Document:

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                                                                    EXHIBIT 10.6

                                                                     [Execution]

                                    GUARANTEE

      THIS GUARANTEE ("Guarantee"), dated June __, 2005, is by Hancock Fabrics,
Inc, a Delaware corporation ("Parent"), HF Merchandising, Inc., a Delaware
corporation ("Merchandising"), Hancock Fabrics of MI, Inc., a Delaware
corporation ("Fabrics MI"), hancockfabrics.com, Inc., a Delaware corporation
("Fabrics.com"), Hancock Fabrics, LLC, a Delaware limited liability
company("Fabrics LLC", and together with Parent, Merchandising, Fabrics MI and
Fabrics.com, each individually a "Borrower" and collectively, "Borrowers" as
hereinafter further defined), HF Enterprises, Inc., a Delaware corporation
("Enterprises"), and HF Resources, Inc., a Delaware corporation ("Resources" and
together with Enterprises, each individually a "Guarantor" and collectively,
"Guarantors" as hereinafter further defined), in favor of Wachovia Bank,
National Association, a national banking association, in its capacity as agent
pursuant to the Loan Agreement (as hereinafter defined) acting for and on behalf
of the parties thereto as Lenders (in such capacity, "Agent"). Borrowers and
Guarantors are sometimes hereinafter referred to hereunder individually each, as
a "Guaranteeing Party" and collectively, as "Guaranteeing Parties".

                              W I T N E S S E T H :

      WHEREAS, Borrowers, Guarantors, Agent and the parties to the Loan
Agreement as lenders (each individually a "Lender" and collectively, "Lenders")
have entered or are about to enter into financing arrangements pursuant to which
Lenders (or Agent on behalf of Lenders) may make loans and advances and provide
other financial accommodations to Borrowers as set forth in the Loan and
Security Agreement, dated of even date herewith, by and among Agent, Lenders,
Borrowers and Guarantors (as the same now exists or may hereafter be amended,
modified, supplemented, extended, renewed, restated or replaced, the "Loan
Agreement") and other agreements, documents and instruments referred to therein
or at any time executed and/or delivered in connection therewith or related
thereto, including, but not limited to, this Guarantee (all of the foregoing,
together with the Loan Agreement, as the same now exist or may hereafter be
amended, modified, supplemented, extended, renewed, restated or replaced, being
collectively referred to herein as the "Financing Agreements"); and

      WHEREAS, due to the close business and financial relationships among
Borrowers and each Guarantor, in consideration of the benefits which will accrue
to each Guaranteeing Party and as an inducement for and in consideration of
Lenders (or Agent on behalf of Lenders) making loans and advances and providing
other financial accommodations to Borrowers pursuant to the Loan Agreement and
the other Financing Agreements, the Guaranteeing Parties desire to enter into
this Guarantee;

      NOW, THEREFORE, in consideration of the premises and for other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, each Guaranteeing Party hereby jointly and severally agrees in
favor of Agent and Lenders as follows:

      1. Guarantee.

            (a) Each Guaranteeing Party absolutely and unconditionally, jointly
and severally, guarantees and agrees to be liable for the full and indefeasible
payment and performance when due of the following (all of which are collectively
referred to herein as the "Guaranteed

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Obligations"): (i) all of the Obligations (as such term is defined in the Loan
Agreement) and (ii) all expenses (including, without limitation, attorneys' fees
and legal expenses) incurred by Agent or any Lender in connection with the
preparation, execution, delivery, recording, administration, collection,
liquidation, enforcement and defense of each Borrower's obligations, liabilities
and indebtedness as aforesaid to Agent or any Lender, the rights of Agent or any
Lender in any collateral or under this Guarantee and all other Financing
Agreements or in any way involving claims by or against Agent or any Lender
directly or indirectly arising out of or related to the relationships between
Borrower, any Guarantor or any other Obligor (as hereinafter defined) and Agent
or any Lender, whether such expenses are incurred before, during or after the
initial or any renewal term of the Loan Agreement and the other Financing
Agreements or after the commencement of any case with respect to any Borrower or
Guarantor under the United States Bankruptcy Code or any similar statute. The
"Guaranteed Obligations" shall not, with respect to any Guaranteeing Party that
is a Borrower, be deemed to constitute a guarantee by such Guaranteeing Party of
its own Obligations.

            (b) This Guarantee is a guaranty of payment and not of collection.
Each Guaranteeing Party agrees that Agent and Lenders need not attempt to
collect any Guaranteed Obligations from any Borrower, any Guarantor or any other
Obligor or to realize upon any collateral, but may require any Guaranteeing
Party to make immediate payment of all of the Guaranteed Obligations to Agent
when due, whether by maturity, acceleration or otherwise, or at any time
thereafter. Agent and Lenders may apply any amounts received in respect of the
Guaranteed Obligations to any of the Guaranteed Obligations, in whole or in part
(including attorneys' fees and legal expenses incurred by Agent or any Lender
with respect thereto or otherwise chargeable to Borrowers or Guarantors) and in
such order as Agent may elect.

