As filed with the Securities and Exchange Commission Via EDGAR

                            Registration No. _______



                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    FORM S-8
                          REGISTRATION STATEMENT UNDER
                           THE SECURITIES ACT OF 1993

                                 RAG SHOPS, INC.
             (Exact name of registrant as specified in its charter)

                 DELAWARE                                 51-0333503
      (State or other jurisdiction of                   (I.R.S. Employer
       incorporation or organization)                  Identification No.)

        111 Wagaraw Road, Hawthorne, New Jersey 07506-2711 (973) 423-1303
      (Address including zip code and telephone number, including area code
                  of Registrant's Principal Executive Offices)

                                 RAG SHOPS, INC.
                         1999 INCENTIVE STOCK AWARD PLAN
                            (Full title of the plan)

                           Stanley U. North III, Esq.
                Sills Cummis Radin Tischman Epstein & Gross, P.A.
                              One Riverfront Plaza
                            Newark, New Jersey 07102
                                 (973) 643-7000

        (Name, address including zip code and telephone number, including
                        area code, of agent for service)





                         Calculation Of Registration Fee
<TABLE>
<CAPTION>
<S>                         <C>              <C>                           <C>                   <C>

Title of securities to be    Amount to be       Proposed maximum             Proposed maximum        Amount of registration
      registered             registered     offering price per unit(1)    aggregate offering price            fee

Common Stock, $.01           300,000                 $2.36                       $708,000                     $278
      par value


(1)  Estimated,  pursuant to Rule 457(h),  solely for the purpose of calculating the registration fee.

</TABLE>


<PAGE>

EXPLANATORY NOTE

     This  Registration  Statement  has been  prepared  in  accordance  with the
requirements of Form S-8 and Form S-3. The Form S-8 portion of this Registration
Statement will be used for offers of Common Stock of the Registrant  pursuant to
the  Registrant's  1999  Incentive  Stock  Award  Plan (the  "1999  Plan").  The
Prospectus  filed as part of this  Registration  Statement  has been prepared in
accordance  with  the  requirements  of Part I of Form  S-3 and will be used for
reofferings  or resales of Common  Stock to be  acquired by the class of persons
named therein pursuant to the 1999 Plan. A cross reference sheet is provided for
such prospectus.

<PAGE>

                                 RAG SHOPS, INC.

                                _________________

                              Cross-Reference Sheet
                    Pursuant to Item 501(b) of Regulation S-K


      Form S-3 Item and Heading                       Location in Prospectus

I.    Forepart of Registration Statement and          Front Cover Page
      Outside Front Cover Page of Prospectus

II.   Inside Front and Outside Back Cover Pages       Inside Front Cover Page
      of Prospectus

III.  Summary Information, Risk Factors and           The Company
      Ratio of Earnings to Fixed Charges

IV.   Use of Proceeds                                 Not applicable

V.    Determination of Offering Price                 Not applicable

VI.   Dilution                                        Not applicable

VII.  Selling Security Holders                        Selling Stockholders

VIII. Plan of Distribution                            Plan of Distribution

IX.   Description of Securities to be Registered      Not applicable

X.    Interests of Named Experts and Counsel          Legal Matters; Experts

XI.   Material Changes                                Not applicable

XII.  Incorporation of Certain Information by         Incorporation of Certain
      Reference                                       Documents by Reference

XIII. Disclosure of Commission Position on            Indemnification
      Indemnification for Securities Act
      Liabilities


<PAGE>

PROSPECTUS
                                 RAG SHOPS, INC.

                         300,000 Shares of Common Stock
                           (par value $.01 per share)

     This Prospectus  relates to the offer and sale of shares of Common Stock of
RAG SHOPS, INC. (the "Company"),  par value $.01 per share (the "Common Stock"),
which may be offered  hereby  from time to time by any and/or all of the selling
stockholders  as described  herein (the  "Selling  Stockholders")  for their own
benefit.  The  Company  will  receive  no part of the  proceeds  of  sales  made
hereunder.  All  expenses  of  registration  incurred  in  connection  with this
offering  are being borne by the  Company,  but all  selling and other  expenses
incurred by the Selling Stockholders will be borne by such Selling Stockholders.
None of the shares  offered  pursuant to this  Prospectus  have been  registered
prior to the filing of the Registration  Statement of which this Prospectus is a
part.

     All or a portion  of the  shares  of Common  Stock  offered  hereby  may be
offered for sale,  from time to time, on the National  Association of Securities
Dealers Automated  Quotation  (NASDAQ) national market system, or otherwise,  at
prices and terms then  obtainable.  All  brokers'  commissions,  concessions  or
discounts will be paid by the Selling Stockholders.

     The Selling  Stockholders and any broker executing selling orders on behalf
of the  Selling  Stockholders  may be deemed to be an  "underwriter"  within the
meaning of the Securities  Act of 1933, as amended (the  "Securities  Act"),  in
which event commissions received by such broker may be deemed to be underwriting
commissions under the Securities Act.

     The Common  Stock of the  Company is listed on the NASDAQ  National  Market
System under the symbol RAGS. On July 28, 1999 the last  reported  closing price
of the Company's Common Stock on the NASDAQ National Market System was $2.31.

THESE  SECURITIES  HAVE NOT BEEN APPROVED OR  DISAPPROVED  BY THE SECURITIES AND
EXCHANGE COMMISSION OR BY ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND  EXCHANGE  COMMISSION  OR ANY STATE  SECURITIES  COMMISSION  PASSED UPON THE
ACCURACY OR ADEQUACY OF THE PROSPECTUS.  ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.

     No  person  has  been  authorized  to give any  information  or to make any
representations, other than those contained in this Prospectus, and, if given or
made,  such  information or  representation  should not be relied upon as having
been authorized by the Company.  This prospectus does not constitute an offer to
sell or a solicitation  of an offer to buy any security in any  jurisdiction  in
which,  or to any person to whom such offer or  solicitation  would be unlawful.
Neither the delivery of this  Prospectus nor any  distribution of the securities
made under this Prospectus shall under any circumstances  create any implication
that  there has been no change in the  affairs  of the  Company  or in any other
information contained herein since the date of the Prospectus.


The date of this Prospectus is August 20, 1999.

<PAGE>

                                TABLE OF CONTENTS

                                                                            PAGE

Available Information..........................................................3

Incorporation of Certain Documents By Reference................................3

The Company....................................................................4

Selling Stockholders...........................................................4

Plan of Distribution...........................................................6

Legal Matters..................................................................6

Experts........................................................................6

Indemnification................................................................7



                                       -2-
<PAGE>

                              AVAILABLE INFORMATION

     The Company is subject to the informational  requirements of the Securities
Exchange  Act of 1934,  as  amended  (the  "Exchange  Act"),  and in  accordance
therewith  files  reports,  proxy  statements  and  other  information  with the
Securities and Exchange Commission (the "SEC").  Such reports,  proxy statements
and other such  information  filed by the Company  with the SEC can be inspected
and copied at the public reference facilities maintained by the SEC at 450 Fifth
Street,  N.W.,  Washington,  D.C. 20549 and at the regional  offices of the SEC,
located at 75 Park Place,  14th Floor, New York, New York 10007.  Copies of such
material  can also be obtained  at  prescribed  rates from the Public  Reference
Section of the SEC, 450 Fifth Street, N.W., Washington,  D.C. 20549, or from the
SEC's website at http://www.sec.gov.

     In addition,  the Company's  Common Stock is listed on the NASDAQ  National
Market System and similar  information  concerning  the Company can be inspected
and copied at the National  Association  of  Securities  Dealers  offices at its
Corporate  Financing   Department,   Executive  Office,  1735  K  Street,  N.W.,
Washington, D.C.

     This  Prospectus  does not contain all of the  information set forth in the
Registration  Statement of which this Prospectus is a part and which the Company
has filed with the SEC. For further  information with respect to the Company and
the securities offered hereby,  reference is made to the Registration Statement,
including the exhibits filed as a part thereof, copies of which may be inspected
at or obtained at prescribed rates from the Public Reference Section of the SEC.


                 INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE

     The following  documents filed by the Company with the SEC are incorporated
hereby by reference:

     A.   The  Company's  Annual  Report on Form 10-K for the fiscal  year ended
          August 29, 1998, filed pursuant to Section 13(a) of the Exchange Act.

     B.   The  Company's  Quarterly  Report on Form 10-Q for the  quarter  ended
          November 28,  1998,  filed  pursuant to Section  13(a) of the Exchange
          Act.

     C.   The  Company's  Quarterly  Report on Form 10-Q for the  quarter  ended
          February 27,  1999,  filed  pursuant to Section  13(a) of the Exchange
          Act.

     D.   The Company's  Quarterly Report on Form 10-Q for the quarter ended May
          29, 1999, filed pursuant to Section 13(a) of the Exchange Act.

All documents  filed by the Company  pursuant to Sections  13(a),  13(c), 14 and
15(d) of the Exchange Act subsequent to the date of this Prospectus and prior to
the  filing  of  a  post-effective  amendment  which  indicates  that  all  such
securities  offered  hereby have been sold or which  deregisters  all securities
then remaining to be sold shall be deemed to be  incorporated  by reference into
this  Prospectus  and to be a part  hereof  from  the  date  of  filing  of such
documents.

     Any  statement  contained  in a  document  incorporated  or  deemed  to  be
incorporated  by reference  herein shall be deemed to be modified or  superseded
for purposes of this Prospectus to the extent that a statement contained herein,
or in any other subsequently filed document that also is or is deemed to be


                                       -3-
<PAGE>

incorporated by reference  herein,  modifies or supersedes  such statement.  Any
statement so modified or superseded  shall not be deemed,  except as so modified
or superseded, to constitute a part of this Prospectus.

     The Company hereby  undertakes to provide  without charge to each person to
whom a copy of this  Prospectus  is  delivered,  upon written or oral request of
such person, a copy of any and all of the information that has been incorporated
by reference (other than the exhibits to such documents unless such exhibits are
specifically incorporated by reference into such documents).  Requests should be
directed  to  Steven B.  Barnett,  Senior  Vice  President  and Chief  Financial
Officer, Rag Shops, Inc., 111 Wagaraw Road, Hawthorne, New Jersey 07506-2711.


                                   THE COMPANY

     The  Corporation  was  incorporated  in the state of  Delaware in 1991 as a
holding  company  successor to a New Jersey  corporation  organized in 1984. The
executive  offices of Rag Shops,  Inc. are at 111 Wagaraw Road,  Hawthorne,  New
Jersey 07506-2711 and its telephone number is (973) 423-1303.


                              SELLING STOCKHOLDERS

     The shares of Common Stock covered by this Prospectus are being  registered
for reoffers and resales by Selling  Stockholders of the Company who may acquire
such shares granted  pursuant to the terms of the Company's 1999 Incentive Stock
Award Plan (the "1999 Plan"). The Selling  Stockholders include Business Segment
Supervisors;  District Managers;  Buyers;  Framing Supervisors;  Store Managers;
Department  Supervisors;   Assistant  Store  Managers;   Assistant  Buyers;  and
Administrative  Assistants.  These  persons  will be named  by a  post-effective
amendment  hereto or by a prospectus  supplement  filed  pursuant to Rule 424(c)
under the Securities Act.



                                       -4-
<PAGE>

                              PLAN OF DISTRIBUTION


     Any shares of Common Stock sold pursuant to this Prospectus will be sold by
the  Selling  Stockholders  for their own  accounts  and they will  receive  all
proceeds from any such sales. The Company will receive none of the proceeds from
the sale of shares which may be offered hereby.  The Selling  Stockholders  have
not advised the Company of any specific plans for the distribution of the shares
of Common Stock covered by this Prospectus, but, if and when shares are sold, it
is  anticipated  that the  shares  will be sold from time to time  primarily  in
transactions  on the NASDAQ  National  Market  System at the  market  price then
prevailing,  although  sales  may  also be made in  negotiated  transactions  or
otherwise,  at prices related to such prevailing  market price or otherwise.  If
shares of Common Stock are sold through  brokers,  the Selling  Stockholders may
pay customary brokerage  commissions and charges.  The Selling  Stockholders may
effect such  transactions  by selling shares to or through  broker-dealers,  and
such  broker-  dealers  may  receive  compensation  in the  form  of  discounts,
concessions or commissions from the Selling  Stockholders  and/or the purchasers
of shares for whom such broker-dealers may act as agent or to whom they may sell
as principal, or both (which compensation as to a particular broker-dealer might
be in  excess  of  customary  commissions).  The  Selling  Stockholders  and any
broker-dealers  that act in  connection  with the sale of the  shares  hereunder
might be deemed to be "underwriters"  within the meaning of Section 2(11) of the
Securities  Act,  and any  commissions  received  by them and any  profit on the
resale of shares as principal might be deemed to be  underwriting  discounts and
commissions under the Securities Act.

     There can be no assurances that the Selling  Stockholders  will sell any or
all of the shares of Common Stock offered hereunder.


                                  LEGAL MATTERS


     The  validity of the shares of Common Stock  offered  hereby will be passed
upon for the  Company by Sills  Cummis  Radin  Tischman  Epstein & Gross,  P.A.,
Newark, New Jersey.


                                     EXPERTS

     The financial statements  incorporated in this prospectus by reference from
the Company's Annual Report on Form 10-K for the year ended August 29, 1998 have
been audited by Deloitte & Touche LLP, independent  auditors, as stated in their
report, which is incorporated herein by reference, and have been so incorporated
by reference in reliance upon the report of such firm given upon their authority
as experts in accounting and auditing.

                                       -5-
<PAGE>


                                 INDEMNIFICATION

     The Company's  Certificate  of  Incorporation  and Bylaws  provide that the
Company shall, to the fullest extent permitted by the Delaware General Corporate
Law, as it is now or hereafter may be in effect,  indemnify a director,  officer
or other agent of the Company  against his  liabilities  in connection  with any
proceeding  by or in the right of the Company to procure a judgment in its favor
which  involves  such person by reason of his being or having been such officer,
director or other agent;  provided,  however,  that no indemnification  shall be
made to or on behalf of the Company if a judgment  or other  final  adjudication
adverse to such person establishes that his acts or omissions (a) were in breach
of his loyalty to the Company or its shareholders, (b) were not in good faith or
involved a knowing violation of law or (c) resulted in receipt by such person of
an improper personal benefit.

     The  Company  currently  maintains  policies of  insurance  under which the
directors and officers of the Company are insured, within the limits and subject
to the limitations of the policies,  against certain expenses in connection with
the defense of actions,  suits or  proceedings,  and certain  liabilities  which
might be imposed as a result of such  actions,  suits or  proceedings,  to which
they are  parties  by  reason  of being or having  been  such  directors  and/or
officers.

     Insofar as indemnification for liabilities arising under the Securities Act
may be  permitted  to  directors,  officers or persons  controlling  the Company
pursuant to the foregoing provisions,  the Company has been informed that in the
opinion of the  Securities  and  Exchange  Commission  such  indemnification  is
against  public  policy as  expressed  in the  Securities  Act and is  therefore
unenforceable.


                                       -6-
<PAGE>

PART II. INFORMATION REQUIRED IN THE REGISTRATION STATEMENT

Item 3. Documents Incorporated By Reference

     Rag Shops, Inc. (the "Company") hereby  incorporates by reference into this
Registration  Statement  the  following  documents  which have been filed by the
Company with the Securities and Exchange Commission (the "SEC"):

          (a) The Company's Annual Report on Form 10-K for the fiscal year ended
August  29,  1998,  filed  pursuant  to Section  13(a) of the of the  Securities
Exchange Act of 1934, as amended (the "Exchange Act").

          (b) The Company's  Quarterly Report on Form 10-Q for the quarter ended
November 28, 1998, filed pursuant to Section 13(a) of the Exchange Act.

          (c) The Company's  Quarterly Report on Form 10-Q for the quarter ended
February 27, 1999, filed pursuant to Section 13(a) of the Exchange Act.

          (d) The Company's  Quarterly Report on Form 10-Q for the quarter ended
May 29, 1999, filed pursuant to Section 13(a) of the Exchange Act.

     All documents subsequently filed by the Company pursuant to Sections 13(a),
13(c), 14 and 15(d) of the Exchange Act, prior to the filing of a post-effective
amendment  which  indicates that all securities  offered have been sold or which
deregisters  all  securities  then  remaining  unsold,  shall  be  deemed  to be
incorporated by reference in this Registration Statement and to be a part hereof
from the date of filing of such documents.

Item 4. Description of Securities

               Not applicable.

Item 5. Interests of Named Experts and Counsel.

               Not applicable.

Item 6. Indemnification of Directors and Officers

               The Company's  Certificate  of  Incorporation  and Bylaws provide
that the Company shall, to the fullest extent  permitted by the Delaware General
Corporation  Law,  as it is  now or  hereafter  may be in  effect,  indemnify  a
director,  officer or other agent of the  Company  against  his  liabilities  in
connection  with any  proceeding  by or in the right of the Company to procure a
judgment  in its  favor  which  involves  such  person by reason of his being or
having been such officer,  director or other agent;  provided,  however, that no
indemnification  shall be made to or on behalf of the  Company if a judgment  or
other final  adjudication  adverse to such person  establishes  that his acts or
omissions (a) were in breach of his loyalty to the Company or its  shareholders,
(b) were  not in good  faith  or  involved  a  knowing  violation  of law or (c)
resulted in receipt by such person of an improper personal benefit.


