Document:

EX-10.2

EXHIBIT 10.2

INDEMNITY AGREEMENT

          THIS AGREEMENT made as of August 1, 2008, by and between Hancock Fabrics, Inc., a Delaware
corporation with executive offices located at One Fashion Way, Baldwyn, MS 38824 (“Company”) and
___, a Director or Officer of Company (“Indemnitee”).

          WHEREAS,

          A. Company is aware that competent and experienced persons are increasingly reluctant to
serve as directors or officers of corporations unless they are protected by comprehensive liability
insurance and indemnification due to increased exposure to litigation costs and risks resulting
from their service to such corporations, particularly after adoption by Congress of the
Sarbanes-Oxley Act of 2002, and due to the fact that the exposure frequently bears no reasonable
relationship to the compensation of such directors and officers;

          B. The statutes and judicial decisions regarding the duties of directors and officers are
often difficult to apply, ambiguous, or conflicting, and therefore fail to provide such directors
and officers with adequate, reliable knowledge of legal risks to which they are exposed or
information regarding the proper course of action to take;

          C. Plaintiffs often seek damages in such large amounts and the costs of litigation may be so
substantial (whether or not the case is meritorious), that the costs of defense and/or settlement
of such litigation is often beyond the personal resources of officers and directors;

          D. Company believes that it is unfair for its directors and officers and the directors and
officers of its subsidiaries to assume the risk of large judgments and other expense that may be
incurred in cases in which the director or officer received no personal profit and in cases where
the director or officer was not culpable;

          E. Company recognizes that the issues in controversy in litigation against a director or
officer of a corporation such as Company or a subsidiary of Company are often related to the
knowledge, motives and intent of such director or officer, that he or she is usually the only
witness with knowledge of the essential facts and exculpating circumstances regarding such matters
and that the long period of time which usually elapses before the trial or other disposition of
which litigation often extends beyond the time that the director or officer can reasonably recall
such matters; and may extend beyond the normal time for retirement or in the event of his or her
death, his or her spouse, heirs, executors or administrators, may be faced with limited ability and
undue hardship in maintaining an adequate defense, which may discourage such a director or officer
from serving in that position;

          F. Based upon their experience as business managers, the Board of Company (the “Board”) has
concluded that, to retain and attract talented and experienced individuals to serve as

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officers and directors of Company and its subsidiaries and to encourage such individuals to
take the business risks necessary for the success of Company and its subsidiaries, it is necessary
and in the bests interests of Company’s stockholders for Company to contractually indemnify its
officers and directors and the officers and directors of its subsidiaries, and to assume for itself
maximum liability for expenses and damages in connection with claims against such officers and
directors in connection with their service to Company and its subsidiaries, and has further
concluded that the failure to provide such contractual indemnification could result in great harm
to Company and its subsidiaries and Company’s stockholders;

          G. Section 145 of the General Corporation Law of Delaware, under which Company is organized
(“Section 145”), empowers Company to indemnify by agreement its officers, directors, employees and
agents, and persons who serve, at the request of Company, as directors, officers, employees or
agents of other corporations or enterprises, and expressly provides that the indemnification
provided by Section 145 is not exclusive;

          H. The Board, after reasonable investigation prior to the date hereof, has determined that
the liability insurance coverage available to Company and its subsidiaries as of the date hereof is
inadequate alone. The Board believes, therefore, that the interest of Company’s stockholders would
best be served by a combination of such insurance as Company may obtain pursuant to Company’s
obligations hereunder, and the indemnification by Company of the directors and officers of Company
and its subsidiaries pursuant to its Certificate of Incorporation and contractually hereunder;

          I. Company desires and has requested Indemnitee to serve or continue to serve as a director
or officer of Company and/or the subsidiaries of Company free from undue concern for claims for
damages arising out of or related to such services to Company and/or a subsidiary of Company; and

          J. Indemnitee is willing to serve, or to continue to serve, Company and/or the subsidiaries
of Company, provided that he or she is furnished the indemnity provided for herein.

          NOW, THEREFORE, the parties hereto, intending to be legally bound, hereby agree as follows:

     1. Definitions.

          (a) Agent. For the purposes of this Agreement, “agent” of Company means any person who is or
was a director, officer, employee or other agent of Company or a subsidiary of Company; or is or
was serving at the request of, for the convenience of or to represent the interest of Company or a
subsidiary of Company as a director, officer, employee or agent of another foreign or domestic
corporation, partnership, joint venture, trust or other enterprise.

          (b) Expenses. For purposes of this Agreement, “expenses” includes all direct and indirect
costs of any type or nature whatsoever (including, without limitation, all attorneys’ fees and
related disbursements, and other out-of-pocket costs) actually and reasonably incurred by
Indemnitee in connection with either the investigation, defense or appeal of a proceeding or
establishing or enforcing a right to indemnification under this Agreement, Section 145 or

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otherwise; provided, however, that expenses shall not include any judgments, fines, ERISA
excise taxes or penalties or amounts paid in settlement of a proceeding, unless otherwise provided
herein.

          (c) Proceeding. For the purposes of this Agreement, “proceeding” means any threatened,
pending, or completed action, suit or other proceeding, whether civil, criminal, administrative,
investigative or any other type whatsoever, which may be subject to indemnification covered by this
Agreement.

          (d) Subsidiary. For purposes of this Agreement, “subsidiary” means any corporation of which
more than 50% of the outstanding voting securities is owned directly or indirectly by Company, by
Company and one or more other subsidiaries, or by one or more other subsidiaries.

     2. Agreement to Serve.

Indemnitee agrees to serve and/or continue to serve as an agent of Company, at its will (or under
separate agreement, if such agreement exists), in the capacity Indemnitee currently serves as an
agent of Company, so long as he or she is duly appointed or elected and qualified in accordance
with the applicable provisions of the Bylaws of Company or any subsidiary of Company or until such
time as he or she tenders a resignation in writing or he or she is removed from such position;
provided, however, that nothing contained in this Agreement is intended to create any right to
continued employment by Indemnitee.

     3. Maintenance of Liability Insurance.

          (a) Company hereby covenants and agrees that, so long as Indemnitee shall continue to serve
as an agent of Company and thereafter so long as Indemnitee shall be subject to any possible
proceeding by reason of the fact that Indemnitee was an agent of Company, Company, subject to
Section 3(b), shall use reasonable efforts to obtain and maintain in full force and effect
directors’ and officers’ liability insurance (“D&O Insurance”) in reasonable amounts from
established and reputable insurers, and to the extent that that Company maintains any D&O
Insurance, Indemnitee shall be covered by such policy or policies, in accordance with the terms
thereof, to the maximum extent of the coverage available for any Company director or officer under
such policy or policies.

          (b) Notwithstanding the foregoing, Company shall have no obligation to obtain or maintain D&O
Insurance if Company determines in good faith that such insurance is not reasonably available, the
premium costs for such insurance are disproportionate to the amount of coverage provided, the
coverage is so limited and/or reduced by exclusions so as to provide an insufficient benefit, or
Indemnitee is covered by similar insurance maintained by a subsidiary of Company.

     4. Mandatory Indemnification.

          (a) If Indemnitee is a person who was or is a party or is threatened to be made a party to
any proceeding by reason of the fact that he or she is or was an agent of Company, or by reason of
anything done or not done by him or her in any such capacity, if he or she acted in good faith

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and in a manner he or she reasonably believed to be in or not opposed to the best interests of
Company, then Company shall indemnify Indemnitee against any and all expenses and liabilities of
any type whatsoever (including, but not limited to, judgments, fines, ERISA excise taxes or
penalties, and amounts paid in settlement) actually and reasonably incurred by him or her in
connection with the investigation, defense, settlement or appeal of such proceeding, as follows:

               (i) Third Party Actions. In any proceeding other than an action in the right of Company (but
with respect to any criminal action or proceeding, only if he or she also had no reasonable cause
to believe his or her conduct was unlawful); and

               (ii) Derivative Actions. In any proceeding by or in the right of Company to procure a
judgment in its favor; except that no indemnification under this subsection shall be made in
respect of any claim, issue or matter as to which such person shall have been finally adjudged to
be liable to Company after the time for an appeal has expired by a court of competent jurisdiction
due to willful misconduct of a culpable nature in the performance of his or her duty to Company
unless and only to the extent that the Court of Chancery or the court in which such proceeding was
brought shall determine upon application that, despite the adjudication of liability but in view of
all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for
such amounts which the Court of Chancery or such other court shall deem proper; and

               (iii) Actions Where Indemnitee is Deceased. In any proceeding, and prior to, during the
pendency or after completion of such proceeding Indemnitee is deceased, except as provided in
Sections 3(b) and 12.

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          (b) Exception for Amounts Covered by Insurance. Notwithstanding the foregoing, Company shall
not be obligated to indemnify Indemnitee for expenses or liabilities of any type whatsoever
(including, but not limited to, judgments, fees, ERISA excise taxes or penalties, and amounts paid
in settlement) which have been paid directly to Indemnitee or to others on behalf of Indemnitee
under D&O Insurance.

          (c) Indemnification for Expenses of a Witness. Notwithstanding any other provision of this
Agreement, to the extent that Indemnitee is, by reason of his or her corporate status as an agent
of Company, a witness in any proceeding to which Indemnitee is not a party, he shall be indemnified
against all expenses actually and reasonably incurred by him or on his behalf in connection
therewith.

          (d) Change of Law. Subject to the further provisions of this Agreement, if Section 145 of
the Delaware General Corporation Law, or any successor statute, is hereafter amended (the “Amended
Statute”) in a manner that expands the authority of Company to indemnify or advance expenses to
Indemnitee, this Agreement shall thereupon be deemed modified to provide for indemnification of and
advance of expenses to Indemnitee to the fullest extent not prohibited by the Amended Statute.

