HANCOCK FABRICS INC
EX-10.40 2001 STOCK INCENTIVE PLAN, AS AMENDED.
<DOCUMENT>
<TYPE>EX-10.40
<SEQUENCE>3
<FILENAME>g11811exv10w40.htm
<DESCRIPTION>EX-10.40 2001 STOCK INCENTIVE PLAN, AS AMENDED.
<TEXT>
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<TITLE>EX-10.40</TITLE>
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<DIV align="right" style="font-size: 10pt; margin-top: 12pt"><B>EXHIBIT 10.40</B>
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<DIV align="center" style="font-size: 10pt; margin-top: 18pt"><B>HANCOCK FABRICS, INC.</B>
</DIV>


<DIV align="Center" style="font-size: 10pt; margin-top: 6pt"><B>2001 STOCK INCENTIVE PLAN</B>

</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>1. Purpose.</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The purpose of the HANCOCK FABRICS, INC. 2001 STOCK INCENTIVE PLAN (the &#147;Plan&#148;) is to further
the earnings of HANCOCK FABRICS, INC., a Delaware corporation, and its subsidiaries (collectively,
the &#147;Company&#148;) by assisting the Company in attracting, retaining and motivating key employees and
directors of high caliber and potential. The Plan provides for the award of long-term incentives
to those key employees and directors who make substantial contributions to the Company by their
loyalty, industry and invention.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>2. Administration.</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The Plan shall be administered by the Stock Plan Committee (the &#147;Committee&#148;) selected by the
Board of Directors of the Company (the &#147;Board of Directors&#148;) consisting solely of two or more
members who are &#147;outside directors&#148; as described in Section 162(m) of the Internal Revenue Code of
1986, as amended (the &#147;Code&#148;). Except to the extent permitted under paragraph 6(g) hereof or Rule
16b-3 under the Securities Exchange Act of 1934, as amended (the &#147;1934 Act&#148;) (or any successor rule
of similar import), each Committee member shall be ineligible to receive, and shall not have been,
during the one-year period prior to appointment thereto, granted or awarded stock options or
restricted stock pursuant to this Plan or any other similar plan of the Company or any affiliate of
the Company. Without limiting the foregoing, the Committee shall have full and final authority in
its discretion to interpret the provisions of the Plan and to decide all questions of fact arising
in its application. Subject to the provisions hereof, the Committee shall have full and final
authority in its discretion to determine the employees and directors to whom awards shall be made
under the Plan; to determine the type of awards to be made and the amount, size and terms and
conditions of each such award; to determine the time when awards shall be granted; to determine the
provisions of each agreement evidencing an award; and to make all other determinations necessary or
advisable for the administration of the Plan.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>3. Stock Subject to the Plan.</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The Company may grant awards under the Plan with respect to not more than a total of 3,150,000
shares of $.01 par value common stock of the Company (the &#147;Shares&#148;), (subject to adjustment as
provided in paragraph 18, below). Such Shares may be authorized and unissued Shares or treasury
Shares. The total shares available to be awarded as Restricted Stock Awards (paragraph 7, below)
shall not exceed 1,350,000 shares in aggregate (subject to adjustment as provided in paragraph 18,
below). Except as otherwise provided herein, any Shares subject to an option which for any reason
is surrendered before exercise or expires or is terminated unexercised as to such Shares shall
again be available for the granting of awards under the Plan. Similarly, if any Shares granted
pursuant to restricted stock awards are forfeited, such forfeited Shares shall again be available
for the granting of awards under the Plan.
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<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>4. Eligibility to Receive Awards.</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Persons eligible to receive awards under the Plan shall be limited to those officers, other
key employees and directors of the Company who are in positions in which their decisions, actions
and counsel have a significant impact upon the profitability and success of the Company (but
excluding members of the Committee, except as provided in paragraph 6(g)).
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>5. Form of Awards.</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Awards may be made from time to time by the Committee in the form of stock options to purchase
Shares, restricted stock, or any combination of the above. Stock options shall be limited to
options which do not qualify (&#147;Nonqualified Stock Options&#148;) as incentive stock options within the
meaning of Section 422(b) of the Code.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>6. Stock Options.</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Stock options for the purchase of Shares shall be evidenced by written agreements in such form
not inconsistent with the Plan as the Committee shall approve from time to time; provided that the
maximum number of options which may be granted to any one grantee during any twelve-month period is
100,000 ((as adjusted pursuant to paragraph 18, below). Such agreement shall contain the terms and
conditions applicable to the options, including in substance the following terms and conditions:
</DIV>

