Form 10-K

        We service our dealers by buying merchandise in quantity lots, mainly from manufacturers. We then
warehouse large
quantities of this merchandise and sell it in smaller lots to our dealers. Most of the products
that we distribute to our members
from our warehouses are sold at a price that we establish ("dealer
cost"), to which a 10% adder ("handling charge") is
generally added. In fiscal year 2001,2002, warehouse sales
were 72% of our totalmerchandise sales and bulletin sales were 3%4% of our total
merchandise sales with the balance of 25%24% being
direct shipment sales.

        The following is a breakdown of our total warehouse sales for merchandise purchases among various general classes of
merchandise
for each of the past three fiscal years:


Class of Merchandise2002          2001          20001999
Paint, cleaning and related supplies                                                                         22%            21%            20%     20%
Plumbing and heating supplies                                                                                 15%            15%            15%
Hand and power tools                                                                                                 14%13%            14%            14%
Garden, rural equipment and related supplies                                                         15%            14%            14%     13%
Electrical supplies                                                                                                        11%            12%            12%     13%
General hardware                                                                                                         11%            12%11%            12%
Sundry                                                                                                                             7%              8%              7%      7%
Housewares and appliances                                                                                         6%             5%              6%      6%

        We sponsor two major hardware conventions each year at various locations. We invite dealers and
vendors to attend, and
dealers generally place orders that are delivered before the next convention.
During the convention, there are exhibits of
regular merchandise, new merchandise and seasonal
merchandise. Lawn and garden supplies and exterior paints are seasonal
merchandise in many parts of
the country. Some types of goods such as holiday decorations are also seasonal.

        Warehouse sales involve the sale of merchandise that we inventory at our warehouses. Direct shipment
sales involve sales
where the merchandise is shipped directly to dealers by vendors. Bulletin sales
involve our special bulletin offers where we
order specific merchandise after dealers sign up to buy particular
quantities of it.

        Dealers place direct shipment orders with our vendors using special purchase orders. The vendors
then bill us for these
orders, which are shipped directly to dealers. We, in turn, bill the ordering dealers
with an adder ("handling charge") that
varies according to the following schedule:

Invoice Amount                                                                              Adder (Handling Charge)
$1,00.00    to    $999.99                                                                                  2.00%
$1,000.00        $1,000.00   to    $1,999.99                                                                                  1.75%
$2,000.00        $2,000.00   to    $2,999.99$ 2,999.99                                                                                  1.50%
$3,000.00        $3,000.00   to    $3,999.99$ 3,999.99                                                                                  1.25%
$4,000.00        $4,000.00   to    $4,999.99$ 4,999.99                                                                                  1.00%
$5,000.00        $5,000.00   to    $5,999.99                    .75%$ 5,999.99                                                                                    ..75%
$6,000.00        $6,000.00   to    $6,999.99                    .50%$ 6,999.99                                                                                    ..50%
$7,000.00        $7,000.00   to    $7,999.99                    .25%$ 7,999.99                                                                                    ..25%
$8,000.00        $8,000.00 and over.00%

        We make bulletin sales based upon notices from dealers that they wish to participate in one of our
special bulletin offers.
Generally, we notify dealers of our intention to purchase certain products for
bulletin shipment. We then purchase these
products in the quantities that the dealers order. When the
bulletin shipment arrives, we do not place it into warehouse
inventory. Rather, we break it up into smaller
quantities and deliver it to the dealers who ordered it. We generally apply a 6%
adder ("handling charge")
to this category of sales.

        We typically apply an additional adder of 3% to merchandise that is exported outside of the United
States, its territories
and possessions. Ace dealers located outside of the United States, its territories and
possessions who are not subject to the
additional 3% adder are assessed a flat 2% adder on all direct shipment
sales. We maintain inventories to meet only normal
resupply orders. Resupply orders help keep our
inventories at normal levels. Usually these resupply orders are filled within
one day of receipt. Bulletin
orders are somewhat similar to resupply orders, but can be for future delivery. We do not backlog
normal
resupply orders and therefore, no significant backlog exists at any point in time.

        Our Store Traffic Opportunity Program ("STOP") is a program where we offer our dealers specific
products that we
assign to a "competitive price sales" classification. These products are delivered from our
warehouses with or without the
addition of freight charges and with an adder (if any) of up to 5%, determined
on an item by item basis. Management has the
authority to add and withdraw items from the STOP
program, and to establish reasonable minimum or multiple item purchase
requirements for this program.
We do not make any patronage dividend distributions for purchases under the STOP program.
We do,
however, consider STOP purchases to be either warehouse purchases or bulletin purchases, as applicable, in
in determining the forms of patronage dividend distributions. (See the heading "Business," subheading
"Forms "Forms of Patronage
Dividend Distributions.")

        Our LTL Plus Program allows dealers to purchase full or partial truckloads of products from specific
vendors for direct
shipment delivery. No adder or national advertising assessment applies to these
purchases. (See heading "Business,"
subheading "Patronage Dividend Determinations and Allocations.")

In addition to hosting conventions as well as other shows and product exhibits for our dealers, we also
provide many
special services. We offer these services at established charges. These services include
inventory control systems, as well as
price and bin ticketing. We also provide dealers with a checklist
service so that they can have current information about the
merchandise that we offer. We also provide a
choice of ongoing educational and training programs for dealers. (See the
heading "Business," subheading
"Special "Special Charges and Assessments.")

        Our wholly owned subsidiary, Ace Insurance Agency, Inc., offers a Group Dealer Insurance Program
so that dealers can
purchase different types of insurance coverage. This program offers "all risk" property
insurance and business interruption,
crime, liability and workers' compensation insurance, in addition to
medical insurance for store employees. AHC Realty Corporation, another wholly owned subsidiary, offers
broker services to dealers who want to buy or sell stores. Loss Prevention
Services, Inc., another wholly
owned subsidiary, offers security training and other loss prevention services to dealers.

        Our wholly owned subsidiary,On February 13, 2003, we sold all of the issued and outstanding shares of Ace Hardware Canada Limited operates as a wholesaler of hardware("Ace
and related merchandise in Canada. It has two distribution facilities located in Calgary, Alberta
and Brantford, Ontario. In November 2001, the Company announced the closure of the Calgary
facility.Canada"), our wholly owned subsidiary, to Sodisco-Howden Group Inc. Ace Hardware Canada Limited generated less than one percent (1%) of
our consolidated
revenue revenues during fiscal year 2001.2002.

        We operate our Company-owned retail hardware stores through our wholly owned subsidiary Ace
Corporate Stores, Inc.
For further information about these stores, please see the heading "Properties."

        We manufacture paint and similar coating products at our factories in Matteson and Chicago Heights,
Illinois. These
factories are the main source of the paint products that we offer for sale. We operate our
paint manufacturing business as a
separate Divisiondivision of our Company for accounting purposes. We purchase
all our raw materials for paint manufacturing from
outside sources. We have had adequate sources of raw
materials in the past, and we do not currently expect any shortages of
raw materials that would have a major
impact on our paint operations. Paint manufacturing is seasonal in the sense that
greater paint sales occur
from April through September. Historically, our need to comply with environmental laws and
regulations
has not had a major effect on our ability to conduct our paint manufacturingmanufacturing operations.

        Our business, bothbusinesses, hardware wholesaling and paint manufacturing, isare not dependent on any major suppliers
and we feel
that seasonal fluctuations do not have a major effect on our operations. For more discussion of our
business, see "Management's
"Management's Discussion and Analysis of Financial Condition and Results of Operations."

