<PAGE>   1


                                    FORM 10-Q

                       SECURITIES AND EXCHANGE COMMISSION

                             WASHINGTON, D.C. 20549


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


For the quarterly period ended       August 2, 1998
                              ------------------------------------

                                       OR

( )    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
                 SECURITIES EXCHANGE ACT OF 1934

For the transition period from ______________to____________________
Commission file number          1-9482
                       --------------------------------------------

                              HANCOCK FABRICS, INC.
             (Exact name of registrant as specified in its charter)

          DELAWARE                                     64-0740905
(State or other jurisdiction of                    (I.R.S. Employer
 incorporation or organization)                     Identification No.)

                      3406 WEST MAIN ST., TUPELO, MS 38803
                    (Address of principal executive offices)
                                   (Zip Code)
                                 (601) 842-2834
              (Registrant's telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.

Yes  X     NO
   -----      -----

Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.

As of August 2, 1998, the registrant had outstanding an aggregate of 20,475,008
shares of common stock, $.01 par value.



<PAGE>   2
HANCOCK FABRICS, INC.

INDEX

<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------

<S>                                                                                     <C> 
PART I.   FINANCIAL INFORMATION:

  Item 1.  Financial Statements (unaudited)                                             Page Numbers

    Consolidated Balance Sheet as of August 2, 1998 and February 1, 1998                       3


    Consolidated Statement of Earnings for the Thirteen Weeks and Twenty-six
      Weeks Ended August 2, 1998 and August 3, 1997                                            4


    Consolidated Statement of Shareholders' Equity for the Twenty-six Weeks
      Ended August 2, 1998                                                                     5


    Consolidated Statement of Cash Flows for the Twenty-six Weeks Ended
      August 2, 1998 and August 3, 1997                                                        6


    Notes to Consolidated Financial Statements                                                 7


  Item 2.  Management's Discussion and Analysis of Financial Condition
     and Results of Operations                                                               8 - 11


PART II.  OTHER INFORMATION:

  Item 6.  Exhibits and Reports on Form 8-K                                                    12


SIGNATURE                                                                                      13
</TABLE>







                                      -2-
<PAGE>   3
                                   PART I. FINANCIAL INFORMATION


HANCOCK FABRICS, INC.
CONSOLIDATED BALANCE SHEET
(unaudited)

<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------
(in thousands, except for                                                  August 2,          February 1,
  share and per share amounts)                                                1998                1998

------------------------------------------------------------------------------------------------------------
<S>                                                                       <C>                 <C> 
ASSETS
Current assets:
    Cash and cash equivalents                                                 $  6,705            $  7,057
    Receivables, less allowance for doubtful accounts                              857               1,136
    Inventories                                                                156,234             149,486
    Deferred tax asset                                                           2,752               3,312
    Prepaid expenses                                                             4,073               3,806
------------------------------------------------------------------------------------------------------------
    Total current assets                                                       170,621             164,797

Property and equipment, at depreciated cost                                     20,335              18,989
Deferred tax asset                                                               9,407               9,065
Other assets                                                                     4,611               2,707
------------------------------------------------------------------------------------------------------------

    Total assets                                                              $204,974            $195,558
============================================================================================================


LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
    Accounts payable                                                          $ 36,686            $ 35,491
    Accrued liabilities                                                         15,370              16,418
    Income taxes                                                                 2,078               4,040
------------------------------------------------------------------------------------------------------------
    Total current liabilities                                                   54,134              55,949

Long-term debt obligations                                                      32,000              10,000
Postretirement benefits other than pensions                                     20,026              19,746
Other liabilities                                                                3,283               3,172
------------------------------------------------------------------------------------------------------------
    Total liabilities                                                          109,443              88,867
------------------------------------------------------------------------------------------------------------

Commitments and contingencies

Shareholders' equity:
  Common stock, $.01 par value; 80,000,000 shares authorized;
   28,549,026 and 28,253,013 issued and outstanding, respectively                  285                 283
  Additional paid-in capital                                                    35,112              31,382
  Retained earnings                                                            177,009             178,643
  Treasury stock, at cost, 8,074,018 and 7,139,074
   shares held, respectively                                                  (111,632)            (99,047)
  Deferred compensation on restricted stock
   incentive plan                                                               (5,243)             (4,570)
------------------------------------------------------------------------------------------------------------
    Total shareholders' equity                                                  95,531             106,691
------------------------------------------------------------------------------------------------------------
    Total liabilities and shareholders' equity                                $204,974            $195,558
============================================================================================================
</TABLE>


See accompanying notes to consolidated financial statements.