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<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left">(a)</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>Number of Shares. Each option agreement shall identify the options represented
as Nonqualified Stock Options, and shall set forth the number of Shares subject to the
option (as adjusted pursuant to paragraph 18, below).</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left">(b)</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>Option Price. The option exercise price to be paid by the optionee to the
Company for each Share purchased upon the exercise of an option shall be determined by
the Committee, but shall in no event be less than 100&nbsp;percent of the fair market value
per Share on the date the option is granted, as determined by the Committee.
Notwithstanding anything herein to the contrary, the Committee shall not reprice any
options to a lower exercise price at any time during the term of any option granted
under this Plan.</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left">(c)</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>Exercise Term. Each option agreement shall state the period or periods of time
within which the option may be exercised, in whole or in part, as determined by the
Committee and subject to such terms and conditions as are prescribed for such purpose
by the Committee, provided that no option shall be exercisable, except as provided in
paragraph 16 or in the event of Retirement (as defined below), death or Disability (as
defined below), any more rapidly than from (i)&nbsp;the first anniversary of the date of
grant thereof, to the extent of 25% of the Shares covered thereby, (ii)&nbsp;the second
anniversary of the date of grant thereof, to the extent of an additional 25% of the
Shares covered thereby, (iii)&nbsp;the third anniversary of the date of grant thereof, to
the extent of an additional 25% of the Shares covered thereby, and (iv)&nbsp;the fourth
anniversary of the date of grant
thereof, to the extent of the remaining 25% of the Shares covered thereby. The
Committee, in its discretion, may provide in the option agreement that the option
</TD>
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<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 6%">shall become immediately exercisable, in whole or in part, in the event of
Retirement, death or Disability. Notwithstanding the foregoing, no option shall be
exercisable after ten years from the date of grant.
</DIV>

