**4. Eligibility to Receive Awards.**     Persons eligible to receive awards under the Plan shall be limited to those officers, otherkey employees and directors of the Company who are in positions in which their decisions, actionsand counsel have a significant impact upon the profitability and success of the Company (butexcluding members of the Committee, except as provided in paragraph 6(g)).**5. Form of Awards.**     Awards may be made from time to time by the Committee in the form of stock options to purchaseShares, restricted stock, or any combination of the above. Stock options shall be limited tooptions which do not qualify (“Nonqualified Stock Options”) as incentive stock options within themeaning of Section 422(b) of the Code.**6. Stock Options.**     Stock options for the purchase of Shares shall be evidenced by written agreements in such formnot inconsistent with the Plan as the Committee shall approve from time to time; provided that themaximum number of options which may be granted to any one grantee during any twelve-month period is100,000 (except that *(i)*the Committee in its discretion may exceed such limitation as to executiveofficers of the Company and *(ii)*such limitation shall be adjusted pursuant to paragraph 18 below).Such agreement shall contain the terms and conditions applicable to the options, including insubstance the following terms and conditions: (a) Number of Shares. Each option agreement shall identify the options representedas Nonqualified Stock Options, and shall set forth the number of Shares subject to theoption (as adjusted pursuant to paragraph 18, below).  (b) Option Price. The option exercise price to be paid by the optionee to theCompany for each Share purchased upon the exercise of an option shall be determined bythe Committee, but shall in no event be less than 100 percent of the fair market valueper Share on the date the option is granted, as determined by the Committee.Notwithstanding anything herein to the contrary, the Committee shall not reprice anyoptions to a lower exercise price at any time during the term of any option grantedunder this Plan.  (c) Exercise Term. Each option agreement shall state the period or periods of timewithin which the option may be exercised, in whole or in part, as determined by theCommittee and subject to such terms and conditions as are prescribed for such purposeby the Committee, provided that no option shall be exercisable, except as provided inparagraph 16 or in the event of Retirement (as defined below), death or Disability (asdefined below), any more rapidly than from (i) the first anniversary of the date ofgrant thereof, to the extent of 25% of the Shares covered thereby, (ii) the thirteenthmonth from the date of grant thereof, and each additional month thereafter, to theextent of an additional 1/36th of the Shares covered thereby. The Committee, in itsdiscretion, may provide in the option agreement that the option shall becomeimmediately exercisable, in whole or in
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   part, in the event of Retirement, death or Disability. Notwithstanding theforegoing, no option shall be exercisable after seven years from the date of grant. (d) Payment for Shares. The purchase price of the Shares with respect to which anoption is exercised shall be payable in full at the time of exercise in cash, Shares atfair market value (i.e., in either a “net” exercise or a “cashless” exercise), or bydelivery of an executed promissory note secured by the shares so purchased, or acombination thereof, as the Committee may determine and all subject to such terms andconditions as may be prescribed by the Committee for such purpose. If the purchaseprice is paid by tendering Shares, the Committee in its discretion may grant theoptionee a new stock option for the number of Shares used to pay the purchase price.  (e) Rights Upon Termination. In the event of Termination (as defined below) of anoptionee’s status as an employee or director of the Company for any cause other thanRetirement, death or Disability, all unexercised options shall terminate immediatelyunless otherwise specified in the Option Grant Agreement or unless the Committee shalldetermine otherwise. (As used herein, “Termination” means, (i) in the case of anemployee, the cessation of the grantee’s employment by the Company for any reason, and(ii) in the case of a director, the cessation of the grantee’s service as a director ofthe Company; and “Terminates” has the corresponding meaning. As used herein,“Retirement” means (in the case of an employee) termination of employment undercircumstances entitling the participant to elect immediate payment of retirementbenefits under the Hancock Fabrics, Inc. Consolidated Retirement Plan or any successorplan, or (in the case of a director), the same meaning as Termination or Terminates and“Retires” has the corresponding meaning. As used herein, “Disability” means failure toreturn to full-time employment duties immediately after the participant has exhaustedthe short term disability benefits under the then applicable short term disabilitypolicy or procedures of the Company, and “Disabled” has the corresponding meaning). Inthe event that an optionee Retires, dies or becomes Disabled prior to the expiration ofhis option and without having fully exercised his option, the optionee or hisBeneficiary (as defined below) shall have the right to exercise the option during itsterm within a period of (i) one year after Termination due to Retirement, death orDisability, or (ii) one year after death if death occurs either within one year afterTermination due to Retirement or Disability to the extent that the option wasexercisable at the time of death or Termination, or within such other period, andsubject to such terms and conditions, as may be specified by the Committee. (As usedherein, “Beneficiary” means the person or persons designated in writing by the granteeas his Beneficiary with respect to an award under the Plan; or, in the absence of aneffective designation or if the designated person or persons predecease the grantee,the grantee’s Beneficiary shall be the person or persons who acquire by bequest orinheritance the grantee’s rights in respect of an award). In order to be effective, agrantee’s designation of a Beneficiary must be on file with the Committee before thegrantee’s death, but any such designation may be revoked and a new designationsubstituted therefor at any time before the grantee’s death.