                                      II-1
<PAGE>

     The  Company  currently  maintains  policies of  insurance  under which the
directors and officers of the Company are insured, within the limits and subject
to the limitations of the policies,  against certain expenses in connection with
the defense of actions,  suits or  proceedings,  and certain  liabilities  which
might be imposed as a result of such  actions,  suits or  proceedings,  to which
they are  parties  by  reason  of being or having  been  such  directors  and/or
officers.

     Insofar as indemnification for liabilities arising under the Securities Act
may be  permitted  to  directors,  officers or persons  controlling  the Company
pursuant to the foregoing provisions,  the Company has been informed that in the
opinion of the  Securities  and  Exchange  Commission  such  indemnification  is
against  public  policy as  expressed  in the  Securities  Act and is  therefore
unenforceable.

Item 7. Exemption from Registration Claimed.

               Not Applicable.

Item 8. Exhibits

Exhibit Number                               Exhibit

     4.1                   Rag Shops, Inc. 1999 Incentive Stock Award Plan

     4.2                   Form of 1999 Stock Award Agreement

     5.1                   Opinion of Sills Cummis Radin Tischman Epstein &
                           Gross, P.A. as to Legality

     23.1                  Consent of Sills Cummis Radin Tischman Epstein &
                           Gross, P.A. (included in Exhibit 5.1)

     23.2                  Consent of Deloitte & Touche LLP

     24                    Powers of Attorney (included in the signature pages
                           of this Registration Statement)


Item 9. Undertakings

     The undersigned  Registrant hereby undertakes to file, during any period in
which  offers  or  sales  are  being  made,  post-effective  amendments  to this
Registration  Statement:  (i) to  include  any  prospectus  required  by Section
10(a)(3) of the  Securities  Act of 1993,  as amended  (the  "Securities  Act");
(ii) to  reflect  in the  prospectus  any  facts or  events  arising  after  the
effective date of this Registration Statement (or the most recent post-effective
amendment  hereof)  which,  individually  or  in  the  aggregate,   represent  a
fundamental change in the information set forth in this Registration  Statement;
and  (iii) to  include  any  material  information  with  respect to the plan of
distribution  not  previously  disclosed in this  Registration  Statement or any
material change to such information in this  Registration  Statement;  provided,
however,  that (i) and (ii) above shall not apply if the information required to



                                      II-2
<PAGE>

be included in a post-effective amendment is contained in periodic reports filed
by the  Registrant  pursuant to Section 13 or Section  15(d) of the Exchange Act
that are incorporated by reference in this Registration Statement.

     The  undersigned   Registrant  hereby  undertakes  that,  for  purposes  of
determining  any liability  under the Securities  Act, each such  post-effective
amendment, and each filing of the Registrant's annual report pursuant to Section
13(a) or Section 15(d) of the Exchange Act (and, where  applicable,  each filing
of an employee  benefit  plan's annual  report  pursuant to Section 15(d) of the
Exchange Act) that is incorporated by reference in this  Registration  Statement
shall be deemed to be a new  registration  statement  relating to the securities
offered  therein,  and the  offering  of such  securities  at that time shall be
deemed to be the initial bona fide offering thereof.

     The undersigned Registrant hereby undertakes to remove from registration by
means of a post-  effective  amendment any of the  securities  being  registered
which remain unsold at the termination of the offering.

     Insofar as indemnification for liabilities arising under the Securities Act
may  be  permitted  to  directors,  officers  and  controlling  persons  of  the
Registrant pursuant to the foregoing  provisions,  or otherwise,  the Registrant
has been advised that in the opinion of the Securities  and Exchange  Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore,  unenforceable. In the event that a claim for indemnification
against such  liabilities  (other than the payment by the Registrant of expenses
incurred or paid by a director,  officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director,  officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been  settled by  controlling  precedent,  submit to a court of  appropriate
jurisdiction the question whether such  indemnification  by it is against public
policy as  expressed  in the  Securities  Act and will be  governed by the final
adjudication of such issue.




                                      II-3
<PAGE>

                                   SIGNATURES

     Pursuant to the  requirements of the Securities Act of 1933, the Registrant
certifies  that it has  reasonable  grounds to believe  that it meets all of the
requirements  for  filing  on Form S-8 and has  duly  caused  this  Registration
Statement  to be  signed  on its  behalf  by  the  undersigned,  thereunto  duly
authorized, in Hawthorne, New Jersey, on the 20th day of August, 1999.


                               RAG SHOPS, INC.

                               By: /s/ Steven B. Barnett
                                  Steven B. Barnett
                                  Senior Vice President, Chief Financial Officer
                                  and Treasurer

                               POWERS OF ATTORNEY

     Each person whose  signature  appears below hereby  authorizes and appoints
Steven B. Barnett his true and lawful attorney-in-fact,  to sign and file on his
behalf  individually  and in  each  such  capacity  stated  below  any  and  all
amendments (including post-effective amendments) to this Registration Statement,
as fully as such person could do in person,  hereby ratifying and confirming all
that said attorneys-in-fact,  or their substitutes,  may lawfully do or cause to
be done by virtue hereof.

     Pursuant  to  the   requirements  of  the  Securities  Act  of  1933,  this
Registration  Statement  has  been  signed  by  the  following  persons  in  the
capacities and as of the dates indicated:


\s\Stanley Berenzweig   Chairman of the Board                   August 20, 1999
Stanley Berenzweig      Chief Executive Officer

\s\Michael Aaronson     President, Chief Operating Officer,     August 20, 1999
Michael Aaronson        Director

\s\Steven B. Barnett    Senior Vice President, Chief Financial  August 20, 1999
Steven B. Barnett       Officer, Treasurer, Director

\s\Evan Berenzweig      Senior Vice President,                  August 20, 1999
Evan Berenzweig         Director

\s\Judith Lombardo      Senior Vice President                   August 20, 1999
Judith Lombardo         Director

\s\Fred J. Damiano      Director                                August 20, 1999
Fred J. Damiano

\s\Alan C. Mintz        Director                                August 20, 1999
Alan C. Mintz


                                      II-4
<PAGE>

                                  EXHIBIT INDEX

EXHIBIT
NO.                        CAPTION

4.1                        Rag Shops, Inc. 1999 Incentive Stock Award Plan

4.2                        Form of 1999 Stock Award Agreement

5.1                        Opinion of Sills Cummis Radin Tischman
                           Epstein & Gross, P.A. as to Legality

23.1                       Consent of Sills Cummis Radin Tischman
                           Epstein & Gross, P.A.
                           (included in Exhibit 5.1)

23.2                       Consent of Deloitte & Touche LLP

24                         Powers of Attorney (included in the signature pages
                           of this Registration Statement)

<PAGE>

                                   EXHIBIT 4.1

                                 Rag Shops, Inc.
                         1999 Incentive Stock Award Plan


       AS ADOPTED BY THE STOCK OPTION COMMITTEE AND THE BOARD OF DIRECTORS
                               AS OF JULY 20, 1999

                                 RAG SHOPS, INC.

                         1999 INCENTIVE STOCK AWARD PLAN

                                    Article I
                            PURPOSE AND EFFECTIVENESS

1.14 Purpose. The purpose of the Rags Shops 1999 Incentive Stock Award Plan (the
     "Plan") is to promote the success of Rag Shops,  Inc.  (the  "Company")  by
     providing  a method  whereby  (i)  eligible  employees  the Company and its
     Subsidiaries  and (ii)  independent  contractors and consultants  providing
     services  to the  Company or its  Subsidiaries  may be  awarded  additional
     remuneration  for  services  rendered and  encouraged  to invest in capital
     stock  of the  Company,  thereby  increasing  proprietary  interest  in the
     Company's  businesses,  encouraging  them to  remain  in the  employ of the
     Company or its Subsidiaries,  and increasing their personal interest in the
     continued success and progress of the Company or its Subsidiaries. The Plan
     is also intended to aid (i) in attracting persons of exceptional capability
     to become  key  employees  of the  Company  and its  Subsidiaries  and (ii)
     inducing contractors to agree to provide services to the Company.

1.2  Effective  Date. The Plan shall be subject to, and become  effective  upon,
     the  approval  by the  affirmative  vote of the Board of  Directors  of the
     Company.


                                   Article II
                                   DEFINITIONS

2.1  Certain Defined Terms.  Capitalized terms not defined elsewhere in the Plan
     shall have the following meanings (whether used in the singular or plural):

     "Affiliate"  of the Company means any  corporation,  partnership,  or other
     business  association  that,  directly or  indirectly,  through one or more
     intermediaries, controls, is controlled by, or is under common control with
     the Company.

     "Agreement" means either a restricted shares agreement or restricted shares
     grant, or an agreement evidencing more than one type of Award, specified in
     Section 7.5, as any such Agreement or grant may be  supplemented or amended
     from time to time.

     "Approved  Transaction"  means any  transaction  in which the Board (or, if
     approval of the board is not required as a matter of law, the  stockholders
     of the  Company)  shall  approve  (i) any  consolidation  or  merger of the
     Company,  or binding  share  exchange,  pursuant to which  shares of Common
     Stock would be changed or converted into or exchanged for cash,  securities



                                        1
<PAGE>

     or other  property,  other  than any such  transaction  in which the common
     stockholders of the Company  immediately prior to such transaction have the
     same proportionate  ownership of the common stock of, and voting power with
     respect to, the surviving  corporation  immediately after such transaction,
     (ii) any  merger,  consolidation  or binding  share  exchange  to which the
     Company  is a party  as a  result  of  which  the  persons  who are  common
     stockholders  of the Company  immediately  prior  thereto  have less than a
     majority of the combined voting power of the  outstanding  capital stock of
     the Company  ordinarily  (and apart from the rights  accruing under special
     circumstances)  having  the  right  to vote in the  election  of  directors
     immediately following such merger, consolidation or binding share exchange,
     (iii)  the  adoption  of any  plan  or  proposal  for  the  liquidation  or
     dissolution  of the  Company,  or (iv) any sale,  lease,  exchange or other
     transfer (in one transaction or a series of related  transactions)  of all,
     or substantially all, of the assets of the Company.

     "Award" means a grant of Restricted Shares under this Plan.

     "Board" means the Board of Directors of the Company.

     "Code"  means the Internal  Revenue  Code of 1986,  as amended from time to
     time, or any successor statue or statues thereto. Reference to any specific
     Code section shall include any successor section.

     "Committee"  means the option committee of the Board appointed  pursuant to
     Section 3.1 to administer the Plan.

     "Common  Stock" means the Common  Stock,  $.01 par value per share,  of the
     Company.

     "Company" means Rag Shops, Inc., a Delaware corporation.

     "Disability"  means the  inability  to engage  in any  substantial  gainful
     activity  by  reason  of any  medically  determinable  physical  or  mental
     impairment  which can be expected to result in death or which has lasted or
     can be expected to last for a continuous period of not less than 12 months.

     "Dividend  Equivalents"  means,  with  respect to  Restricted  Shares to be
     issued at the end of the Restriction Period, to the extent specified by the
     Committee  only, an amount equal to all  dividends and other  distributions
     (or the economic,  equivalent thereof) which are payable to stockholders of
     record during the  Restriction  Period on a like number of shares of Common
     Stock.

     "Domestic  Relations Order" means a domestic  relations order as defined by
     the Code or Title I of the Employee  Retirement Income Security Act, or the
     rules thereunder.

     "Effective  Date"  means  the date on  which  the  Plan  becomes  effective
     pursuant to Section 1.2. "Equity  Security" shall have the meaning ascribed
     to such  term in  Section  3 (a) (11) of the  Exchange  Act,  and an equity
     security of an issuer shall have the meaning ascribed thereto in Rule 16a-1
     promulgated under the Exchange Act, or any successor Rule.


                                        2
<PAGE>

     "Exchange Act" means the  Securities  Exchange Act of 1934, as amended from
     time to time, or any successor  statute or statutes  thereto.  Reference to
     any specific Exchange Act section shall include any successor section.

     "Fair  Market  Value" of a share of the  Common  Stock on any day means the
     last sale price (or, if no last sale price is reported,  the average of the
     closing high bid and low asked  prices) for a share of Common Stock on such
     day (or, if such day is not a trading  day, on the next  preceding  trading
     day) as reported on NASDAQ or, if not reported on NASDAQ,  as quoted by the
     National Quotation Bureau Incorporated, or if the Common Stock is listed on
     an exchange, on the principal exchange on which the Common Stock is listed.
     If for any day the Fair  Market  Value of a share of Common  Stock,  is not
     determinable by any of the foregoing means,  then the Fair Market Value for
     such day shall be determined in good faith by the Committee on the basis of
     such   quotations  and  other   considerations   as  the  Committee   deems
     appropriate.

     "Holder" means an employee of the Company or a Subsidiary or an independent
     contractor or consultant who has received an Award under Plan.

     "NASDAQ" means the Nasdaq Stock Market.

     "Plan" has the meaning ascribed thereto in Section 1.1.

     "Restricted  Shares"  means  shares of Common Stock or the right to receive
     shares of Common Stock, as the case may be, awarded pursuant to Article VI.

     "Restriction  Period" means a period of time  beginning on the date of each
     award of  Restricted  Shares and ending on the Vesting Date with respect to
     such award.

     "Retained Distribution" has the meaning ascribed thereto in Section 6.3.

     "Rule 16b-3" means Rule 16b-3  promulgated  under the Exchange  Act, or any
     successor  Rule,  References  to paragraphs of Rule 16b-3 shall include the
     comparable provisions of any successor Rule.

     "Subsidiary"  of the  Company  means any present or future  subsidiary  (as
     defined  in  Section  424(f) of the Code) of the  Company  or any  business
     entity in which the Company owns directly or indirectly, 50% or more of the
     voting,  capital  or  profits  interests.  An  entity  shall  be  deemed  a
     subsidiary  of the Company for  purposes of this  definition  only for such
     periods as the requisite ownership or control relationship is maintained.

     "Vesting  Date" with respect to any  Restricted  Shares  awarded  hereunder
     means the date on which  such  Restricted  Shares  cease to be subject to a
     risk of forfeiture,  as designated in or determined in accordance  with the
     Agreement  with  respect to such award of  Restricted  Shares  pursuant  to
     Article VIII.  If more than one Vesting Date is designated  for an award of
     Restricted  Shares,  references in the Plan to a Vesting Date in respect of
     such  Award  shall be deemed to refer to each  party of such  Award and the
     Vesting Date of such part.




                                        3
<PAGE>

                                   Article III
                                 ADMINISTRATION

3.1  Committee.  The Plan shall be administered  by the Option  Committee of the
     Board unless a different committee is appointed by the Board. The Committee
     shall be comprised of not less than two persons. The Committee shall select
     one of its  members as its  chairman  and shall hold its  meetings  at such
     times and places as it shall deem  advisable.  A  majority  of its  members
     shall  constitute  a  quorum  and  all  determinations  shall  be made by a
     majority of such quorum. Any determination reduced to writing and signed by
     all of the members  shall be fully as effective as if it had been made by a
     majority vote at a meeting duly called and held.

3.2  Powers.  The  Committee  shall  have full power and  authority  to grant to
     eligible  persons  Restricted  Shares under  Article  VIII of the Plan,  to
     determine  the terms and  conditions  (which need not be  identical) of all
     Awards  so  granted,  to  interpret  the  provisions  of the  Plan  and any
     Agreements  relating to Awards granted under the Plan, and to supervise the
     administration  of the Plan.  The  Committee in making an Award may provide
     for the  granting or issuance of  additional,  replacement  or  alternative
     Awards upon the occurrence of specified  events,  including the exercise of
     the  original  Award.  The  Committee  shall  have  sole  authority  in the
     selection  of persons to whom  Awards may be granted  under the Plan and in
     the  determination  of the  timing,  pricing  and amount of any such Award,
     subject   only  to  the  express   provisions   of  the  Plan.   In  making
     determinations hereunder, the Committee may take into account the nature of
     the services rendered by the respective employees,  independent contractors
     and consultants,  their present and potential  contributions to the success
     of the Company and its Subsidiaries and such other factors as the Committee
     in its discretion deems relevant.

3.3  Interpretation.  The Committee is authorized,  subject to the provisions of
     the Plan, to establish,  amend and rescind such rules and regulations as it
     deems necessary or advisable for the proper  administration of the Plan and
     to take such other action in connection  with or in relation to the Plan as
     it deems  necessary or  advisable.  Each action and  determination  made or
     taken pursuant to the Plan by the Committee,  including any  interpretation
     or construction of the Plan, shall be final and conclusive for all purposes
     and upon all persons.  No member of the  Committee  shall be liable for any
     action or determination  made or take by him or the Committee in good faith
     with respect to the Plan.


                                   Article IV
                           SHARES SUBJECT TO THE PLAN

4.1  Number of Shares. Subject to the provisions of this Article IV, the maximum
     number of shares  of Common  Stock  with  respect  to which  Awards  may be
     granted  during  the term of the Plan shall be  300,000  shares.  Shares of
     Common Stock will be made available from either the authorized but unissued
     shares of the Company or issued treasury shares. The shares of Common Stock
     subject  to (i) any  Award  granted  under  the  Plan  that  shall  expire,
     terminate or be annulled for any reason  without  having been exercised (or
     considered  to have been  exercised  as provided in Section 7) and (ii) any
     Award of Restricted Shares that shall be forfeited prior to becoming vested
     (provided  that the  Holder  received  no  benefits  of  ownership  of such
     Restricted Shares other than


                                        4
<PAGE>

     voting rights and the  accumulation  of Retained  Distributions  and unpaid
     Dividend Equivalents that are likewise forfeited), shall again be available
     for purposes of the Plan.