<DIV style="margin-top: 6pt">
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<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left">(d)</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>Payment for Shares. The purchase price of the Shares with respect to which an
option is exercised shall be payable in full at the time of exercise in cash, Shares at
fair market value, or a combination thereof, as the Committee may determine and subject
to such terms and conditions as may be prescribed by the Committee for such purpose.
If the purchase price is paid by tendering Shares, the Committee in its discretion may
grant the optionee a new stock option for the number of Shares used to pay the purchase
price.</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left">(e)</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>Rights Upon Termination. In the event of Termination (as defined below) of an
optionee&#146;s status as an employee or director of the Company for any cause other than
Retirement, death or Disability, all unexercised options shall terminate immediately
unless otherwise specified in the Option Grant Agreement or unless the Committee shall
determine otherwise. (As used herein, &#147;Termination&#148; means, (i)&nbsp;in the case of an
employee, the cessation of the grantee&#146;s employment by the Company for any reason, and
(ii)&nbsp;in the case of a director, the cessation of the grantee&#146;s service as a director of
the Company; and &#147;Terminates&#148; has the corresponding meaning. As used herein,
&#147;Retirement&#148; means (in the case of an employee) termination of employment under
circumstances entitling the participant to elect immediate payment of retirement
benefits under the Hancock Fabrics, Inc. Consolidated Retirement Plan or any successor
plan, or (in the case of a director), the same meaning as Termination or Terminates and
&#147;Retires&#148; has the corresponding meaning. As used herein, &#147;Disability&#148; means failure to
return to full-time employment duties immediately after the participant has exhausted
the short term disability benefits under the then applicable short term disability
policy or procedures of the Company, and &#147;Disabled&#148; has the corresponding meaning). In
the event that an optionee Retires, dies or becomes Disabled prior to the expiration of
his option and without having fully exercised his option, the optionee or his
Beneficiary (as defined below) shall have the right to exercise the option during its
term within a period of (i)&nbsp;one year after Termination due to Retirement, death or
Disability, or (ii)&nbsp;one year after death if death occurs either within one year after
Termination due to Retirement or Disability to the extent that the option was
exercisable at the time of death or Termination, or within such other period, and
subject to such terms and conditions, as may be specified by the Committee. (As used
herein, &#147;Beneficiary&#148; means the person or persons designated in writing by the grantee
as his Beneficiary with respect to an award under the Plan; or, in the absence of an
effective designation or if the designated person or persons predecease the grantee,
the grantee&#146;s Beneficiary shall be the person or persons who acquire by bequest or
inheritance the grantee&#146;s rights in respect of an award). In order to be effective, a
grantee&#146;s designation of a Beneficiary must be on file with the Committee before the
grantee&#146;s death, but any such designation may be revoked and a new designation substituted therefor at
any time before the grantee&#146;s death.</TD>
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<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left">(f)</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>Nontransferability. Except as provided in paragraph 14(b), options granted
under the Plan shall not be sold, assigned, transferred, exchanged, pledged,
hypothecated, or otherwise encumbered, other than by will or by the laws of descent and
distribution. Except as provided in paragraph 14(b), during the lifetime of the
optionee the option is exercisable only by the optionee.</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left">(g)</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>Automatic Grant of Options to Nonemployee Directors. Notwithstanding any other
provision of the Plan, the grant of options hereunder to directors who are not also
employees of the Company (&#147;Nonemployee Directors&#148;) shall be subject to the following
terms and conditions:</TD>
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    <TD width="6%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left">(i)</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>Immediately following the 2001 Annual Meeting, if this Plan is
approved by the holders of a majority of the Company&#146;s voting securities, each
Nonemployee Director of the Company shall be granted a Nonqualified Stock
Option to purchase 10,000 Shares (as adjusted pursuant to paragraph 18, below).</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="6%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left">(ii)</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>Immediately following each of the consecutive annual meetings
of the stockholders of the Company (&#147;Annual Meeting&#148;) beginning with the first
Annual Meeting subsequent to June&nbsp;7, 2006, each Nonemployee Director of the
Company who is then incumbent shall be granted a Nonqualified Stock Option to
purchase 20,000 Shares (as adjusted pursuant to paragraph 18, below).</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="6%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left">(iii)</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>If, during the period beginning June&nbsp;7, 2006 and ending with
the 2010 Annual Meeting, a person, who is not an incumbent, is elected or
appointed as a Nonemployee Director of the Company, such person shall thereupon
be granted a Nonqualified Stock Option to purchase up to 20,000 Shares, pro
rated for the length of time remaining until the next June&nbsp;15<SUP style="font-size: 85%; vertical-align: text-top">th</SUP> (as
adjusted pursuant to paragraph 18, below).</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="6%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left">(iv)</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>The purchase price of stock subject to an option granted to
Nonemployee Directors under this paragraph 6(g) shall be equal to 100&nbsp;percent
of the fair market value of such stock on the date the option is granted, as
determined by the Committee.</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="6%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left">(v)</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>Except as provided in paragraph 16, each option granted to
Nonemployee Directors under this paragraph 6(g) shall not be exercisable until
one year after the date of grant; provided, however, that no portion of the
option shall be exercisable any earlier than the date the Plan is approved by
the stockholders of the Company.</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="6%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left">(vi)</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>Unless otherwise provided in the Plan, all provisions with
respect to the terms of Nonqualified Stock Options hereunder shall be
applicable to options granted to Nonemployee Directors under this paragraph
6(g).</TD>
</TR>

