereunder pursuant to this Agreement; and if it so commences and deposits, the
Escrow Agent shall be relieved and discharged from any further duties and
obligations under this Agreement. As used in this Agreement, "PERSON" means an
individual, corporation, partnership, joint venture, association, trust, limited
liability company, unincorporated organization or other entity (including,
without limitation, any governmental entity).

                  6. Consent to Jurisdiction, Etc. The Company and Seller hereby
consent to the exclusive personal jurisdiction over them by the Supreme Court of
the state of New York, County of New York, and the United States District Court
for the Southern District of New York and acknowledge that either of such courts
is the proper and exclusive venue for any dispute with the Escrow Agent. The
Company and Seller hereby waive personal service of any summons, complaint or
other process that may be delivered by any of the means permitted for notices
under Section 13.2. In any action or proceeding involving the Escrow Agent in
any jurisdiction, the Company and Seller waive trial by jury in any such
jurisdiction.

                  7. Expenses of the Escrow Agent. The Company and Seller shall
each pay one-half of any and all reasonable out-of-pocket costs and expenses
incurred by the Escrow Agent in connection with the performances of its services
hereunder, including, without limitation, the administration and investment of
the Escrow Fund and the enforcement of this Agreement, including, without
limitation, the reasonable disbursements and expenses of the Escrow Agent,
provided that the Escrow Agent will not incur any such out-of-pocket expense in
excess of $5,000 without the written consent of the Company and Seller.

                  8. Reliance on Documents and Experts. The Escrow Agent shall
be entitled to rely upon any notice, consent, certificate, affidavit, statement,
paper, document, writing or other communication (which to the extent permitted
hereunder may be by telegram, cable, telex, telecopier, or telephone) reasonably
believed by it to be genuine and to have been signed, sent or made by the proper
person or persons, and upon opinions and advice of legal counsel (including
itself or counsel for any party hereto), independent public accountants and
other experts selected by the Escrow Agent.

                  9. Status of the Escrow Agent, Etc. The Escrow Agent is acting
under this Agreement as a stakeholder only and shall be considered an
independent contractor with respect to the Company and Seller hereunder. No term
or provision of this Agreement is intended to

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create, nor shall any such term or provision be deemed to have created, any
principal-agent, trust, joint venture, partnership, debtor-creditor or
attorney-client relationship between or among the Escrow Agent and the Company,
on the one hand, or Seller, on the other hand. This Agreement shall not be
deemed to prohibit or in any way restrict the Escrow Agent's representation (in
its capacity as legal counsel) of the Company or Sub or any of its affiliates,
any of whom may be advised and/or represented by the Escrow Agent on any and all
matters pertaining to this Agreement, the Funding Agreement, the Mutual Release,
the Purchase Agreement, the Merger Agreement (as defined in the Purchase
Agreement) or the Escrow Fund. The Escrow Agent's duties and obligations
hereunder are limited to those expressly set forth in this Agreement. The Escrow
Agent may exercise or otherwise enforce any of its rights, powers, privileges,
remedies and interests under this Agreement and applicable law or perform any of
its duties under this Agreement by or through its partners, employees,
attorneys, agents or designees. To the extent that the Company and/or Sub may be
represented by the Escrow Agent in connection with the transactions contemplated
by the Purchase Agreement, the Mutual Release, the Merger Agreement or the
Funding Agreement, Seller hereby (i) waives any conflict of interest that may
exist or occur as a result of such representation and consents to the continued
representation of the Company and/or Sub or its affiliates by the Escrow Agent
in connection with any action, suit or other proceeding relating to or arising
out of this Agreement, the Purchase Agreement, the Mutual Release, the Merger
Agreement, the Funding Agreement or the transactions contemplated hereby or
thereby and (ii) acknowledges that neither the Company, nor Sub nor any of its
affiliates has waived any attorney-client privilege by virtue of the appointment
of the Escrow Agent hereunder or the performance by the Escrow Agent of its
obligations under this Agreement.

                  10. Exculpation. The Escrow Agent and its designees, and their
respective directors, officers, partners, employees, attorneys and agents, shall
not incur any liability whatsoever for the investment or disposition of Escrow
Fund or the taking of any other action or omission to act with respect to this
Agreement, for compliance with any applicable law or regulation or any
attachment, order or other directive of any court or other authority
(irrespective of any conflicting term or provision of the Purchase Agreement,
the Mutual Release, the Merger Agreement or the Funding Agreement), or for any
mistake or error in judgment of the Escrow Agent or any act or omission of any
other person engaged by the Escrow Agent in connection with this Agreement
(other than for the Escrow Agent's or such other person's mistakes, errors in
judgment, acts or omissions which have been determined in a final and
non-applicable ruling by a court of competent jurisdiction to constitute gross
negligence or willful misconduct).