4.2  Adjustments.  If the Company  subdivides its  outstanding  shares of Common
     Stock into a greater  number of shares of Common Stock (by stock  dividend,
     stock split,  reclassification  or otherwise)  or combines its  outstanding
     shares of Common Stock into a similar  number of shares of Common Stock (by
     reverse stock split,  reclassification  or otherwise),  or if the Committee
     determines   that  any  stock   dividend,   extraordinary   cash  dividend,
     reclassification,  recapitalization,  reorganization,  split-up,  spin-off,
     combination,  exchange of shares,  warrants or rights  offering to purchase
     Common  Stock,  or other  similar  corporate  event  (including  mergers or
     consolidations  other than those which  constitute  Approval  Transactions)
     affects the Common  Stock such that an  adjustment  is required in order to
     preserve the benefits or potential  benefits  intended to be made available
     under this Plan,  then the Committee  shall,  in its sole discretion and in
     such manner as the Committee may deem equitable and appropriate,  make such
     adjustments  to any or all of (i)  the  number  and  kind of  shares  which
     thereafter  may be awarded,  optioned,  or  otherwise  made  subject to the
     benefits  contemplated  by the  Plan;  (ii) the  number  and kind of shares
     subject to  outstanding  Awards,  and (iii) the purchase or exercise  price
     with respect to any of the foregoing, provided, however, that the number of
     shares  subject to any Award shall always be a whole number.  The Committee
     may, if deemed appropriate,  provide for a cash payment to any Holder of an
     Award in connection with any adjustment made pursuant to this Section 4.2.

                                    Article V
                                   ELIGIBILITY

5.1  General.  The persons who shall be eligible to  participate in the Plan and
     to receive  Awards under the Plan shall be such  employees  (including  non
     executive  officers)  of the Company and its  Subsidiaries  or  independent
     contractors  or consultants  as the Committee  shall select.  Awards may be
     made to employees,  independent contractors or consultants who hold or have
     held Awards  under this Plan or any similar or other awards under any other
     plan of the Company or any of its Affiliates.


                                   Article VI
                                RESTRICTED SHARES

6.1  Grant.  Subject  to  the  limitations  of the  Plan,  the  Committee  shall
     designate those eligible persons to be granted awards of Restricted Shares,
     shall  determine  the time when each such Award shall be  granted,  whether
     shares of Common  Stock  covered  by awards of  Restricted  Shares  will be
     issued at the  beginning or the end of the  Restriction  Period and whether
     Dividend  Equivalents  will be paid  during the  Restriction  Period in the
     event  shares  of the  Common  Stock  are to be  issued  at the  end of the
     Restriction  Period,  and  shall  designate  (or set  forth  the  basis for
     determining) the Vesting Date or Vesting Dates for each award of Restricted
     Shares  and  may  prescribe  other   restrictions,   terms  and  conditions
     applicable  to the vesting of such  Restricted  Shares in addition to those
     provided in the Plan. The Committee  shall  determine the price, if any, to
     be paid by the Holder for the Restricted Shares;  provided,  however,  that
     the  issuance of  Restricted  Shares shall be made for at least the minimum
     consideration necessary to permit such Restricted Shares to be


                                        5
<PAGE>

     deemed  fully  paid  and non  assessable.  All  determinations  made by the
     Committee pursuant to this Section 6.1 shall be specified in the Agreement.

6.2  Issuance of  Restricted  Shares at Beginning of the  Restriction  Period If
     shares of Common  Stock are  issued  at the  beginning  of the  Restriction
     Period, the stock certificate or certificates  representing such Restricted
     Shares  shall  be  registered  in the  name  of the  Holder  to  whom  such
     Restricted Shares shall have been awarded.  During the Restriction  Period,
     certificates   representing  the  Restricted   Shares  and  any  securities
     constituting Retained  Distributions shall bear a restrictive legend to the
     effect  that  ownership  of  the  Restricted   Shares  (and  such  Retained
     Distributions),  and the enjoyment of all rights appurtenant  thereto,  are
     subject to the restrictions,  terms and conditions provided in the Plan and
     the  applicable  Agreement.   At  the  discretion  of  the  Committee  such
     certificates  shall either (i) remain in the custody of the Company and the
     Holder shall deposit with the Company stock powers or other  instruments of
     assignment,  each  endorsed  in blank,  so as to permit  retransfer  to the
     Company of all or any portion of the  Restricted  Shares and any securities
     constituting  Retained  Distributions  that shall be forfeited or otherwise
     not become vested in accordance with the Plan and the applicable  Agreement
     or (ii) be delivered to the Holder  bearing a restrictive  legend either as
     provided  for in this  Section  or as may be  designated  by the  Committee
     obligating the Holder to return the Shares and any securities  constituting
     Retained  Distributions  that shall be forfeited  or otherwise  not becoome
     vested in accordance with the Plan an the applicable Agreement.

6.3  Restrictions.  Restricted Shares issued at the beginning of the Restriction
     Period shall constitute  issued and outstanding  shares of Common Stock for
     all  corporate  purposes.  The  Holder  will  have the  right to vote  such
     Restricted  Shares, to receive and retain such dividends and distributions,
     as the Committee may in its sole discretion designate,  paid or distributed
     on such  Restricted  Shares and to exercise  all other  rights,  powers and
     privileges  of a Holder of Common  Stock with  respect  to such  Restricted
     Shares; except, that (a) the Holder will not be entitled to delivery of the
     stock certificate or certificates representing such Restricted Shares until
     the  Restriction  Period  shall have  expired and unless all other  vesting
     requirements with respect thereto shall have been fulfilled or waived;  (b)
     the Company will retain custody of the stock  certificate  or  certificates
     representing  the  Restricted  Shares  during  the  Restriction  Period  as
     provided  in  Section  6.2;  (c) other  than  such  shares,  dividends  and
     distributions  as the Committee may in its sole discretion  designate,  the
     Company will retain custody of all distributions ("Retained Distributions")
     made or declared with respect to the  Restricted  Shares (and such Retained
     Distributions will be subject to the same  restrictions,  terms and vesting
     and other conditions as are applicable to the Restricted Shares) until such
     time, if ever, as the Restricted Shares with respect to which such Retained
     Distributions  shall have been made,  paid or  declared  shall have  become
     vested,  and such  Retained  Distributions  shall not bear  interest  or be
     segregated  in a separate  account;  (d) the  Holder may not sell,  assign,
     transfer, pledge, exchange, encumber or dispose of the Restricted Shares or
     any  Retained  Distributions  or his  interest  in any of them  during  the
     Restriction  Period;  and  (e) a  breach  of  any  restrictions,  terms  or
     conditions  provided  in the  Plan or  established  by the  Committee  with
     respect to any  Restricted  Shares or Retained  Distributions  will cause a
     forfeiture of such Restricted  Shares and any Retained  Distributions  with
     respect thereto.


                                        6
<PAGE>

6.4  Issuance of Stock at the End of the Restriction  Period.  Restricted Shares
     issued at the end of the Restriction Period shall not constitute issued and
     outstanding shares of Common Stock and the Holder shall not have any of the
     rights of a stockholder  with respect to the shares of Common Stock covered
     by such an award of Restricted Shares, in each case until such shares shall
     have been  transferred to the Holder at the end of the Restriction  Period.
     If and to the extent  that  shares of Common  Stock are to be issued at the
     end of the  Restriction  Period,  the Holder  shall be  entitled to receive
     Dividend  Equivalents  with respect to the shares of Common  Stock  covered
     thereby either (i) during the Restriction Period or (ii) in accordance with
     the rules  applicable  to  Retained  Distributions,  as the  Committee  may
     specify in the Agreement.

6.5  Cash  Awards.  In  connection  with any  award  of  Restricted  Shares,  an
     Agreement  may  provide  for the  payment of a cash amount to the Holder of
     such Restricted  Shares at any time after such Restricted Shares shall have
     become  vested.  Such cash awards shall be payable in accordance  with such
     additional restrictions, terms and conditions as shall be prescribed by the
     Committee in the  Agreement  and shall be in addition to any other  salary,
     incentive,  bonus or other compensation payments which such Holder shall be
     otherwise entitled or eligible to receive from the Company.

6.6  Completion of Restriction  Period. On the Vesting Date with respect to each
     award of Restricted  Shares,  and the  satisfaction of any other applicable
     restrictions,  terms and conditions  (a) all or the  applicable  portion of
     such Restricted Shares shall become vested, (b) any Retained  Distributions
     and any unpaid Dividend  Equivalents with respect to such Restricted Shares
     shall  become  vested to the  extent  that the  Restricted  Shares  related
     thereto  shall have become  vested and (c) any cash award to be received by
     the Holder with respect to such Restricted Shares shall become payable, all
     in  accordance  with  the  terms  of the  applicable  Agreement.  Any  such
     Restricted   Shares,   Retained   Distributions  and  any  unpaid  Dividend
     Equivalents  that shall not become vested shall be forfeited to the Company
     and the Holder shall not thereafter have any rights (including dividend and
     voting   rights)  with  respect  to  such   Restricted   Shares,   Retained
     Distributions  and any unpaid Dividend  Equivalents that shall have been so
     forfeited. The Committee may, in its discretion,  provide that the delivery
     of any  Restricted  Shares,  Retained  Distributions  and  unpaid  Dividend
     Equivalents  that shall have become vested,  and payment of any cash awards
     that shall have become payable,  shall be deferred until such date or dates
     as the  recipient  may elect.  Any election of a recipient  pursuant to the
     preceding  sentence  shall be  filed  in  writing  with  the  Committee  in
     accordance with such rules and regulations,  including any deadline for the
     making of such an election, as the Committee may provide.


                                   Article VII
                               GENERAL PROVISIONS

7.1  Acceleration of Restricted Shares.

     (a) Death or Disability. If a Holder's employment shall terminate by reason
     of  death or  Disability,  notwithstanding  any  contrary  waiting  period,
     installment period, vesting schedule or Restriction Period in any Agreement
     or in the Plan, unless the applicable Agreement provides otherwise:  in the



                                        7


<PAGE>

     case of Restricted  Shares,  the Restriction Period applicable to each such
     award of  Restricted  Shares  shall be deemed to have  expired and all such
     Restricted  Shares,  any  related  Retained  Distributions  and any  unpaid
     Dividend  Equivalents  shall  become  vested and any cash  amounts  payable
     pursuant to the  applicable  Agreement  shall be adjusted in such manner as
     may be provided in the Agreement.

     (b)  Approved  Transactions.  In the  event  of any  Approved  Transaction,
     notwithstanding any contrary waiting period,  installment  period,  vesting
     schedule or Restriction  Period in any Agreement or in the Plan, unless the
     applicable Agreement provides otherwise:  in the case of Restricted Shares,
     the Restriction  Period  applicable to each such award of Restricted Shares
     shall be deemed to have expired and all such Restricted Shares, any related
     Retained  Distributions  and any unpaid Dividend  Equivalents  shall become
     vested and any cash amounts  payable  pursuant to the applicable  Agreement
     shall be  adjusted  in such  manner as may be  provided  in the  Agreement.
     Notwithstanding the foregoing,  unless otherwise provided in the applicable
     Agreement, the Committee may, in its discretion,  determine that any or all
     outstanding  Awards of any or all types  granted  pursuant to the Plan will
     not vest or become  exercisable on an accelerated  basis in connection with
     an Approved Transaction and/or will not terminate if not exercised prior to
     consummation of the Approved Transaction,  if the Board or the surviving or
     acquiring  corporation,  as the  case may be,  shall  have  taken,  or made
     effective provision for the taking of, such action as in the opinion of the
     Committee is equitable and  appropriate  to substitute a new Award for such
     Award or to assume  such  Award  and in order to make  such new or  assumed
     Award, as nearly as may be practicable, equivalent to the old Award (before
     giving  effect  to  any  acceleration  of  the  vesting  or  exercisability
     thereof),  taking  into  account,  to the extent  applicable,  the kind and
     amount of  securities,  cash or other  assets  into or for which the Common
     Stock  may be  changed,  converted  or  exchanged  in  connection  with the
     Approved Transaction.


7.2  Termination of Employment.

     (a)  General.  If a Holder's  employment  with the Company or a  Subsidiary
     shall be  terminated  during the  Restriction  Period  with  respect to any
     Restricted  Shares  whether  with or  without  cause  or by  reason  of the
     Holder's  resignation  whether with or without  cause,  then such  Holder's
     rights  to  all  Restricted  Shares,  Retained  Distributions,  any  unpaid
     Dividend Equivalents and any cash awards shall be forfeited immediately.

     (b)  Miscellaneous.  The Committee may determine whether any given leave of
     absence constitutes a termination of employment;  provided,  however,  that
     for purposes of the Plan (i) a leave of absence, duly authorized in writing
     by the Company for military  service or sickness,  or for any other purpose
     approved  by the  Company  if the  period of such  leave does not exceed 90
     days, and (ii) a leave of absence in excess of 90 days,  duly authorized in
     writing by the Company,  provided the employee's  right to  reemployment is
     guaranteed either by statute or contract, shall not be deemed a termination
     of  employment.  Awards  made under the Plan shall not be  affected  by any
     change of employment  so long as the Holder  continues to be an employee of
     the Company or any Subsidiary.

7.3  Right of Company to Terminate Employment.  Nothing contained in the Plan or
     in any Award,  and no action of the Company or the  Committee  with respect
     thereto,  shall confer or be construed to confer on any Holder any right to
     continue  in the  employ  of the  Company  or  any of its  Subsidiaries  or
     interfere  in any way with the  right of the  Company  or a  Subsidiary  to



                                        8


<PAGE>

     terminate the employment of the Holder at any time,  with or without cause;
     subject, however, to the provisions of any employment agreement between the
     Holder and the Company or any Subsidiary.

7.4  Nonalienation  of  Benefits.  No right or  benefit  under the Plan shall be
     subject to alienation, sale, assignment,  hypothecation,  pledge, exchange,
     transfer, encumbrance or charge, and any attempt to alienate, sell, assign,
     hypothecate,  pledge, exchange, transfer, encumber or charge the same shall
     be void. No right or benefit hereunder shall in any manner be liable for or
     subject  to the  debts,  contracts,  liabilities  or  torts  of the  person
     entitled to such benefits.

7.5  Written Agreement.  Each award of Restricted Shares shall be evidenced by a
     restricted shares agreement or grant, each in such form and containing such
     terms and  provisions not  inconsistent  with the provisions of the Plan as
     the Committee from time to time shall approve;  provided,  however, that if
     more than one type of Award is made to the same Holder,  such Awards may be
     evidenced by a single agreement or grant with such Holder.  Each grantee of
     Restricted  Shares  shall be notified  promptly of such grant and a written
     agreement  shall be promptly  executed and delivered by the Company and the
     grantee,  provided that, in the discretion of the Committee,  such grant of
     Restricted  Shares shall terminate if such written  agreement is not signed
     by such grantee (or his attorney)  and  delivered to the Company  within 60
     days after the date the  Committee  approved  such grant.  Any such written
     agreement or grant may contain (but shall not be required to contain)  such
     provisions  as the  Committee  deems  appropriate  (i) to  ensure  that the
     penalty  provisions of Section 4999 of the Code will not apply to any stock
     or cash  received by the Holder  from the  Company or (ii) to provide  cash
     payments to the Holder to mitigate  the impact of such  penalty  provisions
     upon the Holder. Any such agreement or grant may be supplemented or amended
     from time to time as approved by the Committee as  contemplated  by Section
     7.8(b).

7.6  Designation  of  Beneficiaries.  Each  person who shall be granted an Award
     under the Plan may designate a beneficiary or beneficiaries  and may change
     such  designation  from  time to time by filing a  written  designation  of
     beneficiary or beneficiaries  with the Committee on a form to be prescribed
     by it, provided that no such designation shall be effective unless so filed
     prior to the death of such person.

7.7  Termination and Amendment

     (a) General.  Unless the Plan shall  theretofore  have been  terminated  as
     hereinafter  provided, no Awards may be made under the Plan on or after the
     tenth  anniversary of the Effective Date. The Board or the Committee may at
     any time prior to the tenth anniversary of the Effective Date terminate the
     Plan, and may, from time to time, suspend or discontinue the Plan or modify
     or amend the Plan in such respects as it shall deem advisable;  except that
     no such  modification  or amendment shall be effective prior to approval by
     the  Company's  stockholders  to the extent such  approval is then required
     pursuant  to Rule  16b-3 in  order to  preserve  the  applicability  of any
     exemption  provided by such rule to any Award then outstanding  (unless the
     holder of such Award  consents)  or to the extent  stockholder  approval is
     otherwise required by applicable legal requirements.



                                        9


<PAGE>

     (b)  Modification.  No  termination,  modification or amendment of the Plan
     may, without the consent of the person to whom any Award shall  theretofore
     have been granted,  adversely affect the rights of such person with respect
     to such Award. No modification,  extension,  renewal or other change in any
     Award  granted  under the Plan shall be made after the grant of such Award,
     unless the same is consistent  with the  provisions  of the Plan.  With the
     consent of the Holder and subject to the terms and  conditions  of the Plan
     (including Section 7.7(a)), the Committee may amend outstanding  Agreements
     with any Holder, including,  without limitation,  any amendment which would
     (i) accelerate the time or times at which the Award may be exercised and/or
     (ii) extend the scheduled  expiration date of the Award.  Without  limiting
     the  generality of the  foregoing,  the Committee  may, but solely with the
     Holder's  consent  unless  otherwise  provided in the  Agreement,  agree to
     cancel  any Award  under  the Plan and  issue a new  Award in  substitution
     therefor,  provided that the Award so substituted  shall satisfy all of the
     requirements  of the Plan as of the date  such new  Award is made.  Nothing
     contained  in the  foregoing  provisions  of this  Section  7.7(b) shall be
     construed to prevent the Committee from providing in any Agreement that the
     rights of the Holder with respect to the Award  evidenced  thereby shall be
     subject to such rules and regulations as the Committee may,  subject to the
     express  provisions  of the Plan,  adopt  from time to time,  or impair the
     enforceability of any such provision.

