<PAGE>   1
                                                                   Exhibit 10.25

                            INDEMNIFICATION AGREEMENT

        This Agreement is made as of March 15, 2000, by and between Hancock
Fabrics, Inc., a Delaware corporation (the "Company"), and Clayton E. Stallings
("Officer").

                               W I T N E S S E T H :

        WHEREAS, the Company understands that there can be no assurance that
directors' and officers' liability insurance will continue to be available to
the Company and Officer, and believes that it is possible that the cost of such
insurance, if obtainable, may not be acceptable to the Company or the coverage
of such insurance, if obtainable, may be reduced below what has historically
been afforded; and

        WHEREAS, Officer is unwilling to serve, or continue to serve, the
Company as a director without assurances that adequate liability insurance,
indemnification or a combination thereof will be provided; and

        WHEREAS, the Company, in order to induce Officer to continue to serve
the Company, has agreed to provide Officer with the benefits contemplated by
this Agreement, which benefits are intended to supplement or, if necessary,
replace directors' and officers' liability insurance; and

        WHEREAS, as a result of the provision of such benefits Officer has
agreed to serve or to continue to serve as a director of the Company;

        NOW, THEREFORE, in consideration of the promises, conditions,
representations and warranties set forth herein, including Officer's service to
the Company, the Company and Officer hereby agree as follows:



                                      -1-
<PAGE>   2


    1.  Definitions. The following terms, as used herein, shall have the
following respective meanings:

        "Covered Amount" means Loss and Expenses which, in type or amount, are
not insured under directors' and officers' liability insurance maintained by the
Company from time to time.

        "Covered Act" means any breach of duty, neglect, error, misstatement,
misleading statement, omission or other act done or wrongfully attempted by
Officer or any of the foregoing alleged by any claimant or any claim against
Officer by reason of Officer's serving as or being a director, officer,
employee, or agent of the Company, or by reason of Officer's serving at the
request of the Company as a director, officer, partner, member, trustee,
employee or agent of another corporation, partnership, joint venture, trust or
other enterprise.

        "D&O Insurance" means a policy or policies of the directors' and
officers' liability insurance issued to the Company and its directors and
officers.

        "Determination" means a determination, based on the facts known at the
time, made by:

            (i) A majority of the directors who are not parties to the action,
suit or proceeding for which indemnification is considered or being considered,
even though less than a quorum; or

           (ii) Independent legal counsel in a written opinion if there be no
such directors, or if such directors so direct; or

          (iii) A majority of the shareholders of the Company; or

           (iv) A final adjudication by a court of competent jurisdiction.

        "Determined" shall have a correlative meaning.



                                      -2-
<PAGE>   3


        "Excluded Claim" means any payment for Losses or Expenses in connection
with any claim:

            (i) Based upon or attributable to Officer gaining in fact any
personal profit or advantage to which Officer is not entitled; or

           (ii) For the return by Officer of any remuneration, for which prior
approval of the shareholders of the Company was required but not obtained; or

          (iii) For an accounting of profits in fact made from the purchase or
sale by Officer of securities of the Company within the meaning of Section 16 of
the Securities Exchange Act of 1934 as amended, or similar provisions of any
state law; or

           (iv) Resulting from Officer's knowingly fraudulent, dishonest or
willful misconduct; or

            (v) The payment of which by the Company under this Agreement is not
permitted by applicable law; or

            (vi) Which are not within the Covered Amount.

        "Expenses" means any reasonable expenses incurred by Officer as a result
of a claim or claims made against Officer for Covered Acts including, without
limitation, counsel fees and costs of investigative, judicial or administrative
proceedings or appeals, but, where prohibited by law or public policy, shall not
include fines.

        "Loss" means any amount which Officer is legally obligated to pay as a
result of a claim or claims made against Officer for Covered Acts including,
without limitation, damages and judgments and sums paid in settlement of a claim
or claims, but, where prohibited by law or public policy, shall not include
fines.

    2.  Maintenance of D&O Insurance.




                                      -3-
<PAGE>   4


        (a) The Company represents that it presently has in force and effect
policies of D&O Insurance. The Company hereby covenants that it will use its
best efforts to maintain a policy or policies no less beneficial to the Company
and Officer than the policies in effect on the date hereof. The Company shall
not be required, however, to maintain such policy or policies if such insurance
is not reasonably available or if, in the reasonable business judgment of the
then directors of the Company, either (i) the premium cost for such insurance is
disproportionate to the amount of coverage, or (ii) the coverage provided by
such insurance is so limited by exclusions that there is insufficient benefit
from such insurance.

