UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C.  20549





FORM
10-Q





x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE


SECURITIES
EXCHANGE ACT OF 1934





For
the quarterly period ended October 30, 2010





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
              (I.R.S.
      Employerof
      incorporation or organization)
              Identification
      No.)One
      Fashion Way, Baldwyn, MS
              38824(Address
      of principal executive offices)
              (Zip
      Code)





(662)
365-6000


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
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files). Yes  ̈
    No  ̈





Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting
company.  See the definitions of “large accelerated filer,”
“accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act.





Large
      Accelerated Filer  ̈
              Accelerated
      Filer ̈Non-Accelerated
      Filer  ̈
              Smaller
      Reporting Company x





Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).


Yes  ̈
    No x





Indicate
by check mark whether the registrant has filed all documents and reports
required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act
of 1934 subsequent to the distribution of securities under a plan confirmed by a
court. Yes x
    No  ̈





As of
December 6, 2010, there were 20,031,710, shares of Hancock Fabrics, Inc. $.01
par value common stock outstanding.





Hancock
Fabrics, Inc.,


INDEX
TO FORM 10-Q





PagePart I.  Financial
      InformationItem
      1.  Financial StatementsConsolidated
      Balance Sheets as of October 30, 2010, October 31, 2009 and January 30,
      2010
                                  
                                  3Consolidated
      Statements of Operations for the Thirteen and Thirty-nine Weeks Ended
      October 30, 2010 and October 31, 2009
                                  
                                  4Consolidated
      Statement of Shareholders’ Equity for the Thirty-nine Weeks Ended October
      30, 2010
                                  
                                  5Consolidated
      Statements of Cash Flows for the Thirty-nine Weeks Ended October 30, 2010
      and October 31, 2009
                                  
                                  6Notes
      to Consolidated Financial Statements
                                  
                                  7Item
      2.  Management’s Discussion and Analysis of Financial Condition
      and Results of Operations
                                  
                                  12Item
      3.  Quantitative and Qualitative Disclosures about Market
      Risks
                                  
                                  20Item
      4.  Controls and Procedures
                                  
                                  20Part II.  Other
      InformationItem
      1. Legal Proceedings
                                  
                                  21Item
      1A. Risk Factors
                                  
                                  21Item
      2. Unregistered Sales of Equity Securities and Use of
    Proceeds
                                  
                                  21Item
      3. Defaults Upon Senior Securities
                                  
                                  21Item
      5. Other Information
                                  
                                  21Item
      6. Exhibits
                                  
                                  22Signatures
                                  
                                  22Exhibit
      Index
                                  
                                  23




2


PART
I. FINANCIAL INFORMATION




ITEM
1. CONDENSED FINANCIAL STATEMENTS




HANCOCK
FABRICS, INC.


CONSOLIDATED
BALANCE SHEETS





(unaudited)October 30,
                                                                    
                                                                    
                                                                    October 31,
                                                                    
                                                                    
                                                                    January 30,(in thousands, except for share amounts)
                                                                    
                                                                    2010
                                                                    
                                                                    
                                                                    2009
                                                                    
                                                                    
                                                                    2010(1)AssetsCurrent
      assets:Cash
      and cash equivalents
                                                                    
                                                                    $
                                                                    3,702
                                                                    
                                                                    
                                                                    $
                                                                    4,265
                                                                    
                                                                    
                                                                    $
                                                                    2,493Receivables,
      less allowance for doubtful accounts
                                                                    
                                                                    
                                                                    3,412
                                                                    
                                                                    
                                                                    
                                                                    3,952
                                                                    
                                                                    
                                                                    
                                                                    3,469Inventories
                                                                    
                                                                    
                                                                    106,328
                                                                    
                                                                    
                                                                    
                                                                    103,864
                                                                    
                                                                    
                                                                    
                                                                    91,495Prepaid
      expenses
                                                                    
                                                                    
                                                                    2,794
                                                                    
                                                                    
                                                                    
                                                                    2,269
                                                                    
                                                                    
                                                                    
                                                                    1,485Total
      current assets
                                                                    
                                                                    
                                                                    116,236
                                                                    
                                                                    
                                                                    
                                                                    114,350
                                                                    
                                                                    
                                                                    
                                                                    98,942Property
      and equipment, net
                                                                    
                                                                    
                                                                    42,047
                                                                    
                                                                    
                                                                    
                                                                    42,758
                                                                    
                                                                    
                                                                    
                                                                    41,687Goodwill
                                                                    
                                                                    
                                                                    3,210
                                                                    
                                                                    
                                                                    
                                                                    3,210
                                                                    
                                                                    
                                                                    
                                                                    3,210Other
      assets
                                                                    
                                                                    
                                                                    2,330
                                                                    
                                                                    
                                                                    
                                                                    5,131
                                                                    
                                                                    
                                                                    
                                                                    4,707Total
      assets
                                                                    
                                                                    $
                                                                    163,823
                                                                    
                                                                    
                                                                    $
                                                                    165,449
                                                                    
                                                                    
                                                                    $
                                                                    148,546Liabilities
      and Shareholders' EquityCurrent
      liabilities:Accounts
      payable
                                                                    
                                                                    $
                                                                    28,462
                                                                    
                                                                    
                                                                    $
                                                                    25,838
                                                                    
                                                                    
                                                                    $
                                                                    18,638Accrued
      liabilities
                                                                    
                                                                    
                                                                    12,776
                                                                    
                                                                    
                                                                    
                                                                    15,840
                                                                    
                                                                    
                                                                    
                                                                    15,113Pre-petition
      obligations
                                                                    
                                                                    
                                                                    730
                                                                    
                                                                    
                                                                    
                                                                    1,744
                                                                    
                                                                    
                                                                    
                                                                    1,193Total
      current liabilities
                                                                    
                                                                    
                                                                    41,968
                                                                    
                                                                    
                                                                    
                                                                    43,422
                                                                    
                                                                    
                                                                    
                                                                    34,944Long-term
      debt obligations, net
                                                                    
                                                                    
                                                                    35,039
                                                                    
                                                                    
                                                                    
                                                                    37,821
                                                                    
                                                                    
                                                                    
                                                                    26,942Capital
      lease obligations
                                                                    
                                                                    
                                                                    3,103
                                                                    
                                                                    
                                                                    
                                                                    3,209
                                                                    
                                                                    
                                                                    
                                                                    3,184Postretirement
      benefits other than pensions
                                                                    
                                                                    
                                                                    2,262
                                                                    
                                                                    
                                                                    
                                                                    2,270
                                                                    
                                                                    
                                                                    
                                                                    2,150Pension
      and SERP liabilities
                                                                    
                                                                    
                                                                    27,848
                                                                    
                                                                    
                                                                    
                                                                    23,227
                                                                    
                                                                    
                                                                    
                                                                    27,017Other
      liabilities
                                                                    
                                                                    
                                                                    6,731
                                                                    
                                                                    
                                                                    
                                                                    7,678
                                                                    
                                                                    
                                                                    
                                                                    7,097Total
      liabilities
                                                                    
                                                                    
                                                                    116,951
                                                                    
                                                                    
                                                                    
                                                                    117,627
                                                                    
                                                                    
                                                                    
                                                                    101,334Commitments
      and contingenciesShareholders'
      equity:Common
      stock, $.01 par value; 80,000,000 shares authorized;33,449,125, 33,193,070
      and  33,283,944 issued and 20,051,861,19,811,306  and
      19,902,148 outstanding, respectively
                                                                    
                                                                    
                                                                    334
                                                                    
                                                                    
                                                                    
                                                                    332
                                                                    
                                                                    
                                                                    
                                                                    333Additional
      paid-in capital
                                                                    
                                                                    
                                                                    89,581
                                                                    
                                                                    
                                                                    
                                                                    88,780
                                                                    
                                                                    
                                                                    
                                                                    89,128Retained
      earnings
                                                                    
                                                                    
                                                                    125,997
                                                                    
                                                                    
                                                                    
                                                                    124,780
                                                                    
                                                                    
                                                                    
                                                                    126,695Treasury
      stock, at cost, 13,397,264, 13,381,764and 13,381,796 shares held,
      respectively
                                                                    
                                                                    
                                                                    (153,730
                                                                    )
                                                                    
                                                                    
                                                                    (153,698
                                                                    )
                                                                    
                                                                    
                                                                    (153,698
                                                                    )Accumulated
      other comprehensive loss
                                                                    
                                                                    
                                                                    (15,310
                                                                    )
                                                                    
                                                                    
                                                                    (12,372
                                                                    )
                                                                    
                                                                    
                                                                    (15,246
                                                                    )Total
      shareholders' equity
                                                                    
                                                                    
                                                                    46,872
                                                                    
                                                                    
                                                                    
                                                                    47,822
                                                                    
                                                                    
                                                                    
                                                                    47,212Total
      liabilities and shareholders' equity
                                                                    
                                                                    $
                                                                    163,823
                                                                    
                                                                    
                                                                    $
                                                                    165,449
                                                                    
                                                                    
                                                                    $
                                                                    148,546





See
accompanying notes to consolidated financial statements.




(1) From
audited balance sheet included in our annual report on Form 10-K for the fiscal
year ended January 30, 2010.


3


HANCOCK
FABRICS, INC.