     5. Partial Indemnification.

If Indemnitee is entitled under any provision of this Agreement to indemnification by Company for
some or a portion of any expenses or liabilities of any type whatsoever (including, but not
limited to, judgments, fines, ERISA excise taxes or penalties, and amounts paid in settlement)
incurred by him or her in the investigation, defense, settlement or appeal of a proceeding, but is
not entitled to indemnification for all of the total amount thereof, then Company shall
nevertheless indemnify Indemnitee for such portion of the total amount to which Indemnitee is
entitled, but not as to the portion thereof to which Indemnitee is not entitled.

     6. Mandatory Advancement of Expenses.

Except as otherwise limited or prohibited by applicable law, Company shall advance all reasonable
expenses incurred by or on behalf of Indemnitee in connection with any proceeding within 20 days
after the receipt by Company of a statement or statements from Indemnitee requesting such advance
or advances from time to time, whether prior to or after final disposition of such proceeding.
Such statement or statements shall contain reasonable documentation evidencing the expenses
incurred by Indemnitee and may designate that payment be made to another person on Indemnitee’s
behalf. In connection with any such payment, advance or reimbursement, Indemnitee undertakes and
agrees to repay any amounts paid, advanced or reimbursed by Company in respect of expenses relating
to, arising out of or resulting from any proceeding in respect of which it shall have been
determined, following the final disposition of such proceeding and in accordance with Section 8,
that the Indemnitee is not entitled to indemnification hereunder; it being understood and agreed
that the foregoing shall satisfy any requirement that Indemnitee provide Company with an
undertaking to repay any advancement of expenses prior to the payment, advancement or reimbursement
thereof by Company.

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     7. Notice and Other Indemnification Procedures.

          (a) Indemnitee shall, as a condition precedent to his right to be indemnified under this
Agreement, give Company notice in writing as soon as practicable of any claim made against
Indemnitee for which indemnification will or could be sought under this agreement, provided
however, that a delay in giving such notice shall not deprive Indemnitee of any right to be
indemnified under this Agreement unless, and then only to the extent that, such delay is materially
prejudicial to the defense of such claim. The omission to notify Company will not relieve Company
from any liability for indemnification which it may have to Indemnitee otherwise than under this
Agreement. The Secretary of Company shall, promptly upon receipt of such a request for
indemnification, advise the Board in writing that Indemnitee has requested indemnification.

          (b) If, at the time of the receipt of a notice of the commencement of a proceeding pursuant
to Section 7(a) hereof, Company has D&O Insurance in effect, Company shall give prompt notice of
the commencement of such proceeding to the insurers and/or their agent(s) in accordance with the
various procedures set forth in the respective policies. Company shall thereafter take all
necessary or desirable action to cause such insurers to pay, on behalf of Indemnitee, all amounts
payable as a result of such proceeding in accordance with the terms of such policies.

          (c) If Company shall be obligated to advance the expenses for any proceeding against
Indemnitee, then Company, as appropriate, shall be entitled to assume the defense of such
proceeding, with counsel approved by Indemnitee, upon the delivery to Indemnitee of written notice
of its election so to do. After delivery of such notice, approval of such counsel by Indemnitee
and the retention of such counsel by Company, Company will not be liable to Indemnitee under this
Agreement for any fees of counsel subsequently incurred by Indemnitee with respect to the same
proceeding, provided that (i) Indemnitee shall have the right to employ his or her counsel in any
such proceeding at Indemnitee’s expense; and (ii) if (A) the employment of counsel by Indemnitee
has been previously authorized by Company, (B) Indemnitee shall have reasonably concluded that
there may be a conflict of interest between Company and Indemnitee in the conduct of any such
defense or (C) Company shall not, in fact, have employed counsel to assume the defense of such
proceeding, then (after written notice to Company by Indemnitee) the fees and expense of
Indemnitee’s counsel shall be at the expense of Company.

     8. Determination of Right to Indemnification.

          (a) To the extent that Indemnitee shall have been successful on the merits or otherwise in
defense of any proceeding or any portion thereof or in defense of any issue or matter therein,
including, without limitation, dismissal with or without prejudice, (i) Indemnitee shall be
indemnified against all expenses (including, but not limited to, judgments, fines, ERISA excise
taxes or penalties, and amounts paid in settlement) relating to, arising out of or resulting from
such proceeding or portion thereof or issue or matter therein in accordance with Section 4, and
(ii) no Standard of Conduct Determination (as defined below in Section 8(b)) shall be required.

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          (b) To the extent that the provisions of Section 8(a) are inapplicable to a proceeding that
shall have been finally disposed of and there has been no Change of Control pursuant to Section
8(f), any determination of whether Indemnitee has satisfied any applicable standard of conduct
under Delaware law that is a legally required condition precedent to indemnification of Indemnitee
hereunder against expenses (including, but not limited to, judgments, fines, ERISA excise taxes or
penalties, and amounts paid in settlement) relating to, arising out of or resulting from such
proceeding (a “Standard of Conduct Determination”) shall be made, at the election of Indemnitee,
either (i) by a majority vote of directors of Company who are not and were not a party to the
proceeding in respect of which indemnification is sought by Indemnitee (“Disinterested Directors”),
even if less than a quorum of the Board or, if such Disinterested Directors so direct, by a
majority vote of a committee of Disinterested Directors designated by a majority vote of all
Disinterested Directors, (ii) by Independent Counsel (as defined below in Section 8(f)) in a
written opinion addressed to the Board, a copy of which shall be delivered to Indemnitee, or (iii)
by a panel of three arbitrators, one of whom is selected by Indemnitee, another of whom is selected
by Company and the last of whom is selected by the first two arbitrators so selected. Indemnitee
will cooperate with the person or persons making such Standard of Conduct Determination, including
providing to such person or persons, upon reasonable advance request, any documentation or
information which is not privileged or otherwise protected from disclosure and which is reasonably
available to Indemnitee and reasonably necessary to such determination. Company shall indemnify
and hold harmless Indemnitee against and, if requested by Indemnitee, shall reimburse Indemnitee
for, or advance to Indemnitee, within 20 business days of such request, any and all reasonable
costs, expenses and other amounts (including attorneys’ and experts’ fees and expenses) paid or
payable by Indemnitee in so cooperating with the person or persons making such Standard of Conduct
Determination.

          (c) Company shall use its reasonable best efforts to cause any Standard of Conduct
Determination required under Section 8(b) to be made as promptly as practicable. If (i) the person
or persons empowered or selected under Section 8 to make the Standard of Conduct Determination
shall not have made a determination within 30 days after the later of (A) receipt by Company of
written notice from Indemnitee advising Company of the final disposition of the applicable
proceeding and (B) receipt by Company of written notice from Indemnitee notifying Company of
Indemnitee’s choice of forum pursuant to Section 8(b) (the later of the events specified in clause
(A) and clause (B) being the “Notification Date”) and (ii) Indemnitee shall have fulfilled its
obligations set forth in the second sentence of Section 8(b), then Indemnitee shall be deemed to
have satisfied the applicable standard of conduct; provided that such 30-day period may be extended
for a reasonable time, not to exceed an additional 30 days, in good faith by the person or persons
making such Standard of Conduct Determination if (s)he/they require such additional time for the
obtaining or evaluation of documentation and/or information relating to such determination.

          (d) If Indemnitee shall be entitled to indemnification hereunder against any expenses under
circumstances where (i) no determination of whether Indemnitee has satisfied any applicable
standard of conduct under Delaware law is a legally required condition precedent to indemnification
of Indemnitee hereunder against such expenses, or (ii) Indemnitee has been determined or deemed
pursuant to Section 8(b) or (c) to have satisfied any applicable standard

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of conduct under Delaware law which is a legally required condition precedent to
indemnification of Indemnitee hereunder against such expenses, then Company shall pay such expenses
to Indemnitee within 20 business days after the later of (x) the Notification Date in respect of
the proceeding or portion thereof to which such expenses are related, out of which such expenses
arose or from which such expenses resulted and (y) the earliest date on which the applicable
criterion specified in clause (i) or (ii) above shall have been satisfied.

          (e) If a Standard of Conduct Determination is to be made by Independent Counsel pursuant to
Section 8(b), then the Independent Counsel shall be selected by Indemnitee, and Indemnitee shall
give written notice to Company advising it of the identity of the Independent Counsel so selected.
Company may, within five business days after receiving written notice of selection from Indemnitee,
deliver to Indemnitee a written objection to such selection; provided, however, that such
objection may be asserted only on the ground that the Independent Counsel so selected does not
satisfy the criteria set forth in the definition of “Independent Counsel” in Section 8(f), and the
objection shall set forth with particularity the factual basis of such assertion. Absent a proper
and timely objection, the person or firm so selected shall act as Independent Counsel. If such
written objection is properly and timely made and substantiated, (i) the Independent Counsel so
selected may not serve as Independent Counsel unless and until such objection is withdrawn or a
court has determined that such objection is without merit and (ii) Indemnitee may, at its option,
select an alternative Independent Counsel and give written notice to Company advising Company of
the identity of the alternative Independent Counsel so selected, in which case the provisions of
the two immediately preceding sentences and clause (i) of this sentence shall apply to such
subsequent selection and notice. If applicable, the provisions of clause (ii) of the immediately
preceding sentence shall apply to successive alternative selections. If no Independent Counsel that
is permitted under the foregoing provisions of this Section 8(e) to make the Standard of Conduct
Determination shall have been selected within 30 days after Indemnitee gives its initial notice
pursuant to the first sentence of this Section 8(e) or Company gives its initial notice pursuant to
the second sentence of this Section 8(e), as the case may be, either Company or Indemnitee may
petition the Court of Chancery of the State of Delaware for resolution of any objection which shall
have been made by Company or Indemnitee to the other’s selection of Independent Counsel and/or for
the appointment as Independent Counsel of a person selected by the Court or by such other person as
the Court shall designate, and the person or firm with respect to whom all objections are so
resolved or the person or firm so appointed will act as Independent Counsel. In all events,
Company shall pay all of the reasonable fees and expenses of, and all other reasonable fees and
expenses paid or payable by, the Independent Counsel in connection with the Independent Counsel’s
determination pursuant to Section 8(b), including in connection with any challenge thereto or
defense thereof, and Company shall fully indemnify and hold harmless such counsel against any and
all reasonable expenses (including attorney’s fees), claims, liabilities and damages arising out of
or relating to this Agreement or its engagement pursuant hereto.