7.8  Government  and Other  Regulations.  The  obligation  of the  Company  with
     respect  to Awards  shall be  subject  to all  applicable  laws,  rules and
     regulations  and such  approvals  by any  governmental  agencies  as may be
     required,   including,   without  limitation,   the  effectiveness  of  any
     registration  statement  required under the Securities Act of 1933, and the
     rules and  regulations of any  securities  exchange or association on which
     the Common Stock may be listed or quoted.

7.9  Withholding.  The Company's obligation to deliver shares of Common Stock or
     pay cash in  respect  of any  Award  under  the Plan  shall be  subject  to
     applicable federal, state and local tax withholding requirements.  Federal,
     state  and  local  withholding  tax due at the time of an  Award,  upon the
     exercise  of  any  Option  or  upon  the  vesting  of,  or   expiration  of
     restrictions  with respect to, Restricted  Shares, as appropriate,  may, in
     the discretion of the Committee,  be paid in shares of Common Stock already
     owned by the Holder or through the withholding of shares otherwise issuable
     to  such  Holder,  upon  such  terms  and  conditions  (including,  without
     limitation,  the  conditions  referenced  in Section 6.5) as the  Committee
     shall  determine.  If the Holder  shall fail to pay,  or make  arrangements
     satisfactory  to the Committee for the payment,  to the Company of all such
     federal, state and local taxes required to be withheld by the Company, then
     the Company shall, to the extent permitted by law, have the right to deduct
     from any payment of any kind  otherwise  due to such Holder an amount equal
     to any federal, state or local taxes of any kind required to be withheld by
     the Company with respect to such Award.

7.10 Separability.  It is the intent of the  Company  that this Plan comply with
     Rule 16b-3 with  respect to persons  subject to Section 16 of the  Exchange
     Act unless  otherwise  provided  herein or in an Award  Agreement or grant,
     that any ambiguities or inconsistencies in the construction of this Plan be
     interpreted to give effect to such intention,  and that if any provision of
     this Plan is found not to be in compliance with Rule 16b-3,  such provision
     shall be null and void to the extent required to permit this Plan to comply
     with Rule 16b-3.

                                       10
<PAGE>

7.11 Non-Exclusivity  of the Plan. Neither the adoption of the Plan by the Board
     nor the  submission  of the Plan to the  stockholders  of the  Company  for
     approval shall be construed as creating any limitations on the power of the
     Board to adopt such other incentive  arrangements as it may deem desirable,
     including,  without  limitation,  the  granting  of stock  options  and the
     awarding  of  stock  and cash  otherwise  then  under  the  Plan,  and such
     arrangements  may be either  generally  applicable  or  applicable  only in
     specific cases.

7.12 Exclusion from Pension and Profit-Sharing  Computation. By acceptance of an
     Award, unless otherwise provided in the applicable Agreement or grant, each
     Holder shall be deemed to have agreed that such Award is special  incentive
     compensation that will not be taken into account, in any manner, as salary,
     compensation  or bonus in  determining  the amount of any payment under any
     pension,  retirement or other employee  benefit plan,  program or policy of
     the Company or any Subsidiary.  In addition, each beneficiary of a deceased
     Holder  shall be deemed to have  agreed that such Award will not affect the
     amount of any life insurance  coverage,  if any, provided by the Company on
     the life of the Holder which is payable to such beneficiary  under any life
     insurance plan covering employees of the Company or any Subsidiary.

7.13 Unfunded Plan.  Neither the Company nor any Subsidiary shall be required to
     segregate  any cash or any shares of Common  Stock which may at any time be
     represented by authorized but unissued Awards and the Plan shall constitute
     an  "unfunded"  plan of the Company.  Except as provided in Article VI with
     respect to awards of Restricted Shares and except as expressly set forth in
     writing,  no  employee  shall have voting or other  rights with  respect to
     shares of Common Stock prior to the  delivery of such  shares.  Neither the
     Company nor any Subsidiary  shall, by any provisions of the Plan, be deemed
     to be a  trustee  of any  Common  Stock  or any  other  property,  and  the
     liabilities of the Company and any  Subsidiary to any employee  pursuant to
     the Plan shall be those of a debtor  pursuant to such contract  obligations
     as are created by or pursuant to the Plan,  and the rights of any employee,
     former employee or beneficiary  under the Plan shall be limited to those of
     a general creditor of the Company or the applicable Subsidiary, as the case
     may be. In its sole  discretion,  the Board may  authorize  the creation of
     trusts or other  arrangements  to meet the obligations of the Company under
     the Plan,  provided,  however,  that the  existence of such trusts or other
     arrangements is consistent with the unfunded status of the Plan.

7.14 Governing  Law. The Plan shall be governed by, and  construed in accordance
     with, the laws of the State of Delaware.

7.15 Accounts. The delivery of any shares of Common Stock and the payment of any
     amount in respect of an Award  shall be for the  account of the  Company or
     the  applicable  Subsidiary,  as the case maybe,  and any such  delivery or
     payment  shall not be made  until  the  recipient  shall  have paid or made
     satisfactory  arrangements  for the payment of any  applicable  withholding
     taxes as provided in Section 7.9.

7.16 Legends. Each certificate evidencing Common Stock subject to an Award shall
     bear such  legends as the  Committee  deems  necessary  or  appropriate  to
     reflect  or refer to any terms,  conditions  or  restrictions  of the Award
     applicable to such shares, including, without limitation, any to the effect
     that the  shares  represented  thereby  may not be  disposed  of unless the
     Company has received an opinion of counsel, acceptable to the Company, that
     such disposition will not violate any federal or state securities laws.



                                       11
<PAGE>

7.17 Company's Rights. The grant of Awards pursuant to the Plan shall not affect
     in any way the  right or power of the  Company  to make  reclassifications,
     reorganizations or other changes of or to its capital or business structure
     or to merge,  consolidate,  liquidate,  sell or otherwise dispose of all or
     any part of its business or assets.








                                       12
<PAGE>


                                   EXHIBIT 4.2

                                 Rag Shops, Inc.
                       Form of 1999 Stock Award Agreement

                FORM OF INCENTIVE STOCK AWARD AGREEMENT OR GRANT

<PAGE>

                              INCENTIVE STOCK AWARD

     INCENTIVE  STOCK AWARD (the  "Award")  dated as July 20, 1999 by RAG SHOPS,
INC., a Delaware corporation (the "Company") to the individual employee named in
the  Company  Stock  Certificate  identified  in  Exhibit  A  hereto  (the  "Key
Employee").

     WHEREAS,  the Key  Employee  has been  recognized  as a key employee of the
Company; and

     WHEREAS,  for the  benefit  of the  Company's  stockholders  that  would be
derived from the  additional  Key Employee  efforts  arising from the  incentive
provided by this Award,  the Company has granted to the Key Employee an award of
those shares of the Common Stock of the Company  identified  in Exhibit A hereto
(the "Shares").

     NOW  THEREFORE,  to  evidence  the  Award  and to set  forth  its terms and
conditions, the Company and the Key Employee hereby agree as follows:

     1.   Confirmation  of Grant.  By  delivery  of this Award and the  original
Shares to the Key Employee,  the Company hereby evidences and confirms its grant
of the Award to the Key Employee as of the date hereof. By accepting and holding
the original Shares, the parties agree that such Shares shall be governed by the
terms of this  Award and the terms of the 1999 Rag Shop  Incentive  Stock  Award
Plan,  a copy of which is  attached  in the  Exhibit  B hereto  (the  "Incentive
Plan").

     2.   Restrictive  Period.  The  Shares  shall  vest on July 31,  2000  (the
"Restrictive  Period")  and become  subject to being  owned by the Key  Employee
without  restriction  in their  entirety  provided that Key Employee  remains an
employee or active  consultant of the Company from the date hereof  through July
31, 2000.

     3.   Term and Exercise of the Surrender of Shares. The Shares still subject
to  restriction  shall be  surrendered  to the Company in the event Key Employee
ceases for any reason to be either employed or actively  engaged as a consultant
by the Company,  except  where Key  Employee's  employment  or  engagement  as a
consultant is terminated by reason of disability or death.  To the extent any of
the Shares are no longer  restricted  under the terms of this Grant, the Company
shall cause them to have the restrictive legend removed therefrom.

     4.   Issuance of Shares of Common Stock.  Certificates for the Shares shall
be issued to the Key Employee to evidence  this Grant made as of the date hereof
and shall be validly issued,  fully paid and non-assessable  except as expressly
provided herein and shall  constitute  issued and  outstanding  shares of Common
Stock for all corporate  purposes.  The Key Employee will have the right to vote
such Shares,  to receive and retain such  dividends  and  distributions,  as the
Company may in its sole discretion  designate,  pay or distribute on such Shares
and to exercise all other  rights,  powers and  privileges of a holder of Common
Stock with respect to such Shares;  except,  that the Key Employee may not sell,
assign,  transfer,  pledge,  exchange,  encumber or dispose of the Shares or any
retained  distributions or the Key Employee's interest in any of them during the
Restrictive  Period.  Any stock  dividends  made or declared with respect to the
Shares shall be


                                       -1-
<PAGE>

subject to the same restrictions,  terms and vesting and other conditions as are
applicable  to the Shares  until such time,  if ever,  as the Shares  themselves
shall  have  become  vested.

     5.   Rights in the Event of the Key  Employee's  Disability or Death.  If a
Key  Employee's  employment  shall  terminate by reason of  disability or death,
notwithstanding  any  contrary  waiting  period,   installment  period,  vesting
schedule  or  Restrictive  Period in this Grant or in the  Incentive  Plan,  any
remaining  Restrictive  Period applicable to the Shares, if any, shall be deemed
to have expired and all such Shares and any related stock dividends shall become
vested and shall be delivered and paid over to the Key Employee.

     6.   Termination  of Employment.  If a Key Employee 's employment  with the
Company or a subsidiary  shall be terminated,  whether with or without cause and
whether  by the  Company  or by  the  Key  Employee's  resignation,  during  the
Restrictive  Period  then such Key  Employee's  rights to all  Shares  and stock
dividends  shall be  forfeited  immediately  and  returned to the  Company.  The
Committee may  determine,  in accordance  with the  Incentive  Plan  provisions,
whether any given leave of absence  constitutes a termination  of employment for
the purposes of this Award.  Awards made under the  Incentive  Plan shall not be
affected by any change of employment so long as the Key Employee continues to be
an employee or consultant engaged by the Company or any subsidiary thereof.

     7.   No Limitation on Rights of the Company.  The grant of this Award shall
not in any way  affect the right or power of the  Company  to make  adjustments,
reclassifications  or changes in its capital or business  structure or to merge,
consolidate,  dissolve,  liquidate  or sell or  transfer  all or any part of its
business or assets.

     8.   Rights as a  Stockholder.  The Key Employee  (or a  transferee  in the
event of the Key Employee's death) shall have all of the rights of a stockholder
with respect to any and all Shares except as set forth herein.

     9.   Compliance  with   Securities   Laws.  If  at  any  time  the  Company
determines, in its discretion,  that the listing,  registration or qualification
of the Shares upon any securities  exchange or under any state or federal law or
the consent or approval of any  governmental  regulatory  body is necessary as a
condition  of, or in  connection  with,  the issuance of Shares  hereunder,  the
Shares may not be sold,  pledged or transferred by the Key Employee  unless such
listing,  registration,  qualification,  consent  or  approval  shall  have been
effected.  Without limiting the foregoing, the Shares may not be sold by the Key
Employee  until a  registration  of the  Shares  has  been  effected  under  the
Securities  Act of 1933, as amended,  unless,  in the opinion of counsel for the
Company,   such   registration  is  not  required  under  such  Act.  Any  stock
certificates  representing  the Shares or associated stock dividends may bear an
appropriate  restrictive  legend,  if deemed necessary by the Company and during
the  Restrictive  Period , the Key Employee  consents to the Shares  bearing the
following restrictive legend .

     "THE SHARES  EVIDENCED BY THIS  CERTIFICATE ARE SUBJECT TO THE TERMS OF THE
     INCENTIVE  STOCK AWARD PLAN DATED JULY 20, 1999 AND THE TERMS OF GRANT MADE
     AS OF JULY 20, 1999 BY THE RAG SHOPS, INC. STOCK


                                       -2-


<PAGE>

     OPTION COMMITTEE  INCLUDING THAT THE SHARES VEST IN THE REGISTERED OWNER NO
     SOONER  THAN THE  CLOSE OF  BUSINESS  OF JULY 31,  2000,  UNLESS  EXPRESSLY
     PROVIDED OTHERWISE BY THE PLAN OR TERMS OF GRANT."

     10.  Award Not a Contract  of  Employment.  This Award is not a contract of
     employment,  and the terms of employment  of the Key Employee  shall not be
     affected in any way by this Award except as specifically  provided therein.
     The grant and delivery of this Award shall not be  construed as  conferring
     any legal rights upon the Key Employee for a  continuation  of  employment,
     nor shall it interfere  with the right of the Company or any  subsidiary to
     discharge the Key Employee and to treat Key Employee  without regard to the
     effect which such treatment might have upon Key Employee in the capacity as
     holder of this Award.

     11.  Notices.  Notice to the  Company or the Key  Employee  shall be deemed
given if in writing and either  mailed by  certified  mail or sent by  confirmed
telecopy  to the  Company at its  principal  executive  offices,  marked for the
attention  of the Chief  Financial  Officer  or the Key  Employee  at the latest
address shown on the Company's payroll or accounts payable ledger. Notice may be
given at such  other  address  and  number as the  Company  may  notify  the Key
Employee or the Key Employee may notify the Company; in each case with a copy to
the following:

                           Sills Cummis Radin Tischman
                              Epstein & Gross, P.A.
                           One Riverfront Plaza
                           Newark, New Jersey 07102-5400
                           Attn: Stanley U. North, III, Esq.
                           Tel: (973) 643-7000
                           Fax: (973) 643-6500

     12.  Entire  Agreement.  Except as set forth in the  Incentive  Plan,  this
Award constitutes the complete understanding between the parties with respect to
the  subject  matter  hereof  and  supersedes  all  prior   understandings   and
commitments.

     13.  Governing Law.  Except to the extent  preempted by applicable  federal
law, this Award shall be construed and enforced in accordance with, and governed
by, the laws of Delaware without giving effect to the principles of conflicts of
law thereof.

     IN WITNESS  WHEREOF,  the Company hereby confirms this Award as of the date
hereof.

                                  RAG SHOPS, INC.


                                  By:___________________________________________
                                     Stanley Berenzweig, Chief Executive Officer


                                       -3-

<PAGE>

                                   EXHIBIT 5.1

   Opinion of Sills Cummis Radin Tischman Epstein & Gross, P.A. as to Legality














                                       -2-
<PAGE>

















                                    August 16, 1999



Rag Shops, Inc.
111 Wagaraw Road
Hawthorne, New Jersey 07506

Gentlemen:

     We  serve  as your  general  outside  counsel  and are  familiar  with  the
Certificate of Incorporation,  Bylaws and corporate proceedings generally of Rag
Shops,  Inc. (the "Company").  We have reviewed the corporate  records as to the
establishment  of the Company's 1999 Incentive Stock Award Plan, which calls for
the issuance of up to 300,000  shares of Common  Stock to  optionees  upon their
exercise of options that may be granted to them. Based upon such examination and
considerations, we are of the opinion:

     1.   That the Company is a duly organized and validly existing  corporation
under the laws of the State of Delaware; and

     2.   That the  Company  has  taken all  necessary  and  required  corporate
actions in  connection  with the proposed  issuance of 300,000  shares of Common
Stock and that Common Stock, when issued and delivered,  will be validly issued,
fully paid and non-assessable shares of Common Stock of the Company.

     This letter is furnished by us solely for your benefit in  connection  with
the  transactions  referred  to in the  Registration  Statement  and  may not be
circulated  to, or relied  upon by, any other  person.  We hereby  consent to be
named in the Registration  Statement and the Prospectus which constitutes a part
thereof as the attorneys  who have passed upon legal matters in connection  with
the issuance of the aforesaid  Common Stock and to the filing of this opinion as
an exhibit to the Registration Statement.

                                    Yours truly,

                                    SILLS CUMMIS RADIN TISCHMAN
                                    EPSTEIN & GROSS, P.A.

                                    By:________________________

<PAGE>

                                  EXHIBIT 23.2

                        Consent of Deloitte & Touche LLP



<PAGE>

                       Consent of Independent Accountants





     We consent to the incorporation by reference in this Registration Statement
of Rag Shops, Inc. on Form S-8 of our report dated November 11, 1998,  appearing
in the Annual  Report on Form 10-K of Rag Shops,  Inc. for the year ended August
29,  1998,  and to the  reference  to us  under  the  heading  "Experts"  in the
Prospectus, which is part of this Registration Statement.