CONSOLIDATED
STATEMENTS OF OPERATIONS


(unaudited)





Thirteen Weeks Ended
                                                                                      
                                                                                      
                                                                                      Thirty-nine Weeks EndedOctober 30,
                                                                                      
                                                                                      
                                                                                      October 31,
                                                                                      
                                                                                      
                                                                                      October 30,
                                                                                      
                                                                                      
                                                                                      October 31,(in thousands, except per share amounts)
                                                                                      
                                                                                      2010
                                                                                      
                                                                                      
                                                                                      2009
                                                                                      
                                                                                      
                                                                                      2010
                                                                                      
                                                                                      
                                                                                      2009Sales
                                                                                      
                                                                                      $
                                                                                      73,454
                                                                                      
                                                                                      
                                                                                      $
                                                                                      72,730
                                                                                      
                                                                                      
                                                                                      $
                                                                                      197,012
                                                                                      
                                                                                      
                                                                                      $
                                                                                      196,380Cost
      of goods sold
                                                                                      
                                                                                      
                                                                                      41,236
                                                                                      
                                                                                      
                                                                                      
                                                                                      38,946
                                                                                      
                                                                                      
                                                                                      
                                                                                      108,202
                                                                                      
                                                                                      
                                                                                      
                                                                                      106,368Gross
      profit
                                                                                      
                                                                                      
                                                                                      32,218
                                                                                      
                                                                                      
                                                                                      
                                                                                      33,784
                                                                                      
                                                                                      
                                                                                      
                                                                                      88,810
                                                                                      
                                                                                      
                                                                                      
                                                                                      90,012Selling,
      general and administrative expense
                                                                                      
                                                                                      
                                                                                      28,254
                                                                                      
                                                                                      
                                                                                      
                                                                                      28,211
                                                                                      
                                                                                      
                                                                                      
                                                                                      82,070
                                                                                      
                                                                                      
                                                                                      
                                                                                      82,311Depreciation
      and amortization
                                                                                      
                                                                                      
                                                                                      1,144
                                                                                      
                                                                                      
                                                                                      
                                                                                      1,064
                                                                                      
                                                                                      
                                                                                      
                                                                                      3,313
                                                                                      
                                                                                      
                                                                                      
                                                                                      3,280Operating
      income
                                                                                      
                                                                                      
                                                                                      2,820
                                                                                      
                                                                                      
                                                                                      
                                                                                      4,509
                                                                                      
                                                                                      
                                                                                      
                                                                                      3,427
                                                                                      
                                                                                      
                                                                                      
                                                                                      4,421Reorganization
      expense, net
                                                                                      
                                                                                      
                                                                                      131
                                                                                      
                                                                                      
                                                                                      
                                                                                      182
                                                                                      
                                                                                      
                                                                                      
                                                                                      485
                                                                                      
                                                                                      
                                                                                      
                                                                                      592Interest
      expense, net
                                                                                      
                                                                                      
                                                                                      1,329
                                                                                      
                                                                                      
                                                                                      
                                                                                      1,234
                                                                                      
                                                                                      
                                                                                      
                                                                                      3,669
                                                                                      
                                                                                      
                                                                                      
                                                                                      3,944Income
      (loss) from continuing operations before income taxes
                                                                                      
                                                                                      
                                                                                      1,360
                                                                                      
                                                                                      
                                                                                      
                                                                                      3,093
                                                                                      
                                                                                      
                                                                                      
                                                                                      (727
                                                                                      )
                                                                                      
                                                                                      
                                                                                      (115
                                                                                      )Income
      taxes
                                                                                      
                                                                                      
                                                                                      -
                                                                                      
                                                                                      
                                                                                      
                                                                                      64
                                                                                      
                                                                                      
                                                                                      
                                                                                      -
                                                                                      
                                                                                      
                                                                                      
                                                                                      64Income
      (loss) from continuing operations
                                                                                      
                                                                                      
                                                                                      1,360
                                                                                      
                                                                                      
                                                                                      
                                                                                      3,029
                                                                                      
                                                                                      
                                                                                      
                                                                                      (727
                                                                                      )
                                                                                      
                                                                                      
                                                                                      (179
                                                                                      )Earnings
      from discontinued operations (net of tax expense of $0, $0, $0 and
      $0)
                                                                                      
                                                                                      
                                                                                      -
                                                                                      
                                                                                      
                                                                                      
                                                                                      3
                                                                                      
                                                                                      
                                                                                      
                                                                                      29
                                                                                      
                                                                                      
                                                                                      
                                                                                      52Net
      income (loss)
                                                                                      
                                                                                      $
                                                                                      1,360
                                                                                      
                                                                                      
                                                                                      $
                                                                                      3,032
                                                                                      
                                                                                      
                                                                                      $
                                                                                      (698
                                                                                      )
                                                                                      
                                                                                      $
                                                                                      (127
                                                                                      )Basic
      income (loss) per share:Income
      (loss) from continuing operations
                                                                                      
                                                                                      $
                                                                                      0.07
                                                                                      
                                                                                      
                                                                                      $
                                                                                      0.16
                                                                                      
                                                                                      
                                                                                      $
                                                                                      (0.04
                                                                                      )
                                                                                      
                                                                                      $
                                                                                      (0.01
                                                                                      )Earnings
      from discontinued operations
                                                                                      
                                                                                      
                                                                                      -
                                                                                      
                                                                                      
                                                                                      
                                                                                      -
                                                                                      
                                                                                      
                                                                                      
                                                                                      -
                                                                                      
                                                                                      
                                                                                      
                                                                                      -Net
      income (loss)
                                                                                      
                                                                                      $
                                                                                      0.07
                                                                                      
                                                                                      
                                                                                      $
                                                                                      0.16
                                                                                      
                                                                                      
                                                                                      $
                                                                                      (0.04
                                                                                      )
                                                                                      
                                                                                      $
                                                                                      (0.01
                                                                                      )Diluted
      income (loss) per share:Income
      (loss) from continuing operations
                                                                                      
                                                                                      $
                                                                                      0.06
                                                                                      
                                                                                      
                                                                                      $
                                                                                      0.15
                                                                                      
                                                                                      
                                                                                      $
                                                                                      (0.04
                                                                                      )
                                                                                      
                                                                                      $
                                                                                      (0.01
                                                                                      )Earnings
      from discontinued operations
                                                                                      
                                                                                      
                                                                                      -
                                                                                      
                                                                                      
                                                                                      
                                                                                      -
                                                                                      
                                                                                      
                                                                                      
                                                                                      -
                                                                                      
                                                                                      
                                                                                      
                                                                                      -Net
      income (loss)
                                                                                      
                                                                                      $
                                                                                      0.06
                                                                                      
                                                                                      
                                                                                      $
                                                                                      0.15
                                                                                      
                                                                                      
                                                                                      $
                                                                                      (0.04
                                                                                      )
                                                                                      
                                                                                      $
                                                                                      (0.01
                                                                                      )Weighted
      average shares outstanding:Basic
                                                                                      
                                                                                      
                                                                                      19,739
                                                                                      
                                                                                      
                                                                                      
                                                                                      19,427
                                                                                      
                                                                                      
                                                                                      
                                                                                      19,676
                                                                                      
                                                                                      
                                                                                      
                                                                                      19,306Diluted
                                                                                      
                                                                                      
                                                                                      22,327
                                                                                      
                                                                                      
                                                                                      
                                                                                      20,128
                                                                                      
                                                                                      
                                                                                      
                                                                                      19,676
                                                                                      
                                                                                      
                                                                                      
                                                                                      19,306





See
accompanying notes to consolidated financial statements.


4


HANCOCK FABRICS, INC.


CONSOLIDATED
STATEMENT OF SHAREHOLDERS' EQUITY


(unaudited)





AccumulatedAdditional
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      Other
                                      
                                      
                                      TotalCommon Stock
                                      
                                      
                                      Paid-in
                                      
                                      
                                      Retained
                                      
                                      
                                      Treasury Stock
                                      
                                      
                                      Comprehensive
                                      
                                      
                                      Shareholders'(in thousands, except for number of shares)
                                      
                                      Shares
                                      
                                      
                                      Amount
                                      
                                      
                                      Capital
                                      
                                      
                                      Earnings
                                      
                                      
                                      Shares
                                      
                                      
                                      Amount
                                      
                                      
                                      Loss
                                      
                                      
                                      EquityBalance January 30, 2010
                                      
                                      
                                      33,283,944
                                      
                                      
                                      $
                                      333
                                      
                                      
                                      $
                                      89,128
                                      
                                      
                                      $
                                      126,695
                                      
                                      
                                      
                                      (13,381,796
                                      )
                                      
                                      $
                                      (153,698
                                      )
                                      
                                      $
                                      (15,246
                                      )
                                      
                                      $
                                      47,212Comprehensive
      loss:Net
      loss
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      (698
                                      )
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      (698
                                      )Minimum
      pension, SERP and OPEB  liabilities, net of taxes of
      $0
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      (64
                                      )
                                      
                                      
                                      (64
                                      )Total
      comprehensive loss
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      (762
                                      )Stock
      options exercised
                                      
                                      
                                      10,181
                                      
                                      
                                      
                                      1
                                      
                                      
                                      
                                      14
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      15Issuance
      of restricted stock
                                      
                                      
                                      155,000
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      -Stock
      compensation expense
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      297
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      297Amortization
      of directors' stock fees
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      142
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      142Purchase
      of treasury stock
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      (15,468
                                      )
                                      
                                      
                                      (32
                                      )
                                      
                                      
                                      
                                      
                                      
                                      
                                      (32
                                      )Balance
      October 30, 2010
                                      
                                      
                                      33,449,125
                                      
                                      
                                      $
                                      334
                                      
                                      
                                      $
                                      89,581
                                      
                                      
                                      $
                                      125,997
                                      
                                      
                                      
                                      (13,397,264
                                      )
                                      
                                      $
                                      (153,730
                                      )
                                      
                                      $
                                      (15,310
                                      )
                                      
                                      $
                                      46,872





See
accompanying notes to consolidated financial statements.


5


HANCOCK FABRICS, INC.