          (f) Company agrees that if there is a Change in Control (as defined in Attachment “A” hereto)
of Company, then with respect to all matters thereafter arising concerning the rights of Indemnitee
to indemnity payments and advances of any expenses under this Agreement or any other agreement or
Company by-law now or hereafter in effect relating to proceedings, Company shall seek legal advice
only from Independent Counsel (as defined in Attachment “A”

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hereto) selected by Indemnitee and approved by Company (which approval shall not be
unreasonably withheld). Such counsel, among other things, shall render its written opinion to
Company and Indemnitee as to whether and to what extent Indemnitee would be permitted to be
indemnified under applicable law. In all events, Company shall pay all of the reasonable fees and
expenses of, and all other reasonable fees and expenses paid or payable by, the Independent
Counsel referred to in this Section 8(f) in connection with the foregoing, including in connection
with any challenge to or defense of any action or decision of such Independent Counsel, and
Company shall fully indemnify and hold harmless such counsel against any and all reasonable
expenses (including attorney’s fees), claims, liabilities and damages arising out of or relating to
this Agreement or its engagement pursuant hereto.

     9. Reliance as Safe Harbor; Actions of Others.

          (a) For purposes of any Standard of Conduct Determination, the Indemnitee shall be deemed to
have met the requisite standard of conduct if Indemnitee’s action is based on the records or books
of account of Company, including financial statements, or on information supplied to Indemnitee by
the officers of Company in the course of their duties (provided, if Indemnitee is an officer, then
Indemnitee shall not be entitled to rely upon such data furnished in the course of their duties by
officers who report directly to Indemnitee), or on the advice of legal counsel for Company or on
information or records given or reports made to Company by an independent certified public
accountant or by an appraiser or other expert selected with reasonable care by Company. The
provisions of this Section 9 shall not be deemed to be exclusive or to limit in any way the other
circumstances in which Indemnitee may be deemed to have met the applicable standard of conduct set
forth in this Agreement.

          (b) The knowledge and/or actions, or failure to act, of any director, officer, agent or
employee of Company shall not be imputed to Indemnitee for purposes of determining the right to
indemnification under this Agreement.

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     10. Limitation of Actions and Release of Claims.

No proceeding shall be brought and no cause of action shall be asserted by or on behalf of Company
or any subsidiary against Indemnitee, his or her spouse, heirs, estate, executors or administrators
after the expiration of one year from the act or omission of Indemnitee upon which such proceeding
is based; however, in a case where Indemnitee fraudulently conceals the facts underlying such cause
of action, no proceeding shall be brought and no cause of action shall be asserted after the
expiration of one year from the earlier of (i) the date Company or any subsidiary of Company
discovers such facts, or (ii) the date Company or any subsidiary of Company could have discovered
such facts by the exercise of reasonable diligence. Any claim or cause of action of Company or any
subsidiary of Company, including claims predicated upon the negligent act or omission of
Indemnitee, shall be extinguished and deemed released unless asserted by filing of a legal action
within such period. This Section 9 shall not apply to any cause of action which has accrued on the
date hereof and of which Indemnitee is aware on the date hereof, but as to which Company has no
actual knowledge apart from Indemnitee’s knowledge.

     11. Presumption of Entitlement.

In making any Standard of Conduct Determination or other determination relating to this Agreement,
the person or persons making such determination shall presume that Indemnitee has satisfied the
applicable standard of conduct or otherwise is entitled to the treatment hereunder requested by
Indemnitee, and Company shall have the burden of proof to overcome such presumption and shall
satisfy such burden of proof (and the person or persons making such determination shall be entitled
to reach a conclusion contrary to such presumption) only if Company adduces clear and convincing
evidence to the contrary.

     12. Exceptions.

Notwithstanding any other provision herein to the contrary, Company shall not be obligated,
pursuant to the terms of this Agreement:

          (a) Claims Initiated by Indemnitee. To indemnify or advance expenses to Indemnitee with
respect to proceedings or claims initiated or brought voluntarily by Indemnitee and not by way of
defense, except with respect to proceedings brought to establish or enforce a right to
indemnification under this Agreement or any other statute or law or otherwise as required under
Section 145, but such indemnification or advancement of expenses may be provided by Company in
specific cases if the Board finds it to be appropriate; or

          (b) Lack of Good Faith. To indemnify Indemnitee for any expenses incurred by Indemnitee with
respect to any proceeding instituted by Indemnitee to enforce or interpret this Agreement, if a
court of competent jurisdiction determines that each of the material assertions made by Indemnitee
in such proceeding was not made in good faith or was frivolous; or

          (c) Unauthorized Settlements. To indemnify Indemnitee under this Agreement for any amounts
paid in settlement of a proceeding unless Company consents to such settlement; or

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          (d) Claims by Company for Willful Misconduct. To indemnify or advance expenses to Indemnitee
under this Agreement for any expenses incurred by Indemnitee with respect to any proceeding or
claim brought by Company against Indemnitee for willful misconduct, unless a court of competent
jurisdiction determines that each of such claims by Company was not made in good faith or was
frivolous; or

          (e) Section 16(b). To indemnify Indemnitee for expenses and the payment of profits arising
from the purchase and sale by Indemnitee of Company securities in violation of Section 16(b) of the
Securities Exchange Act of 1934, as amended, or any similar successor statute; or

          (f) Willful Misconduct. To indemnify Indemnitee on account of Indemnitee’s conduct which is
finally adjudged to have been knowingly fraudulent or deliberately dishonest, or to constitute
willful misconduct; or

          (g) Unlawful Indemnification. To indemnify Indemnitee if a final decision by a court having
jurisdiction in the matter shall determine that such indemnification is not lawful; or

          (h) Forfeiture of Certain Bonuses and Profits. To indemnify Indemnitee for the payment of
amounts required to be reimbursed to Company pursuant to Section 304 of the Sarbanes-Oxley Act of
2002, as amended, or any similar successor statute.

     13. Remedies of Indemnitee.

          (a) In the event that (i) a determination is made pursuant to Section 8 of this Agreement
that Indemnitee is not entitled to indemnification under this Agreement, (ii) advancement of
expenses is not timely made pursuant to Section 6 of this Agreement, (iii) no determination of
entitlement to indemnification shall have been made pursuant to Section 8(b) or (f) of this
Agreement within 30 days after receipt by Company of the request for indemnification, (iv) payment
of indemnification is not made pursuant to Section 6 or the last sentence of Section 8(b) of this
Agreement within 20 days after receipt by Company of a written request therefore, or (v) payment of
indemnification pursuant to Sections 4 or 5 of this Agreement is not made within the time set forth
in Section 8(d), Indemnitee shall be entitled to an adjudication by a court of his entitlement to
such indemnification or advancement of expenses. Alternatively, Indemnitee, at his option, may
seek an award in arbitration to be conducted by a single arbitrator pursuant to the Commercial
Arbitration Rules of the American Arbitration Association. Company shall not oppose Indemnitee’s
right to seek any such adjudication or award in arbitration.

          (b) In the event that a determination shall have been made pursuant to Section 8 of this
Agreement that Indemnitee is not entitled to indemnification, any judicial proceeding or
arbitration commenced pursuant to this Section 13 shall be conducted in all respects as a de novo
trial, or arbitration, on the merits and Indemnitee shall not be prejudiced by reason of that
adverse determination. In any judicial proceeding or arbitration commenced pursuant to this
Section 13 Company shall have the burden of proving Indemnitee is not entitled to indemnification
or advancement of expenses, as the case may be.

          (c) If a determination shall have been made pursuant to Section 8 of this Agreement that
Indemnitee is entitled to indemnification, Company shall be bound by such determination in any

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judicial proceeding or arbitration commenced pursuant to this Section 13, absent (i) a misstatement
by Indemnitee of a material fact, or an omission of a material fact necessary to make Indemnitee’s
statement not materially misleading, in connection with the request for indemnification, or (ii) a
prohibition of such indemnification under applicable law.

          (d) Company shall be precluded from asserting in any judicial proceeding or arbitration
commenced pursuant to this Section 13 that the procedures and presumptions of this Agreement are
not valid, binding and enforceable and shall stipulate in any such court or before any such
arbitrator that Company is bound by all the provisions of this Agreement. Company shall indemnify
Indemnitee against any and all expenses and, if requested by Indemnitee, shall (within ten days
after receipt by Company of a written request therefore) advance such expenses to Indemnitee, which
are incurred by Indemnitee in connection with any action brought by Indemnitee for indemnification
or advance of expenses from Company under this Agreement or under any directors’ and officers’
liability insurance policies maintained by Company, regardless of whether Indemnitee ultimately is
determined to be entitled to such indemnification, advancement of expenses or insurance recovery,
as the case may be.

     14. Nonexclusivity.

The provisions for indemnification and advancement of expenses set forth in this Agreement shall
not be deemed exclusive of any other rights which Indemnitee may have under any provision of law,
Company’s Certificate of Incorporation or Bylaws, the vote of Company’s stockholders or
disinterested directors, other agreements, or otherwise, both as to actions in his or her official
capacity and to actions in another capacity while occupying his or her position as an agent of
Company. Indemnitee’s rights hereunder shall continue after Indemnitee has ceased acting as an
agent of Company, subject to Section 21.