                                    DELOITTE & TOUCHE LLP

Parsippany, New Jersey
August 12, 1999
[{"type": "S-8", "sequence": "1", "secsgml_size_bytes": 84061}]
{"company-data": {"conformed-name": "RAG SHOPS INC", "cik": "0000874385", "assigned-sic": "5945", "irs-number": "510333503", "state-of-incorporation": "DE", "fiscal-year-end": "0831"}, "filing-values": {"form-type": "S-8", "act": "33", "file-number": "333-86489", "film-number": "99705988"}, "business-address": {"street1": "111 WAGARAW RD", "city": "HAWTHORNE", "state": "NJ", "zip": "07506", "phone": "9734231303"}, "mail-address": {"street1": "111 WAGARAW RD", "city": "HAWTHORNE", "state": "NJ", "zip": "07506"}}
As filed with the Securities and Exchange Commission Via EDGAR

                            Registration No. _______

                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    FORM S-8
                          REGISTRATION STATEMENT UNDER
                           THE SECURITIES ACT OF 1993

                                 RAG SHOPS, INC.
             (Exact name of registrant as specified in its charter)

                 DELAWARE                                 51-0333503
      (State or other jurisdiction of                   (I.R.S. Employer
       incorporation or organization)                  Identification No.)

        111 Wagaraw Road, Hawthorne, New Jersey 07506-2711 (973) 423-1303
      (Address including zip code and telephone number, including area code
                  of Registrant's Principal Executive Offices)

                                 RAG SHOPS, INC.
                         1999 INCENTIVE STOCK AWARD PLAN
                            (Full title of the plan)

                           Stanley U. North III, Esq.
                Sills Cummis Radin Tischman Epstein & Gross, P.A.
                              One Riverfront Plaza
                            Newark, New Jersey 07102
                                 (973) 643-7000

        (Name, address including zip code and telephone number, including
                        area code, of agent for service)

                         Calculation Of Registration Fee
Title of securities to be    Amount to be       Proposed maximum             Proposed maximum        Amount of registration
      registered             registered     offering price per unit(1)    aggregate offering price            fee

Common Stock, $.01           300,000                 $2.36                       $708,000                     $278
      par value

(1)  Estimated,  pursuant to Rule 457(h),  solely for the purpose of calculating the registration fee.
EXPLANATORY NOTE

     This  Registration  Statement  has been  prepared  in  accordance  with the
requirements of Form S-8 and Form S-3. The Form S-8 portion of this Registration
Statement will be used for offers of Common Stock of the Registrant  pursuant to
the  Registrant's  1999  Incentive  Stock  Award  Plan (the  "1999  Plan").  The
Prospectus  filed as part of this  Registration  Statement  has been prepared in
accordance  with  the  requirements  of Part I of Form  S-3 and will be used for
reofferings  or resales of Common  Stock to be  acquired by the class of persons
named therein pursuant to the 1999 Plan. A cross reference sheet is provided for
such prospectus.
RAG SHOPS, INC.

                                _________________

                              Cross-Reference Sheet
                    Pursuant to Item 501(b) of Regulation S-K

      Form S-3 Item and Heading                       Location in Prospectus

I.    Forepart of Registration Statement and          Front Cover Page
      Outside Front Cover Page of Prospectus

II.   Inside Front and Outside Back Cover Pages       Inside Front Cover Page
      of Prospectus

III.  Summary Information, Risk Factors and           The Company
      Ratio of Earnings to Fixed Charges

IV.   Use of Proceeds                                 Not applicable

V.    Determination of Offering Price                 Not applicable

VI.   Dilution                                        Not applicable

VII.  Selling Security Holders                        Selling Stockholders

VIII. Plan of Distribution                            Plan of Distribution

IX.   Description of Securities to be Registered      Not applicable

X.    Interests of Named Experts and Counsel          Legal Matters; Experts

XI.   Material Changes                                Not applicable

XII.  Incorporation of Certain Information by         Incorporation of Certain
      Reference                                       Documents by Reference

XIII. Disclosure of Commission Position on            Indemnification
      Indemnification for Securities Act
      Liabilities
PROSPECTUS
                                 RAG SHOPS, INC.

                         300,000 Shares of Common Stock
                           (par value $.01 per share)

     This Prospectus  relates to the offer and sale of shares of Common Stock of
RAG SHOPS, INC. (the "Company"),  par value $.01 per share (the "Common Stock"),
which may be offered  hereby  from time to time by any and/or all of the selling
stockholders  as described  herein (the  "Selling  Stockholders")  for their own
benefit.  The  Company  will  receive  no part of the  proceeds  of  sales  made
hereunder.  All  expenses  of  registration  incurred  in  connection  with this
offering  are being borne by the  Company,  but all  selling and other  expenses
incurred by the Selling Stockholders will be borne by such Selling Stockholders.
None of the shares  offered  pursuant to this  Prospectus  have been  registered
prior to the filing of the Registration  Statement of which this Prospectus is a
part.

     All or a portion  of the  shares  of Common  Stock  offered  hereby  may be
offered for sale,  from time to time, on the National  Association of Securities
Dealers Automated  Quotation  (NASDAQ) national market system, or otherwise,  at
prices and terms then  obtainable.  All  brokers'  commissions,  concessions  or
discounts will be paid by the Selling Stockholders.

     The Selling  Stockholders and any broker executing selling orders on behalf
of the  Selling  Stockholders  may be deemed to be an  "underwriter"  within the
meaning of the Securities  Act of 1933, as amended (the  "Securities  Act"),  in
which event commissions received by such broker may be deemed to be underwriting
commissions under the Securities Act.

     The Common  Stock of the  Company is listed on the NASDAQ  National  Market
System under the symbol RAGS. On July 28, 1999 the last  reported  closing price
of the Company's Common Stock on the NASDAQ National Market System was $2.31.

THESE  SECURITIES  HAVE NOT BEEN APPROVED OR  DISAPPROVED  BY THE SECURITIES AND
EXCHANGE COMMISSION OR BY ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND  EXCHANGE  COMMISSION  OR ANY STATE  SECURITIES  COMMISSION  PASSED UPON THE
ACCURACY OR ADEQUACY OF THE PROSPECTUS.  ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.

     No  person  has  been  authorized  to give any  information  or to make any
representations, other than those contained in this Prospectus, and, if given or
made,  such  information or  representation  should not be relied upon as having
been authorized by the Company.  This prospectus does not constitute an offer to
sell or a solicitation  of an offer to buy any security in any  jurisdiction  in
which,  or to any person to whom such offer or  solicitation  would be unlawful.
Neither the delivery of this  Prospectus nor any  distribution of the securities
made under this Prospectus shall under any circumstances  create any implication
that  there has been no change in the  affairs  of the  Company  or in any other
information contained herein since the date of the Prospectus.

The date of this Prospectus is August 20, 1999.
TABLE OF CONTENTS

                                                                            PAGE

Available Information..........................................................3

Incorporation of Certain Documents By Reference................................3

The Company....................................................................4

Selling Stockholders...........................................................4

Plan of Distribution...........................................................6

Legal Matters..................................................................6

Experts........................................................................6

Indemnification................................................................7

                                       -2-
AVAILABLE INFORMATION

     The Company is subject to the informational  requirements of the Securities
Exchange  Act of 1934,  as  amended  (the  "Exchange  Act"),  and in  accordance
therewith  files  reports,  proxy  statements  and  other  information  with the
Securities and Exchange Commission (the "SEC").  Such reports,  proxy statements
and other such  information  filed by the Company  with the SEC can be inspected
and copied at the public reference facilities maintained by the SEC at 450 Fifth
Street,  N.W.,  Washington,  D.C. 20549 and at the regional  offices of the SEC,
located at 75 Park Place,  14th Floor, New York, New York 10007.  Copies of such
material  can also be obtained  at  prescribed  rates from the Public  Reference
Section of the SEC, 450 Fifth Street, N.W., Washington,  D.C. 20549, or from the
SEC's website at http://www.sec.gov.

     In addition,  the Company's  Common Stock is listed on the NASDAQ  National
Market System and similar  information  concerning  the Company can be inspected
and copied at the National  Association  of  Securities  Dealers  offices at its
Corporate  Financing   Department,   Executive  Office,  1735  K  Street,  N.W.,
Washington, D.C.

     This  Prospectus  does not contain all of the  information set forth in the
Registration  Statement of which this Prospectus is a part and which the Company
has filed with the SEC. For further  information with respect to the Company and
the securities offered hereby,  reference is made to the Registration Statement,
including the exhibits filed as a part thereof, copies of which may be inspected
at or obtained at prescribed rates from the Public Reference Section of the SEC.

                 INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE

     The following  documents filed by the Company with the SEC are incorporated
hereby by reference:

     A.   The  Company's  Annual  Report on Form 10-K for the fiscal  year ended
          August 29, 1998, filed pursuant to Section 13(a) of the Exchange Act.

     B.   The  Company's  Quarterly  Report on Form 10-Q for the  quarter  ended
          November 28,  1998,  filed  pursuant to Section  13(a) of the Exchange
          Act.

     C.   The  Company's  Quarterly  Report on Form 10-Q for the  quarter  ended
          February 27,  1999,  filed  pursuant to Section  13(a) of the Exchange
          Act.

     D.   The Company's  Quarterly Report on Form 10-Q for the quarter ended May
          29, 1999, filed pursuant to Section 13(a) of the Exchange Act.

All documents  filed by the Company  pursuant to Sections  13(a),  13(c), 14 and
15(d) of the Exchange Act subsequent to the date of this Prospectus and prior to
the  filing  of  a  post-effective  amendment  which  indicates  that  all  such
securities  offered  hereby have been sold or which  deregisters  all securities
then remaining to be sold shall be deemed to be  incorporated  by reference into
this  Prospectus  and to be a part  hereof  from  the  date  of  filing  of such
documents.

     Any  statement  contained  in a  document  incorporated  or  deemed  to  be
incorporated  by reference  herein shall be deemed to be modified or  superseded
for purposes of this Prospectus to the extent that a statement contained herein,
or in any other subsequently filed document that also is or is deemed to be

                                       -3-
incorporated by reference  herein,  modifies or supersedes  such statement.  Any
statement so modified or superseded  shall not be deemed,  except as so modified
or superseded, to constitute a part of this Prospectus.

     The Company hereby  undertakes to provide  without charge to each person to
whom a copy of this  Prospectus  is  delivered,  upon written or oral request of
such person, a copy of any and all of the information that has been incorporated
by reference (other than the exhibits to such documents unless such exhibits are
specifically incorporated by reference into such documents).  Requests should be
directed  to  Steven B.  Barnett,  Senior  Vice  President  and Chief  Financial
Officer, Rag Shops, Inc., 111 Wagaraw Road, Hawthorne, New Jersey 07506-2711.

                                   THE COMPANY

     The  Corporation  was  incorporated  in the state of  Delaware in 1991 as a
holding  company  successor to a New Jersey  corporation  organized in 1984. The
executive  offices of Rag Shops,  Inc. are at 111 Wagaraw Road,  Hawthorne,  New
Jersey 07506-2711 and its telephone number is (973) 423-1303.

                              SELLING STOCKHOLDERS

     The shares of Common Stock covered by this Prospectus are being  registered
for reoffers and resales by Selling  Stockholders of the Company who may acquire
such shares granted  pursuant to the terms of the Company's 1999 Incentive Stock
Award Plan (the "1999 Plan"). The Selling  Stockholders include Business Segment
Supervisors;  District Managers;  Buyers;  Framing Supervisors;  Store Managers;
Department  Supervisors;   Assistant  Store  Managers;   Assistant  Buyers;  and
Administrative  Assistants.  These  persons  will be named  by a  post-effective
amendment  hereto or by a prospectus  supplement  filed  pursuant to Rule 424(c)
under the Securities Act.

                                       -4-
PLAN OF DISTRIBUTION

     Any shares of Common Stock sold pursuant to this Prospectus will be sold by
the  Selling  Stockholders  for their own  accounts  and they will  receive  all
proceeds from any such sales. The Company will receive none of the proceeds from
the sale of shares which may be offered hereby.  The Selling  Stockholders  have
not advised the Company of any specific plans for the distribution of the shares
of Common Stock covered by this Prospectus, but, if and when shares are sold, it
is  anticipated  that the  shares  will be sold from time to time  primarily  in
transactions  on the NASDAQ  National  Market  System at the  market  price then
prevailing,  although  sales  may  also be made in  negotiated  transactions  or
otherwise,  at prices related to such prevailing  market price or otherwise.  If
shares of Common Stock are sold through  brokers,  the Selling  Stockholders may
pay customary brokerage  commissions and charges.  The Selling  Stockholders may
effect such  transactions  by selling shares to or through  broker-dealers,  and
such  broker-  dealers  may  receive  compensation  in the  form  of  discounts,
concessions or commissions from the Selling  Stockholders  and/or the purchasers
of shares for whom such broker-dealers may act as agent or to whom they may sell
as principal, or both (which compensation as to a particular broker-dealer might
be in  excess  of  customary  commissions).  The  Selling  Stockholders  and any
broker-dealers  that act in  connection  with the sale of the  shares  hereunder
might be deemed to be "underwriters"  within the meaning of Section 2(11) of the
Securities  Act,  and any  commissions  received  by them and any  profit on the
resale of shares as principal might be deemed to be  underwriting  discounts and
commissions under the Securities Act.

     There can be no assurances that the Selling  Stockholders  will sell any or
all of the shares of Common Stock offered hereunder.

                                  LEGAL MATTERS

     The  validity of the shares of Common Stock  offered  hereby will be passed
upon for the  Company by Sills  Cummis  Radin  Tischman  Epstein & Gross,  P.A.,
Newark, New Jersey.

                                     EXPERTS

     The financial statements  incorporated in this prospectus by reference from
the Company's Annual Report on Form 10-K for the year ended August 29, 1998 have
been audited by Deloitte & Touche LLP, independent  auditors, as stated in their
report, which is incorporated herein by reference, and have been so incorporated
by reference in reliance upon the report of such firm given upon their authority
as experts in accounting and auditing.

                                       -5-
INDEMNIFICATION

     The Company's  Certificate  of  Incorporation  and Bylaws  provide that the
Company shall, to the fullest extent permitted by the Delaware General Corporate
Law, as it is now or hereafter may be in effect,  indemnify a director,  officer
or other agent of the Company  against his  liabilities  in connection  with any
proceeding  by or in the right of the Company to procure a judgment in its favor
which  involves  such person by reason of his being or having been such officer,
director or other agent;  provided,  however,  that no indemnification  shall be
made to or on behalf of the Company if a judgment  or other  final  adjudication
adverse to such person establishes that his acts or omissions (a) were in breach
of his loyalty to the Company or its shareholders, (b) were not in good faith or
involved a knowing violation of law or (c) resulted in receipt by such person of
an improper personal benefit.

     The  Company  currently  maintains  policies of  insurance  under which the
directors and officers of the Company are insured, within the limits and subject
to the limitations of the policies,  against certain expenses in connection with
the defense of actions,  suits or  proceedings,  and certain  liabilities  which
might be imposed as a result of such  actions,  suits or  proceedings,  to which
they are  parties  by  reason  of being or having  been  such  directors  and/or
officers.

     Insofar as indemnification for liabilities arising under the Securities Act
may be  permitted  to  directors,  officers or persons  controlling  the Company
pursuant to the foregoing provisions,  the Company has been informed that in the
opinion of the  Securities  and  Exchange  Commission  such  indemnification  is
against  public  policy as  expressed  in the  Securities  Act and is  therefore
unenforceable.

                                       -6-
PART II. INFORMATION REQUIRED IN THE REGISTRATION STATEMENT

Item 3. Documents Incorporated By Reference

     Rag Shops, Inc. (the "Company") hereby  incorporates by reference into this
Registration  Statement  the  following  documents  which have been filed by the
Company with the Securities and Exchange Commission (the "SEC"):

          (a) The Company's Annual Report on Form 10-K for the fiscal year ended
August  29,  1998,  filed  pursuant  to Section  13(a) of the of the  Securities
Exchange Act of 1934, as amended (the "Exchange Act").

          (b) The Company's  Quarterly Report on Form 10-Q for the quarter ended
November 28, 1998, filed pursuant to Section 13(a) of the Exchange Act.

          (c) The Company's  Quarterly Report on Form 10-Q for the quarter ended
February 27, 1999, filed pursuant to Section 13(a) of the Exchange Act.

          (d) The Company's  Quarterly Report on Form 10-Q for the quarter ended
May 29, 1999, filed pursuant to Section 13(a) of the Exchange Act.

     All documents subsequently filed by the Company pursuant to Sections 13(a),
13(c), 14 and 15(d) of the Exchange Act, prior to the filing of a post-effective
amendment  which  indicates that all securities  offered have been sold or which
deregisters  all  securities  then  remaining  unsold,  shall  be  deemed  to be
incorporated by reference in this Registration Statement and to be a part hereof
from the date of filing of such documents.

Item 4. Description of Securities

               Not applicable.

Item 5. Interests of Named Experts and Counsel.

               Not applicable.

Item 6. Indemnification of Directors and Officers

               The Company's  Certificate  of  Incorporation  and Bylaws provide
that the Company shall, to the fullest extent  permitted by the Delaware General
Corporation  Law,  as it is  now or  hereafter  may be in  effect,  indemnify  a
director,  officer or other agent of the  Company  against  his  liabilities  in
connection  with any  proceeding  by or in the right of the Company to procure a
judgment  in its  favor  which  involves  such  person by reason of his being or
having been such officer,  director or other agent;  provided,  however, that no
indemnification  shall be made to or on behalf of the  Company if a judgment  or
other final  adjudication  adverse to such person  establishes  that his acts or
omissions (a) were in breach of his loyalty to the Company or its  shareholders,
(b) were  not in good  faith  or  involved  a  knowing  violation  of law or (c)
resulted in receipt by such person of an improper personal benefit.