        (b) In all policies of D&O Insurance, Officer shall be named as an
insured in such a manner as to provide Officer the same rights and benefits,
subject to the same limitations, as are accorded to the Company's directors or
officers most favorably insured by such policy.

    3.  Indemnification. The Company shall indemnify Officer against, and hold
Officer harmless from, the Covered Amount of any and all Losses and Expenses
subject, in each case, to the further provisions of this Agreement.

    4.  Excluded Coverage.

        (a) The Company shall have no obligation to indemnify Officer against,
and hold Officer harmless from, any Loss or Expense which has been Determined to
constitute an Excluded Claim.

        (b) The Company shall have no obligation to indemnify Officer against,
and hold Officer harmless from, any Loss or Expenses to the extent that Officer
is indemnified by the Company pursuant to the provisions of the Company's
Certificate of Incorporation or is otherwise in fact indemnified.

    5.  Indemnification Procedures.

        (a) Promptly after receipt by Officer of notice of the commencement or
the threat of commencement of any action, suit or proceeding, Officer shall
notify the Company of the commencement thereof if indemnification with respect
thereto may be sought from the Company under this Agreement; but the



                                      -4-
<PAGE>   5

omission so to notify the Company shall not relieve it from any liability
that it may have to Officer otherwise than under this Agreement. Such notice may
be given by mailing the same by United States mail, registered or certified,
return receipt requested, postage prepaid, addressed to the Company at: P.O. Box
2400, Tupelo, Mississippi 38803-2400, Attention: Secretary (or to such other
address as the Company may from time to time designate by written notice to
Officer).

        (b) If, at the time of the receipt of such notice, the Company has D&O
Insurance in effect, the Company shall give prompt notice of the commencement of
such action, suit or proceeding to the insurers in accordance with the
procedures set forth in the respective policies in favor of Officer. The Company
shall thereafter take all necessary or desirable action to cause such insurers
to pay, on behalf of Officer, all Losses and Expenses payable as a result of
such action, suit or proceeding in accordance with the terms of such policies.

        (c) To the extent the Company does not, at the time of the commencement
or the threat of commencement of such action, suit or proceeding, have
applicable D&O Insurance, or if a Determination is made that any Expenses
arising out of such action, suit or proceeding will not be payable under the D&O
Insurance then in effect, or if for any reason a D&O insurer does not timely pay
such Expenses, the Company shall be obligated to pay the Expenses of any such
action, suit or proceeding in advance of the final disposition thereof and the
Company, if appropriate, shall be entitled to assume the defense of such action,
suit or proceeding, with counsel satisfactory to Officer, upon the delivery to
Officer of written notice of its election so to do. After delivery of such
notice, the Company will not be liable to Officer under this Agreement for any
legal or other Expenses subsequently incurred by Officer in connection with such
defense other than reasonable Expenses incurred at the request of the Company
provided that Officer shall have the right to employ its counsel in any such
action, suit or proceeding but the fees and expenses of such counsel incurred
after delivery of notice from the Company of its assumption of such defense
shall be at Officer's expense, provided further that if (i) the employment of
counsel by Officer has been previously authorized by the Company, (ii) Officer
shall have reasonably concluded that there may be a conflict of interest between
the Company and Officer in the conduct of any such defense or (iii) the Company
shall not, in fact, have employed counsel to assume



                                      -5-
<PAGE>   6

the defense of such action, the fees and expenses of counsel shall be at the
expense of the Company.

        (d) All payments on account of the Company's indemnification obligations
under this Agreement shall be made within thirty (30) days of Officer's written
request therefor unless a Determination is made that the claims giving rise to
Officer's request are Excluded Claims or otherwise not payable under this
Agreement, provided that all payments on account of the Company's obligations
under Paragraph 5(c) of this Agreement prior to the final disposition of any
action, suit or proceeding shall be made within twenty (20) days of Officer's
written request therefor and such obligation shall not be subject to any such
Determination but shall be subject to Paragraph 5(e) of this Agreement.