     15. Interpretation of Agreement.

It is understood that the parties hereto intend this Agreement to be interpreted and enforced so as
to provide indemnification to Indemnitee to the fullest extent now or hereafter permitted by law.

     16. Severability.

If any provision or provisions of this Agreement shall be held to be invalid, illegal or
unenforceable for any reason whatsoever, (i) the validity, legality and enforceability of the
remaining provisions of the Agreement (including, without limitation, all portions of any
paragraphs of this Agreement containing any such provision held to be invalid, illegal or
unenforceable, that are not themselves invalid, illegal or unenforceable) shall not in any way be
affected or impaired thereby, and (ii) to the fullest extent possible, the provisions of this
Agreement (including, without limitation, all portions of any paragraphs of this Agreement
containing any such provision held to be invalid, illegal or unenforceable, that are not themselves
invalid, illegal or unenforceable) shall be construed so as to give effect to the intent manifested
by the provision held invalid, illegal or unenforceable and to give effect to Section 4 hereof.

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     17. Modification and Waiver; Automatic Revisions.

No supplement, modification or amendment of this Agreement shall be binding unless executed in
writing by both of the parties hereto. No waiver of any of the provisions of this Agreement shall
be deemed or shall constitute a waiver of any other provision hereof (whether or not similar) nor
shall such waiver constitute a continuing waiver. In the event Company enters into an
indemnification agreement with any person after the date hereof which provides for any greater
degree or higher amount of, more readily available, indemnification to such person than is provided
herein, then the terms of this Agreement shall be deemed automatically revised (without need for
formal acquiescence by Company) to provide such improved indemnification to Indemnitee.

     18. Notice.

All notices, requests, demands and other communications under this Agreement shall be in writing
and shall be deemed duly given (i) if delivered by hand and receipted for by the party addressee or
(ii) if mailed by certified or registered mail with postage prepaid, on the third business day
after the mailing date:

          (a) If to Indemnitee, to the address at his signature.

          (b) If to Company, to:

Hancock Fabrics, Inc.

One Fashion Way

Baldwyn, MS 38824

Addresses may be subsequently modified by written notice.

     19. Governing Law; Consent to Jurisdiction.

This Agreement shall be governed exclusively by and construed according to the laws of the State of
Delaware, as applied to contracts between Delaware residents entered into and to be performed
entirely within Delaware. Company and Indemnitee each hereby irrevocably consent 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.

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     20. Specific Performance.

Company and Indemnitee recognize that if any provision of this Agreement is violated by Company,
Indemnitee may be without an adequate remedy at law. Accordingly, in the event of any such
violation, Indemnitee shall be entitled, if Indemnitee so elects, to institute proceedings, either
in law or at equity, to obtain damages, to enforce specific performance, to enjoin such violation,
or to obtain any relief or any combination of the foregoing as Indemnitee may elect it to pursue.

     21. Effectiveness of Agreement; Duration; Complete Agreement.

This Agreement shall be effective as of the date set forth on the first page and may apply to acts
or omissions of Indemnitee which occurred prior to such date if Indemnitee was an officer,
director, employee, or other agent of Company, or was serving at the request of Company as a
director, officer, employee, or agent of another corporation, partnership, joint venture, trust, or
other enterprise at the time such act or omission occurred. This Agreement shall terminate upon
the later of: (a) ten years after the Indemnitee has ceased to be an agent of Company; and (b) the
final termination of all then pending or threatened proceedings to which the Indemnitee may be
subject. The indemnification provided under this Agreement shall continue as to the Indemnitee even
though he may have ceased to be a director or officer of Company. This Agreement shall be binding
upon Company and its successors and assigns and shall inure to the benefit of the Indemnitee and
his spouse, assigns, heirs, devises, executors, administrators or other legal representatives.
This Agreement is the complete agreement of the parties with respect to the subject matter hereof,
supersedes any and all prior agreements between the parties with respect to such subject matter,
and such prior agreements shall not apply to any claims that have not been made upon Indemnitee and
communicated to Company prior to the date hereof.

     22. Contribution.

To the fullest extent permissible under applicable law, if the indemnification provided for in this
Agreement is unavailable to Indemnitee for any reason whatsoever, Company, in lieu of indemnifying
Indemnitee, shall contribute to the amount incurred by Indemnitee, whether for judgments, fines,
penalties, excise taxes, amounts paid or to be paid in settlement and/or for expenses, in
connection with any claim relating to an indemnifiable event under this Agreement, in such
proportion as is deemed fair and reasonable in light of all of the circumstances of such proceeding
in order to reflect (i) the relative benefits received by Company and Indemnitee as a result of the
event(s) and/or transaction(s) giving cause to such proceeding; and/or (ii) the relative fault of
Company (and its directors, officers, employees and agents) and Indemnitee in connection with such
event(s) and/or transaction(s).

     23. Subrogation.

In the event of payment to Indemnitee under this Agreement, Company shall be subrogated to the
extent of such payment to all of the rights of recovery of Indemnitee, who shall execute all papers
required and shall do everything that may be necessary to secure such rights, including the
execution of such documents necessary to enable Company effectively to bring suit to enforce such
rights.

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     EXECUTED as of the date first above written.

	 	 	 	 	 	 	 
	 	 	HANCOCK FABRICS, INC.
	 
	 	 	 	 	 	 
	 

	 	By:	 	 	 	 
	 	 	 	 	 
	 
	 

	 	Name:	 	 	 	 
	 	 	 	 	 
	 
	 

	 	Title:	 	 	 	 
	 	 	 	 	 
	 
	 

	 	Date:	 	 	 	 
	 	 	 	 	 
	 
	 	 	 	 	 	 
	 
	 	 	 	 	 	 
	 	 	 
	 
	 	 	 	 	 	 
	 	 	Name of Indemnitee:	 	 
	 

	 	 	 	 	 	 
	 
	 

	 	Date:	 	 	 	 
	 	 	 	 	 
	 
	 	 	Address:	 	 
	 
	 	 	 	 	 	 
	 
	 	 	 
	 
	 	 	 	 	 	 
	 
	 	 	 

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ATTACHMENT A

DEFINITION OF “CHANGE IN CONTROL”

“Change in Control” means the occurrence after the date of this Agreement of any of the following
events: (i) any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of
the Exchange Act) (a “Person”), is or becomes the beneficial owner (within the meaning of Rule
13d-3 promulgated under the Exchange Act), directly or indirectly, of 50% or more of the total
voting power of the then outstanding Voting Stock; provided, however, that the following events
shall not constitute or result in a Change in Control: (A) any acquisition of Voting Stock directly
from Company, (B) any acquisition of Voting Stock by Company, (C) any acquisition of Voting Stock
by any employee benefit plan (or related trust, or any trustee or other fiduciary thereof in such
capacity) sponsored or maintained by Company or any Subsidiary or (D) any acquisition of Voting
Stock by any Person pursuant to a Business Combination that complies with clauses (A), (B) and (C)
of Section (iii) below; or (ii) during any two-year period, individuals who, as of the beginning of
such period, constitute the Board (the “Incumbent Directors”) cease for any reason (other than
death or disability) to constitute at least a majority of the Board; provided, however, that any
individual becoming a director subsequent to the date hereof whose election, or nomination for
election by Company’s stockholders, was approved by a vote of at least a majority of the then
Incumbent Directors (either by a specific vote or by approval of the proxy statement of Company in
which such person is named as a nominee for director, without objection of Company, to such
nomination) shall be considered as though such individual were an Incumbent Director, but excluding
for this purpose, any such individual whose initial assumption of office occurs as a result of an
actual or threatened election contest (as described in Rule 14a-12(c) of the Exchange Act) with
respect to the election or removal of directors or other actual or threatened solicitation of
proxies or consents by or on behalf of a Person other than the Board; or (iii) consummation of a
reorganization, merger or consolidation, or sale or other disposition of all or substantially all
of the assets, of Company (a “Business Combination”), unless, in each case, immediately following
such Business Combination, (A) all or substantially all of the individuals and entities who were
the beneficial owners of Voting Stock of Company immediately prior to such Business Combination
beneficially own, directly or indirectly, more than 50% of the combined voting power of the then
outstanding voting securities entitled to vote generally in the election of directors of the entity
resulting from such Business Combination (including, without limitation, an entity which as a
result of such transaction owns Company or all or substantially all of Company’s assets either
directly or through one or more subsidiaries) in substantially the same proportions relative to
each other as their ownership, immediately prior to such Business Combination, of the Voting Stock
of Company, (B) no Person (excluding any entity resulting from such Business Combination or any
employee benefit plan (or related trust, or any trustee or other fiduciary thereof in such
capacity) sponsored or maintained by Company, any Subsidiary or such entity resulting from such
Business Combination) beneficially owns, directly or indirectly, voting securities representing 15%
or more of the combined voting power of the then outstanding voting securities entitled to vote
generally in the election of directors of the entity resulting from such Business Combination
except to the extent such ownership existed prior to the Business Combination and (C) at least a
majority of the members of the Board of the entity resulting from such Business Combination were
Incumbent Directors
 at the time of the execution of the initial agreement or of the action of the
Board providing for such Business Combination; or (iv) approval by the stockholders of

 

 

Company of a plan of complete liquidation or dissolution of Company, except pursuant to a Business
Combination that complies with clauses (A), (B) and (C) of Section (iii) above. For purposes of
this Section, the following terms shall have the following meanings:

               (i) “Exchange Act” shall mean the Securities Exchange Act of 1934, as amended, and the rules
and regulations promulgated thereunder.

               (ii) “Subsidiary” means an entity in which Company directly or indirectly beneficially owns
50% or more of the outstanding Voting Stock.

               (iii) “Voting Stock” means securities entitled to vote generally in the election of
directors.