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    <TD width="7%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left">(vii)</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>The automatic grants described in this paragraph 6(g) shall
constitute the only awards under the Plan permitted to be made to Nonemployee
Directors.</TD>
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</TABLE>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>7. Restricted Stock Awards.</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Restricted stock awards under the Plan shall consist of Shares free of any purchase price, or
for such purchase price as may be established by the Committee, restricted against transfer,
subject to forfeiture, and subject to such other terms and conditions (including attainment of
performance objectives) as may be determined by the Committee. Shares available for issuance as
restricted shares shall be subject to the limitation in Paragraph&nbsp;3, above. Restricted stock shall
be evidenced by written restricted stock agreements in such form not inconsistent with the Plan as
the Committee shall approve from time to time, which agreement shall contain the terms and
conditions applicable to such awards, including in substance the following terms and conditions:
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(a)&nbsp;Restriction Period. Restrictions shall be imposed for such period or periods as may be
determined by the Committee. The Committee, in its discretion, may provide in the agreement
circumstances under which the restricted stock shall become immediately transferable and
nonforfeitable, or under which the restricted stock shall be forfeited, provided that no restricted
stock award shall become immediately transferable and nonforfeitable, except as provided in
paragraph 16 or in the event of Retirement, death or Disability, any more rapidly than from (i)&nbsp;the
first anniversary of the date of grant thereof, to the extent of 25% of the Shares covered thereby,
(ii)&nbsp;the second anniversary of the date of grant thereof, to the extent of an additional 25% of the
Shares covered thereby, (iii)&nbsp;the third anniversary of the date of grant thereof, to the extent of
an additional 25% of the Shares covered thereby, and (iv)&nbsp;the fourth anniversary of the date of
grant thereof, to the extent of the remaining 25% of the Shares covered thereby.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(b)&nbsp;Restrictions Upon Transfer. Restricted stock and the right to vote such Shares and to
receive dividends thereon, may not be sold, assigned, transferred, exchanged, pledged,
hypothecated, or otherwise encumbered, except as herein provided, during the restriction period
applicable to such Shares. Notwithstanding the foregoing, and except as otherwise provided in the
Plan, the grantee shall have all of the other rights of a stockholder, including, but not limited
to, the right to receive dividends and the right to vote such Shares.
</DIV>

<DIV style="margin-top: 6pt">
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<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="3%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left">(c)</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>Certificates. A certificate or certificates representing the number of
restricted Shares granted shall be registered in the name of the grantee. The
Committee, in its sole discretion, shall determine when the certificate or certificates
shall be delivered to the grantee (or, in the event of the grantee&#146;s death, to his
Beneficiary), may provide for the holding of such certificate or certificates in escrow
or in custody by the Company or its designee pending their delivery to the grantee or
Beneficiary, and may provide for any appropriate legend to be borne by the certificate
or certificates.</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="3%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left">(d)</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>Lapse of Restrictions. The restricted stock agreement shall specify the terms
and conditions upon which any restriction upon restricted stock awarded under the Plan
shall expire, lapse, or be removed, as determined by the Committee. Upon</TD>
</TR>

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<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 7%">the expiration, lapse, or removal of such restrictions, Shares free of the
restrictive legend shall be issued to the grantee or his legal representative.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>8. Loans and Supplemental Cash.</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The Committee, in its sole discretion to further the purpose of the Plan, may provide for
supplemental cash payments or loans to individuals in connection with all or any part of an award
under the Plan. Supplemental cash payments shall be subject to such terms and conditions as shall
be prescribed by the Committee at the time of grant, provided that in no event shall the amount of
payment exceed:
</DIV>

<DIV style="margin-top: 6pt">
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<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="3%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left">(a)</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>In the case of an option, the excess fair market value of a Share on the date
of exercise over the option price multiplied by the number of Shares for which such
option is exercised, or</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="3%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left">(b)</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>In the case of a restricted stock award, the value of the Shares issued in
payment of such award.</TD>
</TR>

</TABLE>
</DIV>
<DIV align="left" style="font-size: 10pt; margin-top: 6pt">Any loan shall be evidenced by a written loan agreement or other instrument in such form and
containing such terms and conditions (including, without limitation, provisions for interest,
payment schedules, collateral, forgiveness or acceleration) as the Committee may prescribe from
time to time.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>9. General Restrictions.</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Each award under the Plan shall be subject to the requirement that if at any time the Company
shall determine that (i)&nbsp;the listing, registration or qualification of the Shares subject or
related thereto upon any securities exchange or under any state or federal law, or (ii)&nbsp;the consent
or approval of any regulatory body, or (iii)&nbsp;an agreement by the recipient of an award with respect
to the disposition of Shares, or (iv)&nbsp;the satisfaction of withholding tax or other withholding
liabilities is necessary or desirable as a condition of or in connection with the granting of such
award or the issuance or purchase of Shares thereunder, such award shall be consummated in whole or
in part only if such listing, registration, qualification, consent, approval, agreement, or
withholding shall have been effected or obtained on terms acceptable to the Company. Any such
restriction affecting an award shall not extend the time within which the award may be exercised;
and neither the Company nor its directors or officers nor the Committee shall have any obligation
or liability to the grantee or to a Beneficiary with respect to any Shares with respect to which an
award shall lapse or with respect to which the grant, issuance or purchase of Shares shall not be
effected, because of any such restriction.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>10. Single or Multiple Agreements.</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Multiple awards, multiple forms of awards, or combinations thereof may be evidenced by a
single agreement or multiple agreements, as determined by the Committee.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>11. Rights of the Shareholder.</B>
</DIV>