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 (f) Nontransferability. Except as provided in paragraph 14(b), options grantedunder the Plan shall not be sold, assigned, transferred, exchanged, pledged,hypothecated, or otherwise encumbered, other than by will or by the laws of descent anddistribution. Except as provided in paragraph 14(b), during the lifetime of theoptionee the option is exercisable only by the optionee.  (g) Grants to Nonemployee Directors. Notwithstanding any other provision of thePlan, the grant of options and/or restricted stock hereunder to directors who are notalso employees of the Company (“Nonemployee Directors”) shall be subject to thefollowing terms and conditions: (i) The Nonemployee Directors of the Company installed pursuant tothe Company’s Plan of Reorganization approved on August 1, 2008, shall receivean initial grant of 50,000 Shares of restricted stock (granted at August 4,2008), vesting to the extent of 50% of the shares so granted on the firstanniversary of the date of grant, and 25% and 25% on the successive second andthird such anniversary dates. Subsequent grants of restricted stock and/orNonqualified Stock Options to Nonemployee Directors may be made at thediscretion of the Compensation Committee, subject to any limitations underSection 16 of the Securities Exchange Act of 1934.  (ii) Each Nonemployee Director of the Company may elect annually (atthe time of his initial election and subsequently at the time of the annualmeeting of stockholders for the election of directors), in advance, to receiveall or a portion of his compensation for services rendered as a NonemployeeDirector in Shares of restricted stock issued under this Plan in lieu of cash,which Shares shall be granted at the time of such annual election, vesting tothe extent of 1/12th of the shares so awarded on the same date ofeach subsequent month..  (iii) The exercise price of stock subject to an option granted toNonemployee Directors and the price used to calculate the number of Shares ofrestricted stock to be issued in lieu of cash consideration under thisparagraph 6(g) shall be equal to 100 percent of the fair market value of suchstock on the date the option is granted or the compensation would otherwisehave been paid in cash, all as determined by the Committee.  (iv) Except as provided in paragraph 16, each option granted toNonemployee Directors under this paragraph 6(g) shall not be exercisable untilone year after the date of grant; provided, however, that no portion of theoption shall be exercisable any earlier than the date the Plan is approved bythe stockholders of the Company.  (v) Unless otherwise provided in the Plan, all provisions withrespect to the terms of Nonqualified Stock Options hereunder shall beapplicable to options granted to Nonemployee Directors under this paragraph6(g).
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 (vi) The grants described in this paragraph 6(g) shall constitutethe only awards under the Plan permitted to be made to Nonemployee Directors.**7. Restricted Stock Awards.**     Restricted stock awards under the Plan shall consist of Shares free of any purchase price, orfor such purchase price as may be established by the Committee, restricted against transfer,subject to forfeiture, and subject to such other terms and conditions (including attainment ofperformance objectives) as may be determined by the Committee. Shares of restricted stock issuedto Nonemployee Directors shall be governed by Section 6(g) above if that section is inconsistentwith this Section 7. Restricted stock shall be evidenced by written restricted stock agreements insuch form not inconsistent with the Plan as the Committee shall approve from time to time, whichagreement shall contain the terms and conditions applicable to such awards, including in substancethe following terms and conditions: (a) Restriction Period. Restrictions shall be imposed for such period or periodsas may be determined by the Committee. The Committee, in its discretion, may providein the agreement circumstances under which the restricted stock shall becomeimmediately transferable and nonforfeitable, or under which the restricted stock shallbe forfeited, provided that no restricted stock award shall become immediatelytransferable and nonforfeitable, except as provided in paragraph 16 or in the event ofRetirement, death or Disability, any more rapidly than from (i) the first anniversaryof the date of grant thereof, to the extent of 50% of the Shares covered thereby, (ii)the second anniversary of the date of grant thereof, to the extent of an additional 25%of the Shares covered thereby, and (iii) the third anniversary of the date of grantthereof, to the extent of an additional 25% of the Shares covered thereby.  (b) Restrictions Upon Transfer. Restricted stock and the right to vote such Sharesand to receive dividends thereon, may not be sold, assigned, transferred, exchanged,pledged, hypothecated, or otherwise encumbered, except as herein provided, during therestriction period applicable to such Shares. Notwithstanding the foregoing, andexcept as otherwise provided in the Plan, the grantee shall have all of the otherrights of a stockholder, including, but not limited to, the right to receive dividendsand the right to vote such Shares. Any right to receive dividends shall be limited toa right to receive such dividends at the same time and in the same amount as dividendswhich are paid to holders of unrestricted shares of capital stock of the Company.  (c) Certificates. A certificate or certificates representing the number ofrestricted Shares granted shall be registered in the name of the grantee. TheCommittee, in its sole discretion, shall determine when the certificate or certificatesshall be delivered to the grantee (or, in the event of the grantee’s death, to hisBeneficiary), may provide for the holding of such certificate or certificates in escrowor in custody by the Company or its designee pending their delivery to the grantee orBeneficiary, and may provide for any appropriate legend to be borne by the certificateor certificates.