CONSOLIDATED
STATEMENT OF CASH FLOWS


(unaudited)





Thirty-nine Weeks EndedOctober 30,
                                                    
                                                    
                                                    October 31,(in thousands)
                                                    
                                                    2010
                                                    
                                                    
                                                    2009Cash flows from
      operating activities:Net
      loss
                                                    
                                                    $
                                                    (698
                                                    )
                                                    
                                                    $
                                                    (127
                                                    )Adjustments
      to reconcile net loss to cash flows from operating
    activitiesDepreciation
      and amortization, including cost of goods sold
                                                    
                                                    
                                                    4,887
                                                    
                                                    
                                                    
                                                    4,788Amortization
      of deferred loan costs
                                                    
                                                    
                                                    185
                                                    
                                                    
                                                    
                                                    185Amortization
      of bond discount
                                                    
                                                    
                                                    1,748
                                                    
                                                    
                                                    
                                                    1,748Interest
      paid-in-kind by issuance of notes payable
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    694Stock
      compensation expense
                                                    
                                                    
                                                    439
                                                    
                                                    
                                                    
                                                    764Reserve
      for store closings credits, including interest expense
                                                    
                                                    
                                                    (44
                                                    )
                                                    
                                                    
                                                    294Other
                                                    
                                                    
                                                    344
                                                    
                                                    
                                                    
                                                    (104
                                                    )Reorganization
      expense, net
                                                    
                                                    
                                                    485
                                                    
                                                    
                                                    
                                                    592(Increase)
      decrease in assetsReceivables
      and prepaid expenses
                                                    
                                                    
                                                    (1,252
                                                    )
                                                    
                                                    
                                                    (1,091
                                                    )Inventory
      at current cost
                                                    
                                                    
                                                    (14,989
                                                    )
                                                    
                                                    
                                                    323Other
      noncurrent assets
                                                    
                                                    
                                                    2,055
                                                    
                                                    
                                                    
                                                    (488
                                                    )Increase
      (decrease) in liabilitiesAccounts
      payable
                                                    
                                                    
                                                    9,685
                                                    
                                                    
                                                    
                                                    3,760Accrued
      liabilities
                                                    
                                                    
                                                    (2,270
                                                    )
                                                    
                                                    
                                                    1,063Postretirement
      benefits other than pensions
                                                    
                                                    
                                                    (684
                                                    )
                                                    
                                                    
                                                    (721
                                                    )Long-term
      pension and SERP liabilities
                                                    
                                                    
                                                    1,563
                                                    
                                                    
                                                    
                                                    2,151Other
      liabilities
                                                    
                                                    
                                                    (433
                                                    )
                                                    
                                                    
                                                    (292
                                                    )Net
      cash provided by operating activities before reorganization
      activities
                                                    
                                                    
                                                    1,021
                                                    
                                                    
                                                    
                                                    13,539Net
      cash used for reorganization activities
                                                    
                                                    
                                                    (558
                                                    )
                                                    
                                                    
                                                    (700
                                                    )Net
      cash provided by operating activities
                                                    
                                                    
                                                    463
                                                    
                                                    
                                                    
                                                    12,839Cash
      flows from investing activities:Additions
      to property and equipment
                                                    
                                                    
                                                    (5,209
                                                    )
                                                    
                                                    
                                                    (2,564
                                                    )Proceeds
      from the disposition of property and equipment
                                                    
                                                    
                                                    42
                                                    
                                                    
                                                    
                                                    12Net
      cash used in investing activities
                                                    
                                                    
                                                    (5,167
                                                    )
                                                    
                                                    
                                                    (2,552
                                                    )Cash
      flows from financing activities:Net
      borrowings (payments) on revolving credit facility
                                                    
                                                    
                                                    6,349
                                                    
                                                    
                                                    
                                                    (7,598
                                                    )Payments
      for pre-petition liabilities and other
                                                    
                                                    
                                                    (436
                                                    )
                                                    
                                                    
                                                    (762
                                                    )Net
      cash provided by (used in) financing activities
                                                    
                                                    
                                                    5,913
                                                    
                                                    
                                                    
                                                    (8,360
                                                    )Increase
      in cash and cash equivalents
                                                    
                                                    
                                                    1,209
                                                    
                                                    
                                                    
                                                    1,927Cash
      and cash equivalents:Beginning
      of period
                                                    
                                                    
                                                    2,493
                                                    
                                                    
                                                    
                                                    2,338End
      of period
                                                    
                                                    $
                                                    3,702
                                                    
                                                    
                                                    $
                                                    4,265Supplemental
      disclosures:Cash
      paid during the period for:Interest
                                                    
                                                    $
                                                    1,669
                                                    
                                                    
                                                    $
                                                    745Income
      taxes
                                                    
                                                    
                                                    350
                                                    
                                                    
                                                    
                                                    64Non-cash
      activities:Noncash
      change in funded status of benefit plans
                                                    
                                                    $
                                                    (64
                                                    )
                                                    
                                                    $
                                                    (150
                                                    )





See
accompanying notes to consolidated financial statements.


6


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)





NOTE 1 –  BUSINESS AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES





Organization





Hancock
Fabrics, Inc. (“Hancock” or the “Company”) is a specialty retailer committed to
nurturing creativity through a complete selection of fashion and home decorating
textiles, crafts, sewing accessories, needlecraft supplies and sewing machines.
As of October 30, 2010, Hancock operated 266 stores in 37 states and an internet
store under the domain name hancockfabrics.com. Hancock conducts business in one
operating business segment.





References
herein to “Hancock,” the “Company,” “Registrant,” “we,” “our” or “us” refer to
Hancock Fabrics, Inc. and its subsidiaries unless the context specifically
indicates otherwise. References herein to third quarter 2010 and third quarter
2009 are for the 13 week periods ended October 30, 2010 and October 31, 2009,
respectively. References to thirty-nine weeks 2010 or 2010, and thirty-nine
weeks 2009 or 2009 are for the 39 week periods ended October 30, 2010 and
October 31, 2009, respectively.





Basis
of Presentation





We
maintain our financial records on a 52-53 week fiscal year ending on the
Saturday closest to January 31.





The
accompanying unaudited Consolidated Financial Statements should be read in
conjunction with our audited Consolidated Financial Statements and accompanying
notes in our Annual Report on Form 10-K for the year ended January 30, 2010
filed with the U.S. Securities and Exchange Commission (“SEC”) on April 1,
2010. The accompanying (a) consolidated balance sheet as of January 30,
2010, which has been derived from audited financial statements, and
(b) unaudited consolidated financial statements have been prepared pursuant
to SEC Rule 10-01 of Regulation S-X. Certain information and note
disclosures normally included in annual financial statements prepared in
accordance with generally accepted accounting principles in the United States of
America (“GAAP”) have been condensed or omitted pursuant to those rules and
regulations, although we believe that the disclosures made are adequate to make
the information not misleading.





The
unaudited results of operations for the interim periods shown in these financial
statements are not necessarily indicative of operating results for the entire
year. In the opinion of management, the accompanying unaudited Consolidated
Financial Statements recognize all adjustments of a normal recurring nature
considered necessary to fairly state our consolidated financial position as of
October 30, 2010, and October 31, 2009, and our consolidated results of
operations and cash flows for the thirty-nine weeks ended October 30, 2010, and
October 31, 2009.





The
Consolidated Financial Statements have been prepared in accordance with
accounting principles generally accepted in the United States applicable to a
going concern. Except as otherwise disclosed, these principles assume that
assets will be realized and liabilities will be discharged in the ordinary
course of business.





Recently
Issued Accounting Standards





In
January 2010, the Financial Accounting Standards Board (FASB)
issued Accounting Standards Update (ASU) No. 2010-06, “Improving
Disclosures about Fair Value Measurements” an update to Accounting Standards
Codification (ASC) Topic 820, “Fair Value Measurements and Disclosures.” This
update requires an entity to: (i) disclose separately the amounts of
significant transfers in and out of Level 1 and Level 2 fair value measurements
and describe the reasons for the transfers and (ii) present separate
information for Level 3 activity pertaining to gross purchases, sales,
issuances, and settlements.  This update became effective for the Company
beginning the 13-month period ended May 1, 2010, except that the disclosure on
the roll forward activities for Level 3 fair value measurements will become
effective for the Company with the reporting period beginning fiscal year 2011.
Other than requiring additional disclosures, adoption of this new guidance did
not have a material impact on the Company’s Consolidated Financial
Statements.


7


The FASB
issued ASU 2010-12 (ASU), which codifies an SEC Staff Announcement relating to
accounting for the Health Care and Education Reconciliation Act of 2010 and the
Patient Protection and Affordable Care Act under ASC 740, “Income Taxes.”
Management completed its assessment and adoption of ASU 2010-12 in the first
quarter of 2010, and determined it has no impact on the Company.





Several
other new accounting standards became effective during the periods presented or
will be effective subsequent to October 30, 2010. None of these new standards
had or is expected to have a significant impact on the Company’s Consolidated
Financial Statements.





NOTE 2 – PROCEEDINGS UNDER CHAPTER 11 AND
RELATED FINANCINGS





On March
21, 2007, the Company filed a voluntary petition for reorganization under
Chapter 11 of the United States Bankruptcy Code, in the United States Bankruptcy
Court for the District of Delaware. On August 1, 2008 (the “Effective Date”),
the Company’s Plan of Reorganization (the “Plan”) became effective and the
Company emerged from bankruptcy protection. On August 17, 2010 the Final Decree
was approved by the United State Bankruptcy Court closing the bankruptcy case of
the Company.





As of the
Effective Date, in general and except as otherwise provided under the Plan, the
Company was discharged and released from all claims and interests in accordance
with the Plan.  The Plan provided for payment in full in cash plus
interest, as applicable, or reinstatement of allowed administrative, secured,
priority, and general unsecured claims in addition to the retention of ownership
by holders of equity interest in the Company.  Therefore, there were
no impaired classes of creditors or stockholders.





FASB ASC
852, “Reorganizations” (“ASC 852”), provides financial reporting guidance for
entities that are reorganizing under the United States Bankruptcy Code. The
Company implemented this guidance for all periods presented.  Pursuant
to ASC 852, estimated claims were presented as Liabilities Subject to Compromise
due to the uncertainty of the eventual settlement amount.  Due to the
Plan becoming effective and the claims reconciliation process being
substantially complete, there is little uncertainty as to the total amount to be
distributed under the Plan.  Therefore, after the Effective Date,
pre-petition liabilities are no longer presented as Liabilities Subject to
Compromise.





