##### Table of Contents



FORM 10-Q

SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549

[X] Quarterly Report Pursuant to Section 13 or 15 (d) of the
Securities Exchange Act of 1934

For the quarterly period ended August 4, 2002

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
(State or other jurisdiction
of incorporation or organization)    |  | 64-0740905
(I. R. S. Employer
Identification No.)
|                                                                           |  |                                                  
|3406 West Main Street, Tupelo, MS
(Address of principal executive offices) |  | 38801
(Zip Code)                                 

Registrants telephone number, including area code(662) 842-2834

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [  ]

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

As of August 4, 2002, the registrant had outstanding an aggregate of 18,889,008
shares of common stock, $.01 par value.

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TABLE OF CONTENTS



|                              |                                                                                               |                                                        |  |  |  |  |  | 
|----------------------------- | --------------------------------------------------------------------------------------------- | ------------------------------------------------------ |  |  |  |  |  | 
|PART I. FINANCIAL INFORMATION
|CONSOLIDATED BALANCE SHEET   
|                              |                                                                                               | CONSOLIDATED STATEMENT OF INCOME                      
|                              |                                                                                               | CONSOLIDATED STATEMENT OF SHAREHOLDERS EQUITY        
|                              |                                                                                               | CONSOLIDATED STATEMENT OF CASH FLOWS                  
|                              |                                                                                               | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
|                              | ITEM 2: MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|                              | Item 3: Quantitative and Qualitative Disclosures about Market Risks                          
|PART II. OTHER INFORMATION:  
|                              | Item 6: Exhibits and Reports on Form 8-K                                                     
|SIGNATURE                    



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##### Table of Contents



INDEX

Part I. Financial Information:

|                            |                                                                                               |                                                                                                    |                                              |         |              |  | 
|--------------------------- | --------------------------------------------------------------------------------------------- | -------------------------------------------------------------------------------------------------- | -------------------------------------------- | ------- | ------------ |  | 
|                            |                                                                                               |                                                                                                    |                                              |         | Page Numbers
|                            | Item 1. Financial Statements (unaudited)                                                      |                                                                                                    |                                              |         |             
|                            |                                                                                               | Consolidated Balance Sheet as of August 4, 2002 and February 3, 2002                               |                                              |         | 3            | 
|                            |                                                                                               | Consolidated Statement of Income for the Thirteen Weeks and Twenty-six                             |                                              |         | 4            | 
|                            |                                                                                               |                                                                                                    | Weeks Ended August 4, 2002 and July 29, 2001 |         |              |  | 
|                            |                                                                                               | Consolidated Statement of Shareholders Equity for the                                             |                                              |         | 5            | 
|                            |                                                                                               |                                                                                                    | Twenty-six Weeks Ended August 4, 2002        |         |              |  | 
|                            |                                                                                               | Consolidated Statement of Cash Flows for the Twenty-six Weeks Ended                                |                                              |         | 6            | 
|                            |                                                                                               |                                                                                                    | August 4, 2002 and July 29, 2001             |         |              |  | 
|                            |                                                                                               | Notes to Consolidated Financial Statements                                                         |                                              |         | 7 - 9        | 
|                            | Item 2. Managements Discussion and Analysis of Financial Condition
and Results of Operations |                                                                                                    |                                              | 10 - 14 |             
|                            | Item 3. Quantitative and Qualitative Disclosures about Market Risks                           |                                                                                                    |                                              | 14      |             
|                            |                                                                                               |                                                                                                    |                                              |        
|Part II. Other Information: |                                                                                               |                                                                                                    |                                              |        
|                            |                                                                                               |                                                                                                    |                                              |        
|                            | Item 6. Exhibits and Reports on Form 8-K                                                      |                                                                                                    |                                              | 15      |             
|Signature                   |                                                                                               |                                                                                                    | 15                                           |        
|                            |                                                                                               |                                                                                                    |                                              |        
|Certifications              |                                                                                               |                                                                                                    |                                              |        
|                            |                                                                                               |                                                                                                    |                                              |        
|                            |                                                                                               | Certification of Chief Executive Officer Pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002 |                                              |         | 16           | 
|                            |                                                                                               | Certification of Chief Executive Officer Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002 |                                              |         | 16           | 
|                            |                                                                                               | Certification of Chief Financial Officer Pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002 |                                              |         | 17           | 
|                            |                                                                                               | Certification of Chief Financial Officer Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002 |                                              |         | 17           | 

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CONSOLIDATED BALANCE SHEET

PART I. FINANCIAL INFORMATION
CONSOLIDATED BALANCE SHEET
(unaudited)

|                                                   |                                                                                                                            |                                                   |        |             |         |  |        |          |         | 
|-------------------------------------------------- | -------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------- | ------ | ----------- | ------- |  | ------ | -------- | ------- | 
|(in thousands, except for                          |                                                                                                                            | August 4,                                         |        | February 3,
|share and per share amounts)                       |                                                                                                                            | 2002                                              |        | 2002       
|Assets                                             |                                                                                                                            |                                                   |        |             |         |  |        |         
|Current assets:                                    |                                                                                                                            |                                                   |        |             |         |  |        |         
|                                                   |                                                                                                                            | Cash and cash equivalents                         |        | $           | 3,666   |  |        | $        | 6,914   | 
|                                                   |                                                                                                                            | Receivables, less allowance for doubtful accounts |        |             | 1,296   |  |        |          | 1,339   | 
|                                                   |                                                                                                                            | Inventories                                       |        |             | 142,072 |  |        |          | 135,672 | 
|                                                   |                                                                                                                            | Prepaid expenses                                  |        |             | 2,625   |  |        |          | 1,317   | 
|                                                   |                                                                                                                            |                                                   |        |             |         |  |        |          |         | 
|                                                   |                                                                                                                            | Total current assets                              |        |             | 149,659 |  |        |          | 145,242 | 
|Property and equipment, at depreciated cost        |                                                                                                                            |                                                   | 40,023 |             |         |  | 30,607 |         
|Deferred tax assets                                |                                                                                                                            |                                                   | 7,654  |             |         |  | 7,654  |         
|Pension payment in excess of required contribution |                                                                                                                            |                                                   | 2,550  |             |         |  | 3,424  |         
|Goodwill, net of accumulated amortization          |                                                                                                                            |                                                   | 4,480  |             |         |  | 4,480  |         
|Other assets                                       |                                                                                                                            |                                                   | 3,741  |             |         |  | 4,142  |         
|                                                   |                                                                                                                            |                                                   |        |             |         |  |        |          |         | 
|                                                   |                                                                                                                            | Total assets                                      |        | $           | 208,107 |  |        | $        | 195,549 | 
|                                                   |                                                                                                                            |                                                   |        |             |         |  |        |          |         | 
|                                                   |                                                                                                                            |                                                   |        |             |         |  |        |         
|Liabilities and Shareholders Equity               |                                                                                                                            |                                                   |        |             |         |  |        |         
|Current liabilities:                               |                                                                                                                            |                                                   |        |             |         |  |        |         
|                                                   |                                                                                                                            | Accounts payable                                  |        | $           | 39,511  |  |        | $        | 40,147  | 
|                                                   |                                                                                                                            | Accrued liabilities                               |        |             | 15,084  |  |        |          | 18,395  | 
|                                                   |                                                                                                                            | Deferred tax liabilities                          |        |             | 2,969   |  |        |          | 2,969   | 
|                                                   |                                                                                                                            | Income taxes                                      |        |             | 705     |  |        |          | 4,363   | 
|                                                   |                                                                                                                            | Total current liabilities                         |        |             | 58,269  |  |        |          | 65,874  | 
|Long-term debt obligations                         |                                                                                                                            |                                                   | 11,000 |             |         |  |        |         
|Postretirement benefits other than pensions        |                                                                                                                            |                                                   | 21,906 |             |         |  | 21,871 |         
|Reserve for store closings                         |                                                                                                                            |                                                   | 1,585  |             |         |  | 2,056  |         
|Other liabilities                                  |                                                                                                                            |                                                   | 4,928  |             |         |  | 5,145  |         
|                                                   |                                                                                                                            |                                                   |        |             |         |  |        |          |         | 
|                                                   |                                                                                                                            | Total liabilities                                 |        |             | 97,688  |  |        |          | 94,946  | 
|                                                   |                                                                                                                            |                                                   |        |             |         |  |        |          |         | 
|Commitments and contingencies                      |                                                                                                                            |                                                   |        |             |         |  |        |         
|Shareholders equity:                              |                                                                                                                            |                                                   |        |             |         |  |        |         
|                                                   | Common stock, $.01 par value; 80,000,000 shares authorized;
31,313,116 and 30,246,101 issued and outstanding, respectively |                                                   |        | 313         |         |  |        | 302      |        
|                                                   | Additional paid-in capital                                                                                                 |                                                   |        | 61,708      |         |  |        | 47,487   |        
|                                                   | Retained earnings                                                                                                          |                                                   |        | 197,976     |         |  |        | 195,738  |        
|                                                   | Treasury stock, at cost, 12,424,108 and 12,010,594
shares held, respectively                                               |                                                   |        | (142,421    | )       |  |        | (136,311 | )      
|                                                   | Deferred compensation on restricted stock
incentive plan                                                                   |                                                   |        | (7,157      | )       |  |        | (6,613   | )      
|                                                   |                                                                                                                            |                                                   |        |             |         |  |        |          |         | 
|                                                   |                                                                                                                            | Total shareholders equity                        |        |             | 110,419 |  |        |          | 100,603 | 
|                                                   |                                                                                                                            |                                                   |        |             |         |  |        |          |         | 
|                                                   |                                                                                                                            | Total liabilities and shareholders equity        |        | $           | 208,107 |  |        | $        | 195,549 | 
|                                                   |                                                                                                                            |                                                   |        |             |         |  |        |          |         | 