                                      II-1
The  Company  currently  maintains  policies of  insurance  under which the
directors and officers of the Company are insured, within the limits and subject
to the limitations of the policies,  against certain expenses in connection with
the defense of actions,  suits or  proceedings,  and certain  liabilities  which
might be imposed as a result of such  actions,  suits or  proceedings,  to which
they are  parties  by  reason  of being or having  been  such  directors  and/or
officers.

     Insofar as indemnification for liabilities arising under the Securities Act
may be  permitted  to  directors,  officers or persons  controlling  the Company
pursuant to the foregoing provisions,  the Company has been informed that in the
opinion of the  Securities  and  Exchange  Commission  such  indemnification  is
against  public  policy as  expressed  in the  Securities  Act and is  therefore
unenforceable.

Item 7. Exemption from Registration Claimed.

               Not Applicable.

Item 8. Exhibits

Exhibit Number                               Exhibit

     4.1                   Rag Shops, Inc. 1999 Incentive Stock Award Plan

     4.2                   Form of 1999 Stock Award Agreement

     5.1                   Opinion of Sills Cummis Radin Tischman Epstein &
                           Gross, P.A. as to Legality

     23.1                  Consent of Sills Cummis Radin Tischman Epstein &
                           Gross, P.A. (included in Exhibit 5.1)

     23.2                  Consent of Deloitte & Touche LLP

     24                    Powers of Attorney (included in the signature pages
                           of this Registration Statement)

Item 9. Undertakings

     The undersigned  Registrant hereby undertakes to file, during any period in
which  offers  or  sales  are  being  made,  post-effective  amendments  to this
Registration  Statement:  (i) to  include  any  prospectus  required  by Section
10(a)(3) of the  Securities  Act of 1993,  as amended  (the  "Securities  Act");
(ii) to  reflect  in the  prospectus  any  facts or  events  arising  after  the
effective date of this Registration Statement (or the most recent post-effective
amendment  hereof)  which,  individually  or  in  the  aggregate,   represent  a
fundamental change in the information set forth in this Registration  Statement;
and  (iii) to  include  any  material  information  with  respect to the plan of
distribution  not  previously  disclosed in this  Registration  Statement or any
material change to such information in this  Registration  Statement;  provided,
however,  that (i) and (ii) above shall not apply if the information required to

                                      II-2
be included in a post-effective amendment is contained in periodic reports filed
by the  Registrant  pursuant to Section 13 or Section  15(d) of the Exchange Act
that are incorporated by reference in this Registration Statement.

     The  undersigned   Registrant  hereby  undertakes  that,  for  purposes  of
determining  any liability  under the Securities  Act, each such  post-effective
amendment, and each filing of the Registrant's annual report pursuant to Section
13(a) or Section 15(d) of the Exchange Act (and, where  applicable,  each filing
of an employee  benefit  plan's annual  report  pursuant to Section 15(d) of the
Exchange Act) that is incorporated by reference in this  Registration  Statement
shall be deemed to be a new  registration  statement  relating to the securities
offered  therein,  and the  offering  of such  securities  at that time shall be
deemed to be the initial bona fide offering thereof.

     The undersigned Registrant hereby undertakes to remove from registration by
means of a post-  effective  amendment any of the  securities  being  registered
which remain unsold at the termination of the offering.

     Insofar as indemnification for liabilities arising under the Securities Act
may  be  permitted  to  directors,  officers  and  controlling  persons  of  the
Registrant pursuant to the foregoing  provisions,  or otherwise,  the Registrant
has been advised that in the opinion of the Securities  and Exchange  Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore,  unenforceable. In the event that a claim for indemnification
against such  liabilities  (other than the payment by the Registrant of expenses
incurred or paid by a director,  officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director,  officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been  settled by  controlling  precedent,  submit to a court of  appropriate
jurisdiction the question whether such  indemnification  by it is against public
policy as  expressed  in the  Securities  Act and will be  governed by the final
adjudication of such issue.

                                      II-3
SIGNATURES

     Pursuant to the  requirements of the Securities Act of 1933, the Registrant
certifies  that it has  reasonable  grounds to believe  that it meets all of the
requirements  for  filing  on Form S-8 and has  duly  caused  this  Registration
Statement  to be  signed  on its  behalf  by  the  undersigned,  thereunto  duly
authorized, in Hawthorne, New Jersey, on the 20th day of August, 1999.

                               RAG SHOPS, INC.

                               By: /s/ Steven B. Barnett
                                  Steven B. Barnett
                                  Senior Vice President, Chief Financial Officer
                                  and Treasurer

                               POWERS OF ATTORNEY

     Each person whose  signature  appears below hereby  authorizes and appoints
Steven B. Barnett his true and lawful attorney-in-fact,  to sign and file on his
behalf  individually  and in  each  such  capacity  stated  below  any  and  all
amendments (including post-effective amendments) to this Registration Statement,
as fully as such person could do in person,  hereby ratifying and confirming all
that said attorneys-in-fact,  or their substitutes,  may lawfully do or cause to
be done by virtue hereof.

     Pursuant  to  the   requirements  of  the  Securities  Act  of  1933,  this
Registration  Statement  has  been  signed  by  the  following  persons  in  the
capacities and as of the dates indicated:

\s\Stanley Berenzweig   Chairman of the Board                   August 20, 1999
Stanley Berenzweig      Chief Executive Officer

\s\Michael Aaronson     President, Chief Operating Officer,     August 20, 1999
Michael Aaronson        Director

\s\Steven B. Barnett    Senior Vice President, Chief Financial  August 20, 1999
Steven B. Barnett       Officer, Treasurer, Director

\s\Evan Berenzweig      Senior Vice President,                  August 20, 1999
Evan Berenzweig         Director

\s\Judith Lombardo      Senior Vice President                   August 20, 1999
Judith Lombardo         Director

\s\Fred J. Damiano      Director                                August 20, 1999
Fred J. Damiano

\s\Alan C. Mintz        Director                                August 20, 1999
Alan C. Mintz

                                      II-4
EXHIBIT INDEX

EXHIBIT
NO.                        CAPTION

4.1                        Rag Shops, Inc. 1999 Incentive Stock Award Plan

4.2                        Form of 1999 Stock Award Agreement

5.1                        Opinion of Sills Cummis Radin Tischman
                           Epstein & Gross, P.A. as to Legality

23.1                       Consent of Sills Cummis Radin Tischman
                           Epstein & Gross, P.A.
                           (included in Exhibit 5.1)

23.2                       Consent of Deloitte & Touche LLP

24                         Powers of Attorney (included in the signature pages
                           of this Registration Statement)
EXHIBIT 4.1

                                 Rag Shops, Inc.
                         1999 Incentive Stock Award Plan

       AS ADOPTED BY THE STOCK OPTION COMMITTEE AND THE BOARD OF DIRECTORS
                               AS OF JULY 20, 1999

                                 RAG SHOPS, INC.

                         1999 INCENTIVE STOCK AWARD PLAN

                                    Article I
                            PURPOSE AND EFFECTIVENESS

1.14 Purpose. The purpose of the Rags Shops 1999 Incentive Stock Award Plan (the
     "Plan") is to promote the success of Rag Shops,  Inc.  (the  "Company")  by
     providing  a method  whereby  (i)  eligible  employees  the Company and its
     Subsidiaries  and (ii)  independent  contractors and consultants  providing
     services  to the  Company or its  Subsidiaries  may be  awarded  additional
     remuneration  for  services  rendered and  encouraged  to invest in capital
     stock  of the  Company,  thereby  increasing  proprietary  interest  in the
     Company's  businesses,  encouraging  them to  remain  in the  employ of the
     Company or its Subsidiaries,  and increasing their personal interest in the
     continued success and progress of the Company or its Subsidiaries. The Plan
     is also intended to aid (i) in attracting persons of exceptional capability
     to become  key  employees  of the  Company  and its  Subsidiaries  and (ii)
     inducing contractors to agree to provide services to the Company.

1.2  Effective  Date. The Plan shall be subject to, and become  effective  upon,
     the  approval  by the  affirmative  vote of the Board of  Directors  of the
     Company.

                                   Article II
                                   DEFINITIONS

2.1  Certain Defined Terms.  Capitalized terms not defined elsewhere in the Plan
     shall have the following meanings (whether used in the singular or plural):

     "Affiliate"  of the Company means any  corporation,  partnership,  or other
     business  association  that,  directly or  indirectly,  through one or more
     intermediaries, controls, is controlled by, or is under common control with
     the Company.

     "Agreement" means either a restricted shares agreement or restricted shares
     grant, or an agreement evidencing more than one type of Award, specified in
     Section 7.5, as any such Agreement or grant may be  supplemented or amended
     from time to time.

     "Approved  Transaction"  means any  transaction  in which the Board (or, if
     approval of the board is not required as a matter of law, the  stockholders
     of the  Company)  shall  approve  (i) any  consolidation  or  merger of the
     Company,  or binding  share  exchange,  pursuant to which  shares of Common
     Stock would be changed or converted into or exchanged for cash,  securities

                                        1
or other  property,  other  than any such  transaction  in which the common
     stockholders of the Company  immediately prior to such transaction have the
     same proportionate  ownership of the common stock of, and voting power with
     respect to, the surviving  corporation  immediately after such transaction,
     (ii) any  merger,  consolidation  or binding  share  exchange  to which the
     Company  is a party  as a  result  of  which  the  persons  who are  common
     stockholders  of the Company  immediately  prior  thereto  have less than a
     majority of the combined voting power of the  outstanding  capital stock of
     the Company  ordinarily  (and apart from the rights  accruing under special
     circumstances)  having  the  right  to vote in the  election  of  directors
     immediately following such merger, consolidation or binding share exchange,
     (iii)  the  adoption  of any  plan  or  proposal  for  the  liquidation  or
     dissolution  of the  Company,  or (iv) any sale,  lease,  exchange or other
     transfer (in one transaction or a series of related  transactions)  of all,
     or substantially all, of the assets of the Company.

     "Award" means a grant of Restricted Shares under this Plan.

     "Board" means the Board of Directors of the Company.

     "Code"  means the Internal  Revenue  Code of 1986,  as amended from time to
     time, or any successor statue or statues thereto. Reference to any specific
     Code section shall include any successor section.

     "Committee"  means the option committee of the Board appointed  pursuant to
     Section 3.1 to administer the Plan.

     "Common  Stock" means the Common  Stock,  $.01 par value per share,  of the
     Company.

     "Company" means Rag Shops, Inc., a Delaware corporation.

     "Disability"  means the  inability  to engage  in any  substantial  gainful
     activity  by  reason  of any  medically  determinable  physical  or  mental
     impairment  which can be expected to result in death or which has lasted or
     can be expected to last for a continuous period of not less than 12 months.

     "Dividend  Equivalents"  means,  with  respect to  Restricted  Shares to be
     issued at the end of the Restriction Period, to the extent specified by the
     Committee  only, an amount equal to all  dividends and other  distributions
     (or the economic,  equivalent thereof) which are payable to stockholders of
     record during the  Restriction  Period on a like number of shares of Common
     Stock.

     "Domestic  Relations Order" means a domestic  relations order as defined by
     the Code or Title I of the Employee  Retirement Income Security Act, or the
     rules thereunder.

     "Effective  Date"  means  the date on  which  the  Plan  becomes  effective
     pursuant to Section 1.2. "Equity  Security" shall have the meaning ascribed
     to such  term in  Section  3 (a) (11) of the  Exchange  Act,  and an equity
     security of an issuer shall have the meaning ascribed thereto in Rule 16a-1
     promulgated under the Exchange Act, or any successor Rule.

                                        2
"Exchange Act" means the  Securities  Exchange Act of 1934, as amended from
     time to time, or any successor  statute or statutes  thereto.  Reference to
     any specific Exchange Act section shall include any successor section.

     "Fair  Market  Value" of a share of the  Common  Stock on any day means the
     last sale price (or, if no last sale price is reported,  the average of the
     closing high bid and low asked  prices) for a share of Common Stock on such
     day (or, if such day is not a trading  day, on the next  preceding  trading
     day) as reported on NASDAQ or, if not reported on NASDAQ,  as quoted by the
     National Quotation Bureau Incorporated, or if the Common Stock is listed on
     an exchange, on the principal exchange on which the Common Stock is listed.
     If for any day the Fair  Market  Value of a share of Common  Stock,  is not
     determinable by any of the foregoing means,  then the Fair Market Value for
     such day shall be determined in good faith by the Committee on the basis of
     such   quotations  and  other   considerations   as  the  Committee   deems
     appropriate.

     "Holder" means an employee of the Company or a Subsidiary or an independent
     contractor or consultant who has received an Award under Plan.

     "NASDAQ" means the Nasdaq Stock Market.

     "Plan" has the meaning ascribed thereto in Section 1.1.

     "Restricted  Shares"  means  shares of Common Stock or the right to receive
     shares of Common Stock, as the case may be, awarded pursuant to Article VI.

     "Restriction  Period" means a period of time  beginning on the date of each
     award of  Restricted  Shares and ending on the Vesting Date with respect to
     such award.

     "Retained Distribution" has the meaning ascribed thereto in Section 6.3.

     "Rule 16b-3" means Rule 16b-3  promulgated  under the Exchange  Act, or any
     successor  Rule,  References  to paragraphs of Rule 16b-3 shall include the
     comparable provisions of any successor Rule.

     "Subsidiary"  of the  Company  means any present or future  subsidiary  (as
     defined  in  Section  424(f) of the Code) of the  Company  or any  business
     entity in which the Company owns directly or indirectly, 50% or more of the
     voting,  capital  or  profits  interests.  An  entity  shall  be  deemed  a
     subsidiary  of the Company for  purposes of this  definition  only for such
     periods as the requisite ownership or control relationship is maintained.

     "Vesting  Date" with respect to any  Restricted  Shares  awarded  hereunder
     means the date on which  such  Restricted  Shares  cease to be subject to a
     risk of forfeiture,  as designated in or determined in accordance  with the
     Agreement  with  respect to such award of  Restricted  Shares  pursuant  to
     Article VIII.  If more than one Vesting Date is designated  for an award of
     Restricted  Shares,  references in the Plan to a Vesting Date in respect of
     such  Award  shall be deemed to refer to each  party of such  Award and the
     Vesting Date of such part.

                                        3
Article III
                                 ADMINISTRATION

3.1  Committee.  The Plan shall be administered  by the Option  Committee of the
     Board unless a different committee is appointed by the Board. The Committee
     shall be comprised of not less than two persons. The Committee shall select
     one of its  members as its  chairman  and shall hold its  meetings  at such
     times and places as it shall deem  advisable.  A  majority  of its  members
     shall  constitute  a  quorum  and  all  determinations  shall  be made by a
     majority of such quorum. Any determination reduced to writing and signed by
     all of the members  shall be fully as effective as if it had been made by a
     majority vote at a meeting duly called and held.

3.2  Powers.  The  Committee  shall  have full power and  authority  to grant to
     eligible  persons  Restricted  Shares under  Article  VIII of the Plan,  to
     determine  the terms and  conditions  (which need not be  identical) of all
     Awards  so  granted,  to  interpret  the  provisions  of the  Plan  and any
     Agreements  relating to Awards granted under the Plan, and to supervise the
     administration  of the Plan.  The  Committee in making an Award may provide
     for the  granting or issuance of  additional,  replacement  or  alternative
     Awards upon the occurrence of specified  events,  including the exercise of
     the  original  Award.  The  Committee  shall  have  sole  authority  in the
     selection  of persons to whom  Awards may be granted  under the Plan and in
     the  determination  of the  timing,  pricing  and amount of any such Award,
     subject   only  to  the  express   provisions   of  the  Plan.   In  making
     determinations hereunder, the Committee may take into account the nature of
     the services rendered by the respective employees,  independent contractors
     and consultants,  their present and potential  contributions to the success
     of the Company and its Subsidiaries and such other factors as the Committee
     in its discretion deems relevant.

3.3  Interpretation.  The Committee is authorized,  subject to the provisions of
     the Plan, to establish,  amend and rescind such rules and regulations as it
     deems necessary or advisable for the proper  administration of the Plan and
     to take such other action in connection  with or in relation to the Plan as
     it deems  necessary or  advisable.  Each action and  determination  made or
     taken pursuant to the Plan by the Committee,  including any  interpretation
     or construction of the Plan, shall be final and conclusive for all purposes
     and upon all persons.  No member of the  Committee  shall be liable for any
     action or determination  made or take by him or the Committee in good faith
     with respect to the Plan.

                                   Article IV
                           SHARES SUBJECT TO THE PLAN

4.1  Number of Shares. Subject to the provisions of this Article IV, the maximum
     number of shares  of Common  Stock  with  respect  to which  Awards  may be
     granted  during  the term of the Plan shall be  300,000  shares.  Shares of
     Common Stock will be made available from either the authorized but unissued
     shares of the Company or issued treasury shares. The shares of Common Stock
     subject  to (i) any  Award  granted  under  the  Plan  that  shall  expire,
     terminate or be annulled for any reason  without  having been exercised (or
     considered  to have been  exercised  as provided in Section 7) and (ii) any
     Award of Restricted Shares that shall be forfeited prior to becoming vested
     (provided  that the  Holder  received  no  benefits  of  ownership  of such
     Restricted Shares other than

                                        4
voting rights and the  accumulation  of Retained  Distributions  and unpaid
     Dividend Equivalents that are likewise forfeited), shall again be available
     for purposes of the Plan.