                  11. Indemnification. The Escrow Agent and its designees, and
their respective directors, officers, partners, employees, attorneys and agents,
shall be indemnified, reimbursed, held harmless and, at the request of the
Escrow Agent, defended, by the Company and Seller from and against any and all
claims, liabilities, losses and expenses (including, without limitation, the
disbursements, expenses and reasonable fees of their respective attorneys) that
may be imposed upon, incurred by, or asserted against any of them, arising out
of or related directly or indirectly to this Agreement or the Escrow Fund,
except such as are occasioned by the indemnified person's own acts and omissions
amounting to gross negligence or willful misconduct.

                                      -5-


                  12. Resignation of Escrow Agent; Appointment of Successor
Escrow Agent. The Escrow Agent may, at any time, at its option, elect to resign
its duties as Escrow Agent under this Agreement by providing written notice
thereof to the Company and Seller. In such event, the Escrow Agent shall
transfer the Escrow Fund to a successor independent escrow agent to be appointed
by (a) the Buyer and the Seller within 30 days following the receipt of notice
of resignation from the Escrow Agent, or (b) the Escrow Agent, if the Company
and Seller shall have not agreed on a successor escrow agent within the
aforesaid 30 day period, as designated by the Escrow Agent in each case upon
such appointment and delivery of the Escrow Fund to the successor Escrow Agent,
the Escrow Agent shall be released of and from all liability under this
Agreement; provided, however, that the obligations of the Company and Seller to
pay expenses and to reimburse, exculpate, indemnify, hold harmless and/or defend
the Escrow Agent pursuant to Sections 7, 10 and 11 shall continue in full force
and effect with respect to any Escrow Agent resigning pursuant to this Section
12.

                  13. Miscellaneous.

                  13.1 Fees and Expenses. The Company and Seller shall each be
responsible for their own fees and expenses (including, without limitation, the
fees and expenses of their accountants and counsel) in connection with the
entering into of this Agreement and the performance by them of their obligations
hereunder, except that: (i) in the event that, following delivery by Seller of a
Claim Objection Notice to the Company and the Escrow Agent, the portion of the
Escrow Fund actually paid to the Company pursuant to the Claim Notice to which
such Claim Objection Notice relates is closer to the amount set forth the Claim
Notice pursuant to Section 4.1(a)(iii) than the amount set forth in the Claim
Objection Notice pursuant to Section 4.1(b)(i), then Seller shall pay all fees
and expenses incurred by the Company in connection with the defense of such
Claim Notice; and (ii) in the event that, following delivery by the Company of a
Payment Objection Notice to Seller and the Escrow Agent, the portion of the
Escrow Fund actually paid to Seller pursuant to the Payment Notice to which such
Payment Objection Notice relates is closer to the amount set forth the Payment
Notice pursuant to Section 4.2(a)(ii) than the amount set forth in the Payment
Objection Notice pursuant to Section 4.2(b)(i), then the Company shall pay all
fees and expenses incurred by Seller in connection with the defense of such
Payment Notice.

                  13.2 Notices. All notices, requests, claims, demands and other
communications hereunder shall be in writing and shall be deemed given if
delivered personally or sent by telecopier or overnight courier (providing proof
of delivery) to the parties at the following addresses (or at such other address
for a party as shall be specified by like notice):


                  if to the Company, to:

                           Rag Shops, Inc.
                           111 Wagaraw Road
                           Hawthorne, NJ 07506-2711
                           Attention: Alan C. Mintz and Jeffrey C. Gerstel
                           Telecopier:  (973) 423-6568

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         with copies to:

                  Sills Cummis Epstein & Gross P.C.
                  One Riverfront Plaza
                  Newark, NJ  07102
                  Attention: Steven R. Kamen, Esq.
                  Telecopier No.:  (973) 643-6500

         and copies to:

                  c/o Sun Capital Partners, Inc.
                  5200 Town Center Circle, Suite 470
                  Boca Raton, FL  33486
                  Attention:  Marc J. Leder, Rodger R. Krouse and C. Deryl Couch
                  Telecopier No.:  (561) 394-0540

         and copies to:

                  Hughes Hubbard & Reed LLP
                  One Battery Park Plaza
                  New York, NY  10004
                  Attention: Michael Weinsier
                  Telecopier No.:  (212) 422-4726

         if to Seller, to:

                  Mr. Stanley Berenzweig
                  c/o Rag Shops, Inc.
                  111 Wagaraw Road Hawthorne, NJ 07506
                  Telecopier No.: (973) 643-6500

         with copies to:

                  Wolff & Samson PC
                  One Boland Drive
                  West Orange, NJ 07052
                  Attention:  Morris Bienenfeld
                  Telecopier No.:  (973) 530-2213

         if to the Escrow Agent, to:

                  Hughes Hubbard & Reed LLP
                  One Battery Park Plaza
                  New York, NY  10004
                  Attention: Michael Weinsier
                  Telecopier No.:  (212) 422-4726