        We also offer services to members that relate to the operation of their retail businesses. We provide
these services (such
as advertising, merchandising and training programs) to assist our members and in
some cases, to maximize our centralized
buying power.

Strategic Planning

        We have a strategic planning process that results in goals, objectives and programs that we want to
develop in the future
for our CompanyAce and our members. Because strategic plans deal with the future,
this discussion of them contains "forward looking
statements," which are based on our current expectations.
The actual results of our efforts can differ greatly from the results
that we might desire. We believe
that we have the facilities, the employees and the resources for ongoing success as we
implement our
plans and programs, butprograms. However, the future is difficult to forecast, especially areas such asrelated to revenues, costs, margins
and profits which are influenced by many factors. Some of these factors are discussed below.

        The effects of future growth in the hardware and hardlines-related industries are uncertain. By "hardlines-related
industries" we mean home center, do-it-yourself, rental and commercial/industrial categories. The future
condition of the
economy is also uncertain, when viewed domestically, internationally or in specific geographical
regions. Some other
uncertainties that could affect our plans include possible future changes in merchandise
and inventory prices, and the effect of
increasingly intense competition. There could be potential shifts in market
demand for some products. Lawsuits and laws,
especially laws dealing with franchising, licensing, importing,
exporting and environmental matters could affect our future
business. We cannot predict whether these uncertainties
might causegive rise to future costs or liabilities or have some other effect
on our future ability to achieve our plans.

        Through our ongoing strategic planning process we have focused our plans around four segments for
future growth and
success in our competitive industry. These four segments are: Retail Success (store operations),
Wholesale Success
(distribution), International growth and new member growth. Retail success for our
dealers is a primary objective because, in
our opinion, it drives both their retail performance and our wholesale
growth. We have therefore increased our efforts to assist
members in "retail success initiatives," which are
designed to improve their retail performance and competitiveness. These
retail success initiatives include retail
goals that we urge dealers to strive for within their stores and in locally competitive
markets. These goals do
not, however, impose major restrictions or requirements on members. Our minimum requirements for
the
acceptance of new members are outlined in the current Membership Agreement and Supplement and in the Member
Member Operational Requirements that apply under that Agreement. The Operational Requirements do
require that, within one year,
the member must make us the primary source of supply and terminate any
previous participation in the program of any other
major hardware wholesaler. There are currently no general
requirements (apart from special voluntary programs) where
members have to make particular percentages of
purchases from us or have to achieve minimum retail performance levels,
such as sales dollars per square foot.

        Our current strategic initiative, Vision 21, focuses on becoming a world class organization through encouraging dealers
dealers to adopt certain merchandising, marketing and operational practices that are supported by some of our
most successful dealers
to improve the Company'sAce's and the dealers' overall competitiveness and efficiency. The
cornerstones to Vision 21 are to improve
retailer's sales and profits, streamline our processes, bring wholesale
and retail together as one Ace team and provide ultimate
customer satisfaction. Vision 21 goals include minimizing
disparities between retail and wholesale, developing dealer-friendly
procedures that take duplication
and costs out of dealers' operations, achieving consistent implementation of programs more
rapidly and
improving the dealers' financial performance and their ability to pursue new stores and store expansions. As
retailers become Vision 21 retailers they are afforded various benefits to assist them to succeed at retail.


Special Charges and Assessments

        We sponsor a national advertising program. To pay for this program, we assess dealers an amount equal to
1.50% of their
purchases (except purchases of LTL Plus products, building material products and certain hardware and software computer
systems), with minimum and maximum yearly assessments of $2,223.00 and(effective January 1, 2003, $2,535.00 or 1.50% of the annual
purchase volume of required purchases in order for a store to avoid imposition of the low volume account service charge, if
greater). The maximum yearly assessment is $6,800.00 respectively, (based on
purchases) for each store location. We grant exemptions
from these assessments and make various adjustments
to them for stores located outside the continental United States, and for new
stores during their start up year
and for stores operating under an agreement that does not permit them to use "Ace" or "Ace
Hardware". For
the year 2002, we willWe intend to also impose a flat charge of $100.00 on May 1, 2002 and November 1, 2002a per store location
event basis to pay for national sales promotions for
including, but not limited to, the Memorial Day sale and the day after Thanksgiving.Thanksgiving sale. The amount of our national
national advertising assessment can be changed from time to time by our Board of Directors. We can also impose
assessments at a flat
monthly rate or based on a percentage of sales for regional advertising not to exceed 2% of
a dealer's annual purchases.
Regional advertising assessments are subject to the same minimum and maximum
amounts as the National Advertising national advertising
assessment.

        EveryThrough December 31, 2002, every two weeks, we billbilled the member store for a special low volume account service
charge of $75 if
annual purchases from us arewere less than $50,000. We will billbilled the member store for a special low volume
account service charge of $60 per bi-weekly billing statement period if purchases from us during such period were less than
$5,700. Effective January 1, 2003, we will bill the member store for a special low volume account service charge of $100 per
bi-weekly billing statement period if purchases from us during such period are less than $5,700.00.$6,500. The low volume service
charges that we bill to the store in a specific year
are automatically refunded if that store's total purchases increase to over $148,200
$169,000 during the year. The
A new store is excused from this low volume account service charge during the first 12 months that
it is a
member. There are some exceptions to our low volume account service charges that are described below:

        1.    Stores which purchase $148,200$169,000 of merchandise from us during the year are given a credit on
the next billing
statement for any low volume charges which we billed that store earlier in the
year. We then stop billing that store for low
volume account service charges for the rest of the
year, even if its current purchases on a billing statement are less than $5,700; and
$6,500.
        2.   We do not bill low volume account service charges every two weeks if a store's sales volume with us
the year before
was at our minimum ($148,200)169,000), but we will bill these charges in a lump sum to a
store's last statement of the year if that
store does not reach our applicable minimum by that time.
        3.    We will not bill low volume account service charges to members that have signed and are in compliance with a
Vision 21 Retailer and Retail Support Commitment ("Vision 21 Agreement"), but we will bill low volume account service
charges, if applicable, to members who are not in compliance with their Vision 21 Agreements.

        Low volume service charges are not included in a retailer's purchases of merchandise that qualify for patronage
dividends. An Ace store that falls below our minimum purchase levels can also be subject to termination.

        We add a late payment service charge on any past due balance that we are owed for merchandise,
services, or for a stock
subscription. The current rate for the late payment service charge is .77% per
bi-weekly statement period, except in Texas
where the charge is .384% and Georgia where the charge is
.692%. We consider a past due balance to exist whenever we do
not receive payment of the amount shown
as due on a billing statement within 10 days after the date of that statement. We can
change the rate of
our late payment service charge from time to time.

        Effective August, 2001, weWe assess members operating under a standard Membership Agreement a
mandatory monthly fee for Core Retail
Services in the amount of $197$168 per month for all single stores or
parent stores and $67$37 per month for all branch stores located
in the United States. Core Retail Services
consist of the following elements:

        1.    ACENET. This service is our primary communications vehicle with our members. It is an
electronic network that
allows defective goods claims processing, product search online or
through a CD-ROM catalog, electronic communications,
employee testing and training courses,
review and payment of retailer statements and numerous other applications.

        2.    Material Safety Data Sheet Subscription Service. This service provides members with access
24 hours per day and 7
days per week to information on the chemical ingredients of certain
products that we sell.