4.2  Adjustments.  If the Company  subdivides its  outstanding  shares of Common
     Stock into a greater  number of shares of Common Stock (by stock  dividend,
     stock split,  reclassification  or otherwise)  or combines its  outstanding
     shares of Common Stock into a similar  number of shares of Common Stock (by
     reverse stock split,  reclassification  or otherwise),  or if the Committee
     determines   that  any  stock   dividend,   extraordinary   cash  dividend,
     reclassification,  recapitalization,  reorganization,  split-up,  spin-off,
     combination,  exchange of shares,  warrants or rights  offering to purchase
     Common  Stock,  or other  similar  corporate  event  (including  mergers or
     consolidations  other than those which  constitute  Approval  Transactions)
     affects the Common  Stock such that an  adjustment  is required in order to
     preserve the benefits or potential  benefits  intended to be made available
     under this Plan,  then the Committee  shall,  in its sole discretion and in
     such manner as the Committee may deem equitable and appropriate,  make such
     adjustments  to any or all of (i)  the  number  and  kind of  shares  which
     thereafter  may be awarded,  optioned,  or  otherwise  made  subject to the
     benefits  contemplated  by the  Plan;  (ii) the  number  and kind of shares
     subject to  outstanding  Awards,  and (iii) the purchase or exercise  price
     with respect to any of the foregoing, provided, however, that the number of
     shares  subject to any Award shall always be a whole number.  The Committee
     may, if deemed appropriate,  provide for a cash payment to any Holder of an
     Award in connection with any adjustment made pursuant to this Section 4.2.

                                    Article V
                                   ELIGIBILITY

5.1  General.  The persons who shall be eligible to  participate in the Plan and
     to receive  Awards under the Plan shall be such  employees  (including  non
     executive  officers)  of the Company and its  Subsidiaries  or  independent
     contractors  or consultants  as the Committee  shall select.  Awards may be
     made to employees,  independent contractors or consultants who hold or have
     held Awards  under this Plan or any similar or other awards under any other
     plan of the Company or any of its Affiliates.

                                   Article VI
                                RESTRICTED SHARES

6.1  Grant.  Subject  to  the  limitations  of the  Plan,  the  Committee  shall
     designate those eligible persons to be granted awards of Restricted Shares,
     shall  determine  the time when each such Award shall be  granted,  whether
     shares of Common  Stock  covered  by awards of  Restricted  Shares  will be
     issued at the  beginning or the end of the  Restriction  Period and whether
     Dividend  Equivalents  will be paid  during the  Restriction  Period in the
     event  shares  of the  Common  Stock  are to be  issued  at the  end of the
     Restriction  Period,  and  shall  designate  (or set  forth  the  basis for
     determining) the Vesting Date or Vesting Dates for each award of Restricted
     Shares  and  may  prescribe  other   restrictions,   terms  and  conditions
     applicable  to the vesting of such  Restricted  Shares in addition to those
     provided in the Plan. The Committee  shall  determine the price, if any, to
     be paid by the Holder for the Restricted Shares;  provided,  however,  that
     the  issuance of  Restricted  Shares shall be made for at least the minimum
     consideration necessary to permit such Restricted Shares to be

                                        5
deemed  fully  paid  and non  assessable.  All  determinations  made by the
     Committee pursuant to this Section 6.1 shall be specified in the Agreement.

6.2  Issuance of  Restricted  Shares at Beginning of the  Restriction  Period If
     shares of Common  Stock are  issued  at the  beginning  of the  Restriction
     Period, the stock certificate or certificates  representing such Restricted
     Shares  shall  be  registered  in the  name  of the  Holder  to  whom  such
     Restricted Shares shall have been awarded.  During the Restriction  Period,
     certificates   representing  the  Restricted   Shares  and  any  securities
     constituting Retained  Distributions shall bear a restrictive legend to the
     effect  that  ownership  of  the  Restricted   Shares  (and  such  Retained
     Distributions),  and the enjoyment of all rights appurtenant  thereto,  are
     subject to the restrictions,  terms and conditions provided in the Plan and
     the  applicable  Agreement.   At  the  discretion  of  the  Committee  such
     certificates  shall either (i) remain in the custody of the Company and the
     Holder shall deposit with the Company stock powers or other  instruments of
     assignment,  each  endorsed  in blank,  so as to permit  retransfer  to the
     Company of all or any portion of the  Restricted  Shares and any securities
     constituting  Retained  Distributions  that shall be forfeited or otherwise
     not become vested in accordance with the Plan and the applicable  Agreement
     or (ii) be delivered to the Holder  bearing a restrictive  legend either as
     provided  for in this  Section  or as may be  designated  by the  Committee
     obligating the Holder to return the Shares and any securities  constituting
     Retained  Distributions  that shall be forfeited  or otherwise  not becoome
     vested in accordance with the Plan an the applicable Agreement.

6.3  Restrictions.  Restricted Shares issued at the beginning of the Restriction
     Period shall constitute  issued and outstanding  shares of Common Stock for
     all  corporate  purposes.  The  Holder  will  have the  right to vote  such
     Restricted  Shares, to receive and retain such dividends and distributions,
     as the Committee may in its sole discretion designate,  paid or distributed
     on such  Restricted  Shares and to exercise  all other  rights,  powers and
     privileges  of a Holder of Common  Stock with  respect  to such  Restricted
     Shares; except, that (a) the Holder will not be entitled to delivery of the
     stock certificate or certificates representing such Restricted Shares until
     the  Restriction  Period  shall have  expired and unless all other  vesting
     requirements with respect thereto shall have been fulfilled or waived;  (b)
     the Company will retain custody of the stock  certificate  or  certificates
     representing  the  Restricted  Shares  during  the  Restriction  Period  as
     provided  in  Section  6.2;  (c) other  than  such  shares,  dividends  and
     distributions  as the Committee may in its sole discretion  designate,  the
     Company will retain custody of all distributions ("Retained Distributions")
     made or declared with respect to the  Restricted  Shares (and such Retained
     Distributions will be subject to the same  restrictions,  terms and vesting
     and other conditions as are applicable to the Restricted Shares) until such
     time, if ever, as the Restricted Shares with respect to which such Retained
     Distributions  shall have been made,  paid or  declared  shall have  become
     vested,  and such  Retained  Distributions  shall not bear  interest  or be
     segregated  in a separate  account;  (d) the  Holder may not sell,  assign,
     transfer, pledge, exchange, encumber or dispose of the Restricted Shares or
     any  Retained  Distributions  or his  interest  in any of them  during  the
     Restriction  Period;  and  (e) a  breach  of  any  restrictions,  terms  or
     conditions  provided  in the  Plan or  established  by the  Committee  with
     respect to any  Restricted  Shares or Retained  Distributions  will cause a
     forfeiture of such Restricted  Shares and any Retained  Distributions  with
     respect thereto.

                                        6
6.4  Issuance of Stock at the End of the Restriction  Period.  Restricted Shares
     issued at the end of the Restriction Period shall not constitute issued and
     outstanding shares of Common Stock and the Holder shall not have any of the
     rights of a stockholder  with respect to the shares of Common Stock covered
     by such an award of Restricted Shares, in each case until such shares shall
     have been  transferred to the Holder at the end of the Restriction  Period.
     If and to the extent  that  shares of Common  Stock are to be issued at the
     end of the  Restriction  Period,  the Holder  shall be  entitled to receive
     Dividend  Equivalents  with respect to the shares of Common  Stock  covered
     thereby either (i) during the Restriction Period or (ii) in accordance with
     the rules  applicable  to  Retained  Distributions,  as the  Committee  may
     specify in the Agreement.

6.5  Cash  Awards.  In  connection  with any  award  of  Restricted  Shares,  an
     Agreement  may  provide  for the  payment of a cash amount to the Holder of
     such Restricted  Shares at any time after such Restricted Shares shall have
     become  vested.  Such cash awards shall be payable in accordance  with such
     additional restrictions, terms and conditions as shall be prescribed by the
     Committee in the  Agreement  and shall be in addition to any other  salary,
     incentive,  bonus or other compensation payments which such Holder shall be
     otherwise entitled or eligible to receive from the Company.

6.6  Completion of Restriction  Period. On the Vesting Date with respect to each
     award of Restricted  Shares,  and the  satisfaction of any other applicable
     restrictions,  terms and conditions  (a) all or the  applicable  portion of
     such Restricted Shares shall become vested, (b) any Retained  Distributions
     and any unpaid Dividend  Equivalents with respect to such Restricted Shares
     shall  become  vested to the  extent  that the  Restricted  Shares  related
     thereto  shall have become  vested and (c) any cash award to be received by
     the Holder with respect to such Restricted Shares shall become payable, all
     in  accordance  with  the  terms  of the  applicable  Agreement.  Any  such
     Restricted   Shares,   Retained   Distributions  and  any  unpaid  Dividend
     Equivalents  that shall not become vested shall be forfeited to the Company
     and the Holder shall not thereafter have any rights (including dividend and
     voting   rights)  with  respect  to  such   Restricted   Shares,   Retained
     Distributions  and any unpaid Dividend  Equivalents that shall have been so
     forfeited. The Committee may, in its discretion,  provide that the delivery
     of any  Restricted  Shares,  Retained  Distributions  and  unpaid  Dividend
     Equivalents  that shall have become vested,  and payment of any cash awards
     that shall have become payable,  shall be deferred until such date or dates
     as the  recipient  may elect.  Any election of a recipient  pursuant to the
     preceding  sentence  shall be  filed  in  writing  with  the  Committee  in
     accordance with such rules and regulations,  including any deadline for the
     making of such an election, as the Committee may provide.

                                   Article VII
                               GENERAL PROVISIONS

7.1  Acceleration of Restricted Shares.

     (a) Death or Disability. If a Holder's employment shall terminate by reason
     of  death or  Disability,  notwithstanding  any  contrary  waiting  period,
     installment period, vesting schedule or Restriction Period in any Agreement
     or in the Plan, unless the applicable Agreement provides otherwise:  in the

                                        7
case of Restricted  Shares,  the Restriction Period applicable to each such
     award of  Restricted  Shares  shall be deemed to have  expired and all such
     Restricted  Shares,  any  related  Retained  Distributions  and any  unpaid
     Dividend  Equivalents  shall  become  vested and any cash  amounts  payable
     pursuant to the  applicable  Agreement  shall be adjusted in such manner as
     may be provided in the Agreement.

     (b)  Approved  Transactions.  In the  event  of any  Approved  Transaction,
     notwithstanding any contrary waiting period,  installment  period,  vesting
     schedule or Restriction  Period in any Agreement or in the Plan, unless the
     applicable Agreement provides otherwise:  in the case of Restricted Shares,
     the Restriction  Period  applicable to each such award of Restricted Shares
     shall be deemed to have expired and all such Restricted Shares, any related
     Retained  Distributions  and any unpaid Dividend  Equivalents  shall become
     vested and any cash amounts  payable  pursuant to the applicable  Agreement
     shall be  adjusted  in such  manner as may be  provided  in the  Agreement.
     Notwithstanding the foregoing,  unless otherwise provided in the applicable
     Agreement, the Committee may, in its discretion,  determine that any or all
     outstanding  Awards of any or all types  granted  pursuant to the Plan will
     not vest or become  exercisable on an accelerated  basis in connection with
     an Approved Transaction and/or will not terminate if not exercised prior to
     consummation of the Approved Transaction,  if the Board or the surviving or
     acquiring  corporation,  as the  case may be,  shall  have  taken,  or made
     effective provision for the taking of, such action as in the opinion of the
     Committee is equitable and  appropriate  to substitute a new Award for such
     Award or to assume  such  Award  and in order to make  such new or  assumed
     Award, as nearly as may be practicable, equivalent to the old Award (before
     giving  effect  to  any  acceleration  of  the  vesting  or  exercisability
     thereof),  taking  into  account,  to the extent  applicable,  the kind and
     amount of  securities,  cash or other  assets  into or for which the Common
     Stock  may be  changed,  converted  or  exchanged  in  connection  with the
     Approved Transaction.

7.2  Termination of Employment.

     (a)  General.  If a Holder's  employment  with the Company or a  Subsidiary
     shall be  terminated  during the  Restriction  Period  with  respect to any
     Restricted  Shares  whether  with or  without  cause  or by  reason  of the
     Holder's  resignation  whether with or without  cause,  then such  Holder's
     rights  to  all  Restricted  Shares,  Retained  Distributions,  any  unpaid
     Dividend Equivalents and any cash awards shall be forfeited immediately.

     (b)  Miscellaneous.  The Committee may determine whether any given leave of
     absence constitutes a termination of employment;  provided,  however,  that
     for purposes of the Plan (i) a leave of absence, duly authorized in writing
     by the Company for military  service or sickness,  or for any other purpose
     approved  by the  Company  if the  period of such  leave does not exceed 90
     days, and (ii) a leave of absence in excess of 90 days,  duly authorized in
     writing by the Company,  provided the employee's  right to  reemployment is
     guaranteed either by statute or contract, shall not be deemed a termination
     of  employment.  Awards  made under the Plan shall not be  affected  by any
     change of employment  so long as the Holder  continues to be an employee of
     the Company or any Subsidiary.

7.3  Right of Company to Terminate Employment.  Nothing contained in the Plan or
     in any Award,  and no action of the Company or the  Committee  with respect
     thereto,  shall confer or be construed to confer on any Holder any right to
     continue  in the  employ  of the  Company  or  any of its  Subsidiaries  or
     interfere  in any way with the  right of the  Company  or a  Subsidiary  to

                                        8
terminate the employment of the Holder at any time,  with or without cause;
     subject, however, to the provisions of any employment agreement between the
     Holder and the Company or any Subsidiary.

7.4  Nonalienation  of  Benefits.  No right or  benefit  under the Plan shall be
     subject to alienation, sale, assignment,  hypothecation,  pledge, exchange,
     transfer, encumbrance or charge, and any attempt to alienate, sell, assign,
     hypothecate,  pledge, exchange, transfer, encumber or charge the same shall
     be void. No right or benefit hereunder shall in any manner be liable for or
     subject  to the  debts,  contracts,  liabilities  or  torts  of the  person
     entitled to such benefits.

7.5  Written Agreement.  Each award of Restricted Shares shall be evidenced by a
     restricted shares agreement or grant, each in such form and containing such
     terms and  provisions not  inconsistent  with the provisions of the Plan as
     the Committee from time to time shall approve;  provided,  however, that if
     more than one type of Award is made to the same Holder,  such Awards may be
     evidenced by a single agreement or grant with such Holder.  Each grantee of
     Restricted  Shares  shall be notified  promptly of such grant and a written
     agreement  shall be promptly  executed and delivered by the Company and the
     grantee,  provided that, in the discretion of the Committee,  such grant of
     Restricted  Shares shall terminate if such written  agreement is not signed
     by such grantee (or his attorney)  and  delivered to the Company  within 60
     days after the date the  Committee  approved  such grant.  Any such written
     agreement or grant may contain (but shall not be required to contain)  such
     provisions  as the  Committee  deems  appropriate  (i) to  ensure  that the
     penalty  provisions of Section 4999 of the Code will not apply to any stock
     or cash  received by the Holder  from the  Company or (ii) to provide  cash
     payments to the Holder to mitigate  the impact of such  penalty  provisions
     upon the Holder. Any such agreement or grant may be supplemented or amended
     from time to time as approved by the Committee as  contemplated  by Section
     7.8(b).

7.6  Designation  of  Beneficiaries.  Each  person who shall be granted an Award
     under the Plan may designate a beneficiary or beneficiaries  and may change
     such  designation  from  time to time by filing a  written  designation  of
     beneficiary or beneficiaries  with the Committee on a form to be prescribed
     by it, provided that no such designation shall be effective unless so filed
     prior to the death of such person.

7.7  Termination and Amendment

     (a) General.  Unless the Plan shall  theretofore  have been  terminated  as
     hereinafter  provided, no Awards may be made under the Plan on or after the
     tenth  anniversary of the Effective Date. The Board or the Committee may at
     any time prior to the tenth anniversary of the Effective Date terminate the
     Plan, and may, from time to time, suspend or discontinue the Plan or modify
     or amend the Plan in such respects as it shall deem advisable;  except that
     no such  modification  or amendment shall be effective prior to approval by
     the  Company's  stockholders  to the extent such  approval is then required
     pursuant  to Rule  16b-3 in  order to  preserve  the  applicability  of any
     exemption  provided by such rule to any Award then outstanding  (unless the
     holder of such Award  consents)  or to the extent  stockholder  approval is
     otherwise required by applicable legal requirements.