<P align="center" style="font-size: 10pt"><!-- Folio -->6<!-- /Folio -->
</DIV>

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<DIV style="font-family: 'Times New Roman',Times,serif">




<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The recipient of any award under the Plan, shall have no rights as a shareholder, except as
provided in Paragraph&nbsp;7(b), with respect thereto unless and until certificates for Shares are
issued to him, and the issuance of Shares shall confer no retroactive right to dividends.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>12. Rights to Terminate.</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Nothing in the Plan or in any agreement entered into pursuant to the Plan shall confer upon
any person the right to continue in the employment of the Company or to serve as a director, or
affect any right which the Company may have to terminate the employment or directorship of such
person.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>13. Withholding.</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Prior to the issuance or transfer of Shares under the Plan, the recipient shall remit to the
Company an amount sufficient to satisfy any federal, state or local withholding tax requirements.
The amount to be withheld shall be determined by the Company and shall be the based on the minimum
statutory requirements. The recipient may satisfy the withholding requirement in whole or in part
by electing to have the Company withhold Shares having a value equal to the amount required to be
withheld. The value of the Shares to be withheld shall be the fair market value, as determined by
the Committee, of the stock on the date that the amount of tax to be withheld is determined (the
&#147;Tax Date&#148;). Such election must be made prior to the Tax Date, must comply with all applicable
securities law and other legal requirements, as interpreted by the Committee, and may not be made
unless approved by the Committee, in its discretion.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>14. Non-Assignability.</B>
</DIV>


<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="3%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left">(a)</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>Except as provided in paragraph 14(b), no award under the Plan shall be sold,
assigned, transferred, exchanged, pledged, hypothecated, or otherwise encumbered, other
than by will or by the laws of descent and distribution, or by such other means as the
Committee may approve. Except as provided in paragraph 14(b), or as otherwise
provided herein, during the life of the recipient, such award shall be exercisable only
by such person or by such person&#146;s guardian or legal representative.</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="3%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left">(b)</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>The Committee may, in its sole discretion from time to time, permit the
assignment of any Nonqualified Stock Option to one or more of an optionee&#146;s &#147;Immediate
Family&#148; (as defined herein). As used herein, members of an optionee&#146;s &#147;Immediate
Family&#148; shall include only (i)&nbsp;persons who, at the time of transfer, are the optionee&#146;s
spouse or natural or adoptive lineal ancestors or descendants, and (ii)&nbsp;trusts
established for the exclusive benefit of the optionee and/or one or more of the persons
described in clause (i)&nbsp;of this paragraph 14(b).</TD>
</TR>

</TABLE>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>15. Non-Uniform Determinations.</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The Committee&#146;s determinations under the Plan (including without limitation determinations of
the persons to receive awards, the form, amount and timing of such awards, the terms and provisions
of such awards and the agreements evidencing same, and the establishment of values and performance
targets) need not be uniform and may be made selectively among
</DIV>

<P align="center" style="font-size: 10pt"><!-- Folio -->7<!-- /Folio -->
</DIV>

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<DIV style="font-family: 'Times New Roman',Times,serif">
<DIV align="left" style="font-size: 10pt; margin-top: 6pt">persons who receive, or are eligible to receive, awards under the Plan, whether or not such
persons are similarly situated.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>16. Change In Control Provisions.</B>
</DIV>


<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="3%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left">(a)</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>In the event of (1)&nbsp;a Change in Control (as defined below) or (2)&nbsp;a Potential
Change in Control (as defined below), but only if and to the extent so determined by
the Board of Directors at or after grant (subject to any right of approval expressly
reserved by the Board of Directors at the time of such determination), the following
acceleration and valuation provisions shall apply:</TD>
</TR>

</TABLE>
</DIV>

<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="7%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left">(i)</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>Any stock options awarded under the Plan not previously
exercisable and vested shall become fully exercisable and vested.</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="7%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left">(ii)</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>Any restrictions and deferral limitations applicable to any
restricted stock to the extent not already vested under the Plan, shall lapse
and such shares shall be deemed fully vested.</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="7%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left">(iii)</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>The value of all outstanding stock options and restricted
stock, in each case to the extent vested, shall, unless otherwise determined by
the Committee in its sole discretion at or after grant but prior to any Change
in Control, be cashed out on the basis of the Change in Control Price (as
defined) as of the date such Change in Control or such Potential Change in
Control is determined to have occurred or such other date as the Committee may
determine prior to the Change in Control.</TD>
</TR>

