FORM 10-Q

                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D. C. 20549

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

                   For the quarterly period ended May 5, 2002

                                       OR

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

            For the transition period from_____________to___________.

                         Commission File Number 1 - 9482

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

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

 3406 West Main Street, Tupelo, MS                                    38801
(Address of principal executive offices)                            (Zip Code)


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

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

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

As of May 5, 2002,  the  registrant  had  outstanding an aggregate of 18,966,791
shares of common stock, $.01 par value.




<PAGE>

                                     INDEX

Part I.  Financial Information:
                                                                    Page Numbers
  Item 1.  Financial Statements (unaudited)

    Consolidated Balance Sheet as of May 5, 2002 and February 3, 2002          3

    Consolidated Statement of Income for the Thirteen Weeks Ended              4
      May 5, 2002 and April 29, 2001

    Consolidated Statement of Shareholder's Equity for the Thirteen Weeks      5
      May 5, 2002

    Consolidated Statement of Cash Flows for the Thirteen Weeks Ended          6
      May 5, 2002 and April 29, 2001

    Notes to Consolidated Financial Statements                             7 - 9

  Item 2.  Management's Discussion and Analysis of Financial Condition
    and Results of Operations                                             9 - 12


Part II.  Other Information:

  Item 3.  Quantitative and Qualitative Disclosures about Market Risks        12

  Item 4.  Submission of Matters to a Vote of Securityholders                 12

  Item 6.  Exhibits and Reports on Form 8-K                                   13


Signature                                                                     13














<PAGE>



PART I. FINANCIAL INFORMATION

CONSOLIDATED BALANCE SHEET
(unaudited)
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------
(in thousands, except for                                                     May 5,              February 3,
  share and per share amounts)                                                  2002                  2002
-------------------------------------------------------------------------------------------------------------
Assets
Current assets:
<S>                                                                            <C>                   <C>
    Cash and cash equivalents                                                  $7,255                $6,914
    Receivables, less allowance for doubtful accounts                           1,370                 1,339
    Inventories                                                               132,585               135,672
    Prepaid expenses                                                            1,370                 1,317
-------------------------------------------------------------------------------------------------------------
    Total current assets                                                      142,580               145,242

Property and equipment, at depreciated cost                                    31,358                30,607
Deferred tax assets                                                             7,654                 7,654
Pension payment in excess of required contribution                              2,987                 3,424
Goodwill                                                                        5,719                 5,719
Other assets                                                                    2,828                 2,903
-------------------------------------------------------------------------------------------------------------
    Total assets                                                             $193,126              $195,549
=============================================================================================================

Liabilities and Shareholders' Equity
Current liabilities:
    Accounts payable                                                          $33,295               $40,147
    Accrued liabilities                                                        14,289                18,395
    Deferred tax liabilities                                                    2,969                 2,969
    Income taxes                                                                  860                 4,363
-------------------------------------------------------------------------------------------------------------
    Total current liabilities                                                  51,413                65,874

Long-term debt obligations
Postretirement benefits other than pensions                                    21,866                21,871
Reserve for store closings                                                      1,882                 2,056
Other liabilities                                                               5,115                 5,145
-------------------------------------------------------------------------------------------------------------
    Total liabilities                                                          80,276                94,946
-------------------------------------------------------------------------------------------------------------
Commitments and contingencies

Shareholders' equity:
  Common stock, $.01 par value; 80,000,000 shares authorized;
   31,018,057 and 30,246,101 issued and outstanding, respectively                 310                   302
  Additional paid-in capital                                                   57,564                47,487
  Retained earnings                                                           197,979               195,738
  Treasury stock, at cost, 12,051,266 and 12,010,594
   shares held, respectively                                                  137,039)             (136,311)
  Deferred compensation on restricted stock
   incentive plan                                                              (5,964)               (6,613)
-------------------------------------------------------------------------------------------------------------
    Total shareholders' equity                                                112,850               100,603
-------------------------------------------------------------------------------------------------------------
    Total liabilities and shareholders' equity                               $193,126              $195,549
=============================================================================================================
</TABLE>

See accompanying notes to consolidated financial statements.


<PAGE>

CONSOLIDATED STATEMENT OF INCOME
(unaudited)
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------
(in thousands, except
  per share amounts)                                                Thirteen Weeks Ended
                                                           ----------------------------------------
                                                                May 5,               April 29,
                                                                  2002                  2001
---------------------------------------------------------------------------------------------------
<S>                                                                 <C>                    <C>
Sales                                                               $104,054               $97,616
Cost of goods sold                                                    51,519                49,197
---------------------------------------------------------------------------------------------------
  Gross profit                                                        52,535                48,419
---------------------------------------------------------------------------------------------------
  Selling, general and administrative                                 45,301                42,819
  Depreciation and amortization                                        1,332                 1,336
  Interest expense                                                        60                   397
  Interest income                                                        (31)                  (38)
---------------------------------------------------------------------------------------------------
  Total operating and interest expenses                               46,662                44,514
---------------------------------------------------------------------------------------------------
Earnings before taxes                                                  5,873                 3,905
Income taxes                                                           2,132                 1,417
---------------------------------------------------------------------------------------------------
Net earnings and comprehensive income                                 $3,741                $2,488
===================================================================================================
Earnings per share
       Basic                                                           $0.21                 $0.15
       Diluted                                                         $0.20                 $0.15
===================================================================================================
Weighted average shares outstanding
       Basic                                                          17,594                16,489
       Diluted                                                        18,828                16,696
===================================================================================================
Dividends per share                                                    $0.08                 $0.04
===================================================================================================
</TABLE>

See accompanying notes to consolidated financial statements.









<PAGE>

CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(unaudited)
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
(in thousands, except for
  number of shares)                        Common Stock       Additional                Treasury Stock                     Total
  -----------------                     -------------------    Paid-in     Retained    ------------------   Deferred   Shareholders'
                                        Shares       Amount    Capital     Earnings    Shares      Amount  Compensation    Equity
------------------------------------------------------------------------------------------------------------------------------------
Thirteen weeks ended May 5, 2002
------------------------------------------------------------------------------------------------------------------------------------
<S>              <C>                 <C>              <C>     <C>         <C>       <C>            <C>           <C>       <C>
Balance February 3, 2002             30,246,101       $302    $47,487     $195,738  (12,010,594)   ($136,311)    ($6,613)  $100,603
Net earnings                                                                 3,741                                            3,741
Cash dividend - $.08 per
 share on a quarterly basis                                                 (1,500)                                          (1,500)
Cancellation of restricted stock        (16,400)                 (134)                                               134
Amortization and vesting of deferred
 compensation on restricted stock
 incentive plan                                                   237                                                515        752
Purchase of treasury stock                                                              (40,672)        (728)                  (728)
Issurance of shares as compensation
  for professional services                 457                     8
Issuance of shares under directors'
  stock plan                              2,499                    44                                                            44
Exercise of stock options               785,400          8      9,922                                                         9,930
------------------------------------------------------------------------------------------------------------------------------------
Balance May 5, 2002                  31,018,057       $310    $57,564     $197,979  (12,051,266)   ($137,039)    ($5,964)  $112,850
====================================================================================================================================
</TABLE>

See accompanying notes to consolidated financial statements.




<PAGE>

<TABLE>
<CAPTION>
CONSOLIDATED STATEMENT OF CASH FLOWS
(unaudited)
-------------------------------------------------------------------------------------------
(in thousands)
                                                                 Thirteen Weeks Ended
                                                            -------------------------------
                                                               May 5,         April 29,
                                                                 2002             2001
-------------------------------------------------------------------------------------------
Cash flows from operating activities:
<S>                                                                <C>              <C>
  Net earnings                                                     $3,741           $2,488
  Adjustments to reconcile net earnings to cash
   provided by (used in) operating activities
    Depreciation and amortization                                   1,332            1,336
    Deferred income taxes                                                              670
    Amortization of deferred compensation on
     restricted stock incentive plan                                  515              472
    Interest expense on closed store accrual                           43               54
    (Increase) decrease in assets
      Receivables and prepaid expenses                                (84)             321
      Inventory at current cost                                     3,087            3,372
      Pension payment in excess of required contribution              437              233
      Other noncurrent assets                                          75               62
    Increase (decrease) in liabilities
      Accounts payable                                             (6,852)          (4,555)
      Accrued liabilities                                          (4,106)          (2,557)
      Current income tax obligations                               (3,266)          (3,802)
      Postretirement benefits other than pensions                      (5)             134
      Payments against closed store accrual                          (217)            (568)
      Issuance of shares as compensation for professional
services                                                                8
      Other liabilities                                               (30)            (117)
-------------------------------------------------------------------------------------------
     Net cash provided by (used in) operating activities           (5,322)          (2,457)
-------------------------------------------------------------------------------------------
Cash flows from investing activities:
  Additions to property and equipment                              (2,083)          (3,191)
-------------------------------------------------------------------------------------------
     Net cash provided by (used in) investing activities           (2,083)          (3,191)
-------------------------------------------------------------------------------------------
Cash flows from financing activities:
  Net borrowings on revolving
    credit agreement
                                                                        -            7,000
  Purchase of treasury stock                                         (728)            (573)
  Issuance of shares under directors' stock plan                       44               32
  Proceeds from exercise of stock options                           9,930               24
  Cash dividends paid                                              (1,500)            (688)
-------------------------------------------------------------------------------------------
     Net cash provided by (used in) financing activities            7,746            5,795
-------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents                      341              147

Cash and cash equivalents:
  Beginning of period                                               6,914            3,891
-------------------------------------------------------------------------------------------
  End of period                                                    $7,255           $4,038
===========================================================================================
Supplemental disclosures:
  Cash paid during the period for:
    Interest                                                          $16             $296
    Income taxes                                                   $3,105           $5,453
===========================================================================================
</TABLE>

See accompanying notes to consolidated financial statements.

<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1:  BASIS OF PRESENTATION

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

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


NOTE 2:  EARNINGS PER SHARE

Basic  earnings per share excludes  dilution and is computed by dividing  income
available to common shareholders by the weighted-average number of common shares
outstanding  for the period.  Diluted  earnings per share reflects the potential
dilution that could occur if securities or other contracts to issue common stock
were  exercised  or  converted  into common stock or resulted in the issuance of
common stock that then shared in the earnings of the Company.

COMPUTATION OF EARNINGS PER SHARE
(unaudited)
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------
(dollars in thousands, except for share and                                      Thirteen Weeks Ended
                                                                          ------------------------------------
  per share amounts)                                                           May 5,           April 29,
                                                                                 2002              2001
--------------------------------------------------------------------------------------------------------------
Basic earnings per share:
<S>                                                                                 <C>                <C>
  Net earnings                                                                      $3,741             $2,488
                                                                          ================= ==================

  Weighted average number of common shares outstanding during period            17,594,178         16,488,743
                                                                          ================= ==================

Basic earnings per share                                                             $0.21              $0.15
                                                                          ================= ==================

Diluted earnings per share:

  Net earnings                                                                      $3,741             $2,488
                                                                          ================= ==================

  Weighted average number of common shares outstanding during period            17,594,178         16,488,743

   Common stock equivalents                                                        769,788            148,865

   Contingently issuable shares                                                    464,400             58,365
                                                                          ----------------- ------------------

                                                                                18,828,366         16,695,973
                                                                          ================= ==================

Diluted earnings per share                                                           $0.20              $0.15
                                                                          ================= ==================

Weighted average common stock ezuivalents not included in EPS
  bacause the effect would be anti-dilutive                                        464,400                  0
                                                                          ================= ==================
</TABLE>

NOTE 3:  RESERVE FOR STORE CLOSINGS

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

At May 5, 2002,  the total reserve  balance  included in current and  noncurrent
liabilities was $2,710,000  which represents the present value of the future net
lease  obligations  required for the locations which have been closed.  The 2002
activity in the reserve is as follows (in thousands):
<TABLE>
<CAPTION>
                                                        Imputed              Payments on
                           February 3, 2002             Interest               Reserve            May 5, 2002
                           ----------------             --------               -------            -----------
<S>                              <C>                      <C>                   <C>                  <C>
Lease Obligations                $2,884                   43                   (217)                  $2,710
</TABLE>



NOTE 4: RECENT ACCOUNTING PRONOUNCEMENTS

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

                                            --------------------------------
                                                 Thirteen Weeks Ended
                                            --------------------------------
                                                May 5,         April 29,
                                                  2002            2001
                                            --------------------------------
Reported Net Income                                 $3,741           $2,488
    Add Back:  Goodwill Amortization
      (net of tax)                                       -               60
                                            --------------- ----------------
Adjusted Net Income                                 $3,741           $2,548
                                            =============== ================
Basic Earnings Per Share:
  Reported Net Income                                $0.21            $0.15

  Goodwill Amortization                                  -                -
                                            --------------- ----------------
  Adjusted Net Income                                $0.21            $0.15
                                            =============== ================
Diluted Earnings Per Share
  Reported Net Income                                $0.20            $0.15

  Goodwill Amortization                                  -                -
                                            --------------- ----------------
  Adjusted Net Income                                $0.20            $0.15
                                            =============== ================

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

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

FINANCIAL CONDITION

Historically,  cash flow from  operations  has been  sufficient  to finance  the
expansion  and  operation of Hancock's  business.  Hancock's  principal  capital
requirements  are for the  financing of  inventories  and to a lesser extent for
capital  expenditures   relating  to  store  locations  and  its  warehouse  and
distribution  facility.  Funds for such  purposes are generated  from  Hancock's
operations  and,  if  necessary,  supplemented  by  borrowings  from  commercial
lenders.  In addition to cash dividends,  Hancock has  historically  used excess
cash and, if necessary,  borrowings from commercial lenders to purchase treasury
stock as market and financial  conditions  dictate.  Hancock opened 5 stores and
closed 7 stores  during the  thirteen  weeks ended May 5, 2002,  resulting  in a
total of 437 stores at quarter end.