            (c) Payment by Guaranteeing Parties shall be made to Agent at the
office of Agent from time to time on demand as Guaranteed Obligations become
due. Guaranteeing Parties shall make all payments to Agent on the Guaranteed
Obligations free and clear of, and without deduction or withholding for or on
account of, any setoff, counterclaim, defense, duties, taxes, levies, imposts,
fees, deductions, withholding, restrictions or conditions of any kind. One or
more successive or concurrent actions may be brought hereon against any
Guaranteeing Party either in the same action in which any Borrower, Guarantor,
other Guaranteeing Party or any other Obligor is sued or in separate actions. In
the event any claim or action, or action on any judgment, based on this
Guarantee is brought against any Guaranteeing Party, each Guaranteeing Party
agrees not to deduct, set-off, or seek any counterclaim for or recoup any
amounts which are or may be owed by Agent or any other Lender to any
Guaranteeing Party.

            (d) Notwithstanding anything to the contrary contained herein, the
amount of the obligations payable by any Guaranteeing Party under this Guarantee
shall be the aggregate amount of the Guaranteed Obligations unless a court of
competent jurisdiction adjudicates such Guaranteeing Party's obligations to be
invalid, avoidable or unenforceable for any reason (including, without
limitation, because of any applicable state or federal law relating to
fraudulent conveyances or transfers), in which case the amount of the Guaranteed
Obligations payable by such Guaranteeing Party hereunder shall be limited to the
maximum amount that could be guaranteed by such Guaranteeing Party without
rendering such Guaranteeing Party's obligations under this Guarantee invalid,
avoidable or unenforceable under such applicable law.

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      2. Waivers and Consents.

            (a) Notice of acceptance of this Guarantee, the making of loans and
advances and providing other financial accommodations to Borrowers and
presentment, demand, protest, notice of protest, notice of nonpayment or default
and all other notices to which any Borrower or any Guarantor are entitled are
hereby waived by each Guaranteeing Party. Each Guaranteeing Party also waives
notice of and hereby consents to, (i) any amendment, modification, supplement,
extension, renewal, or restatement of the Loan Agreement and any of the other
Financing Agreements, including, without limitation, extensions of time of
payment of or increase or decrease in the amount of any of the Guaranteed
Obligations, the interest rate, fees, other charges, or any collateral, and the
guarantee made herein shall apply to the Loan Agreement and the other Financing
Agreements and the Guaranteed Obligations as so amended, modified, supplemented,
renewed, restated or extended, increased or decreased, (ii) the taking,
exchange, surrender and releasing of collateral or guarantees now or at any time
held by or available to Agent for itself and the benefit of Secured Parties (as
defined in the Loan Agreement) for the obligations of any Borrower or any other
party at any time liable on or in respect of the Guaranteed Obligations or who
is the owner of any property which is security for the Guaranteed Obligations
(individually, an "Obligor" and collectively, the "Obligors"), including,
without limitation, the surrender or release by Agent of any Guaranteeing Party
hereunder, (iii) the exercise of, or refraining from the exercise of any rights
against any Borrower, Guarantor, any Guaranteeing Party or any other Obligor or
any collateral, (iv) the settlement, compromise or release of, or the waiver of
any default with respect to, any of the Guaranteed Obligations and (v) any
financing by Agent or any Lender of any Borrower under Section 364 of the United
States Bankruptcy Code or consent to the use of cash collateral by Agent or any
Lenders under Section 363 of the United States Bankruptcy Code. Each
Guaranteeing Party agrees that the amount of the Guaranteed Obligations shall
not be diminished and the liability of Guaranteeing Parties hereunder shall not
be otherwise impaired or affected by any of the foregoing.

            (b) No invalidity, irregularity or unenforceability of all or any
part of the Guaranteed Obligations shall affect, impair or be a defense to this
Guarantee, nor shall any other circumstance which might otherwise constitute a
defense available to or legal or equitable discharge of any Borrower in respect
of any of the Guaranteed Obligations, or any Guaranteeing Party in respect of
this Guarantee, affect, impair or be a defense to this Guarantee. Without
limitation of the foregoing, the liability of the Guaranteeing Parties hereunder
shall not be discharged or impaired in any respect by reason of any failure by
Agent to perfect or continue perfection of any lien or security interest in any
collateral or any delay by Agent in perfecting any such lien or security
interest. As to interest, fees and expenses, whether arising before or after the
commencement of any case with respect to any Borrower under the United States
Bankruptcy Code or any similar statute, Guaranteeing Parties shall be liable
therefor, even if such Borrower's liability for such amounts does not, or ceases
to, exist by operation of law. Each Guaranteeing Party acknowledges that Agent
has not made any representations to any Guaranteeing Party with respect to any
Borrower, Guarantor, any other Obligor or otherwise in connection with the
execution and delivery by Guaranteeing Parties of this Guarantee and
Guaranteeing Parties are not in any respect relying upon Agent or any statements
by Agent in connection with this Guarantee.

            (c) Unless and until the indefeasible payment and satisfaction in
full of all of the

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Guaranteed Obligations in immediately available funds and the termination of the
financing arrangements of Agent and Lenders with Borrowers, each Guaranteeing
Party hereby irrevocably and unconditionally waives and relinquishes (i) all
statutory, contractual, common law, equitable and all other claims against any
Borrower, any collateral for the Guaranteed Obligations or other assets of any
Borrower, Guarantor or any other Obligor, for subrogation, reimbursement,
exoneration, contribution, indemnification, setoff or other recourse in respect
to sums paid or payable to Agent or any Lender by any Guaranteeing Party
hereunder and (ii) any and all other benefits which any Guaranteeing Party might
otherwise directly or indirectly receive or be entitled to receive by reason of
any amounts paid by or collected or due from Guarantors, Borrowers or any other
Obligor upon the Guaranteed Obligations or realized from their property.