                                      -7-


                  13.3 Interpretation. When a reference is made in this
Agreement to a Section, such reference shall be to a Section of this Agreement
unless otherwise indicated. The headings contained in this Agreement are for
reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement. Whenever the words "include", "includes" or
"including" are used in this Agreement, they shall be deemed to be followed by
the words "without limitation." The words "hereof", "herein" and "hereunder" and
words of similar import when used in this Agreement shall refer to this
Agreement as a whole and not to any particular provision of this Agreement. The
words "date hereof" shall refer to the date of this Agreement. The term "or" is
not exclusive. The word "extent" in the phrase "to the extent" shall mean the
degree to which a subject or other thing extends, and such phrase shall not mean
simply "if." The definitions contained in this Agreement are applicable to the
singular as well as the plural forms of such terms. Any agreement or instrument
defined or referred to herein or in any agreement or instrument that is referred
to herein means such agreement or instrument as from time to time amended,
modified or supplemented. References to a person are also to its or his
permitted heirs, successors and assigns.

                  13.4 Counterparts. This Agreement may be executed in one or
more counterparts (including telecopy), all of which shall be considered one and
the same agreement and shall become effective when one or more counterparts have
been signed by each of the parties and delivered to the other parties.

                  13.5 Entire Agreement; No Third Party Beneficiaries. This
Agreement, the Purchase Agreement, the Mutual Release, the Merger Agreement and
the Funding Agreement (a) constitute the entire agreement, and supersedes all
prior agreements and understandings, both written and oral, among the parties
with respect to the subject matter of this Agreement, the Purchase Agreement,
the Mutual Release and the Merger Agreement and (b) are not intended to confer
upon any person other than the parties hereto and Sub (and their respective
successors and assigns) any rights or remedies.

                  13.6 Governing Law. This Agreement shall be governed by, and
construed in accordance with, the laws of the State of New York, regardless of
the laws that might otherwise govern under applicable principles of conflicts of
laws thereof.

                  13.7 Assignment. Neither this Agreement nor any of the rights,
interests or obligations hereunder shall be assigned, in whole or in part
(except by operation of law), by any of the parties hereto without the prior
written consent of the other parties hereto, except that Sub may assign, in its
sole discretion, any of or all its rights, interests and obligations under this
Agreement to Parent or to any direct wholly-owned subsidiary of Parent, but no
such assignment shall relieve Sub of any of its obligations hereunder. Subject
to the preceding sentence, this Agreement shall be binding upon, inure to the
benefit of and be enforceable by, the parties hereto and their respective
successors and assigns.

                  13.8 Waiver of Jury Trial. Each party hereto hereby waives, to
the fullest extent permitted by applicable law, any right it may have to a trial
by jury in respect of any suit, action or other proceeding directly or
indirectly arising out of, under or in connection with this Agreement. Each
party hereto (a) certifies that no representative, agent or attorney of any
other party has represented, expressly or otherwise, that such party would not,
in the event of any


                                      -8-


action,  suit or  proceeding,  seek to  enforce  the  foregoing  waiver  and (b)
acknowledges  that it and the other  parties  hereto have been  induced to enter
into  this   Agreement,   by,  among  other   things,   the  mutual  waiver  and
certifications in this Section 13.8.

                  13.9 Severability. If any term or other provision of this
Agreement is invalid, illegal or incapable of being enforced by any rule of law
or public policy, all other conditions and provisions of this Agreement shall
nevertheless remain in full force and effect so long as the economic or legal
substance of the transactions contemplated hereby is not affected in any manner
materially adverse to any party. Upon such determination that any term or other
provision is invalid, illegal or incapable of being enforced, the parties hereto
shall negotiate in good faith to modify this Agreement so as to effect the
original intent of the parties as closely as possible in an acceptable manner to
the end that transactions contemplated hereby are fulfilled to the extent
possible.

                  13.10 Amendments; Waivers. Any provision of this Agreement may
be amended or waived, but only if such amendment or waiver is in writing and is
signed, in the case of an amendment, by each party to this Agreement or, in the
case of a waiver, by each party against whom the waiver is to be effective.


                      [The next page is the signature page]


                                      -9-



                  IN WITNESS WHEREOF, this Escrow Agreement has been signed by
or on behalf of each of the parties as of the day first above written.


                                         /s/ Stanley Berenzweig
                                        ----------------------------------------
                                        Stanley Berenzweig


                                        RAG SHOPS, INC.


                                        By:  /s/ Jeffrey C. Gerstel
                                           -------------------------------------
                                           Name:  Jeffrey C. Gerstel
                                           Title: Vice President


                                        HUGHES HUBBARD & REED LLP
                                        as Escrow Agent

                                        By:  /s/ Michael Weinsier
                                           -------------------------------------
                                           Name:  Michael Weinsier
                                           Title: Partner





                                      S-1




                                    EXHIBIT A
                           WIRE TRANSFER INSTRUCTIONS

             Citibank
             120 Broadway
             New York, NY  10271
             ABA 021 000 089
             Account name:  Hughes Hubbard & Reed LLP Attorney Escrow Account
             Account number:  09117491






                                      A-1