Pre-petition
obligations (in thousands):





October 30,
                                  
                                  
                                  October 31,
                                  
                                  
                                  January 30,2010
                                  
                                  
                                  2009
                                  
                                  
                                  2010Real estate claims
                                  
                                  $
                                  5
                                  
                                  
                                  $
                                  1,019
                                  
                                  
                                  $
                                  468Professional
      fee claim
                                  
                                  
                                  725
                                  
                                  
                                  
                                  725
                                  
                                  
                                  
                                  725Total
      pre-petition claims
                                  
                                  $
                                  730
                                  
                                  
                                  $
                                  1,744
                                  
                                  
                                  $
                                  1,193





Legal and
professional fees associated with the administration of the bankruptcy
proceedings are reflected as reorganization expenses on the statement of
operations.


8


NOTE 3 –EMPLOYEE BENEFIT
PLANS





Retirement Plans. The
following summarizes the net periodic benefit cost for Hancock’s defined benefit
pension retirement plan and its postretirement health care benefit plan for the
thirteen and thirty-nine weeks ended October 30, 2010 and October 31, 2009 (in
thousands):





Retirement Plan
                      
                      
                      Postretirement Benefit
                        Plan
                      
                      
                      Retirement Plan
                      
                      
                      Postretirement Benefit
                        PlanThirteen Weeks Ended
                      
                      
                      Thirty-nine Weeks EndedOctober 30,
                      
                      
                      October 31,
                      
                      
                      October 30,
                      
                      
                      October 31,
                      
                      
                      October 30,
                      
                      
                      October 31,
                      
                      
                      October 30,
                      
                      
                      October 31,2010
                      
                      
                      2009
                      
                      
                      2010
                      
                      
                      2009
                      
                      
                      2010
                      
                      
                      2009
                      
                      
                      2010
                      
                      
                      2009Service
      costs
                      
                      $
                      107
                      
                      
                      $
                      102
                      
                      
                      $
                      21
                      
                      
                      $
                      12
                      
                      
                      $
                      321
                      
                      
                      $
                      307
                      
                      
                      $
                      55
                      
                      
                      $
                      36Interest
      cost
                      
                      
                      1,169
                      
                      
                      
                      1,228
                      
                      
                      
                      34
                      
                      
                      
                      44
                      
                      
                      
                      3,447
                      
                      
                      
                      3,684
                      
                      
                      
                      99
                      
                      
                      
                      132Expected
      return on assets
                      
                      
                      (957
                      )
                      
                      
                      (805
                      )
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      (2,875
                      )
                      
                      
                      (2,414
                      )
                      
                      
                      -
                      
                      
                      
                      -Amortization
      of prior service costs
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      (200
                      )
                      
                      
                      (193
                      )
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      (597
                      )
                      
                      
                      (579
                      )Recognized
      net actuarial (gain) loss
                      
                      
                      251
                      
                      
                      
                      210
                      
                      
                      
                      (55
                      )
                      
                      
                      (67
                      )
                      
                      
                      731
                      
                      
                      
                      630
                      
                      
                      
                      (199
                      )
                      
                      
                      (202
                      )Net
      periodic benefit cost (gain)
                      
                      $
                      570
                      
                      
                      $
                      735
                      
                      
                      $
                      (200
                      )
                      
                      $
                      (204
                      )
                      
                      $
                      1,624
                      
                      
                      $
                      2,207
                      
                      
                      $
                      (642
                      )
                      
                      $
                      (613
                      )





At
October 30, 2010, the fair value of the assets held by the pension plan was
$52.8 million reflecting a $1.1 million decrease from January 30,
2010.





Based on
management’s assessment of the Patient Protection and Affordable Care Act and
the Health Care and Education Reconciliation Act of 2010 (the “Acts”) as they
relate to the Company’s Postretirement Benefit Plan, management does not believe
the impact of this legislation is a significant event to the Company and
believes the Acts will not materially impact costs in subsequent
periods.





NOTE 4 – EARNINGS (LOSS) PER
SHARE





Earnings
(loss) per share is presented for basic and diluted earnings per
share.  Basic earnings per share excludes dilution and is computed by
dividing income available to holders of common stock by the weighted-average
number of common shares outstanding for 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. The additional shares in the diluted per share
calculations are computed based upon the Treasury Stock method.





As of
October 30, 2010, there were outstanding warrants for 9,485,600 shares with an
exercise price of $1.12 and stock options for 1,600,094 shares with a weighted
average exercise price of $2.96, which are included in the computation of common
stock equivalents for diluted earnings per share, if the impact is not
anti-dilutive.


9


COMPUTATION OF EARNINGS (LOSS) PER SHARE





(in thousands, except for share and
                        
                        Thirteen Weeks Ended
                        
                        
                        Thirty-nine Weeks Endedper share amounts)
                        
                        October 30,
                        
                        
                        October 31,
                        
                        
                        October 30,
                        
                        
                        October 31,2010
                        
                        
                        2009
                        
                        
                        2010
                        
                        
                        2009Basic earnings (loss)
      per share:Net
      income (loss)
                        
                        $
                        1,360
                        
                        
                        $
                        3,032
                        
                        
                        $
                        (698
                        )
                        
                        $
                        (127
                        )Weighted
      average number of common shares outstanding during period
                        
                        
                        19,739,148
                        
                        
                        
                        19,427,425
                        
                        
                        
                        19,675,566
                        
                        
                        
                        19,305,873Basic
      earnings (loss) per share
                        
                        $
                        0.07
                        
                        
                        $
                        0.16
                        
                        
                        $
                        (0.04
                        )
                        
                        $
                        (0.01
                        )Diluted
      earnings (loss) per share:Net
      income (loss)
                        
                        $
                        1,360
                        
                        
                        $
                        3,032
                        
                        
                        $
                        (698
                        )
                        
                        $
                        (127
                        )Weighted
      average number of common shares outstanding during period
                        
                        
                        19,739,148
                        
                        
                        
                        19,427,425
                        
                        
                        
                        19,675,566
                        
                        
                        
                        19,305,873Stock
      options
                        
                        
                        141,904
                        
                        
                        
                        54,290
                        
                        
                        
                        -
                        
                        
                        
                        -Warrants
      to purchase common stock
                        
                        
                        2,433,503
                        
                        
                        
                        626,467
                        
                        
                        
                        -
                        
                        
                        
                        -Restricted
      stock
                        
                        
                        12,539
                        
                        
                        
                        19,344
                        
                        
                        
                        -
                        
                        
                        
                        -Weighted average number of common
      shares outstanding during periodadjusted for
      dilutive securities
                        
                        
                        22,327,094
                        
                        
                        
                        20,127,526
                        
                        
                        
                        19,675,566
                        
                        
                        
                        19,305,873Diluted
      earnings (loss) per share
                        
                        $
                        0.06
                        
                        
                        $
                        0.15
                        
                        
                        $
                        (0.04
                        )
                        
                        $
                        (0.01
                        )





Approximately
1.0 million shares of common stock equivalents were excluded from the diluted
per share calculation for the thirteen week periods of 2010 and 2009 since the
exercise price was in excess of the average stock price and the impact would be
anti-dilutive.  For the thirty-nine weeks of 2010 and 2009, 11.0
million shares of common stock equivalents were excluded from the diluted per
share calculation because the Company was in a loss position.





NOTE 5 – RESERVE FOR STORE CLOSINGS AND
DISCONTINUED OPERATIONS





Reserves
for store closings are established based on estimates of net lease obligations
and other store closing costs. At October 30, 2010, the total reserve balance,
which is included in accrued liabilities, represents the present value of the
future net lease obligations for the locations which have been
closed.





The
activity in the reserve is as follows (in thousands):





January 30,
                  
                  
                  Reduction in
                  
                  
                  
                  
                  
                  
                  
                  
                  October 30,2010
                  
                  
                  Reserve
                  
                  
                  Interest
                  
                  
                  Payments
                  
                  
                  2010Lease
      obligations
                  
                  $
                  346
                  
                  
                  $
                  (45
                  )
                  
                  $
                  1
                  
                  
                  $
                  (213
                  )
                  
                  $
                  89





During
the thirty-nine weeks ended October 30, 2010 and October 31, 2009 income of
$29,000 and $52,000, respectively was recognized in earnings from discontinued
operations for the settlement of claims on stores closed in prior years. This
was the result of changes in the closed store reserve due to settlement of
certain real estate bankruptcy claims.


10


NOTE
6 – FAIR VALUE MEASUREMENTS AND FINANCIAL INSTRUMENTS





FASB ASC
820, Fair Value Measurements and Disclosures, defines fair value, establishes a
three-level valuation hierarchy for disclosures of fair value measurement and
enhances disclosure requirements for fair value measures. The three levels are
defined as follows:





Level 1 - inputs
to the valuation methodology are quoted prices (unadjusted) for identical assets
or liabilities in active markets.





Level 2 - inputs
to the valuation methodology include quoted prices for similar assets and
liabilities in active markets, and inputs that are observable for the assets or
liability, either directly or indirectly, for substantially the full term of the
financial instruments.





Level 3 - inputs
to the valuation methodology are unobservable and significant to the fair
value.





The
Company measures certain financial assets (cash and cash equivalents) at fair
value on a recurring basis. The Company’s investments in cash and cash
equivalents are classified within Level 1 of the fair value hierarchy because
they are valued based on quoted market prices in active markets.  The
carrying amounts of certain of the Company’s financial instruments, which are
not required to be valued at fair value on a recurring basis, including accounts
receivable, accounts payable, accrued liabilities and debt approximate fair
value due to their short maturities or the nature and terms of the
obligation.