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<PAGE>   4
HANCOCK FABRICS, INC.
CONSOLIDATED STATEMENT OF EARNINGS
(unaudited)

<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------------------
(in thousands, except
  per share amounts)                                     Thirteen Weeks Ended                        Twenty-six Weeks Ended
                                                  -----------------------------------------------------------------------------
                                                    August 2,            August 3,               August 2,            August 3,
                                                      1998                 1997                    1998                 1997
-------------------------------------------------------------------------------------------------------------------------------
<S>                                                 <C>                  <C>                     <C>                  <C>        
Sales                                                $85,372              $79,954                $183,168             $171,954
Cost of goods sold                                    43,650               39,881                  94,289               88,431
-------------------------------------------------------------------------------------------------------------------------------

  Gross profit                                        41,722               40,073                  88,879               83,523
-------------------------------------------------------------------------------------------------------------------------------

Expenses (income)
  Selling, general and administrative                 39,794               36,543                  82,572               75,345
  Depreciation and amortization                          974                  812                   1,907                1,673
  Interest expense                                       304                   49                     480                   95
  Interest income                                        (40)                 (70)                    (77)                (132)
-------------------------------------------------------------------------------------------------------------------------------
  Total operating and interest expenses               41,032               37,334                  84,882               76,981
-------------------------------------------------------------------------------------------------------------------------------

Earnings before taxes                                    690                2,739                   3,997                6,542
Income taxes                                             248                1,050                   1,448                2,514
-------------------------------------------------------------------------------------------------------------------------------

Net earnings                                         $   442              $ 1,689                $  2,549             $  4,028
===============================================================================================================================

Earnings per share
     Basic                                           $  0.02              $  0.08                $   0.12             $   0.19
     Diluted                                         $  0.02              $  0.08                $   0.12             $   0.19

===============================================================================================================================

Weighted average shares outstanding
     Basic                                            20,299               21,042                  20,456               21,012
     Diluted                                          20,595               21,512                  20,871               21,457

===============================================================================================================================

Dividends per share                                  $  0.10              $  0.08                $   0.20             $   0.16
===============================================================================================================================
</TABLE>


See accompanying notes to consolidated financial statements.








                                      -4-
<PAGE>   5
HANCOCK FABRICS, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(unaudited)

<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------
(in thousands, except for                                                                                      
  number of shares)                                    Common Stock               Additional                   
                                             ------------------------------        Paid-in        Retained     
                                                 Shares            Amount          Capital        Earnings     
<S>                                            <C>                 <C>            <C>             <C>                   
---------------------------------------------------------------------------------------------------------------
Twenty-six weeks

---------------------------------------------------------------------------------------------------------------

Balance February 1, 1998                        28,253,013             $283         $31,382        $178,643    
Net earnings                                                                                          2,549    
Cash dividend - $.10 per
 share on a quarterly basis                                                                          (4,183)   
Exercise of stock options                          202,250                1           1,705                    
Restricted stock transactions                       88,750                1           1,348                    
Amortization and vesting of deferred
 compensation on restricted stock
 incentive plan                                                                         605                    
Issuance of shares under directors'
 stock plan                                          5,013                               72                    
Purchase of treasury stock                                                                                     

---------------------------------------------------------------------------------------------------------------

Balance August 2, 1998                          28,549,026             $285         $35,112        $177,009    
===============================================================================================================


<CAPTION>
-----------------------------------------------------------------------------------------------------------
(in thousands, except for                                                                 
  number of shares)                                 Treasury Stock            Deferred            Total  
                                           ---------------------------------    Com-          Shareholders'
                                               Shares          Amount         pensation          Equity
<S>                                         <C>                <C>            <C>             <C>
-----------------------------------------------------------------------------------------------------------
Twenty-six weeks

-----------------------------------------------------------------------------------------------------------

Balance February 1, 1998                     (7,139,074)      $ (99,047)       $ (4,570)          $106,691
Net earnings                                                                                         2,549
Cash dividend - $.10 per
 share on a quarterly basis                                                                         (4,183)
Exercise of stock options                                                                            1,706
Restricted stock transactions                                                    (1,349)                 0
Amortization and vesting of deferred
 compensation on restricted stock
 incentive plan                                                                     676              1,281
Issuance of shares under directors'
 stock plan                                                                                             72
Purchase of treasury stock                     (934,944)        (12,585)                           (12,585)

-----------------------------------------------------------------------------------------------------------

Balance August 2, 1998                       (8,074,018)      $(111,632)       $ (5,243)          $ 95,531
===========================================================================================================
</TABLE>



See accompanying notes to consolidated financial statements.