        3.    Ace Training Network. This service is one of our retail training programs. Each single store or
parent store is
credited with 16 points per month and each branch store is credited with 11 points
per month. A single store or parent store is
one that has purchased or subscribed for a share of
our Class A voting stock. A branch store is one whose membership
involves only shares (or a
subscription for shares) of our nonvoting Class C Stock. (See Article XXV, Section 2 of our By-laws)By-
laws).
A store may use its points at any time to buy one of the training programs that we offer. If a store does
not have enough
points for the program that it wants, it can use the points that it has and
be billed for the difference. Multiple stores and
member groups can pool their points together
to purchase our training programs.

        4.    NRHA E-Tools. These include unlimited use of certain Internet-based services offered by
the National Retail
Hardware Association (NRHA), including their Advanced Course in
Hardware Retailing, the Forte International
Communications Survey and their Employee
Compensation Study.

        5.    Retail Pricing. This includes access to our national price shopping and ad data collected from
non-Ace stores, our
suggested retail prices, our customized retail pricing strategy services and
catalog updates to our suggested retail prices.

        Members operating under a Contractor agreement are assessed a mandatory monthly fee of $53 for
ACENET and the
Material Safety Data Sheet Subsciption Service.Subscription Service; however, there are no members operating under a Contractor agreement as
of the date of this annual report.


Trademark and Service Mark Registrations

        The names "ACE HARDWARE" and "ACE" are used extensively by members and ourselves in the promotion,
promotion, advertising and marketing of products and services that we sell. We have had the following
Trademark trademark and Service Mark Registrationsservice mark
registrations issued by the U.S. Patent and Trademark Office for our marks:


                                          Registration
                                                                                                                  Registration
Description of MarkType of MarkNumberExpiration Date
"ACE
    "ACE HARDWARE" with winged
        emblem design                                            Service Mark               840,176            December 5, 2007
"ACE    "ACE HARDWARE" with winged
        emblem design                                            Trademark                   898,070            September 8, 2010
"THE    "THE PAINTIN' PLACE"                              Service Mark           1,138,654            August 12, 20102010)
"PACE" with design                   Service Mark  1,208,887     September 14, 2002
"ACE    "ACE HARDWARE" with winged
        emblem design                                            Trademark                1,277,581            May 15, 2004
"ACE    "ACE HARDWARE" in stylized
        lettering design                                           Trademark               1,426,137            January 27, 2007
"ACE"    "ACE" in stylized lettering design               Service Mark          1,464,025            November 3, 2007
"ACE    "ACE HARDWARE" in stylized
        lettering design                                           Service Mark          1,486,528            April 26, 2008
"ACE    "ACE HARDWARE AND
        GARDEN CENTER" in stylized
        lettering design                                           Service Mark          1,487,216            May 3, 2008
"ACE    "ACE NEW EXPERIENCE" in
        stylized lettering design                            Trademark               1,554,322            September 5, 2009
"ACE    "ACE SEVEN STAR" in stylized
        lettering design                                           Trademark               1,556,389            September 19, 2009
"ACE    "ACE BEST BUYS" in circle design             Service Mark         1,560,250            October 10, 2009
"ACENET"    "ACENET"                                                       Service Mark         1,574,019            December 26, 2009
"ACE    "ACE IS THE PLACE"                                   Service Mark         1,602,715            June 19, 2010
"LUB-E"    "LUB-E"                                                           Trademark              1,615,386            October 2, 2010
"ASK    "ASK ACE"                                                     Service Mark         1,653,263            August 6, 2010
"ACE 2000"                           Service Mark  1,682,467     April 7, 2002
"ACE"    "ACE" in stylized lettering design               Trademark              1,683,538            April 12, 2002
"THE OAKBROOK COLLECTION"21, 2012
    in stylized lettering design       Trademark     1,707,986     August 18, 2002
"ACE"ACE HARDWARE BROWN BAG
        BONANZA" with design                           Service Mark         1,761,277            April 13, 2003
"ACE    "ACE HARDWARE
        COMMITTED TO A QUALITY
        ENVIRONMENT" design                          Service Mark          1,764,803            April 13, 2003
"CELEBRATIONS"    "CELEBRATIONS"                                        Service Mark          1,918,785            September 12, 2005
Repetitive Stylized "A" design                    Service Mark          1,926,798            October 10, 2005
"The    "The NEW AGE OF ACE" design               Service Mark          1,937,008            November 21, 2005
"ACE    "ACE RENTAL PLACE"
        in stylized lettering design                        Service Mark          1,943,140            December 19, 2005
"HELPFUL    "HELPFUL HARDWARE FOLKS"             Service Mark          1,970,828            April 30, 2006
"ACE    "ACE HOME CENTER"                                Service Mark          1,982,130            June 25, 2006
"SEALTECH"    "SEALTECH"                                                 Trademark               2,007,132            October 8, 2006
"GREAT    "GREAT FINISHES"                                      Trademark              2,019,696            November 26, 2006
"WOODROYAL"    "WOODROYAL"                                           Trademark              2,065,927            May 27, 2007
"ROYAL    "ROYAL SHIELD"                                         Trademark              2,070,848            June 10, 2007
"ROYAL    "ROYAL TOUCH"                                         Trademark              2,070,849            June 10, 2007
"QUALITY    "QUALITY SHIELD"                                     Trademark              2,102,305            September 30, 2007
"QUALITY    "QUALITY TOUCH"                                     Trademark              2,102,306            September 30, 2007
"STAINHALT"    "STAINHALT"                                               Trademark              2,122,418            December 16, 2007
"ACE    "ACE CONTRACTOR CENTER"                Service Mark          2,158,681            May 19, 2008
"NHS    "NHS NATIONAL
        HARDLINES SUPPLY"                             Service Mark          2,171,775            July 7, 2008
"ACE    "ACE COMMERCIAL &
        INDUSTRIAL SUPPLY"                           Service Mark          2,186,394            September 1, 2008
"THE    "THE OAKBROOK COLLECTION"           Trademark              2,187,586            September 8, 2008
"ACE    "ACE GARDEN PLACE"                              Service Mark         2,227,729            March 2, 2009
"ACE    "ACE ROYAL"                                               Trademark              2,237,981            April 13, 2009
"HELPFUL    "HELPFUL HARDWARE CLUB"               Service Mark         2,239,400            April 13, 2009
"THE    "THE FOLKS IN THE RED VEST"              Service Mark        2,261,946             July 20, 2009
"ACE    "ACE CONTRACTOR PRO"                        Trademark            2,273,483             August 31, 2009
"ILLUMINATIONS"    "ILLUMINATIONS"                                      Trademark            2,353,666             May 30, 2010
"ACE    "ACE YOUR NEIGHBROHOODNEIGHBORHOOD
        SOLUTIONS PLACE"                                 Service Mark       2,386,359            September 12, 2010
"ACE"    "ACE" with accent design                             Service Mark       2,378,123            August 15, 2010
"ACE    "ACE SOLUTIONS PLACE"                         Service Mark        2,394,181           October 10, 2010
    "ACE" with halo design                                 Service Mark        2,558,478           April 19, 2012
    "ACE HOMEPLACE"                                     Trademark            2,621,873            September 17, 2012

        As of the date of this filing, we also have the following applications for new registrations pending in
the U.S. Patent and
Trademark Office:

MarkType of goods/services
"STORE-IT-RIGHT"                             "Store-It-Right"hardware products, namely, hooks,
                                                                                                          brackets, knobs, hangers and extensions
                                         extensions                                                                                                          for support or hanging
"ACE HOMEPLACE"                          magazines
"ACE" with halo design                   retail hardware store services
"COLOR    "COLOR YOUR LIFE"   indoor and outdoor paint, coatings and
                                                                                                          varnishes
"CONTRACTOR    "CONTRACTOR CENTERS OF AMERICA"
and design                                                                               retail store services in the field of hardware
                                         hardware                                                                                                           and related goods
"NATIONAL    "NATIONAL SUPPLY NETWORK"                                       wholesale store services; namely providing
                                         providing                                                                                                           wholesale industrial supplies and equipment
                                                                                                           to commercial and industrial customers
    "NSN" in circle design                                                               wholesale store services; namely providing
                                                                                                           wholesale industrial supplies and equipment to
                                                                                           ��               commercial and
industrial customers
    "SIMPLY MAGIC"                                                                     interior, exterior house paints and primers
    "COLOR YOUR LIFE"                                                               written and graphic advertisements and
                                                                                                           promotional materials of paper and signage
    "YOUR NEIGHBORHOOD ACE HARDWARE
        THE HELPFUL PLACE"                                                        retail hardware store services
    "THE HELPFUL PLACE"                                                          retail hardware store services

Competition
Competition

        Competitive conditions in the wholesale and retail hardware industry are intense and increasing.
Independent hardware
retailers must remain competitive with discount stores and chain stores, such as
WalMart, Home Depot, Menard's, Sears, and
Lowe's, and with other mass merchandisers. Retail hardware
stores have been slowly shifting their locations to high rent
shopping centers. There has also been a
trend toward longer store hours. There is intense pressure on hardware retailers to
obtain low cost wholesale
supply sources. In several markets in the United States, we also compete directly with other dealer-
dealer-ownedowned wholesalers such as TruServ Corporation, Do it Best Corporation and United Hardware
Distributing Co.

Employees
Employees

        WeAs of December 28, 2002, we have 5,2295,268 full-time employees, of which 1,5901,555 are salaried employees. Excluding our
Canadian
operations and Company-owned retail locations, we have 4,8284,824 full-time employees to support our
domestic and
international retailers. We also have, as of the end of the 20012002 fiscal year, union contracts
covering one (1) truck drivers'
bargaining unit and two (2) warehouse bargaining units. We consider our
employee relations with both union and non-union
employees to be good, and we have had no strikes in
the past five years. In general, our employees are covered by either
negotiated or nonnegotiated benefit
plans that include hospitalization, death benefits and, with few exceptions, retirement
benefits.


Limitations on Ownership of Stock

        Our members own all of our outstanding shares of capital stock. Membership in our CompanyAce is
limited to approved dealers in
hardware and related products who have Membership Agreements with
us. These are the only ones eligible to own or
purchase shares of any class of our stock.

        No dealer is allowed to own more than 1 share of our Class A voting stock, no matter how many store
locations that
dealer owns or controls. This ensures that each stockholder in our cooperative has equal
voting power. We treat an
unincorporated member or a partnership member as being controlled by
someone else if 50% or more of the assets or profit
shares of that member are owned by (i) another
person, partnership or corporation; or (ii) the owner(s) of 50% or more of the
assets or profit shares of
another unincorporated business firm or (iii) the owner(s) of at least 50% of the capital stock of a
corporation.
We treat a member that is a corporation as being controlled by someone else if at least 50% of the
capital stock
of that member is owned by (i) another person, partnership or corporation; or (ii) the
owner(s) of at least 50% of the capital
stock of another corporation; or (iii) the owner(s) of at least 50%
of the assets or profit shares of another unincorporated
business.


Distribution of Patronage Dividends

        We operate on a cooperative basis for patronage purchases of merchandise from us that are made by
dealers who have
become members of our Company.Ace. We also operate on a cooperative basis with dealers
who have subscribed for shares of our stock but
who have not yet actually become "members" because they
have not yet fully paid for their $1,000 par value shares of our
Class A voting stock. The dealers in either
of these two categories are entitled to receive patronage dividends once a year on
an equitable basis.

        We made patronage dividend distributions at the following percentages of our sales in the warehouse,
bulletin and direct
shipment categories and on the total sales of products manufactured by our Paint
Division during the past three fiscal years:

2002200120001999
Warehouse Sales                                                                              4.56348%     4.27330%       4.43564% 4.98172%
Bulletin Sales                                                                                             2.0%             2.0%               2.0%
Direct Shipment Sales                                                                               1.0%            1.0%                1.0%
Paint Sales                                                                                           10.1109%      8.9371%          8.1131%  7.8827%

        Under our LTL Plus Program, we also calculate patronage dividends separately on sales of full or
partial truckloads of
products purchased by eligible dealers from certain vendors (see discussion of LTL
Plus Program under the heading "Business.
"Business.") The LTL Plus Program patronage dividend was .5%0.5% of
these sales for fiscal year 2002, 2001 2000 and 1999.2000.

        Sales of merchandise under our Contractor and Industrial Distributor Programs are made on a
nonpatronage basis.


Patronage Dividend Determinations and Allocations

        The amounts that we distribute as patronage dividends consist of our gross profits on patronage business
that we do with
dealers who qualify for patronage dividend distributions, less a proportionate share
of our expenses for administration and
operations. Our gross profits consist of the difference between our
selling price for the merchandise that these dealers buy
from us and our purchase price for that merchandise. The total patronage dividend paid to members is based on net earnings
calculated in accordance with accounting principles generally accepted in the United States of America after reducing or
increasing net earnings for non-member income or losses. Our computation of patronage dividends excludes all of our income
and expenses from activities that
are not directly related to patronage transactions. The excluded items primarily consist of
profits on business
that we do withor losses generated from non-shareholder international dealers and non-shareholder retail accounts served through
National Hardlines Supply, Inc. and our industrial distributor and contractor programs, profits or other customers who do not qualify for patronage dividend distributionslosses realized from Ace
Insurance Agency, Inc., New Age Insurance Limited, Ace Hardware Canada Limited, company-owned retail locations and our
share of the profits or losses realized from our minority-owned investments including Builder Marts of America, Inc. and joint
ventures. Additionally, any income or loss that we realize from the disposition of property and equipment.equipment is excluded from
patronage dividends. The amount we distribute as patronage dividends also excludes profits or losses generated from our non-
shareholder programs. (See the heading "Business" and the subheading "Non-Shareholders Programs".)

        Patronage dividends are usually paid to members within 90 days after the close of Ace's fiscal year; however, the Internal
Revenue Code (the "Code") permits distribution of patronage dividends as late as the15th day of the ninth month after the
close of Ace's fiscal year, and Ace may elect to distribute the annual patronage dividend at a later time than usual in
accordance with the provisions of the Code.

        Our By-laws provide that, by virtue of dealers being "members" of our CompanyAce (that is, by owning
shares of our Class A voting
stock), they consent to include in their gross income for federal income tax
purposes all patronage dividends that we distribute
to them. These distributions must be included in gross
income for the taxable year in which the dealer receives them. Dealers
who have not yet fully paid the $1,000
purchase price for their shares of our Class A voting stock are also required to include
all patronage dividends
we distribute to them in their gross income as explained above. Under our Stock Subscription
Agreement,
dealers must expressly consent to take these patronage dividend distributions into their gross incomes.

        The amount of the patronage dividends which dealers must include in their gross incomes includes
both the cash portion
of patronage dividends and any portion of patronage dividends that we apply against
any indebtedness the dealer owes to us in
accordance with Section 7 of Article XXIV of our By-laws. It
also includes any portion of patronage dividends that they
receive in shares of our Class C nonvoting
stock, other property and patronage refund certificates. The CompanyAce also has the authority
to issue a
portion of the patronage dividend in the form of other property.