        (e) Officer agrees to reimburse the Company for all Losses and Expenses
paid by the Company in connection with any action, suit or proceeding against
Officer in the event and only to the extent that a Determination shall have been
made that Officer is not entitled to be indemnified by the Company because the
claim is an Excluded Claim or because Officer is otherwise not entitled to
payment under this Agreement.

    6.  Settlement. The Company shall have no obligation to indemnify Officer
under this Agreement for any amounts paid in settlement of any action, suit or
proceeding effected without the Company's prior written consent. The Company
shall not settle any claim in any manner which would impose any fine or any
obligation on Officer without Officer's written consent. Neither the Company nor
Officer shall unreasonably withhold consent to any proposed settlement.

    7.  Subrogation. To the extent of any payment under this Agreement, the
Company shall be subrogated to all of the rights of recovery of Officer. Officer
shall execute all papers required and shall do everything that may be necessary
to secure such rights, including the execution of such documents as are
necessary to enable the Company effectively to bring suit to enforce such
rights.

    8.  Rights Not Exclusive. The rights provided hereunder shall not be
deemed exclusive of any other rights to which Officer may be entitled under any
provision of the Delaware General Corporation Law or any other provisions of



                                      -6-
<PAGE>   7

law, the Company's Certificate of Incorporation, its by-laws, or any agreement,
vote of shareholders or of disinterested directors or otherwise, both as to
action in an official capacity and as to action in any other capacity by holding
such office, and shall continue after Officer ceases to serve the Company as a
director.

    9.  Enforcement.

        (a) An adverse Determination shall not foreclose an action to enforce
Officer's rights under this Agreement to the extent allowed by law. If a prior
adverse Determination has been made, the burden of proving that indemnification
is required under this Agreement shall be on Officer. The Company shall have the
burden of proving that indemnification is not required under this Agreement if
no prior adverse Determination shall have been made.

        (b) In the event that any action is instituted by Officer under this
Agreement, or to enforce or interpret any of the terms of this Agreement,
Officer shall be entitled to be paid all court costs and expenses, including
reasonable counsel fees, incurred by Officer with respect to such action, unless
the court determines that each of the material assertions made by Officer as a
basis for such action was not made in good faith or was frivolous.

   10.  Continuation of Agreement. All agreements and obligations of the
Company contained herein shall continue during the period Officer is a director,
officer, employee or agent of the Company (or serving at the request of the
Company as a director, officer, partner, member, trustee, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise) and
shall continue thereafter so long as Officer shall be subject to any possible
demand, claim or threatened, pending or completed proceeding, whether civil,
criminal, administrative or investigative, by reason of the fact that Officer
was a director of the Company or serving in any other capacity referred to in
this paragraph.

   11.  Severability. In the event that any provision of this Agreement is
determined by a court to require the Company to do or to fail to do an act which
is in violation of applicable law, such provision shall be limited or modified
in its application to the minimum extent necessary to avoid a violation of law,
and such provision, as so limited or modified, and the balance of this Agreement
shall be enforceable in accordance with their terms.




                                      -7-
<PAGE>   8


   12.  Choice of Law. This Agreement shall be governed by and construed and
enforced in accordance with the laws of the State of Delaware.

   13.  Consent to Jurisdiction. The Company and Officer each hereby irrevocably
consents to the jurisdiction of the courts of the State of Delaware for all
purposes in connection with any action or proceeding which arises out of or
relates to this Agreement and agrees that any action instituted under this
Agreement shall be brought only in the state courts of the State of Delaware.

   14.  Successor and Assigns. This Agreement shall be (i) binding upon all
successors and assigns of the Company (including any transferee of all or
substantially all of its assets and any successor by, merger or otherwise by
operation of law) and (ii) shall be binding on and inure to the benefit of the
heirs, personal representatives and estate of Officer.

   15.  Amendment. No amendment, modification, termination or cancellation of
this Agreement shall be effective unless made in a writing signed by each of the
parties hereto.

   IN WITNESS WHEREOF, the Company and Officer have executed this agreement as
of the day and year first above written.


                                         HANCOCK FABRICS, INC.,
                                         a Delaware corporation

                                         By:
                                             ---------------------------------
                                         Its:
                                             ---------------------------------
                                                                     "Company"


                                         -------------------------------------
                                                                     "Officer"



                                      -8-