UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C.  20549





FORM
10-Q





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


SECURITIES
EXCHANGE ACT OF 1934





For
the quarterly period ended July 31, 2010





OR





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


SECURITIES
EXCHANGE ACT OF 1934





For
the transition period from_____________to___________.





Commission
File Number 1 – 9482





HANCOCK
FABRICS, INC.


(Exact
name of registrant as specified in its charter)





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





One
      Fashion Way, Baldwyn, MS
              38824(Address
      of principal executive offices)
              (Zip
      Code)





(662)
365-6000


Registrant’s
telephone number, including area code





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





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





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





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





Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).      Yes  ̈
    No x





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





As of
August 28, 2010, there were 20,026,861,
shares of Hancock Fabrics, Inc. $.01 par value common stock
outstanding.









Table of
Contents




Hancock
Fabrics, Inc.,


INDEX
TO FORM 10-Q





PagePart I.  Financial
      InformationItem
      1.  Financial StatementsConsolidated
      Balance Sheets as of July 31, 2010, August 1, 2009 and January 30,
      2010
                            3Consolidated
      Statements of Operations for the Thirteen and Twenty-six Weeks Ended July
      31, 2010 and August 1, 2009
                            4Consolidated
      Statement of Shareholders’ Equity for the Twenty-six Weeks Ended July 31,
      2010
                            5Consolidated
      Statements of Cash Flows for the Twenty-six Weeks Ended July 31, 2010 and
      August 1, 2009
                            6Notes
      to Consolidated Financial Statements
                            7Item
      2.  Management’s Discussion and Analysis of Financial Condition
      and Results of Operations
                            11Item
      3.  Quantitative and Qualitative Disclosures about Market
      Risks
                            20Item
      4T.  Controls and Procedures
                            20Part II.  Other
      InformationItem
      1. Legal Proceedings
                            21Item
      1A. Risk Factors
                            21Item
      2. Unregistered Sales of Equity Securities and Use of
    Proceeds
                            21Item
      3. Defaults Upon Senior Securities
                            22Item
      5. Other Information
                            22Item
      6. Exhibits
                            22Signatures
                            22


2





PART
I. FINANCIAL INFORMATION





ITEM
1. CONDENSED FINANCIAL STATEMENTS





HANCOCK
FABRICS, INC.


CONSOLIDATED
BALANCE SHEETS





(unaudited)July 31,
                                            
                                            
                                            August 1,
                                            
                                            
                                            January 30,(in thousands, except for share amounts)
                                            
                                            2010
                                            
                                            
                                            2009
                                            
                                            
                                            2010(1)AssetsCurrent
      assets:Cash
      and cash equivalents
                                            
                                            $
                                            3,163
                                            
                                            
                                            $
                                            2,724
                                            
                                            
                                            $
                                            2,493Receivables,
      less allowance for doubtful accounts
                                            
                                            
                                            3,082
                                            
                                            
                                            
                                            3,479
                                            
                                            
                                            
                                            3,469Inventories
                                            
                                            
                                            104,598
                                            
                                            
                                            
                                            99,952
                                            
                                            
                                            
                                            91,495Prepaid
      expenses
                                            
                                            
                                            2,228
                                            
                                            
                                            
                                            2,263
                                            
                                            
                                            
                                            1,485Total
      current assets
                                            
                                            
                                            113,071
                                            
                                            
                                            
                                            108,418
                                            
                                            
                                            
                                            98,942Property
      and equipment, net
                                            
                                            
                                            41,944
                                            
                                            
                                            
                                            43,042
                                            
                                            
                                            
                                            41,687Goodwill
                                            
                                            
                                            3,210
                                            
                                            
                                            
                                            3,210
                                            
                                            
                                            
                                            3,210Other
      assets
                                            
                                            
                                            4,084
                                            
                                            
                                            
                                            5,293
                                            
                                            
                                            
                                            4,707Total
      assets
                                            
                                            $
                                            162,309
                                            
                                            
                                            $
                                            159,963
                                            
                                            
                                            $
                                            148,546Liabilities
      and Shareholders' EquityCurrent
      liabilities:Accounts
      payable
                                            
                                            $
                                            23,530
                                            
                                            
                                            $
                                            20,308
                                            
                                            
                                            $
                                            18,638Accrued
      liabilities
                                            
                                            
                                            13,933
                                            
                                            
                                            
                                            14,567
                                            
                                            
                                            
                                            15,113Pre-petition
      obligations
                                            
                                            
                                            730
                                            
                                            
                                            
                                            1,748
                                            
                                            
                                            
                                            1,193Total
      current liabilities
                                            
                                            
                                            38,193
                                            
                                            
                                            
                                            36,623
                                            
                                            
                                            
                                            34,944Long-term
      debt obligations, net
                                            
                                            
                                            38,959
                                            
                                            
                                            
                                            42,670
                                            
                                            
                                            
                                            26,942Capital
      lease obligations
                                            
                                            
                                            3,132
                                            
                                            
                                            
                                            3,233
                                            
                                            
                                            
                                            3,184Postretirement
      benefits other than pensions
                                            
                                            
                                            2,243
                                            
                                            
                                            
                                            2,251
                                            
                                            
                                            
                                            2,150Pension
      and SERP liabilities
                                            
                                            
                                            27,553
                                            
                                            
                                            
                                            22,720
                                            
                                            
                                            
                                            27,017Other
      liabilities
                                            
                                            
                                            6,835
                                            
                                            
                                            
                                            7,848
                                            
                                            
                                            
                                            7,097Total
      liabilities
                                            
                                            
                                            116,915
                                            
                                            
                                            
                                            115,345
                                            
                                            
                                            
                                            101,334Commitments
      and contingenciesShareholders'
      equity:Common
      stock, $.01 par value; 80,000,000 shares authorized; 33,364,125,
      33,139,070 and  33,283,944 issued and
      19,967,163, 19,758,075  and 19,902,148 outstanding,
      respectively
                                            
                                            
                                            334
                                            
                                            
                                            
                                            331
                                            
                                            
                                            
                                            333Additional
      paid-in capital
                                            
                                            
                                            89,460
                                            
                                            
                                            
                                            88,558
                                            
                                            
                                            
                                            89,128Retained
      earnings
                                            
                                            
                                            124,637
                                            
                                            
                                            
                                            121,748
                                            
                                            
                                            
                                            126,695Treasury
      stock, at cost, 13,396,962, 13,380,995 and 13,381,796 shares held,
      respectively
                                            
                                            
                                            (153,730
                                            )
                                            
                                            
                                            (153,697
                                            )
                                            
                                            
                                            (153,698
                                            )Accumulated
      other comprehensive loss
                                            
                                            
                                            (15,307
                                            )
                                            
                                            
                                            (12,322
                                            )
                                            
                                            
                                            (15,246
                                            )Total
      shareholders' equity
                                            
                                            
                                            45,394
                                            
                                            
                                            
                                            44,618
                                            
                                            
                                            
                                            47,212Total
      liabilities and shareholders' equity
                                            
                                            $
                                            162,309
                                            
                                            
                                            $
                                            159,963
                                            
                                            
                                            $
                                            148,546





See
accompanying notes to consolidated financial statements.





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


3





HANCOCK
FABRICS, INC.


CONSOLIDATED
STATEMENTS OF OPERATIONS


(unaudited)





ThirteenWeeksEnded
                                                                              
                                                                              
                                                                              Twenty-sixWeeksEndedJuly 31,
                                                                              
                                                                              
                                                                              August 1,
                                                                              
                                                                              
                                                                              July 31,
                                                                              
                                                                              
                                                                              August 1,(in thousands, except per share amounts)
                                                                              
                                                                              2010
                                                                              
                                                                              
                                                                              2009
                                                                              
                                                                              
                                                                              2010
                                                                              
                                                                              
                                                                              2009Sales
                                                                              
                                                                              $
                                                                              60,455
                                                                              
                                                                              
                                                                              $
                                                                              59,581
                                                                              
                                                                              
                                                                              $
                                                                              123,558
                                                                              
                                                                              
                                                                              $
                                                                              123,650Cost of goods sold
                                                                              
                                                                              
                                                                              31,596
                                                                              
                                                                              
                                                                              
                                                                              32,265
                                                                              
                                                                              
                                                                              
                                                                              66,966
                                                                              
                                                                              
                                                                              
                                                                              67,422Gross
      profit
                                                                              
                                                                              
                                                                              28,859
                                                                              
                                                                              
                                                                              
                                                                              27,316
                                                                              
                                                                              
                                                                              
                                                                              56,592
                                                                              
                                                                              
                                                                              
                                                                              56,228Selling,
      general and administrative expense
                                                                              
                                                                              
                                                                              27,172
                                                                              
                                                                              
                                                                              
                                                                              26,919
                                                                              
                                                                              
                                                                              
                                                                              53,816
                                                                              
                                                                              
                                                                              
                                                                              54,100Depreciation and
    amortization
                                                                              
                                                                              
                                                                              1,097
                                                                              
                                                                              
                                                                              
                                                                              1,127
                                                                              
                                                                              
                                                                              
                                                                              2,169
                                                                              
                                                                              
                                                                              
                                                                              2,216Operating
      income (loss)
                                                                              
                                                                              
                                                                              590
                                                                              
                                                                              
                                                                              
                                                                              (730
                                                                              )
                                                                              
                                                                              
                                                                              607
                                                                              
                                                                              
                                                                              
                                                                              (88
                                                                              )Reorganization
      expense, net
                                                                              
                                                                              
                                                                              158
                                                                              
                                                                              
                                                                              
                                                                              171
                                                                              
                                                                              
                                                                              
                                                                              354
                                                                              
                                                                              
                                                                              
                                                                              410Interest expense, net
                                                                              
                                                                              
                                                                              1,196
                                                                              
                                                                              
                                                                              
                                                                              1,376
                                                                              
                                                                              
                                                                              
                                                                              2,340
                                                                              
                                                                              
                                                                              
                                                                              2,710Loss
      from continuing operations before income taxes
                                                                              
                                                                              
                                                                              (764
                                                                              )
                                                                              
                                                                              
                                                                              (2,277
                                                                              )
                                                                              
                                                                              
                                                                              (2,087
                                                                              )
                                                                              
                                                                              
                                                                              (3,208
                                                                              )Income taxes
                                                                              
                                                                              
                                                                              -
                                                                              
                                                                              
                                                                              
                                                                              -
                                                                              
                                                                              
                                                                              
                                                                              -
                                                                              
                                                                              
                                                                              
                                                                              -Loss
      from continuing operations
                                                                              
                                                                              
                                                                              (764
                                                                              )
                                                                              
                                                                              
                                                                              (2,277
                                                                              )
                                                                              
                                                                              
                                                                              (2,087
                                                                              )
                                                                              
                                                                              
                                                                              (3,208
                                                                              )Earnings from discontinued operations (net of tax
      expense of $0, $0, $0 and $0)
                                                                              
                                                                              
                                                                              7
                                                                              
                                                                              
                                                                              
                                                                              -
                                                                              
                                                                              
                                                                              
                                                                              29
                                                                              
                                                                              
                                                                              
                                                                              49Net loss
                                                                              
                                                                              $
                                                                              (757
                                                                              )
                                                                              
                                                                              $
                                                                              (2,277
                                                                              )
                                                                              
                                                                              $
                                                                              (2,058
                                                                              )
                                                                              
                                                                              $
                                                                              (3,159
                                                                              )Basic
      and diluted loss per share:Loss
      from continuing operations
                                                                              
                                                                              $
                                                                              (0.04
                                                                              )
                                                                              
                                                                              $
                                                                              (0.12
                                                                              )
                                                                              
                                                                              $
                                                                              (0.10
                                                                              )
                                                                              
                                                                              $
                                                                              (0.16
                                                                              )Earnings from discontinued
      operations
                                                                              
                                                                              
                                                                              -
                                                                              
                                                                              
                                                                              
                                                                              -
                                                                              
                                                                              
                                                                              
                                                                              -
                                                                              
                                                                              
                                                                              
                                                                              -Net loss
                                                                              
                                                                              $
                                                                              (0.04
                                                                              )
                                                                              
                                                                              $
                                                                              (0.12
                                                                              )
                                                                              
                                                                              $
                                                                              (0.10
                                                                              )
                                                                              
                                                                              $
                                                                              (0.16
                                                                              )Weighted
      average shares outstanding:Basic and diluted
                                                                              
                                                                              
                                                                              19,649
                                                                              
                                                                              
                                                                              
                                                                              19,272
                                                                              
                                                                              
                                                                              
                                                                              19,627
                                                                              
                                                                              
                                                                              
                                                                              19,245





See
accompanying notes to consolidated financial statements.


4





HANCOCK FABRICS, INC.


CONSOLIDATED
STATEMENT OF SHAREHOLDERS' EQUITY


(unaudited)





AccumulatedAdditional
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            Other
                            
                            
                            TotalCommonStock
                            
                            
                            Paid-in
                            
                            
                            Retained
                            
                            
                            TreasuryStock
                            
                            
                            Comprehensive
                            
                            
                            Shareholders'(in thousands, except for number of shares)
                            
                            Shares
                            
                            
                            Amount
                            
                            
                            Capital
                            
                            
                            Earnings
                            
                            
                            Shares
                            
                            
                            Amount
                            
                            
                            Loss
                            
                            
                            EquityBalance
      January 30, 2010
                            
                            
                            33,283,944
                            
                            
                            $
                            333
                            
                            
                            $
                            89,128
                            
                            
                            $
                            126,695
                            
                            
                            
                            (13,381,796
                            )
                            
                            $
                            (153,698
                            )
                            
                            $
                            (15,246
                            )
                            
                            $
                            47,212Comprehensive
      loss:Net
      loss
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            (2,058
                            )
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            (2,058
                            )Minimum
      pension, SERP and OPEB  liabilities, net of taxes of
      $0
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            (61
                            )
                            
                            
                            (61
                            )Total
      comprehensive loss
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            (2,119
                            )Stock
      options exercised
                            
                            
                            10,181
                            
                            
                            
                            1
                            
                            
                            
                            14
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            15Issuance
      of restricted stock
                            
                            
                            70,000
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            -Stock
      compensation expense
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            215
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            215Amortization
      of directors' stock fees
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            103
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            103Purchase
      of treasury stock
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            (15,166
                            )
                            
                            
                            (32
                            )
                            
                            
                            
                            
                            
                            
                            (32
                            )Balance
      July 31, 2010
                            
                            
                            33,364,125
                            
                            
                            $
                            334
                            
                            
                            $
                            89,460
                            
                            
                            $
                            124,637
                            
                            
                            
                            (13,396,962
                            )
                            
                            $
                            (153,730
                            )
                            
                            $
                            (15,307
                            )
                            
                            $
                            45,394





See
accompanying notes to consolidated financial statements.


5





HANCOCK FABRICS, INC.


CONSOLIDATED
STATEMENTS OF CASH FLOWS


(unaudited)





Twenty-six Weeks EndedJuly 31,
                                                            
                                                            
                                                            August 1,(in thousands)
                                                            
                                                            2010
                                                            
                                                            
                                                            2009Cash
      flows from operating activities:Net
      loss
                                                            
                                                            $
                                                            (2,058
                                                            )
                                                            
                                                            $
                                                            (3,159
                                                            )Adjustments
      to reconcile net loss to cash flows from operating
    activitiesDepreciation
      and amortization, including cost of goods sold
                                                            
                                                            
                                                            3,222
                                                            
                                                            
                                                            
                                                            3,187Amortization
      of deferred loan costs
                                                            
                                                            
                                                            124
                                                            
                                                            
                                                            
                                                            124Amortization
      of bond discount
                                                            
                                                            
                                                            1,165
                                                            
                                                            
                                                            
                                                            1,165Interest
      paid-in-kind by issuance of notes payable
                                                            
                                                            
                                                            -
                                                            
                                                            
                                                            
                                                            694Stock
      compensation expense
                                                            
                                                            
                                                            318
                                                            
                                                            
                                                            
                                                            541Reserve
      for store closings credits, including interest expense
                                                            
                                                            
                                                            (45
                                                            )
                                                            
                                                            
                                                            302Other
                                                            
                                                            
                                                            99
                                                            
                                                            
                                                            
                                                            (81
                                                            )Reorganization
      expense, net
                                                            
                                                            
                                                            354
                                                            
                                                            
                                                            
                                                            410(Increase)
      decrease in assetsReceivables
      and prepaid expenses
                                                            
                                                            
                                                            (371
                                                            )
                                                            
                                                            
                                                            (615
                                                            )Inventory
      at current cost
                                                            
                                                            
                                                            (13,147
                                                            )
                                                            
                                                            
                                                            4,260Other
      noncurrent assets
                                                            
                                                            
                                                            499
                                                            
                                                            
                                                            
                                                            (589
                                                            )Increase
      (decrease) in liabilitiesAccounts
      payable
                                                            
                                                            
                                                            4,802
                                                            
                                                            
                                                            
                                                            (1,770
                                                            )Accrued
      liabilities
                                                            
                                                            
                                                            (1,148
                                                            )
                                                            
                                                            
                                                            (193
                                                            )Postretirement
      benefits other than pensions
                                                            
                                                            
                                                            (448
                                                            )
                                                            
                                                            
                                                            (480
                                                            )Long-term
      pension and SERP liabilities
                                                            
                                                            
                                                            1,016
                                                            
                                                            
                                                            
                                                            1,434Other liabilities
                                                            
                                                            
                                                            (345
                                                            )
                                                            
                                                            
                                                            (178
                                                            )Net
      cash provided by (used in) operating activities before reorganization
      activities
                                                            
                                                            
                                                            (5,963
                                                            )
                                                            
                                                            
                                                            5,052Net cash used for reorganization
      activities
                                                            
                                                            
                                                            (385
                                                            )
                                                            
                                                            
                                                            (504
                                                            )Net cash provided by (used in) operating
      activities
                                                            
                                                            
                                                            (6,348
                                                            )
                                                            
                                                            
                                                            4,548Cash
      flows from investing activities:Additions
      to property and equipment
                                                            
                                                            
                                                            (3,451
                                                            )
                                                            
                                                            
                                                            (1,265
                                                            )Proceeds from the disposition of property and
      equipment
                                                            
                                                            
                                                            17
                                                            
                                                            
                                                            
                                                            9Net cash used in investing
      activities
                                                            
                                                            
                                                            (3,434
                                                            )
                                                            
                                                            
                                                            (1,256
                                                            )Cash
      flows from financing activities:Net
      borrowings (payments) on revolving credit facility
                                                            
                                                            
                                                            10,852
                                                            
                                                            
                                                            
                                                            (2,166
                                                            )Payments for pre-petition liabilities and
      other
                                                            
                                                            
                                                            (400
                                                            )
                                                            
                                                            
                                                            (740
                                                            )Net cash provided by (used in) financing
      activities
                                                            
                                                            
                                                            10,452
                                                            
                                                            
                                                            
                                                            (2,906
                                                            )Increase
      in cash and cash equivalents
                                                            
                                                            
                                                            670
                                                            
                                                            
                                                            
                                                            386Cash
      and cash equivalents:Beginning of period
                                                            
                                                            
                                                            2,493
                                                            
                                                            
                                                            
                                                            2,338End of period
                                                            
                                                            $
                                                            3,163
                                                            
                                                            
                                                            $
                                                            2,724Supplemental
      disclosures:Cash
      paid during the period for:Interest
                                                            
                                                            $
                                                            1,014
                                                            
                                                            
                                                            $
                                                            720Income
      taxes
                                                            
                                                            
                                                            300
                                                            
                                                            
                                                            
                                                            -Non-cash
      activities:Noncash
      change in funded status of benefit plans
                                                            
                                                            $
                                                            (61
                                                            )
                                                            
                                                            $
                                                            (100
                                                            )





See
accompanying notes to consolidated financial statements.


6





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)





NOTE 1 –  BUSINESS AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES





Organization





Hancock
Fabrics, Inc. (“Hancock” or the “Company”) is a specialty retailer committed to
nurturing creativity through a complete selection of fashion and home decorating
textiles, crafts, sewing accessories, needlecraft supplies and sewing machines.
As of July 31, 2010, Hancock operated 266 stores in 37 states and an internet
store under the domain name hancockfabrics.com. Hancock conducts business in one
operating business segment.





References
herein to “Hancock,” the “Company,” “Registrant,” “we,” “our” or “us” refer to
Hancock Fabrics, Inc. and its subsidiaries unless the context specifically
indicates otherwise. References herein to second quarter 2010 and second quarter
2009 are for the 13 week periods ended July 31, 2010 and August 1, 2009,
respectively. References to twenty-six weeks 2010, first half 2010 or 2010, and
twenty-six weeks 2009, first half 2009 or 2009 are for the 26 week periods ended
July 31, 2010 and August 1, 2009, respectively.





Basis
of Presentation





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





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





The
unaudited results of operations for the interim periods shown in these financial
statements are not necessarily indicative of operating results for the entire
year. In the opinion of management, the accompanying unaudited Consolidated
Financial Statements recognize all adjustments of a normal recurring nature
considered necessary to fairly state our consolidated financial position as of
July 31, 2010, and August 1, 2009, and our consolidated results of operations
and cash flows for the twenty-six weeks ended July 31, 2010, and August 1,
2009.





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


7


Recently
Issued Accounting Standards





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





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





Several
other new accounting standards became effective during the periods presented or
will be effective subsequent to July 31, 2010. None of these new standards had
or is expected to have a significant impact on Company’s Consolidated Financial
Statements.





NOTE 2 – PROCEEDINGS UNDER CHAPTER 11 AND
RELATED FINANCINGS





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





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





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





Pre-petition
obligations (in thousands):





July 31,
                                
                                
                                August 1,
                                
                                
                                January 30,2010
                                
                                
                                2009
                                
                                
                                2010Real
      estate claims
                                
                                $
                                5
                                
                                
                                $
                                1,023
                                
                                
                                $
                                468Professional
      fee claim
                                
                                
                                725
                                
                                
                                
                                725
                                
                                
                                
                                725Total
      pre-petition claims
                                
                                $
                                730
                                
                                
                                $
                                1,748
                                
                                
                                $
                                1,193


8





NOTE 3 –EMPLOYEE BENEFIT
PLANS





Retirement Plans. The
following summarizes the net periodic benefit cost for Hancock’s defined benefit
pension retirement plan and its postretirement health care benefit plan for the
thirteen and twenty-six weeks ended July 31, 2010 and August 1, 2009 (in
thousands):





Retirement Plan
                                                                                                                    
                                                                                                                    
                                                                                                                    Postretirement
                                                                                                                      Benefit Plan
                                                                                                                    
                                                                                                                    
                                                                                                                    Retirement Plan
                                                                                                                    
                                                                                                                    
                                                                                                                    Postretirement
                                                                                                                      Benefit PlanThirteen Weeks Ended
                                                                                                                    
                                                                                                                    
                                                                                                                    Twenty-six Weeks EndedJuly 31,
                                                                                                                    
                                                                                                                    
                                                                                                                    August 1,
                                                                                                                    
                                                                                                                    
                                                                                                                    July 31,
                                                                                                                    
                                                                                                                    
                                                                                                                    August 1,
                                                                                                                    
                                                                                                                    
                                                                                                                    July 31,
                                                                                                                    
                                                                                                                    
                                                                                                                    August 1,
                                                                                                                    
                                                                                                                    
                                                                                                                    July 31,
                                                                                                                    
                                                                                                                    
                                                                                                                    August 1,2010
                                                                                                                    
                                                                                                                    
                                                                                                                    2009
                                                                                                                    
                                                                                                                    
                                                                                                                    2010
                                                                                                                    
                                                                                                                    
                                                                                                                    2009
                                                                                                                    
                                                                                                                    
                                                                                                                    2010
                                                                                                                    
                                                                                                                    
                                                                                                                    2009
                                                                                                                    
                                                                                                                    
                                                                                                                    2010
                                                                                                                    
                                                                                                                    
                                                                                                                    2009Service
      costs
                                                                                                                    
                                                                                                                    $
                                                                                                                    107
                                                                                                                    
                                                                                                                    
                                                                                                                    $
                                                                                                                    102
                                                                                                                    
                                                                                                                    
                                                                                                                    $
                                                                                                                    17
                                                                                                                    
                                                                                                                    
                                                                                                                    $
                                                                                                                    12
                                                                                                                    
                                                                                                                    
                                                                                                                    $
                                                                                                                    214
                                                                                                                    
                                                                                                                    
                                                                                                                    $
                                                                                                                    205
                                                                                                                    
                                                                                                                    
                                                                                                                    $
                                                                                                                    34
                                                                                                                    
                                                                                                                    
                                                                                                                    $
                                                                                                                    24Interest
      cost
                                                                                                                    
                                                                                                                    
                                                                                                                    1,139
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    1,228
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    33
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    44
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    2,278
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    2,456
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    65
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    88Expected
      return on assets
                                                                                                                    
                                                                                                                    
                                                                                                                    (959
                                                                                                                    )
                                                                                                                    
                                                                                                                    
                                                                                                                    (804
                                                                                                                    )
                                                                                                                    
                                                                                                                    
                                                                                                                    -
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    -
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    (1,918
                                                                                                                    )
                                                                                                                    
                                                                                                                    
                                                                                                                    (1,609
                                                                                                                    )
                                                                                                                    
                                                                                                                    
                                                                                                                    -
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    -Amortization
      of prior service costs
                                                                                                                    
                                                                                                                    
                                                                                                                    -
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    -
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    (199
                                                                                                                    )
                                                                                                                    
                                                                                                                    
                                                                                                                    (193
                                                                                                                    )
                                                                                                                    
                                                                                                                    
                                                                                                                    -
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    -
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    (398
                                                                                                                    )
                                                                                                                    
                                                                                                                    
                                                                                                                    (386
                                                                                                                    )Recognized
      net actuarial (gain) loss
                                                                                                                    
                                                                                                                    
                                                                                                                    240
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    210
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    (72
                                                                                                                    )
                                                                                                                    
                                                                                                                    
                                                                                                                    (68
                                                                                                                    )
                                                                                                                    
                                                                                                                    
                                                                                                                    480
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    420
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    (144
                                                                                                                    )
                                                                                                                    
                                                                                                                    
                                                                                                                    (135
                                                                                                                    )Net
      periodic benefit cost (gain)
                                                                                                                    
                                                                                                                    $
                                                                                                                    527
                                                                                                                    
                                                                                                                    
                                                                                                                    $
                                                                                                                    736
                                                                                                                    
                                                                                                                    
                                                                                                                    $
                                                                                                                    (221
                                                                                                                    )
                                                                                                                    
                                                                                                                    $
                                                                                                                    (205
                                                                                                                    )
                                                                                                                    
                                                                                                                    $
                                                                                                                    1,054
                                                                                                                    
                                                                                                                    
                                                                                                                    $
                                                                                                                    1,472
                                                                                                                    
                                                                                                                    
                                                                                                                    $
                                                                                                                    (442
                                                                                                                    )
                                                                                                                    
                                                                                                                    $
                                                                                                                    (409
                                                                                                                    )





At July
31, 2010, the fair value of the assets held by the pension plan was $51.0
million reflecting a $2.8 million decrease from January 30, 2010.





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





NOTE 4 – EARNINGS (LOSS) PER
SHARE





Earnings
(loss) per share is presented for basic and diluted earnings per
share.  Basic earnings per share excludes dilution and is computed by
dividing income available to holders of common stock by the weighted-average
number of common shares outstanding for the period.  Diluted earnings
per share reflects the potential dilution that could occur if securities or
other contracts to issue common stock were exercised or converted into common
stock or resulted in the issuance of common stock that then shared in the
earnings of the Company. The additional shares in the diluted per share
calculations are computed based upon the Treasury Stock method.





As of
July 31, 2010, there were outstanding warrants for 9,485,600 shares with an
exercise price of $1.12 and stock options for 1,543,474 shares with a weighted
average exercise price of $3.09, which would be included in the computation of
common stock equivalents for diluted earnings per share, if the impact were not
anti-dilutive.


9





COMPUTATION OF LOSS PER SHARE





(in
      thousands, except for share and
                        
                        Thirteen Weeks Ended
                        
                        
                        Twenty-six Weeks Endedper
      share amounts)
                        
                        July 31,
                        
                        
                        August 1,
                        
                        
                        July 31,
                        
                        
                        August 1,2010
                        
                        
                        2009
                        
                        
                        2010
                        
                        
                        2009Basic
      and diluted loss per share:Net
      loss
                        
                        $
                        (757
                        )
                        
                        $
                        (2,277
                        )
                        
                        $
                        (2,058
                        )
                        
                        $
                        (3,159
                        )Weighted
      average number of common shares outstanding during period
                        
                        
                        19,648,694
                        
                        
                        
                        19,271,598
                        
                        
                        
                        19,626,553
                        
                        
                        
                        19,245,097Basic
      and diluted loss per share
                        
                        $
                        (0.04
                        )
                        
                        $
                        (0.12
                        )
                        
                        $
                        (0.10
                        )
                        
                        $
                        (0.16
                        )





Using the
Treasury Stock method, the number of shares excluded from the diluted loss per
share calculation totaled approximately 4.7 and 10.7 million for the second
quarters and 5.6 and 11.0 million for the twenty-six weeks of 2010 and 2009,
respectively.





NOTE 5 – RESERVE FOR STORE CLOSINGS AND
DISCONTINUED OPERATIONS





Reserves
for store closings are established based on estimates of net lease obligations
and other store closing costs. At July 31, 2010, the total reserve balance,
which is included in accrued liabilities, represents the present value of the
future net lease obligations for the locations which have been
closed.





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





January 30,
                  
                  
                  Reduction in
                  
                  
                  
                  
                  
                  
                  
                  
                  July 31,2010
                  
                  
                  Reserve
                  
                  
                  Interest
                  
                  
                  Payments
                  
                  
                  2010Lease
      obligations
                  
                  $
                  346
                  
                  
                  $
                  (46
                  )
                  
                  $
                  1
                  
                  
                  $
                  (212
                  )
                  
                  $
                  89





During
the twenty-six weeks ended July 31, 2010 and August 1, 2009 income of $29,000
and $49,000, respectively was recognized in earnings from discontinued
operations for the settlement of claims on stores closed in prior years. This
was the result of changes in the closed store reserve due to settlement of
certain real estate bankruptcy claims.





NOTE
6 – FAIR VALUE MEASUREMENTS AND FINANCIAL INSTRUMENTS





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





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





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


10





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





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





NOTE
7 – LONG-TERM DEBT OBLIGATIONS




At July
31, 2010, the Company had outstanding borrowings of $24.4 million under its
revolving credit facility (the “Revolver”) with General Electric Capital
Corporation, which has a maturity date of August 1, 2013. Outstanding
standby letters of credit were $6.6 million, outstanding documentary letters of
credit were $1.6 million and availability was $38.2 million at July 31, 2010.
The Revolver is collateralized by a fully perfected first priority security
interest in all real and personal, tangible and intangible assets of the
Company.  The Company is not subject to any financial covenants
pursuant to the Revolver.




At the
Company’s option, any portion of the outstanding borrowings under the Revolver
can bear interest at LIBOR - based rates plus an applicable margin, or a
floating interest rate plus the applicable margins. At July 31, 2010, the
Company had $17.0 million of its outstanding borrowings at a LIBOR-based
interest rate of 1.97%





In
addition to the Revolver, the Company has $21.6 million of Floating Rate Secured
Notes (the “Notes”) outstanding at July 31, 2010. The Notes mature on August 1,
2013, are subordinated to the Revolver, and are secured by a junior lien on all
of the Company’s assets. Interest on the Notes is payable quarterly at a rate of
LIBOR plus 4.5%. For the quarterly interest periods ended May 1, 2009 and August
1, 2009 the Company had the option and elected to make the interest payment
in-kind by issuing additional Notes totaling $0.7 million. An additional $1.2
million of interest expense was recorded for the first half of 2010 and 2009
related to the amortization of the discount recorded at the time of issuance of
the Notes. As of July 31, 2010 the balance of the unamortized discount was $7.0
million.





NOTE
8 – SUBSEQUENT EVENTS





The
Company has evaluated events and transactions that occurred subsequent to July
31, 2010 through the date the financial statements were issued for potential
recognition or disclosure. We did not identify any events or transactions that
should be recognized or disclosed in the accompanying condensed, consolidated
financial statements other than the closure of the bankruptcy case as discussed
in Note 2.





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





Forward
Looking Statements





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


11





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





Our
Business





Hancock
Fabrics, Inc. is a specialty retailer committed to serving creative enthusiasts
with a complete selection of fashion and home decorating textiles, sewing
accessories, needlecraft supplies and sewing machines.  We are one of
the largest fabric retailers in the United States, operating 266 stores in 37
states and an internet store under the domain name hancockfabrics.com as of July
31, 2010.  Our stores present a broad selection of fabrics and notions
used in apparel sewing, home decorating and quilting projects.





Overview





Financial
highlights include:





·
            Net
      sales for the second quarter of fiscal 2010 were $60.5 million compared to
      $59.6 million for the second quarter of fiscal 2009, and comparable store
      sales increased 0.7% in the second quarter of 2010 compared to a decrease
      of 4.2% in the second quarter of
2009.





·
            Our
      online sales for the second quarter of fiscal 2010, which are included in
      the comparable sales number above, increased 7.0% to $0.8
      million.





·
            Gross
      margin for the second quarter of fiscal 2010 was 47.7% compared with 45.8%
      for the second quarter of fiscal
2009.





·
            Operating
      income was $0.6 million in the second quarter of fiscal 2010 compared to a
      loss of  $0.7 million in the second quarter of fiscal
      2009.





·
            Net
      loss was $0.8 million, or $0.04 per basic share, in the second quarter of
      fiscal 2010 compared to a net loss of $2.3 million, or $0.12 per basic
      share in the second quarter of fiscal
2009.


12


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





Thirteen Weeks Ended
                
                
                Twenty-six Weeks EndedJuly 31,
                
                
                August 1,
                
                
                July 31,
                
                
                August 1,2010
                
                
                2009
                
                
                2010
                
                
                2009Net
      sales (in thousands)
                
                $
                60,455
                
                
                $
                59,581
                
                
                $
                123,558
                
                
                $
                123,650Gross
      margin percentage
                
                
                47.7
                %
                
                
                45.8
                %
                
                
                45.8
                %
                
                
                45.5
                %Number
      of storesOpen
      at end of period (1)
                
                
                266
                
                
                
                264
                
                
                
                266
                
                
                
                264Comparable
      stores at period end (2)
                
                
                264
                
                
                
                262
                
                
                
                264
                
                
                
                262Sales
      growthAll
      retail outlets
                
                
                1.5
                %
                
                
                (6.6
                )
      %
                
                
                (0.1
                )
      %
                
                
                (3.1
                )
      %Comparable
      retail outlets (3)
                
                
                0.7
                %
                
                
                (4.2
                )
      %
                
                
                (0.7
                )
      %
                
                
                (0.9
                )
      %Total
      store square footage at period end (in thousands)
                
                
                3,816
                
                
                
                3,772
                
                
                
                3,816
                
                
                
                3,772Net
      sales per total square footage
                
                $
                15.84
                
                
                $
                15.80
                
                
                $
                32.38
                
                
                $
                32.78





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





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





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





Results
of Operations





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





Thirteen Weeks Ended
                    
                    
                    Twenty-six Weeks EndedJuly 31,
                    
                    
                    August 1,
                    
                    
                    July 31,
                    
                    
                    August 1,2010
                    
                    
                    2009
                    
                    
                    2010
                    
                    
                    2009Sales
                    
                    
                    100.0
                    %
                    
                    
                    100.0
                    %
                    
                    
                    100.0
                    %
                    
                    
                    100.0
                    %Cost
      of goods sold
                    
                    
                    52.3
                    
                    
                    
                    54.2
                    
                    
                    
                    54.2
                    
                    
                    
                    54.5Gross
      profit
                    
                    
                    47.7
                    
                    
                    
                    45.8
                    
                    
                    
                    45.8
                    
                    
                    
                    45.5Selling,
      general and administrative expense
                    
                    
                    44.9
                    
                    
                    
                    45.2
                    
                    
                    
                    43.6
                    
                    
                    
                    43.8Depreciation
      and amortization
                    
                    
                    1.8
                    
                    
                    
                    1.8
                    
                    
                    
                    1.7
                    
                    
                    
                    1.8Operating
      income (loss)
                    
                    
                    1.0
                    
                    
                    
                    (1.2
                    )
                    
                    
                    0.5
                    
                    
                    
                    (0.1
                    )Reorganization
      expense, net
                    
                    
                    0.3
                    
                    
                    
                    0.3
                    
                    
                    
                    0.3
                    
                    
                    
                    0.3Interest
      expense, net
                    
                    
                    2.0
                    
                    
                    
                    2.3
                    
                    
                    
                    1.9
                    
                    
                    
                    2.2Loss
      from continuing operations before income taxes
                    
                    
                    (1.3
                    )
                    
                    
                    (3.8
                    )
                    
                    
                    (1.7
                    )
                    
                    
                    (2.6
                    )Income
      taxes
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Income
      from discontinued operations
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Net
      loss
                    
                    
                    (1.3
                    )
      %
                    
                    
                    (3.8
                    )
      %
                    
                    
                    (1.7
                    )
      %
                    
                    
                    (2.6
                    )
      %


13





Net
Sales





Thirteen Weeks Ended
                            
                            
                            Twenty-six Weeks Ended(in thousands)
                            
                            July 31,
                            
                            
                            August 1,
                            
                            
                            July 31,
                            
                            
                            August 1,2010
                            
                            
                            2009
                            
                            
                            2010
                            
                            
                            2009Retail
      comparable store base
                            
                            $
                            59,091
                            
                            
                            $
                            58,738
                            
                            
                            $
                            120,609
                            
                            
                            $
                            121,620E-Commerce
                            
                            
                            807
                            
                            
                            
                            754
                            
                            
                            
                            1,815
                            
                            
                            
                            1,672Comparable
      sales
                            
                            $
                            59,898
                            
                            
                            $
                            59,492
                            
                            
                            $
                            122,424
                            
                            
                            $
                            123,292New
      stores
                            
                            
                            557
                            
                            
                            
                            -
                            
                            
                            
                            1,134
                            
                            
                            
                            -Closed
      stores
                            
                            
                            -
                            
                            
                            
                            89
                            
                            
                            
                            -
                            
                            
                            
                            358Total
      net sales
                            
                            $
                            60,455
                            
                            
                            $
                            59,581
                            
                            
                            $
                            123,558
                            
                            
                            $
                            123,650





The
retail comparable store base above consists of the stores which were included in
the comparable sales computation for the current period. The second quarter 2010
retail comparable sales increase of 0.6% was the result of a 0.4% increase in
transaction count and a 0.2% improvement in average ticket. Sales in both
apparel and craft fabrics and non-sewing products led the sales
improvement.





Sales
provided by our e-commerce channel increased 7.0% in the second quarter and have
increased 8.6% in the first half of fiscal 2010.  We continue to reap
the benefit of our new platform which was launched in 2008 as well as receiving
a lift from adding a Vice-President of e-commerce to our team in the first
quarter.





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





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





Thirteen Weeks Ended
                      
                      
                      Twenty-six WeeksEndedJuly 31,
                      
                      
                      August 1,
                      
                      
                      July 31,
                      
                      
                      August 1,2010
                      
                      
                      2009
                      
                      
                      2010
                      
                      
                      2009Apparel
      and Craft Fabrics
                      
                      
                      42
                      %
                      
                      
                      41
                      %
                      
                      
                      42
                      %
                      
                      
                      41
                      %Home
      Decorating Fabrics
                      
                      
                      14
                      %
                      
                      
                      15
                      %
                      
                      
                      14
                      %
                      
                      
                      15
                      %Sewing
      Accessories
                      
                      
                      27
                      %
                      
                      
                      29
                      %
                      
                      
                      28
                      %
                      
                      
                      28
                      %Non-Sewing
      Products
                      
                      
                      17
                      %
                      
                      
                      15
                      %
                      
                      
                      16
                      %
                      
                      
                      16
                      %100
                      %
                      
                      
                      100
                      %
                      
                      
                      100
                      %
                      
                      
                      100
                      %





Gross
Margin





Costs of
goods sold include:





·
            the
      cost of merchandise;





·
            inventory
      rebates and allowances including term
discounts;





·
            inventory
      shrinkage and valuation
adjustments;


14




·
            freight
      charges;





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





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





The
classification of these expenses varies across the retail industry.





Specific
components of cost of goods sold for the second quarter and first twenty-six
weeks of fiscal 2010 and 2009 are as follows:





Thirteen Weeks Ended
                                                                    
                                                                    
                                                                    Twenty-six Weeks EndedJuly 31,
                                                                    
                                                                    
                                                                    % of
                                                                    
                                                                    
                                                                    August 1,
                                                                    
                                                                    
                                                                    % of
                                                                    
                                                                    
                                                                    July 31,
                                                                    
                                                                    
                                                                    % of
                                                                    
                                                                    
                                                                    August 1,
                                                                    
                                                                    
                                                                    % of(in thousands)
                                                                    
                                                                    2010
                                                                    
                                                                    
                                                                    Sales
                                                                    
                                                                    
                                                                    2009
                                                                    
                                                                    
                                                                    Sales
                                                                    
                                                                    
                                                                    2010
                                                                    
                                                                    
                                                                    Sales
                                                                    
                                                                    
                                                                    2009
                                                                    
                                                                    
                                                                    SalesTotal
      net sales
                                                                    
                                                                    $
                                                                    60,455
                                                                    
                                                                    
                                                                    
                                                                    100.0
                                                                    %
                                                                    
                                                                    $
                                                                    59,581
                                                                    
                                                                    
                                                                    
                                                                    100.0
                                                                    %
                                                                    
                                                                    $
                                                                    123,558
                                                                    
                                                                    
                                                                    
                                                                    100.0
                                                                    %
                                                                    
                                                                    $
                                                                    123,650
                                                                    
                                                                    
                                                                    
                                                                    100.0
                                                                    %Merchandise
      cost
                                                                    
                                                                    
                                                                    27,442
                                                                    
                                                                    
                                                                    
                                                                    45.5
                                                                    %
                                                                    
                                                                    
                                                                    27,380
                                                                    
                                                                    
                                                                    
                                                                    46.0
                                                                    %
                                                                    
                                                                    
                                                                    57,700
                                                                    
                                                                    
                                                                    
                                                                    46.7
                                                                    %
                                                                    
                                                                    
                                                                    57,108
                                                                    
                                                                    
                                                                    
                                                                    46.2
                                                                    %Freight
                                                                    
                                                                    
                                                                    1,713
                                                                    
                                                                    
                                                                    
                                                                    2.8
                                                                    %
                                                                    
                                                                    
                                                                    1,730
                                                                    
                                                                    
                                                                    
                                                                    2.9
                                                                    %
                                                                    
                                                                    
                                                                    3,712
                                                                    
                                                                    
                                                                    
                                                                    3.0
                                                                    %
                                                                    
                                                                    
                                                                    3,528
                                                                    
                                                                    
                                                                    
                                                                    2.9
                                                                    %Sourcing
      and warehousing
                                                                    
                                                                    
                                                                    2,441
                                                                    
                                                                    
                                                                    
                                                                    4.0
                                                                    %
                                                                    
                                                                    
                                                                    3,155
                                                                    
                                                                    
                                                                    
                                                                    5.3
                                                                    %
                                                                    
                                                                    
                                                                    5,554
                                                                    
                                                                    
                                                                    
                                                                    4.5
                                                                    %
                                                                    
                                                                    
                                                                    6,786
                                                                    
                                                                    
                                                                    
                                                                    5.4
                                                                    %Gross
      Profit
                                                                    
                                                                    $
                                                                    28,859
                                                                    
                                                                    
                                                                    
                                                                    47.7
                                                                    %
                                                                    
                                                                    $
                                                                    27,316
                                                                    
                                                                    
                                                                    
                                                                    45.8
                                                                    %
                                                                    
                                                                    $
                                                                    56,592
                                                                    
                                                                    
                                                                    
                                                                    45.8
                                                                    %
                                                                    
                                                                    $
                                                                    56,228
                                                                    
                                                                    
                                                                    
                                                                    45.5
                                                                    %





Merchandise
cost decreased 50 basis points in the second quarter of 2010 compared to the
same period of 2009, due to a reduction in promotional activity and reduced
product costs. For the first half of 2010 merchandise cost was 50 basis points
higher than 2009 as a result of first quarter discounting that was initiated to
address inventory mix issues in select categories.





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





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





In total,
gross margin increased by 190 basis points in the second quarter 2010 from
second quarter 2009, and increased 30 basis points for the first twenty-six
weeks of 2010 over the first twenty-six weeks of 2009.





Sales,
General & Administrative Expenses





Sales,
general & administrative expenses include:





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





·
            advertising;


15


·
            general
      and administrative expenses;





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





·
            operating
      costs of our headquarter facilities;
and





·
            other
      expense (income).





Specific
components of sales, general & administrative expenses include:





Thirteen Weeks Ended
                                                                    
                                                                    
                                                                    Twenty-six Weeks EndedJuly 31,
                                                                    
                                                                    
                                                                    % of
                                                                    
                                                                    
                                                                    August 1,
                                                                    
                                                                    
                                                                    % of
                                                                    
                                                                    
                                                                    July 31,
                                                                    
                                                                    
                                                                    % of
                                                                    
                                                                    
                                                                    August 1,
                                                                    
                                                                    
                                                                    % of(in thousands)
                                                                    
                                                                    2010
                                                                    
                                                                    
                                                                    Sales
                                                                    
                                                                    
                                                                    2009
                                                                    
                                                                    
                                                                    Sales
                                                                    
                                                                    
                                                                    2010
                                                                    
                                                                    
                                                                    Sales
                                                                    
                                                                    
                                                                    2009
                                                                    
                                                                    
                                                                    SalesRetail
      store labor costs
                                                                    
                                                                    $
                                                                    10,013
                                                                    
                                                                    
                                                                    
                                                                    16.6
                                                                    %
                                                                    
                                                                    $
                                                                    10,164
                                                                    
                                                                    
                                                                    
                                                                    17.1
                                                                    %
                                                                    
                                                                    $
                                                                    19,998
                                                                    
                                                                    
                                                                    
                                                                    16.2
                                                                    %
                                                                    
                                                                    $
                                                                    20,231
                                                                    
                                                                    
                                                                    
                                                                    16.4
                                                                    %Advertising
                                                                    
                                                                    
                                                                    2,236
                                                                    
                                                                    
                                                                    
                                                                    3.7
                                                                    %
                                                                    
                                                                    
                                                                    2,496
                                                                    
                                                                    
                                                                    
                                                                    4.2
                                                                    %
                                                                    
                                                                    
                                                                    4,654
                                                                    
                                                                    
                                                                    
                                                                    3.8
                                                                    %
                                                                    
                                                                    
                                                                    4,607
                                                                    
                                                                    
                                                                    
                                                                    3.7
                                                                    %Store
      occupancy
                                                                    
                                                                    
                                                                    7,359
                                                                    
                                                                    
                                                                    
                                                                    12.2
                                                                    %
                                                                    
                                                                    
                                                                    7,326
                                                                    
                                                                    
                                                                    
                                                                    12.3
                                                                    %
                                                                    
                                                                    
                                                                    14,681
                                                                    
                                                                    
                                                                    
                                                                    11.9
                                                                    %
                                                                    
                                                                    
                                                                    14,690
                                                                    
                                                                    
                                                                    
                                                                    11.9
                                                                    %Retail
      SG&A
                                                                    
                                                                    
                                                                    5,168
                                                                    
                                                                    
                                                                    
                                                                    8.5
                                                                    %
                                                                    
                                                                    
                                                                    4,812
                                                                    
                                                                    
                                                                    
                                                                    8.1
                                                                    %
                                                                    
                                                                    
                                                                    9,861
                                                                    
                                                                    
                                                                    
                                                                    8.0
                                                                    %
                                                                    
                                                                    
                                                                    9,824
                                                                    
                                                                    
                                                                    
                                                                    8.0
                                                                    %Corp
      SG&A
                                                                    
                                                                    
                                                                    2,396
                                                                    
                                                                    
                                                                    
                                                                    3.9
                                                                    %
                                                                    
                                                                    
                                                                    2,121
                                                                    
                                                                    
                                                                    
                                                                    3.5
                                                                    %
                                                                    
                                                                    
                                                                    4,622
                                                                    
                                                                    
                                                                    
                                                                    3.7
                                                                    %
                                                                    
                                                                    
                                                                    4,748
                                                                    
                                                                    
                                                                    
                                                                    3.8
                                                                    %Total
      SG&A
                                                                    
                                                                    $
                                                                    27,172
                                                                    
                                                                    
                                                                    
                                                                    44.9
                                                                    %
                                                                    
                                                                    $
                                                                    26,919
                                                                    
                                                                    
                                                                    
                                                                    45.2
                                                                    %
                                                                    
                                                                    $
                                                                    53,816
                                                                    
                                                                    
                                                                    
                                                                    43.6
                                                                    %
                                                                    
                                                                    $
                                                                    54,100
                                                                    
                                                                    
                                                                    
                                                                    43.8
                                                                    %





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





Advertising
– Certain advertising costs were shifted from the second quarter to the first
quarter of fiscal 2010.  Year to date expenses are consistent with the
prior year.





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





Retail
SG&A – Second quarter 2010 expenses increased primarily due to an increase
in insurance claims and the shifting of inventory service costs from the first
quarter of 2010.  Costs for the first half of the year have remained
constant year over year.





Corporate
SG&A – The second quarter 2009 corporate costs were reduced by the write-off
of previously accrued bankruptcy claims related to continuing
operations.  Excluding this non-recurring item, expenses are
consistent with the prior year second quarter.  The marginal decrease
for the first half is a result of the reduction in incentive compensation
accruals for the current year.


16


Reorganization
Expenses, Net





Thirteen Weeks Ended
                                  
                                  
                                  Twenty-six Weeks EndedJuly 31,
                                  
                                  
                                  % of
                                  
                                  
                                  August 1,
                                  
                                  
                                  % of
                                  
                                  
                                  July 31,
                                  
                                  
                                  % of
                                  
                                  
                                  August 1,
                                  
                                  
                                  % of(in thousands)
                                  
                                  2010
                                  
                                  
                                  Sales
                                  
                                  
                                  2009
                                  
                                  
                                  Sales
                                  
                                  
                                  2010
                                  
                                  
                                  Sales
                                  
                                  
                                  2009
                                  
                                  
                                  SalesReorganziation
      expense, net
                                  
                                  $
                                  158
                                  
                                  
                                  
                                  0.3
                                  %
                                  
                                  $
                                  171
                                  
                                  
                                  
                                  0.3
                                  %
                                  
                                  $
                                  354
                                  
                                  
                                  
                                  0.3
                                  %
                                  
                                  $
                                  410
                                  
                                  
                                  
                                  0.3
                                  %





Reorganization
expenses are comprised of the cost of professional fees associated with our
bankruptcy proceedings.  With the closure of our bankruptcy
proceedings and limited bankruptcy issues remaining, these costs are not
expected to be significant going forward and are expected to end in
2010.





Interest
Expense, Net





Thirteen Weeks Ended
                                  
                                  
                                  Twenty-six Weeks Ended(in thousands)
                                  
                                  July 31,
                                  
                                  
                                  % of
                                  
                                  
                                  August 1,
                                  
                                  
                                  % of
                                  
                                  
                                  July 31,
                                  
                                  
                                  % of
                                  
                                  
                                  August 1,
                                  
                                  
                                  % of2010
                                  
                                  
                                  Sales
                                  
                                  
                                  2009
                                  
                                  
                                  Sales
                                  
                                  
                                  2010
                                  
                                  
                                  Sales
                                  
                                  
                                  2009
                                  
                                  
                                  SalesInterest
      expense, net
                                  
                                  $
                                  1,196
                                  
                                  
                                  
                                  2.0
                                  %
                                  
                                  $
                                  1,376
                                  
                                  
                                  
                                  2.3
                                  %
                                  
                                  $
                                  2,340
                                  
                                  
                                  
                                  1.9
                                  %
                                  
                                  $
                                  2,710
                                  
                                  
                                  
                                  2.2
                                  %





The
Company’s interest costs are driven by borrowings on our credit facilities and a
small number of capital leases.  Our current credit facilities consist
of both an asset-based facility and a subordinated-debt
facility.  Interest expense for the second quarter 2010 and 2009, and
the first twenty-six weeks of 2010 and 2009 included note discount amortization
of $0.6 million and $1.2 million, respectively. In addition, interest was paid
with the issuance of additional notes of $346,000 in the second quarter 2009 and
$0.7 million in the first twenty-six weeks of 2009.  Excluding these
non-cash items, interest expense for the second quarter of 2010 was $0.6 million
or 1.0% of sales compared to $0.4 million or 0.7% of sales in second quarter
2009, and $1.2 million or 1.0% of sales in the first half of 2010 compared to
$0.9 million or 0.7% of sales in the first twenty-six weeks of
2009.





Income
Taxes





The
Company did not recognize any income tax benefit during the first half of
fiscal 2010 or 2009 given the uncertainty in realizing the future benefit. As of
July 31, 2010, January 30, 2010 and August 1, 2009 the Company has established a
100% valuation allowance to offset the net deferred tax assets related to net
operating loss carryforwards and other book-tax timing differences.





Liquidity
and Capital Resources





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





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


17





Hancock’s
cash flow related information for the first twenty-six weeks of fiscal 2010 and
2009 follows (in thousands):





Twenty-six Weeks EndedJuly 31,
                  
                  
                  August 1,2010
                  
                  
                  2009Net
      cash flows provided (used):Operating
      activites
                  
                  $
                  (6,348
                  )
                  
                  $
                  4,548Investing
      activities
                  
                  
                  (3,434
                  )
                  
                  
                  (1,256
                  )Financing
      activites
                  
                  
                  10,452
                  
                  
                  
                  (2,906
                  )





Operating
Activities





Net cash inflows provided by operating
activitiesduring the first
twenty-six weeks of 2010 decreased by $10.9 millioncompared to thefirst twenty-six weeks of
2009.Thenet decreaseoccurred due to the seasonal inventory
buildup and the addition of merchandise for an expanded craft assortment being
tested in 14 stores which was partially offset by an increase in accounts
payable.  The seasonal inventory buildup for 2009 occurred later in
the year and was less pronounced than the 2010 buildup.





Investing Activities





Cash used
for investing activities consists primarily of purchases and sales of property
and equipment.  Capital expenditures during the first twenty-six weeks
2010 increased by $2.2 million from the first twenty-six weeks of 2009.
Expenditures for 2010 consisted primarily of store fixtures related to six
relocations, fixtures for new product lines and point of sale (POS) equipment
upgrades compared to two new store locations, five store remodels and technology
upgrades completed during the first twenty-six weeks of 2009.





Financing Activities





Borrowings from the Revolver of $10.9
million were used to finance inventory purchases and capital expenditures during
the first twenty-six weeks of 2010.





Credit
Facilities





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





As of
July 31, 2010, the Company had outstanding borrowings under the Revolver of
$24.4 million and outstanding letters of credit of $8.2
million.  Additional amounts available to borrow at that time were
$38.2 million.





As of
July 31, 2010, the Note balance was $21.6 million and the unamortized discount
on Notes Payable related to warrants issued was $7.0 million.


18


Off-Balance
Sheet Arrangements





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





Contractual
Obligations and Commercial Commitments





Hancock
has an arrangement within its Revolver that provides up to $20.0 million in
letters of credit.  At July 31, 2010, Hancock had commitments of $1.6
million on documentary letters of credit under the facility, which support
purchase orders for merchandise.  Hancock also has $6.6 million on
standby letters of credit to guarantee payment of potential insurance
claims.  Hancock leases its retail fabric store locations under
operating leases expiring at various dates through 2024.





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





Critical
Accounting Policies and Estimates





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





Related
Party Transactions





See Note
18 to the Company’s Consolidated Financial Statements included in the Company’s
Annual Report on Form 10-K filed with the SEC on April 1, 2010, for details
regarding the sole related party transaction that the Company has entered
into.





The
Company has no other balances with related parties, nor has it had any other
material transactions with related parties during either of the twenty-six week
periods ended July 31, 2010 and August 1, 2009.





Effects
of Inflation





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


19





Seasonality





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





ITEM
3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS





Hancock
did not hold derivative financial or commodity instruments at July 31,
2010.





Interest
Rate Risk





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




As of
July 31, 2010, the Company had borrowings outstanding of approximately $24.4
million under the Revolver.  If interest rates increased 100 basis
points, the Company’s annual interest expense would increase approximately
$244,000, assuming borrowings under the Revolver of $24.4 million as existed at
July 31, 2010.





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





The
Company will pay the subsequent interest payments on the Notes in cash, the next
payment date being November 1, 2010.  If interest rates increased 100
basis points, the Company’s annual interest expense would increase $216,000,
based on balance of the Notes of $21.6 million at July 31, 2010.




Foreign
Currency Risk





All of
the Company’s business is transacted in U.S. dollars and, accordingly,
devaluation of the dollar against other currencies can increase product costs,
although this risk did not significantly impact the twenty-six week period ended
July 31, 2010. As of July 31, 2010, the Company had no financial instruments
outstanding that were sensitive to changes in foreign currency
rates.





ITEM
4T. CONTROLS AND PROCEDURES





Disclosure
Controls and Procedures





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


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In connection with the preparation of
this Quarterly Report on Form 10-Q as ofJuly31, 2010, the Company’s management, under the supervision and
with the participation of the Company’sPresident and Chief Executive
Officer,andExecutiveVicePresident and Chief Financial Officer,
performed an evaluation of the effectiveness of our disclosure controls and
procedures (as such term is defined in the Rules 13a-15(e) and
15d-15(e) under the Exchange Act).  Based upon this evaluation, the
Company’sprincipal executive officer and
principal financialofficerconcluded that the Company’s disclosure controls and procedures were effective as ofJuly31, 2010.




Changes in Internal Control Over
Financial Reporting




There have beennochanges in our internalcontrol over financial reporting (as
such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act)
within the fiscal quarter to which this report relates that have materially
affected, or are reasonably likely to materially affect, our internal control over financial
reporting.




PART
II.  OTHER INFORMATION





ITEM
1. LEGAL PROCEEDINGS





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




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





ITEM
1A. RISK FACTORS





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





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





In June
of 2000 the Board of Directors authorized the repurchase of up to 2,000,000
shares of the Company’s Common Stock from time to time when warranted by market
conditions.  There have been 1,756,485 shares purchased under this
authorization through July 31, 2010, and the number of shares that may yet be
purchased under this authorization is 243,515.





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


21


ITEM
3. DEFAULTS UPON SENIOR SECURITIES





None.





ITEM
5. OTHER INFORMATION





None.





ITEM
6. EXHIBITS





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


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


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





SIGNATURE





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





HANCOCK
      FABRICS, INC.(Registrant)By:
              /s/ Robert W. DriskellRobert
      W. DriskellExecutive
      Vice President andChief
      Financial Officer(Principal
      Financial Officer)





Date:    August
30, 2010


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EXHIBIT
INDEX




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


23