        Under our present program, patronage dividends on each of our three basic categories of sales (warehouse
sales, bulletin
sales and direct shipment sales) are allocated separately, as are patronage dividends
under our LTL Plus Program. Dividend
percentage calculations are made with reference to the net earnings
derived from each of the respective categories. The 2001 2002
patronage dividend rate for the LTL Plus
Program is .5%0.5% of our LTL Plus sales. The 20012002 patronage dividend rates for direct
shipment and bulletin
sales are 1.0% and 2.0%, respectively, while the current 20012002 warehouse patronage warehouse dividend rate is 4.27%
4.56%.

        Patronage dividends are calculated separately for full and partial truckloads of products purchased
under the LTL Plus
Program. (See the heading "Business", discussion of LTL Plus Program and the
subheading "Forms of Patronage Dividend
Distributions" below.)

        Any manufacturing profit realized on intracompany sales of products manufactured by our Paint
Division is allocated and
distributed as patronage dividends to eligible dealers in proportion to their respective
annual dollar purchases of paint and
related products from that division. The earnings we realize on wholesale
sales of the Paint Division's products to our eligible
dealers are currently distributed as patronage
dividends to them as part of the patronage dividends which they receive each
year in the basic patronage
dividend categories of warehouse sales, bulletin sales and direct shipment sales. The 20012002 paint
patronage dividend rate
is 8.94%10.11%. Under Section 8 of Article XXIV of our By-laws, if the Paint Division's manufacturing
operations
for any year result in a net loss instead of a profit to the Paint Division, this loss would be netted
against the
earnings we realized from our other activities during the year, so that the earnings available for
distribution as patronage
dividends from these other activities would be reduced for the year. Therefore, if a loss were to result from Paint Division
activities, it would result in a reduced patronage dividend to all members, irrespective of their paint purchases.

        We have established a LBM Retailer Incentive Pool Plan for our members who purchase LBM products
through Builder
Marts of America, Inc. ("BMA"), and are eligible participants under our Contractor
Center standards. This is not a patronage
dividend plan, but rather an allocation of the increase in our stock
investment in BMA. Under the plan, we calculate an annual
estimate of the amount by which our stock in
BMA has increased or decreased in value from our initial investment, net of
certain expenses. We allocate
this estimate to eligible members annually based on their qualifying purchases of LBM products.
A member's pool allocation only becomes vested and can only be redeemed upon the termination of the
member's Ace
membership which results in the sale or redemption of Ace stock held for that location,
Ace's termination of the LBM
Retailer Incentive Pool Plan, or Ace's liquidation, whichever occurs first.
Negative pool balances are not charged to
members. The 20012002 incentive pool rate under this plan is .40%
0.57% of qualifying purchases.


Forms of Patronage Dividend Distributions

        We make patronage dividend distributions to our eligible dealers in cash, shares of our Class C Stock
and patronage
refund certificates according to a specific plan that has been adopted by our Board of
Directors. This plan can be changed
from time to time by the Board as they deem fit depending on business
conditions and our Company'sAce's needs.

        This plan is summarized below for the purchases that our eligible dealers make from us for the year
2001 2000 and subsequent
years.

        1.    For each of a dealer's eligible stores, we initially calculate the minimum cash patronage dividend
distribution as
follows:
                (a)    20% of the first $5,000 of the total patronage dividends allocated for distribution each year
to the dealer based
                        on the purchases made for the eligible store;
                (b)    25% of the portion of the total patronage dividends allocated for that store which exceed
$5,000 but do not
                        exceed $7,500;
                (c)    30% of the portion of the total patronage dividends allocated for that store which exceed
$7,500 but do not
                        exceed $10,000;
                (d)    35% of the portion of the total patronage dividends allocated for that store which exceed
$10,000 but do not
                        exceed $12,500;
                (e)    40% of the portion of the total patronage dividends allocated for that store which exceed
$12,500.

        2.    We distribute the portion of patronage dividends in excess of the cash or property amounts above
in the form of
shares of our Class C nonvoting stock (par value $100 per share) until the total par
value of all shares of all classes of our
capital stock that a dealer holds for the eligible store equals the
greater of:
                (a)    $20,000; or
                (b)    the sum of purchases in the following categories that a dealer made for the eligible store during
the most recent
                        �� calendar year:
                            (i)    15% of the volume of Ace manufactured paint and related products purchases, plus
                            (ii)   3% of the volume of drop-shipment or direct purchases (excluding Ace manufactured
paint and related
                                    products), plus
                            (iii)  15% of the volume of warehouse and bulletin purchases (including STOPStop and excluding
Ace manufactured
                                    paint and related products), plus
                            (iv)  4% of the volume of LTL Plus purchases.

        Please note, however, that we do not issue fractional shares of Class C Stock. We take any amount
that would result
in a fractional share of stock and distribute it in cash or patronage refund certificates
instead.

        3.    The portion of a dealer's total patronage dividends for each of the dealer's eligible stores which exceeds the
sum of:
                (a)    the cash amount determined under Paragraph 1 above and
                (b)    the amount of Class C Stock determined under Paragraph 2 above is distributed to the dealer in cash
up to
                         certain limits. The total amount that a dealer receives in cash for an eligible store cannot exceed
45% of that
                         store's total patronage dividends for the year. If a store's total cash distribution
would exceed this 45% limit,
                         then the distribution over that amount is made instead in the form
of a non-negotiable patronage refund
                         certificate. Our Board of Directors determines the maturity
dates and interest rates of these patronage refund
                         certificates before they are issued. These
certificates include provisions that give us a first lien on the amount of
                         any indebtedness that
a dealer owes us. The certificates also contain language subordinating them to all the
                         rights and
claims of our secured creditors, general creditors and our bank creditors. Historically, these patronage
        patronage                         refund certificates have matured within five years from the date we issued them.

        Article XXIV, Section 7 of our By-laws requires the cash portion of any patronage dividends to be
applied against any
indebtedness a member owes us where the membership for his store is terminated
before the distribution of patronage
dividends. Despite this, however, 20% of a terminated store's total
annual patronage dividends will be paid in cash if we
receive a timely request for this form of payment.

        Because of the requirement of the U. S. Internal Revenue Code that we withhold 30% of the annual
patronage dividends
distributed to eligible dealers whose places of business are located in foreign countries
or Puerto Rico, the cash portion of
patronage dividends to these dealers is a minimum of 30%. There
are exceptions to this 30% cash payment in the case of 1)
unincorporated Puerto Rico dealers owned by
individuals who are U.S. citizens, 2) certain dealers incorporated in Guam,
American Samoa, the
Northern Mariana Islands or the U.S. Virgin Islands. These exceptions apply if less than 25% of the
stock
of these dealers is owned by foreign persons, and at least 65% of their gross income for the last three years
has been
sufficiently connected with a trade or business in one of these locations or in the United States
and 3) dealers located in
countries maintaining tax treaties with the United States that provide for
reduced rates of withholding.

        We also have certain loan programs that allow dealers to pay us back with part of their patronage dividend distributions.
distributions. For example, to help members buy standardized exterior signs identifying their stores,
our Board of Directors has authorized a
loan program. Under this program, a dealer may apply to borrow
between $100 to $25,000 per location from us for this
purpose. If a dealer obtains a loan under this program,
the dealer may either repay it in twelve payments billed on the regular
bi-weekly billing statement, or the dealer may
apply the non-cash portion of the annual patronage dividends (for up to the next
three annual patronage
dividend distributions) toward payment of the loan.