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 (d) Lapse of Restrictions. The restricted stock agreement shall specify the termsand conditions upon which any restriction upon restricted stock awarded under the Planshall expire, lapse, or be removed, as determined by the Committee. Upon theexpiration, lapse, or removal of such restrictions, Shares free of the restrictivelegend shall be issued to the grantee or his legal representative.**8. Loans and Supplemental Cash.**     The Committee, in its sole discretion to further the purpose of the Plan, may provide forsupplemental cash payments or loans to individuals in connection with all or any part of an awardunder the Plan. Supplemental cash payments shall be subject to such terms and conditions as shallbe prescribed by the Committee at the time of grant, provided that in no event shall the amount ofpayment exceed: (a) In the case of an option, the excess fair market value of a Share on the dateof exercise over the option price multiplied by the number of Shares for which suchoption is exercised, or  (b) In the case of a restricted stock award, the value of the Shares issued inpayment of such award.Any loan shall be evidenced by a written loan agreement or other instrument in such form andcontaining such terms and conditions (including, without limitation, provisions for interest,payment schedules, collateral, forgiveness or acceleration) as the Committee may prescribe fromtime to time.**9. General Restrictions.**     Each award under the Plan shall be subject to the requirement that if at any time the Companyshall determine that (i) the listing, registration or qualification of the Shares subject orrelated thereto upon any securities exchange or under any state or federal law, or (ii) the consentor approval of any regulatory body, or (iii) an agreement by the recipient of an award with respectto the disposition of Shares, or (iv) the satisfaction of withholding tax or other withholdingliabilities is necessary or desirable as a condition of or in connection with the granting of suchaward or the issuance or purchase of Shares thereunder, such award shall be consummated in whole orin part only if such listing, registration, qualification, consent, approval, agreement, orwithholding shall have been effected or obtained on terms acceptable to the Company. Any suchrestriction affecting an award shall not extend the time within which the award may be exercised;and neither the Company nor its directors or officers nor the Committee shall have any obligationor liability to the grantee or to a Beneficiary with respect to any Shares with respect to which anaward shall lapse or with respect to which the grant, issuance or purchase of Shares shall not beeffected, because of any such restriction.**10. Single or Multiple Agreements.**     Multiple awards, multiple forms of awards, or combinations thereof may be evidenced by asingle agreement or multiple agreements, as determined by the Committee.**11. Rights of the Shareholder.**
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     The recipient of any award under the Plan, shall have no rights as a shareholder, except asprovided in Paragraph 7(b), with respect thereto unless and until certificates for Shares areissued to him, and the issuance of Shares shall confer no retroactive right to dividends.**12. Rights to Terminate.**     Nothing in the Plan or in any agreement entered into pursuant to the Plan shall confer uponany person the right to continue in the employment of the Company or to serve as a director, oraffect any right which the Company may have to terminate the employment or directorship of suchperson.**13. Withholding.**     Prior to the issuance or transfer of Shares under the Plan, the recipient shall remit to theCompany an amount sufficient to satisfy any federal, state or local withholding tax requirements.The amount to be withheld shall be determined by the Company and shall be the based on the minimumstatutory requirements. The recipient may satisfy the withholding requirement in whole or in partby electing to have the Company withhold Shares having a value equal to the amount required to bewithheld. The value of the Shares to be withheld shall be the fair market value, as determined bythe Committee, of the stock on the date that the amount of tax to be withheld is determined (the“Tax Date”). Such election must be made prior to the Tax Date, must comply with all applicablesecurities law and other legal requirements, as interpreted by the Committee, and may not be madeunless approved by the Committee, in its discretion.**14. Non-Assignability.** (a) Except as provided in paragraph 14(b), no award under the Plan shall be sold,assigned, transferred, exchanged, pledged, hypothecated, or otherwise encumbered, otherthan by will or by the laws of descent and distribution, or by such other means as theCommittee may approve. Except as provided in paragraph 14(b), or as otherwise providedherein, during the life of the recipient, such award shall be exercisable only by suchperson or by such person’s guardian or legal representative.  (b) The Committee may, in its sole discretion from time to time, permit theassignment of any Nonqualified Stock Option to one or more of an optionee’s “ImmediateFamily” (as defined herein). As used herein, members of an optionee’s “ImmediateFamily” shall include only (i) persons who, at the time of transfer, are the optionee’sspouse or natural or adoptive lineal ancestors or descendants, and (ii) trustsestablished for the exclusive benefit of the optionee and/or one or more of the personsdescribed in clause (i) of this paragraph 14(b).**15. Non-Uniform Determinations.**     The Committee’s determinations under the Plan (including without limitation determinations ofthe persons to receive awards, the form, amount and timing of such awards, the terms and provisionsof such awards and the agreements evidencing same, and the establishment of values and performancetargets) need not be uniform and may be made selectively among
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persons who receive, or are eligible to receive, awards under the Plan, whether or not suchpersons are similarly situated.**16. Change In Control Provisions.** (a) In the event of a Change in Control (as defined below), the Committee in itssole discretion may cause any stock options awarded under the Plan to vest andrestrictions on restricted stock granted under the Plan to lapse, all in accordancewith terms determined by the Committee in such event, even though such determination ismade after the date of award or grant (so long as such terms are not more restrictivethan those contained in any prior agreement with the optionees/grantees relating to theaffected options or restricted stock). The Committee may provide in grant/awardagreements issued pursuant to this Plan that the following acceleration and valuationprovisions shall be available in the event of a Change in Control (provided that morerestrictive provisions may be applicable in the discretion of the Committee) forindividual officers who (i) are involuntarily terminated upon a Change in Control as adirect result of the Change in Control or (ii) terminate their own employment for causeupon a Change in Control (e.g., material increase in duties, reduction of authority,reduction of compensation or change in location) (which determination of causation in(i) and (ii) is to be made by the Board of Directors): (i) Any stock options awarded under the Plan not previouslyexercisable and vested shall become fully exercisable and vested.  (ii) Any restrictions and deferral limitations applicable to anyrestricted stock to the extent not already vested under the Plan, shall lapseand such shares shall be deemed fully vested.  (iii) The value of all outstanding stock options and restrictedstock, in each case to the extent vested, shall, unless otherwise determined bythe Committee in its sole discretion at or after grant but prior to any Changein Control, be cashed out on the basis of the Change in Control Price (asdefined) as of the date such Change in Control is determined to have occurredor such other date as the Committee may determine prior to the Change inControl. (b) As used herein, the term “Change in Control” means the happening of any of thefollowing: (i) Any person or entity, including a “group” as defined in Section13(d)(3) of the 1934 Act, other than the Company, a subsidiary of the Company,or any employee benefit plan of the Company or its subsidiaries, becomes thebeneficial owner of the Company’s securities having 51 percent or more of thecombined voting power of the then outstanding securities of the Company thatmay be cast for the election for directors of the Company (other than as aresult of an issuance of securities initiated by the Company in the ordinarycourse of business), or
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 (ii) As the result of, or in connection with, any cash tender orexchange offer, merger or other business combination, sale of assets orcontested election, or any combination of the foregoing transactions, less thana majority of the combined voting power of the then outstanding securities ofthe Company or any successor corporation or entity entitled to vote generallyin the election of directors of the Company or such other corporation or entityafter such transaction, are held in the aggregate by holders of the Company’ssecurities entitled to vote generally in the election of directors of theCompany immediately prior to such transactions. (c) As used herein, the term “Change in Control Price” means, as to (b)(i) above,the average closing price per share as reported on the exchange on which the Shares arethen traded during the 60 day period immediately preceding the occurrence of the Changein Control, or as to (b)(ii) above, the actual price paid in any transaction (or theweighted average price paid in the case of a combination of transactions) related tothe Change in Control, in each case as determined by the Committee.**17. Non-Competition Provision.