                                      -5-
<PAGE>   6
HANCOCK FABRICS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(unaudited)

<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------
(in thousands)

                                                                                         Twenty-six Weeks Ended
                                                                                ------------------------------------
                                                                                     August 2,             August 3,
                                                                                        1998                 1997
--------------------------------------------------------------------------------------------------------------------
<S>                                                                                  <C>                   <C>
Cash flows from operating activities:
  Net earnings                                                                        $  2,549              $ 4,028
  Adjustments to reconcile net earnings to cash
   provided by operating activities
    Depreciation and amortization                                                        1,907                1,673
    LIFO charge (credit)                                                                  (400)                 500
    Deferred income taxes                                                                  218                    3
    Amortization of deferred compensation on
     restricted stock incentive plan                                                       676                  597
    (Increase) decrease in assets
      Receivables and prepaid expenses                                                      12               (1,849)
      Inventory reduction (growth) at current cost                                      (6,348)               3,931
      Other noncurrent assets                                                             (747)                 120
    Increase (decrease) in liabilities
      Accounts payable                                                                   1,195               (3,390)
      Accrued liabilities                                                               (1,048)              (1,334)
      Current income tax obligations                                                    (1,357)              (3,285)
      Postretirement benefits other than pensions                                          280                  428
      Other liabilities                                                                    111                  338

--------------------------------------------------------------------------------------------------------------------
     Net cash provided by (used in) operating activities                                (2,952)               1,760

--------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
  Additions to property and equipment                                                   (3,311)                (974)
  Dispositions of property and equipment                                                    58                  346
  Other                                                                                 (1,157)                   0

--------------------------------------------------------------------------------------------------------------------
     Net cash used in investing activities                                              (4,410)                (628)

--------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
  Long-term debt borrowing                                                              22,000                2,000
  Purchase of treasury stock                                                           (12,585)              (3,020)
  Proceeds from exercise of stock options                                                1,706                2,123
  Shares issued under director's stock plan                                                 72                   78
  Cash dividends paid                                                                   (4,183)              (3,452)

--------------------------------------------------------------------------------------------------------------------
     Net cash used in (provided by) financing activities                                 7,010               (2,271)

--------------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents                                          (352)              (1,139)

Cash and cash equivalents:
  Beginning of period                                                                    7,057                6,870
--------------------------------------------------------------------------------------------------------------------

  End of period                                                                       $  6,705              $ 5,731
====================================================================================================================

Supplemental disclosures:
  Cash paid during the period for:
    Interest                                                                          $    229              $    42
    Income taxes                                                                      $  2,422              $ 5,956
====================================================================================================================
</TABLE>

See accompanying notes to consolidated financial statements.





                                      -6-
<PAGE>   7






HANCOCK FABRICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

-------------------------------------------------------------------------------
NOTE 1:  BASIS OF PRESENTATION
-------------------------------------------------------------------------------

The accompanying unaudited consolidated financial statements have been prepared
in accordance with the instructions to Form 10-Q and therefore do not include
all information and footnotes necessary for a fair presentation of financial
position, results of operations and cash flows in conformity with generally
accepted accounting principles. The statements do reflect all adjustments
(consisting of only normal recurring accruals) which are, in the opinion of
management, necessary for a fair presentation of financial position in
conformity with generally accepted accounting principles. The statements should
be read in conjunction with the Notes to the Consolidated Financial Statements
for the fiscal year ended February 1, 1998 incorporated into the Company's
Annual Report on Form 10-K.

The results of operations for the thirteen and twenty-six week periods are not
necessarily indicative of the results to be expected for the full fiscal year.


-------------------------------------------------------------------------------
NOTE 2:  EARNINGS PER SHARE
-------------------------------------------------------------------------------

Earnings per share is calculated in accordance with Statement of Financial
Accounting Standards No. 128 "Earnings per Share," which requires the
presentation of basic and diluted earnings per share. Basic earnings per share
is computed by dividing income available to common shareholders by the
weighted-average number of common shares outstanding during the period. Diluted
earnings per share reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or converted
into common stock or resulted in the issuance of common stock that then shared
in the earnings of the Company.