See accompanying notes to consolidated financial statements.

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CONSOLIDATED STATEMENT OF INCOME
(unaudited)

|                                          |                                       |                      |        |                        |        |          |        |           |        |          |         |         |        |   |         |        |        | 
|----------------------------------------- | ------------------------------------- | -------------------- | ------ | ---------------------- | ------ | -------- | ------ | --------- | ------ | -------- | ------- | ------- | ------ | - | ------- | ------ | ------ | 
|(in thousands, except                     |                                       |                      |        |                        |        |          |        |           |        |          |         |         |        |   |         |       
|per share amounts)                        |                                       | Thirteen Weeks Ended |        | Twenty-six Weeks Ended
|                                          |                                       |                      |        |                       
|                                          |                                       |                      |        | August 4,              |        | July 29, |        | August 4, |        | July 29,
|                                          |                                       |                      |        | 2002                   |        | 2001     |        | 2002      |        | 2001    
|Sales                                     |                                       | $                    | 92,676 |                        |        | $        | 86,815 |           |        | $        | 196,730 |         |        | $ | 184,431 |       
|Cost of goods sold                        |                                       |                      | 45,125 |                        |        |          | 43,092 |           |        |          | 96,644  |         |        |   | 92,289  |       
|                                          |                                       |                      |        |                        |        |          |        |           |        |          |         |         |        |   |         |       
|                                          | Gross profit                          |                      |        | 47,551                 |        |          |        | 43,723    |        |          |         | 100,086 |        |   |         | 92,142 |       
|                                          |                                       |                      |        |                        |        |          |        |           |        |          |         |         |        |   |         |       
|Expenses (income)                         |                                       |                      |        |                        |        |          |        |           |        |          |         |         |        |   |         |       
|                                          | Selling, general and administrative   |                      |        | 43,722                 |        |          |        | 41,017    |        |          |         | 89,023  |        |   |         | 83,836 |       
|                                          | Depreciation and amortization         |                      |        | 1,343                  |        |          |        | 1,389     |        |          |         | 2,675   |        |   |         | 2,725  |       
|                                          | Interest expense                      |                      |        | 94                     |        |          |        | 417       |        |          |         | 154     |        |   |         | 814    |       
|                                          | Interest income                       |                      |        | (19                    | )      |          |        | (27       | )      |          |         | (50     | )      |   |         | (65    | )     
|                                          |                                       |                      |        |                        |        |          |        |           |        |          |         |         |        |   |         |       
|                                          | Total operating and interest expenses |                      |        | 45,140                 |        |          |        | 42,796    |        |          |         | 91,802  |        |   |         | 87,310 |       
|                                          |                                       |                      |        |                        |        |          |        |           |        |          |         |         |        |   |         |       
|Earnings before taxes                     |                                       |                      | 2,411  |                        |        |          | 927    |           |        |          | 8,284   |         |        |   | 4,832   |       
|Income taxes                              |                                       |                      | 876    |                        |        |          | 337    |           |        |          | 3,008   |         |        |   | 1,754   |       
|                                          |                                       |                      |        |                        |        |          |        |           |        |          |         |         |        |   |         |       
|Net earnings and comprehensive income     |                                       | $                    | 1,535  |                        |        | $        | 590    |           |        | $        | 5,276   |         |        | $ | 3,078   |       
|                                          |                                       |                      |        |                        |        |          |        |           |        |          |         |         |        |   |         |       
|Earnings per share
Basic                  |                                       | $                    | 0.09   |                        |        | $        | 0.04   |           |        | $        | 0.30    |         |        | $ | 0.19    |       
|                                          |                                       | Diluted              |        | $                      | 0.08   |          |        | $         | 0.03   |          |         | $       | 0.28   |   |         | $      | 0.18   | 
|                                          |                                       |                      |        |                        |        |          |        |           |        |          |         |         |        |   |         |       
|Weighted average shares outstanding
Basic |                                       |                      | 18,042 |                        |        |          | 16,656 |           |        |          | 17,818  |         |        |   | 16,569  |       
|                                          |                                       | Diluted              |        |                        | 19,064 |          |        |           | 16,998 |          |         |         | 18,907 |   |         |        | 16,814 | 
|                                          |                                       |                      |        |                        |        |          |        |           |        |          |         |         |        |   |         |       
|Dividends per share                       |                                       | $                    | 0.08   |                        |        | $        | 0.04   |           |        | $        | 0.16    |         |        | $ | 0.08    |       
|                                          |                                       |                      |        |                        |        |          |        |           |        |          |         |         |        |   |         |       

See accompanying notes to consolidated financial statements.

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CONSOLIDATED STATEMENT OF SHAREHOLDERS EQUITY
(unaudited)

|                                                                                     |  |              |            |            |  |          |     |          |  |                |          |        |  |               |         |        |  |  |             |   |  |  |           |   |  |  |         |   |  |   |         |  
|------------------------------------------------------------------------------------ |  | ------------ | ---------- | ---------- |  | -------- | --- | -------- |  | -------------- | -------- | ------ |  | ------------- | ------- | ------ |  |  | ----------- | - |  |  | --------- | - |  |  | ------- | - |  | - | ------- | -
|(in thousands, except fornumber of shares)                                           |  | Common Stock |            | Additional |  |          |     |          |  | Treasury Stock |          |        |  |               |         | Total 
|                                                                                     |  |              |            | Paid-in    |  | Retained |     |          |  |                | Deferred |        |  | Shareholders'
|                                                                                     |  | Shares       |            | Amount     |  | Capital  |     | Earnings |  | Shares         |          | Amount |  | Compensation  |         | Equity
|                                                                                     |  |              |            |            |  |          |     |          |  |                |          |        |  |               |         |       
|Twenty-six weeks ended August 4, 2002                                                |  |              |            |            |  |          |     |          |  |                |          |        |  |               |         |        |  |  |             |   |  |  |           |   |  |  |         |   |  |   |         |  
|Balance February 3, 2002                                                             |  |              | 30,246,101 |            |  | $        | 302 |          |  | $              | 47,487   |        |  | $             | 195,738 |        |  |  | (12,010,594 | ) |  |  | ($136,311 | ) |  |  | ($6,613 | ) |  | $ | 100,603 |  
|Net earnings                                                                         |  |              |            |            |  |          |     |          |  |                |          |        |  |               | 5,276   |        |  |  |             |   |  |  |           |   |  |  |         |   |  |   | 5,276   |  
|Cash dividend  $.08 per
share on a quarterly basis                                  |  |              |            |            |  |          |     |          |  |                |          |        |  |               | (3,038  | )      |  |  |             |   |  |  |           |   |  |  |         |   |  |   | (3,038  | )
|Issuance of restricted stock                                                         |  |              | 97,600     |            |  |          | 1   |          |  |                | 1,764    |        |  |               |         |        |  |  |             |   |  |  |           |   |  |  | (1,765  | ) |  |   |         |  
|Cancellation of restricted stock                                                     |  |              | (16,400    | )          |  |          |     |          |  |                | (134     | )      |  |               |         |        |  |  |             |   |  |  |           |   |  |  | 134     |   |  |   |         |  
|Amortization and vesting of deferred
compensation on restricted stock
incentive plan |  |              |            |            |  |          |     |          |  |                | 306      |        |  |               |         |        |  |  |             |   |  |  |           |   |  |  | 1,087   |   |  |   | 1,393   |  
|Purchase of treasury stock                                                           |  |              |            |            |  |          |     |          |  |                |          |        |  |               |         |        |  |  | (413,514    | ) |  |  | (6,110    | ) |  |  |         |   |  |   | (6,110  | )
|Issuance of shares as compensation
for professional services                         |  |              | 553        |            |  |          |     |          |  |                | 10       |        |  |               |         |        |  |  |             |   |  |  |           |   |  |  |         |   |  |   | 10      |  
|Issuance of shares under directors
stock plan                                       |  |              | 4,987      |            |  |          |     |          |  |                | 89       |        |  |               |         |        |  |  |             |   |  |  |           |   |  |  |         |   |  |   | 89      |  
|Exercise of stock options                                                            |  |              | 980,275    |            |  |          | 10  |          |  |                | 12,186   |        |  |               |         |        |  |  |             |   |  |  |           |   |  |  |         |   |  |   | 12,196  |  
|                                                                                     |  |              |            |            |  |          |     |          |  |                |          |        |  |               |         |        |  |  |             |   |  |  |           |   |  |  |         |   |  |   |         |  
|Balance August 4, 2002                                                               |  |              | 31,313,116 |            |  | $        | 313 |          |  | $              | 61,708   |        |  | $             | 197,976 |        |  |  | (12,424,108 | ) |  |  | ($142,421 | ) |  |  | ($7,157 | ) |  | $ | 110,419 |  
|                                                                                     |  |              |            |            |  |          |     |          |  |                |          |        |  |               |         |        |  |  |             |   |  |  |           |   |  |  |         |   |  |   |         |  

See accompanying notes to consolidated financial statements.

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CONSOLIDATED STATEMENT OF CASH FLOWS
(unaudited)
(in thousands)

|                                                 |                                                                                          |                                                                          |                                                     |                                                              |       |                        |        |          |       |        |        |  
|------------------------------------------------ | ---------------------------------------------------------------------------------------- | ------------------------------------------------------------------------ | --------------------------------------------------- | ------------------------------------------------------------ | ----- | ---------------------- | ------ | -------- | ----- | ------ | ------ | -
|                                                 |                                                                                          |                                                                          |                                                     |                                                              |       | Twenty-six Weeks Ended
|                                                 |                                                                                          |                                                                          |                                                     |                                                              |       |                       
|                                                 |                                                                                          |                                                                          |                                                     |                                                              |       | August 4,              |        | July 29,
|                                                 |                                                                                          |                                                                          |                                                     |                                                              |       | 2002                   |        | 2001    
|                                                 |                                                                                          |                                                                          |                                                     |                                                              |       |                        |        |         
|Cash flows from operating activities:            |                                                                                          |                                                                          |                                                     |                                                              |       |                        |        |         
|                                                 | Net earnings                                                                             |                                                                          | $                                                   | 5,276                                                        |       |                        | $      | 3,078    |      
|                                                 | Adjustments to reconcile net earnings to cash
provided by (used in) operating activities |                                                                          |                                                     |                                                              |       |                        |        |          |      
|                                                 |                                                                                          | Depreciation and amortization                                            |                                                     |                                                              | 2,675 |                        |        |          | 2,725 |       
|                                                 |                                                                                          | LIFO                                                                     |                                                     |                                                              | (500  | )                      |        |          | 150   |       
|                                                 |                                                                                          | Deferred income taxes                                                    |                                                     |                                                              |       |                        |        |          | 509   |       
|                                                 |                                                                                          | Amortization of deferred compensation on
restricted stock incentive plan |                                                     |                                                              | 1,087 |                        |        |          | 1,003 |       
|                                                 |                                                                                          | Interest expense on closed store accrual                                 |                                                     |                                                              | 84    |                        |        |          | 105   |       
|                                                 |                                                                                          | (Increase) decrease in assets                                            |                                                     |                                                              |       |                        |        |          |       |       
|                                                 |                                                                                          |                                                                          |                                                     | Receivables and prepaid expenses                             |       |                        | (1,265 | )        |       |        | (701   | )
|                                                 |                                                                                          |                                                                          |                                                     | Inventory at current cost                                    |       |                        | (5,900 | )        |       |        | (2,524 | )
|                                                 |                                                                                          |                                                                          |                                                     | Pension payment in excess of required contribution           |       |                        | 874    |          |       |        | 466    |  
|                                                 |                                                                                          |                                                                          |                                                     | Other noncurrent assets                                      |       |                        | 401    |          |       |        | 37     |  
|                                                 |                                                                                          | Increase (decrease) in liabilities                                       |                                                     |                                                              |       |                        |        |          |       |       
|                                                 |                                                                                          |                                                                          |                                                     | Accounts payable                                             |       |                        | (636   | )        |       |        | (2,140 | )
|                                                 |                                                                                          |                                                                          |                                                     | Accrued liabilities                                          |       |                        | (3,311 | )        |       |        | (1,826 | )
|                                                 |                                                                                          |                                                                          |                                                     | Current income tax obligations                               |       |                        | (3,352 | )        |       |        | (5,458 | )
|                                                 |                                                                                          |                                                                          |                                                     | Postretirement benefits other than pensions                  |       |                        | 35     |          |       |        | 293    |  
|                                                 |                                                                                          |                                                                          |                                                     | Payments against closed store accrual                        |       |                        | (555   | )        |       |        | (901   | )
|                                                 |                                                                                          |                                                                          |                                                     | Issuance of shares as compensation for professional services |       |                        | 10     |          |       |        |        |  
|                                                 |                                                                                          |                                                                          |                                                     | Other liabilities                                            |       |                        | (217   | )        |       |        | (540   | )
|                                                 |                                                                                          |                                                                          |                                                     |                                                              |       |                        |        |          |      
|                                                 |                                                                                          |                                                                          | Net cash provided by (used in) operating activities |                                                              |       | (5,294                 | )      |          |       | (5,724 | )     
|                                                 |                                                                                          |                                                                          |                                                     |                                                              |       |                        |        |          |      
|Cash flows from investing activities:            |                                                                                          |                                                                          |                                                     |                                                              |       |                        |        |         
|                                                 | Additions to property and equipment                                                      |                                                                          |                                                     | (12,091                                                      | )     |                        |        | (5,209   | )    
|                                                 |                                                                                          |                                                                          |                                                     |                                                              |       |                        |        |          |      
|                                                 |                                                                                          |                                                                          | Net cash provided by (used in) investing activities |                                                              |       | (12,091                | )      |          |       | (5,209 | )     
|                                                 |                                                                                          |                                                                          |                                                     |                                                              |       |                        |        |          |      
|Cash flows from financing activities:            |                                                                                          |                                                                          |                                                     |                                                              |       |                        |        |         
|                                                 | Net borrowings (repayments) on revolving
credit agreement                                |                                                                          |                                                     | 11,000                                                       |       |                        |        | 11,000   |      
|                                                 | Purchase of treasury stock                                                               |                                                                          |                                                     | (6,110                                                       | )     |                        |        | (578     | )    
|                                                 | Issuance of shares under directors stock plan                                           |                                                                          |                                                     | 89                                                           |       |                        |        | 81       |      
|                                                 | Exercise of stock options                                                                |                                                                          |                                                     | 12,196                                                       |       |                        |        | 2,081    |      
|                                                 | Cash dividends paid                                                                      |                                                                          |                                                     | (3,038                                                       | )     |                        |        | (1,393   | )    
|                                                 |                                                                                          |                                                                          | Net cash provided by (used in) financing activities |                                                              |       | 14,137                 |        |          |       | 11,191 |       
|                                                 |                                                                                          |                                                                          |                                                     |                                                              |       |                        |        |          |      
|Increase (decrease) in cash and cash equivalents |                                                                                          |                                                                          | (3,248                                              | )                                                            |       |                        | 258    |         
|Cash and cash equivalents:                       |                                                                                          |                                                                          |                                                     |                                                              |       |                        |        |         
|                                                 | Beginning of period                                                                      |                                                                          |                                                     | 6,914                                                        |       |                        |        | 3,891    |      
|                                                 |                                                                                          |                                                                          |                                                     |                                                              |       |                        |        |          |      
|                                                 | End of period                                                                            |                                                                          | $                                                   | 3,666                                                        |       |                        | $      | 4,149    |      
|                                                 |                                                                                          |                                                                          |                                                     |                                                              |       |                        |        |          |      
|Supplemental disclosures:                        |                                                                                          |                                                                          |                                                     |                                                              |       |                        |        |         
|                                                 | Cash paid during the period for:                                                         |                                                                          |                                                     |                                                              |       |                        |        |          |      
|                                                 |                                                                                          | Interest                                                                 |                                                     | $                                                            | 48    |                        |        | $        | 614   |       
|                                                 |                                                                                          | Income taxes                                                             |                                                     | $                                                            | 3,309 |                        |        | $        | 7,192 |       
|                                                 |                                                                                          |                                                                          |                                                     |                                                              |       |                        |        |          |      

See accompanying notes to consolidated financial statements.

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##### Table of Contents






NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

NOTE 1: BASIS OF PRESENTATION

The accompanying unaudited consolidated financial statements of Hancock
Fabrics, Inc. (Hancock or the Company) have been prepared in accordance
with the instructions to Form 10-Q and therefore do not include all information
and footnotes necessary for a fair presentation of financial position, results
of operations and cash flows in conformity with generally accepted accounting
principles. The statements do reflect all adjustments (consisting of only
normal recurring entries) which are, in the opinion of management, necessary
for a fair presentation of financial position in conformity with generally
accepted accounting principles. The statements should be read in conjunction
with the Notes to the Consolidated Financial Statements for the fiscal year
ended February 3, 2002 incorporated into the Companys Annual Report on Form
10-K.

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

NOTE 2: EARNINGS PER SHARE

Basic earnings per share excludes dilution and is computed by dividing income
available to common shareholders 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.

COMPUTATION OF EARNINGS PER SHARE
(unaudited)

|                                                                                                        |                                                                    |                      |            |                        |  |           |            |            |  |      |            |            |  |   |            |            |  | 
|------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------ | -------------------- | ---------- | ---------------------- |  | --------- | ---------- | ---------- |  | ---- | ---------- | ---------- |  | - | ---------- | ---------- |  | 
|(in thousands, except for share and                                                                     |                                                                    | Thirteen Weeks Ended |            | Twenty-six Weeks Ended
|per share amounts)                                                                                      |                                                                    | August 4,            |            | July 29,               |  | August 4, |            | July 29,  
|                                                                                                        |                                                                    |                      |            |                        |  |           |            |           
|                                                                                                        |                                                                    |                      |            | 2002                   |  | 2001      |            | 2002       |  | 2001
|Basic earnings per share:                                                                               |                                                                    |                      |            |                        |  |           |            |            |  |      |            |            |  |   |            |           
|                                                                                                        | Net earnings                                                       |                      | $          | 1,535                  |  |           | $          | 590        |  |      | $          | 5,276      |  |   | $          | 3,078      | 
|                                                                                                        |                                                                    |                      |            |                        |  |           |            |            |  |      |            |            |  |   |            |            | 
|                                                                                                        | Weighted average number of common shares outstanding during period |                      |            | 18,042,472             |  |           |            | 16,655,772 |  |      |            | 17,818,325 |  |   |            | 16,568,675 | 
|                                                                                                        |                                                                    |                      |            |                        |  |           |            |            |  |      |            |            |  |   |            |            | 
|Basic earnings per share                                                                                |                                                                    | $                    | 0.09       |                        |  | $         | 0.04       |            |  | $    | 0.30       |            |  | $ | 0.19       |           
|                                                                                                        |                                                                    |                      |            |                        |  |           |            |            |  |      |            |            |  |   |            |            | 
|Diluted earnings per share:                                                                             |                                                                    |                      |            |                        |  |           |            |            |  |      |            |            |  |   |            |           
|                                                                                                        | Net earnings                                                       |                      | $          | 1,535                  |  |           | $          | 590        |  |      | $          | 5,276      |  |   | $          | 3,078      | 
|                                                                                                        |                                                                    |                      |            |                        |  |           |            |            |  |      |            |            |  |   |            |            | 
|                                                                                                        | Weighted average number of common shares outstanding during period |                      |            | 18,042,472             |  |           |            | 16,655,772 |  |      |            | 17,818,325 |  |   |            | 16,568,675 | 
|                                                                                                        | Common stock equivalents                                           |                      |            | 634,845                |  |           |            | 342,058    |  |      |            | 701,345    |  |   |            | 245,469    | 
|                                                                                                        | Contingently issuable shares                                       |                      |            | 386,646                |  |           |            | 0          |  |      |            | 387,684    |  |   |            | 0          | 
|                                                                                                        |                                                                    |                      |            |                        |  |           |            |            |  |      |            |            |  |   |            |            | 
|                                                                                                        |                                                                    |                      | 19,063,963 |                        |  |           | 16,997,830 |            |  |      | 18,907,354 |            |  |   | 16,814,144 |           
|                                                                                                        |                                                                    |                      |            |                        |  |           |            |            |  |      |            |            |  |   |            |            | 
|Diluted earnings per share                                                                              |                                                                    | $                    | 0.08       |                        |  | $         | 0.03       |            |  | $    | 0.28       |            |  | $ | 0.18       |           
|                                                                                                        |                                                                    |                      |            |                        |  |           |            |            |  |      |            |            |  |   |            |            | 
|Weighted average common stock equivalents not included in EPS
because the effect would be anti-dilutive |                                                                    |                      | 264,011    |                        |  |           | 1,280,290  |            |  |      | 132,006    |            |  |   | 1,922,649  |           
|                                                                                                        |                                                                    |                      |            |                        |  |           |            |            |  |      |            |            |  |   |            |            | 

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NOTE 3: RESERVE FOR STORE CLOSINGS

Store closing reserves are established based on estimates of net lease
obligations and other store closing costs. During the fourth quarter of 1998,
the Company recorded a charge of $8,604,000 for revised estimates of net lease
obligations for stores closed at January 31, 1999 and stores committed to be
closed in fiscal 1999. This charge, when combined with an already existing
reserve, resulted in a total reserve of $9,022,000 at January 31, 1999.

At August 4, 2002, the total reserve balance included in current and noncurrent
liabilities was $2,285,000 which represents the present value of the future net
lease obligations for the locations which have been closed. The 2002
activity in the reserve is as follows (in thousands):

|                  |  |                  |       |          |  |         |    |                |  |  |      |   |  |   |       | 
|----------------- |  | ---------------- | ----- | -------- |  | ------- | -- | -------------- |  |  | ---- | - |  | - | ----- | 
|                  |  |                  |       |          |  | Imputed |    | Payments on    |  |  |      |  
|                  |  | February 3, 2002 |       | Interest |  | Reserve |    | August 4, 2002
|                  |  |                  |       |          |  |         |    |               
|Lease Obligations |  | $                | 2,884 |          |  |         | 84 |                |  |  | (555 | ) |  | $ | 2,413 | 
|                  |  |                  |       |          |  |         |    |                |  |  |      |   |  |   |       | 

NOTE 4: RECENT ACCOUNTING PRONOUNCEMENTS

Recently Adopted

In July 2001, the FASB issued SFAS No. 142, Goodwill and Other Intangible
Assets. SFAS No. 142 changes the accounting for goodwill and other
indefinite-lived intangible assets from an amortization method to an
impairment-only approach. Amortization of goodwill and other indefinite-lived
intangible assets will cease upon adoption of this Statement. The Company
implemented SFAS No. 142 on February 4, 2002. Therefore, annual goodwill
amortization expense of $383,000 will not recur; however, if the value of such
goodwill is deemed impaired, a charge to earnings will be recorded for the
impairment.

|                            |  |                                              |       |   |                      |   |                        |   |           |   |          |   |      |   |       |   |      |  | 
|--------------------------- |  | -------------------------------------------- | ----- | - | -------------------- | - | ---------------------- | - | --------- | - | -------- | - | ---- | - | ----- | - | ---- |  | 
|                            |  |                                              |       |   | Thirteen Weeks Ended |   | Twenty-six Weeks Ended
|                            |  |                                              |       |   |                      |   |                       
|                            |  |                                              |       |   | August 4,            |   | July 29,               |   | August 4, |   | July 29,
|                            |  |                                              |       |   | 2002                 |   | 2001                   |   | 2002      |   | 2001    
|                            |  |                                              |       |   |                      |   |                        |   |           |   |         
|Reported Net Income         |  | $                                            | 1,535 |   |                      | $ | 590                    |   |           | $ | 5,276    |   |      | $ | 3,078 |  
|                            |  | Add Back: Goodwill Amortization
(net of tax) |       |   |                     |   |                        |   | 60        |   |          |   |     |   |       |   | 120  | 
|                            |  |                                              |       |   |                      |   |                        |   |           |   |          |   |      |   |       |  
|Adjusted Net Income         |  | $                                            | 1,535 |   |                      | $ | 650                    |   |           | $ | 5,276    |   |      | $ | 3,198 |  
|                            |  |                                              |       |   |                      |   |                        |   |           |   |          |   |      |   |       |  
|Basic Earnings Per Share:   |  |                                              |       |   |                      |   |                        |   |           |   |          |   |      |   |       |  
|                            |  | Reported Net Income                          |       | $ | 0.09                 |   |                        | $ | 0.04      |   |          | $ | 0.30 |   |       | $ | 0.19 | 
|                            |  | Goodwill Amortization                        |       |   |                     |   |                        |   |          |   |          |   |     |   |       |   |     | 
|                            |  |                                              |       |   |                      |   |                        |   |           |   |          |   |      |   |       |  
|Adjusted Net Income         |  | $                                            | 0.09  |   |                      | $ | 0.04                   |   |           | $ | 0.30     |   |      | $ | 0.19  |  
|                            |  |                                              |       |   |                      |   |                        |   |           |   |          |   |      |   |       |  
|Diluted Earnings Per Share: |  |                                              |       |   |                      |   |                        |   |           |   |          |   |      |   |       |  
|                            |  | Reported Net Income                          |       | $ | 0.08                 |   |                        | $ | 0.03      |   |          | $ | 0.28 |   |       | $ | 0.18 | 
|                            |  | Goodwill Amortization                        |       |   |                     |   |                        |   |          |   |          |   |     |   |       |   |     | 
|                            |  |                                              |       |   |                      |   |                        |   |           |   |          |   |      |   |       |  
|Adjusted Net Income         |  | $                                            | 0.08  |   |                      | $ | 0.03                   |   |           | $ | 0.28     |   |      | $ | 0.18  |  
|                            |  |                                              |       |   |                      |   |                        |   |           |   |          |   |      |   |       |  

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In October 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets,effective for years beginning after December 15,
2001. This Statement supersedes SFAS No. 121, Accounting for the Impairment of
Long-Lived Assets and Long-Lived Assets to Be Disposed of, but retains the
fundamental provision of SFAS No. 121 for recognition and measurement of the
impairment of long-lived assets to be held and used and measurement of
long-lived assets to be held for sale. The statement requires that whenever
events or changes in circumstances indicate that a long-lived assets carrying
value may not be recoverable, the asset should be tested for recoverability.
The statement also requires that a long-lived asset classified as held for sale
should be carried at the lower of its carrying value or fair value, less cost
to sell. The Company adopted SFAS No. 144 on February 4, 2002 and it did not
have a material effect on its financial statements upon adoption.

Pronouncements Not Yet Adopted

In June 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement
Obligations. FAS 143 requires that obligations associated with the retirement
of a tangible long-lived asset be recorded as a liability when those
obligations are incurred, with the amount of the liability initially measured
at fair value. Upon initially recognizing a liability for an asset retirement
obligation (ARO), an entity must capitalize the cost by recognizing an
increase in the carrying amount of the related long-lived asset. Over time, the
liability is accreted to its present value each period, and the capitalized
cost is depreciated over the useful life of the related asset. Upon settlement
of the liability, an entity either settles the obligation for its recorded
amount or incurs a gain or loss upon settlement. The Statement will be
effective for financial statements for fiscal years beginning after June 15,
2002. The Company does not believe that the adoption of this statement will
have a material impact on its financial statements.

In May 2002, the FASB issued SFAS 145, Rescission of FASB Statements No. 4, 44,
and 64, Amendment of FASB Statement No. 13 and Technical Corrections as of
April 2002.This statement eliminates an inconsistency between the required
accounting for sale-leaseback transactions and the required accounting for
certain lease modifications that have economic effects that are similar to
sale-leaseback transactions. This Statement also amends other existing
authoritative pronouncements to make various technical corrections, clarify
meanings, or describe their applicability under changed conditions, and it
eliminates the treatment of early extinguishments of debt as extraordinary
items. The provisions of this Statement related to the rescission of SFAS 4
shall be applied in fiscal years beginning after May 15, 2002. The provisions
related to SFAS 13 shall be effective for transactions occurring after May 15,
2002. All other provisions of this Statement shall be effective for financial
statements issued on or after
May 15, 2002. The Company does not believe that adoption of this statement will
have a material impact on its financial statements.

In July 2002, the FASB issued SFAS 146 Accounting for Costs Associated with
Exit or Disposal Activities. This Statement addresses financial accounting and
reporting for costs associated with exit or disposal activities and nullifies
Emerging Issues Task Force (EITF) Issue No. 94-3, Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring). This Statement requires
that a liability for a cost
associated with an exit or disposal activity be recognized when the liability
is incurred rather than at the date of an entitys commitment as provided under
Issue 94-3. This Statement also establishes that fair value is the objective
for initial measurement of the liability. The provisions of this Statement are
effective for exit or disposal activities that are initiated after December 31,
2002. The Company does not believe adoption of the provisions of this statement
will have a material impact on its financial statements.

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ITEM 2: MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

FINANCIAL CONDITION

Historically, cash flow from operations has been sufficient to finance the
expansion and operation of Hancocks business. Hancocks principal capital
requirements are for the financing of inventories and to a lesser extent for
capital expenditures relating to store locations and its warehouse and
distribution facility. Funds for such purposes are generated from Hancocks
operations and, if necessary, supplemented by borrowings from commercial
lenders. In addition to cash dividends, Hancock has historically used excess
cash and, if necessary, borrowings from commercial lenders to purchase treasury
stock as market and financial conditions dictate. Hancock opened 6 stores and
closed 7 stores during the thirteen weeks ended August 4, 2002, resulting in a
total of 436 stores at quarter end.

On May 7, 2002, Hancock announced the acquisition of a 473,000 square foot
warehouse/distribution facility on 64 acres north of the Tupelo headquarters
for $7.7 million. This facility initially will be utilized to stock, allocate
and distribute merchandise groups that require special handling, such as
foam/batting, seasonal products and home accents, as well as a growing
cross-docking operation.

During the twenty-six weeks ended August 4, 2002, net earnings of $5.3 million,
$12.2 million provided through the exercise of stock options, and $11 million
in borrowings were used to fund $12.1 million in additions to property and
equipment, a $5.9 million increase in inventory, a $3.3 million reduction in
accrued liabilities and a $3.4 million decrease in current income tax
obligations. At August 4, 2002, the Company had $11 million in debt, or 9% of
total capitalization, compared to $27 million, or 24% of total capitalization
at July 29, 2001.

RESULTS OF OPERATIONS

Thirteen weeks ended August 4, 2002 compared to thirteen weeks ended July 29,
2001

Net earnings were $1.5 million, or $.08 per diluted share, compared with $590
thousand, or $.03 per diluted share, in the same period of the prior year.
Earnings were influenced by higher sales, a higher gross margin and lower
expenses as a percentage of sales than last year.

Sales increased to $92.7 million from $86.8 million in last years first
quarter, as the result of an increase of 7.3% in comparable store sales.
Sales benefited from the remerchandising of our product mix, which
has led to higher sales in the home decorating side of our business
and the continued repositioning of our store base. The store
repositioning strategy has consisted of closing smaller, low
potential stores that were often located too closely together, while
opening or acquiring larger stores spaced farther apart to better
support an expanded product offering within our core merchandise
competency. Gross margins increased to 51.3% from 50.4%
last year due to a LIFO credit resulting from product cost deflation,
enhancements to the merchandise mix related to higher-margin home
decorating products, and a more effective marketing/advertising
program.

In the second quarter of 2002, total selling, general and administrative
expenses as a percentage of sales were slightly lower than in the second
quarter of 2001 due to expense leverage from comparable store sales increases.
Such improvements were partially offset by higher pension costs resulting from
the two-year weakness in investment returns, rising employee medical insurance
expense and higher advertising costs due to a direct mail promotion that was
required to be expensed in the second quarter although most of the ad related
to the third quarter.

Interest expense decreased due to a lower level of outstanding debt and lower
interest rates throughout the quarter.

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Twenty-six weeks ended August 4, 2002 compared to twenty-six weeks ended July
29, 2001

Net earnings were $5.3 million, or $.28 per diluted share, compared with $3.1
million, or $.18 per diluted share, in the same period of the prior year.
Earnings were influenced by higher sales, a higher gross margin and lower
expenses as a percentage of sales than last year.

Sales increased to $196.7 million from $184.4 million in last years first
half, as the result of an increase of 7.3% in comparable store sales.
Sales benefited from the remerchandising of our product mix, which
has led to higher sales in the home decorating side of our business
and the continued repositioning of our store base. The store
repositioning strategy has consisted of closing smaller, low
potential stores that were often located too closely together, while
opening or acquiring larger stores spaced farther apart to better
support an expanded product offering within our core merchandise
competency. Gross margins increased to 50.9% from 50.0%
last year due to a LIFO credit resulting from product cost deflation, the
enhancements to the merchandise mix related to higher-margin home
decorating products, and a more effective marketing/advertising
program.

In the first half of 2002, total selling, general and administrative expenses
as a percentage of sales were slightly lower than in the same period of 2001
due to expense leverage from comparable store sales increases. Such
improvements were partially offset by higher pension costs resulting from the
two-year weakness in investment returns, rising employee medical insurance
expense and higher advertising costs due to a direct mail promotion that was
required to be expensed in the second quarter although most of the ad related
to the third quarter.

Interest expense decreased due to a lower level of outstanding debt and lower
interest rates throughout the twenty-six weeks of 2002.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the recorded amount of assets and
liabilities at the date of the financial statements and revenues and expenses
during the period. Significant accounting policies employed by the Company,
including the use of estimates and assumptions, are presented in the Notes to
Consolidated Financial Statements incorporated into the Companys Annual Report
on Form 10-K. Management bases its estimates on its historical experience,
together with other relevant factors, in order to form the basis for making
judgments which will affect the carrying values of assets and liabilities. On
an ongoing basis, management evaluates its estimates and makes changes to
carrying values as deemed necessary and appropriate. The Company believes that
estimates related to the following areas involve a higher degree of judgment
and/or complexity:



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Inventories are valued at the lower of cost or market; cost is
determined by the LIFO method. As with other retailers, it is not practical
to perform physical inventory counts for all stores on the last day of a
period; therefore, certain assumptions must be made in order to record cost
of sales and the related change in inventory for the period of time from
each stores most recent physical count to the end of the period. Although,
under certain circumstances, actual results could prove to be materially
different from the estimates used, Hancock has consistently used the same
methodology throughout its existence with dependable results, and management
believes that it provides an inventory valuation which results in carrying
inventory at the lower of cost or market.
|
| | Workers compensation, general liability and employee medical insurance
programs are largely self-insured. It is the Companys policy to record its
self-insurance liabilities using estimates of claims incurred but not yet
reported or paid, based on historical trends and other relevant factors.
Actual results can vary from estimates for many reasons including, among
others, future inflation rates, claims settlement patterns, litigation
trends and legal interpretations.                                                                                                                                                                                                                                                                                                                 
|
| | Store closing reserves are based on estimates of net lease obligations
and other store closing costs, including assumptions about anticipated
future subleases of properties. If real estate leasing markets change, the
reserves will have to be adjusted.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              

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OFF-BALANCE SHEET ARRANGEMENTS

The Company has no off-balance sheet financing arrangements.

CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS

The Company has arrangements with two banks that provide for up to $10 million
in letters of credit. At August 4, 2002, Hancock had commitments under these
arrangements of $3,520,000 to guarantee payment of potential workers
compensation claims and $4,696,000 on issued letters of credit, which support
purchase orders for merchandise to be imported. Also, Hancock leases its
retail fabric store locations under operating leases expiring at various dates
through 2022.

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

EFFECTS OF INFLATION

The impact of inflation on labor and occupancy costs can significantly affect
Hancocks operations. Many of Hancocks employees are paid hourly rates
related to Federal and State minimum wage requirements; accordingly, any
increases will affect Hancock. In addition, payroll taxes, employee benefits
and other employee costs continue to increase. Health insurance costs, in
particular, continue to rise at an unsettling rate in the United States each
year, and higher employer contributions to the Companys pension plan have been
necessary recently in light of weaker investment returns. Costs of leases for
new store locations remain stable, but renewal costs of older leases continue
to increase. Property and casualty insurance premiums are now increasing
substantially after several years of soft pricing in the insurance industry.
Hancock believes the practice of maintaining adequate operating margins through
a combination of price adjustments and cost controls, careful evaluation of
occupancy needs and efficient purchasing practices are the most effective tools
for coping with increased costs and expenses.

Inflation is one of the key factors used in the calculation of the LIFO charge
or credit to Cost of Sales. In 2001, an increase in the producer price indices
(PPI) resulted in a LIFO charge. A decrease in the PPI resulted in a LIFO
credit in 2002.

SEASONALITY

Hancocks business is slightly seasonal. Peak sales periods occur during the
fall and pre-Easter weeks, while the lowest sales periods occur during the
summer and the month of January.

RECENT ACCOUNTING PRONOUNCEMENTS

Recently Adopted

In July 2001, the FASB issued SFAS No. 142, Goodwill and Other Intangible
Assets. SFAS No. 142 changes the accounting for goodwill and other
indefinite-lived intangible assets from an amortization

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method to an impairment-only approach. Amortization of goodwill and other
indefinite-lived intangible assets will cease upon adoption of this Statement.
The Company implemented SFAS No. 142 on February 4, 2002. Therefore, annual
goodwill amortization expense of $383,000 will not recur; however, if the value
of such goodwill is deemed impaired, a charge to earnings will be recorded for
the impairment. An impairment test was performed, and no impairment was noted as
of May 5, 2002.

|                            |                       |                                              |       |                      |   |                        |      |           |    |          |       |      |   |   |       |      |     | 
|--------------------------- | --------------------- | -------------------------------------------- | ----- | -------------------- | - | ---------------------- | ---- | --------- | -- | -------- | ----- | ---- | - | - | ----- | ---- | --- | 
|                            |                       |                                              |       | Thirteen Weeks Ended |   | Twenty-six Weeks Ended
|                            |                       |                                              |       |                      |   |                       
|                            |                       |                                              |       | August 4,            |   | July 29,               |      | August 4, |    | July 29,
|                            |                       |                                              |       | 2002                 |   | 2001                   |      | 2002      |    | 2001    
|                            |                       |                                              |       |                      |   |                        |      |           |    |         
|Reported Net Income         |                       | $                                            | 1,535 |                      |   | $                      | 590  |           |    | $        | 5,276 |      |   | $ | 3,078 |     
|                            |                       | Add Back: Goodwill Amortization
(net of tax) |       |                      |  |                        |      |           | 60 |          |       |      |  |   |       |      | 120 | 
|                            |                       |                                              |       |                      |   |                        |      |           |    |          |       |      |   |   |       |     
|Adjusted Net Income         |                       | $                                            | 1,535 |                      |   | $                      | 650  |           |    | $        | 5,276 |      |   | $ | 3,198 |     
|                            |                       |                                              |       |                      |   |                        |      |           |    |          |       |      |   |   |       |     
|Basic Earnings Per Share:   |                       |                                              |       |                      |   |                        |      |           |    |          |       |      |   |   |       |     
|                            | Reported Net Income   |                                              | $     | 0.09                 |   |                        | $    | 0.04      |    |          | $     | 0.30 |   |   | $     | 0.19 |    
|                            | Goodwill Amortization |                                              |       |                     |   |                        |      |          |    |          |       |     |   |   |       | 0.01 |    
|                            |                       |                                              |       |                      |   |                        |      |           |    |          |       |      |   |   |       |     
|Adjusted Net Income         |                       | $                                            | 0.09  |                      |   | $                      | 0.04 |           |    | $        | 0.30  |      |   | $ | 0.20  |     
|                            |                       |                                              |       |                      |   |                        |      |           |    |          |       |      |   |   |       |     
|Diluted Earnings Per Share: |                       |                                              |       |                      |   |                        |      |           |    |          |       |      |   |   |       |     
|                            | Reported Net Income   |                                              | $     | 0.08                 |   |                        | $    | 0.03      |    |          | $     | 0.28 |   |   | $     | 0.18 |    
|                            | Goodwill Amortization |                                              |       |                     |   |                        |      |          |    |          |       |     |   |   |       | 0.01 |    
|                            |                       |                                              |       |                      |   |                        |      |           |    |          |       |      |   |   |       |     
|Adjusted Net Income         |                       | $                                            | 0.08  |                      |   | $                      | 0.03 |           |    | $        | 0.28  |      |   | $ | 0.19  |     
|                            |                       |                                              |       |                      |   |                        |      |           |    |          |       |      |   |   |       |     

In October 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets,effective for years beginning after December 15,
2001. This Statement supersedes SFAS No. 121, Accounting for the Impairment of
Long-Lived Assets and Long-Lived Assets to Be Disposed of, but retains the
fundamental provision of SFAS No. 121 for recognition and measurement of the
impairment of long-lived assets to be held and used and measurement of
long-lived assets to be held for sale. The Statement requires that whenever
events or changes in circumstances indicate that a long-lived assets carrying
value may not be recoverable, the asset should be tested for recoverability.
The Statement also requires that a long-lived asset classified as held for sale
should be carried at the lower of its carrying value or fair value, less cost
to sell. The Company adopted SFAS No. 144 on February 4, 2002 and it did not
have a material effect on its financial statements upon adoption.

Pronouncements Not Yet Adopted

In June 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement
Obligations. FAS 143 requires that obligations associated with the retirement
of a tangible long-lived asset be recorded as a liability when those
obligations are incurred, with the amount of the liability initially measured
at fair value. Upon initially recognizing a liability for an asset retirement
obligation (ARO), an entity must capitalize the cost by recognizing an
increase in the carrying amount of the related long-lived asset. Over time, the
liability is accreted to its present value each period, and the capitalized
cost is
depreciated over the useful life of the related asset. Upon settlement of the
liability, an entity either settles the obligation for its recorded amount or
incurs a gain or loss upon settlement. The Statement will be
effective for financial statements for fiscal years beginning after June 15,
2002. The Company does not believe that the adoption of this Statement will
have a material impact on its financial statements.

In May 2002, the FASB issued SFAS 145, Rescission of FASB Statements No. 4, 44,
and 64, Amendment of FASB Statement No. 13 and Technical Corrections as of
April 2002.This Statement eliminates an inconsistency between the required
accounting for sale-leaseback transactions and the required accounting for
certain lease modifications that have economic effects that are similar to
sale-leaseback

13



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transactions. This Statement also amends other existing
authoritative pronouncements to make various technical corrections, clarify
meanings, or describe their applicability under changed conditions, and it
eliminates the treatment of early extinguishments of debt as extraordinary
items. The provisions of this Statement related to the rescission of SFAS 4
shall be applied in fiscal years beginning after May 15, 2002. The provisions
related to SFAS 13 shall be effective for transactions occurring after May 15,
2002. All other provisions of this Statement shall be effective for financial
statements issued on or after
May 15, 2002. The Company does not believe that adoption of this
Statement will
have a material impact on its financial statements.

In July 2002, the FASB issued SFAS 146 Accounting for Costs Associated with
Exit or Disposal Activities. This Statement addresses financial accounting and
reporting for costs associated with exit or disposal activities and nullifies
Emerging Issues Task Force (EITF) Issue No. 94-3, Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring). This Statement requires
that a liability for a cost
associated with an exit or disposal activity be recognized when the liability
is incurred rather than at the date of an entitys commitment as provided under
Issue 94-3. This Statement also establishes that fair value is the objective
for initial measurement of the liability. The provisions of this Statement are
effective for exit or disposal activities that are initiated after December 31,
2002. The Company does not believe adoption of the provisions of this
Statement
will have a material impact on its financial statements.

FORWARD-LOOKING STATEMENTS

From time to time, the Company may publish forward-looking statements relating
to such matters as anticipated financial performance, financial items and
results, plans for future expansion, store closures and other business
development activities, capital spending or financing sources, capital
structure and similar matters. The Private Securities Litigation Reform Act of
1995 provides a safe harbor for forward-looking statements. In order to comply
with the terms of the safe harbor, the Company notes that a variety of factors
could cause the Companys actual results and experience to differ materially
from the anticipated results or other expectations expressed in the Companys
forward-looking statements. The risks and uncertainties that may affect the
operations, performance, development and results of the Companys business
include, but are not limited to, stability of interest rates during periods of
borrowings and the effects of regulation, general economic trends
(including inflation), changes in
consumer demand or purchase patterns, delays or interruptions in the flow of
merchandise between the Companys suppliers and/or its distribution center and
its stores, disruption in the Companys data processing services, and
competitive changes, including, but not limited to, liquidations of inventory
in Hancocks markets in connection with a competitors store closings or mass
liquidations of old inventory.




Item 3: Quantitative and Qualitative Disclosures about Market Risks

The Company does not hold derivative financial or commodity instruments at
August 4, 2002. The Company is exposed to financial market risks, including
changes in interest rates. All borrowings under the Companys Revolving Credit
Agreement bear interest at a negotiated rate, a floating rate (the higher of
the federal funds rate plus 1/2% or the prime rate), a rate derived from the
money market rate, or a rate derived from the London Interbank Offered Rate.
An increase in interest rates of 100 basis points would not significantly
affect the Companys results. All of the Companys business is transacted in
U. S. dollars and, accordingly, foreign exchange rate fluctuations have never
had a significant impact on the Company, and they are not expected to in the
foreseeable future.

14



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##### Table of Contents






PART II. OTHER INFORMATION:




Item 6: Exhibits and Reports on Form 8-K

(b)  Reports on Form 8-K

None




SIGNATURE

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

|                   |  |                                                 |  |                                                                                                              
|------------------ |  | ----------------------------------------------- |  | -------------------------------------------------------------------------------------------------------------
|                   |  | HANCOCK FABRICS, INC.
             (Registrant)
|                  
|                   |  |                                                 |  |                                                                                                              
|                  
|                   |  | By:                                             |  | /s/                                                                                                          
|                   |  |                                                 |  | Bruce D. Smith
Senior Vice President and
Chief Financial Officer
(Principal Financial and
Accounting Officer)
|                  
|                   |  |                                                 |  |                                                                                                              
|                  
|September 18, 2002 |  |                                                 |  |                                                                                                              

15



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##### Table of Contents



Certification of Chief Executive Officer
Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002

I, Larry G. Kirk, certify that:



| |                                                                                                                                                                                                                                                                                                                                      
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 1. I have reviewed this quarterly report on Form 10-Q of Hancock
Fabrics, Inc. (Hancock);                                                                                                                                                                                                                                          
|
| | 2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to the
period covered by this quarterly report; and
|
| | 3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of Hancock Fabrics, Inc. as of, and for, the periods presented in
this quarterly report.                

|                         |  |     |  |                                                                
|------------------------ |  | --- |  | ---------------------------------------------------------------
|Date: September 18, 2002 |  | /s/ |  | Larry G. Kirk
Chairman of the Board and Chief Executive Officer

Certification of Chief Executive Officer
Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002

In connection with this quarterly report on Form 10-Q of Hancock Fabrics, Inc.,
I, Larry G. Kirk, Chief Executive Officer of Hancock Fabrics, Inc., certify,
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:



| |                                                                                                                                                                    
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (1)  The report fully complies with the requirements of Section 13(a)
or 15(d) of the Securities Exchange Act of 1934; and                                         
|
| | (2)  The information contained in this report fairly presents, in all
material respects, the financial condition and results of operations
of Hancock Fabrics, Inc.

|                         |  |     |  |                                                                
|------------------------ |  | --- |  | ---------------------------------------------------------------
|Date: September 18, 2002 |  | /s/ |  | Larry G. Kirk
Chairman of the Board
and Chief Executive Officer

16



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##### Table of Contents



Certification of Chief Financial Officer
Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002

I, Bruce D. Smith, certify that:



| |                                                                                                                                                                                                                                                                                                                                           
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 1.      I have reviewed this quarterly report on Form 10-Q of Hancock
Fabrics, Inc. (Hancock);                                                                                                                                                                                                                                          
|
| | 2.      Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to the
period covered by this quarterly report; and
|
| | 3.      Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of Hancock Fabrics, Inc. as of, and for, the periods presented in
this quarterly report.                

|                         |  |     |  |                                                                 
|------------------------ |  | --- |  | ----------------------------------------------------------------
|Date: September 18, 2002 |  | /s/ |  | Bruce D. Smith
Senior Vice President and
Chief Financial Officer

Certification of Chief Financial Officer
Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002

In connection with this quarterly report on Form 10-Q of Hancock Fabrics, Inc.
I, Bruce D. Smith, Chief Financial Officer of Hancock Fabrics, Inc., certify,
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:



| |                                                                                                                                                                        
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (1)      The report fully complies with the requirements of Section
13(a) or 15(d) of the Securities Exchange Act of 1934; and                                         
|
| | (2)      The information contained in this report fairly presents, in
all material respects, the financial condition and results of
operations of Hancock Fabrics, Inc.

|                         |  |     |  |                                                                 
|------------------------ |  | --- |  | ----------------------------------------------------------------
|Date: September 18, 2002 |  | /s/ |  | Bruce D. Smith
Senior Vice President and Chief Financial Officer

17