NOTE
7 – LONG-TERM DEBT OBLIGATIONS




At
October 30, 2010, the Company had outstanding borrowings of $19.9 million under
its revolving credit facility (the “Revolver”) with General Electric Capital
Corporation, which has a maturity date of August 1, 2013. Outstanding
standby letters of credit were $7.2 million, outstanding documentary letters of
credit were $1.5 million and availability was $49.8 million at October 30, 2010.
The Revolver is collateralized by a fully perfected first priority security
interest in all real and personal, tangible and intangible assets of the
Company.  The Company is not subject to any financial covenants
pursuant to the Revolver.




At the
Company’s option, any portion of the outstanding borrowings under the Revolver
can bear interest at LIBOR - based rates plus an applicable margin, or a
floating interest rate plus the applicable margins. At October 30, 2010, the
Company had $18.0 million of its outstanding borrowings at a LIBOR-based
interest rate of 1.88%.





In
addition to the Revolver, the Company has $21.6 million of Floating Rate Secured
Notes (the “Notes”) outstanding at October 30, 2010. The Notes mature on August
1, 2013, are subordinated to the Revolver, and are secured by a junior lien on
all of the Company’s assets. Interest on the Notes is payable quarterly at a
rate of LIBOR plus 4.5%. For the quarterly interest periods ended May 1, 2009
and August 1, 2009 the Company had the option and elected to make the interest
payment in-kind by issuing additional Notes totaling $0.7 million. An additional
$1.7 million of interest expense was recorded to date in each of 2010 and 2009
related to the amortization of the discount recorded at the time of issuance of
the Notes. As of October 30, 2010 the balance of the unamortized discount was
$6.4 million.





NOTE
8 – SUBSEQUENT EVENTS





The
Company has evaluated events and transactions that occurred subsequent to
October 30, 2010 through the date the financial statements were issued for
potential recognition or disclosure. We did not identify any events or
transactions that should be recognized or disclosed in the accompanying
condensed, consolidated financial statements.


11


ITEM
      2.
            MANAGEMENT’S
      DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
      OPERATIONS





Forward
Looking Statements





This
Quarterly Report on Form 10-Q (“Quarterly Report”) contains forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of
1995.  Such statements are not historical facts and reflect our
current views regarding matters such as operations and financial
performance.  In general, forward-looking statements are identified by
such words or phrases as “anticipates,” “believes,” “approximates,” “estimates,”
“expects,” “intends” or “plans” or the negative of those words or other similar
terminology.  Forward-looking statements involve inherent risks and
uncertainties; our actual results could differ materially from those expressed
in our forward-looking statements.





The risks
and uncertainties, either alone or in combination, that could cause our actual
results to differ from those expressed in our forward-looking statements
include, but are not limited to, those that are discussed in our Annual Report
on Form 10-K filed with the SEC on April 1, 2010 under Item 1A. Risk
Factors.  Other risks not presently known to us, or that we currently
believe are immaterial, could also adversely affect our business, financial
condition or results of operations.  Forward-looking statements speak
only as of the date made, and neither Hancock nor its management undertakes any
obligation to update or revise any forward-looking statement.





Our
Business





Hancock
Fabrics, Inc. is a specialty retailer committed to serving creative enthusiasts
with a complete selection of fashion and home decorating textiles, sewing
accessories, needlecraft supplies and sewing machines.  We are one of
the largest fabric retailers in the United States, operating as of October
30, 2010, 266 stores in 37 states and an internet store under the domain name
hancockfabrics.com.  Our stores present a broad selection of fabrics
and notions used in apparel sewing, home decorating and quilting
projects.





Overview





Financial
highlights include:





·
            Net
      sales for the third quarter of fiscal 2010 were $73.5 million compared to
      $72.7 million for the third quarter of fiscal 2009, and comparable store
      sales increased 0.3% in the third quarter of 2010 compared to an increase
      of 4.0% in the third quarter of
2009.





·
            Our
      online sales for the third quarter of fiscal 2010, which are included in
      the comparable sales number above, increased 12.7% to $1.4
      million.





·
            Gross
      margin for the third quarter of fiscal 2010 was 43.9% compared to 46.5%
      for the third quarter of fiscal
2009.





·
            Operating
      income was $2.8 million in the third quarter of fiscal 2010 compared to
      $4.5 million of operating income in the third quarter of fiscal
      2009.





·
            Net
      income was $1.4 million, or $0.07 per basic share, in the third quarter of
      fiscal 2010 compared to net income of $3.0 million, or $0.16 per basic
      share, in the third quarter of fiscal
2009.


12


We use a
number of key performance measures to evaluate our financial performance,
including the following:





Thirteen Weeks Ended
                
                
                Thirty-nine Weeks EndedOctober 30,
                
                
                October 31,
                
                
                October 30,
                
                
                October 31,2010
                
                
                2009
                
                
                2010
                
                
                2009Net
      sales (in thousands)
                
                $
                73,454
                
                
                $
                72,730
                
                
                $
                197,012
                
                
                $
                196,380Gross
      margin percentage
                
                
                43.9
                %
                
                
                46.5
                %
                
                
                45.1
                %
                
                
                45.8
                %Number
      of storesOpen
      at end of period (1)
                
                
                266
                
                
                
                265
                
                
                
                266
                
                
                
                265Comparable
      stores at period end (2)
                
                
                265
                
                
                
                262
                
                
                
                265
                
                
                
                262Sales
      growthAll
      retail outlets
                
                
                1.0
                %
                
                
                3.1
                %
                
                
                0.3
                %
                
                
                (0.9
                )%Comparable
      retail outlets (3)
                
                
                0.3
                %
                
                
                4.0
                %
                
                
                (0.3
                )%
                
                
                0.9
                %Total
      store square footage at period end (in thousands)
                
                
                3,816
                
                
                
                3,795
                
                
                
                3,816
                
                
                
                3,795Net
      sales per total square footage
                
                $
                19.25
                
                
                $
                19.16
                
                
                $
                51.63
                
                
                $
                51.75





(1)
            Open
      store count does not include the internet
store.





(2)
            A
      new store is included in the comparable sales computation immediately upon
      reaching its one-year anniversary. In those rare instances where stores
      are either expanded or down-sized, the store is not treated as a new store
      and, therefore, remains in the computation of comparable
      sales.





(3)
            Comparable
      sales growth computation also includes net sales derived from
      e-commerce.





Results
of Operations





The
following table sets forth, for the periods indicated, selected statement of
operations data expressed as a percentage of sales.  This table should
be read in conjunction with the following discussion and with our Consolidated
Financial Statements, including the related notes.





Thirteen Weeks Ended
                  
                  
                  Thirty-nine Weeks EndedOctober 30,
                  
                  
                  October 31,
                  
                  
                  October 30,
                  
                  
                  October 31,2010
                  
                  
                  2009
                  
                  
                  2010
                  
                  
                  2009Sales
                  
                  
                  100.0
                  %
                  
                  
                  100.0
                  %
                  
                  
                  100.0
                  %
                  
                  
                  100.0
                  %Cost
      of goods sold
                  
                  
                  56.1
                  
                  
                  
                  53.5
                  
                  
                  
                  54.9
                  
                  
                  
                  54.2Gross
      profit
                  
                  
                  43.9
                  
                  
                  
                  46.5
                  
                  
                  
                  45.1
                  
                  
                  
                  45.8Selling,
      general and administrative expense
                  
                  
                  38.5
                  
                  
                  
                  38.8
                  
                  
                  
                  41.7
                  
                  
                  
                  41.9Depreciation
      and amortization
                  
                  
                  1.6
                  
                  
                  
                  1.5
                  
                  
                  
                  1.7
                  
                  
                  
                  1.6Operating
      income
                  
                  
                  3.8
                  
                  
                  
                  6.2
                  
                  
                  
                  1.7
                  
                  
                  
                  2.3Reorganization
      expense, net
                  
                  
                  0.2
                  
                  
                  
                  0.2
                  
                  
                  
                  0.2
                  
                  
                  
                  0.3Interest
      expense, net
                  
                  
                  1.8
                  
                  
                  
                  1.7
                  
                  
                  
                  1.9
                  
                  
                  
                  2.0Income
      (loss) from continuing operations before income taxes
                  
                  
                  1.8
                  
                  
                  
                  4.3
                  
                  
                  
                  (0.4
                  )
                  
                  
                  -Income
      taxes
                  
                  
                  -
                  
                  
                  
                  0.1
                  
                  
                  
                  -
                  
                  
                  
                  -Income
      from discontinued operations
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Net
      income (loss)
                  
                  
                  1.8
                  %
                  
                  
                  4.2
                  %
                  
                  
                  (0.4
                  )%
                  
                  
                  -
                  %




13


Net
Sales





Thirteen Weeks Ended
                        
                        
                        Thirty-nine Weeks Ended(in thousands)
                        
                        October 30,
                        
                        
                        October 31,
                        
                        
                        October 30,
                        
                        
                        October 31,2010
                        
                        
                        2009
                        
                        
                        2010
                        
                        
                        2009Retail comparable
      store base
                        
                        $
                        71,552
                        
                        
                        $
                        71,460
                        
                        
                        $
                        192,161
                        
                        
                        $
                        193,080E-Commerce
                        
                        
                        1,431
                        
                        
                        
                        1,270
                        
                        
                        
                        3,246
                        
                        
                        
                        2,942Comparable
      sales
                        
                        
                        72,983
                        
                        
                        
                        72,730
                        
                        
                        
                        195,407
                        
                        
                        
                        196,022New
      stores
                        
                        
                        471
                        
                        
                        
                        -
                        
                        
                        
                        1,605
                        
                        
                        
                        -Closed
      stores
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        358Total
      net sales
                        
                        $
                        73,454
                        
                        
                        $
                        72,730
                        
                        
                        $
                        197,012
                        
                        
                        $
                        196,380





The
retail comparable store base above consists of the stores which were included in
the comparable sales computation for the current period. The third quarter 2010
retail comparable sales increase of 0.1% was the result of a 0.4% increase in
transaction count and a 0.4% decline in average ticket. Sales in both apparel
and craft fabrics and non-sewing products led the sales
improvement.





Sales
provided by our e-commerce channel increased 12.7% in the third quarter and have
increased 10.3% in the first thirty-nine weeks of fiscal 2010.  We
continue to benefit from of our new platform which was launched in
2008.





New
stores includes results for one store prior to reaching its 53rd week
anniversary, which occurred in the second quarter of 2010, and two stores which
were closed during the prior year due to building damage.





Our
merchandise mix has had minimal change year over year, as reflected in the table
below.





Thirteen Weeks Ended
                  
                  
                  Thirty-nine Weeks EndedOctober 30,
                  
                  
                  October 31,
                  
                  
                  October 30,
                  
                  
                  October 31,2010
                  
                  
                  2009
                  
                  
                  2010
                  
                  
                  2009Apparel
      and Craft Fabrics
                  
                  
                  46
                  %
                  
                  
                  45
                  %
                  
                  
                  43
                  %
                  
                  
                  43
                  %Home
      Decorating Fabrics
                  
                  
                  11
                  %
                  
                  
                  12
                  %
                  
                  
                  13
                  %
                  
                  
                  14
                  %Sewing
      Accessories
                  
                  
                  26
                  %
                  
                  
                  28
                  %
                  
                  
                  27
                  %
                  
                  
                  28
                  %Non-Sewing
      Products
                  
                  
                  17
                  %
                  
                  
                  15
                  %
                  
                  
                  17
                  %
                  
                  
                  15
                  %100
                  %
                  
                  
                  100
                  %
                  
                  
                  100
                  %
                  
                  
                  100
                  %





Gross
Profit





Costs of
goods sold include:





·
            the
      cost of merchandise;





·
            inventory
      rebates and allowances including term
discounts;





·
            inventory
      shrinkage and valuation
adjustments;


14


·
            freight
      charges;





·
            costs
      associated with our sourcing operations, including payroll and related
      benefits; and





·
            costs
      associated with receiving, processing, and warehousing
      merchandise.





The
classification of these expenses varies across the retail industry.





Specific
components of cost of goods sold for the third quarter and first thirty-nine
weeks of fiscal 2010 and 2009 are as follows:





Thirteen Weeks Ended
                                                                        
                                                                        
                                                                        Thirty-nine Weeks EndedOctober 30,
                                                                        
                                                                        
                                                                        % of
                                                                        
                                                                        
                                                                        October 31,
                                                                        
                                                                        
                                                                        % of
                                                                        
                                                                        
                                                                        October 30,
                                                                        
                                                                        
                                                                        % of
                                                                        
                                                                        
                                                                        October 31,
                                                                        
                                                                        
                                                                        % of(in
      thousands)
                                                                        
                                                                        2010
                                                                        
                                                                        
                                                                        Sales
                                                                        
                                                                        
                                                                        2009
                                                                        
                                                                        
                                                                        Sales
                                                                        
                                                                        
                                                                        2010
                                                                        
                                                                        
                                                                        Sales
                                                                        
                                                                        
                                                                        2009
                                                                        
                                                                        
                                                                        SalesTotal
      net sales
                                                                        
                                                                        $
                                                                        73,454
                                                                        
                                                                        
                                                                        
                                                                        100.0
                                                                        %
                                                                        
                                                                        $
                                                                        72,730
                                                                        
                                                                        
                                                                        
                                                                        100.0
                                                                        %
                                                                        
                                                                        $
                                                                        197,012
                                                                        
                                                                        
                                                                        
                                                                        100.0
                                                                        %
                                                                        
                                                                        $
                                                                        196,380
                                                                        
                                                                        
                                                                        
                                                                        100.0
                                                                        %Merchandise
      cost
                                                                        
                                                                        
                                                                        35,374
                                                                        
                                                                        
                                                                        
                                                                        48.3
                                                                        %
                                                                        
                                                                        
                                                                        33,682
                                                                        
                                                                        
                                                                        
                                                                        46.3
                                                                        %
                                                                        
                                                                        
                                                                        93,074
                                                                        
                                                                        
                                                                        
                                                                        47.2
                                                                        %
                                                                        
                                                                        
                                                                        90,789
                                                                        
                                                                        
                                                                        
                                                                        46.2
                                                                        %Freight
                                                                        
                                                                        
                                                                        2,303
                                                                        
                                                                        
                                                                        
                                                                        3.1
                                                                        %
                                                                        
                                                                        
                                                                        2,152
                                                                        
                                                                        
                                                                        
                                                                        2.9
                                                                        %
                                                                        
                                                                        
                                                                        6,015
                                                                        
                                                                        
                                                                        
                                                                        3.1
                                                                        %
                                                                        
                                                                        
                                                                        5,681
                                                                        
                                                                        
                                                                        
                                                                        3.0
                                                                        %Sourcing
      and warehousing
                                                                        
                                                                        
                                                                        3,559
                                                                        
                                                                        
                                                                        
                                                                        4.7
                                                                        %
                                                                        
                                                                        
                                                                        3,112
                                                                        
                                                                        
                                                                        
                                                                        4.3
                                                                        %
                                                                        
                                                                        
                                                                        9,113
                                                                        
                                                                        
                                                                        
                                                                        4.6
                                                                        %
                                                                        
                                                                        
                                                                        9,898
                                                                        
                                                                        
                                                                        
                                                                        5.0
                                                                        %Gross
      Profit
                                                                        
                                                                        $
                                                                        32,218
                                                                        
                                                                        
                                                                        
                                                                        43.9
                                                                        %
                                                                        
                                                                        $
                                                                        33,784
                                                                        
                                                                        
                                                                        
                                                                        46.5
                                                                        %
                                                                        
                                                                        $
                                                                        88,810
                                                                        
                                                                        
                                                                        
                                                                        45.1
                                                                        %
                                                                        
                                                                        $
                                                                        90,012
                                                                        
                                                                        
                                                                        
                                                                        45.8
                                                                        %





Merchandise
cost increased 200 basis points in the third quarter of 2010 compared to the
same period of 2009, due to promotional activity during the period. For the
first thirty-nine weeks of 2010 merchandise cost was 100 basis points higher
than 2009 as a result of first quarter discounting that was initiated to address
inventory mix issues in select categories and promotional activity in the third
quarter.





Freight
costs included in cost of goods sold have remained relatively constant for the
quarter and year.  The Company has experienced limited freight pricing
pressure for imported goods.





Sourcing
and warehousing costs for the Company vary based on both the volume of inventory
received during any period and the rate at which inventory is shipped out, or
inventory turns. The cost differences for the third quarter and first
thirty-nine weeks of 2010 compared to the same periods in 2009 are primarily due
to the change in inventory turns during those periods, which influence the
amount of sourcing and warehousing costs capitalized in
inventory.  Actual sourcing and warehousing costs incurred during the
quarter and for the year are not significantly different than in the prior
year.





In total,
gross margin decreased by 260 basis points in the third quarter 2010 from third
quarter 2009, and decreased 70 basis points for the first thirty-nine weeks of
2010 from the first thirty-nine weeks of 2009.





Sales,
General & Administrative Expenses





Sales,
general & administrative expenses include:





·
            payroll
      and related benefits (for our store operations, field management, and
      corporate functions);





·
            advertising;





·
            general
      and administrative expenses;





·
            occupancy,
      including rent, common area maintenance, taxes and insurance for our
      retail locations;


15


·
            operating
      costs of our headquarters facilities;
and





·
            other
      expense (income).





Specific
components of sales, general & administrative expenses include:





Thirteen Weeks Ended
                                                                
                                                                
                                                                Thirty-nine Weeks EndedOctober 30,
                                                                
                                                                
                                                                % of
                                                                
                                                                
                                                                October 31,
                                                                
                                                                
                                                                % of
                                                                
                                                                
                                                                October 30,
                                                                
                                                                
                                                                % of
                                                                
                                                                
                                                                October 31,
                                                                
                                                                
                                                                % of(in
      thousands)
                                                                
                                                                2010
                                                                
                                                                
                                                                Sales
                                                                
                                                                
                                                                2009
                                                                
                                                                
                                                                Sales
                                                                
                                                                
                                                                2010
                                                                
                                                                
                                                                Sales
                                                                
                                                                
                                                                2009
                                                                
                                                                
                                                                SalesRetail
      store labor costs
                                                                
                                                                $
                                                                10,575
                                                                
                                                                
                                                                
                                                                14.4
                                                                %
                                                                
                                                                $
                                                                10,446
                                                                
                                                                
                                                                
                                                                14.4
                                                                %
                                                                
                                                                $
                                                                30,573
                                                                
                                                                
                                                                
                                                                15.5
                                                                %
                                                                
                                                                $
                                                                30,677
                                                                
                                                                
                                                                
                                                                15.6
                                                                %Advertising
                                                                
                                                                
                                                                2,557
                                                                
                                                                
                                                                
                                                                3.5
                                                                %
                                                                
                                                                
                                                                2,359
                                                                
                                                                
                                                                
                                                                3.2
                                                                %
                                                                
                                                                
                                                                7,211
                                                                
                                                                
                                                                
                                                                3.7
                                                                %
                                                                
                                                                
                                                                6,965
                                                                
                                                                
                                                                
                                                                3.5
                                                                %Store
      occupancy
                                                                
                                                                
                                                                7,467
                                                                
                                                                
                                                                
                                                                10.2
                                                                %
                                                                
                                                                
                                                                7,363
                                                                
                                                                
                                                                
                                                                10.1
                                                                %
                                                                
                                                                
                                                                22,148
                                                                
                                                                
                                                                
                                                                11.2
                                                                %
                                                                
                                                                
                                                                22,053
                                                                
                                                                
                                                                
                                                                11.2
                                                                %Retail
      SG&A
                                                                
                                                                
                                                                5,551
                                                                
                                                                
                                                                
                                                                7.6
                                                                %
                                                                
                                                                
                                                                5,454
                                                                
                                                                
                                                                
                                                                7.5
                                                                %
                                                                
                                                                
                                                                15,412
                                                                
                                                                
                                                                
                                                                7.8
                                                                %
                                                                
                                                                
                                                                15,279
                                                                
                                                                
                                                                
                                                                7.9
                                                                %Corp
      SG&A
                                                                
                                                                
                                                                2,104
                                                                
                                                                
                                                                
                                                                2.8
                                                                %
                                                                
                                                                
                                                                2,589
                                                                
                                                                
                                                                
                                                                3.6
                                                                %
                                                                
                                                                
                                                                6,726
                                                                
                                                                
                                                                
                                                                3.5
                                                                %
                                                                
                                                                
                                                                7,337
                                                                
                                                                
                                                                
                                                                3.7
                                                                %Total
      SG&A
                                                                
                                                                $
                                                                28,254
                                                                
                                                                
                                                                
                                                                38.5
                                                                %
                                                                
                                                                $
                                                                28,211
                                                                
                                                                
                                                                
                                                                38.8
                                                                %
                                                                
                                                                $
                                                                82,070
                                                                
                                                                
                                                                
                                                                41.7
                                                                %
                                                                
                                                                $
                                                                82,311
                                                                
                                                                
                                                                
                                                                41.9
                                                                %





Retail
Store Labor Costs – The store labor costs remained constant during the third
quarter and first thirty-nine weeks of 2010, despite two additional stores in
operation as compared to the same period in 2009.  These savings
resulted from a continued emphasis on costs control.





Advertising
– Advertising costs increased for the third quarter and first thirty-nine weeks
of 2010 due to costs related to in-store signage.





Store
Occupancy – These costs have remained relatively constant despite the renewal of
a significant number of leases over the past twelve months.  We have
made significant efforts to restructure rents as a result of the current
commercial real estate market.  These efforts in some cases resulted
in rent reductions, concessions on future escalations, and term
extensions.





Retail
SG&A – Costs for the third quarter and first thirty-nine weeks of the year
have remained constant year over year.





Corporate
SG&A – The third quarter 2010 corporate costs were reduced by the write-off
of previously accrued incentive compensation amounts. The decrease for the first
thirty-nine weeks of 2010 as compared to 2009 is a result of the absence of
incentive compensation accruals for the current year.





Reorganization
Expenses, Net





Thirteen Weeks Ended
                                
                                
                                Thirty-nine Weeks EndedOctober 30,
                                
                                
                                % of
                                
                                
                                October 31,
                                
                                
                                % of
                                
                                
                                October 30,
                                
                                
                                % of
                                
                                
                                October 31,
                                
                                
                                % of(in
      thousands)
                                
                                2010
                                
                                
                                Sales
                                
                                
                                2009
                                
                                
                                Sales
                                
                                
                                2010
                                
                                
                                Sales
                                
                                
                                2009
                                
                                
                                SalesReorganziation
      expense, net
                                
                                $
                                131
                                
                                
                                
                                0.2
                                %
                                
                                $
                                182
                                
                                
                                
                                0.2
                                %
                                
                                $
                                485
                                
                                
                                
                                0.2
                                %
                                
                                $
                                592
                                
                                
                                
                                0.3
                                %





Reorganization
expenses are comprised of the cost for professional services associated with our
bankruptcy proceedings.  With the closure of our bankruptcy
proceedings, these costs are not expected to continue in subsequent
periods.


16


Interest
Expense, Net





Thirteen Weeks Ended
                                
                                
                                Thirty-nine Weeks Ended(in thousands)
                                
                                October 30,
                                
                                
                                % of
                                
                                
                                October 31,
                                
                                
                                % of
                                
                                
                                October 30,
                                
                                
                                % of
                                
                                
                                October 31,
                                
                                
                                % of2010
                                
                                
                                Sales
                                
                                
                                2009
                                
                                
                                Sales
                                
                                
                                2010
                                
                                
                                Sales
                                
                                
                                2009
                                
                                
                                SalesInterest
      expense, net
                                
                                $
                                1,329
                                
                                
                                
                                1.8
                                %
                                
                                $
                                1,234
                                
                                
                                
                                1.7
                                %
                                
                                $
                                3,669
                                
                                
                                
                                1.9
                                %
                                
                                $
                                3,944
                                
                                
                                
                                2.0
                                %





The
Company’s interest costs are driven by borrowings on our credit facilities and a
small number of capital leases.  Our current credit facilities consist
of both an asset-based facility and a subordinated-debt
facility.  Interest expense for the third quarter 2010 and 2009, and
the first thirty-nine weeks of 2010 and 2009 included a non-cash charge for note
discount amortization of $0.6 million and $1.7 million, respectively. In
addition, interest was paid with the issuance of additional notes of $0.7
million in the first thirty-nine weeks of 2009.  Excluding these
non-cash items, interest expense for the third quarter of 2010 was $0.7 million
or 1.0% of sales compared to $0.7 million or 0.9% of sales in third quarter
2009, and $1.9 million or 1.0% of sales in the first thirty-nine weeks of 2010
compared to $1.5 million or 0.8% of sales for the same period of
2009.





Income
Taxes


Thirteen Weeks Ended
                                
                                
                                Thirty-nine Weeks Ended(in thousands)
                                
                                October 30,
                                
                                
                                % of
                                
                                
                                October 31,
                                
                                
                                % of
                                
                                
                                October 30,
                                
                                
                                % of
                                
                                
                                October 31,
                                
                                
                                % of2010
                                
                                
                                Sales
                                
                                
                                2009
                                
                                
                                Sales
                                
                                
                                2010
                                
                                
                                Sales
                                
                                
                                2009
                                
                                
                                SalesIncome
      taxes
                                
                                $
                                -
                                
                                
                                
                                0.0
                                %
                                
                                $
                                64
                                
                                
                                
                                0.1
                                %
                                
                                $
                                -
                                
                                
                                
                                0.0
                                %
                                
                                $
                                64
                                
                                
                                
                                0.0
                                %





The
Company did not recognize any income tax expense or benefit during the
first thirty-nine weeks of fiscal 2010 based on the year to date results. Income
tax expense for 2009 represents alternative minimum tax (AMT), which cannot be
fully offset by the net operating loss carryforward of the Company. ASC 740,
“Income Taxes”, requires the AMT be recognized as a tax credit carryforward to
be utilized against income taxes in a future period when income taxes exceed
AMT. The AMT credit may be carried forward with no expiration. Since the
realization of future tax credit carryforwards is dependent upon profitable
future operations, the Company has in essence recognized a full valuation
allowance against such credits and treated the payment of AMT as tax expense.
AMT expense will be recognized when the Company reports a profit on a year to
date basis.





As of
October 30, 2010, January 30, 2010 and October 31, 2009 the Company has
established a 100% valuation allowance to offset the net deferred tax assets
related to net operating loss carryforwards and other book-tax timing
differences.





Liquidity
and Capital Resources





Hancock's
primary capital requirements are for the financing of inventories and, to a
lesser extent, for capital expenditures relating to store locations and the
Company’s distribution facility.  Funds for such purposes have
historically been generated from Hancock's operations, short-term trade credit
in the form of extended payment terms from suppliers for inventory purchases,
and borrowings from commercial lenders.





We
anticipate that we will be able to satisfy our working capital requirements,
planned capital expenditures and debt service requirements with available cash,
proceeds from cash flows from operations, short-term trade credit, borrowings
under our revolving credit facility and other sources of
financing.  We expect to generate adequate cash flow from operating
activities to sustain current levels of operations.


17


Hancock’s
cash flow related information for the first thirty-nine weeks of fiscal 2010 and
2009 follows:





Thirty-nine Weeks EndedOctober 30,
                  
                  
                  October 31,(in
      thousands)
                  
                  2010
                  
                  
                  2009Net
      cash flows provided (used):Operating
      activites
                  
                  $
                  463
                  
                  
                  $
                  12,839Investing
      activities
                  
                  
                  (5,167
                  )
                  
                  
                  (2,552
                  )Financing
      activites
                  
                  
                  5,913
                  
                  
                  
                  (8,360
                  )





Operating
Activities





Net cash
inflows provided by operating activities during the first thirty-nine weeks of
2010 decreased by $12.4 million compared to the first thirty-nine weeks of
2009.  The net decrease occurred primarily due to the seasonal
inventory buildup and the addition of merchandise for an expanded craft
assortment being tested in 15 stores which was partially offset by an increase
in accounts payable.  The seasonal inventory buildup for 2009 was less
pronounced than the 2010 buildup.





Investing
Activities





Cash used
for investing activities consists primarily of purchases and sales of property
and equipment.  Capital expenditures during the first thirty-nine
weeks 2010 increased by $2.6 million from the first thirty-nine weeks of 2009.
Expenditures for 2010 consisted primarily of store fixtures related to six
relocations, fixtures for new product lines and point of sale (POS) equipment
upgrades compared to three new store locations, five store remodels and
technology upgrades completed during the first thirty-nine weeks of
2009.





Financing
Activities





Borrowings
from the Revolver of $6.3 million net of pre-petition obligations payments of
$0.4 million were used to finance inventory purchases and capital expenditures
during the first thirty-nine weeks of 2010. For the thirty-nine weeks ended
October 31, 2009 the cash provided by operating activities provided funds to
reduce the Revolver balance by $7.6 million and pay $0.7 million of pre-petition
obligations.





Credit
Facilities





The
following should be read in conjunction with Note 7 to the Consolidated
Financial Statements included in this report and Note 8 to the Company’s
Consolidated Financial Statements included in the Company’s Annual Report on
Form 10-K filed with the SEC on April 1, 2010.





As of
October 30, 2010, the Company had outstanding borrowings under the Revolver of
$19.9 million and outstanding letters of credit of $8.7
million.  Additional amounts available to borrow at that time were
$49.8 million.





As of
October 30, 2010, the Note balance was $21.6 million and the unamortized
discount on Notes Payable related to warrants issued was $6.4
million.


18


Off-Balance
Sheet Arrangements





Hancock
has no off-balance sheet financing arrangements. Hancock leases its retail
fabric store locations mainly under non-cancelable operating
leases.  Four of the Company’s store leases qualified for capital
lease treatment. Future payments under the operating leases are appropriately
excluded from the Company’s balance sheet.  Capital lease obligations
are, however, reflected on the Company’s balance sheet.





Contractual
Obligations and Commercial Commitments





Hancock
has an arrangement within its Revolver that provides up to $20.0 million in
letters of credit.  At October 30, 2010, Hancock had commitments of
$1.5 million on documentary letters of credit under the facility, which support
purchase orders for merchandise.  Hancock also has $6.4 million on
standby letters of credit to guarantee payment of potential insurance claims and
$0.8 million which secures an outstanding pre-petition
obligation.  Hancock leases its retail fabric store locations under
operating leases expiring at various dates through 2024.





The
Company has no standby repurchase obligations or guarantees of other entities'
debt.





Critical
Accounting Policies and Estimates





The
preparation of financial statements in accordance with accounting principles
generally accepted in the United States of America requires management to adopt
accounting policies and make significant judgments and estimates to develop
amounts reflected and disclosed in the financial statements. In many cases,
there are alternative policies or estimation techniques that could be used. We
maintain a process to review the application of our accounting policies and to
evaluate the appropriateness of the many estimates that are required to prepare
the financial statements of a large corporation. However, even under optimal
circumstances, estimates routinely require adjustment based on changing
circumstances and the receipt of new or better information. There have been no
significant changes to our accounting policies and estimates as discussed in our
Annual Report on Form 10-K for the fiscal year ended January 30,
2010.





Effects
of Inflation





Inflation
in labor and occupancy costs could significantly affect Hancock's
operations.  Many of Hancock's employees are paid hourly rates related
to federal and state minimum wage requirements; accordingly, any increases in
those requirements will affect Hancock.  In addition, payroll taxes,
employee benefits, and other employee costs continue to increase, and the full
impact of the recently enacted health care reform legislation will not be known
for several years.  Health insurance costs, in particular, continue to
rise at a high rate in the United States each year, and higher employer
contributions to Hancock’s pension plan could be necessary if investment returns
are weak.  Costs of leases for new store locations remain stable, but
renewal costs of older leases continue to increase.  Hancock believes
the practice of maintaining adequate operating margins through a combination of
product price adjustments and cost controls, careful evaluation of occupancy
needs, and efficient purchasing practices are the most effective tools for
coping with increased costs and expenses.





Seasonality





Hancock's
business is seasonal.  Peak sales periods occur during the fall and
early spring weeks, while the lowest sales periods occur during the summer.
Working capital requirements needed to finance our operations fluctuate during
the year and reach their highest levels during the second and third fiscal
quarters as we increase our inventory in preparation for our peak selling season
during the fourth quarter.


19


ITEM
3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS





Hancock
did not hold derivative financial or commodity instruments at October 30,
2010.





Interest
Rate Risk





The
Company is exposed to financial market risks, including changes in interest
rates. At the Company's option, all loans under the Revolver bear interest at
either (a) a floating interest rate plus the applicable margins or (b) absent a
default, a fixed interest rate for periods of one, two or three months equal to
the reserve adjusted London Interbank Offered Rate, or LIBOR, plus the
applicable margins.




As of
October 30, 2010, the Company had borrowings outstanding of approximately $19.9
million under the Revolver.  If interest rates increased 100 basis
points, the Company’s annual interest expense would increase approximately
$199,000, assuming borrowings under the Revolver of $19.9 million as existed at
October 30, 2010.






In
addition to the Revolver, the Company issued $20.0 million of Floating Rate
Secured Notes (the “Notes”) on August 1, 2008.  Interest on the Notes
is payable quarterly at LIBOR plus 4.50%.  Interest for the first four
quarters was paid by the issuance of additional notes at a rate equal to LIBOR
plus 5.50%, which resulted in the capitalization of $1.6 million into the
balance.





The
Company will pay the subsequent interest payments on the Notes in cash, the next
payment date being February 1, 2011.  If interest rates increased 100
basis points, the Company’s annual interest expense would increase $216,000,
based on balance of the Notes of $21.6 million at October 30, 2010.




Foreign
Currency Risk





The
Company either directly or indirectly purchases product from several foreign
countries. All of the Company’s business is transacted in U.S. dollars and,
accordingly, devaluation of the dollar against other currencies can increase
product costs. This risk did not significantly impact the thirty-nine week
period ended October 30, 2010, however product costs in the near-term could be
adversely impacted by devaluation of the U.S. dollar. As of October 30, 2010,
the Company had no financial instruments outstanding that were sensitive to
changes in foreign currency rates.




ITEM
4. CONTROLS AND PROCEDURES





Disclosure
Controls and Procedures





The
Company maintains disclosure controls and procedures that are designed to ensure
that information required to be disclosed in the reports filed or submitted
under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) is
recorded, processed, summarized, and reported within the time periods specified
in the Securities and Exchange Commission’s rules and forms and that such
information is accumulated and communicated to the Company’s management,
including our President  and Chief Executive Officer (principal
executive officer) and Executive Vice President and Chief Financial Officer
(principal financial officer), as appropriate, to allow timely decisions
regarding the required disclosures. In designing and evaluating the disclosure
controls and procedures, our Management recognizes that any controls and
procedures, no matter how well designed and operated, can provide only
reasonable assurance of achieving the desired control objectives.




In
connection with the preparation of this Quarterly Report on Form 10-Q as of
October 30, 2010, the Company’s management, under the supervision and with the
participation of the Company’s President and Chief Executive Officer, and
Executive Vice President and Chief Financial Officer, performed an evaluation of
the effectiveness of our disclosure controls and procedures (as such term is
defined in the Rules 13a-15(e) and 15d-15(e) under the Exchange
Act).  Based upon this evaluation, the Company’s principal executive
officer and principal financial officer concluded that the Company’s
disclosure controls and procedures were effective as of October 30,
2010.


20


Changes
in Internal Control Over Financial Reporting




There
have been no changes in our internal control over financial reporting (as such
term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) within
the fiscal quarter to which this report relates that have materially affected,
or are reasonably likely to materially affect, our internal control over
financial reporting.





PART
II.  OTHER INFORMATION





ITEM
1. LEGAL PROCEEDINGS





On March
21, 2007, the Company and its affiliated debtors filed voluntary petitions for
reorganization under Chapter 11 of the United States Bankruptcy Code, in the
United States Bankruptcy Court for the District of Delaware. The reorganization
case was administered under the caption ”In re Hancock Fabrics, Inc., et al.,
Case No. 07-10353 (BLS).”  On June 10, 2008, the Company filed its
joint plan of reorganization (Docket No. 2746) (as modified and including all
documents ancillary thereto, the “Plan”) and, thereafter, its related
court-approved notice of plan confirmation hearing.  On July 22, 2008,
the court entered an order confirming the Plan (Docket No. 2996).  On
August 1, 2008, the Plan became effective, and the Company emerged from
bankruptcy protection. On August 17, 2010 the Court issued the Final Decree
closing the bankruptcy case.




The
Company is a party to several legal proceedings and claims. Although the outcome
of such proceedings and claims cannot be determined with certainty, we are of
the opinion that it is unlikely that these proceedings and claims will have a
material effect on the financial condition or operating results of the
Company.





ITEM
1A. RISK FACTORS





The risk
factors listed in Part I “Item 1A. Risk Factors” in the Company’s
Annual Report on Form 10-K for the fiscal year ended January 30, 2010, should be
considered with the information provided elsewhere in this Quarterly Report on
Form 10-Q, which could materially adversely affect the business, financial
condition or results of operations.  There have been no material changes to
the risk factors as previously disclosed in such Annual Report on Form
10-K.





ITEM
2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF
PROCEEDS





In June
of 2000 the Board of Directors authorized the repurchase of up to 2,000,000
shares of the Company’s Common Stock from time to time when warranted by market
conditions.  There have been 1,756,485 shares purchased under this
authorization through October 30, 2010, and the number of shares that may yet be
purchased under this authorization is 243,515.





The
Registrant did not sell any unregistered equity securities during the period
covered by this Quarterly Report.





ITEM
3. DEFAULTS UPON SENIOR SECURITIES





None.





ITEM
5. OTHER INFORMATION





None.


21


ITEM
6. EXHIBITS





31.1
            Certification
      of Chief Executive Officer Pursuant to Rule 13a-14(a) Under The Securities
      Exchange Act of 1934




31.2
            Certification
      of Chief Financial Officer Pursuant to Rule 13a-14(a) Under The Securities
      Exchange Act of 1934




32.1
            Certification
      of Chief Executive Officer and Chief Financial Officer Pursuant to 18
      U.S.C. Section 1350, as Adopted Pursuant To Section 906 of The
      Sarbanes-Oxley Act of 2002





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/ Robert W. DriskellRobert
      W. DriskellExecutive
      Vice President andChief
      Financial Officer(Principal
      Financial Officer)





Date:    December
9, 2010


22


EXHIBIT
INDEX




Exhibit No.
                      
                      Description31.1
                      
                      Certification
      of Chief Executive Officer Pursuant to Rule 13a-14(a) Under The Securities
      Exchange Act of 193431.2
                      
                      Certification
      of Chief Financial Officer Pursuant to Rule 13a-14(a) Under The Securities
      Exchange Act of 193432.1
                      
                      Certification
      of Chief Executive Officer and Chief Financial Officer Pursuant to 18
      U.S.C. Section 1350, as Adopted Pursuant To Section 906 of The
      Sarbanes-Oxley Act of
2002


23