</TABLE>
</DIV>

<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="3%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left">(b)</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>As used herein, the term &#147;Change in Control&#148; means the happening of any of the
following:</TD>
</TR>

</TABLE>
</DIV>

<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="7%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left">(i)</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>Any person or entity, including a &#147;group&#148; as defined in Section
13(d)(3) of the 1934 Act, other than the Company, a subsidiary of the Company,
or any employee benefit plan of the Company or its subsidiaries, becomes the
beneficial owner of the Company&#146;s securities having 20&nbsp;percent or more of the
combined voting power of the then outstanding securities of the Company that
may be cast for the election for directors of the Company (other than as a
result of an issuance of securities initiated by the Company in the ordinary
course of business), or</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="7%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left">(ii)</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>As the result of, or in connection with, any cash tender or
exchange offer, merger or other business combination, sale of assets or
contested election, or any combination of the foregoing transactions, less than
a majority of the combined voting power of the then outstanding securities of
the Company or any successor corporation or entity entitled to vote generally
in the election of directors of the Company or such other corporation or entity
after such transaction, are held in the aggregate by holders of the
</TD>
</TR>
</TABLE>
</DIV>
<P align="center" style="font-size: 10pt"><!-- Folio -->8<!-- /Folio -->
</DIV>

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<DIV style="font-family: 'Times New Roman',Times,serif">

<DIV style="margin-top: 6pt"><TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">


</TABLE>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 11%">Company&#146;s securities entitled to vote generally in the election of directors
of the Company immediately prior to such transactions; or
</DIV>

<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="7%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left">(iii)</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>During any period of two consecutive years, individuals who at
the beginning of any such period constitute the Board of Directors cease for
any reason to constitute at least a majority thereof, unless the election, or
the nomination for election by the Company&#146;s stockholders, of each director of
the Company first elected during such period was approved by a vote of at least
two-thirds of the directors of the Company then still in office who were
directors of the Company at the beginning of any such period.</TD>
</TR>

</TABLE>
</DIV>

<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="3%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left">(c)</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>As used herein, the term &#147;Potential Change in Control&#148; means the happening of
any of the following:</TD>
</TR>

</TABLE>
</DIV>

<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="7%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left">(i)</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>The approval by stockholders of an agreement by the Company,
the consummation of which would result in a Change in Control of the Company;
or</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="7%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left">(ii)</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>The acquisition of beneficial ownership, directly or
indirectly, by any entity, person or group (other than the Company, a
wholly-owned subsidiary thereof or any employee benefit plan of the Company or
its subsidiaries (including any trustee of such plan acting as such trustee))
of securities of the Company representing 10&nbsp;percent or more of the combined
voting power of the Company&#146;s outstanding securities and the adoption by the
Board of Directors of a resolution to the effect that a Potential Change in
Control of the Company has occurred for purposes of this Plan.</TD>
</TR>

</TABLE>
</DIV>

<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="3%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left">(d)</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>As used herein, the term &#147;Change in Control Price&#148; means the highest price per
share paid in any transaction reported on the New York Stock Exchange &#151; Composite
Transactions, or paid or offered in any bonafide transaction related to a Potential or
actual Change in Control of the Company at any time during the 60&nbsp;day period
immediately preceding the occurrence of the Change in Control (or, where applicable,
the occurrence of the Potential Change in Control event), in each case determined by
the Committee.</TD>
</TR>

</TABLE>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>17. Non-Competition Provision.</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Unless the award agreement relating to a stock option or restricted stock specifies otherwise,
a grantee shall forfeit all unexercised, unearned and/or unpaid awards, including, but not by way
of limitation, awards earned but not yet paid, all unpaid dividends and dividend equivalents, and
all interest, if any, accrued on the foregoing, if the grantee, without the written consent of the
Company, engages directly or indirectly in any manner or capacity as principal, agent, partner,
officer, director, employee or otherwise, in any business or activity which is, in the opinion of
the Committee, (i)&nbsp;competitive with the business conducted by the Company or
</DIV>