**     Unless the award agreement relating to a stock option or restricted stock specifies otherwise,a grantee shall forfeit all unexercised, unearned and/or unpaid awards, including, but not by wayof limitation, awards earned but not yet paid, all unpaid dividends and dividend equivalents, andall interest, if any, accrued on the foregoing, if the grantee, without the written consent of theCompany, engages directly or indirectly in any manner or capacity as principal, agent, partner,officer, director, employee or otherwise, in any business or activity which is, in the opinion ofthe Committee, (i) competitive with the business conducted by the Company or any of itssubsidiaries, or (ii) inimical to the best interests of the Company or any of its subsidiaries.**18. Adjustments.**     In the event of any change in the outstanding common stock of the Company, by reason of astock dividend or distribution, recapitalization, merger, consolidation, reorganization, split-up,combination, exchange of Shares or the like, the Board of Directors, in its discretion, may adjustproportionately the number of Shares which may be issued under the Plan, the number of Sharessubject to outstanding awards, and the option exercise price of each outstanding option, and maymake such other changes in outstanding options and restricted stock awards, as it deems equitablein its absolute discretion to prevent dilution or enlargement of the rights of grantees, providedthat any fractional Shares resulting from such adjustments shall be eliminated. Provided, however,that no change in the terms may provide the holder of options with a direct or indirect reductionin the ratio of the option exercise price to the fair market value of the Shares.**19. Amendment.**     The Board of Directors may terminate, amend, modify or suspend the Plan at any time, exceptthat the Board shall not, without the authorization of the holders of a majority of Company’svoting securities, modify existing awards respecting the number of shares, exercise
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price or extension of terms, issue new awards in exchange for the cancellation of outstandingawards, increase the maximum number of Shares which may be issued under the Plan (other thanpursuant to paragraph 18 hereof), extend the last date on which awards may be granted under thePlan, extend the date on which the Plan expires, change the class of persons eligible to receiveawards, or change the minimum option price. In no event, however, shall the provisions ofparagraph 6(g) be amended more often than once every six months, other than to comport with changesin the Code, the Employment Retirement Income Security Act of 1974, as amended, or the rulesthereunder. No termination, modification, amendment or suspension of the Plan shall adverselyaffect the rights of any grantee or Beneficiary under an award previously granted, unless thegrantee or Beneficiary shall consent; but it shall be conclusively presumed that any adjustmentpursuant to paragraph 18 hereof does not adversely affect any such right.**20. Effect on Other Plans.**     Participation in this Plan shall not affect a grantee’s eligibility to participate in anyother benefit or incentive plan of the Company. Any awards made pursuant to this Plan shall not beused in determining the benefits provided under any other plan of the Company unless specificallyprovided therein.**21. Effective Date and Duration of the Plan.**     The Plan shall become effective when adopted by the Board of Directors, provided that the Planis approved by the holders of a majority of the Company’s voting securities on the date of itsadoption by the Board or before the first anniversary of that date. Unless it is sooner terminatedin accordance with paragraph 19 hereof, the Plan shall remain in effect until all awards under thePlan have been satisfied by the issuance of Shares or payment of cash or have expired or otherwiseterminated, but no award shall be granted more than ten years after the earlier of the date thePlan is adopted by the Board of Directors or is approved by the holders of the Company’s votingsecurities.**22. Unfunded Plan.**     The Plan shall be unfunded, except to the extent otherwise provided in accordance with Section7 hereof. Neither the Company nor any affiliate shall be required to segregate any assets that maybe represented by stock options and neither the Company nor any affiliate shall be deemed to be atrustee of any amounts to be paid under any stock option. Any liability of the Company or anyaffiliate to pay any grantee or Beneficiary with respect to an option shall be based solely uponany contractual obligations created pursuant to the provisions of the Plan; no such obligationswill be deemed to be secured by a pledge or encumbrance on any property of the Company or anaffiliate.**23. Governing Law.**     The Plan shall be construed and its provisions enforced and administered in accordance withthe laws of the State of Delaware except to the extent that such laws may be superseded by anyfederal law.ADOPTED BY THE BOARD OF DIRECTORS OF HANCOCK FABRICS, INC., ON THE 14th DAY OF JUNE2001.
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        By:         As amended June 9, 2005, June 7, 2006 and August 4, 2008
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**STOCK OPTION AGREEMENT**