        Our Board of Directors has also authorized a loan program to help qualified dealers pay for costs of
converting their
stores from another hardware distributor's program to our program. Under this loan
program, these dealers can borrow up to $95,000
$95,000 per store. If the dealer obtains a loan under this program, we will
apply the non-cash portion of the dealer's annual
patronage dividends (for up to the next three annual patronage
dividend distributions) towards payment of the loan. Unless
extended by the Board of Directors, this loan
program will remain in effect until June 1, 20022003 or until 100 loans are made,
whichever occurs first.

        Our Board of Directors has also authorized finance programs to help qualified dealers buy certain
computer systems from
us and to finance capital improvements with patronage dividends. The amount
financed cannot exceed 80% of the cost of any system. For PAINTMAKER
computers, members have
applied to��to borrow between $4,000 to $15,000$25,000 per location repayable over a period of three (3)
years.

        Under these programs, members have directed us to first apply the patronage refund certificate
portion of their patronage
dividend distributions toward the balance owed on financed items and next to
apply patronage dividends which would
otherwise be payable for the same year in the form of our Class C
Stock. These signage, computer financing and store
conversion programs may be revised or discontinued
by our Board at any time.

        Members also have the ability to apply for a Capital Stock loan which is designed to provide them with
access to their
future patronage dividends to assist them in opening new retail stores or to assist in significant
store expansions. These loans
are repaid at the end of seven (7) years from rebatepatronage distributions of the
non-cash portion of the annual patronage rebate on
the respective store during that period.


Federal Income Tax Treatment of Patronage Dividends

        Both the shares of Class C nonvoting stock and the patronage refund certificates that we use to pay
patronage dividends
are "qualified written notices of allocation" within the meaning of Sections 1381
through 1388 of the U.S. Internal Revenue
Code. The CompanyAce may pay a portion of its dividend in the
form of other qualified property pursuant to Section 1382 of the U.S.
Internal Revenue Code. These
Sections of the Internal Revenue Code deal with the income tax treatment of cooperatives and
their
patrons and have been in effect since 1963. The dollar amount stated on a qualified written notice of allocation
and fair
market value of other qualified property must be taken into the gross income of the person
to whom the notice is issued, even
though this dollar amount may not actually be paid to the person in
the same year that it is taxed.

        In order for us to receive a deduction from our gross income for federal income tax purposes for the
amount of any
patronage dividends that we pay to a patron (that is, to one of our eligible and qualifying
dealers) in the form of qualified
written notices of allocation or other qualified property, we have to pay
(or (or apply against any indebtedness that the patron
owes us in accordance with Section 7 of Article XXIV
of our By-laws) not less than 20% of each patron's total patronage
dividend distribution in cash and the
patron also has to consent to having the written notices of allocation at their stated dollar
amounts, and
other qualified property at the fair market value, included in his gross income for the taxable year in which he
he receives them. The Internal Revenue Code also requires that any patronage dividend distributions that
we deduct on our
federal income tax return for business we do with patrons must be paid to those patrons
within eight and one-half months after
the end of that taxable year.

        By becoming one of our "members" by owning 1 share of Class A voting stock, a patron is deemed
under the U.S.
Internal Revenue Code to have consented to take the written notices of allocation and
other qualified property that we
distribute into the patron's gross income. Such consent is deemed because
of 1) the act of obtaining or retaining membership
in our Company,Ace, and 2) because our By-laws provide
that the membership constitutes this consent, and we give written notification of
that By-law provision.
Under another provision of the Internal Revenue Code, dealers who have subscribed for shares of our
our stock are also deemed to have consented to take the dollar amounts of their written notices of allocation
and other qualified
property into their gross incomes. This occurs because of the consent provisions
included in the Subscription Agreement for
our stock.

        AIf a patron receives a patronage refund certificate as part of a patron's patronage dividends (see the subheading "Forms of
"Forms of Patronage Dividend Distributions"), the patron may be deemed to have received interest income.
This interest would arise in
the form of an original issue discount to the extent that the face amount of
the certificate exceeds the present value of the
stated principal and interest payments that we have to pay
the patron under the terms of the certificate. This interest income
would be taxable to a patron's "ratably" over the
term of the certificate under Section 7872(b) (2) of the U.S. Internal
Revenue Code. Present value for
this purpose is determined by using a discount rate equal to the applicable Federal rate in
effect as of the
day of issuance of the certificate, compounded twice a year.

        We are required to backup withhold for federal income tax on the total patronage dividend distribution
we make to
anyone who has not furnished us with a correct taxpayer identification number. We can
also be required to backup withhold
federal taxes on the cash portion of each patronage dividend distribution
made to someone who fails to certify to us that he is
not subject to backup withholding. This
backup withholding obligation based on a failure to certify may not be applicable,
however, unless 50%
or more of the total distribution is made in cash. Since we distribute all of our patronage dividends for a
given year at the same time and since our current patronage dividend plan (see the heading "Business",
"Business", subheading "Forms of
Patronage Dividend Distributions") does not permit any member store to receive
more than 45% of its patronage dividends
for the year in cash, we believe that a certification failure like
this should not ordinarily have any effect on our CompanyAce or any of its
dealers.

        Patronage dividends that we distribute to patrons who are located in foreign countries or certain
U.S. possessions (including those who are incorporated in Puerto Rico or who reside in Puerto Rico but
have not become
citizens of the United States) have been held to be "fixed or determinable annual or
periodic income." Patrons who receive
this type of income are currently required to pay a tax of 30% of
the amount received under Sections 871(a)(1)(A) and
881(a)(1) of the Internal Revenue Code. When
dealers are subject to this 30% tax, we must withhold it from their patronage
dividends and pay it over to
the U.S. Internal Revenue Service. The above does not apply to a corporation organized in
Guam,
American Samoa, the Northern Mariana Islands or the U. S. Virgin Islands if less than 25% of its stock is
owned by
foreign persons and at least 65% of its gross income for the last three years has been effectively
connected with the conduct of
a trade or business in that location or in the United States. A reduced rate
of withholding may apply to dealers located in
countries maintaining tax treaties with the United States.

        The 20% minimum portion of the patronage dividends that must be paid in cash to patrons other than
those discussed
above may not be enough, depending upon the patron's income tax bracket, to pay all of
the patron's federal income tax on
his annual patronage dividend distributions. In our management's
opinion, the payment of a minimum of 20% of total
patronage dividends in cash each year will not have
a material adverse affect on our operations or on our ability to obtain
sufficient working capital for the
normal requirements of our business.


Membership Agreements

        Persons who apply to become an Ace member must sign a Subscription Agreement to purchase our
stock. They must also
sign our customary Membership Agreement and Supplement and submit
a payment of $1,500 ($2,500 for conversions or new
investor ground-ups) with yourtheir signed
Membership Agreement and Supplement. We use this fee toward our estimated costs
of processing
the membership applications. If a person submits a membership application and we accept it, we sign your
Stock Subscription Agreement and your Membership Agreement and Supplement and send them
back to you for your records. YourA membership may generally be terminated upon various notice
periods and for
various reasons (including voluntary termination by either of us)party). The details of these
reasons and notice periods are
contained in the Membership Agreement. These reasons for termination and
notice periods apply except where special laws or
regulations in certain locations limit our right to
terminateterminate memberships, or require longer notice periods.


Non-Shareholder Programs

        In 1989, our Board of Directors first authorized us to affiliate non-shareholder international dealers
who operate retail
businesses outside the United States, its territories and possessions. These international
dealers sign agreements that differ
from our regular Membership Agreement. They may be granted
a license to use certain of our trademarks and service marks,
but they do not sign stock subscription agreements
or become shareholders, nor do they receive patronage dividends.