                                        9
(b)  Modification.  No  termination,  modification or amendment of the Plan
     may, without the consent of the person to whom any Award shall  theretofore
     have been granted,  adversely affect the rights of such person with respect
     to such Award. No modification,  extension,  renewal or other change in any
     Award  granted  under the Plan shall be made after the grant of such Award,
     unless the same is consistent  with the  provisions  of the Plan.  With the
     consent of the Holder and subject to the terms and  conditions  of the Plan
     (including Section 7.7(a)), the Committee may amend outstanding  Agreements
     with any Holder, including,  without limitation,  any amendment which would
     (i) accelerate the time or times at which the Award may be exercised and/or
     (ii) extend the scheduled  expiration date of the Award.  Without  limiting
     the  generality of the  foregoing,  the Committee  may, but solely with the
     Holder's  consent  unless  otherwise  provided in the  Agreement,  agree to
     cancel  any Award  under  the Plan and  issue a new  Award in  substitution
     therefor,  provided that the Award so substituted  shall satisfy all of the
     requirements  of the Plan as of the date  such new  Award is made.  Nothing
     contained  in the  foregoing  provisions  of this  Section  7.7(b) shall be
     construed to prevent the Committee from providing in any Agreement that the
     rights of the Holder with respect to the Award  evidenced  thereby shall be
     subject to such rules and regulations as the Committee may,  subject to the
     express  provisions  of the Plan,  adopt  from time to time,  or impair the
     enforceability of any such provision.

7.8  Government  and Other  Regulations.  The  obligation  of the  Company  with
     respect  to Awards  shall be  subject  to all  applicable  laws,  rules and
     regulations  and such  approvals  by any  governmental  agencies  as may be
     required,   including,   without  limitation,   the  effectiveness  of  any
     registration  statement  required under the Securities Act of 1933, and the
     rules and  regulations of any  securities  exchange or association on which
     the Common Stock may be listed or quoted.

7.9  Withholding.  The Company's obligation to deliver shares of Common Stock or
     pay cash in  respect  of any  Award  under  the Plan  shall be  subject  to
     applicable federal, state and local tax withholding requirements.  Federal,
     state  and  local  withholding  tax due at the time of an  Award,  upon the
     exercise  of  any  Option  or  upon  the  vesting  of,  or   expiration  of
     restrictions  with respect to, Restricted  Shares, as appropriate,  may, in
     the discretion of the Committee,  be paid in shares of Common Stock already
     owned by the Holder or through the withholding of shares otherwise issuable
     to  such  Holder,  upon  such  terms  and  conditions  (including,  without
     limitation,  the  conditions  referenced  in Section 6.5) as the  Committee
     shall  determine.  If the Holder  shall fail to pay,  or make  arrangements
     satisfactory  to the Committee for the payment,  to the Company of all such
     federal, state and local taxes required to be withheld by the Company, then
     the Company shall, to the extent permitted by law, have the right to deduct
     from any payment of any kind  otherwise  due to such Holder an amount equal
     to any federal, state or local taxes of any kind required to be withheld by
     the Company with respect to such Award.

7.10 Separability.  It is the intent of the  Company  that this Plan comply with
     Rule 16b-3 with  respect to persons  subject to Section 16 of the  Exchange
     Act unless  otherwise  provided  herein or in an Award  Agreement or grant,
     that any ambiguities or inconsistencies in the construction of this Plan be
     interpreted to give effect to such intention,  and that if any provision of
     this Plan is found not to be in compliance with Rule 16b-3,  such provision
     shall be null and void to the extent required to permit this Plan to comply
     with Rule 16b-3.

                                       10
7.11 Non-Exclusivity  of the Plan. Neither the adoption of the Plan by the Board
     nor the  submission  of the Plan to the  stockholders  of the  Company  for
     approval shall be construed as creating any limitations on the power of the
     Board to adopt such other incentive  arrangements as it may deem desirable,
     including,  without  limitation,  the  granting  of stock  options  and the
     awarding  of  stock  and cash  otherwise  then  under  the  Plan,  and such
     arrangements  may be either  generally  applicable  or  applicable  only in
     specific cases.

7.12 Exclusion from Pension and Profit-Sharing  Computation. By acceptance of an
     Award, unless otherwise provided in the applicable Agreement or grant, each
     Holder shall be deemed to have agreed that such Award is special  incentive
     compensation that will not be taken into account, in any manner, as salary,
     compensation  or bonus in  determining  the amount of any payment under any
     pension,  retirement or other employee  benefit plan,  program or policy of
     the Company or any Subsidiary.  In addition, each beneficiary of a deceased
     Holder  shall be deemed to have  agreed that such Award will not affect the
     amount of any life insurance  coverage,  if any, provided by the Company on
     the life of the Holder which is payable to such beneficiary  under any life
     insurance plan covering employees of the Company or any Subsidiary.

7.13 Unfunded Plan.  Neither the Company nor any Subsidiary shall be required to
     segregate  any cash or any shares of Common  Stock which may at any time be
     represented by authorized but unissued Awards and the Plan shall constitute
     an  "unfunded"  plan of the Company.  Except as provided in Article VI with
     respect to awards of Restricted Shares and except as expressly set forth in
     writing,  no  employee  shall have voting or other  rights with  respect to
     shares of Common Stock prior to the  delivery of such  shares.  Neither the
     Company nor any Subsidiary  shall, by any provisions of the Plan, be deemed
     to be a  trustee  of any  Common  Stock  or any  other  property,  and  the
     liabilities of the Company and any  Subsidiary to any employee  pursuant to
     the Plan shall be those of a debtor  pursuant to such contract  obligations
     as are created by or pursuant to the Plan,  and the rights of any employee,
     former employee or beneficiary  under the Plan shall be limited to those of
     a general creditor of the Company or the applicable Subsidiary, as the case
     may be. In its sole  discretion,  the Board may  authorize  the creation of
     trusts or other  arrangements  to meet the obligations of the Company under
     the Plan,  provided,  however,  that the  existence of such trusts or other
     arrangements is consistent with the unfunded status of the Plan.

7.14 Governing  Law. The Plan shall be governed by, and  construed in accordance
     with, the laws of the State of Delaware.

7.15 Accounts. The delivery of any shares of Common Stock and the payment of any
     amount in respect of an Award  shall be for the  account of the  Company or
     the  applicable  Subsidiary,  as the case maybe,  and any such  delivery or
     payment  shall not be made  until  the  recipient  shall  have paid or made
     satisfactory  arrangements  for the payment of any  applicable  withholding
     taxes as provided in Section 7.9.

7.16 Legends. Each certificate evidencing Common Stock subject to an Award shall
     bear such  legends as the  Committee  deems  necessary  or  appropriate  to
     reflect  or refer to any terms,  conditions  or  restrictions  of the Award
     applicable to such shares, including, without limitation, any to the effect
     that the  shares  represented  thereby  may not be  disposed  of unless the
     Company has received an opinion of counsel, acceptable to the Company, that
     such disposition will not violate any federal or state securities laws.

                                       11
7.17 Company's Rights. The grant of Awards pursuant to the Plan shall not affect
     in any way the  right or power of the  Company  to make  reclassifications,
     reorganizations or other changes of or to its capital or business structure
     or to merge,  consolidate,  liquidate,  sell or otherwise dispose of all or
     any part of its business or assets.

                                       12
EXHIBIT 4.2

                                 Rag Shops, Inc.
                       Form of 1999 Stock Award Agreement

                FORM OF INCENTIVE STOCK AWARD AGREEMENT OR GRANT
INCENTIVE STOCK AWARD

     INCENTIVE  STOCK AWARD (the  "Award")  dated as July 20, 1999 by RAG SHOPS,
INC., a Delaware corporation (the "Company") to the individual employee named in
the  Company  Stock  Certificate  identified  in  Exhibit  A  hereto  (the  "Key
Employee").

     WHEREAS,  the Key  Employee  has been  recognized  as a key employee of the
Company; and

     WHEREAS,  for the  benefit  of the  Company's  stockholders  that  would be
derived from the  additional  Key Employee  efforts  arising from the  incentive
provided by this Award,  the Company has granted to the Key Employee an award of
those shares of the Common Stock of the Company  identified  in Exhibit A hereto
(the "Shares").

     NOW  THEREFORE,  to  evidence  the  Award  and to set  forth  its terms and
conditions, the Company and the Key Employee hereby agree as follows:

     1.   Confirmation  of Grant.  By  delivery  of this Award and the  original
Shares to the Key Employee,  the Company hereby evidences and confirms its grant
of the Award to the Key Employee as of the date hereof. By accepting and holding
the original Shares, the parties agree that such Shares shall be governed by the
terms of this  Award and the terms of the 1999 Rag Shop  Incentive  Stock  Award
Plan,  a copy of which is  attached  in the  Exhibit  B hereto  (the  "Incentive
Plan").

     2.   Restrictive  Period.  The  Shares  shall  vest on July 31,  2000  (the
"Restrictive  Period")  and become  subject to being  owned by the Key  Employee
without  restriction  in their  entirety  provided that Key Employee  remains an
employee or active  consultant of the Company from the date hereof  through July
31, 2000.

     3.   Term and Exercise of the Surrender of Shares. The Shares still subject
to  restriction  shall be  surrendered  to the Company in the event Key Employee
ceases for any reason to be either employed or actively  engaged as a consultant
by the Company,  except  where Key  Employee's  employment  or  engagement  as a
consultant is terminated by reason of disability or death.  To the extent any of
the Shares are no longer  restricted  under the terms of this Grant, the Company
shall cause them to have the restrictive legend removed therefrom.

     4.   Issuance of Shares of Common Stock.  Certificates for the Shares shall
be issued to the Key Employee to evidence  this Grant made as of the date hereof
and shall be validly issued,  fully paid and non-assessable  except as expressly
provided herein and shall  constitute  issued and  outstanding  shares of Common
Stock for all corporate  purposes.  The Key Employee will have the right to vote
such Shares,  to receive and retain such  dividends  and  distributions,  as the
Company may in its sole discretion  designate,  pay or distribute on such Shares
and to exercise all other  rights,  powers and  privileges of a holder of Common
Stock with respect to such Shares;  except,  that the Key Employee may not sell,
assign,  transfer,  pledge,  exchange,  encumber or dispose of the Shares or any
retained  distributions or the Key Employee's interest in any of them during the
Restrictive  Period.  Any stock  dividends  made or declared with respect to the
Shares shall be

                                       -1-
subject to the same restrictions,  terms and vesting and other conditions as are
applicable  to the Shares  until such time,  if ever,  as the Shares  themselves
shall  have  become  vested.

     5.   Rights in the Event of the Key  Employee's  Disability or Death.  If a
Key  Employee's  employment  shall  terminate by reason of  disability or death,
notwithstanding  any  contrary  waiting  period,   installment  period,  vesting
schedule  or  Restrictive  Period in this Grant or in the  Incentive  Plan,  any
remaining  Restrictive  Period applicable to the Shares, if any, shall be deemed
to have expired and all such Shares and any related stock dividends shall become
vested and shall be delivered and paid over to the Key Employee.

     6.   Termination  of Employment.  If a Key Employee 's employment  with the
Company or a subsidiary  shall be terminated,  whether with or without cause and
whether  by the  Company  or by  the  Key  Employee's  resignation,  during  the
Restrictive  Period  then such Key  Employee's  rights to all  Shares  and stock
dividends  shall be  forfeited  immediately  and  returned to the  Company.  The
Committee may  determine,  in accordance  with the  Incentive  Plan  provisions,
whether any given leave of absence  constitutes a termination  of employment for
the purposes of this Award.  Awards made under the  Incentive  Plan shall not be
affected by any change of employment so long as the Key Employee continues to be
an employee or consultant engaged by the Company or any subsidiary thereof.

     7.   No Limitation on Rights of the Company.  The grant of this Award shall
not in any way  affect the right or power of the  Company  to make  adjustments,
reclassifications  or changes in its capital or business  structure or to merge,
consolidate,  dissolve,  liquidate  or sell or  transfer  all or any part of its
business or assets.

     8.   Rights as a  Stockholder.  The Key Employee  (or a  transferee  in the
event of the Key Employee's death) shall have all of the rights of a stockholder
with respect to any and all Shares except as set forth herein.

     9.   Compliance  with   Securities   Laws.  If  at  any  time  the  Company
determines, in its discretion,  that the listing,  registration or qualification
of the Shares upon any securities  exchange or under any state or federal law or
the consent or approval of any  governmental  regulatory  body is necessary as a
condition  of, or in  connection  with,  the issuance of Shares  hereunder,  the
Shares may not be sold,  pledged or transferred by the Key Employee  unless such
listing,  registration,  qualification,  consent  or  approval  shall  have been
effected.  Without limiting the foregoing, the Shares may not be sold by the Key
Employee  until a  registration  of the  Shares  has  been  effected  under  the
Securities  Act of 1933, as amended,  unless,  in the opinion of counsel for the
Company,   such   registration  is  not  required  under  such  Act.  Any  stock
certificates  representing  the Shares or associated stock dividends may bear an
appropriate  restrictive  legend,  if deemed necessary by the Company and during
the  Restrictive  Period , the Key Employee  consents to the Shares  bearing the
following restrictive legend .

     "THE SHARES  EVIDENCED BY THIS  CERTIFICATE ARE SUBJECT TO THE TERMS OF THE
     INCENTIVE  STOCK AWARD PLAN DATED JULY 20, 1999 AND THE TERMS OF GRANT MADE
     AS OF JULY 20, 1999 BY THE RAG SHOPS, INC. STOCK

                                       -2-
OPTION COMMITTEE  INCLUDING THAT THE SHARES VEST IN THE REGISTERED OWNER NO
     SOONER  THAN THE  CLOSE OF  BUSINESS  OF JULY 31,  2000,  UNLESS  EXPRESSLY
     PROVIDED OTHERWISE BY THE PLAN OR TERMS OF GRANT."

     10.  Award Not a Contract  of  Employment.  This Award is not a contract of
     employment,  and the terms of employment  of the Key Employee  shall not be
     affected in any way by this Award except as specifically  provided therein.
     The grant and delivery of this Award shall not be  construed as  conferring
     any legal rights upon the Key Employee for a  continuation  of  employment,
     nor shall it interfere  with the right of the Company or any  subsidiary to
     discharge the Key Employee and to treat Key Employee  without regard to the
     effect which such treatment might have upon Key Employee in the capacity as
     holder of this Award.

     11.  Notices.  Notice to the  Company or the Key  Employee  shall be deemed
given if in writing and either  mailed by  certified  mail or sent by  confirmed
telecopy  to the  Company at its  principal  executive  offices,  marked for the
attention  of the Chief  Financial  Officer  or the Key  Employee  at the latest
address shown on the Company's payroll or accounts payable ledger. Notice may be
given at such  other  address  and  number as the  Company  may  notify  the Key
Employee or the Key Employee may notify the Company; in each case with a copy to
the following:

                           Sills Cummis Radin Tischman
                              Epstein & Gross, P.A.
                           One Riverfront Plaza
                           Newark, New Jersey 07102-5400
                           Attn: Stanley U. North, III, Esq.
                           Tel: (973) 643-7000
                           Fax: (973) 643-6500

     12.  Entire  Agreement.  Except as set forth in the  Incentive  Plan,  this
Award constitutes the complete understanding between the parties with respect to
the  subject  matter  hereof  and  supersedes  all  prior   understandings   and
commitments.

     13.  Governing Law.  Except to the extent  preempted by applicable  federal
law, this Award shall be construed and enforced in accordance with, and governed
by, the laws of Delaware without giving effect to the principles of conflicts of
law thereof.

     IN WITNESS  WHEREOF,  the Company hereby confirms this Award as of the date
hereof.

                                  RAG SHOPS, INC.

                                  By:___________________________________________
                                     Stanley Berenzweig, Chief Executive Officer

                                       -3-
EXHIBIT 5.1

   Opinion of Sills Cummis Radin Tischman Epstein & Gross, P.A. as to Legality

                                       -2-
August 16, 1999

Rag Shops, Inc.
111 Wagaraw Road
Hawthorne, New Jersey 07506

Gentlemen:

     We  serve  as your  general  outside  counsel  and are  familiar  with  the
Certificate of Incorporation,  Bylaws and corporate proceedings generally of Rag
Shops,  Inc. (the "Company").  We have reviewed the corporate  records as to the
establishment  of the Company's 1999 Incentive Stock Award Plan, which calls for
the issuance of up to 300,000  shares of Common  Stock to  optionees  upon their
exercise of options that may be granted to them. Based upon such examination and
considerations, we are of the opinion:

     1.   That the Company is a duly organized and validly existing  corporation
under the laws of the State of Delaware; and

     2.   That the  Company  has  taken all  necessary  and  required  corporate
actions in  connection  with the proposed  issuance of 300,000  shares of Common
Stock and that Common Stock, when issued and delivered,  will be validly issued,
fully paid and non-assessable shares of Common Stock of the Company.

     This letter is furnished by us solely for your benefit in  connection  with
the  transactions  referred  to in the  Registration  Statement  and  may not be
circulated  to, or relied  upon by, any other  person.  We hereby  consent to be
named in the Registration  Statement and the Prospectus which constitutes a part
thereof as the attorneys  who have passed upon legal matters in connection  with
the issuance of the aforesaid  Common Stock and to the filing of this opinion as
an exhibit to the Registration Statement.

                                    Yours truly,

                                    SILLS CUMMIS RADIN TISCHMAN
                                    EPSTEIN & GROSS, P.A.

                                    By:________________________
EXHIBIT 23.2

                        Consent of Deloitte & Touche LLP
Consent of Independent Accountants

     We consent to the incorporation by reference in this Registration Statement
of Rag Shops, Inc. on Form S-8 of our report dated November 11, 1998,  appearing
in the Annual  Report on Form 10-K of Rag Shops,  Inc. for the year ended August
29,  1998,  and to the  reference  to us  under  the  heading  "Experts"  in the
Prospectus, which is part of this Registration Statement.

                                    DELOITTE & TOUCHE LLP

Parsippany, New Jersey
August 12, 1999