      3. Subordination. Payment of all amounts now or hereafter owed to any
Guaranteeing Party by any Borrower, Guarantor or any other Obligor is hereby
subordinated in right of payment to the indefeasible payment in full to Agent
and Lenders of the Guaranteed Obligations and all such amounts and any security
and guarantees therefor are hereby assigned to Agent and Lenders as security for
the Guaranteed Obligations.

      4. Acceleration. Notwithstanding anything to the contrary contained herein
or any of the terms of any of the other Financing Agreements, the liability of
the Guaranteeing Parties for the entire Guaranteed Obligations shall mature and
become immediately due and payable, even if the liability of any Borrower,
Guarantor or any other Obligor therefor does not, upon the occurrence of any
act, condition or event which constitutes an Event of Default as such term is
defined in the Loan Agreement; provided, that, nothing in this Section 3 shall
prohibit Parent or Merchandising from making payments of interest to Resources
which are otherwise permitted by the terms of the Affiliate Subordination
Agreement, dated on or about the date hereof, among Agent, Resources and
Enterprises.

      5. Account Stated. The books and records of Agent showing the account
between Agent and Borrowers shall be admissible in evidence in any action or
proceeding against or involving Guaranteeing Parties as prima facie proof of the
items therein set forth.

      6. Termination. This Guarantee is continuing, unlimited, absolute and
unconditional. All Guaranteed Obligations shall be conclusively presumed to have
been created in reliance on this Guarantee. Each Guaranteeing Party shall
continue to be liable hereunder until one of Agent's officers actually receives
a written termination notice from a Guaranteeing Party sent to Agent at its
address set forth above by certified mail, return receipt requested and
thereafter as set forth below. Such notice received by Agent from any
Guaranteeing Party shall not constitute a revocation or termination of this
Guarantee as to any other Guaranteeing Party. Revocation or termination hereof
by any Guaranteeing Party shall not affect, in any manner, the rights of Agent
or any obligations or duties of any Guaranteeing Party (including the
Guaranteeing Party which may have sent such notice) under this Guarantee with
respect to (a) Guaranteed Obligations which have been created, contracted,
assumed or incurred prior to the receipt by Agent of such written notice of
revocation or termination as provided herein, including, without limitation, (i)
all amendments, extensions, renewals and modifications of such Guaranteed
Obligations (whether or not evidenced by new or additional agreements, documents
or instruments executed on or after such notice of revocation or termination),
(ii) all interest, fees and similar charges accruing or due on and after
revocation or termination, and (iii) all attorneys' fees and legal expenses,
costs and other expenses paid or incurred on or after such notice of revocation
or

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termination in attempting to collect or enforce any of the Guaranteed
Obligations against Borrowers, Guaranteeing Parties or any other Obligor
(whether or not suit be brought), or (b) Guaranteed Obligations which have been
created, contracted, assumed or incurred after the receipt by Agent of such
written notice of revocation or termination as provided herein pursuant to any
contract entered into by Agent or any Lender prior to receipt of such notice.
The sole effect of such revocation or termination by any Guaranteeing Party
shall be to exclude from this Guarantee the liability of such Guaranteeing Party
for those Guaranteed Obligations arising after the date of receipt by Agent of
such written notice which are unrelated to Guaranteed Obligations arising or
transactions entered into prior to such date. Without limiting the foregoing,
this Guarantee may not be terminated and shall continue so long as the Loan
Agreement shall be in effect (whether during its original term or any renewal,
substitution or extension thereof).

      7. Reinstatement. If after receipt of any payment of, or proceeds of
collateral applied to the payment of, any of the Guaranteed Obligations, Agent
or any Lender is required to surrender or return such payment or proceeds to any
Person for any reason, then the Guaranteed Obligations intended to be satisfied
by such payment or proceeds shall be reinstated and continue and this Guarantee
shall continue in full force and effect as if such payment or proceeds had not
been received by Agent or such Lender. Each Guaranteeing Party shall be liable
to pay to Agent and each Lender, and does indemnify and hold Agent and each
Lender harmless for the amount of any payments or proceeds surrendered or
returned. This Section 7 shall remain effective notwithstanding any contrary
action which may be taken by Agent or any Lender in reliance upon such payment
or proceeds. This Section 7 shall survive the termination or revocation of this
Guarantee.

      8. Amendments and Waivers. Neither this Guarantee nor any provision hereof
shall be amended, modified, waived or discharged orally or by course of conduct,
but only by a written agreement signed by an authorized officer of Agent. Agent
shall not by any act, delay, omission or otherwise be deemed to have expressly
or impliedly waived any of its rights, powers and/or remedies unless such waiver
shall be in writing and signed by an authorized officer of Agent. Any such
waiver shall be enforceable only to the extent specifically set forth therein. A
waiver by Agent of any right, power and/or remedy on any one occasion shall not
be construed as a bar to or waiver of any such right, power and/or remedy which
Agent would otherwise have on any future occasion, whether similar in kind or
otherwise.