        In 1995, our Board of Directors first authorized us to affiliate non-shareholder retail accounts other
than international
dealers. These accounts, which are generally served through our wholly-owned
subsidiary National Hardlines Supply, Inc.
("NHS"), are not granted an ongoing license to use our trademarks
and service marks. They can purchase selected types of
products from us for resale. They are not
members of our cooperative, and therefore do not own our stock or receive
patronage dividends.

        In 1996, we established a license program for international non-shareholder dealers. These international licensees
licensees typically receive the exclusive right to use our trademarks and service marks, as well as
exclusive rights to distribute the
merchandise they purchase from us in their home countries.
International licensees pay us a negotiated license fee and
ongoing royalties on their retail sales in
exchange for these rights, and for our ongoing training and support.

     In 1996, we also began operations through our subsidiary Ace Hardware Canada, Limited ("Ace
Canada"). Ace Canada's customers are non-shareholders who do not receive patronage dividends from us.
Only customers signed under the Ace Canada Franchise Agreement are licensed to use our trademarks
and service marks.

        In 1998, the Company began developing joint ventures with certain dealers as a way of increasing the
Ace presence in
key markets without the need for Ace to use solely its own resources to open company
stores. For each joint venture, the
Company and the dealermember enter into a Limited Liability Company
Agreement, with the dealerretailer acting as the managing
member, and form a limited liability company ("LLC")
to operate the joint venture stores. In each joint venture, the Company ownswe own 50%
or less of the LLC's
units. Currently, the CompanyAce has an ownership interest in sixseven joint ventures. In the future, we may explore
explore other joint venture opportunities with our members; however, we consider each situation unique
and we evaluate each
opportunity on its own merits.

        In our sole discretion, we may offer a member a mutually agreeable termination arrangement.
In some situations, a
member who terminates on this basis may be offered the opportunity to
purchase products from us (including Ace private
label products) for a period of up to 5 years after the
termination of membership. The former member is not required to make
any such purchases from us,
but must maintain favorable credit status in order to do so.

        In 1999, we entered into an agreement with Builder Marts of America (BMA), to combine our lumber and building
materials division (the "LBM division") with BMA, a non-cooperative buying group for lumber and building materials in the
United States. Under this agreement, we contributed certain business assets (primarily vendor rebate receivables, fixed assets
and inventories) in exchange for a non-controlling (28%) interest in the combined entity. The investment in the combined
entity is accounted for under the equity method of accounting. As a result of this transaction, we have established an LBM
Retailer Incentive Pool Plan for our members who purchase LBM products through BMA. This program is not a patronage
dividend plan but rather a process for allocating the increase in the value of our investment in BMA to those qualifying
dealers who purchase LBM products through BMA. (See the heading "Business", subheading "Patronage Dividend
Determinations and Allocations".)

        In 2001, we developed a non-shareholder industrial distributor program and contractor program.
These retailersindustrial distributors can purchase
selected types of products from us for resale. resale under an Industrial Distributor Agreement or Distributor Franchise Agreement.
They are not members of our
cooperative by reason of their participation in the industrial distributor program, and therefore
do not own stock or receive patronage dividends.dividends in connection with that program. These programs are made
available to
cooperative members, however, members will not receive patronage dividends for purchases
of products under these
programs.

        Sales to international non-shareholder dealers accounted for approximately 4.4%1.9 % of our merchandise sales in 2002,
approximately 2.0% of our merchandise sales in 2001 and approximately 2.2% of our merchandise sales in 2000. Sales to
domestic non-shareholder locations accounted for less than 1.0 % of our total sales in
2001, approximately 6.7% of our total sales in 2000 and approximately 6.5% of our total sales in 1999.
Sales to domestic non-shareholder locations accounted for 2002, less than 2.0% of our total sales in
2001 and less
than 2.5%3.0% of our total sales in 2000 and less than 1.5% of our total sales in 1999.2000. (See Appendix A, Article
XXV, section 2 of our By-laws regarding
International Retail Merchants and non-member accounts.)

        In connection with the sales of the shares of Ace Canada to Sodisco-Howden Group Inc. on February 13, 2003, we
signed a License Agreement granting Ace Canada the right to operate, and license others to operate, retail hardware stores
under our trademarks and service marks. These retail hardware dealers are not shareholders and do not receive patronage
dividends from us.

Item 2. Properties

        Our general offices are located at 2200 Kensington Court, Oak Brook, Illinois 60523. Information
about our main
properties appears below:


Square Feet                Owned                    Lease
               of Facility                      or                   Expiration
                                  Location(Land in Acres)LeasedDate

General Offices:
        Oak Brook, Illinois 291,816(1)                                                            206,030               Owned    
        Oak Brook, Illinois                                                                   85,786               Leased          September 30, 2009
        Downers Grove, Illinois                                                          23,962               Leased          June 30, 2004
        Markham, Ontario, Canada(1)Canada (2)                                              15,372                Leased          February 28, 2006November 30, 2002

Distribution Warehouses:
        Lincoln, Nebraska                                                                  345,440               Leased          December 31, 2006
        Arlington, Texas                                                                    313,091               Leased          July 31, 2003
        Perrysburg, Ohio                                                                   393,720               Leased          December 31, 2004
        Tampa, Florida                                                                       391,755               Owned
        Yakima, Washington                                                            507,030               Owned
        Maumelle, Arkansas                                                            597,253                Owned
        LaCrosse, Wisconsin                                                          591,964                Owned
        Rocklin, California                                                                (4)            478,468                OwnedLeased           September 30, 2004
        Rocklin, California                                                                  75,000                Leased           July 31, 2003
        Rocklin, California (3)                                                         82 acres                Leased           January 15, 2023
        Gainesville, Georgia                                                             481,013                Owned
        Prescott Valley, Arizona                                                      631,485               Owned
        Princeton, Illinois                                                              1,094,756                Owned
        Chicago, Illinois (2)               18,168      Leased  May 31, 2002
Summit, Illinois (2)(4)                                                                 37,236                Leased            February 28, 2017
        Baltimore, Maryland (2)(4)                                                        19,600                Leased            December 31, 2008
        Colorado Springs, Colorado                                               494,219               Owned
        Wilton, New York                                                                800,525                Leased            September 1, 2007
        Loxley, Alabama                                                                  798,698                Leased            May 27, 2009
        Brantford, Ontario, Canada (3)(5)                                          354,000                Leased            March 31, 2006
   Calgary, Alberta, Canada (3)       240,000      Leased  June 30, 2002
        Prince George County, Virginia                                         798,786                Owned
        Fort Worth, Texas (2)(4)                                                            10,915                Leased            December 31, 2005
        Cuyahoga Heights, Ohio (4)                                                21,320                Leased            April 30, 2017
Print Shop Facility:
        Downers Grove, Illinois                                                        41,000                Leased            April 30, 20032004

Paint Manufacturing Facilities:
        Matteson, Illinois                                                                371,411                Owned
        Chicago Heights, Illinois                                                    194,000                Owned
    Other Property:
        Aurora, Illinois                                                                   72 acres                 Owned

    (


(1)1) This property iswas leased by our subsidiaryAce for its corporate office until purchased in June, 2002.
    (2) This property was leased by Ace Hardware Canada Limited for its corporate office.
(2)    (3) Ace has entered into a ground lease for 82 acres of land containing a 619,688 square foot warehouse/office building,
          including 75,000 square feet of building space leased by Ace. Ace intends to exercise an option to purchase this property by
          September, 2003, and to develop this property for use as a distribution warehouse.
    (4) This property is leased for use as a freight consolidation center.
(3)    (5) Our subsidiary, Ace Hardware Canada Limited,3070070 Nova Scotia Company, leases this property for a distribution warehouse.
    Ace Hardware Canada Limited has exercised an option to terminate the lease for the Calgary Warehouse
    effective April 30, 2002.
(4) The Company has entered into an agreement to sell this property and plans to acquire vacant land and
    construct a larger replacement warehouse.