               (iv) “Independent Counsel” means a law firm, or a member of a law firm, that is experienced
in matters of corporation law and neither presently is, nor in the past five years has been,
retained to represent (i) Company or Indemnitee in any matter material to either such party (other
than with respect to matters concerning other indemnitees under similar [i.e., non-Hancock]
indemnification agreements) or (ii) any other party to the proceeding giving rise to
indemnification hereunder. Notwithstanding the foregoing, the term “Independent Counsel” shall not
include any person who, under the applicable standards of professional conduct then prevailing,
would have a conflict of interest in representing either Company or Indemnitee in an action to
determine Indemnitee’s rights under this Agreement.EX-10.10

EXHIBIT 10.10

AMENDED AND RESTATED EMPLOYMENT AGREEMENT

     This AMENDED AND RESTATED EMPLOYMENT AGREEMENT is made and entered into by and between HANCOCK
FABRICS, INC., a Delaware corporation (“Company”), and JANE F. AGGERS (“Executive”) to be effective
for all purposes as of August 1, 2008 (the “Effective Date”).

     WHEREAS, Company wishes to employ Executive as Chief Executive Officer (“CEO”) and upon the
terms and conditions hereinafter set forth, and Executive desires to serve in such capacities upon
the terms and conditions hereinafter set forth; Company and Executive first entered into this
Employment Agreement as of December 15, 2004, and amended their agreement as of December 7, 2005
and hereby again amend their agreement pursuant to this Amended and Restated Employment Agreement;

     NOW, THEREFORE, in consideration of the foregoing and of the mutual covenants herein, and for
other good and valuable consideration the receipt and sufficiency of which are hereby acknowledged,
the parties, intending to be legally bound, hereby agree as follows:

     Section 1. Position and Duties. Commencing on the Effective Date, Executive shall be
employed by Company as President and CEO, reporting to Company’s Board of Directors (the “Board”).
As its CEO, Executive agrees to devote her full business time, energy and skill to her duties at
the Company. These duties shall include all those duties customarily performed by a CEO as well as
any duties as may be reasonably determined and specified in the future by the Board. During the
term of Executive’s employment, Executive shall be permitted to serve on boards of directors of
for-profit or not-for-profit entities provided that the Board has approved such service in writing,
and only so long as such service does not conflict with or adversely affect the performance of
Executive’s duties to Company under this Agreement. If the Board requests Executive to resign from
such position at any time, Executive shall resign immediately. Executive has been elected to the
Board as of the Effective Date.

     Section 2. Term of Employment. This Agreement shall remain in effect for a period of
30 months from the Effective Date, subject to Executive’s continued employment with the Company
(the “Initial Term”). Unless notice is given by either party as provided in this Section 2, the
term of Executive’s employment with Company will be extended automatically for successive
additional one -day periods after the expiration of the Initial Term. Such automatic extension of
the term of this Agreement will become inapplicable at such time as either the Executive provides
at least 45 days’ prior written notice or Company provides at least 15 days’ prior written notice
that it does not agree to such automatic extension . After such notice has been given by either
Executive or Company, the term of this Agreement will remain in effect for 30 months after the
effective date of the notice is given as provided in Section 10(c) (together with the Initial Term,
such 30-month period following notice is referred to in this Agreement as the “Term”). Any other
extension or modification of this Agreement shall be subject to future

1

 

agreement by the parties. Upon the termination of Executive’s employment for any reason, neither
party shall have any further obligation or liability under this Agreement to the other, except as
explicitly set forth herein.

     Section 3. Compensation. Executive shall be compensated by Company for her services as
follows:

     (a) Base Salary. As CEO, Executive shall be paid a monthly Base Salary of $37,500 per month
($450,000 on an annualized basis), subject to all applicable withholding, in accordance with
Company’s normal payroll procedures. Executive’s Base Salary shall be in effect during the Term of
this Agreement, and, in the sole discretion of the Board, may be increased from time to time during
the Term of this Agreement.

     (b) Benefits. Executive shall have the right, on the same basis as other employees of Company,
to participate in and to receive benefits under any of Company’s employee benefit plans, as such
plans may be modified from time to time. In addition, Executive shall be entitled to the specific
benefits set out on Enclosure 1, which is attached hereto and incorporated herein by reference.

     (c) Performance Bonuses. Executive shall have the opportunity to earn a performance bonus in
accordance with Company’s Bonus Plan (the “Bonus Plan”), as such plan may be modified or supplanted
by the Board over time. Bonus criteria for Executive shall be established by the Board in
consultation with Executive.

     Section 4. Equity Compensation Grants. All equity compensation grants, including, but
not limited to, stock options and restricted stock (“Equity Grants”) shall be governed by the terms
of an agreement setting forth the terms and conditions of the Equity Grant and the terms of the
equity compensation plan of Company pursuant to which such Equity Grants are made to Executive;
provided that . notwithstanding any other provision to the contrary contained in any such equity
compensation plan, each such agreement shall be deemed to include each of the additional provisions
set forth below. The rights provided by this Section 4 shall be in addition to any rights granted
to Executive under any such agreement and plan. In the event of an inconsistency or conflict
between the provisions of this Section 4 or Section 5 and another agreement or plan of the Company,
the provisions of this Section 4 or Section 5, as applicable, shall apply and be given priority.

     (a) Acceleration of Equity Compensation Vesting Upon Non-Assumption. In the event of a Change
in Control, each Equity Grant held by Executive, to the extent then outstanding, shall become fully
vested and exercisable immediately prior to but conditioned upon the consummation of the Change in
Control, except to the extent that the surviving, continuing, successor, or purchasing entity or
parent thereof, as the case may be (the “Acquiror”), (i) assumes or continues in effect Company’s
rights and obligations under such Equity Grant, (ii) substitutes for such Equity Grant a
substantially equivalent right for the Acquiror’s stock or (iii) replaces such Equity Grant with a
cash incentive program pursuant to which Executive is to be paid for each share of Company’s common
stock that is subject to such option or award immediately prior to the consummation of the Change
in Control and in accordance with the

2

 

same vesting schedule applicable to such Equity Grant (including any subsequent acceleration of
vesting determined under any other Section of this Agreement) an amount equal to the excess of the
fair market value of the consideration paid by the Acquiror for each share of the common stock of
Company outstanding immediately prior to the consummation of the Change in Control over the per
share exercise price of such option.

     (b) Acceleration of Equity Compensation Grant Vesting Upon an Involuntary Termination During a
Change in Control Period. If Executive’s employment with Company terminates as a result of an
Involuntary Termination During a Change in Control Period, then each Equity Grant held by
Executive, to the extent then outstanding, (i) shall become fully vested and exercisable (and any
forfeiture provision shall lapse; provided, however, that the Equity Grant may expire in the
interim in accordance with its terms) in full as of the passing of both (x) the date of termination
of Executive’s employment and (y) the last day following Executive’s execution of the Release on
which Executive may revoke such Release under its terms, and (ii) shall remain exercisable in full
until the earlier of (x) the expiration of a period of three months following the date on which
Executive’s employment terminated or (y) the expiration of the term of such Equity Grant.

     (c) Acceleration of Equity Compensation Grant Vesting Upon Death. If Executive’s employment
with Company terminates due to Executive’s death, then each Equity Grant held by Executive, to the
extent then outstanding, shall become fully vested and exercisable (and any forfeiture provision
shall lapse) in full as of the date of Executive’s death. The Equity Grants shall be exercisable by
the estate of Executive in accordance with the time periods and procedures set forth in the Equity
Grant agreement.

     Section 5. Effect of Termination of Employment.

     (a) Voluntary Termination, Death or Disability. (x) In the event of Executive’s voluntary
Separation from Service, Executive shall be entitled to no compensation or benefits from Company
other than those earned under Section 3 through the date of her Separation From Service. . In
the event that Executive’s Separation From Service is a result of her death or disability,
Executive shall be entitled to a pro-rata share of the Bonus, if any, provided for in Section 3(c)
(presuming performance meeting target performance goals) in addition to all compensation and
benefits earned under Section 3 through the date of Separation From Service.

     (b) Termination for Cause. If Executive’s employment is terminated by Company for Cause,
Executive shall be entitled to no compensation or benefits from Company other than those earned
under Section 3 through the date of her termination and, shall be entitled to exercise or retain,
as the case may be, shares of Company stock subject to each stock option, restricted stock award
or other Company stock-based award granted to Executive, only to the extent such awards have
vested through the date of her employment termination. In the event that Company terminates
Executive’s employment for Cause, Company shall provide written notice to Executive of that fact
prior to, or concurrently with, the termination of employment. Failure to provide written notice
that Company contends that the termination is for Cause shall constitute a waiver of any contention
that the termination was for Cause, and the termination shall be

3

 

irrebuttably presumed to be a termination without Cause. However, if, within thirty (30) days
following the termination, Company first discovers facts that would have established Cause, and
those facts were not known by Company at the time of the termination, then Company shall provide
Executive with written notice, including the facts establishing that the purported Cause was not
known at the time of the termination, and Company will pay no severance.