                                       -7-


<PAGE>   8



HANCOCK FABRICS, INC.
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
 CONDITION AND RESULTS OF OPERATIONS

FINANCIAL CONDITION

Historically, cash flow from operations has been sufficient to finance the
expansion and operation of Hancock's business. Hancock's principal capital
requirements are for the financing of inventories and to a lesser extent for
capital expenditures relating to store locations and its warehouse and
distribution facility. Funds for such purposes are generated from Hancock's
operations and, if necessary, supplemented by borrowings from commercial
lenders. In addition to cash dividends, Hancock has historically used excess
cash and, if necessary, borrowings from commercial lenders to purchase treasury
stock as market and financial conditions dictate. During 1998, Hancock plans to
open approximately 25 units and close approximately 25. Hancock opened 4 stores
and closed 14 stores during the thirteen weeks ended August 2, 1998 resulting in
a total of 470 stores at period end.

During the twenty-six weeks ended August 2, 1998 total inventory increased $6.3
million due to seasonal factors, and cash was used to fund $12.6 million of
treasury stock repurchases and a dividend payment totaling $4.2 million. At
August 2, 1998, the Company had $32 million in outstanding debt, or about 25% of
total capitalization, compared to $10 million in outstanding debt at the end of
last year.

RESULTS OF OPERATIONS

Thirteen weeks ended August 2, 1998 compared to thirteen weeks ended
August 3, 1997

Net earnings were $442 thousand, or $.02 per share, compared with $1.7 million,
or $.08 per share, in the comparable period of the prior year. The decrease in
earnings resulted from lower gross margins and higher operating and interest
expenses.

Sales increased to $85.4 million from $80.0 million in the same period of the
prior year due to $9.2 million of sales from the recently acquired Northwest
Fabrics and Crafts stores, partially offset by a decrease of 2% in comparable
store sales and a $2.2 million reduction in sales from net store opening and
closing activity.

Gross margin decreased to 48.9% from 50.1% due to higher markdowns on seasonal
goods. There were no adjustments for LIFO in either period.




                                       -8-



<PAGE>   9



Operating expenses as a percentage of sales increased to 46.6% from 45.7% in the
second quarter of 1997 primarily due to an aggressive store remodeling program
and the decline in comparable store sales.

Interest expense was higher due to an increase in debt as the result of seasonal
increases in inventory, capital expenditures and treasury stock repurchases.

Twenty-six weeks ended August 2, 1998 compared to twenty-six weeks ended August
3, 1997

Net earnings were $2.5 million, or $.12 per share, compared to $4.0 million, or
$.19 per share, in the comparable period of the prior year. The decrease was
primarily due to higher operating and interest expenses.

Sales were $183.2 million, a 6.5% increase over the same period of the prior
year, due to $19.6 million of sales from the Northwest Fabrics and Crafts
stores, acquired in the fourth quarter of 1997, partially offset by the decrease
of 2% in comparable store sales and a $5.2 million reduction in sales from net
store opening and closing activity.

Gross margin decreased slightly to 48.5% in the twenty-six weeks of 1998 from
48.6% in the comparable period of 1997. The effect of LIFO for the twenty-six
weeks ended August 2, 1998 was to increase gross profit by $400 thousand
compared with a decrease in gross profit of $500 thousand in the period ended
August 3, 1997.

Operating expenses as a percentage of sales increased to 45.1% from 43.8% for
the same period of the prior year primarily due to an aggressive store
remodeling program and lower same store sales.

Interest expense was higher due to the increase in debt, which resulted from
seasonal increases in inventory, capital expenditures and treasury stock
repurchases.

EFFECT OF INFLATION

The impact of inflation on labor and occupancy costs can significantly affect
Hancock's operations. Many of Hancock's employees are paid hourly rates related
to the Federal minimum wage; accordingly, any increases will affect Hancock. In
addition, payroll taxes, employee benefits and other employee related costs
continue to increase. Costs of leases for new store locations remain stable, but
renewal costs of older leases continue to increase. Taxes, maintenance and
insurance costs have also risen. Hancock believes the practice of maintaining
adequate operating margins through a combination of price adjustments and cost
controls, careful evaluation of occupancy needs and efficient purchasing
practices is the most effective tool for coping with increasing costs and
expenses.

Inflation is one of the key factors used in the calculation of the LIFO charge
or credit to Cost of Goods Sold. A deflationary trend in recent quarters has
caused lower LIFO charges than in comparable periods of the prior year.



                                       -9-



<PAGE>   10



SEASONALITY


The Company's business is slightly seasonal. Peak sales periods occur during the
fall and pre-Easter weeks, while the lowest sales periods occur during
pre-Christmas and mid-summer.

YEAR 2000 IMPACT

Hancock recognizes the potential impact that the year 2000 issue may have
relative to its computer systems and has implemented an action plan to ensure
that all systems will be fully year 2000 compliant. The action plan includes a
combination of modifications that have been or will be completed internally or
through software upgrades from Hancock's software vendors. Modifications for all
systems are in various stages of completion. Some modifications have been fully
implemented and satisfactorily tested, while others are in lesser stages of
completion. Hancock is confident that all systems will be appropriately modified
in a timely manner to handle the turn of the century computer issues and the
related costs of compliance will not have a material impact on its financial
condition or results of operation.

Hancock has also communicated with all its significant merchandise suppliers and
service providers to determine the extent to which Hancock is vulnerable to
those third parties to remediate their own year 2000 issues. Although the
failure by other companies to timely convert their systems would have an
insignificant impact on Hancock's systems (because of limited interface), there
can be no assurance that such failure would not impair these companies' ability
to supply Hancock with merchandise or service on a timely basis.

RECENT FINANCIAL ACCOUNTING STANDARDS BOARD STATEMENTS

In June 1997, the Financial Accounting Standards Board ("FASB") issued Statement
of Accounting Standards ("FAS") No. 130, "Reporting Comprehensive Income," FAS
130 establishes standards for the report and display of comprehensive income and
its components (revenues, expenses, gains, and losses) in a full set of general
purpose financial statements. FAS 130 requires that an enterprise (I) classify
items of other comprehensive income by their nature in a financial statement and
(ii) display the accumulated balance of other comprehensive income separately
from retained earnings and additional paid-in capital. FAS 130 is effective for
fiscal years beginning after December 15, 1997. As the Company does not have any
items of other comprehensive income, the new standard does not impact the
Company.



                                      -10-




<PAGE>   11



In June 1997, the FASB issued FAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information," FAS 131 established standards for reporting
information about operating segments in annual financial statements and requires
reporting of selected information about operating segments in interim financial
reports issued to shareholders. FAS 131 also establishes standards for related
disclosure about products and services, geographic areas, and major customers.
FAS 131 is effective for financial statements for periods beginning after
December 15, 1997, and requires the restatement of disclosures for earlier
periods for comprehensive purposes unless the information is not readily
available, in which case a description of unavailable information is required.
As the Company operates in only one segment, the adoption of this standard had
no impact.

FORWARD-LOOKING STATEMENTS


The Private Securities Litigation Reform Act of 1995 provides a "safe harbor"
for certain qualifying forward-looking statements. Certain information included
in this Form 10-Q contains statements that are forward-looking, such as
statements related to financial items and results, plans for future expansion,
store closure and other business development activities, capital spending or
financing sources, capital structure, stability of interest rates during periods
of borrowings and the effects of regulation and competition. Such
forward-looking information involves important risks and uncertainties that
could significantly impact anticipated results in the future. Accordingly, such
results may differ materially from those expressed in any forward-looking
statements by or on behalf of Hancock. These risks and uncertainties include,
but are not limited to, those described above.




                                      -11-





<PAGE>   12






                       PART II.  OTHER INFORMATION

HANCOCK FABRICS, INC.
-------------------------------------------------------------------------------



Item 6. Exhibits and Reports of Form 8-K

    (a) Exhibits -

        11    Statement regarding computation of earnings per share
       
        27    Financial Data Schedule (SEC Use Only)

    (b) Reports on Form 8-K -
        None








                                      -12-




<PAGE>   13




HANCOCK FABRICS, INC.
SIGNATURE

-------------------------------------------------------------------------------

Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.



                                         HANCOCK FABRICS, INC.
                                             (Registrant)


                                         By: /s/ Bruce D. Smith
                                            --------------------------------
                                            Bruce D. Smith
                                            Senior Vice President and
                                            Chief Financial Officer
                                            (Principal Financial and
                                            Accounting Officer)

Date: September 16, 1998




                                      -13-