After the quarter  ending May 5, 2002,  Hancock  announced the  acquisition of a
473,000  square  foot  warehouse/distribution  facility on 64 acres north of the
Tupelo  headquarters for $7.7 million.  This facility initially will be utilized
to stock,  allocate  and  distribute  merchandise  groups that  require  special
handling, such as foam/batting, seasonal products and home accents, as well as a
growing cross-docking operation.

During the thirteen  weeks ended May 5, 2002,  net earnings of $3.7  million,  a
decrease of $3.0 million in  inventory  and $9.9  million  provided  through the
exercise of stock options were used to fund a $6.9 million  decrease in accounts
payable,  a $4.1  million  reduction in accrued  liabilities  and a $3.3 million
decrease in current income tax  obligations.  At May 5, 2002, the Company had no
debt, compared to $23 million, or 21% of total capitalization at April 29, 2001.

RESULTS OF OPERATIONS

Thirteen weeks ended May 5, 2002 compared to thirteen weeks ended April 29, 2001

Net earnings were $3.7 million,  or $.20 per diluted  share,  compared with $2.5
million,  or $.15 per  diluted  share,  in the same  period of the  prior  year.
Earnings  were  influenced  by higher  sales,  a higher  gross  margin and lower
expenses as a percentage of sales than last year.

Sales  increased  to $104.0  million  from $97.6  million in last  year's  first
quarter,  as the result of an increase of 7.4% in comparable store sales.  Sales
benefited  from  the  continued   repositioning   of  our  store  base  and  the
remerchandising  of our product  mix,  which has led to higher sales in the home
decorating  side of our business.  Gross  margins  increased to 50.5% from 49.6%
last year as a result of the changes and additions to the  merchandise mix and a
more effective marketing/advertising program.

In the first quarter of 2002, total selling, general and administrative expenses
as a  percentage  of sales were 43.5%  compared  to 43.9% in 2001 due to expense
leverage from comparable store sales increases and continued efficiencies gained
in advertising  expenditures.  Such improvements were partially offset by rising
employee medical  insurance  expense and higher pension costs resulting from the
two-year weakness on investment returns.

Interest expense was lower due to no outstanding debt throughout the quarter.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

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

     Inventories  are valued at the lower of cost or market;  cost is determined
     by the LIFO method. As with other retailers, it is not practical to perform
     physical  inventory  counts  for all  stores  on the last day of a  period;
     therefore,  certain  assumptions  must be made in order to  record  cost of
     sales and the related  change in inventory for the period of time from each
     store's  most recent  physical  count to the end of the  period.  Although,
     under certain  circumstances,  actual  results could prove to be materially
     different from the estimates used,  Hancock has consistently  used the same
     methodology   throughout  its  existence  with  dependable   results,   and
     management  believes that it provides an inventory  valuation which results
     in carrying inventory at the lower of cost or market.

     Worker's  compensation,  general  liability and employee medical  insurance
     programs are largely self-insured. It is the Company's policy to record its
     self-insurance  liabilities  using estimates of claims incurred but not yet
     reported or paid,  based on historical  trends and other relevant  factors.
     Actual  results can vary from estimates for many reasons  including,  among
     others,  future inflation rates,  claims  settlement  patterns,  litigation
     trends and legal interpretations.

     Store closing reserves are based on estimates of net lease  obligations and
     other store closing costs,  including  assumptions about anticipated future
     subleases  of  properties.  If real  estate  leasing  markets  change,  the
     reserves will have to be adjusted.

OFF-BALANCE SHEET ARRANGEMENTS

The Company has no off-balance sheet financing arrangements.





CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS

The Company has  arrangements  with two banks that provide for up to $10 million
in letters of  credit.  At May 5, 2002,  Hancock  had  commitments  under  these
arrangements    of    $3,520,000    to    guarantee    payment   of    potential
workers'compensation  claims and  $3,846,000  on issued  letters of credit which
support purchase orders for merchandise to be imported. Also, Hancock leases its
retail fabric store locations  under operating  leases expiring at various dates
through 2022.

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

EFFECTS OF INFLATION

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

Inflation is one of the key factors used in the  calculation  of the LIFO charge
or credit to Cost of Sales. In 2001 and 2002, an increase in PPI indices,  which
offset the effect of inventory reductions, resulted in no LIFO charges in either
year.

SEASONALITY

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

RECENT ACCOUNTING PRONOUNCEMENTS

In July 2001,  the FASB  issued  SFAS No.  142,  Goodwill  and Other  Intangible
Assets.   SFAS  No.  142  changes  the   accounting   for   goodwill  and  other
indefinite-lived   intangible   assets  from  an   amortization   method  to  an
impairment-only  approach.  Amortization of goodwill and other  indefinite-lived
intangible  assets  will cease upon  adoption  of this  statement.  The  Company
implemented  SFAS No.  142 on  February  4,  2002.  Therefore,  annual  goodwill
amortization  expense of $383,000 will not recur;  however, if the value of such
goodwill  is deemed  impaired,  a charge to earnings  will be  recorded  for the
impairment.  An impairment test was performed, and no impairment was noted as of
May 5, 2002.

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

FORWARD-LOOKING STATEMENTS

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

PART II.  OTHER INFORMATION:

Item 3:  Quantitative and Qualitative Disclosures about Market Risks

The Company does not hold derivative  financial or commodity  instruments at May
5, 2002. The Company is exposed to financial market risks,  including changes in
interest rates.  All borrowings  under the Company's  Revolving Credit Agreement
bear  interest at a negotiated  rate, a floating rate (the higher of the federal
funds rate plus 1/2% or the prime  rate),  a rate  derived from the money market
rate, or a rate derived from the London  Interbank  Offered Rate. An increase in
interest rates of 100 basis points would not significantly  affect the Company's
results.  All of the  Company's  business is  transacted  in U. S.  dollars and,
accordingly,  foreign  exchange rate  fluctuations  have never had a significant
impact on the Company, and they are not expected to in the foreseeable future.

Item 4:  Submission of Matters to a Vote of Securityholders

     (a)  Registrant's Annual Meeting of Shareholders was held on June 13, 2002.

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

     (c)  The vote in the uncontested  election of the nominees for the Board of
          Directors  elected  to serve  until 2005 were as  follows:  15,633,660
          votes cast and 271,546 votes withheld for Jack W. Busby and 15,633,007
          votes cast and 272,199 votes withheld for Donna L. Weaver.

     (d)  Not applicable.

Item 6:  Exhibits and Reports on Form 8-K

  (a)
     10.1 Employment Agreement with John R. McCord dated June 13, 2001.
     10.2 Indemnification Agreement for John R. McCord dated June 13, 2002.
     10.3 Agreement to Secure  Certain  Contingent  Payments with John R. McCord
          dated June 13, 2002.
     10.4 Severance Agreement with John R. McCord dated June 13, 2002.

  (b)  Reports on Form 8-K

     None



                                   SIGNATURE

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

                                                  HANCOCK FABRICS, INC.
                                                  (Registrant)

                                                  By: /s/ Bruce D. Smith
                                                  ----------------------
                                                      Bruce D. Smith
                                                  Senior Vice President and
                                                    Chief Financial Officer
                                                  (Principal Financial and
                                                  Accounting Officer)






June 19, 2002


<PAGE>








                                                                    Exhibit 10.1


                                    AGREEMENT

           AGREEMENT,  dated as of June 13, 2002, between HANCOCK FABRICS,  INC.
("the Company"), a Delaware corporation, and John R. McCord ("the Employee").

A.   The Employee has been employed by the Company (or one of its  subsidiaries)
     since March 30, 1981.  During the period of such  employment  the judgment,
     skill and efforts of the Employee  have  contributed  greatly to the growth
     and  success of the  Company,  and the  Company  desires to provide for the
     continued availability of the services of the Employee. The Company further
     recognizes  that it would not be to the best  interest of the Company  were
     the Employee to engage in activities  competitive  with the business of the
     Company or any of its subsidiaries.

B.   The  Employee is willing and able to render the  services  herein  provided
     for,  and is  willing  to  refrain  from  activities  competitive  with the
     business  of the  Company  and its  subsidiaries,  on the terms  herein set
     forth.

IT IS AGREED AS FOLLOWS:

     1.  The  payment   obligation  of  the  Company  under  this  Agreement  is
conditioned  upon  the  occurrence  of one of the  following:  (a) the  Employee
remains  in the  employment  of the  Company  or  any of its  subsidiaries  on a
full-time basis until 6/19/2016  ("said date");  or, (b) the Employee dies prior
to said date while so employed by the Company or any of its subsidiaries.

     2. If such  employment  ceases  (other than by reason of death) on or after
said date, the Company shall pay to the Employee, if living, Two Thousand Eighty
Three and Thirty-Three  One-Hundreths Dollars ($2,083.33) (the "monthly amount")
on the first day of the calendar  month  following  such  cessation,  and on the
first day of each and every month thereafter until a total of one hundred eighty
(180) monthly payments shall have been paid.

     3. (a) If the  Employee  dies while still so employed by the Company or any
of its subsidiaries, the Company shall pay, as the Employee by appointment shall
have provided  pursuant to paragraph 10 hereof,  the monthly amount on the first
day of the month  following  his  death,  and on the first day of each and every
month  thereafter  until a total of one hundred  eighty (180)  monthly  payments
shall have been paid.

          (b) If the Employee  dies after said date,  and prior to the time that
     the payments  made to him pursuant to paragraph 2 hereof shall have totaled
     Three  Hundred  Seventy-Five  Thousand  Dollars  ($375,000.00)  ("the total
     amount"),  the Company shall pay, as the Employee by appointment shall have
     so provided, the monthly amount on the first day of the month following his
     death,  and on the first day of each and every month  thereafter  until the
     sum of all payments made under  paragraph 2 hereof and under this paragraph
     shall equal the total amount.

     4. So long as the  Employee is receiving  monthly  payments  hereunder,  he
shall not,  without the prior approval of the Board of Directors of the Company,
engage in or be or become  interested  (as an  individual,  officer,  principal,
agent,  employee,  trustee,  investor,  stockholder or creditor, or in any other
relation whatsoever) in any business substantially competitive with the business
of the Company, its successor or subsidiary;  provided,  that the Employee shall
not be precluded from holding securities of a corporation,  which securities are
publicly  held, so long as the Employee  shall not hold in excess of one percent
(1%)  of any  class  of said  securities.  The  determination  of the  Board  of
Directors of the Company shall be  conclusive  of the question  whether any such
business is substantially competitive with the business of the Company.

     5. So long as the  Employee is  receiving  monthly  payments  hereunder  he
shall, at the reasonable  request of the Company,  and to the extent  consistent
with his then age and state of  health,  make  available  to the  Company at all
reasonable  times the benefit of his  experience  and advice.  The Company shall
reimburse the Employee for his reasonable  travel and other expenses incurred in
the performance of his obligations under this paragraph.

     6. All obligations of the Company under this Agreement are conditioned upon
the  performance  by the Employee of his  obligations  under  paragraphs 4 and 5
hereof.  Upon  failure  of any said  condition,  this  Agreement  shall be of no
further  effect,  and no  person  shall  have  any  further  right  to  payments
hereunder.

     7.  Nothing in this  Agreement  shall be construed to affect the rights and
obligations of the Employee, his heirs, successors or personal  representatives,
under the Company's  Retirement  Plan,  Extra  Compensation  Plan, or employees'
stock option plans,  as from time to time amended,  or under any other agreement
or plan.  Payments pursuant to this Agreement are in the nature of a fee, and do
not constitute "compensation" as defined in the Company's Retirement Plan.

     8. This Agreement is not a contract of employment,  and shall not be deemed
to affect the right of either the  Employee  or the  Company  to  terminate  the
employment of the Employee by the Company at any time, with or without cause.

     9. The right to  payments  pursuant  to this  Agreement  shall not be sold,
transferred,  anticipated,  assigned,  hypothecated,  or otherwise  disposed of,
shall not at any time be subject to the  claims of  creditors,  and shall not be
liable to attachment,  execution, or other legal process. The Company shall have
no  obligation  to make any  payment  hereunder  to any  person  other  than the
Employee or his appointee designated pursuant to paragraph 10 hereof.

     10.  Subject  to the  provisions  of  paragraph  9 of this  Agreement,  the
Employee may appoint, by written instrument (other than a will) delivered to the
Secretary of the Company,  the permitted  appointee or  appointees to whom,  the
proportions in which,  and any  contingencies  upon which the Company shall make
payments payable under paragraphs 2 and 3 of this Agreement,  but not paid prior
to the death of the Employee.  "Permitted appointee" includes only the following
persons:  spouse,  descendant (or spouse thereof),  parent, brother or sister of
the Employee (or  descendant  of such  brother or sister);  parent,  descendant,
brother or sister of the spouse of the Employee (or  descendant  of such brother
or  sister);  the  trustee  or  trustees  of a trust or trusts  (created  by the
Employee  either  during his  lifetime  or by his will) the  purpose of which is
primarily  to provide for any of the  foregoing  persons;  or any other  natural
person.  The  determination  of the Board of Directors  of the Company  shall be
conclusive  of the question  whether such purpose of any such trust is primarily
to provide for such person or persons.  To any extent that amounts payable under
paragraphs 2 and 3 of this  Agreement are not paid to the Employee  prior to his
death and are not the  subject  of an  effective  appointment  pursuant  to this
paragraph,  no person  shall be entitled to payment  thereof,  and said  amounts
shall remain the property of the Company.

     11. For purposes of this  Agreement,  the Employee shall be deemed to be in
the  employment of the Company on a full-time  basis during any period for which
he is on Company-approved sick leave or disability leave.

     12.  Notwithstanding  any of the provisions of this Agreement,  no payments
shall be made  hereunder  following  the death of the Employee in the event that
such death is the result of suicide  occurring within three years of the date of
this Agreement.

     13. This Agreement shall be binding upon the parties  hereto,  their heirs,
personal  representatives and successors.  Upon the sale of all or substantially
all of the assets,  business and goodwill of the Company,  or upon the merger or
consolidation  of the Company with another  corporation  or  corporations,  this
Agreement  shall inure to the benefit of and be binding  upon both the  Employee
and such purchaser or surviving corporation.

     14.  The  purpose  of this  paragraph  is solely  to  provide  for  greater
flexibility  and  convenience  in the  precise  timing of the  monthly  payments
provided  for above,  and it shall not be deemed to affect the amount that shall
be payable or the conditions upon which it shall become payable. The Company may
make the payment for any given month upon such day or days and in such manner as
shall  be  applicable  from  time  to  time  to  executive  payroll  then  being
administered  by the  disbursing  office of the Company that then shall have the
responsibility for the making of payments under this Agreement.

     15. (a) Neither  Employee  nor any other person shall have any rights under
this paragraph 15 until both:

          (i)  A "Change of  Control"  (as defined in  subparagraph  (b) of this
               paragraph 15) has occurred; and

          (ii) Either (A) Employee has satisfied  the  conditions of paragraph 1
               of this  Agreement  or (B)  pursuant to the terms of that certain
               Severance  Agreement,  dated as of this date, between the Company
               and Employee, as hereafter amended, extended or renewed, Employee
               is deemed to have satisfied those conditions. For the purposes of
               this  paragraph  15, the  "Effective  Date" shall be the earliest
               date upon which both of the conditions  described in subparagraph
               (a) of this paragraph 15 shall have been satisfied.

          (b) For  purposes of this  paragraph  15, a "Change of Control"  shall
     mean a change of control of the  Company of a nature that would be required
     to be reported  in response to Item 1(a) of the Current  Report on Form 8-K
     (or its  successor  Item or Form,  as the case may be), as in effect on the
     date  hereof (or from time to time  thereafter),  pursuant to Section 13 or
     15(d) of the Securities  Exchange Act of 1934  ("Exchange  Act");  provided
     that,  without  limitation,  a "Change of Control"  shall be deemed to have
     occurred if: (i) a third person,  including a "group" as defined in Section
     13(d) (3) of the Exchange Act,  becomes the beneficial  owner,  directly or
     indirectly,  of 20% or more of the combined  voting power of the  Company's
     outstanding  voting securities  ordinarily having the right to vote for the
     election of directors of the Company;  or (ii)  individuals  who constitute
     the Board of  Directors  of the Company as of the date  hereof  ("Incumbent
     Board")  cease for any reason to constitute  at least  two-thirds  thereof,
     provided that any person becoming a director  subsequent to the date hereof
     whose election,  or nomination for election by the Company's  stockholders,
     was approved by a vote of at least  three-quarters  of (or if less, all but
     one of) the  directors  constituting  the  Incumbent  Board  (other than an
     election or nomination in connection with an actual or threatened  election
     contest relating to the election of directors of the Company, as such terms
     are used in Rule 14a-11 of Regulation  14A  promulgated  under the Exchange
     Act) shall be, for purposes of this paragraph 15, considered as though such
     person were a member of the Incumbent Board.

          (c) (i) Promptly,  and in no event more than seven (7) days, after the
     Effective Date, the Company shall establish an irrevocable letter of credit
     (the  "Letter of  Credit"),  as  provided in  subparagraph  (c)(iv) of this
     paragraph 15, in an amount equal to the largest sum  (calculated  as of the
     Effective  Date) of all  payments  provided to be paid in the future  under
     paragraphs 2 and 3 of this Agreement,  as security for such payments as may
     become due under this Agreement.

          (ii) Until  such time as all  amounts  provided  to be paid to or with
               respect to Employee  under this Agreement have been paid in full,
               the  Company  shall,  no later than  thirty  (30) days before the
               Letter of  Credit  would  otherwise  lapse or  expire,  renew the
               Letter of Credit or establish a  replacement  letter of credit in
               an amount equal to the largest sum  (calculated as of the date of
               the renewal or replacement)  of all payments  provided to be paid
               in  the  future  under  paragraphs  2  and 3 of  this  Agreement.
               Hereinafter,  the term "Letter of Credit" shall mean the original
               letter  of  credit  referred  to in  subparagraph  (c)(i) of this
               paragraph  15 and the renewal and  replacement  letters of credit
               referred to in this subparagraph (c)(ii).

          (iii)If the Company fails,  within the times provided in  subparagraph
               (c)(i) and (c)(ii) of this  paragraph 15, to establish,  renew or
               replace  the Letter of Credit  before all  amounts  payable to or
               with respect to Employee  under this  Agreement have been paid in
               full, --

               (A) if any payments to or with respect to Employee have been made
          under this  Agreement,  then the Company shall pay in a cash lump sum,
          without  discount,  to Employee or to such  appointee as may have been
          designated  pursuant to  paragraph 10 of this  Agreement  (hereinafter
          Employee  and such other  person  being  collectively  referred  to as
          "Entitled  Payee") the balance of all  payments  under this  Agreement
          remaining  unpaid,  regardless  of the fact that under this  Agreement
          such payments would not otherwise be payable until some future date or
          future performance by Employee;

               or

               (B) if no payments to or with respect to Employee  have been made
          under this  Agreement,  then the Company shall pay in a cash lump sum,
          without discount, to Entitled Payee the sum of all payments that would
          have been paid to Entitled Payee had Employee ceased employment (x) on
          the date by which the  Company  was  required  to renew or replace the
          last Letter of Credit issued hereunder,  or (y) if no Letter of Credit
          shall have been issued, on the Effective Date,  regardless of the fact
          that under this  Agreement such payments would not otherwise have been
          payable until some future date or future performance by Employee.  The
          cash  lump sums  required  to be paid by  clauses  (A) and (B) of this
          subparagraph (c)(iii) shall be paid within fifteen (15) days after the
          date by which the Company was required to establish,  renew or replace
          the Letter of Credit.

          (iv) The  Letter of Credit is to be issued by a  commercial  bank (the
               "Bank") that is a state or national banking  association and that
               has a stockholders'  equity in excess of one (1) billion dollars.
               The term of the Letter of Credit  shall be the maximum  term then
               available for commercial  letters of credit. The Letter of Credit
               shall  provide  that the Bank  shall  pay to  Entitled  Payee the
               amount of Entitled  Payee's draft,  at sight,  on presentation to
               the Bank of a  statement,  signed by  Entitled  Payee or Entitled
               Payee's  authorized  representative,  setting forth that Entitled
               Payee is entitled to payments of not less than the amount of such
               draft pursuant to the Agreement and that such payments are, under
               the  Agreement,  due and  unpaid.  The  Letter  of  Credit  shall
               otherwise be in form and  substance  reasonably  satisfactory  to
               Entitled  Payee and the  Company.  The  Letter  of  Credit  shall
               further  provide  that   twenty-five   (25)  days  prior  to  the
               expiration  of the  Letter  of  Credit  the  Bank  shall  mail by
               registered  mail a written notice to the Entitled Payee (but only
               if the Entitled  Payee has provided the Bank with written  notice
               of the Entitled  Payee's mailing  address),  such notice to state
               whether or not the Letter of Credit has been renewed or replaced.

          (v)  The payment by the Bank of the amount of Entitled  Payee's  draft
               in  accordance  with the terms hereof and of the Letter of Credit
               shall not  constitute  a waiver by the  Company of, or in any way
               preclude  the Company from  asserting,  any claim the Company may
               have against  Entitled  Payee that Entitled Payee is not entitled
               to some or all of such payment. Drawing upon the Letter of Credit
               shall not constitute a waiver by Entitled Payee of, or in any way
               preclude  Entitled Payee from  asserting,  any claim the Entitled
               Payee  may  have  against  the  Company  that  Entitled  Payee is
               entitled to amounts  under this  Agreement  that were not paid by
               amounts received under the Letter of Credit.

          (d) The Company's obligation to make the payments provided for in this
     paragraph 15 and otherwise to perform its  obligations  hereunder shall not
     be  affected  by any  circumstances,  including,  without  limitation,  any
     setoff, counterclaim,  recoupment,  defense or other right that the Company
     may have against the Entitled Payee provided,  however,  that the Company's
     failure to make any such setoff shall not  constitute a waiver of any claim
     of the Company against the Entitled Payee.

     16. (a) If (1) an Employee has made an election  pursuant to the provisions
of this  paragraph 16 to have his benefits  under this  Agreement paid in a cash
lump sum pursuant to this paragraph 16 and (2) each of the conditions  described
in clauses 15(a)(i) and 15(a)(ii) of this Agreement is satisfied with respect to
the  Employee,  the  Company  shall pay to the  Entitled  Payee (as  defined  in
paragraph 15 of this Agreement) the present value of -

          (i)  if any  payments to or with  respect to  Employee  have been made
               under this  Agreement,  the  balance of all  payments  under this
               Agreement remaining unpaid, or

          (ii) if no  payments  to or with  respect to  Employee  have been made
               under this  Agreement,  the sum of all  payments  that would have
               been paid to Entitled Payee had Employee ceased employment on the
               Effective Date (as defined in paragraph 15 of this Agreement).

     Payment  shall be made in a single  cash lump sum  within 20 days after the
Effective Date. If such payment shall not be made in full as provided herein any
unpaid  balance  shall draw  interest at the lesser of: (1) the highest  rate of
interest that may legally be chargeable on such amount; and (2) two percent (2%)
over the prime  commercial  lending rate announced by the Morgan  Guaranty Trust
Company  of New York in  effect  from  time to time  during  the  period of such
non-payment, compounded monthly.

          (b)  For  purposes  of this  paragraph  16,  present  value  shall  be
     determined in accordance with the following:

          (i)  Present value shall be determined as of the Effective Date.

          (ii) The stream of monthly  payments  for which the  present  value is
               being  calculated  shall  be  assumed  to run for  the  following
               period:

               (A) if any payments have been made under this Agreement, a period
          beginning  one month after the date the most recent  payment  made was
          required to have been made and continuing  until the date on which the
          last of the  monthly  payments  to be made  under  this  Agreement  is
          required to be made, and

               (B) if no such payments have been made, a period beginning on the
          later  of the  Effective  Date or the  date of  the,  Employee's  60th
          birthday and continuing for 180 months.

          (iii)The interest  rate used to determine  present  value shall be two
               percent  (2%) below the average of the daily yield (to  maturity)
               quotations  published  in  the  Wall  Street  Journal  on  the 30
               business  days   preceding  the  Effective   Date  regarding  the
               obligations (bonds or notes) of the U.S. Treasury maturing on the
               date closest to the 15th  anniversary  of the Effective  Date. No
               discount  factor other than this  interest  rate shall be used to
               determine present value.

          (iv) In making such determination,  the provisions of paragraphs 4, 5,
               and 6 of this Agreement shall be disregarded.

          (c) In order to elect to have his benefits  under this  Agreement paid
     in a cash lump sum pursuant to this  paragraph  16 the  Employee  must give
     written notice to the Company as provided in this paragraph (c).

          (i)  The notice  must be in writing and be  substantially  in the form
               set  forth in  Exhibit A to this  Agreement.  The  notice,  to be
               valid,  must  be  given  before  either  of  the  two  conditions
               described in clauses 15(a)(i) and 15(a)(ii) of this Agreement has
               occurred.

          (ii) Service of such  notice  shall be deemed  complete  when given by
               hand delivery to an officer of the Company, or, if given by mail,
               on the day of deposit in the United  States mail by  certified or
               registered  mail,  first-class  postage  prepaid,   addressed  as
               follows:

                            Hancock Fabrics, Inc.
                            3406 W. Main Street
                            P.O. Box 2400
                            Tupelo, Mississippi 38003-2400
                            Attn: Corporate Secretary

               or to such other address as the Company  shall have  furnished to
               the Employee in writing in accordance herewith.

          (d) If  Employee  elects  to  receive  his  benefits  pursuant  to the
     provisions of this  paragraph 16,  Employee shall have, as of the Effective
     Date, no further  obligation to the Company under this  Agreement,  and the
     Company shall have no further  obligation to the Entitled  Payee under this
     Agreement as of the date that all payments  required to be made to Entitled
     Payee under this paragraph 16 have been made.

          (e) If Entitled Payee incurs any legal fees or expenses as a result of
     seeking to obtain or enforce any benefit under this  paragraph 16,  Company
     shall pay or  reimburse  Entitled  Payee for all such  reasonable  fees and
     expenses.

          (f) The Company's obligation to make the payments provided for in this
     paragraph 16 shall not be affected by any circumstances, including, without
     limitation, any setoff,  counterclaim,  recoupment,  defense or other right
     that the Company may have against the  Entitled  Payee  provided,  however,
     that the Company's  failure to make any such setoff shall not  constitute a
     waiver of any claim of the Company against the Entitled Payee.


     IN WITNESS  WHEREOF,  the  parties  hereto  have  executed  this  Agreement
personally or by officers thereunto duly authorized.

HANCOCK FABRICS, INC.

By: /s/ Larry Kirk
------------------

Its: Chief Executive Officer
----------------------------



/s/ John R. McCord
------------------------------
                      Employee

<PAGE>





                               NOTICE OF ELECTION


To:        Hancock Fabrics, Inc.
           3406 W. Main Street
           P.O. Box 2400
           Tupelo, MS 38003-2400
           Attention: Corporate Secretary



           I, John R.  McCord  ("Employee"),  pursuant to  paragraph  16 of that
Agreement dated June 13, 2002 to which Hancock Fabrics, Inc. and I are parties (
the Agreement"),  hereby elect to have my benefits under the Agreement paid in a
cash lump sum pursuant to the provisions of said paragraph 16.

Dated: June 13, 2002
                                                             /s/ John R. McCord
                                                             ------------------
                                                             Employee














<PAGE>



                                                                    Exhibit 10.2


                            INDEMNIFICATION AGREEMENT


         This  Agreement  is made as of June 13,  2002,  by and between  Hancock
Fabrics,  Inc.,  a Delaware  corporation  (the  "Company"),  and John R.  McCord
("Officer").


                              W I T N E S S E T H :
                               -------------------


         WHEREAS,  the Company  understands  that there can be no assurance that
directors'  and officers'  liability  insurance will continue to be available to
the Company and Officer,  and believes that it is possible that the cost of such
insurance,  if obtainable,  may not be acceptable to the Company or the coverage
of such  insurance,  if obtainable,  may be reduced below what has  historically
been afforded; and

         WHEREAS,  Officer is  unwilling  to serve,  or continue  to serve,  the
Company as a director  without  assurances  that adequate  liability  insurance,
indemnification or a combination thereof will be provided; and

         WHEREAS,  the Company,  in order to induce Officer to continue to serve
the Company,  has agreed to provide  Officer with the benefits  contemplated  by
this  Agreement,  which  benefits are intended to  supplement  or, if necessary,
replace directors' and officers' liability insurance; and

         WHEREAS,  as a result of the  provision  of such  benefits  Officer has
agreed to serve or to continue to serve as a director of the Company;

         NOW,   THEREFORE,   in  consideration  of  the  promises,   conditions,
representations and warranties set forth herein,  including Officer's service to
the Company, the Company and Officer hereby agree as follows:

         1.       Definitions.  The following terms, as used herein,  shall have
                  the following respective meanings:

                  "Covered  Amount"  means Loss and Expenses  which,  in type or
         amount,  are not  insured  under  directors'  and  officers'  liability
         insurance maintained by the Company from time to time.

                  "Covered  Act"  means  any  breach  of duty,  neglect,  error,
         misstatement,  misleading  statement,  omission  or  other  act done or
         wrongfully  attempted by Officer or any of the foregoing alleged by any
         claimant or any claim against Officer by reason of Officer's serving as
         or being a director,  officer, employee, or agent of the Company, or by
         reason  of  Officer's  serving  at  the  request  of the  Company  as a
         director,  officer,  partner,  member,  trustee,  employee  or agent of
         another  corporation,   partnership,  joint  venture,  trust  or  other
         enterprise.

                  "D&O  Insurance"  means a policy or policies of the directors'
         and  officers'  liability  insurance  issued  to the  Company  and  its
         directors and officers.

                  "Determination"  means a  determination,  based  on the  facts
         known at the time, made by:

                           (i) A majority of the  directors  who are not parties
                  to the action, suit or proceeding for which indemnification is
                  considered  or  being  considered,  even  though  less  than a
                  quorum; or

                           (ii)  Independent  legal counsel in a written opinion
                  if there be no such directors, or if such directors so direct;
                  or

                           (iii) A majority of the  shareholders of the Company;
                  or

                           (iv) A final  adjudication  by a court  of  competent
                  jurisdiction.

                  "Determined" shall have a correlative meaning.

                  "Excluded  Claim"  means any payment for Losses or Expenses in
         connection with any claim:

                           (i) Based upon or  attributable to Officer gaining in
                  fact any personal  profit or advantage to which Officer is not
                  entitled; or

                           (ii) For the return by Officer of any remuner- ation,
                  for which prior  approval of the  shareholders  of the Company
                  was required but not obtained; or

                           (iii) For an  accounting of profits in fact made from
                  the purchase or sale by Officer of  securities  of the Company
                  within the  meaning of Section 16 of the  Securities  Exchange
                  Act of 1934 as  amended,  or similar  provisions  of any state
                  law; or

                           (iv) Resulting from Officer's  knowingly  fraudulent,
                  dishonest or willful misconduct; or

                           (v) The  payment of which by the  Company  under this
                  Agreement is not permitted by applicable law; or

                           (vi) Which are not within the Covered Amount.

                  "Expenses" means any reasonable  expenses  incurred by Officer
         as a result of a claim or claims made against  Officer for Covered Acts
         including, without limitation, counsel fees and costs of investigative,
         judicial  or   administrative   proceedings  or  appeals,   but,  where
         prohibited by law or public policy, shall not include fines.

                  "Loss" means any amount which Officer is legally  obligated to
         pay as a result of a claim or claims made  against  Officer for Covered
         Acts including, without limitation, damages and judgments and sums paid
         in settlement  of a claim or claims,  but,  where  prohibited by law or
         public policy, shall not include fines.

         2. Maintenance of D&O Insurance.

                  (a) The Company  represents that it presently has in force and
         effect policies of D&O Insurance.  The Company hereby covenants that it
         will use its best  efforts  to  maintain a policy or  policies  no less
         beneficial  to the Company and Officer  than the  policies in effect on
         the date  hereof.  The  Company  shall  not be  required,  however,  to
         maintain  such policy or policies if such  insurance is not  reasonably
         available  or if,  in the  reasonable  business  judgment  of the  then
         directors  of the  Company,  either  (i)  the  premium  cost  for  such
         insurance is  disproportionate  to the amount of coverage,  or (ii) the
         coverage  provided by such  insurance is so limited by exclusions  that
         there is insufficient benefit from such insurance.

                  (b) In all policies of D&O  Insurance,  Officer shall be named
         as an insured in such a manner as to provide  Officer  the same  rights
         and benefits,  subject to the same limitations,  as are accorded to the
         Company's directors or officers most favorably insured by such policy.

         3.  Indemnification.  The Company shall indemnify Officer against,  and
hold  Officer  harmless  from,  the  Covered  Amount of any and all  Losses  and
Expenses subject, in each case, to the further provisions of this Agreement.

         4. Excluded Coverage.

                  (a) The Company shall have no obligation to indemnify  Officer
         against,  and hold Officer harmless from, any Loss or Expense which has
         been Determined to constitute an Excluded Claim.

                  (b) The Company shall have no obligation to indemnify  Officer
         against,  and hold Officer  harmless  from, any Loss or Expenses to the
         extent  that  Officer is  indemnified  by the  Company  pursuant to the
         provisions  of  the  Company's   Certificate  of  Incorporation  or  is
         otherwise in fact indemnified.

         5. Indemnification Procedures.

                  (a)  Promptly  after  receipt  by  Officer  of  notice  of the
         commencement  or the  threat of  commencement  of any  action,  suit or
         proceeding,  Officer  shall  notify  the  Company  of the  commencement
         thereof if indemnification  with respect thereto may be sought from the
         Company under this Agreement; but the omission so to notify the Company
         shall not  relieve  it from any  liability  that it may have to Officer
         otherwise  than  under  this  Agreement.  Such  notice  may be given by
         mailing the same by United States mail, registered or certified, return
         receipt requested,  postage prepaid,  addressed to the Company at: P.O.
         Box 2400, Tupelo, Mississippi 38803-2400,  Attention:  Secretary (or to
         such other  address as the Company may from time to time  designate  by
         written notice to Officer).

                  (b) If, at the time of the receipt of such notice, the Company
         has D&O  Insurance in effect,  the Company  shall give prompt notice of
         the commencement of such action,  suit or proceeding to the insurers in
         accordance with the procedures set forth in the respective  policies in
         favor of Officer.  The Company shall  thereafter  take all necessary or
         desirable  action to cause such  insurers to pay, on behalf of Officer,
         all Losses and  Expenses  payable as a result of such  action,  suit or
         proceeding in accordance with the terms of such policies.

                  (c) To the extent  the  Company  does not,  at the time of the
         commencement  or the threat of  commencement  of such  action,  suit or
         proceeding,  have applicable D&O Insurance,  or if a  Determination  is
         made that any Expenses  arising out of such action,  suit or proceeding
         will not be payable under the D&O Insurance  then in effect,  or if for
         any reason a D&O insurer does not timely pay such Expenses, the Company
         shall be  obligated  to pay the  Expenses of any such  action,  suit or
         proceeding in advance of the final disposition thereof and the Company,
         if appropriate, shall be entitled to assume the defense of such action,
         suit or  proceeding,  with counsel  satisfactory  to Officer,  upon the
         delivery to Officer of written  notice of its  election so to do. After
         delivery  of such  notice,  the  Company  will not be liable to Officer
         under  this  Agreement  for any  legal or other  Expenses  subsequently
         incurred  by  Officer  in  connection  with  such  defense  other  than
         reasonable  Expenses  incurred at the  request of the Company  provided
         that  Officer  shall have the right to employ  its  counsel in any such
         action,  suit or  proceeding  but the fees and expenses of such counsel
         incurred after delivery of notice from the Company of its assumption of
         such defense shall be at Officer's  expense,  provided  further that if
         (i) the employment of counsel by Officer has been previously authorized
         by the Company, (ii) Officer shall have reasonably concluded that there
         may be a conflict  of  interest  between the Company and Officer in the
         conduct of any such  defense or (iii) the  Company  shall not, in fact,
         have  employed  counsel to assume the defense of such action,  the fees
         and expenses of counsel shall be at the expense of the Company.

                  (d) All payments on account of the  Company's  indemnification
         obligations  under this Agreement shall be made within thirty (30) days
         of Officer's  written request  therefor unless a Determination  is made
         that the claims giving rise to Officer's request are Excluded Claims or
         otherwise not payable under this Agreement,  provided that all payments
         on account of the Company's  obligations  under  Paragraph 5(c) of this
         Agreement  prior  to the  final  disposition  of any  action,  suit  or
         proceeding  shall be made within twenty (20) days of Officer's  written
         request  therefor and such obligation  shall not be subject to any such
         Determination but shall be subject to Paragraph 5(e) of this Agreement.

                  (e) Officer agrees to reimburse the Company for all Losses and
         Expenses  paid by the Company in  connection  with any action,  suit or
         proceeding  against  Officer in the event and only to the extent that a
         Determination  shall have been made that  Officer is not entitled to be
         indemnified  by the Company  because the claim is an Excluded  Claim or
         because  Officer  is  otherwise  not  entitled  to  payment  under this
         Agreement.

         6.  Settlement.  The  Company  shall have no  obligation  to  indemnify
Officer  under this  Agreement for any amounts paid in settlement of any action,
suit or proceeding  effected  without the Company's prior written  consent.  The
Company  shall not settle any claim in any manner which would impose any fine or
any obligation on Officer without Officer's written consent. Neither the Company
nor Officer shall unreasonably withhold consent to any proposed settlement.

         7. Subrogation.  To the extent of any payment under this Agreement, the
Company shall be subrogated to all of the rights of recovery of Officer. Officer
shall execute all papers  required and shall do everything that may be necessary
to  secure  such  rights,  including  the  execution  of such  documents  as are
necessary  to enable the  Company  effectively  to bring  suit to  enforce  such
rights.

         8. Rights Not Exclusive.  The rights  provided  hereunder  shall not be
deemed  exclusive of any other rights to which Officer may be entitled under any
provision of the Delaware  General  Corporation  Law or any other  provisions of
law, the Company's Certificate of Incorporation,  its by-laws, or any agreement,
vote of  shareholders  or of  disinterested  directors or otherwise,  both as to
action in an official capacity and as to action in any other capacity by holding
such office,  and shall  continue after Officer ceases to serve the Company as a
director.

         9. Enforcement.

                  (a) An adverse  Determination shall not foreclose an action to
         enforce  Officer's rights under this Agreement to the extent allowed by
         law.  If a prior  adverse  Determination  has been made,  the burden of
         proving that  indemnification is required under this Agreement shall be
         on  Officer.  The  Company  shall  have  the  burden  of  proving  that
         indemnification  is not  required  under  this  Agreement  if no  prior
         adverse Determination shall have been made.

                  (b) In the event  that any  action is  instituted  by  Officer
         under this  Agreement,  or to enforce or interpret  any of the terms of
         this  Agreement,  Officer  shall be entitled to be paid all court costs
         and expenses,  including  reasonable counsel fees,  incurred by Officer
         with respect to such action,  unless the court  determines that each of
         the material  assertions made by Officer as a basis for such action was
         not made in good faith or was frivolous.

         10.  Continuation  of Agreement.  All agreements and obligations of the
Company contained herein shall continue during the period Officer is a director,
officer,  employee  or agent of the  Company  (or  serving at the request of the
Company as a director,  officer,  partner, member, trustee, employee or agent of
another corporation,  partnership, joint venture, trust or other enterprise) and
shall  continue  thereafter  so long as Officer shall be subject to any possible
demand,  claim or threatened,  pending or completed  proceeding,  whether civil,
criminal,  administrative or  investigative,  by reason of the fact that Officer
was a director  of the Company or serving in any other  capacity  referred to in
this paragraph.

         11. Severability.  In the event that any provision of this Agreement is
determined by a court to require the Company to do or to fail to do an act which
is in violation of applicable  law, such provision  shall be limited or modified
in its application to the minimum extent  necessary to avoid a violation of law,
and such provision, as so limited or modified, and the balance of this Agreement
shall be enforceable in accordance with their terms.

         12.  Choice of Law. This  Agreement  shall be governed by and construed
and enforced in accordance with the laws of the State of Delaware.

         13.  Consent to  Jurisdiction.  The  Company  and  Officer  each hereby
irrevocably  consents to the jurisdiction of the courts of the State of Delaware
for all purposes in connection with any action or proceeding which arises out of
or relates to this  Agreement and agrees that any action  instituted  under this
Agreement shall be brought only in the state courts of the State of Delaware.

         14. Successor and Assigns. This Agreement shall be (i) binding upon all
successors  and  assigns of the  Company  (including  any  transferee  of all or
substantially  all of its assets and any  successor  by,  merger or otherwise by
operation  of law) and (ii) shall be binding on and inure to the  benefit of the
heirs, personal representatives and estate of Officer.

         15. Amendment. No amendment, modification,  termination or cancellation
of this Agreement shall be effective  unless made in a writing signed by each of
the parties hereto.



         IN  WITNESS  WHEREOF,  the  Company  and  Officer  have  executed  this
agreement as of the day and year first above written.


                                   HANCOCK FABRICS, INC.,
                                   a Delaware corporation


                                   By: /s/ Larry Kirk
                                   ------------------

                                   Its: Chief Executive Officer
                                   ----------------------------

                                     "Company"



                                   /s/ John R. McCord
                                   ------------------
                                   "Officer"




<PAGE>
                                                                    Exhibit 10.3



                 AGREEMENT TO SECURE CERTAIN CONTINGENT PAYMENTS


         THIS AGREEMENT TO SECURE CERTAIN  CONTINGENT  PAYMENTS  between Hancock
Fabrics,  Inc., a Delaware corporation (the "Company"),  and John R. McCord (the
"Executive"), dated as of June 13, 2002.

                                R E C I T A L S :
                                - - - - - - - -

         WHEREAS,  Executive  and the Company  have  entered  into that  certain
Severance  Agreement dated this date (in its present form or as it may hereafter
be amended,  extended or renewed,  the "Severance  Agreement")  and that certain
Agreement dated this date ("Deferred Compensation Agreement"); and

         WHEREAS,  under such  Agreements,  certain  payments  are to be made at
times  which are  contingent  upon a change in  control of the  Company,  and in
certain instances also contingent upon a termination of Executive's  employment,
all of which contingencies are set forth in such Agreements; and

         WHEREAS,  the  Company  wishes  to make  additional  provision  for the
security  of the  payment  of  certain  of the  contingent  amounts  under  such
Agreements in order to assure  itself of continuity of management  and to assure
the Executive of payment of the amounts in question,

         NOW,  THEREFORE,  in  consideration  of the  foregoing  and the  mutual
covenants  contained  herein, it is hereby agreed by and between the Company and
the Executive as follows:

         3. Letter of Credit Required.

         The  Company  shall,  no later  than the date of a change in control as
defined in the Severance Agreement ("Change in Control"), provide Executive with
an  irrevocable  letter of credit  ("Letter of Credit"),  under which  Executive
shall be the beneficiary, to pay the following amounts:

         a.       Severance  benefits  to be paid by the  Company as provided in
                  Section (5)(a)(I) of the Severance Agreement.

         b.       "Penalty  Taxes" (as  defined  in Section 10 of the  Severance
                  Agreement)  and all other amounts to be paid by the Company as
                  provided in Section 10 of the Severance Agreement.

         c.       Payments  to be made by the  Company  under  Section 16 of the
                  Deferred Compensation Agreement.

         4. Amount of Letter of Credit.

         a.       The  Letter of Credit  shall be in an amount  equal to the sum
                  determined by the Accounting Firm identified in Section 9 (the
                  "Accounting   Firm"),   as   follows   (both   initially   and
                  recalculated  as provided in Section 7) plus ten percent (10%)
                  of said sum.

         b.       The Accounting Firm shall determine the sum of:

                  (i)      The amount  which  would be payable to the  Executive
                           under  Section  5(a)(I)  of the  Severance  Agreement
                           assuming a Change of Control  has  occurred  and that
                           the Executive  terminates  employment for Good Reason
                           (as defined in the  Severance  Agreement) at the time
                           the determination is made;

                  (ii)     The amount of "Penalty  Taxes" and income  taxes,  if
                           any, that the  Accounting  Firm has determined as the
                           total amount  payable by the Company to the Executive
                           under Section 10(a) of the Severance Agreement; and

                  (iii)    The amount  which  would be payable to the  Executive
                           under   Section  16  of  the  Deferred   Compensation
                           Agreement  if he had made  the  election  to  receive
                           benefits  under  that  Section  and was in all  other
                           respects  eligible to receive benefits  thereunder at
                           the time the determination is made.

         c.       The amount so determined  shall be stated in a written  notice
                  by the Accounting  Firm to the Company;  and such notice shall
                  thereupon  be marked  "Attachment  A" and be  attached  to and
                  become a part of this Agreement.

         5. Form of Letter of Credit.

         The Letter of Credit  shall be in a form  agreed to by the  Company and
the issuing bank (the "Bank")  consistent with the terms of this Agreement.  The
Executive shall be entitled to draw on the Letter of Credit by presenting to the
Bank a draft and a certificate in which the Executive  certifies in writing that
the requisite  events have occurred  under the  Severance  Agreement  and/or the
Deferred  Compensation  Agreement  for  payment  to  the  Executive  of  amounts
specified in Section 1.

         6. Issuer.

         The  Letter of Credit  shall be issued by a  commercial  bank that is a
state or national  banking  association and which has a stockholders'  equity in
excess of $1 billion.

         7. Single Letter of Credit with Multiple Beneficiaries.

         At the  Company's  discretion,  the  Letter of Credit may  provide  for
payment of similar  compensation and benefits to other executives of the Company
who are parties to  agreements  similar to this  Agreement  as long as the total
amount of the  Letter  of  Credit,  for all such  other  executives  and for the
Executive, is, at all times, no less than the sum of the required amounts of the
Letter of Credit and of the letters of credit required under the agreements with
such other executives (initially or after recalculation pursuant to Section 7).




<PAGE>


         8. Term of Letter of Credit.

         The Letter of Credit to be  provided  as required by Section 1 shall be
issued for a term which shall be the maximum term then  available for commercial
letters of credit.  Until such time as all amounts  described in Sections  1(a),
1(b) and 1(c) have been paid in full, the Company  shall,  not later than thirty
(30) days before the Letter of Credit would otherwise lapse or expire, renew the
Letter of Credit or establish a replacement letter of credit with terms at least
as favorable as the initial Letter of Credit.  The term "Letter of Credit" shall
mean both the original letter of credit and the renewal and replacement  letters
of credit  referred  to in this  Section  6. The period of time  during  which a
Letter of Credit is required to remain in effect under this  Agreement is herein
called the "Secured Period." If the Company does not establish or renew a Letter
of Credit as  required  by  Section 1 and this  Section  6, the  payment  of all
amounts described in Section 1 shall be accelerated in accordance with Section 8
hereof.

         9. Calculation and Recalculation of Amounts Secured by Letter of Credit
and Increase in Amount of Letter of Credit.

         During the Secured Period, the Accounting Firm shall, no later than the
end of each  calendar  quarter in the Secured  Period,  recalculate  the amounts
listed on Attachment A and give prompt written notice of such  recalculations to
the  Executive,  the Company and the Bank. Any such  recalculated  amounts shall
thereafter  be  deemed  to be the  amounts  listed  on  Attachment  A.  If  such
recalculated  amounts plus ten percent (10%) thereof exceed the amounts  payable
under the Letter of Credit  then in  effect,  no later than seven (7) days after
receipt of such written  notice of  recalculation,  the Company  shall cause the
amounts  payable under the Letter of Credit to be increased to the  recalculated
amounts plus 10%.


<PAGE>


         10. Acceleration Under Letter of Credit.

         If at  least 30 days  prior to the  expiration  of a Letter  of  Credit
established  hereunder,  which  expiration  would  occur  before  the end of the
Secured Period,  the Executive  shall not have received  written notice from the
Company  that an  extension  or  renewal  of the  expiring  Letter of Credit has
occurred  or a new  Letter  of  Credit  has been  obtained  with the  terms  and
conditions  at least as favorable  as the  predecessor  Letter of Credit,  then,
notwithstanding  any other provisions of the Severance  Agreement,  the Deferred
Compensation  Agreement,  or this Agreement,  all amounts which are described in
Section  1  shall  be  due  and  payable   immediately  without  regard  to  any
contingencies or future events and Executive,  his beneficiaries or estate shall
be entitled to immediately draw on the Letter of Credit for all such amounts.

         11. Accounting Firm.

         The Accounting  Firm shall mean the same  Accounting Firm as determined
under  the  provisions  of  Section  10(h)  of  the  Severance  Agreement.   All
calculations  by the  Accounting  Firm  shall be  binding  on the  Company,  the
Executive and the Bank in the absence of wilful  misconduct or gross  negligence
by the Accounting Firm.

         12. Expenses.

         The Company shall pay all expenses and fees of the Accounting Firm.

         13. Information.

         The Company shall provide the Accounting Firm with such  information as
the Company has in its possession that the Accounting  Firm believes  necessary,
in its  discretion,  to make its  calculations  and  recalculations  under  this
Agreement.

         14. Obligation of Executive.

         Subject to the provisions of Section 8, if Executive  receives payments
under  the  Letter  of  Credit  for any  amount in excess of that to which he is
entitled under the Severance Agreement,  the Deferred Compensation Agreement, or
this Agreement, Executive shall immediately repay such amount to Company.

         15. Legal Fees, Etc.

         If Executive  incurs any legal fees and expenses as a result of seeking
to obtain or enforce any right or benefit  provided by this  Agreement,  Company
shall pay or reimburse Executive for all such reasonable fees and expenses.

         16. No Waivers.

         The payment by a Bank on a Letter of Credit  established  in accordance
with the terms hereof shall not constitute a waiver by the Company of, or in any
way preclude the Company from asserting,  any claim the Company may have against
Executive that Executive is not entitled to some or all of such payment. Drawing
upon the Letter of Credit shall not  constitute a waiver by Executive  of, or in
any way preclude Executive from asserting,  any claim Executive may have against
the Company that  Executive is entitled to amounts  under this  Agreement or the
Severance Agreement or the Deferred Compensation Agreement (except to the extent
that  such  amounts  have  been  paid in full by the Bank  under  the  Letter of
Credit).

         17. Enforceability.

         Subject to Section 19, this Agreement shall inure to the benefit of and
be  enforceable  by Executive's  personal or legal  representatives,  executors,
administrators, successors, heirs, distributees, devisees and legatees.

         18. No Change to Agreements.

         Except as  expressly  modified by this  Agreement,  Executive's  rights
under the  Severance  Agreement  and the  Deferred  Compensation  Agreement  are
unchanged by this Agreement.

         19. Modification in Writing.

         No  provision  of this  Agreement  may be modified or waived  unless in
writing and signed by Executive and such officer of Company as may be designated
or authorized by its Board of Directors.

         20. Severability.

         The invalidity or  unenforceability  of any provision of this Agreement
shall not affect the validity or  enforceability  of any other provision of this
Agreement, which shall remain in full force and effect.

         21. Assignment.

         Executive's  rights under this  Agreement  and the Letter of Credit are
not assignable.

         22. Notices.

         Any notice,  report,  demand or waiver required or permitted  hereunder
shall be in writing and shall be given  personally  or by prepaid  registered or
certified mail, return receipt requested, addressed as follows:

           If to the Company:              Hancock Fabrics, Inc.
                                           3406 West Main Street
                                           P.O. Box 2400
                                           Tupelo, Mississippi 38003-2400
                                           Attention: Corporate Secretary

           If to the Executive:            John R. McCord
                                           6586 Hwy 9 North
                                           Pontotoc, Mississippi 38863


A notice shall be effective upon the receipt thereof. The above addresses can be
changed by notice in writing delivered as provided above.

         23. Additional Benefits.

         The security provided under this Agreement is in addition to and not by
way of limitation of any rights or benefits to which Executive is entitled under
the Severance Agreement and the Deferred Compensation Agreement.

         IN WITNESS WHEREOF  Executive and,  pursuant to authorization  from its
Board of  Directors,  Company have  executed  this  Agreement to Secure  Certain
Contingent Payments effective as of the date first above written.


                                            Executive


                                            HANCOCK FABRICS, INC.

                                            By: /s/ Larry Kirk
                                            ------------------

                                            Its: Chief Executive Officer
                                            ----------------------------







<PAGE>
                                                                    Exhibit 10.4


                               SEVERANCE AGREEMENT

         THIS AGREEMENT  between Hancock Fabrics,  Inc., a Delaware  corporation
(the  "Corporation"),  and John R.  McCord  whose  address  is 6586 Hwy 9 North,
Pontotoc, Mississippi 38863(the "Executive"), dated as of June 13, 2002.

                              W I T N E S S E T H :
                              -------------------

         WHEREAS,  the  Corporation  wishes to attract and retain well qualified
executive  and key  personnel  and,  in the event of any Change of  Control  (as
defined  in  Section  2) of the  Corporation,  to  assure  both  itself  and the
Executive of continuity of management; and

         WHEREAS, the Corporation, wishes to enter into this Agreement until
May 4, 2005 ("the Expiration  Date"),  and to automatically  renew the Severance
Agreement for an additional  three year period on the  Expiration  Date and each
subsequent expiration, unless the Incumbent Board elects to cancel the agreement
as of the next Expiration Date; and

         WHEREAS,  no benefits shall be payable under this Agreement  unless the
Effective  Date  shall  occur  and  thereafter  the  Executive's  employment  is
terminated; and

         WHEREAS,  the  employment  of the  Executive  is "at  will"  and may be
terminated by the Corporation  without  payment of any benefits  hereunder until
the occurrence of a Change of Control;

         NOW,  THEREFORE,  in consideration of the premises and mutual covenants
herein  contained,  it is hereby agreed by and between the  Corporation  and the
Executive as follows:


<PAGE>


     1. Operation of Agreement.  No benefits shall be payable hereunder unless a
Change of Control (as defined in Section 2) occurs  during the Change of Control
Period (as defined in Section 3). For the purposes of this Agreement the date on
which such a Change of Control  occurs is referred  to herein as the  "Effective
Date."

     2. Change of Control.  For the  purposes  of this  Agreement,  a "Change of
Control" shall mean a change of control of a nature that would be required to be
reported by the  Corporation  in response to Item 1(a) of the Current  Report on
Form 8-K (or its  successor  Item or Form,  as the case may be), as in effect on
the date  hereof (or from time to time  thereafter),  pursuant  to Section 13 or
15(d) of the  Securities  Exchange Act of 1934 (the  "Exchange  Act");  provided
that,  without  limitation,  such a "Change of Control"  shall be deemed to have
occurred  if:  (i)  a  third  person,   including  an   aggregation  of  persons
constituting  a "person " as defined in Section  13(d)(3) of the  Exchange  Act,
becomes the  beneficial  owner,  directly or  indirectly,  of 20% or more of the
combined  voting  power  of  the  Corporation's  outstanding  voting  securities
ordinarily  having  the  right  to vote for the  election  of  directors  of the
Corporation  or (ii)  individuals  who  constitute the Board of Directors of the
Corporation as of the date hereof (the  "Incumbent  Board") cease for any reason
to constitute at least two-thirds  thereof,  provided that any person becoming a
director  subsequent  to the date  hereof  whose  election,  or  nomination  for
election by the Corporation's  stockholders,  was approved by a vote of at least
three-quarters  of (or if less,  all but one of) the  directors  comprising  the
Incumbent  Board (other than an election or  nomination  in  connection  with an
actual or threatened  election  contest relating to the election of directors of
the  Corporation,  as such terms are used in Rule 14a-12(c)of the Regulation 14A
promulgated  under the Exchange  Act) shall be, for purposes of this  Agreement,
considered as though such person were a member of the Incumbent Board.

     3. Change of Control  Period.  The "Change of Control Period" is the period
commencing  on the date of this  Agreement and ending on the earlier to occur of
(i) the Expiration  Date, or (ii) the first day of the month  coinciding with or
next following the  Executive's  65th birthday.  The expiration of the Change of
Control Period shall not limit the Corporation's  obligation to provide,  or the
Executive's  right to collect,  payments and benefits  pursuant to Section 5 and
Section 10 hereof.

     4. Certain Definitions.

         (a)      Death  or  Disability.   The  Executive's   employment   shall
                  terminate  automatically upon the Executive's death ("Death").
                  The  Corporation  will be  considered to have  terminated  the
                  Executive's   employment  for  Disability,   if  after  having
                  established the Executive's Disability (as defined below), the
                  Executive  receives  written  notice given in accordance  with
                  Section 9(b) of the  Corporation's  intention to terminate his
                  employment.  The  Executive's  employment  will  terminate for
                  Disability  effective  on the 90th day after  receipt  of such
                  notice (the "Disability  Effective Date")if within such 90-day
                  period after such receipt the  Executive  shall fail to return
                  to full-time  performance of his duties.  For purposes of this
                  Agreement,  "Disability"  means a disability  that,  after the
                  expiration  of more than 180 days after its  commencement,  is
                  determined to be total and  permanent by a physician  selected
                  by the  Corporation  or its  insurers  and  acceptable  to the
                  Executive or his legal  representative  (such  agreement as to
                  acceptability not to be withheld unreasonably).



<PAGE>


                  Consistent  with,  and not in limitation of, the provisions of
                  Section 6 of this Agreement,  neither a termination for, nor a
                  determination  of,  Disability  pursuant to this  Section 4(a)
                  shall  be  deemed  in  and  of  itself  a  termination  for or
                  determination  of disability  with respect to the  Executive's
                  eligibility   to  receive   long-term   disability   benefits,
                  continued  medical,   dental,  or  life  insurance   coverage,
                  retirement  benefits,  or  benefits  under any  other  plan or
                  program  provided by the  Corporation or one of its affiliated
                  companies and for which the Executive may qualify.

         (b)      Cause. The Executive's employment will be terminated for Cause
                  if the majority of the Incumbent  Board  determines that Cause
                  (as defined in this  Agreement)  exists.  For purposes of this
                  Agreement,  "Cause"  means  (i) an act or  acts  of  fraud  or
                  misappropriation on the Executive's part that result in or are
                  intended to result in his personal  enrichment  at the expense
                  of the Corporation or one of its affiliated  companies or (ii)
                  conviction of a felony.

         (c) Good Reason. For purposes of this Agreement, "Good Reason" means

                  (i)      without the express written consent of the Executive,
                           (A) the  assignment  to the  Executive  of any duties
                           inconsistent  in any  substantial  respect  with  the
                           Executive's  position,  authority or responsibilities
                           as in effect  during  the 90-day  period  immediately
                           preceding  the  Effective  Date,  or  (B)  any  other
                           substantial   adverse   change   in   such   position
                           (including   titles  and   reporting   requirements),
                           authority or responsibilities;

                  (ii)     any  failure  by  the   Corporation  to  furnish  the
                           Executive and/or,  where applicable,  his family with
                           compensation (including annual bonus) and benefits at
                           a level equal to or exceeding  those  received (on an
                           annual basis) by the Executive  from the  Corporation
                           during  the 90-day  period  preceding  the  Effective
                           Date,  including  a  failure  by the  Corporation  to
                           maintain   the   Corporation's   extra   compensation
                           plan(s)("Extra   Compensation  Plan")  and  "Officers
                           Incentive Compensation Plan" or any subsequent plans)
                           (including the right to defer the receipt of payments
                           thereunder)   and  the   Corporation's   supplemental
                           retirement  benefit  plan  ("SERP"),  other  than  an
                           insubstantial and inadvertent failure remedied by the
                           Corporation  promptly after receipt of notice thereof
                           given by the Executive;

                  (iii)    the Corporation's requiring the Executive to be based
                           or to  perform  services  at any  office or  location
                           other than that at which the  Executive  is primarily
                           based  during  the  90-day   period   preceding   the
                           Effective Date, except for travel reasonably required
                           in    the     performance    of    the    Executive's
                           responsibilities; or

                  (iv)     any  failure  by  the   Corporation   to  obtain  the
                           assumption and agreement to perform this Agreement by
                           a successor as  contemplated by Section 8(b). For the
                           purposes  of  this  Section  4(c),   any  good  faith
                           determination  of "Good Reason" made by the Executive
                           shall be conclusive.  (d)  [Reserved].  (e) Notice of
                           Termination.  Any  termination by the Corporation for
                           Cause or by the  Executive  for Good Reason  shall be
                           communicated  by Notice of  Termination  to the other
                           party hereto given in  accordance  with Section 9(b).
                           Any  notice of  termination  by the  Corporation  for
                           Disability  shall be given in accordance with Section
                           4(a).  For purposes of this  Agreement,  a "Notice of
                           Termination"   means  a  written   notice   that  (i)
                           indicates the specific termination  provision in this
                           Agreement  relied upon, (ii) sets forth in reasonable
                           detail the facts and circumstances claimed to provide
                           a basis for termination of the Executive's employment
                           under the  provision  so  indicated  and (iii) if the
                           termination date is other than the date of receipt of
                           such notice,  specifies the  termination  date (which
                           date  shall not be more than 15 days after the giving
                           of such notice).

         (f)      Date of  Termination.  Date of  Termination  means the date of
                  receipt  of  the  Notice  of  Termination  or any  later  date
                  specified therein as the termination date, as the case may be,
                  or  if  the  Executive's   employment  is  terminated  by  the
                  Corporation  for  any  reason  other  than  Cause,   Death  or
                  Disability,  the date on which the  Corporation  notifies  the
                  Executive of such  termination.  Notwithstanding  any contrary
                  provision in this Section 4(f), if the Executive's  employment
                  terminates due to Disability, the Date of Termination shall be
                  the  Disability   Effective   Date.  5.   Obligations  of  the
                  Corporation Upon  Termination.  (a) Good Reason Other Than For
                  Cause,  Death or Disability.  Regardless of whether the Change
                  of Control  Period has expired,  if,  within three years after
                  the Effective  Date, (i) the  Corporation  shall terminate the
                  Executive's  employment  for any reason  other than for Cause,
                  Death or Disability, or (ii) the Executive shall terminate his
                  employment for Good Reason:

                  (I)      the Corporation  shall pay to the Executive in a lump
                           sum  in  cash  within  20  days  after  the  Date  of
                           Termination  the aggregate of the amounts  determined
                           pursuant to the following clauses (A) and (B):

                           (A)      if not  theretofore  paid,  the  Executive's
                                    base salary  through the Date of Termination
                                    at the rate in effect at the time the Notice
                                    of Termination was given; and

                           (B)      the sum of (x) the  Executive's  annual base
                                    salary at the rate in effect at the time the
                                    Notice  of  Termination  was  given,  or  if
                                    higher, at the highest rate in effect at any
                                    time within the 90-day period  preceding the
                                    Effective  Date and (y) an  amount  equal to
                                    the  highest  bonus  paid or  payable to the
                                    Executive  pursuant to the  applicable  cash
                                    incentive  compensations plan(s) within five
                                    fiscal  years prior to the  Effective  Date,
                                    provided,  however,  that in no event  shall
                                    the  Executive be entitled to receive  under
                                    this   clause  (B)  more  than  the  product
                                    obtained   by    multiplying    the   amount
                                    determined as  hereinabove  provided in this
                                    clause  (B) by a  fraction  whose  numerator
                                    shall be the  number  of  months  (including
                                    fractions  of a  month)  that at the Date of
                                    Termination  remain  until  the first day of
                                    the month  coinciding with or next following
                                    the  Executive's  65th  birthday  and  whose
                                    denominator shall equal twelve (12); and

                  (II)     until the  earlier  to occur of (i) the date one year
                           following the Date of Termination,  or (ii) the first
                           day  of the  first  month  coinciding  with  or  next
                           following the  Executive's  65th birthday (the period
                           of time  from  the  Date  of  Termination  until  the
                           earlier of (i) or (ii) is hereinafter  referred to as
                           the  "Unexpired   Period"),   the  Corporation  shall
                           continue to provide all benefits  that the  Executive
                           and/or his family is or would have been  entitled  to
                           receive   under   all   medical,    dental,   vision,
                           disability,  executive life,  group life,  accidental
                           death  and  travel   accident   insurance  plans  and
                           programs  of  the   Corporation  and  its  affiliated
                           companies,  in each  case on a  basis  providing  the
                           Executive  and/or his family with the  opportunity to
                           receive  benefits at least equal to those provided by
                           the Corporation and its affiliated  companies for the
                           Executive  under such plans and programs if and as in
                           effect at any time during the 90-day period preceding
                           the Effective Date.

                  (III)    Within  20 days  after  the Date of  Termination  the
                           Corporation  shall pay to the  Executive  and/or  his
                           beneficiary,  as the  case may be, a lump sum in cash
                           in  the  amount  of the  present  value  of  periodic
                           payments  equal  to  the  excess,   if  any,  of  the
                           "Enhanced SERP Benefits" over the amount of benefits,
                           if any, the Executive and/or his beneficiary,  as the
                           case  may  be,  has  actually  received  (or is  then
                           currently  entitled  to receive)  from the SERP.  For
                           purposes of this Section  5(a),  the  "Enhanced  SERP
                           Benefits"  shall equal the amount of  benefits  under
                           the SERP the Executive  and/or his beneficiary  would
                           have received had the benefits  under Section  4.1(i)
                           of  the  SERP  been  determined  by  considering  the
                           Executive (a) to have been employed for an additional
                           period of time equal to the Unexpired Period;  (b) to
                           have  been a member  of the  SERP  for an  additional
                           period of time equal to the Unexpired Period;  (c) to
                           have retired at the age he would have attained at the
                           end  of  the  Unexpired  Period;   (d)  to  have  had
                           compensation  for such additional Plan Years (as such
                           term is defined  for  purposes  of the SERP) equal to
                           the  Executive's  earnings for the Plan Year prior to
                           the  Effective  Date;  and  (e)  to  be  vested  in a
                           fraction  (not to exceed 1) of his benefit  under the
                           Hancock Fabrics,  Inc.  Consolidated  Retirement Plan
                           (the  "Retirement  Plan")  and the SERP  equal to the
                           quotient  obtained  by  dividing  (i)  the  years  of
                           service for vesting purposes the Executive would have
                           had under the Retirement Plan if he had been employed
                           for  an  additional  period  of  time  equal  to  the
                           Unexpired  Period  by (ii)  the  number  of  years of
                           service for vesting  purposes that (as of the Date of
                           Termination) are required before a participant in the
                           Retirement  Plan is  considered  to be  fully  vested
                           under  the  Retirement  Plan (the  determination  and
                           payment of the amount  payable  under this  paragraph
                           (III) to be pursuant to Section 11); and

                  (IV)     for  purposes  of any written  agreement  between the
                           Executive and the Corporation relating to the payment
                           of compensation to the Executive on a deferred basis,
                           the Executive shall be deemed to have remained in the
                           employment of the  Corporation  on a full-time  basis
                           until the Executive's 60th birthday.

     6.  Non-exclusivity  of Rights.  Nothing in this Agreement shall prevent or
limit the Executive's continuing or future participation in any benefit,  bonus,
incentive  or other plan or program  provided by the  Corporation  or any of its
affiliated companies and for which the Executive may qualify, nor shall anything
herein limit or otherwise affect such rights as the Executive may have under any
employment,  stock option or other agreements with the Corporation or any of its
affiliated companies.  Amounts that are vested benefits or that the Executive is
otherwise  entitled to receive under any plan or program of the  Corporation  or
any of its  affiliated  companies at or  subsequent  to the Date of  Termination
shall be payable in accordance with such plan or program.

     7. Full Settlement. The payments provided for in this Agreement are in full
settlement of any claims the Executive may have against the Corporation  arising
out of his termination,  including,  but not limited to, any claims for wrongful
discharge.  The  Corporation's  obligation to make the payments  provided for in
this Agreement and otherwise to perform its  obligations  hereunder shall not be
affected  by any  circumstances,  including,  without  limitation,  any  setoff,
counterclaim,  recoupment,  defense or other right that the Corporation may have
against the  Executive  or others;  provided,  however,  that the  Corporation's
failure to make any such setoff  shall not  constitute  a waiver of any claim of
the  Corporation  against  the  Executive.  In no event shall the  Executive  be
obligated to seek other  employment by way of mitigation of the amounts  payable
to the Executive under any of the provisions of this Agreement.  The Corporation
agrees to pay, to the full extent  permitted by law, all legal fees and expenses
the Executive may reasonably incur as a result of any contest (regardless of the
outcome thereof) by the Corporation or others of the validity or  enforceability
of, or liability  under,  any  provision of this  Agreement or any  guarantee of
performance  thereof,  in each case plus interest,  compounded  monthly,  on the
total unpaid amount determined to be payable under this Agreement, such interest
to be calculated  on the basis of the prime  commercial  lending rate  announced
byUnion Planters National Bank, in effect from time to time during the period of
such non-payment.

     8. Successors.

         (a)      This  Agreement is personal to the  Executive  and without the
                  prior  written  consent  of  the  Corporation   shall  not  be
                  assignable by the Executive otherwise than by will or the laws
                  of descent and distribution. This Agreement shall inure to the
                  benefit  of  and  be  enforceable  by  the  Executive's  legal
                  representatives, executors, heirs and legatees.

         (b)      This  Agreement  shall  inure to the benefit of and be binding
                  upon the Corporation and its successors. The Corporation shall
                  require  any  successor  to  all or  substantially  all of the
                  business and/or assets of the Corporation, whether directly or
                  indirectly, by purchase, merger, consolidation, acquisition of
                  stock,  or  otherwise,  by an agreement in form and  substance
                  satisfactory  to the Executive,  expressly to assume and agree
                  to perform  this  Agreement in the same manner and to the same
                  extent as the  Corporation  would be required to perform if no
                  such  succession had taken place.  9.  Miscellaneous.  (a) The
                  captions  of this  Agreement  are not  part of the  provisions
                  hereof and shall have no force or effect.  This  Agreement may
                  not  be  amended  or  modified  otherwise  than  by a  written
                  agreement  executed by the parties hereto or their  respective
                  successors  and legal  representatives.  (b) All  notices  and
                  other  communications  hereunder shall be in writing and shall
                  be given by hand  delivery to the other party or by registered
                  or certified mail, return receipt requested,  postage prepaid,
                  addressed as follows: If to the Executive:

                  At the address first hereinabove written.


                  If to the Corporation:

                  Hancock Fabrics, Inc.
                  3406 W. Main Street
                  P.O. Box 2400
                  Tupelo, Mississippi 38003-2400
                  Attn: Corporate Secretary

                  or to such other address as either party shall have  furnished
                  to the other in writing  in  accordance  herewith.  Notice and
                  communications  shall be effective  when actually  received by
                  the addressee.

         (c)      The  invalidity or  unenforceability  of any provision of this
                  Agreement shall not affect the validity or  enforceability  of
                  any other provision of this Agreement.

         (d)      The  Corporation  may withhold from any amounts  payable under
                  this Agreement such federal,  state or local taxes as shall be
                  required to be  withheld  pursuant  to any  applicable  law or
                  regulation,  provided, however, that such withholding shall be
                  consistent with the calculations made by Accounting Firm under
                  Section 10 of the Agreement.

         (e)      This  Agreement  contains  the entire  understanding  with the
                  Executive with respect to the subject matter hereof.

         (f)      Whenever used in this  Agreement,  the masculine  gender shall
                  include  the   feminine  or  neuter   wherever   necessary  or
                  appropriate  and vice versa and the singular shall include the
                  plural and vice versa.

         (g)      The  Executive  and  the  Corporation   acknowledge  that  the
                  employment  of the Executive by the  Corporation  is "at will"
                  and  may  be   terminated  by  either  the  Executive  or  the
                  Corporation at any time and for any reason.  Nothing contained
                  in the  Agreement  shall affect such rights to  terminate,  it
                  being agreed, however, that nothing in this Section 9(g) shall
                  prevent the  Executive  from  receiving  any  amounts  payable
                  pursuant to Section 5(a), or 10 of this Agreement in the event
                  of a  termination  described in such Section 5(a), or 10 on or
                  after the Effective Date.

     10. Penalty Taxes.

         (a)      Payment. In the event that the Accounting Firm determines that
                  any payment or other compensation or benefits made or provided
                  to or for the benefit of the  Executive  in any way  connected
                  with  employment of the Executive by the  Corporation  will be
                  subject to tax  pursuant  to  Section  4999 of the Code or any
                  successor provision or any counterpart  provision of state tax
                  law (the "Penalty  Taxes"),  the Corporation  shall pay to the
                  Executive  within 20 days after  receipt  of a written  demand
                  therefore from the Executive an amount which,  after deduction
                  of all additional  Federal,  state and local taxes (including,
                  without limitation, income taxes and additional Penalty Taxes)
                  required to be paid by the  Executive in respect of receipt of
                  such  amount,   shall  be  equal  to  the  Penalty  Taxes.  In
                  calculating  the  income  taxes  required  to be  paid  by the
                  Executive, the Accounting Firm shall assume that the Executive
                  will pay tax at the maximum marginal Federal,  state and local
                  rates  and that  the  Executive  will  have no  deductions  or
                  credits  available to reduce such taxes. In  consideration  of
                  the payment of such amounts,  the  Executive  shall report and
                  pay such taxes and  promptly  provide the  Corporation  with a
                  written  statement  that such filing and payment have occurred
                  executed  by the  person  or firm that  signed  as income  tax
                  return preparer of the Executive's  federal income tax return,
                  or if prepared by the Executive, executed by the Executive.

         (b)      Indemnity.  If the Executive  shall be required to pay Penalty
                  Taxes in addition to those  reimbursed  pursuant to  paragraph
                  (a) above,  or if based upon failure to receive the opinion of
                  Tax Counsel  referred to in paragraph  (d) below the Executive
                  reports  and pays  greater  amounts of Penalty  Taxes than are
                  reimbursed  pursuant  to  paragraph  (a) above (any such event
                  hereafter being referred to as a "Loss"),  the Executive shall
                  notify the Corporation  and the  Corporation  shall pay to the
                  Executive as an indemnity an amount which,  after deduction of
                  all income taxes and additional Federal, state and local taxes
                  (including,  without  limitation,  income taxes and additional
                  Penalty Taxes) required to be paid by the Executive in respect
                  of receipt of such amount  (assuming,  for this purpose,  that
                  the  Executive  is subject to the  maximum  marginal  rates of
                  taxation applicable to individuals at such time as such amount
                  becomes due and that the Executive  will have no deductions or
                  credits available to reduce such taxes), shall be equal to the
                  sum of (x) the Penalty Taxes resulting in the Loss and (y) the
                  net amount of any  interest,  penalties  or  additions  to tax
                  payable to the United States  Government or any state or local
                  government  (after allowing for the deduction of such amounts,
                  to the extent properly deductible, for Federal, state or local
                  income tax purposes) as a result of such Loss. Each payment by
                  the  Corporation  hereunder shall be made within 30 days after
                  receipt  of a  written  demand  therefore  from the  Executive
                  accompanied  by a written  statement  describing in reasonable
                  detail the Loss in  question,  the amount of  additional  tax,
                  interest, penalties or additions to tax and the calculation of
                  the  payment  due in  respect  thereof;  provided  that,  if a
                  contest of the Loss is being  conducted  pursuant to paragraph
                  (c) below,  payment  shall not be required by the  Corporation
                  until 30 days  after the  completion  or  termination  of such
                  contest.

         (c)      Contest.

                  (1)      The Executive shall notify the Corporation  within 30
                           days of receipt from the Internal  Revenue Service of
                           a revenue agent's report, a 30-day letter or a notice
                           of  deficiency  (as  described in Section 6212 of the
                           Code  or any  successor  provision)  or of a  similar
                           written claim from a state taxing authority, in which
                           an  adjustment  is  proposed  to the federal or state
                           taxes of the  Executive  for  which  the  Corporation
                           would  be  required  to   indemnify   the   Executive
                           hereunder.   If  the  Corporation  (i)  requests  the
                           Executive  to do so within 30 days after such notice,
                           and  (ii)  furnishes  the  Executive  an  opinion  of
                           recognized  tax counsel  selected by the  Corporation
                           and approved by the  Executive,  which approval shall
                           not  unreasonably  be  withheld,   (hereinafter  "Tax
                           Counsel")  to  the  effect  that a  reasonable  basis
                           exists for contesting such proposed  adjustment,  the
                           Executive  shall  contest the proposed  adjustment in
                           good  faith,  shall keep the  Corporation  reasonably
                           informed  as to the  progress  of such  contest,  and
                           shall consider in good faith any  suggestion  made by
                           the  Corporation  as to the method of  pursuing  such
                           contest; provided,  however, that the Executive shall
                           not be obligated to contest  such  adjustment  unless
                           (i)  the  Corporation  acknowledges  in  writing  its
                           liability  under paragraph (b) above to indemnify the
                           Executive  in the  event  that the  Internal  Revenue
                           Service or a state taxing  authority  prevails in its
                           position regarding the proposed adjustment;  (ii) the
                           Corporation  shall  have  fully  performed  its prior
                           obligations  under  this  Agreement;  and  (iii)  the
                           subject matter thereof shall not have been previously
                           decided  pursuant to the contest  provisions  of this
                           paragraph (c) with respect to any other  executive of
                           the  Corporation,  unless the Corporation  shall have
                           furnished an opinion of Tax Counsel to the  Executive
                           that more likely than not the Executive  will prevail
                           in the contest; provided, further, that the Executive
                           shall determine,  in his sole discretion,  the nature
                           of all  action to be taken to contest  such  proposed
                           adjustment,  including  (x)  whether  any  action  to
                           contest such proposed  adjustment  initially shall be
                           by way of judicial or administrative  proceedings, or
                           both, (y) whether any such proposed  adjustment shall
                           be  contested  by  resisting  payment  thereof  or by
                           paying the same and seeking a refund thereof, and (z)
                           if the Executive shall undertake judicial action with
                           respect  to such  proposed  adjustment,  the court or
                           other judicial body before which such action shall be
                           commenced.  The Executive  shall, if requested by the
                           Corporation    within   30   days   of   an   adverse
                           determination  by any court, and if Tax Counsel is of
                           the opinion  that there is a  reasonable  basis for a
                           successful  appeal  of the  matter  in  question,  be
                           obligated to appeal such adverse determination.

                  (2)      The  Executive  shall  not be  required  to take  any
                           action  pursuant  to this  paragraph  (c)  unless and
                           until the Corporation shall have agreed in writing to
                           indemnify  the  Executive  in  a  manner   reasonably
                           satisfactory to the Executive for any fees, expenses,
                           statutory   or   regulatory   penalties,    interest,
                           additions  to tax, or other  similar  liabilities  or
                           losses which the  Executive  may incur as a result of
                           contesting  the validity of any  proposed  adjustment
                           and shall have  agreed to pay (or in the  Executive's
                           sole discretion to prepay) to the Executive on demand
                           all costs and expenses  which the Executive may incur
                           in   connection   with   contesting   such   proposed
                           adjustment  (including  without  limitation  fees and
                           disbursements   of   counsel).   If   the   Executive
                           determines  to contest any  adjustment  by paying the
                           additional   tax  and  suing   for  a   refund,   the
                           Corporation  shall timely advance to the Executive on
                           an interest  free basis an amount equal to the sum of
                           any tax,  interest,  penalties  and  additions to tax
                           which are  required  to be paid;  provided,  however,
                           that,  if the  Executive  is  required  to include in
                           income  any amount  with  respect to such loan or the
                           imputation of interest thereon in any taxable year of
                           the  Executive  prior to final  determination  of the
                           contest,  then  the  Corporation,  within  30 days of
                           written notice thereof by the Executive, shall pay to
                           the Executive an amount which, after deduction of all
                           additional Federal, state and local taxes required to
                           be paid by the Executive in respect of the receipt of
                           such amount  (assuming,  for this  purpose,  that the
                           Executive is subject to the maximum  marginal rate of
                           taxation  applicable to  individuals at such times as
                           such  amount  becomes  due),  shall  be  equal to the
                           aggregate  additional  federal and state income taxes
                           payable by the Executive with respect to such taxable
                           year as a result of such  inclusion.  Upon receipt by
                           the  Executive of a refund of any amounts paid by the
                           Executive based on any adjustment in respect of which
                           amounts  the  Executive   shall  have  been  paid  or
                           advanced an equivalent amount by the Corporation, the
                           Executive  shall pay to the Corporation the amount of
                           such  refund  (which,  in the case of any  contest in
                           which  a loan  has  been  advanced  pursuant  to this
                           paragraph,  shall be deemed to be in repayment of the
                           loan advanced by the Corporation to the extent fairly
                           attributable  thereto),  but  not  in  excess  of the
                           amount paid or advanced by the Corporation,  together
                           with any interest  received by the  Executive on such
                           refund  plus  any net  additional  Federal,  state or
                           local tax benefits actually realized by the Executive
                           as the  result of such  payment,  and  reduced by the
                           amount of any  Federal,  state or local tax  actually
                           payable  with  respect  to  receipt  of such  refund;
                           provided,  however, that the Executive may offset the
                           amount of such refund and benefits against any amount
                           due and  owing by the  Corporation  to the  Executive
                           pursuant to this Agreement.  Upon disallowance of any
                           such refund, the Corporation shall forgive the amount
                           of the advance fairly attributable  thereto and shall
                           pay to the  Executive  the  amount  of its  indemnity
                           obligation hereunder, including such amount as, after
                           deduction  of all  taxes  required  to be paid by the
                           Executive  in respect of the  receipt of such  amount
                           under  the  laws  of  any  Federal,  state  or  local
                           government or taxing  authority of the United States,
                           shall be equal to the sum on an after-tax  basis,  of
                           any tax,  interest,  penalties  or  additions  to tax
                           payable  with  respect  to the  forgiveness  of  such
                           advance.

                  (3)      If any  adjustment  referred to in this paragraph (c)
                           shall be  proposed  and the  Corporation  shall  have
                           requested the Executive to contest such adjustment as
                           above  provided and shall have duly complied with the
                           terms  of  this  paragraph  (c),  the   Corporation's
                           liability  with  respect  to  such  adjustment  shall
                           become  fixed  upon  final   determination   of  such
                           adjustment;    provided,   however,   that   if   the
                           Corporation  shall not  deliver  the  opinion  of Tax
                           Counsel  provided in this paragraph (c) to the effect
                           that  there is a  reasonable  basis for a contest  or
                           appeal, then the Corporation's obligation to pay such
                           indemnity shall become immediately fixed.

         (d)      No Inconsistent  Action. The Executive agrees that he will not
                  take any action,  directly or indirectly,  or file any returns
                  or other documents  inconsistent  with the assumption that the
                  payments to which the indemnification of paragraph (b) applies
                  do not result in imposition of the tax under Section 4999, and
                  the  Executive  shall file such  returns,  take such  actions,
                  maintain  such  records and execute  such  documents as may be
                  reasonably  requested by the Corporation;  provided,  however,
                  that the Executive's  obligations hereunder to file returns or
                  other documents shall apply only if the Executive  receives an
                  opinion of Tax  Counsel at least 10 days prior to the due date
                  of the return  (without  regard to extensions)  required to be
                  made with respect to the payments to which the indemnification
                  of  paragraph  (b)  applies  that  the  Executive  will not be
                  subject to the penalties  described in Sections 6651,  6662 or
                  6663 of the Code, or successor provisions then in effect, as a
                  result of taking such position.

         (e)      Disbursements.  Any  payments  required  to  be  made  by  the
                  Corporation pursuant to this Section 10 shall be made directly
                  by the  Corporation  to the  Executive.  Payments  made by the
                  Corporation or the Executive  pursuant to this Agreement shall
                  be made by wire  transfer of  immediately  available  funds to
                  such bank and/or account in the  continental  United States as
                  specified  by the other  party in written  directions  to such
                  payor party,  and if no such direction  shall have been given,
                  by check  payable to the order of such other  party and mailed
                  to such other party by certified mail, postage prepaid.

         (f)      No Setoff.  No payment  required to be made by the Corporation
                  pursuant  to this  Section 10 shall be subject to any right of
                  setoff,   counterclaim,    defense,   abatement,   suspension,
                  deferment or reduction,  and,  except in  accordance  with the
                  express terms hereof,  the Corporation  shall have no right to
                  terminate  the  Agreement  or  to  be  released,  relieved  or
                  discharged from any obligation or liability thereunder for any
                  reason whatsoever.

         (g)      Late Payment,  Interest.  Any late payment by any party hereto
                  of any of its  obligations  under  this  Agreement  shall bear
                  interest  to the extent  permitted  by  applicable  law,  at a
                  fluctuating  rate  per  annum  equal  to  the  Prime  Rate  as
                  announced  publicly by Union Planters National Bank, from time
                  to time  plus  two  percentage  points,  for the  period  such
                  interest is payable.

         (h)      Accounting Firm. The "Accounting Firm" shall mean the Memphis,
                  Tennessee  Main Office of  PricewaterhouseCoopers,  or, at the
                  election of the Executive, the Memphis,  Tennessee Main Office
                  of such other  national  or  regional  accounting  firm as the
                  Executive   shall  select  subject  to  the  approval  of  the
                  Corporation,   which  approval  shall  not   unreasonably   be
                  withheld.  Compensation of the Accounting Firm with respect to
                  its  services  hereunder  shall be the  responsibility  of the
                  Executive.

     11.  Determination of Present Values Under Section 5. The  determination of
present values for purposes of Paragraph (a)(III) of Section 5 of this Agreement
shall be in accordance with the following:

         (a)      Present  values shall be  determined as of the last day of the
                  calendar quarter ending most recently prior to the Termination
                  Date ("Valuation Date").

         (b)      The  interest  rate and other  actuarial  assumptions  used to
                  determine  present  values  shall be the  same as those  which
                  would  be  required  to be  used as of the  Valuation  Date to
                  determine  the  amount  of a lump sum  distribution  under the
                  Retirement Plan.

         (c)      The  determination  of present  values shall be made by Hewitt
                  Associates, or such other actuarial firm as shall, at the time
                  of the  determination,  be the actuary for the Retirement Plan
                  ("Actuary Firm"). The Corporation shall provide to the Actuary
                  Firm all information in its possession reasonably requested by
                  the Actuary Firm for the purpose of making such present  value
                  determination.

         (d)      The payment of benefits under Paragraph  (a)(III) of Section 5
                  shall  be made  within  the  time  limits  set  forth  in such
                  Paragraph based upon the present value  determinations made by
                  the Actuarial Firm, and such  determinations  shall be binding
                  upon the Corporation and the Executive.

         IN  WITNESS  WHEREOF,  the  Executive  has  hereunto  set his hand and,
pursuant to the  authorization  of its Board of Directors,  the  Corporation has
caused  these  presents  to be  executed  in its  name  on its  behalf,  and its
corporate  seal to be hereunto  affixed,  all as of the day and year first above
written.
                                            /s/ John R. McCord
                                            ---------------------------------
                                            Executive


                                            HANCOCK FABRICS, INC.



                                            By: /s/ Larry Kirk
                                            ------------------
                                            Larry Kirk,
                                            Chief Executive Office