        In addition to the above, we or our subsidiary, Ace Corporate Stores, Inc., lease 26 retail hardware
stores ranging from 13,000
7,000 to 25,000 square feet in size located in the following states: Colorado, Georgia,
Illinois, New Jersey, Oregon,
Washington and Wisconsin.

        We also lease a fleet of trucks and equipment for the main purpose of delivering merchandise from
our warehouses to our
dealers.


Item 3. Legal Proceedings

        In the normal course of our business, we are a party to various legal proceedings. We do not expect
that any currently
pending proceedings will, individually or in the aggregate, have a material adverse
effect on our business, results of
operations or financial condition.

I
Itemtem 4. Submission of Matters to a Vote of Security Holders

        None.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Year Ended                                          
                                                                                                    December 28,                December 29,                December 30,
       2002                2001                2000        
                                                                                                                                             (000's omitted)
Net earnings   $        82,091                    $     73,069                       $   80,392
Foreign Currency Translation, net   1,826                            (1,206)   (911)
Unrealized gains on securities   116   129   458
Comprehensive income                                                         $   84,033                     $     71,992                       $   79,939
                                                                                                 ===========                ===========                ===========

                                        See accompanying notes to consolidated financial statements.


                                      ACE HARDWARE CORPORATION

CONSOLIDATED STATEMENTS OF MEMBER DEALERS' EQUITY
                                         Three Years Ended December 29, 200128, 2002        (000's Omitted)
omitted)

Class C Stock
                                                                                                           Issuable to                                                                 Accumulated
                                                                                                           Dealers for    Additional       Retained                           Other Com-
                                                  Class A       Class B         Class C         Patronage         Stock           Earnings   Contributed       Comprehensiveprehensive    Treasury
                                                   Stock           Stock            Stock           Dividends    Subscribed*     (deficit)        Capital         Income/(loss)     Stock         Total
Balance at January 2, 1999                      $3,8461, 2000               $3,856        $6,499      $226,571    $26,170       $241,226        $21,648$498              $594          $13,485$ 471       $3,292     $3,295       $(818)       $(7,814)    $261,512
      -            $(8,134)     $279,672
Net earnings     -               -     -    -                  -      80,392      -                     -     -           92,562         -           -              -        92,562
   80,392
Net payments on subscriptions              -                 -          -          -        1,531           -          -           -              -         1,531
   Patronage financing deductions                   -        -          -        (847)         -            -          -           -              -          (847)
   Stock issued                                    238       -      26,616    (25,323)     (1,504)          -          -           -              -            27
   Stock repurchased                                -        -          -          -           -            -          -           -         (12,509)     (12,509)
   Stock retired                                  (228)      -     (11,961)        -           -            -          -           -          12,189           -
   Patronage dividends issuable                     -        -          -      21,648          -            -      10,190          -              -        31,838
   Patronage dividends payable                      -        -          -          -           -       (95,260)        -           -              -       (95,260)
   Accumulated other comprehensive income (loss)    -      -        -       -      -        -       -   1,109       -     1,109 
Balance at January 1, 2000                       3,856    6,499    241,226     21,648         498          594     13,485         291         (8,134)     279,963
   Net earnings                                     -        -          -          -           -        80,392         -           -              -        80,392
   Net payments on subscriptions -                   -                     - -               1,830                - -                  -                       - -                 -               1,830
Patronage financing deductions -                 -                   -                     (158)             -                   -    -                       -                 -   (158)
Stock issued                                  234             -                 23,391           (21,490)        (1,977)               -                  -                       -                 -   158
Stock repurchased      -                -                    -                     -                   -                  -                  -                       -             (14,804)      (14,804)
Stock retired (307)            -                (14,137)               -                   -                  -                  -                       -              14,444   -
Patronage dividends issuable             -                -                   -                 24,267               -           -                  -                       -             -   24,267
Patronage dividends payable     -                -                    -                     -      -             (86,537)             -                       -                  -   (86,537)
Accumulated other comprehensive
income (loss)      -     -   -   -     -     -   -   458      -   458
Balance at December 30, 2000      3,783           6,499           250,480  24,267     Patronage dividends payable                           351             (5,551)        13,485                 458             (8,494)  285,278
Net earnings      -                -                    -                        -                -      (86,537)       73,069            -   -     -   (86,537)
   Accumulated other comprehensive income (loss)    -      -        -       -      -        -       -    (453)      -      (453)
Balance at December 30, 2000                     3,783    6,499    250,480     24,267         351       (5,551)    13,485        (162)        (8,494)     284,658
   Net earnings                                     -        -          -          -           -        73,069         -           -              -        73,069
   
Net payments on subscriptions -                -                    -                        -            1,479                -                  -      -                  -  1,479
Patronage financing deductions      -                -      -                  (1,324)              -                  -                  -                      -                  -    (1,324)
Stock issued   170      -                 24,202           (22,943)        (1,527)               -                  -                      -                  -   (98)
Stock repurchased -                 -           -                      -                 -                  -      -                      -             (15,006)  (15,006)
Stock retired      (260)              -                (14,458)           -                  -                  -        -           -            -          -           -         (15,006)     (15,006)
   Stock retired                                  (260)      -     (14,458)        -           -            -      -                       -              14,718   -
Patronage dividends issuable                   -      -                     -      23,284              -                 -                  -                      -                   -   23,284
Patronage dividends payable      -                -              -                      -           -            (85,109)          -                      -                   -   (85,109)
Accumulated other comprehensive
   income (loss)      -   -     -   -   -   -   -   129   -   129
Balance at December 29, 2001      3,693            6,499            260,224            23,284        303          (17,591)        13,485                  587            (8,782)  281,702
Net earnings                                        -                 -                    -                        -           -             82,091           -                       -           -  82,091
Net payments on subscriptions               -                  -                    -                        -           1,322           -                  -                       -           -  1,322
Patronage financing deductions      -                  -                    -                        -           -                  -                  -                       -                  -        -
Stock issued      171                -                 24,495      (23,284)      (1,382)               -                  -                       -                  -   -
Stock repurchased      -                  -           -                        -           -      -                 -                       -            (15,682)   (15,682)
Stock retired      (247)               -           (15,107)                  -                -                  -                 -                      -        15,354   -
Patronage dividends issuable      -                 -                    -                   26,053             -      -                 -                       -                   -   26,053
Patronage dividends payable                     -                 -                    -      -      -           (85,109)(95,580)              -                       -                   -   (85,109)
   (95,580)
Accumulated other comprehensive
income (loss)    -              -                 -                    -             -              -              -                (1,077)116               -           (1,077)116    
Balance at December 29, 2001                    $3,69328, 2002             $3,617          $6,499         $260,224    $23,284      $269,612             $26,053   $  303     $(17,591)243         $(31,080)        $13,485              $(1,239)       $(8,782)    $279,876
			                =======  =======  =========   ========     =======    =========   ========    ========      ========= $703           $(9,110)    =========$280,022

*Additional stock subscribed is comprised of the following amounts at January 1, 2000, December 30, 2000, December 29, 2001 and December 29, 2001: