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 May 4, 2003

                                       OR

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

            For the transition period from_____________to___________.

                         Commission File Number 1 - 9482

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

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

 3406 West Main Street, Tupelo, MS                           38801
(Address of principal executive offices)                   (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  by check mark  whether  the  Registrant  is an  accelerated  filer (as
defined in Exchange Act Rule 12b-2). 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 May 4, 2003,  the  registrant  had  outstanding an aggregate of 18,417,425
shares of common stock, $.01 par value.
<PAGE>

INDEX

Part I.  Financial Information:

                                                                   Page Numbers
Item 1.  Financial Statements (unaudited)

 Consolidated Balance Sheet as of May 4, 2003 and
  February 2, 2003                                                         3

 Consolidated Statement of Earnings for the Thirteen
  Weeks Ended May 4, 2003 and May 5, 2002                                  4

 Consolidated Statement of Shareholder's Equity for
  the Thirteen Weeks May 4, 2003                                           5

 Consolidated Statement of Cash Flows for the Thirteen
  Weeks Ended May 4, 2003 and May 5, 2002                                  6

 Notes to Consolidated Financial Statements                              7 - 9

 Item 2.  Management's Discussion and Analysis of
  Financial Condition and Results of Operations                         10 - 13

 Item 3.  Quantitative and Qualitative Disclosures about
          Market Risks                                                    14

 Item 4.  Controls and Procedures                                         14

Part II.  Other Information:

  Item 4.  Submission of Matters to a Vote of Securityholders             14

  Item 6.  Exhibits and Reports on Form 8-K                               15

Signature                                                                 15

Certification of the Chief Executive Officer                              16

Certification of the Chief Financial Officer                              17

                                       2
<PAGE>
PART I.  FINANCIAL INFORMATION

CONSOLIDATED BALANCE SHEET
(unaudited)
--------------------------------------------------------------------------------
(in thousands, except for share and per share amounts)      May 4,   February 2,
                                                             2003       2003
--------------------------------------------------------------------------------

Assets
Current assets:
    Cash and cash equivalents                               $3,928      $4,589
    Receivables, less allowance for doubtful accounts        1,040       1,100
    Inventories                                            146,106     144,061
    Prepaid expenses                                         1,389       2,570
-------------------------------------------------------------------------------
    Total current assets                                   152,463     152,320

Property and equipment, at depreciated cost                 43,976      41,853
Deferred tax asset                                           4,465       4,465
Pension payment in excess of required contribution          18,049      18,829
Goodwill                                                     4,480       4,480
Other assets                                                 3,479       3,563
-------------------------------------------------------------------------------
    Total assets                                          $226,912    $225,510
===============================================================================
Liabilities and Shareholders' Equity
Current liabilities:
    Accounts payable                                       $40,460     $44,357
    Accrued liabilities                                     16,300      21,039
    Deferred tax liabilities                                 3,078       3,078
    Income taxes                                             4,269       5,089
-------------------------------------------------------------------------------
    Total current liabilities                               64,107      73,563

Long-term debt obligations                                  17,000           0
Postretirement benefits other than pensions                 22,077      21,976
Reserve for store closings                                     740         878
Other liabilities                                            4,676       4,862
-------------------------------------------------------------------------------
    Total liabilities                                      108,600     101,279
-------------------------------------------------------------------------------

Commitments and contingencies

Shareholders' equity:
  Common stock, $.01 par value; 80,000,000 shares
   authorized; 31,501,476 and 31,481,715 issued and
   outstanding, respectively                                   315         315
  Additional paid-in capital                                64,181      63,805
  Retained earnings                                        210,846     208,659
  Treasury stock, at cost, 13,084,051 and 12,431,937
   shares held, respectively                              (151,747)   (142,545)
  Deferred compensation on restricted stock
   incentive plan                                           (5,283)     (6,003)
-------------------------------------------------------------------------------
    Total shareholders' equity                             118,312     124,231
-------------------------------------------------------------------------------
    Total liabilities and shareholders' equity            $226,912    $225,510
===============================================================================

          See accompanying notes to consolidated financial statements.
                                       3
<PAGE>
CONSOLIDATED STATEMENT OF EARNINGS
(unaudited)

--------------------------------------------------------------------------------
                                                --------------------------------
(in thousands, except                                 Thirteen Weeks Ended
                                                --------------------------------
  per share amounts)                               May 4,             May 5,
                                                    2003               2002
--------------------------------------------------------------------------------

Sales                                            $107,636            $104,054
Cost of goods sold                                 52,897              51,519
--------------------------------------------------------------------------------

  Gross profit                                     54,739              52,535
--------------------------------------------------------------------------------

Expenses (income)
  Selling, general and administrative              46,820              45,379
  Depreciation and amortization                     1,452               1,332
  Interest expense                                     94                  60
  Interest income                                     (17)                (31)
--------------------------------------------------------------------------------
  Total operating and interest expenses            48,349              46,740
--------------------------------------------------------------------------------

Earnings before income taxes                        6,390               5,795
Income taxes                                        2,319               2,104
------------------------------------------------------------------------------

Net earnings and comprehensive income              $4,071              $3,691
================================================================================

Earnings per share
       Basic                                        $0.23               $0.21
       Diluted                                      $0.22               $0.20

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

Weighted average shares outstanding
       Basic                                       17,790              17,594
       Diluted                                     18,684              18,828

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

Dividends per share                                 $0.10                0.08
================================================================================

          See accompanying notes to consolidated financial statements.

                                       4
<PAGE>
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(unaudited)
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------------------
(in thousands, except for
  number of shares)                       Common Stock    Additional                Treasury Stock                     Total
                                   ----------------------- Paid-in   Retained    ------------------    Deferred     Shareholders'
                                     Shares       Amount   Capital   Earnings     Shares     Amount   Compensation     Equity
--------------------------------------------------------------------------------------------------------------------------------
Thirteen weeks ended May 4, 2003
--------------------------------------------------------------------------------------------------------------------------------
       <S>                             <C>           <C>     <C>        <C>       <C>           <C>            <C>          <C>
Balance February 2, 2003            31,481,715       $315   $63,805  $208,659  (12,431,937) ($142,545)  ($6,003)       $124,231
Net earnings                                                            4,071                                             4,071
Cash dividend - $.10 per
 share on a quarterly basis                                            (1,884)                                           (1,884)
Cancellation of restricted stock       (26,100)                (216)                                        216
Amortization and vesting of deferred
 compensation on restricted stock
 incentive plan                                                  30                                         504             534
Purchase of treasury stock                                                        (652,114)    (9,202)                   (9,202)
Issurance of shares as compensation
  for professional services                497                    7                                                           7
Issuance of shares under directors'
  stock plan                             3,114                   45                                                          45
Exercise of stock options               42,250                  510                                                         510

--------------------------------------------------------------------------------------------------------------------------------
Balance May 4, 2003                 31,501,476       $315   $64,181  $210,846  (13,084,051) ($151,747)  ($5,283)       $118,312
================================================================================================================================
</TABLE>
                                       5
          See accompanying notes to consolidated financial statements.
<PAGE>
CONSOLIDATED STATEMENT OF CASH FLOWS
(unaudited)
--------------------------------------------------------------------------------
(in thousands)
<TABLE>
<CAPTION>
                                                             Thirteen Weeks Ended
                                                         ----------------------------
                                                            May 4,         May 5,
                                                             2003           2002
-------------------------------------------------------------------------------------
<S>                                                            <C>            <C>
Cash flows from operating activities:
  Net earnings                                                 $4,071         $3,691
  Adjustments to reconcile net earnings to cash
   provided by (used in) operating activities
    Depreciation and amortization                               1,452          1,332
    Amortization of deferred compensation on
     restricted stock incentive plan                              504            515
    Interest expense on closed store accrual                       34             43
    (Increase) decrease in assets
      Receivables and prepaid expenses                          1,241            (84)
      Inventory at current cost                                (2,045)         3,087
      Pension payment in excess of required contribution          780            437
      Other noncurrent assets                                      84             75
    Increase (decrease) in liabilities
      Accounts payable                                         (3,897)        (6,852)
      Accrued liabilities                                      (4,739)        (4,028)
      Current income tax obligations                             (790)        (3,294)
      Postretirement benefits other than pensions                 101             (5)
      Payments against closed store accrual                      (172)          (217)
      Issuance of shares as compensation for professional
       services                                                     7              8
      Other liabilities                                          (186)           (30)
-------------------------------------------------------------------------------------
     Net cash provided by (used in) operating activities       (3,555)        (5,322)
-------------------------------------------------------------------------------------
Cash flows from investing activities:
  Additions to property and equipment                          (3,575)        (2,083)
-------------------------------------------------------------------------------------
     Net cash provided by (used in) investing activities       (3,575)        (2,083)
-------------------------------------------------------------------------------------
Cash flows from financing activities:
  Net borrowings (repayments) on revolving
    credit agreement                                           17,000
  Purchase of treasury stock                                   (9,202)          (728)
  Issuance of shares under directors' stock plan                   45             44
  Exercise of stock options                                       510          9,930
  Cash dividends paid                                          (1,884)        (1,500)
-------------------------------------------------------------------------------------
     Net cash provided by (used in) financing activities        6,469          7,746
-------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents                 (661)           341

Cash and cash equivalents:
  Beginning of period                                           4,589          6,914
-------------------------------------------------------------------------------------
  End of period                                                $3,928         $7,255
=====================================================================================
Supplemental disclosures:
  Cash paid during the period for:
    Interest                                                      $34            $16
    Income taxes                                               $3,109         $3,105
=====================================================================================
</TABLE>
                                       6
          See accompanying notes to consolidated financial statements.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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 2, 2003 incorporated into the Company's Annual Report on Form 10-K.

The  results of  operations  for the  thirteen  week  period is not  necessarily
indicative of the results to be expected for the full fiscal year.

Stock  options are  accounted  for using the methods  prescribed  by  Accounting
Principles  Board  Opinion No. 25,  Accounting  for Stock  Issued to  Employees.
Compensation  cost for stock  options is measured as the excess,  if any, of the
quoted  market price of Hancock's  stock at the date of grant over the amount an
employee  must pay to acquire the stock.  Pro forma  information  regarding  net
income and earnings per share as  calculated  under the  provisions  of SFAS No.
123, Accounting for Stock-Based Compensation, is presented below:

                                                       May 4,       May 5,
                                                        2003         2002
                                                    ----------   ----------

Net earnings, as reported                            $  4,071      $ 3,691
Deduct: Total stock-based employee
  compensation expense determined under
  fair value based method for all awards,
  net of related tax effects                             (162)        (110)
                                                    ----------   ----------
Pro forma net earnings                               $  3,909      $ 3,581
                                                    ==========   ==========

Earnings per share:
      Basic - as reported                            $    .23      $   .21
                                                    ==========   ==========
      Basic - pro forma                              $    .22      $   .20
                                                    ==========   ==========

      Diluted - as reported                          $    .22      $   .20
                                                    ==========   ==========
      Diluted - pro forma                            $    .21      $   .19
                                                    ==========   ==========

                                       7
<PAGE>

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
                                                   -----------------------
  per share amounts)                                 May 4,      May 5,
                                                      2003        2002
--------------------------------------------------------------------------
Basic earnings per share:

  Net earnings                                         $4,071      $3,691
                                                   =========== ===========

  Weighted average number of common shares
   outstanding during period                       17,790,199  17,594,178
                                                   =========== ===========

Basic earnings per share                                $0.23       $0.21
                                                   =========== ===========

Diluted earnings per share:

  Net earnings                                         $4,071      $3,691
                                                   =========== ===========

  Weighted average number of common shares
   outstanding during period                       17,790,199  17,594,178

   Stock options                                      443,548     769,788

   Restricted stock                                   450,234     464,400
                                                   ----------- -----------

                                                   18,683,981  18,828,366
                                                   =========== ===========

Diluted earnings per share                              $0.22       $0.20
                                                   =========== ===========

Weighted average common stock equivalents
  not included in EPS because the effect
  would be anti-dilutive                              444,168     464,400
                                                   =========== ===========

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 May 4, 2003,  the total reserve  balance  included in current and  noncurrent
liabilities was $1,611,000, which represents the present value of the future net
lease  obligations  required for the locations which have been closed.  The 2003
activity in the reserve is as follows (in thousands):

                        February 2,  Additions to  Imputed    Payments    May 4,
                           2003        Reserve     Interest  on Reserve   2003
                        -----------  ------------  --------  ----------  -------

Lease Obligations          1,749             0          34     (172)       1,611
                        ===========  ============  ========  ==========  =======

                                      8
<PAGE>

NOTE 4 - RECENT ACCOUNTING PRONOUNCEMENTS

In June 2001,  the FASB  issued SFAS No. 143,  Accounting  for Asset  Retirement
Obligations.  SFAS 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.  Hancock
adopted SFAS 143 as of February 3, 2003, and there was no material impact on its
financial statements.

In May 2002, the FASB issued SFAS No. 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.  Hancock  adopted  SFAS 145 as of
February 3, 2003, and there was no material impact on its financial statements.

In July 2002, the FASB issued SFAS No. 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.  Hancock does not believe adoption of the
provisions  of this  statement  will have a  material  impact  on its  financial
statements.

During  January  2003,  the FASB  issued FIN No. 46,  Consolidation  of Variable
Interest  Entities.  FIN 46 provides  guidance for companies having ownership of
variable interest  entities,  typically referred to as special purpose entities,
in determining  whether to consolidate such variable interest  entities.  FIN 46
has immediate applicability for variable interest entities created after January
31, 2003 or interests in variable  interest  entities  obtained after that date.
For interests in variable  interest entities obtained prior to February 1, 2003,
FIN 46 becomes  effective  on July 1,  2003.  Because  Hancock  does not hold an
interest in an entity  governed by the  pronouncement,  Hancock does not believe
the  adoption  will  have a  significant  effect on its  consolidated  financial
position or results of operations.

During  2002,  the EITF  released  EITF Issue 02-16,  "Accounting  by a Customer
(Including a Reseller) for Cash Consideration Received From a Vendor." The issue
addresses the accounting  treatment of vendor allowances.  We are in the process
of evaluating the impact of EITF Issue 02-16.  However,  the application of EITF
Issue  02-16  is  not  expected  to  have a  material  impact  on our  financial
statements.

                                       9
<PAGE>
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 7 stores and
closed 6 stores  during the  thirteen  weeks ended May 4, 2003,  resulting  in a
total of 431 stores at quarter end.

During the  thirteen  weeks ended May 4, 2003,  net earnings of $4.1 million and
borrowings  of  $17.0  million  were  used to fund a $2.0  million  increase  in
inventory,  $9.2  million of treasury  stock  repurchased,  $1.9 million in cash
dividends,  an $8.6 million decrease in accounts payable and accrued liabilities
and $3.6 million in additions to property  and  equipment.  At May 4, 2003,  the
Company had outstanding debt of $17 million, or 12.6% of total capitalization at
May 4, 2003, compared to no debt outstanding at May 5, 2002.


RESULTS OF OPERATIONS

Thirteen weeks ended May 4, 2003 compared to thirteen weeks ended May 5, 2002

Net earnings were $4.1 million,  or $.22 per diluted  share,  compared with $3.7
million,  or $.20 per  diluted  share,  in the same  period of the  prior  year.
Earnings  were  influenced  by  higher  sales  and a higher  gross  margin  as a
percentage of sales than last year.

Sales  increased to $107.6  million from $104.0  million in the first quarter of
last year,  as the result of an  increase  of 4.2% in  comparable  store  sales.
Comparable  store sales benefited from the continued  repositioning of the store
base, the  remerchandising  of Hancock's  product mix and efforts to appeal to a
more diverse  customer  base.  Gross margins  increased to 50.9% from 50.5% last
year as a result of the shift in the merchandise mix more towards  higher-margin
home decorating products.

Selling, general and administrative expenses as a percentage of sales were 43.5%
compared to 43.6% in the first quarter of 2002. Expense leverage from comparable
store sales increases was offset partially by higher costs resulting from the
start-up of certain activities at the new distribution center. As Hancock
continues to transfer its warehousing and distribution activities to the new
facility over the next year, costs will tend to be higher than the prior
comparable periods due to some duplication of expenses. In addition, employee
health insurance, general business insurance and pension costs were higher in
this year's first quarter.

Interest  expense was higher due to average debt totaling $7 million during this
year's first quarter versus no debt outstanding in the first quarter of 2002.

                                       10
<PAGE>
Critical Accounting Policies and Estimates

The preparation of financial statements in conformity with accounting principles
generally  accepted in the United States of America 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
duzring  the  period.  Significant  accounting  policies  employed  by  Hancock,
including  the use of estimates and  assumptions,  are presented in the Notes to
Consolidated  Financial  Statements.  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.  Hancock  believes that
estimates  related to the  following  areas  involve a higher degree of judgment
and/or complexity:

     Inventories. 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.

     Insurance Reserves.  Workers' compensation,  general liability and employee
     medical insurance programs are largely self-insured. It is Hancock'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, claim settlement patterns, litigation
     trends and legal interpretations.

     Store Closing  Reserves.  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.

     Pension and  Postretirement  Benefit  Obligations.  The value of assets and
     liabilities   associated  with  pension  and  postretirement   benefits  is
     determined on an actuarial  basis.  These values are affected by the market
     value of plan assets,  estimates of the expected  return on plan assets and
     the discount rates.  Hancock determines the discount rates using changes in
     the rates of high quality, fixed income investments.  Actual changes in the
     fair market value of plan assets, differences between the actual return and
     the expected  return on plan assets and changes in the  discount  rate used
     affect the amount of pension expense recognized.

     Valuation  of  Long-Lived  Assets.  Hancock  periodically  reviews  the net
     realizable  value of long-lived  assets whenever  events and  circumstances
     indicate impairment has occurred.  In the event that the carrying values of
     long-lived  assets are in excess of  estimated  gross future cash flows for
     those  assets,  the  values  of the  assets  are  written  down  to a level
     commensurate  with a discounted cash flow analysis of the estimated  future
     cash flows.

     Goodwill.  Goodwill  represents  the excess of the purchase  price over the
     fair value of the net assets acquired. In accordance with the provisions of
     SFAS 142, Hancock ceased amortizing goodwill effective February 4, 2002. On
     an annual basis,  the fair value of Hancock's  reporting units are compared
     with their  carrying  values.  If the  carrying  value of a reporting  unit
     exceeds  its fair value,  Hancock  would  recognize  the  difference  as an
     impairment  charge. The fair value of the reporting unit is estimated using
     the discounted present value of future cash flows.

                                       11
<PAGE>
OFF-BALANCE SHEET ARRANGEMENTS

The Company has no off-balance sheet financing arrangements.

CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS

The Company has an  arrangement to secure up to $5 million in letters of credit.
At May 4, 2003,  Hancock had  commitments  of $5.1 million on issued  letters of
credit which support  purchase  orders for  merchandise to be imported.  Hancock
also has a $3.5  million  standby  letter  of  credit to  guarantee  payment  of
potential future workers' compensation claims.  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  Hancock'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 the first quarter of 2002,  increases in the PPI,
which offset the effect of inventory  reductions,  resulted in no LIFO charge. A
flat trend in product  costs in the first quarter of 2003 resulted in no changes
in the LIFO reserve.


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

In June 2001,  the FASB  issued SFAS No. 143,  Accounting  for Asset  Retirement
Obligations.  SFAS 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.  Hancock
does not believe that the adoption of this statement will have a material impact
on its financial statements.

                                       12
<PAGE>

In May 2002, the FASB issued SFAS No. 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.  Hancock  does not  believe  that
adoption  of  this  statement  will  have a  material  impact  on its  financial
statements.

In July 2002, the FASB issued SFAS No. 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.  Hancock does not believe adoption of the
provisions  of this  statement  will have a  material  impact  on its  financial
statements.

During  January  2003,  the FASB  issued FIN No. 46,  Consolidation  of Variable
Interest  Entities.  FIN 46 provides  guidance for companies having ownership of
variable interest  entities,  typically referred to as special purpose entities,
in determining  whether to consolidate such variable interest  entities.  FIN 46
has immediate applicability for variable interest entities created after January
31, 2003 or interests in variable  interest  entities  obtained after that date.
For interests in variable  interest entities obtained prior to February 1, 2003,
FIN 46 becomes  effective  on July 1,  2003.  Because  Hancock  does not hold an
interest in an entity  governed by the  pronouncement,  Hancock does not believe
the  adoption  will  have a  significant  effect on its  consolidated  financial
position or results of operations.

FORWARD-LOOKING STATEMENTS

From time to time, Hancock 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,  Hancock  notes that a variety of factors  could  cause  Hancock's
actual results and experience to differ materially from the anticipated  results
or other expectations  expressed in Hancock's  forward-looking  statements.  The
risks and uncertainties that may affect the operations, performance, development
and results of Hancock's business include,  but are not limited to, stability of
interest  rates  during  periods of  borrowings  and the effects of  regulation,
general economic trends, changes in consumer demand or purchase patterns, delays
or interruptions in the flow of merchandise  between Hancock's  suppliers and/or
its distribution center and its stores,  disruption in Hancock'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 need to dispose of old inventory.

                                       13
<PAGE>
Item 3:  Quantitative and Qualitative Disclosures about Market Risks

Hancock does not hold  derivative  financial or commodity  instruments at May 4,
2003.  Hancock  is exposed  to  financial  market  risks,  including  changes in
interest rates.  All borrowings  under the Hancock'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 Hancock's
results.  All of the  Hancock's  business is  transacted  in U. S.  dollars and,
accordingly,  foreign  exchange rate  fluctuations  have never had a significant
impact on the Hancock, and they are not expected to in the foreseeable future.

Item 4. Controls and Procedures

Within  90 days  prior  to the  date  of this  report,  Hancock  carried  out an
evaluation,  under  the  supervision  and with the  participation  of our  Chief
Executive Officer and Chief Financial Officer, of the effectiveness of Hancock's
disclosure  controls and procedures (as defined in Rules 13a-14((c) and 15d-1(c)
under the Securities Exchange Act of 1934). Based on that evaluation,  the Chief
Executive  Officer and Chief Financial Officer concluded that, as of the date of
their evaluation,  Hancock's disclosure controls and procedures are effective in
timely  alerting  them  to  material  information  required  to be  included  in
Hancock's  periodic  SEC  reports.  There  have been no  significant  changes in
Hancock's internal controls, or in factors that could significantly affect these
internal controls,  subsequent to the date the Chief Executive Officer and Chief
Financial Officer completed their evaluation.

PART II.  OTHER INFORMATION:

Item 4:  Submission of Matters to a Vote of Securityholders

(a)  Registrant's Annual Meeting of Shareholders was held on June 12, 2003.

(b)  Proxies for the meeting were solicited  pursuant to Regulation 14 under the
     Securities  Act of 1934;  there was no  solicitation  in  opposition to the
     management's  nominees as listed in the proxy statement,  and such nominees
     were elected.

(c)  The vote in the  uncontested  election  of the  nominees  for the  Board of
     Directors elected to serve until 2006 was as follows: 16,554,364 votes cast
     for and 201,004 votes withheld for Don L. Fruge' and 16,492,542  votes cast
     for and 262,826 votes withheld for Larry G. Kirk.

     The vote in the proposal to approve the cash compensation  plans, as to the
     named executive officers was as follows: 16,328,249 votes cast for, 363,664
     votes withheld and 63,455 votes abstain.

(d)  Not applicable.

                                       14
<PAGE>
Item 6:  Exhibits and Reports on Form 8-K

  (a)
     10.1 Amended and Restated  1995  Restricted  and Deferred  Stock Unit Plan.
     99.1  Certification of the Chief Executive  Officer.
     99.2 Certification of the Chief Financial Officer.


  (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 Smith
                                         -----------------------
                                         Bruce D. Smith

                                      Senior Vice President and
                                      Chief Financial Officer
                                     (Principal Financial and
                                      Accounting Officer)

June 18, 2003

                                       15
<PAGE>

                    Certification of Chief Executive Officer


I, Larry G. Kirk, certify that:

1.   I have reviewed this quarterly report on Form 10-Q of Hancock Fabrics, Inc.

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,  in  light  of the  circumstances  under  which  such
     statements  were made, not misleading with respect to the period covered by
     this quarterly report;

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 the  registrant  as of, and for,  the  periods  presented  in this
     quarterly report;

4.   The  registrant's  other  certifying  officer  and  I  am  responsible  for
     establishing and maintaining disclosure controls and procedures (as defined
     in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

     a)   designed  such  disclosure  controls  and  procedures  to ensure  that
          material  information  relating  to  the  registrant,   including  its
          consolidated subsidiaries,  is made known to us by others within those
          entities,  particularly  during  the  period in which  this  quarterly
          report is being prepared;

     b)   evaluated the  effectiveness of the registrant's  disclosure  controls
          and procedures as of a date within 90 days prior to the filing date of
          this quarterly report (the "Evaluation Date"); and

     c)   presented  in  this  quarterly   report  our  conclusions   about  the
          effectiveness  of the disclosure  controls and procedures based on our
          evaluation as of the Evaluation Date;

5.   The registrant's  other certifying  officer and I have disclosed,  based on
     our most recent  evaluation,  to the  registrant's  auditors  and the audit
     committee of  registrant's  board of directors (or persons  performing  the
     equivalent function):

     a)   all  significant  deficiencies  in the design or operation of internal
          controls  which could  adversely  affect the  registrant's  ability to
          record,  process,   summarize  and  report  financial  data  and  have
          identified for the  registrant's  auditors any material  weaknesses in
          internal controls; and

     b)   any fraud, whether or not material,  that involves management or other
          employees who have a  significant  role in the  registrant's  internal
          controls.

6.   The  registrant's  other  certifying  officer and I have  indicated in this
     quarterly report whether or not there were significant  changes in internal
     controls  or in other  factors  that could  significantly  affect  internal
     controls  subsequent to the date of our most recent  evaluation,  including
     any corrective actions with regard to significant deficiencies and material
     weaknesses.

Date:  June 18, 2003


/s/ Larry G. Kirk
------------------
Larry G. Kirk
Chairman of the Board and Chief Executive Officer

                                       16
<PAGE>

                    Certification of Chief Financial Officer


I, Bruce D. Smith, certify that:

1.   I have reviewed this quarterly report on Form 10-Q of Hancock Fabrics, Inc.

2.   Based on my  knowledge,  this  annual  report  does not  contain any untrue
     statement of a material fact or omit to state a material fact  necessary to
     make the  statements,  in  light  of the  circumstances  under  which  such
     statements  were made, not misleading with respect to the period covered by
     this quarterly report;

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 the  registrant  as of, and for,  the  periods  presented  in this
     quarterly report;

4.   The  registrant's  other  certifying  officer  and  I  am  responsible  for
     establishing and maintaining disclosure controls and procedures (as defined
     in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

     a)   designed  such  disclosure  controls  and  procedures  to ensure  that
          material  information  relating  to  the  registrant,   including  its
          consolidated subsidiaries,  is made known to us by others within those
          entities,  particularly  during  the  period in which  this  quarterly
          report is being prepared;

     b)   evaluated the  effectiveness of the registrant's  disclosure  controls
          and procedures as of a date within 90 days prior to the filing date of
          this quarterly report (the "Evaluation Date"); and

     c)   presented  in  this  quarterly   report  our  conclusions   about  the
          effectiveness  of the disclosure  controls and procedures based on our
          evaluation as of the Evaluation Date;

5.   The registrant's  other certifying  officer and I have disclosed,  based on
     our most recent  evaluation,  to the  registrant's  auditors  and the audit
     committee of  registrant's  board of directors (or persons  performing  the
     equivalent function):

     a)   all  significant  deficiencies  in the design or operation of internal
          controls  which could  adversely  affect the  registrant's  ability to
          record,  process,   summarize  and  report  financial  data  and  have
          identified for the  registrant's  auditors any material  weaknesses in
          internal controls; and

     b)   any fraud, whether or not material,  that involves management or other
          employees who have a  significant  role in the  registrant's  internal
          controls.

6.   The  registrant's  other  certifying  officer and I have  indicated in this
     annual  report  whether or not there were  significant  changes in internal
     controls  or in other  factors  that could  significantly  affect  internal
     controls  subsequent to the date of our most recent  evaluation,  including
     any corrective actions with regard to significant deficiencies and material
     weaknesses.

Date:  June 18, 2003

/s/ Bruce D. Smith
------------------
Bruce D. Smith
Senior Vice President and
Chief Financial Officer

                                       17
<PAGE>
                                                                    Exhibit 99.1

                    Certification of Chief Executive Officer
                       Pursuant to 18 U.S.C. Section 1850

     I, Larry G. Kirk, certify pursuant to 18 U.S.C. Section 1850, that: (1) The
quarterly  report on Form 10-Q of  Hancock  Fabrics,  Inc.  ("Hancock")  for the
quarter ended May 4, 2003 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 the quarterly report fairly presents, in all material respects, the
financial condition and results of operations of Hancock.

Date: June 18, 2003

                                                    /s/ Larry G. Kirk
                                                    ---------------------------
                                                    Larry G. Kirk
                                                    Chairman of the Board
                                                    and Chief Executive Officer

                                       18
<PAGE>
                                                                    Exhibit 99.2

                    Certification of Chief Financial Officer
                       Pursuant to 18 U.S.C. Section 1850

     I, Bruce D. Smith,  certify  pursuant to 18 U.S.C.  Section 1850, that: (1)
The quarterly report on Form 10-Q of Hancock Fabrics,  Inc.  ("Hancock") for the
quarter ended May 4, 2003 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 the quarterly report fairly presents, in all material respects, the
financial condition and results of operations of Hancock.

Date: June 18, 2003

                                                    /s/ Bruce D. Smith
                                                    ---------------------------
                                                    Bruce D. Smith
                                                    Senior Vice President
                                                    and Chief Financial Officer

                                       19
<PAGE>
                                                                    Exhibit 10.1

                            HANCOCK FABRICS, INC.
                              AMENDED AND RESTATED
                              1995 RESTRICTED STOCK
                                      AND
                              DEFERRED STOCK UNIT
                                      PLAN

<PAGE>

                                TABLE OF CONTENTS
Article                                                                    Page
-------                                                                    ----

ARTICLE I
INTRODUCTION...................................................................1
   1.1      Name of Plan.......................................................1
   1.2      Purpose of Plan....................................................1
   1.3      "Top Hat" Pension Benefit Plan.....................................1
   1.4      Funding............................................................1
   1.5      Effective Date.....................................................2
   1.6      Administration.....................................................2
   1.7      SCOPE AND DURATION OF THE PLAN.....................................3

ARTICLE II
DEFINITIONS AND CONSTRUCTION...................................................3
   2.1      Definitions........................................................3
   2.2      Number and Gender..................................................5
   2.3      Headings...........................................................5

ARTICLE III
PARTICIPATION AND ELIGIBILITY..................................................6
   3.1      Participation......................................................6
   3.2      Commencement of Participation......................................6
   3.3      Cessation of Active Participation..................................6

ARTICLE IV
RESTRICTED STOCK...............................................................6
   4.1      Restrictions.......................................................6
   4.2      Removal of Restrictions............................................7
   4.3      Participant's Service..............................................7
   4.4      Nontransferability.................................................7
   4.5      Stock Certificates.................................................7
   4.6      Termination of Employment..........................................7
   4.7      Retirement or Death of Participant.................................8
   4.8      Adjustments........................................................8
   4.9      Approval of Shareholders...........................................8
   4.10     Effectiveness of Awards............................................8
   4.11     Listing and Registration of Shares.................................9
   4.12     Change of Control..................................................9

ARTICLE V
DEFERRALS   ...................................................................9
   5.1      Deferrals by Participants..........................................9
   5.2      Effective Date of Deferral Agreement...............................9
   5.3      Deferral Periods...................................................9


<PAGE>

ARTICLE VI
ACCOUNTS    ..................................................................10
   6.1      Establishment of Bookkeeping Accounts.............................10
   6.2      Subaccounts.......................................................10
   6.3      Hypothetical Nature of Accounts...................................10
   6.4      Vesting...........................................................10
   6.5      Dividends.........................................................11

ARTICLE VII
PAYMENT OF ACCOUNT............................................................11
   7.1      Timing of Distribution of Benefits................................11
   7.2      Form of Payment...................................................11
   7.3      Change of Control.................................................11
   7.4      Designation of Beneficiaries......................................11
   7.5      Unclaimed Benefits................................................11

ARTICLE VIII
DETERMINATION OF BENEFITS, CLAIMS PROCEDURE AND ADMINISTRATION................12
   8.1      Claims............................................................12
   8.2      Claim Decision....................................................12

ARTICLE IX
MISCELLANEOUS.................................................................12
   9.1      Not Contract of Employment........................................12
   9.2      Non-Assignability of Benefits.....................................12
   9.3      Withholding Tax...................................................13
   9.4      Amendment and Termination.........................................13
   9.5      No Trust Created..................................................13
   9.6      Unsecured General Creditor Status of Employee.....................13
   9.7      Severability......................................................14
   9.8      Governing Laws....................................................14
   9.9      Binding Effect....................................................14
   9.10     Entire Agreement..................................................14
   9.11     Funding Upon Change In Control....................................14


<PAGE>

                              Hancock Fabrics, Inc.
                              Amended and Restated
               1995 Restricted Stock and Deferred Stock Unit Plan


                                    ARTICLE I
                                  INTRODUCTION
1.1  Name of Plan.

     Hancock  Fabrics,  Inc. (the  "Company")  hereby amends the 1995 Restricted
     Stock Plan (the  "Plan") by  changing  the name of the Plan to the  Hancock
     Fabrics, Inc. Amended and Restated 1995 Restricted Stock and Deferred Stock
     Unit Plan.

1.2  Purpose of Plan.

     The Hancock  Fabrics,  Inc. 1995 Restricted Stock Plan ("Plan") is intended
     to provide an incentive  for key  employees to  contribute to the growth of
     the Company's  business by providing  opportunities  for their ownership of
     shares of the  Company's  common  stock and to retain them in the employ of
     the  Company  or its  Subsidiaries.  The  provisions  of this  Plan and all
     actions and  transactions  under and  pursuant to this Plan are intended to
     comply with all  applicable  conditions of Rule l6(b)-3  promulgated  under
     Section 16 of the Securities Exchange Act of 1934 ("Exchange Act") , or its
     successors,  with respect to persons  subject to such Section  ("Section 16
     reporting  persons")  . To the  extent  any  provision  of,  or  action  or
     transaction  pursuant to, this Plan fails to so comply,  it shall be deemed
     null and void to the extent  permitted  by law and deemed  advisable by the
     Plan administrators.

     Additional  purposes of the Plan are to provide certain eligible  employees
     of the  Company the  opportunity  to defer  elements of their  compensation
     which might not otherwise be deferrable under the other Company plans.

1.3  "Top Hat" Pension Benefit Plan.

     The deferred stock unit portion of the Plan is an "employee pension benefit
     plan" within the meaning of ERISA. The plan is maintained,  however,  for a
     select group of management or  highly-compensated  employees and therefore,
     it is intended  that the Plan is exempt from Parts 2, 3 and 4 of Title 1 of
     ERISA. The Plan is not intended to qualify under Code section 401 (k).

1.4  Funding.

     The Plan is unfunded.

<PAGE>
1.5  Effective Date.

     The Plan as herein amended is effective as of the date of execution hereof.

1.6  Administration.

     The  Board  shall  appoint  a  Restricted  Stock and  Deferred  Stock  Unit
     Committee,  which shall consist of two or more members of the Board who are
     not eligible to receive  awards  under the Plan and who shall  otherwise be
     "disinterested" as defined in the regulations  promulgated under Section 16
     of the Exchange Act. The Committee may be the Board's Management Review and
     Compensation Committee.  The Committee shall be responsible for the general
     operation  and  administration  of  the  Plan  and  for  carrying  out  the
     provisions thereof. The Committee may delegate to others certain aspects of
     the management and operational  responsibilities  of the Plan including the
     employment  of  advisors  and  the  delegation  of  ministerial  duties  to
     qualified  individuals,  provided that such  delegation is in writing.  The
     Committee shall have full authority in its  discretion,  but subject to the
     express provisions of the Plan: to determine the key employees to whom, and
     the time or times at which,  Shares  shall be  awarded;  to  determine  the
     number of Shares to be  covered  by each  award;  to  determine  the terms,
     conditions and restrictions of the respective award agreements  (which need
     not be identical),  of any legend on any  certificate  representing  Shares
     awarded  pursuant  to the Plan,  and of any other  instrument  or  document
     relating to the Plan,  except that each such document  respecting awards to
     Section 16 reporting  persons shall be written so as to comply with Section
     16 of the Exchange Act; to determine whether and to what extent adjustments
     shall be made pursuant to the  provisions of Paragraph 12; to interpret the
     Plan; to prescribe, amend and rescind rules and regulations relating to the
     Plan;  and  to  make  any  other  determinations,  deemed  necessary  to or
     advisable for the  administration  of the Plan.  The Committee may delegate
     all or any part of such  authority  to  members  of the  Board  who are not
     "disinterested" as defined in the regulations  promulgated under Section 16
     of the Exchange Act in the case of awards to persons who are not Section 16
     reporting persons. All determinations, decisions, interpretations and other
     actions of the Committee and the Board shall be conclusive and binding upon
     all  persons.  No member of the  Committee  or of the Board  shall have any
     liability in respect of anything  done or omitted to be done by such member
     or any other  member,  except for a member's own willful  misconduct  or as
     expressly provided for by law. The Company shall indemnify,  hold harmless,
     and defend the members of the Committee against any and all claims, losses,
     damages,  expenses,  including  attorney's fees,  incurred by them, and any
     liability,  including any amounts paid in settlement  with their  approval,
     arising  from  their  action or  failure  to act,  except  when the same is
     judicially  determined  to be  attributable  to their gross  negligence  or
     willful misconduct.

                                       2
<PAGE>

1.7  SCOPE AND DURATION OF THE PLAN.

     Shares may be awarded from time to time during the life of the Plan. Unless
     sooner  terminated  pursuant to Section  9.4,  the Plan shall  terminate on
     December 5, 2005 and  thereafter no Shares shall be awarded under the Plan.
     Termination  of the Plan shall have no effect on awards  then  outstanding.
     The aggregate  number of Shares that may be issued or reserved for issuance
     pursuant to awards under the Plan (including awards to Section 16 reporting
     persons)  shall not exceed  1,000,000  Shares  (subject  to  adjustment  as
     provided  in the  Plan) .  Awards  may  consist,  in whole  or in part,  of
     authorized but unissued Shares or Shares  reacquired by the Company and not
     reserved for any other  purpose and Shares  subject to any previous  awards
     under the Plan that are forfeited.

                                   ARTICLE II
                          DEFINITIONS AND CONSTRUCTION
2.1  Definitions.

     For purposes of the Plan,  the  following  words and phrases shall have the
     respective  meanings set forth below, unless their context clearly requires
     a different meaning:

     (a)  "Account" means the bookkeeping  account  maintained by the Company on
          behalf of each Participant pursuant to Article VI. As of any Valuation
          Date,  a  Participant's  benefit  under the Plan shall be equal to the
          amount credited to his Account as of such date.

     (b)  "Committee"  means  the  Restricted  Stock  and  Deferred  Stock  Unit
          Committee as may be established by the Board,  which shall  administer
          the Plan in accordance with Section 1.6.

     (c)  "Beneficiary"   means  the  person  or  persons   designated   by  the
          Participant in accordance with Section 7.4.

     (d)  "Board" means the Board of Directors of the Company.

     (e)  "Change in  Control"  means a change of  control  of the  Company of a
          nature  that would be required to be reported in response to Item 1(a)
          of the Current  Report on Form 8-K, as in effect on the effective date
          of the Plan,  pursuant  to  Section 13 or 15(d) of the  Exchange  Act;
          provided that,  without limitation a change of control shall be deemed
          to have  occurred  if:  (i) a third  person,  including  a "group"  as
          defined  in  Section  13(d)  (3)  of the  Exchange  Act,  becomes  the
          beneficial  owner,  directly  or  indirectly,  of 20% or  more  of the
          combined voting power of the Company's  outstanding  voting securities
          ordinarily  having the right to vote for the  election of directors of
          the Company;  or (ii)  individuals  who constitute the Board as of the
          effective date of the Plan ("incumbent Board") cease for any reason to

                                       3

<PAGE>

          constitute  at least  two-thirds  thereof,  provided  that any  person
          becoming a director subsequent to the effective date of the Plan whose
          election,  or nomination  for election by the Company's  shareholders,
          was approved by a vote of at least  three-quarters of (or if less, all
          but one of) the directors constituting the incumbent Board (other than
          an election or nomination  in connection  with an actual or threatened
          election contest relating to the election of directors of the Company,
          as such terms are used in Rule 14a-11 of  Regulation  14A  promulgated
          under the Exchange Act) shall be, for purposes of the Plan, considered
          as though such person were a member of the incumbent Board.

     As used in this  subsection  (e), the term "person"  means natural  person,
     corporation,    partnership,   joint   venture,   trust,   government,   or
     instrumentality of a government.

     (f)  "Code" means the U.S. Internal Revenue Code of 1986, as amended.

     (g)  "Company" means Hancock Fabrics, Inc., a Delaware corporation, and its
          successors and assigns.

     (h)  "Shares" means the common stock of the Company.

     (i)  "Deferral Agreement" means the written agreement, in the form attached
          hereto as  Attachment  1,  entered  into  between  the  Company  and a
          Participant pursuant to which the Participant elects the amount of his
          Deferred  Stock  Unit to be  deferred  into the Plan and the  Deferral
          Period, and the time of payment for such amounts.

     (j)  "Deferral  Period"  means the  period of time for which a  Participant
          elects to defer receipt of the Deferred Stock Unit Deferrals  credited
          to such Participant's  Account.  Deferral Periods shall be measured on
          the  basis of whole  Plan  Years,  beginning  with the Plan  Year that
          commences immediately following the Plan Year for which the applicable
          Deferred  Stock  Unit  Deferrals  are  credited  to the  Participant's
          Account

     (k)  "Deferred  Stock  Unit"  means  a  unit   representing  the  Company's
          obligation  to  deliver  or  issue  to  a  Participant  one  Share  in
          accordance  with the Terms of the Plan.  The Deferred Stock Unit shall
          be evidenced by a certificate containing such rights, restrictions and
          limitations as may be determined by the Committee.

     (l)  "Early  Retirement"  means  termination  of  employment  after  having
          attained age 55 and under  circumstances  entitling the participant to
          elect  immediate  payment of  retirement  benefits  under the  Hancock
          Fabrics,  Inc.  Consolidated  Retirement  Plan or any  successor  plan
          thereto ("Hancock Retirement Plan").

     (m)  "Effective Date" means the Effective Date of this Amended and Restated
          Plan: March 24, 2003.

     (n)  "Employee"  means  a  person  employed  by the  Company  or any of its
          subsidiaries.

                                       4

<PAGE>
     (o)  "Employment"   means   employment   by  the  Company  or  any  of  its
          subsidiaries.

     (p)  "ERISA" means the Employee  Retirement Income Security Act of 1974, as
          amended.

     (q)  "Normal  Retirement"  means  termination  of  employment  after having
          attained age 65 and under  circumstances  entitling the participant to
          elect  immediate  payment of  retirement  benefits  under the  Hancock
          Fabrics,  Inc.  Consolidated  Retirement  Plan or any  successor  plan
          thereto ("Hancock Retirement Plan")

     (r)  "Participant"  means an  employee  to whom  Shares  have been  awarded
          pursuant to the Plan.

     (s)  "Plan  Year"  means the  twelve-consecutive  month  period  commencing
          January 1 of each year ending on December 31.

     (t)  "Retirement  Date" means the date the  Participant is eligible for and
          retires under any qualified retirement plan maintained by the Company.

     (u)  "Shares" means the Company's Common Stock.

     (v)  "Subsidiary"  means a  corporation  of which the  Company  owns  stock
          having fifty percent (50%) or more of the total voting power.

     (w)  "Valuation  Date" means the last business day of each  calendar  month
          and each  special  valuation  date  designated  by the  Administrative
          Committee.

2.2  Number and Gender.

     Wherever appropriate herein, words used in the singular shall be considered
     to include the plural and words used in the plural shall be  considered  to
     include the singular.  The masculine  gender,  where appearing in the Plan,
     shall be deemed to include the feminine gender.

2.3  Headings.

     The  headings of  Articles  and  Sections  herein are  included  solely for
     convenience,  and if there is any conflict  between  such  headings and the
     text of the Plan, the text shall control.

                                       5
<PAGE>
                                  ARTICLE III
                          PARTICIPATION AND ELIGIBILITY
3.1  Participation.

     Shares may be awarded only to full-time key Employees  (including officers)
     of the Company or any of its  subsidiaries,  who are  responsible  for, and
     shall be considered by the Committee to be contributing  significantly  to,
     the growth of the Company's business.  A director of the Company who is not
     also an Employee shall not be eligible to receive an award.  In determining
     the  Employees to whom Shares shall be awarded,  the number of Shares to be
     covered by each award,  and the terms,  conditions and restrictions of each
     award, the Committee may take into account any factors it may deem relevant
     in  connection  with  accomplishing  the  purpose of the Plan.  An award of
     Shares under the Plan to an employee shall not disqualify that employee for
     a further award or awards.

     Participants  in the Plan who shall be eligible to exchange Shares pursuant
     to Article V shall be limited to those employees who are (a) subject to the
     income tax laws of the United  States,  (b) determined by the Company to be
     members of a select group of highly compensated or management  Employees of
     the Company, and (c) selected by the Committee, in its sole discretion,  as
     Participants. The Administrative Committee shall notify each Participant of
     eligibility under this paragraph. Subject to the provisions of Section 3.3,
     a Participant  shall remain eligible to continue  participation in the Plan
     for each Plan Year following his initial year of participation in the Plan,
     provided  the  Participant  continues to satisfy the  requirements  of this
     Section 3.1.

3.2  Commencement of Participation.

     An  Employee  shall  become  a  Participant  effective  as of the  date the
     Administrative Committee determines.

3.3  Cessation of Active Participation.

     Notwithstanding any provision herein to the contrary, an individual who has
     become a Participant in the Plan shall cease to be a Participant  hereunder
     effective as of any date determined by the Administrative Committee.

                                   ARTICLE IV
                                RESTRICTED STOCK
4.1  Restrictions.

     The  Committee  may  impose  such  restrictions  on any award or any Shares
     awarded pursuant to the Plan as it deems advisable (including  restrictions
     on transferability).

                                       6
<PAGE>

4.2  Removal of Restrictions.

     Except as provided in Sections 4.7 and 4.12,  the  restrictions  imposed by
     the Committee on any award or any Shares awarded pursuant to the Plan shall
     lapse as the Committee shall determine at the time of the award.  Shares as
     to which restrictions have lapsed shall not thereafter be forfeitable under
     any circumstances.

4.3  Participant's Service.

     Awards  under the Plan  shall not be  affected  by any  change of duties or
     position so long as the  Participant  continues to be a key Employee of the
     Company or any of its subsidiaries. The agreement respecting each award may
     contain such  provisions as the Committee  shall approve with  reference to
     the  effect of  approved  leaves  of  absence.  Nothing  in the Plan or any
     agreement  pursuant to the Plan (whether written or unwritten) shall confer
     upon any Employee any right to continue in the employment of the Company or
     any of its  Subsidiaries,  shall interfere in any way with the right of the
     Company or any of its  Subsidiaries  to terminate  that  Employment  at any
     time, or shall affect in any way the terms or conditions of employment.

4.4  Nontransferability.

     Shares subject to restrictions shall not be transferable other than by will
     or the laws of descent  and  distribution.  In no event  shall a Section 16
     reporting person be entitled to sell or otherwise dispose of Shares awarded
     under the Plan for period of six (6) months from the time of award  without
     the written consent of the Committee.

4.5  Stock Certificates.

     The Committee may at any time require the placement of appropriate  legends
     on any  certificate  or  certificates  representing  the Shares  subject to
     restrictions.  The  Committee may also require the retention by the Company
     or the placement in escrow of any such  certificate or  certificates  until
     such  certificate or certificates  shall become  deliverable  following the
     lapse of the restrictions. The Committee may require, as a condition of any
     award,  that the participant  deliver to the Company a stock power relating
     to Shares  subject  to an award,  endorsed  in blank and in all other  ways
     satisfactory to the Company (including,  without limitation,  as to a valid
     and appropriate signature guaranty ensuring transferability of the Shares).

4.6  Termination of Employment.

     Except as provided in Sections  4.7 and 4.12,  effective  as of the date of
     termination of a Participant's Employment,  for whatever reason, all or any
     portion of an award for Shares  still  subject to  restrictions  (including
     restrictions  on  transferability)  shall  automatically  be  forfeited.  A
     Participant  shall  have  no  rights  or  privileges  as a  shareholder  or
     otherwise with respect to Shares that have been forfeited. Shares no longer

                                       7
<PAGE>
     subject to restrictions  (including  restrictions on transferability) shall
     be fully vested and nonforfeitable.

4.7  Retirement or Death of Participant.

     (a)  In the  event  that  Employment  shall  be  terminated  by the  Normal
          Retirement or death of a participant,  the restrictions imposed by the
          Committee on any Shares awarded  pursuant to the Plan shall lapse upon
          such termination.

     (b)  In the  event  that  employment  shall  be  terminated  by  the  Early
          Retirement  of a  Participant,  the  Committee  may,  but shall not be
          obligated to, determine that the restrictions imposed by the Committee
          on any  Shares  awarded  pursuant  to the Plan  shall  lapse upon such
          termination.

4.8  Adjustments.

     The Committee may make such adjustment,  as the Committee  determines to be
     appropriate,  in the number of Shares subject to outstanding  awards and in
     the number of Shares  available for awards in order to  compensate  for the
     effect of any change in the Company's capitalization or structure or in the
     Shares or  outstanding  awards  (including  without  limitation  any change
     arising  through  the  declaration  of a stock  dividend  or stock split or
     through a spin-off, spin-out or other distribution of assets of the Company
     or any of its  subsidiaries to  shareholders,  whether payable in Shares or
     other shares of stock of the Company or any of its subsidiaries, or through
     reorganization,     recapitalization,    partial    liquidation,    merger,
     consolidation  or similar event,  or through the sale or exchange of all or
     substantially  all of the Company's  assets,  or through stock  splitups or
     combinations or exchanges of Shares or other shares of stock of the Company
     or any of its  subsidiaries) or of any stock purchase  pursuant to a tender
     offer by the Company or any other party.

4.9  Approval of Shareholders.

     No award may be made hereunder to any Section 16 reporting  person prior to
     the approval of the Plan by the Company's  shareholders  in accordance with
     the Exchange Act.

4.10 Effectiveness of Awards.

     Subject  to  Section  4.9,  the  date of the  Committee's  approval  of the
     awarding of Shares shall  constitute  the date of the award;  provided that
     the  effectiveness  of any award  hereunder  shall  also be  subject to the
     execution of a restricted  stock agreement and such other  documentation as
     the Committee may require.

                                       8
<PAGE>
4.11 Listing and Registration of Shares.

     The  Plan  shall  be  subject  to the  requirement  that if at any time the
     Committee shall determine in its discretion that the listing,  registration
     or  qualification  of the Shares upon any securities  exchange or under any
     state or federal  law,  or the  consent  or  approval  of any  governmental
     regulatory  body,  is  necessary  or  desirable  as a  condition  of  or in
     connection  with  the  issuance  or  delivery  of  the  Shares  or  related
     certificate  pursuant  to  the  Plan,  no  Shares  may  be  issued  and  no
     certificate  representing  any Shares may be delivered unless and until the
     listing, registration,  qualification,  consent or approval shall have been
     effected or obtained, and maintained, free of any conditions not acceptable
     to the Committee.

4.12 Change in Control.

     Immediately  upon the occurrence of a Change in Control,  the  restrictions
     imposed by the Committee on any Shares  previously  awarded pursuant to the
     Plan shall lapse.

                                   ARTICLE V
                                   DEFERRALS
5.1  Deferrals by Participants.

     Subject  to  the  Agreement  of  the  Committee,  before  the  December  31
     immediately  preceding  the  first  day of  the  Plan  Year  in  which  the
     restrictions  on Shares  previously  awarded lapse, a Participant  may file
     with the Committee one or more Deferral  Agreements  pursuant to which such
     Participant  elects to  exchange  Shares  previously  awarded  for an equal
     number of Deferred  Stock Units,  and defer payment of such Deferred  Stock
     Units for the Deferral  Period(s) elected pursuant to Section 5.2. Deferred
     Stock Units will be credited to the Account of each  Participant  as of the
     day determined by the Committee.

5.2  Effective Date of Deferral Agreement.

     Each Deferral  Agreement shall become  effective no later than the last day
     of the Plan  Year  preceding  the Plan Year in which  the  restrictions  on
     Shares deferred shall lapse.

5.3  Deferral Periods.

     A Participant may elect on his Deferral Agreement, a Deferral Period of any
     period of one (1) Plan Year or more. The Deferral Period must end no sooner
     than  the   Participant's   completion   of  at  least   one  (1)  year  of
     Participation.  The Deferral Period shall in any event end upon termination

                                       9
<PAGE>
     of employment,  death, and disability.  A Participant must specify,  on the
     Deferral  Agreement,  the Deferral  Period for the Deferred  Stock Units to
     which the  Deferral  Agreement  relates,  subject  to such  rules as may be
     established  by  the   Administrative   Committee  from  time  to  time.  A
     Participant may change an election of a Deferral Period,  to either extend,
     or  shorten  (subject  to the  second  sentence  of this  Section  5.3) the
     Deferral Period, at any time prior to the first day of the calendar year in
     which the Deferral  Period would otherwise end. The Deferral Period may not
     be shortened to end in the then current taxable year of the Participant, or
     the  subsequent  taxable  year.

                                   ARTICLE VI
                                    ACCOUNTS

6.1  Establishment of Bookkeeping Accounts.

     A separate  bookkeeping  account shall be maintained for each Participant's
     Account.  Such account shall be credited with the Deferred Stock Units made
     by the Participant pursuant to Section 5.1.

6.2  Subaccounts.

     Within each Participant's  bookkeeping account,  separate subaccounts shall
     be maintained to the extent necessary for the  administration  of the Plan.
     For example, it may be necessary to maintain separate subaccounts where the
     Participant has specified  different  Deferral Periods,  methods of payment
     for different Plan Years.

6.3  Hypothetical Nature of Accounts.

     The account  established  under this  Article VI shall be  hypothetical  in
     nature and shall be maintained  for  bookkeeping  purposes only so that the
     number and value of  Deferred  Stock Units can be  determined.  Neither the
     Plan nor any of the accounts (or subaccounts)  established  hereunder shall
     hold any actual funds or assets.  The right of any person to receive one or
     more payments  under the Plan shall be only an unsecured  claim against the
     general  assets  of  the  Company.  Any  liability  of the  Company  to any
     Participant,  former Participant, or Beneficiary with respect to a right to
     payment shall be based solely upon contractual  obligations  created by the
     Plan. Neither the Company,  the Board, nor any other person shall be deemed
     to be a trustee of any amounts to be paid under the Plan. Nothing contained
     in the Plan, and no action taken pursuant to its  provisions,  shall create
     or be construed to create a trust of any kind, or a fiduciary relationship,
     between the Company and a Participant or any other person.

6.4  Vesting.

     A Participant's  Account shall become 100% vested and  nonforfeitable  upon
     the maturity of the Deferred Stock Units credited to the Account,  provided
     the  Participant's  employment with the Company has not then terminated for
     reasons other than stated in Section 4.7.

                                       10
<PAGE>
6.5  Dividend Equivalents

     The Company  shall pay to each  Participant  with respect to each  Deferred
     Stock  Unit an amount  equivalent  to the  dividends  paid on each share of
     Company Stock.

                                  ARTICLE VII
                               PAYMENT OF ACCOUNT

7.1  Timing of Distribution of Benefits.

     Distribution  of  Accounts  to a  Participant  shall  be made  or  commence
     following the date the Deferral Period for such amounts ends, in accordance
     with the Participant's election on his Deferral Agreement.

7.2  Form of Payment.

     Accounts shall be distributed in accordance with the form of Shares.

7.3  Change in Control.

     Upon  termination  of a  Participant's  employment  following  a Change  in
     Control, a Participant's  Account shall be distributed in a single lump sum
     distribution of shares.


7.4  Designation of Beneficiaries.

     Each  Participant  shall have the right to  designate  the  beneficiary  or
     beneficiaries  to receive payment of his benefit in the event of his death.
     A  beneficiary  designation  shall  be  made  by  executing  a  beneficiary
     designation  form in the form  attached  hereto as Attachment 2, and filing
     the same with the  Committee.  Any such  designation  may be changed at any
     time by execution of a new designation in accordance with this Section.  If
     no such  designation is on file with the Committee at the time of the death
     of the Participant, or for any reason such designation is not effective, as
     determined  by  the   Committee,   then  the   designated   beneficiary  or
     beneficiaries to receive such benefit shall be the Participant's  surviving
     spouse, if any, or if none, the Participant's executor or administrator, or
     his  heirs  at law if  there  is no  administration  of such  Participant's
     estate.

7.5  Unclaimed Benefits.

     In the case of a benefit  payable  on behalf  of such  Participant,  if the
     Committee is unable to locate the  Participant  or beneficiary to whom such
     benefit is payable,  such benefit may be forfeited to the Company, upon the
     Committee's determination.  Notwithstanding the foregoing, if subsequent to
     any  such  forfeiture  but no  later  than  six (6)  years  following  such
     forfeiture,  the Participant or beneficiary to whom such benefit is payable
     makes a valid claim for such benefit,  such forfeited benefit shall be paid
     by the Company or restored to the Plan by the Company.

                                       11
<PAGE>
                                  ARTICLE VIII
                        DETERMINATION OF BENEFITS, CLAIMS
                          PROCEDURE AND ADMINISTRATION
8.1  Claims.

     A person  who  believes  that he is being  denied a benefit  to which he is
     entitled under the Plan (hereinafter  referred to as a "Claimant") may file
     a written  request for such benefits with the Committee,  setting forth his
     claim. The request must be addressed to the Committee at the Company at its
     then principal place of business.

8.2  Claim Decision.

     Upon receipt of a claim,  the Committee shall make a  determination  of the
     claim and reply to the claimant  within ninety (90) days.  The Company may,
     however,  extend the reply  period for an  additional  ninety  (90) days if
     special  circumstances  require.  If the claim is denied,  the denial shall
     explain the reason for the denial with specific reference to the provisions
     of the Plan on which the denial is based. The Claimant may within (60) days
     request a review of the denial and may submit comments or other material in
     writing.  The Company shall review the denial and render a decision  within
     sixty (60) days after  receipt of the request for  review,  unless  special
     circumstances require an extension of such time to no more than one-hundred
     twenty (120) days.

                                   ARTICLE IX
                                  MISCELLANEOUS
9.1  Not Contract of Employment.

     The  adoption  and  maintenance  of the Plan  shall  not be  deemed to be a
     contract between the Company and any person or to be consideration  for the
     employment of any person.  Nothing herein contained shall be deemed to give
     any person  the right to be  retained  in the  employ of the  Company or to
     restrict the rights of the Company to discharge  any person at any time nor
     shall the Plan be  deemed to give the  Company  the  right to  require  any
     person to remain in the employ of the Company or to restrict  any  person's
     right to terminate his employment at any time.

9.2  Non-Assignability of Benefits.

     No Participant, Beneficiary or distributee of benefits under the Plan shall
     have any power or right to transfer,  assign,  anticipate,  hypothecate  or
     otherwise encumber any part or all of the amounts payable hereunder,  which
     are expressly  declared to be unassignable  and  nontransferable.  Any such
     attempted assignment or transfer shall be void. No amount payable hereunder
     shall,  prior to actual  payment  thereof,  be  subject  to  seizure by any
     creditor of any such Participant,  Beneficiary or other distributee for the
     payment of any debt,  judgment or other obligation,  by a proceeding at law
     or in equity,  nor  transferable  by  operation  of law in the event of the
     bankruptcy,  insolvency or death of such Participant,  Beneficiary or other
     distributee hereunder.
                                       12

<PAGE>
9.3  Withholding Tax.

     The  Committee  shall have the right to require,  prior to the  issuance or
     delivery of any Shares or any certificates  representing any Shares awarded
     pursuant to the Plan, that the participant pay to the Company the amount of
     any taxes which the Company is  required to withhold  with  respect to such
     Shares in such manner as the Committee shall determine,  including  without
     limitation by requiring the Company to retain a sufficient number of Shares
     to cover the amount or any portion thereof required to be withheld.

9.4  Amendment and Termination.

     The Company may from time to time, in its  discretion,  amend , in whole or
     in part, any or all of the provisions of the Plan; provided,  however, that
     no amendment may be made that would impair the rights of a Participant with
     respect to Shares, or to Deferred Stock Units or dividends allocated to his
     Account,  without the Participant's  consent. The Company may terminate the
     Plan at any time. In the event that the Plan is terminated,  any balance in
     the  Participant's  Account  shall  be  paid  to  such  Participant  or his
     Beneficiary  in a  single  lump  sum,  in  full  satisfaction  of all  such
     Participant's or Beneficiary's benefits hereunder.

9.5  No Trust Created.

     Nothing  contained in this  Agreement,  and no action taken pursuant to its
     provisions  by either  party  hereto,  shall  create,  nor be  construed to
     create, a trust of any kind or a fiduciary relationship between the Company
     and the Participant, his beneficiary, or any other person.

9.6  Unsecured General Creditor Status of Employee.

     The  payments to  Participant,  his  Beneficiary,  or any other  distribute
     hereunder shall be made from assets which shall continue, for all purposes,
     to be a part of the general,  unrestricted assets of the Company; no person
     shall have nor  acquire  any  interest  in any such assets by virtue of the
     provisions of this Agreement.  The Company's  obligation hereunder shall be
     an unfunded and unsecured  promise to distribute  shares in the future.  To
     the extent that the Participant,  Beneficiary, or other distribute acquires
     a  right  to  receive  share  distributions  from  the  Company  under  the
     provisions  hereof,  such right  shall be no greater  than the right of any
     unsecured  general  creditor of the Company,  no such person shall have nor
     require  any  legal  or  equitable  right,  interest  or claim in or to any
     property or assets of the Company.  In the event that,  in its  discretion,
     the Company purchases an insurance  policy, or policies,  insuring the life
     of the Employee (or any other property) to allow the Company to recover the
     cost of providing the benefits,  in whole, or in part,  hereunder,  neither
     the Participant,  Beneficiary or other  distributee  shall have nor acquire
     any rights  whatsoever  therein or in the proceeds  therefrom.  The Company
     shall be the sole owner and beneficiary of any such policy or policies and,
     as such,  shall  possess  and,  may  exercise  all  incidents  of ownership
     therein.  No such policy,  policies or other  property shall be held in any
     trust  for a  Participant,  Beneficiary  or  other  distribute  or  held as
     collateral security for any obligation of the Company hereunder.

                                       13
<PAGE>
9.7  Severability.

     If any  provision  of this Plan shall be held  illegal  or invalid  for any
     reason,  said  illegality  or  invalidity  shall not affect  the  remaining
     provisions hereof; instead, each provision shall be fully severable and the
     Plan  shall  be  construed  and  enforced  as if said  illegal  or  invalid
     provision had never been included herein.

9.8  Governing Laws.

     All  provisions  of the Plan shall be construed  and enforced in accordance
     with the laws of the State of Delaware,  and in the courts situated in that
     State,  to the extent not  preempted by Federal law,  regardless of the law
     which might otherwise  govern under  applicable  Delaware  conflicts of law
     principles.

9.9  Binding Effect.

     This Plan  shall be  binding  on each  Participant  and his heirs and legal
     representatives and on the Company and its successors and assigns.

9.10 Entire Agreement.

     This document and any  amendments  contain all the terms and  provisions of
     the Plan and shall  constitute  the entire Plan, any other alleged terms or
     provisions being of no effect.

9.11 Funding Upon Change In Control.

     Upon a Change in Control,  the Company shall immediately and fully fund the
     value of all Accounts by contribution of such shares as may be necessary to
     the Hancock Fabrics, Inc. Deferred Stock Unit Trust.

     IN  WITNESS  WHEREOF,  the  Company  has  caused  this Plan to be  properly
executed on the _______ day of ___________________, 2003.

ATTEST:                                      HANCOCK FABRICS, INC.

                                        By:  ---------------------------------
---------------------------------
Title:                               Title:  ---------------------------------
      ---------------------------

                                       14
<PAGE>

                               DEFERRAL AGREEMENT

     To the Plan Administrator of the Hancock Fabrics, Inc. Amended and Restated
     1995 Restricted Stock and Deferred Stock Unit Plan ("Plan").

     In accordance  with the Section 5.1 of the Plan, I enter into this Deferral
     Agreement ("Agreement) with Hancock Fabrics, Inc. (the "Employer"). I elect
     to exchange ____ Shares for ______ Deferred Stock Units.

(1)  The  Employer  will  establish a  bookkeeping  account on my behalf for the
     Deferred Stock Units.

(2)  This Agreement remains in effect until I revoke the Agreement. I may revoke
     this Agreement by filing a new Agreement at any time.

(3)  I am not vested in my Deferred  Stock Units until they reach their maturity
     date or an event  described  in  Section  4.7 of the Plan  occurs.

(4)  The Deferred  Stock Units,  or shares  converted  from such Deferred  Stock
     Units,  will not be paid to me until the date(s)  determined  in accordance
     with the terms of the Plan and no earlier than ________________.


     Dated this _____ day of ___________________,  200__, by the Participant and
the Employer.

EMPLOYER:                                     PARTICIPANT:

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

By:  -----------------------------            ----------------------------------
                                                                    Printed Name

                                              ----------------------------------
                                                          Social Security Number

                                  Attachment 1
<PAGE>

                           DESIGNATION OF BENEFICIARY

To the Plan Administrator of the Hancock Fabrics, Inc. Amended and Restated 1995
Restricted Stock and Deferred Stock Unit Plan (the "Plan"):

RE:
     --------------------------------------------, Participant
     Social Security Number:
                            ---------------------

     Pursuant to the  provisions of the Plan  permitting  the  designation  of a
beneficiary or beneficiaries by a participant,  I hereby designate the following
person or persons as primary and  contingent  beneficiaries  of my Account under
the Plan payable by reason of my death:

--------------------------------------------------------------------------------
Primary Beneficiary(ies) [Include address and relationship):


--------------------------------------------------------------------------------
Contingent Beneficiary(ies) [Include address and relationship]:

     I RESERVE  THE RIGHT TO REVOKE OR CHANGE  ANY  BENEFICIARY  DESIGNATION.  I
     HEREBY REVOKE ALL PRIOR DESIGNATIONS (IF ANY) OF PRIMARY  BENEFICIARIES AND
     CONTINGENT BENEFICIARIES.

     The Plan  Administrator  will pay all sums payable under the Plan by reason
of my death to the  primary  beneficiary,  if he or she  survives  me, and if no
primary beneficiary survives me, then to the contingent  beneficiary,  and if no
named beneficiary survives me, then the Plan Administrator shall pay all amounts
in accordance with the terms of the Plan.

---------------------------------          -------------------------------------
Date of this Designation                   Signature of Participant

                                  Attachment 2