     (c) Involuntary Termination Without Cause During Change in Control Period. If Executive has a
Separation From Service with Company as a result of an Involuntary Termination During a Change in
Control Period, then, in addition to any other benefits described in the Agreement, Executive shall
receive the following (collectively with the acceleration of equity provisions under Section 4, the
“Change in Control Severance Benefits”):

          (i) all compensation and benefits earned under Section 3 through the date of Executive’s
Separation from Service;

          (ii) a pro-rata share of the Bonus provided for in Section 3(c) if, and only to the extent
that, Company has met its target performance objectives for the year to date;

          (iii) a lump sum payment equivalent to two and one-half (2 1/2) years’ Base Salary (as it was
in effect immediately prior to the Change in Control);

          (iv) a lump sum payment equivalent to two and one-half (2 1/2) times the bonus paid under the
Bonus Plan for the year immediately prior to the year in which the Change in Control occurred;

          (v) a lump sum payment equal to thirty (30) times the monthly cost of coverage for the Company
sponsored medical, life and disability insurance in effect for Executive immediately prior to
Executive’s Separation From Service; however,

          (vi) if any payments to the Executive in connection with a Change of Control would be
subject to the excise tax under Sections 280G or 4999 of the Internal Revenue Code on excess
parachute payments, the Company will, in general, “gross up” the Executive’s compensation to offset
the excise tax, except that (a) if the aggregate parachute payments that would otherwise be made to
the Executive do not exceed 110% of the maximum amount of parachute payments that can be made
without triggering the excise tax, the parachute payments to the Executive will be reduced to the
extent necessary to avoid the imposition of the excise tax and no “gross up” will be paid, and (b)
if the aggregate parachute payments that would otherwise be made to the Executive do exceed 110% of
the maximum amount of parachute payments that can be made without triggering the excise tax, the
full amount of those parachute payments will be made, the Executive will have to individually bear
the excise tax allocable to 10% of the aggregate total of parachute payments, and the Company will
“gross up” the Executive’s compensation to offset the excise taxes other than that portion that is
allocable to 10% of the aggregate total of parachute payments. In the event that the Change in
Control Severance Benefits exceed the minimum amount required to impose the excise tax penalty of
Section 4999 of the Code (the “Threshold 280G Amount”) by an amount equal to or less than ten
percent (10%) of the

4

 

Threshold 280G Amount, then the Change in Control Severance Benefits shall be reduced so that they
total $1.00 less than the Threshold 280G Amount.

     (d) Involuntary Termination Without Cause Not in a Change in Control Period. In the event
that Executive’s Separation From Service with Company occurs during the Term as a result of an
Involuntary Termination Not in a Change in Control Period, then Executive shall receive the
following benefits:

          (i) all compensation and benefits earned under Section 3 through the date of Executive’s
Separation From Service;

          (ii) the Base Salary due Executive through the remaining Term of this Agreement, which amounts
shall be payable monthly during the remaining portion of such Term;

          (iii) a pro-rata share of the Bonus provided for in Section 3(c) if, and only to the extent
that, Company has met its target performance objectives for the year to date;

          (iv) reimbursement, payable monthly, for the cost of medical, life and disability insurance
coverage at a level equivalent to that provided by Company for a period of the earlier of: (i) the
remaining Term of this Agreement, or (ii) the time Executive begins alternative employment. It
shall be the obligation of Executive to inform Company that new employment has been obtained;

          (v) the Equity Grants shall continue in force and shall vest for the benefit of Executive
during the remaining Term of this Agreement, notwithstanding any language to the contrary in any
Equity Grant or any applicable plan of the Company.

     (e) Resignation from Positions. In the event that Executive has a Separation From Service with
Company for any reason, on the effective date of the Separation From Service Executive shall
simultaneously resign from each position she holds on the Board and/or the board of directors of
any of Company’s affiliated entities and any position Executive holds as an officer of Company or
any of Company’s affiliated entities.

     (f) Special Provisions re Payments to Executive. The amounts payable to Executive under
subsections (c)(ii), (iii), (iv), and (v) shall be paid to Executive in a lump sum sixty (60)
days following the Executive’s Separation From Service, provided Executive has executed the Release
and the date by which Executive may revoke such Release has expired within such sixty (60) day
period. If Executive has not executed such Release and the period for revocation thereof has not
expired within sixty (60) days after the date on which the involuntary Separation From Service
occurs, then Company shall not be obligated to make such lump sum payment. The amounts payable
under subsection (d)(ii) and (iv) shall be paid monthly during the remaining Term, beginning sixty
(60) days after Executive’s Separation From Service (with any amount otherwise payable within such
sixty (60) day period payable at the expiration of the sixty (60) day period), and the amount
payable under (d)(iii) normally shall be paid sixty (60) days after the Separation From Service,
provided Executive has in each case executed the Release and the date by which Executive may revoke
such Release has expired within such sixty (60) day period.

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Notwithstanding any other provision of this Agreement to the contrary, in the case of welfare
benefit coverage provided to Executive under this paragraph, or in the case of any other
compensation which is subject to Code Section 409A, if Executive is a Specified Employee at the
time of a Separation From Service and the payment or provision of such compensation is made as a
result of the Separation From Service, then no portion of such benefits or other such compensation
shall be made before the date that is six (6) months after the date of the Separation from Service
or, if earlier, the date of death of the Specified Employee. Any compensation which would
otherwise be paid within such six (6) month period after a Separation From Service shall be paid on
the date which is six (6) months and one day after the Separation From Service, or the first
business day thereafter. The provisions and application of this paragraph will be construed and
applied in a manner consistent with Code Section 409A and Treasury Regulations of other guidance
issued thereunder.

     Section 6. Certain Definitions. For the purposes of this Agreement, the following
capitalized terms shall have the meanings set forth below:

     (a) “Applicable Termination Anniversary” shall mean (i) in the event of an Involuntary
Termination During a Change in Control Period, the date thirty (30) months after the date of
termination or (ii) in the event of an Involuntary Termination Not in a Change in Control Period,
the remaining Term of this Agreement, or (iii) in the event of voluntary termination by Executive,
the date two (2) years after the date of termination.

     (b) “Business” shall mean (i) the retail and wholesale fabric business, (ii) the business of
selling fabrics, yarn and related accessories to sewing, knitting, quilting and home decorating
retail customers and at wholesale to independent retailers, and (iii) any other commercial
enterprise conducted by Company during the term of this Agreement.

     (c) “Cause” shall mean any of the following:

          (i) Executive’s theft, dishonesty, willful misconduct, breach of fiduciary duty for personal
profit, or falsification of any employment or Company records;

          (ii) Executive’s willful, reckless or grossly negligent violation of any law, rule, or
regulation (other than traffic violations or similar offenses) or final cease-and-desist order or
commission of an act that involves moral turpitude;

          (iii) Executive’s intentional failure to perform stated duties or to comply with a resolution
of the Board;

          (iv) Executive’s improper disclosure of Company’s confidential or proprietary information;

          (v) any breach by Executive of Company’s Insider Trading Policy (as it may be amended from
time to time);

6

 

          (vi) any material breach by Executive of Company’s Code of Business Conduct and Ethics (as it
may be amended from time to time), which breach shall be deemed “material” if it results from an
intentional, reckless or grossly negligent act or omission by Executive and has a detrimental
effect on Company’s reputation or business; or

          (vii) any material breach by Executive of this Agreement, which breach, if curable, is not
cured within thirty (30) days following written notice of such breach from Company.

     (d) “Change in Control” shall mean the occurrence of any of the following with respect to the
Company at a time when the Company is the “relevant corporation” referenced in Treasury Regulation
1.409A-3(i)(5)(ii):

          (i) Change in Ownership. The date subsequent to the Effective Date that any one
person, or more than one person acting as a group, acquires ownership of stock of the Company that,
together with stock held by such person or group, constitutes more than fifty percent (50%) of the
total fair market value or total voting power of the stock of the Company.

          (ii) Change in Effective Control. The date on which a majority of members of the Board is
replaced during any 12-month period by directors whose appointment or election is not endorsed by a
majority of the members of the Company’s Board of Directors before the date of the appointment or
election.

          (iii) Change in the Ownership of a Substantial Portion of Company’s Assets. The date
that any one person, or more than one person acting as a group, acquires (or has acquired during
the 12-month period ending on the date of the most recent acquisition by such person or persons)
assets from the Company that have a total gross fair market value equal to or more than fifty
percent (50%) of the total gross fair market value of all of the assets of the Company immediately
before such acquisition or acquisitions. For this purpose, gross fair market value means the value
of the assets of the Company, or the value of the assets being disposed of, determined without
regard to any liabilities associated with such assets.

          (iv) Rules of Construction and Application. The provisions of this definition shall be
construed and applied by the Incumbent Directors, in a manner consistent with the provisions and
rules of application set forth in Treasury Regulation 1.409A-3(i)(5), as amended or supplemented
from time to time by guidance issued by the U. S. Department of the Treasury, or any successor to
same. Any such determination by the Incumbent Directors shall be final, binding and conclusive.

7

 

     (e) “Change in Control Period” shall mean the period commencing on the earlier of: (i) thirty
(30) days prior to the date of consummation of the Change in Control (provided the Change in
Control occurs); (ii) the date of the first public announcement of a definitive agreement that
would result in a Change in Control (even though still subject to approval by Company’s
stockholders and other conditions and contingencies); and (iii) the date of the public announcement
of a tender offer that is not approved by the Incumbent Directors and ending on the day prior to
the two (2) year anniversary date of the consummation of the Change in Control.

     (f) “Confidential Information” shall mean all non-public information respecting Company’s
business, including, but not limited to, its services, pricing, costs, scheduling, products,
research and development, processes, customer lists and contact information, marketing plans and
strategies, financing plans and personnel, financial information, projections, and acquisition
strategies and initiatives but excluding information (i) that was known to Executive concerning
the industry generally or the Company, based on Executive’s extensive experience in the industry
prior to Executive’s employment by the Company, and (ii) that is, or becomes, available to the
public through no fault of Executive..

     (g) “Good Reason During a Change in Control Period” shall mean any of the following
conditions, first occurring during a Change in Control Period:

          (i) a decrease in Executive’s Base Salary and/or a decrease in Executive’s potential
performance Bonus (as a multiple of Executive’s Base Salary) under the Bonus Plan or employee
benefits other than (x) as part of any across-the-board reduction applying to all senior executives
and (y) not resulting in those senior executives receiving lesser benefits than similarly situated
executives of an acquiror;

          (ii) a material, adverse change in Executive’s title, authority, responsibilities or duties,
as measured against those immediately prior to such change. For purposes of this subsection, in
addition to any other change in title, authority, responsibilities or duties, the following changes
shall not constitute an event of “Good Reason During a Change in Control Period”: (i) an individual
who held a position in an independent, publicly held company prior to the Change in Control holds a
position in a subsidiary company following the Change in Control; and (ii) an individual who
reported directly to the Non-Executive Chairman or board of directors of a publicly held company
prior to the Change in Control reports to an individual or entity that is not, respectively, the
Non-Executive Chairman or Board of Directors of a publicly held company.