      9. Existence, Power and Authority. Each Guaranteeing Party is a
corporation or limited liability company duly organized and in good standing
under the laws of its state or other jurisdiction of incorporation or formation
and is duly qualified as a foreign corporation or limited liability company and
in good standing in all states or other jurisdictions where the nature and
extent of the business transacted by it or the ownership of assets makes such
qualification necessary, except for those jurisdictions in which the failure to
so qualify would not have a material adverse effect on the financial condition,
results of operation or businesses of any Guaranteeing Party or the rights of
Agent and Lenders hereunder or under any of the other Financing Agreements. The
execution, delivery and performance of this Guarantee is within the powers of
each Guaranteeing Party, have been duly authorized and are not in contravention
of law or the terms of the certificates of incorporation or formation, by-laws,
operating agreement or other organizational documentation of any Guaranteeing
Party, or any indenture, agreement or undertaking to which any Guaranteeing
Party is a party or by which any Guaranteeing Party or

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its property are bound. This Guarantee constitutes the legal, valid and binding
obligation of each Guaranteeing Party enforceable in accordance with its terms.
Any Guaranteeing Party signing this Guarantee shall be bound hereby whether or
not any other Guaranteeing Party or any other person signs this Guarantee at any
time.

      10. Governing Law; Choice of Forum; Service of Process; Jury Trial Waiver.

            (a) The validity, interpretation and enforcement of this Guarantee
and any dispute arising out of the relationship between any Guaranteeing Party
and Agent or any Lender, whether in contract, tort, equity or otherwise, shall
be governed by the internal laws of the State of New York but excluding any
principles of conflicts of law or other rule of law that would result in the
application of the law of any jurisdiction other than the laws of the State of
New York.

            (b) Each Guaranteeing Party hereby irrevocably consents and submits
to the non-exclusive jurisdiction of the Supreme Court of the State of New York
in New York County and the United States District Court for the Southern
District of New York, whichever Agent elects, and waives any objection based on
venue or forum non conveniens with respect to any action instituted therein
arising under this Guarantee or any of the other Financing Agreements or in any
way connected with or related or incidental to the dealings of any Guaranteeing
Party and Agent or any Lender in respect of this Guarantee or any of the other
Financing Agreements or the transactions related hereto or thereto, in each case
whether now existing or hereafter arising and whether in contract, tort, equity
or otherwise, and agrees that any dispute arising out of the relationship
between any Guaranteeing Party or any Borrower and Agent or any Lender or the
conduct of any such persons in connection with this Guarantee, the other
Financing Agreements or otherwise shall be heard only in the courts described
above (except that Agent and Lenders shall have the right to bring any action or
proceeding against any Guaranteeing Party or its property in the courts of any
other jurisdiction which Agent deems necessary or appropriate in order to
realize on collateral at any time granted by any Borrower or Guaranteeing Party
to Agent or any Lender or to otherwise enforce its rights against any
Guaranteeing Party or its property).

            (c) Each Guaranteeing Party hereby waives personal service of any
and all process upon it and consents that all such service of process may be
made by U.S. certified mail (return receipt requested) directed to its address
set forth on the signature pages hereof and service so made shall be deemed to
be completed immediately upon receipt thereof by such Guaranteeing Party, or, at
Agent's option, by service upon any Guaranteeing Party in any other manner
provided under the rules of any such courts. Within thirty (30) days after such
service, any Guaranteeing Party so served shall appear in answer to such
process, failing which such Guaranteeing Party shall be deemed in default and
judgment may be entered by Agent against the Guaranteeing Parties for the amount
of the claim and other relief requested.

            (d) EACH GUARANTEEING PARTY HEREBY WAIVES ANY RIGHT TO TRIAL BY JURY
OF ANY CLAIM, DEMAND, ACTION OR CAUSE OF ACTION (i) ARISING UNDER THIS GUARANTEE
OR ANY OF THE OTHER FINANCING AGREEMENTS OR (ii) IN ANY WAY CONNECTED WITH OR
RELATED OR INCIDENTAL TO THE DEALINGS OF ANY OF THE GUARANTEEING PARTIES AND
AGENT OR ANY LENDER IN RESPECT OF THIS GUARANTEE OR ANY OF THE OTHER FINANCING
AGREEMENTS OR THE TRANSACTIONS RELATED HERETO OR

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THERETO IN EACH CASE WHETHER NOW EXISTING OR HEREAFTER ARISING, AND WHETHER IN
CONTRACT, TORT, EQUITY OR OTHERWISE. EACH GUARANTEEING PARTY HEREBY AGREES AND
CONSENTS THAT ANY SUCH CLAIM, DEMAND, ACTION OR CAUSE OF ACTION SHALL BE DECIDED
BY COURT TRIAL WITHOUT A JURY AND THAT ANY GUARANTEEING PARTY OR ANY LENDER OR
AGENT MAY FILE AN ORIGINAL COUNTERPART OF A COPY OF THIS AGREEMENT WITH ANY
COURT AS WRITTEN EVIDENCE OF THE CONSENT OF GUARANTEEING PARTIES AND LENDERS AND
AGENT TO THE WAIVER OF THEIR RIGHT TO TRIAL BY JURY.

            (e) Agent and Lenders shall not have any liability to the
Guaranteeing Parties (whether in tort, contract, equity or otherwise) for losses
suffered by the Guaranteeing Parties in connection with, arising out of, or in
any way related to the transactions or relationships contemplated by this
Guarantee, or any act, omission or event occurring in connection herewith,
unless it is determined by a final and non-appealable judgment or court order
binding on Agent or such Lender that the losses were the result of acts or
omissions constituting gross negligence or willful misconduct. In any such
litigation, Agent and Lenders shall be entitled to the benefit of the rebuttable
presumption that each acted in good faith and with the exercise of ordinary care
in the performance by each of the terms of the Loan Agreement and the other
Financing Agreements.

      11. Notices. All notices, requests and demands hereunder shall be in
writing and deemed to have been given or made: if delivered in person,
immediately upon delivery; if by telex, telegram or facsimile transmission,
immediately upon sending and upon confirmation of receipt; if by nationally
recognized overnight courier service with instructions to deliver the next
business day, one (1) business day after sending; and if by certified mail,
return receipt requested, five (5) days after mailing by deposit (postage
prepaid) in the U.S. Mail. All notices, requests and demands upon the parties
are to be given to the following addresses (or to such other address as any
party may designate by notice in accordance with this Section):

      If to any Guaranteeing Party:         Hancock Fabrics, Inc.
                                            One Fashion Way
                                            Baldwyn, MS 38824
                                            Attention: Bruce D. Smith
                                            Telephone No.: (662) 365-6112
                                            Telecopy No.: (662) 365-6025

      with a copy to:                       Baker, Donelson, Bearman, Caldwell &
                                             Berkowitz, PC
                                            165 Madison Avenue
                                            First Tennessee Building
                                            Memphis, TN 38103
                                            Attention: Sam D. Chafetz, Esq.
                                            Telephone No.: (901) 577-2148
                                            Telecopy No.: (901) 577-0854

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      If to Agent and Lenders:              Wachovia Bank, National Association
                                            Heritage Square II, Suite 1050
                                            5001 LBJ Freeway
                                            Dallas, TX 75244
                                            Attention: Portfolio Manager
                                            Telephone No.: (214) 761-9044
                                            Telecopy No.: (214) 748-9118

      12. Partial Invalidity. If any provision of this Guarantee is held to be
invalid or unenforceable, such invalidity or unenforceability shall not
invalidate this Guarantee as a whole, but this Guarantee shall be construed as
though it did not contain the particular provision held to be invalid or
unenforceable and the rights and obligations of the parties shall be construed
and enforced only to such extent as shall be permitted by applicable law.

      13. Entire Agreement. This Guarantee, the other Financing Agreements and
any other document referred to herein or therein represents the entire agreement
and understanding of this parties concerning the subject matter hereof, and
supersedes all other prior agreements, understandings, negotiations and
discussions, representations, warranties, commitments, proposals, offers and
contracts concerning the subject matter hereof, whether oral or written.

      14. Successors and Assigns. This Guarantee shall be binding upon each
Guaranteeing Party and their respective successors and assigns and shall inure
to the benefit of Agent and each Lender and their respective successors,
endorsees, transferees and assigns. The liquidation, dissolution or termination
of any Guaranteeing Party shall not terminate this Guarantee as to such entity
or as to any of the other Guaranteeing Parties.

      15. Construction. Capitalized terms used and not defined herein shall have
the meanings assigned them in the Loan Agreement. All references to the term
"Guaranteeing Parties" wherever used herein shall mean each and all of the
Guaranteeing Parties and their respective successors and assigns, individually
and collectively, jointly and severally (including, without limitation, any
receiver, trustee or custodian for any of the Guaranteeing Parties or any of
their respective assets or any of the Guaranteeing Parties in its capacity as
debtor or debtor-in-possession under the United States Bankruptcy Code). All
references to the term "Agent" wherever used herein shall mean Agent and its
successors and assigns, all references to the term "Borrowers" "Guarantors" or
"Obligors" wherever used herein shall mean each and all of Borrowers, Guarantors
or Obligors and their respective successors and assigns, individually and
collectively, jointly and severally (including, without limitation, any
receiver, trustee or custodian for any Borrower, Guarantor or Obligor or any of
their respective assets or any Borrower, Guarantor or Obligor in its capacity as
debtor or debtor-in-possession under the United States Bankruptcy Code), and all
references to the term "Lenders" and "Secured Parties" wherever used herein
shall mean Lenders, Secured Parties and their respective successors and assigns.
All references to the term "Person" or "person" wherever used herein shall mean
any individual, sole proprietorship, partnership, corporation (including,
without limitation, any corporation which elects subchapter S status under the
Internal Revenue Code of 1986, as amended), limited liability company, limited
liability partnership, business trust, unincorporated association, joint stock
corporation, trust, joint venture or other entity or any government or any

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agency or instrumentality of political subdivision thereof. All references to
the plural shall also mean the singular and to the singular shall also mean the
plural.

      16. Counterparts. This Guarantee may be executed in any number of
counterparts, each of which shall be an original, but all of which taken
together shall constitute one and the same agreement. Delivery of an executed
counterpart of this Guarantee by telefacsimile or other means of electronic
transmission shall have the same force and effect as the delivery of an original
executed counterpart of this Guarantee. Any party delivering an executed
counterpart of this Guarantee by telefacsimile or other means of electronic
transmission shall also deliver an original executed counterpart, but the
failure to do so shall not affect the validity, enforceability or binding effect
of this Guarantee.

                  [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]

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      IN WITNESS WHEREOF, each Guaranteeing Party has executed and delivered
this Guarantee as of the day and year first above written.

                                            BORROWERS

                                            HANCOCK FABRICS, INC.

                                            By:_________________________________

                                            Title:______________________________

                                            HF MERCHANDISING, INC.

                                            By:_________________________________

                                            Title:______________________________

                                            HANCOCK FABRICS OF MI, INC.

                                            By:_________________________________

                                            Title:______________________________

                                            HANCOCKFABRICS.COM, INC.

                                            By:_________________________________

                                            Title:______________________________

                                            HANCOCK FABRICS, LLC

                                            By:_________________________________

                                            Title:______________________________

                                            GUARANTORS

                                            HF ENTERPRISES, INC.