          (iii) the relocation of Executive’s principal workplace to a location that is greater than
fifty (50) miles from Executive’s original workplace or from any workplace to which Executive has
voluntarily relocated;

          (iv) any material breach by Company of any provision of this Agreement, which breach is not
cured within thirty (30) days following written notice of such breach from Executive;

8

 

          (v) any failure of Company to obtain the assumption of this Agreement by any successor or
assign of Company; or

          (vi) any purported termination of Executive’s employment for “material breach of contract”
which is purportedly effected without providing the “cure” period, if applicable, described in
subsection (vii) of the definition of “Cause.”

     (h) “Good Reason Not in a Change in Control Period” shall mean any of the following conditions
first occurring outside of a Change in Control Period and occurring without Executive’s written
consent:

          (i) a decrease in Executive’s total cash compensation opportunity (adding Base Salary and
Bonus) of greater than 20%;

          (ii) a material, adverse change in Executive’s title, authority, responsibilities or duties,
as measured against those immediately prior to such change. For purposes of this subsection, a
material, adverse change shall not occur merely by a change in reporting relationship; or

          (iii) any material breach by Company of any provision of this Agreement, which breach is not
cured within thirty (30) days following written notice of such breach from Executive;

     (i) “Incumbent Directors” shall mean members of the Board who either (i) are members of the
Board as of the Effective Date, or (ii) are elected, or nominated for election, to the Board with
the affirmative vote of at least a majority of the Incumbent Directors at the time of such election
or nomination (but shall not include an individual whose election or nomination is in connection
with an actual or threatened proxy contest relating to the election of members of the Board).

     (j) “Involuntary Termination During a Change in Control Period” shall mean the occurrence of
either of the following during a Change in Control Period:

          (i) initiation by Company of Executive’s Separation From Service with Company for any reason
other than Cause; or

          (ii) Executive’s Separation From Service by resignation for Good Reason During a Change in
Control Period within six (6) months following the occurrence of the event constituting Good Reason
During a Change in Control Period that has not been cured.

For the purposes of any determination regarding the existence of Good Reason During a Change
in Control Period hereunder, any claim by Executive that Good Reason During a Change in
Control Period exists shall be presumed to be correct if the Board, acting in good faith,
affirms such determination by a vote of not less than two-thirds of its entire membership.
The effective date of any Involuntary Termination During a Change in Control Period shall be
the date of notification to Executive of the Separation From

9

 

Service by Company or the date of notification to Company of the resignation by Executive
for Good Reason During a Change in Control Period.

     (k) “Involuntary Termination Not in a Change in Control Period” shall mean the occurrence of
either of the following occurring outside a Change in Control Period:

          (i) initiation by Company of Executive’s Separation From Service with Company for any reason
other than Cause; or

          (ii) Executive’s Separation From Service by resignation for Good Reason Not in a Change in
Control Period within six (6) months following the occurrence of the event constituting Good Reason
Not in a Change in Control Period that has not been cured.

For the purposes of any determination regarding the existence of Good Reason Not in a Change
in Control Period hereunder, Executive shall bear the burden of demonstrating that an event
of Good Reason Not in a Change in Control Period has occurred. Only the Board, acting by
simple majority, may determine that an event of Good Reason Not in a Change in Control
Period has occurred; the Board must act within twenty (20) business days of such
notification, or Executive’s claim shall be deemed valid. The effective date of any
Involuntary Termination Not in a Change in Control Period shall be the date of notification
to Executive of the Separation From Service by Company or the date of notification to
Company of the resignation by Executive for Good Reason Not in a Change in Control Period.

     (l) “Release” shall mean a general release substantially in the form as Enclosure 2 hereof.

     (m) “Specified Employee” means a service provider who, as of the date of the service
provider’s Separation from Service, is a key employee of a service recipient any stock of which is
publicly traded on an established securities market or otherwise. A key employee is any individual
who is described in Code Section 416(i)(1)(A)(i), (ii), or (iii) (applied in accordance with the
Regulations thereunder and disregarding section 416(i)(5)) at any time during the 12-month period
ending on a Specified Employee identification date. The provisions and application of this
paragraph will be construed and applied in a manner consistent with Code Section 409A and Treasury
Regulations of other guidance issued thereunder.

     (n) “Separation From Service” means the time at which the parties reasonably anticipate that
no further services will be performed by Executive after a certain date, or that the level of bona
fide services Executive would perform after such date (whether as an employee or as an independent
contractor) would permanently decrease to no more than 20 percent of the average level of bona fide
services performed (whether as an employee or an independent contractor) by the individual over the
immediately preceding 36-month period. If Executive provides services both as an employee and as an
independent contractor, Executive must separate from service both as an employee and as an
independent contractor to be treated as having a Separated From Service. If Executive ceases
providing services as an employee and begins providing services as an independent contractor,
Executive will not be considered to have a Separation From Service until Executive has ceased
providing services in both capacities. The

10

 

provisions and application of this paragraph will be construed and applied in a manner consistent
with Code Section 409A and Treasury Regulations of other guidance issued thereunder.

     Section 7. Confidentiality; Non-Compete; Non-Solicitation; Nondisparagement.

     (a) While employed by Company and through the appropriate Applicable Termination Anniversary,
Executive shall not disclose any Confidential Information either directly or indirectly, to anyone
(other than appropriate Company employees and advisors), or use such information for her own
account, or for the account of any other person or entity, without the prior written consent of
Company or except as required by law. This confidentiality covenant has no temporal or geographical
restriction. Upon termination of this Agreement, Executive shall promptly supply to Company all
property and any other tangible product or document that has been produced by, received by or
otherwise submitted to Executive during or prior to her term of employment, and shall not retain
any copies thereof.

     (b) Executive acknowledges that her services are of special, unique and extraordinary value to
Company. Accordingly, Executive shall not at any time prior to the Applicable Termination
Anniversary (i) become an employee, consultant, officer, partner, director, guarantor or financier,
directly or indirectly, of any entity or organization engaged in the Business which competes,
directly or indirectly, with Company (or any of its affiliates) or (ii) whether on Executive’s own
behalf or on behalf of or in conjunction with any person, company, business entity or other
organization whatsoever, directly or indirectly solicit, hire or encourage any employee of Company
(or any of its affiliates) to leave the employment of Company (or any of its affiliates). For
purposes of this Section 7(b) the parties agree that the following entities or their affiliates or
successors: A.C. Moore Arts & Crafts, Inc., Jo-Ann Stores, Inc., Calico Corners, Inc. or Michaels
Stores, Inc. shall be deemed to be engaged in a Business which competes with the Company. Executive
agrees that the provisions of this Section 7(b) are reasonable. Company and Executive agree that
twenty percent (20%) (the “Non-Compete Payment”) of any payment to Executive pursuant to Section
5(c) or 5(d) is specifically attributable to the provisions contained in this Section 7(b). Should
a court determine that any provision of this Section 7(b) is unreasonable, either in period of time
or otherwise, the parties hereto agree that such covenant should be interpreted and enforced to the
maximum extent which such court deems reasonable. Company and Executive acknowledge that, should a
court determine that the entire covenant not to compete contained in Section 7(b) is unenforceable,
there will have been a failure of consideration for the Non-Compete Payment. In such an event,
Executive agrees to repay immediately to Company the entire Non-Compete Payment.

     (c) During the Term of this Agreement and thereafter, Executive and the Company each agree not
to make any untruthful or disparaging statements, written or oral, about the other party, its
affiliates, their predecessors or successors or any of their past and present officers, directors,
stockholders, partners, members, agents and employees or each party’s business practices,
operations or personnel policies and practices to any of Company’s customers, clients, competitors,
suppliers, investors, directors, consultants, employees, former employees, or the press or other
media in any country.

11

 

     (d) Company and Executive agrees that any breach of the terms of this Section 7 would result
in irreparable injury and damage for which there would be no adequate remedy at law, and that, in
the event of said breach or any threat of breach, Executive and Company shall be entitled to an
immediate injunction and restraining order to prevent such breach or threatened breach, without
having to prove damages, in addition to any other remedies to which Company may be entitled at law
or in equity. If Executive violates any of the restrictive covenants contained in Section 7 in
connection with or following an Involuntary Termination During a Change in Control Period or an
Involuntary Termination Not in a Change in Control Period, Executive shall be required to repay to
Company the greater of the Non-Compete Payment or a prorated portion of all payments made to
Executive pursuant to Section 5(c) or 5(d) (prorated in monthly increments based on the number of
whole and fractional months remaining until the Applicable Termination Anniversary). The provisions
of this Section 7 shall survive any termination of this Agreement and Executive’s term of
employment. The existence of any claim or cause of action or otherwise, shall not constitute a
defense to the enforcement of the covenants and agreements of this Section 7.

     Section 8. Dispute Resolution. In the event of any dispute or claim relating to or
arising out of this Agreement (including, but not limited to, any claims of breach of contract,
wrongful termination or age, sex, race or other discrimination), but excluding any claims or
disputes relating to or arising out of Section 7 of this Agreement, Executive and Company agree
that all such disputes shall be fully and finally resolved by binding arbitration conducted by the
American Arbitration Association in Lee County, Mississippi, in accordance with its National
Employment Dispute Resolution rules, but provided that the Company agrees to pay in full the
reasonable costs of such arbitration. Executive acknowledges that by accepting this arbitration
provision she is waiving any right to a jury trial in the event of such dispute. Any claim or
dispute relating to or arising out of Section 7 of this Agreement may be adjudicated in a state or
federal court having jurisdiction of such claim or dispute, and the parties agree, without
limitation, that Lee County, Mississippi is a proper place for any such suit.

     Section 9. Attorneys’ Fees. The prevailing party in any dispute or claim relating to
or arising out of this Agreement that is not resolved, for whatever reason, through the dispute
resolution process of Section 8 shall be entitled to recover from the losing party its attorneys’
fees and costs incurred in any arbitration, action or other proceeding brought to enforce any right
arising out of this Agreement.

     Section 10. General.

     (a) Successors and Assigns. The provisions of this Agreement shall inure to the benefit of and
be binding upon Company, Executive and each and all of their respective heirs, legal
representatives, successors and assigns. The duties, responsibilities and obligations of Executive
under this Agreement shall be personal and not assignable or delegable by Executive in any manner
whatsoever to any person, corporation, partnership, firm, company, joint venture or other entity.
Executive may not assign, transfer, convey, mortgage, pledge or in any other manner encumber the
compensation or other benefits to be received by her or any rights which she may have pursuant to
the terms and provisions of this Agreement.

12

 

     (b) Amendments; Waiver. No provision of this Agreement shall be modified, waived or discharged
unless the modification, waiver or discharge is agreed to in writing and signed by Executive and by
an authorized officer of Company. No waiver by either party of any breach of, or of compliance
with, any condition or provision of this Agreement by the other party shall be considered a waiver
of any other condition or provision or of the same condition or provision at another time.

     (c) Notices. Any notices to be given pursuant to this Agreement by either party to the other
party may be effected by personal delivery or by overnight delivery with receipt requested and if
given in either such manner shall be deemed effective on the date of personal delivery or the day
after notice has been sent by overnight delivery . Mailed notices shall be addressed to the parties
at the addresses stated below, but each party may change its or her address by written notice to
the other in accordance with this Paragraph.

Mailed notices to Executive shall be addressed as follows:

Ms. Jane F. Aggers

Hancock Fabrics, Inc.

One Fashion Way

Baldwyn, MS 38824

Mailed notices to Company shall be addressed as follows:

Hancock Fabrics, Inc.

One Fashion Way

Baldwyn, MS 38824

Attention: Chairman of the Board

with a copy to:

Baker, Donelson, Bearman, Caldwell & Berkowitz, PC

165 Madison Avenue, Suite 2000

Memphis, TN 38103

Attention: Samuel D. Chafetz, Esq.

     (d) Entire Agreement. This Agreement constitutes the entire employment agreement between
Executive and Company regarding the terms and conditions of her employment, with the exception of
any stock option, restricted stock or other Company stock-based award agreements between Executive
and Company to the extent not modified by this Agreement. This Agreement (including the stock-based
award agreements described in the preceding sentence) supersedes all prior negotiations,
representations or agreements between Executive and Company, whether written or oral, concerning
Executive’s employment by Company.

     (e) Withholding Taxes. All payments made under this Agreement shall be subject to reduction to
reflect taxes required to be withheld by law.

13

 

     (f) Counterparts. This Agreement may be executed by Company and Executive in counterparts,
each of which shall be deemed an original and which together shall constitute one instrument.

     (g) Headings. Each and all of the headings contained in this Agreement are for reference
purposes only and shall not in any manner whatsoever affect the construction or interpretation of
this Agreement or be deemed a part of this Agreement for any purpose whatsoever.

     (h) Savings Provision. To the extent that any provision of this Agreement or any paragraph,
term, provision, sentence, phrase, clause or word of this Agreement shall be found to be illegal or
unenforceable for any reason, such paragraph, term, provision, sentence, phrase, clause or word
shall be modified or deleted in such a manner as to make this Agreement, as so modified, legal and
enforceable under applicable laws. The remainder of this Agreement shall continue in full force and
effect.

     (i) Construction. The language of this Agreement and of each and every paragraph, term and
provision of this Agreement shall, in all cases, for any and all purposes, and in any and all
circumstances whatsoever be construed as a whole, according to its fair meaning, not strictly for
or against Executive or Company, and with no regard whatsoever to the identity or status of any
person or persons who drafted all or any portion of this Agreement.

     (j) Further Assurances. From time to time, at Company’s request and without further
consideration, Executive shall execute and deliver such additional documents and take all such
further action as reasonably requested by Company to be necessary or desirable to make effective,
in the most expeditious manner possible, the terms of this Agreement and to provide adequate
assurance of Executive’s due performance hereunder.

     (k) Governing Law. Executive and Company agree that this Agreement shall be interpreted in
accordance with and governed by the laws of the State of Mississippi.

     (l) Miscellanous Moving Cost: Notwithstanding any other provisions of this Agreement,
Executive shall be entitled to the balance of relocation re-imbursement (primarily realtor fees)
that are still due on her home in Ohio.

[remainder of page intentionally left blank]

14

 

     IN WITNESS WHEREOF, the parties have executed this Employment Agreement as of the date first
written above.

	 	 	 	 	 	 	 
	 	 	HANCOCK FABRICS, INC.	 	 
	 
	 	 	 	 	 	 
	 

	 	By:	 	/s/ Carl E. Berg	 	 
	 

	 	 	 	 	 	 
	 	 	Name: Carl E. Berg	 	 
	 	 	Title: Chairman of the Board of Directors	 	 
	 
	 	 	 	 	 	 
	 	 	EXECUTIVE	 	 
	 
	 	 	 	 	 	 
	 	 	/s/ Jane F. Aggers	 	 
	 	 	 	 	 
	 	 	Name: Jane F. Aggers	 	 

15

 

ENCLOSURE 1

Benefits of Executive

1.. An automobile allowance of Seven Hundred Fifty ($750) Dollars per month during the Term of the
Agreement.

2.. Major medical, hospitalization, and life insurance coverage as generally provided by the
Company to its employees from time to time during the Term of this Agreement.

3.. Indemnification by the Company of the Executive for any claims, or liabilities incurred by
Executive serving as a director or executive officer of the Company or its subsidiaries during the
Term of this Agreement, which obligation shall be in the form of indemnity agreement generally
provided by the Company to its directors and executive officers.

16

 

ENCLOSURE 2

GENERAL RELEASE

This Release is made and entered into by Jane F. Aggers (the “Executive”) and Hancock Fabrics, Inc.
(the “Company”).

In consideration of the payments, benefit continuation and acceleration provided for in Section 5
of her Employment Agreement with the Company, Executive, on behalf of herself and for any person or
entity who may claim by or through her, irrevocably and unconditionally releases, waives, and
forever discharges Company, its past, present, and future subsidiaries, divisions, affiliates,
successors, and their respective officers, directors, attorneys, agents, and present and past
employees from any and all claims or causes of action that Executive had, has, or may have, whether
known or unknown, relating to Executive’s employment with Company and/or termination therefrom up
to and including the date of this Agreement, including but not limited to any claims under the
Mississippi Employment Protection Act, Title VII of the Civil Rights Act of 1964, the Age
Discrimination in Employment Act (“ADEA”), the Americans with Disabilities Act, each as amended,
and claims under any other federal, state, or local statute, regulation, or ordinance, including
wrongful or retaliatory discharge.

This Release shall not be construed as an admission by Company of any liability, wrongdoing, or
violation of any law, statute, regulation, agreement or policy, and Company denies any such
liability or wrongdoing.

Executive acknowledges and agrees that this Release includes a release and waiver as to claims
under the ADEA. Executive acknowledges and confirms that she understands and agrees to the terms
and conditions of this Release; that these terms are written in layperson terms, and that she has
been fully advised of her rights to seek the advice and assistance of consultants, including an
attorney, to review this Release. Executive further acknowledges that she does not waive any
rights or claims under the ADEA that arise after the date this Release is signed by her, and
specifically, Executive understands that she is receiving money and benefits beyond anything of
value to which she is already entitled from Company. Executive acknowledges that she has had up to
21 days to consider whether to accept and sign this Release, and has had adequate time and
opportunity to review the Release and consult with any legal counsel or other advisors of her
choosing. Executive understands that if she signs this Release before the expiration of the 21-day
period, her signature will evidence her voluntary election to forego waiting the full 21 days to
sign this Release. If Executive chooses not to accept, or the 21-day period expires without her
acceptance, then the offer in this Release is null and void. Executive further acknowledges that
in compliance with the Older Workers’ Benefit Protection Act of 1990, she has been fully advised by
Company of her right to revoke and nullify this Release, and that this revocation must be
exercised, if at all, within seven days of the date she signs this Release. Executive may revoke
her acceptance at any time within the seven days following her signing of this Release by notifying
Company of her decision to revoke the acceptance by writing directed and delivered to Hancock
Fabrics, Inc., One Fashion Way, Baldwyn, MS 38824, Attention: Chairman of the Board.

17

 

Acceptance of this offer is strictly voluntary. This Release shall become effective and
enforceable only after the seven-day revocation period has expired. Should Executive decline to
accept the benefits of this Release, or if is revoked by her, Executive will not receive the
proposed additional compensation and benefits.

     By her signature below, Executive accepts the terms of this Release.

	 	 	 	 	 	 	 
	HANCOCK FABRICS, INC.	 	EXECUTIVE	 	 
	 
	 	 	 	 	 	 
	By: 

Name:

	 	/s/ Jane F. Aggers
 

Jane F. Aggers
	 	/s/ Carl E. Berg
 

Name: Carl E. Berg
	 	 
	Title:

	 	President, Director and
Chief Executive
Officer (Principal
Executive Officer)
	 	Title: Director and Chairman of the
Board	 	 
	 
	 	 	 	 	 	 
	Date: August 1, 2008	 	Date: August 1, 2008	 	 

18

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