                                            By:_________________________________

                                            Title:______________________________

                                            HF RESOURCES, INC.

                                            By:_________________________________

                                            Title:______________________________<PAGE>

                                                                    EXHIBIT 10.7

                        DEPOSIT ACCOUNT CONTROL AGREEMENT

      THIS DEPOSIT ACCOUNT CONTROL AGREEMENT ("Agreement") is dated June 29,
2005 by and among BancorpSouth Bank (together with its successors and assigns,
"Bank"), Hancock Fabrics, Inc. (together with its successors and assigns, the
"Company") and Wachovia Bank, National Association, in its capacity as agent
pursuant to the Loan Agreement (as hereinafter defined) acting for and on behalf
of the parties thereto as lenders (in such capacity, together with its
successors and assigns, "Agent").

                               W I T N E S S E T H

      WHEREAS, Bank maintains or will maintain for the use of the Company the
deposit account listed on Schedule 1 hereto as the collection account (the
"Collection Account") and in addition, Bank maintains the other deposit accounts
used by or on behalf of the Company listed on Schedule 1 hereto (the "Operating
Accounts", and together with the Collection Account and any other deposit
accounts at any time established or maintained at Bank by or for the benefit of
the Company or to which any funds of the Company are at any time remitted or
deposited, but excluding deposit accounts specifically and exclusively used for
payroll, payroll taxes and other employee wage and benefit payments, being
collectively, the "Deposit Accounts", and individually, each a "Deposit
Account");

      WHEREAS, the Company has entered or is about to enter into financing
arrangements with Agent and the parties to the Loan Agreement as lenders
(collectively, together with their respective successors and assigns, "Lenders")
pursuant to which the Company may from time to time have certain indebtedness or
other obligations to Agent and Lenders as set forth in the Loan and Security
Agreement by and among Agent, Lenders, the Company and certain of its affiliates
(as the same now exists or may hereafter be amended, modified, supplemented,
extended, renewed, restated or replaced, the "Loan Agreement");

      WHEREAS, such indebtedness and other obligations of the Company to Agent
and Lenders are secured by, among other things, all right, title and interest of
the Company in and to the following, whether now or hereafter existing or
arising (collectively, the "Deposit Account Collateral"): (a) the Deposit
Accounts, (b) all checks, money orders, drafts, instruments, electronic funds
transfers and other items and forms of remittances and all funds and other
amounts at any time paid, deposited or credited (whether for collection,
provisionally or otherwise), held or otherwise in the possession or under the
control of, or in transit to, Bank or any agent or custodian thereof for credit
to or to be deposited in any Deposit Account, (c) all funds and cash balances or
other amounts in or attributable to any Deposit Account, and (d) any and all
proceeds of any of the foregoing;

      WHEREAS, in connection with such financing arrangements, Agent and Lenders
require that Bank and the Company enter into this Agreement to establish certain
rights and benefits with respect to the Deposit Accounts;

      NOW, THEREFORE, in order for the Company to comply with the requirements
of Agent and Lenders under their financing arrangements with the Company, the
Company, Bank and Agent agree as follows:

<PAGE>

      1. Deposit Account Collateral. Bank hereby represents, warrants and
covenants with and to Agent and Lenders that: (a) Bank has established and will
maintain the Deposit Accounts and has identified the Company as the sole owner
of the Deposit Accounts, subject to the rights of Agent therein as provided
herein; (b) the records of Bank do not reflect, and it has not received any
notice of, any assignment or pledge of, or security interest in the Deposit
Accounts or any of the other Deposit Account Collateral (other than the pledge
and security interest of Agent referred to herein), or any notice of any adverse
claim with respect to any of the same; (c) Bank has not entered and will not
enter into any agreement with any person other than Agent by which it is
obligated for any reason to comply with instructions from such other person as
to the disposition of funds in or from the Deposit Accounts or with respect to
any other dealings with any of the Deposit Account Collateral; (d) Bank will not
agree that any person other than the Company or Agent is the Bank's customer
with respect to any Deposit Account; (e) Schedule 1 is a correct and complete
list of the Deposit Accounts as of the date hereof and each of them constitutes
a "deposit account" as such term is defined in the UCC; (f) effective as of the
Effective Date (as hereinafter defined), the title of the Collection Account
shall be changed to "Hancock Fabrics, Inc. -- Wachovia Bank, National
Association as Agent Blocked Account"; (g) Bank acknowledges that it holds and
will hold possession of the Deposit Account Collateral consisting of instruments
and money as bailee for Agent and for the benefit of Agent; and (h) Bank is
hereby irrevocably authorized and instructed to change the designation of the
customer on any Deposit Account to Agent upon the request of Agent and Bank
shall so change the customer promptly upon such request by Agent.

      2. Control.

            (a) Notwithstanding any other term or provision of this Agreement or
any other agreement between Bank and the Company or otherwise, Bank is hereby
irrevocably authorized and directed to, and Bank agrees that it will, comply
with instructions originated by Agent directing the disposition of funds from
time to time in any Deposit Account or as to any other matters relating to any
Deposit Account or any of the other Deposit Account Collateral without further
consent by the Company (which instructions may include the giving of stop
payment orders for any items being presented to a Deposit Account for payment).

            (b) Effective upon the receipt by Bank of written notice from Agent
that Agent is exercising exclusive control over any Deposit Account (each such
notice being referred to as a "Notice of Exclusive Control"), Bank shall not
permit the Company or any of its affiliates to withdraw any amounts from, to
draw upon or otherwise exercise any authority or powers with respect to the
Deposit Account and all Deposit Account Collateral related thereto specified in
any such Notice of Exclusive Control and Bank shall not at any time honor, any
instructions with respect to the such Deposit Account and Deposit Account
Collateral, other than those approved in writing by Agent. Until the receipt by
Bank of a Notice of Exclusive Control, the Company shall be entitled to present
items drawn on and otherwise to withdraw or direct the disposition of funds from
the Deposit Accounts.

      3. Remittance of Funds. Unless and until Bank shall receive written
instruction from Agent to the contrary, effective as of the Effective Date, all
checks, money orders, drafts, instruments, electronic funds transfers and other
items and forms of remittances received for deposit in the Collection Account
shall be deposited only in the Collection Account on the date received. On and
after the date of the receipt by Bank of a Notice of Exclusive Control as to any

                                       2
<PAGE>

Deposit Account, all available funds in such Deposit Account shall automatically
and without further direction on each business day be remitted, at the Company's
cost and expense, by federal funds wire transfer solely to Wachovia Bank,
National Association, ABA No. 053-000-219, for credit to Wachovia Bank, National
Association, Account No. 5000000030295, re: Hancock Fabrics or to such other
account as Agent may specify.

      4. Indemnity; Bank's Responsibility. The Company agrees to indemnify,
defend and hold harmless Bank against any loss, liability or expense (including
reasonable fees and disbursements of counsel) incurred in connection with this
Agreement, including any action taken by Bank pursuant to the instructions of
Agent, except to the extent due to the gross negligence or willful misconduct of
Bank or breach of any of the provisions hereof. The Company confirms and agrees
that neither Bank nor Agent or Lenders shall have any liability to the Company
for wrongful dishonor of any items as a result of any instructions of Agent.
Bank shall have no duty to inquire or determine whether the obligations of the
Company to Agent or Lenders are in default or whether Agent is entitled to give
any such instructions and Bank is fully entitled to rely upon such instructions
from Agent (even if such instructions are contrary or inconsistent with any
instructions or demands given by the Company).

      5. Statements, Confirmations and Notices of Adverse Claims. At such time
or times as Agent may request, Bank will promptly report to Agent the amounts
received in and held in the Deposit Accounts and will furnish to Agent any
copies of bank statements, deposit tickets, deposited items, debit and credit
advices and other records maintained by Bank under the terms of its arrangements
with the Company (as in effect on the date hereof). Agent will reimburse Bank
for its reasonable expenses in providing such items to Agent. Upon receipt of
notice of any lien, encumbrance or adverse claim against any Deposit Account
Collateral, Bank will promptly notify Agent and the Company thereof.

      6. Subordination of Bank's Security Interest; Setoff Rights.

            (a) In the event that at any time Bank has a security interest in or
lien upon any of the Deposit Account Collateral, such security interest and lien
of Bank shall be subject and subordinate to the security interest and lien of
Agent therein. Bank shall not for any reason charge, debit, deduct or offset, or
exercise any security interest or lien rights, against any checks, automated
clearinghouse transfers or other form of remittances at any time deposited in or
credited to any Deposit Account, except that Bank may setoff against funds in
the Deposit Accounts for all amounts due to Bank in respect of its customary
fees and expenses for routine operation of the Deposit Accounts that are unpaid
and outstanding, for the amount of any checks, automated clearinghouse
transfers, items or other form of remittances that have been credited to any
Deposit Account and subsequently returned unpaid or lawfully demanded to be
refunded by any paying or collecting bank (whether for insufficient funds or any
other reason), for the amount of any checks, automated clearinghouse transfers,
items or other form of remittances which have been credited to any Deposit
Account incorrectly by reason of inadvertent error which is corrected as soon as
practicable after the discovery of such error, and for any overdrafts arising as
a result thereof; provided, that, Bank shall first setoff for such amounts due
to it against funds held in the Operating Accounts before the Collection
Account.

            (b) In the event that the funds in the Deposit Accounts are
insufficient to reimburse Bank, on and after the receipt by Bank of a Notice of
Exclusive Control from Agent with respect

                                       3
<PAGE>

to a Deposit Account, Agent shall reimburse Bank for the face amount of any
checks, automated clearinghouse transfers, items or other forms of remittances
that were deposited in such Deposit Account or such fees and expenses, in each
case to the extent that: (i) in the case of a check, automated clearinghouse
transfer, items or other form of remittance returned unpaid, or which is
lawfully demanded to be refunded by any paying or collecting bank (whether for
insufficient funds or any other reason), or which was credited to any Deposit
Account incorrectly by reason of inadvertent error, Agent received final payment
in respect thereof and Agent has received notice from Bank of the failure of the
Company to pay Bank prior to the date that is ninety (90) days after such check,
automated clearinghouse transfer, items or other form of remittance is returned
to Bank or such demand is made to Bank or such error was discovered by Bank and
(ii) in the case of such fees and expenses, Agent has received written demand
from Bank for payment for such fees and expenses prior to the date that is sixty
(60) days after the date such fees were due and payable to Bank. The Company
shall reimburse Agent for any amounts paid by Agent to Bank under this Section 6
or otherwise under this Agreement promptly upon demand by Agent (without inquiry
as to, and regardless of, any dispute between the Company and Bank). Such
amounts shall be paid to Agent by Company (or at Agent's option, Agent may
charge any loan account of the Company or its affiliates maintained by Agent)
without offset, defense or counterclaim.

      7. Termination. This Agreement cannot be changed, modified or terminated
except that this Agreement may be terminated either: (a) by Bank upon thirty
(30) days prior written notice to the Company and Agent and (b) upon written
notice by Agent to Bank of the termination of the financing arrangements of
Agent and Lenders with the Company or its affiliates. In the event that for any
reason this Agreement shall be terminated other than pursuant to the written
notice by Agent to Bank of the termination of the financing arrangements of
Agent with the Company, Bank will immediately transfer any funds in the
Collection Account to the account of Agent specified in Section 3 hereof, the
Collection Account will be closed and Bank will forward any mail received in the
Deposit Accounts after such termination to Agent or to such address as Agent may
designate to Bank in writing for such purpose.

      8. Notices. All notices hereunder to the Bank shall be in writing, sent by
telecopier and by nationally recognized overnight courier with instructions to
deliver the next business day, and shall be deemed to have been given or made
when Bank has had a reasonable period of time to act thereon (but in no event
longer than two business days after the Bank has received such notice). All
notices to any other party hereunder shall be in writing and deemed to have been
given or made: if delivered in person, immediately upon delivery; if by telex,
telegram or facsimile transmission, immediately upon sending and upon
confirmation of receipt; if by nationally recognized overnight courier service
with instructions to deliver the next business day, one (1) business day after
sending; and if by certified mail, return receipt requested, five (5) days after
mailing. All notices to any party shall be given to its address set forth below
(or to such other address as any party may designate by notice in accordance
with this Section).

      9. Customer Agreement. This Agreement supplements any other agreements
between the Company and Bank with respect to the Deposit Accounts, as such
agreements may now exist or may hereafter be amended and whether now existing or
hereafter arising. No consent of the Agent or the Lenders shall be required to
amend any such other agreement or for the Company and the Bank to enter into any
additional agreement. In the event of any inconsistency between this Agreement
and the terms of such other agreements of the Company or its affiliates with

                                       4
<PAGE>

Bank, the terms of this Agreement control. Notwithstanding anything to the
contrary contained herein, the Deposit Accounts shall not include any deposit
accounts specifically and exclusively used for payroll, payroll taxes and other
employee wage and benefit payments (collectively, "Payroll Accounts") and the
terms of this Agreement shall not apply to any Payroll Accounts.

      10. Governing Law. This Agreement shall be governed by the laws of the
State of Mississippi. Notwithstanding anything to the contrary contained in any
other agreement among any of the parties hereto, for purposes of the UCC, the
State of Mississippi shall be deemed to be the Bank's jurisdiction within the
meaning of Section 9-304 of the UCC. All references to the "UCC" herein shall
mean the Uniform Commercial Code as in effect on the date hereof in the State of
Mississippi.

      11. Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be an original, but all of which taken
together shall constitute one and the same agreement. Delivery of an executed
counterpart of this Agreement by telefacsimile or other means of electronic
transmission shall have the same force and effect as the delivery of an original
executed counterpart of this Agreement. Any party delivering an executed
counterpart of any such agreement by telefacsimile or other means of electronic
transmission shall also deliver an original executed counterpart, but the
failure to do so shall not affect the validity, enforceability or binding effect
of such agreement.

      12. Successors and Assigns. Agent and Lenders are relying upon this
Agreement in providing financing to the Company and this Agreement shall be
binding upon the Company and Bank and their respective successors and assigns
and inure to the benefit of Agent and Lenders and their respective successors
and assigns.

                  [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]

                                       5
<PAGE>

      13. Effective Date. This Agreement shall become effective on the date when
each of the following conditions shall have been satisfied (the "Effective
Date"): (a) this Agreement shall have been executed and delivered by Agent,
Company and Bank, and (b) the Termination Agreement, dated on or about the date
hereof, between Union Planters Bank, National Association and Company shall have
become effective.

HANCOCK FABRICS, INC.                    WACHOVIA BANK, NATIONAL ASSOCIATION,
                                         as Agent

By: _________________________________
                                         By: _________________________________

Title:_______________________________
                                         Title:_______________________________

Address for Notices:

                                         Address for Notices:

One Fashion Way
Baldwyn, MS 38824                        Heritage Square II, Suite 1050
Attention:  Bruce D. Smith               5001 LBJ Freeway
Telecopy:  662-365-6025                  Dallas, TX 75244
                                         Attention: Portfolio Manager
                                         Telecopy: 214-761-9044

BANCORPSOUTH BANK

By: _________________________________

Title:_______________________________

Address for Notices:

Corporate Banking Department
201 South Spring Street
Tupelo, Mississippi 38804
Attention:  Coy Livingston
Telecopy: 662-680-2261

with a copy to:

Cash Management Department
6363 Poplar Avenue, Suite 429
Memphis, Tennessee 38119
Attention: E.P. Morgan
Telecopy: 901-374-0860

with a copy to:

Cash Management Department
2830 West Jackson Street, Building B
Tupelo, Mississippi 38801
Attention:  Tracey Hall
Telecopy: 662-620-4029

<PAGE>

                                   SCHEDULE 1
                                       TO
                        DEPOSIT ACCOUNT CONTROL AGREEMENT

1. Collection Account:

      Hancock Fabrics, Inc. - Account No. 01-210513

2. Operating Accounts:

      Hancock Fabrics, Inc. - Account No.: 01-247794
      Hancock Fabrics, Inc. - Account No.: 01-236083
      Hancock Fabrics, Inc. - Account No.: 01-248669

                                      S-1

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