<P align="center" style="font-size: 10pt"><!-- Folio -->9<!-- /Folio -->
</DIV>

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<DIV style="font-family: 'Times New Roman',Times,serif">
<DIV align="left" style="font-size: 10pt; margin-top: 6pt">any of its subsidiaries, or (ii)&nbsp;inimical to the best interests of the Company or any of its
subsidiaries.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>18. Adjustments.</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In the event of any change in the outstanding common stock of the Company, by reason of a
stock dividend or distribution, recapitalization, merger, consolidation, reorganization, split-up,
combination, exchange of Shares or the like, the Board of Directors, in its discretion, may adjust
proportionately the number of Shares which may be issued under the Plan, the number of Shares
subject to outstanding awards, and the option exercise price of each outstanding option, and may
make such other changes in outstanding options and restricted stock awards, as it deems equitable
in its absolute discretion to prevent dilution or enlargement of the rights of grantees, provided
that any fractional Shares resulting from such adjustments shall be eliminated.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>19. Amendment.</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The Board of Directors may terminate, amend, modify or suspend the Plan at any time, except
that the Board shall not, without the authorization of the holders of a majority of Company&#146;s
voting securities, modify existing awards respecting the number of shares, exercise price or
extension of terms, issue new awards in exchange for the cancellation of outstanding awards,
increase the maximum number of Shares which may be issued under the Plan (other than pursuant to
paragraph 18 hereof), extend the last date on which awards may be granted under the Plan, extend
the date on which the Plan expires, change the class of persons eligible to receive awards, or
change the minimum option price. In no event, however, shall the provisions of paragraph 6(g) be
amended more often than once every six months, other than to comport with changes in the Code, the
Employment Retirement Income Security Act of 1974, as amended, or the rules thereunder. No
termination, modification, amendment or suspension of the Plan shall adversely affect the rights of
any grantee or Beneficiary under an award previously granted, unless the grantee or Beneficiary
shall consent; but it shall be conclusively presumed that any adjustment pursuant to paragraph 18
hereof does not adversely affect any such right.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>20. Effect on Other Plans.</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Participation in this Plan shall not affect a grantee&#146;s eligibility to participate in any
other benefit or incentive plan of the Company. Any awards made pursuant to this Plan shall not be
used in determining the benefits provided under any other plan of the Company unless specifically
provided therein.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>21. Effective Date and Duration of the Plan.</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The Plan shall become effective when adopted by the Board of Directors, provided that the Plan
is approved by the holders of a majority of the Company&#146;s voting securities on the date of its
adoption by the Board or before the first anniversary of that date. Unless it is sooner terminated
in accordance with paragraph 19 hereof, the Plan shall remain in effect until all awards under the
Plan have been satisfied by the issuance of Shares or payment of cash or have expired or otherwise
terminated, but no award shall be granted more than ten years after the earlier of the date the
Plan is adopted by the Board of Directors or is approved by the holders of the Company&#146;s voting
securities.
</DIV>

<P align="center" style="font-size: 10pt"><!-- Folio -->10<!-- /Folio -->
</DIV>

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<DIV style="font-family: 'Times New Roman',Times,serif">

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>22. Unfunded Plan.</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The Plan shall be unfunded, except to the extent otherwise provided in accordance with Section
7 hereof. Neither the Company nor any affiliate shall be required to segregate any assets that may
be represented by stock options and neither the Company nor any affiliate shall be deemed to be a
trustee of any amounts to be paid under any stock option. Any liability of the Company or any
affiliate to pay any grantee or Beneficiary with respect to an option shall be based solely upon
any contractual obligations created pursuant to the provisions of the Plan; no such obligations
will be deemed to be secured by a pledge or encumbrance on any property of the Company or an
affiliate.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>23. Governing Law.</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The Plan shall be construed and its provisions enforced and administered in accordance with
the laws of the State of Delaware except to the extent that such laws may be superseded by any
federal law.
</DIV>
<DIV align="left" style="font-size: 10pt; margin-top: 6pt">ADOPTED BY THE BOARD OF DIRECTORS OF HANCOCK FABRICS, INC., ON THE <U>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</U> DAY OF <U>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</U>,
200.
</DIV>

<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="1%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="25%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="70%">&nbsp;</TD>
</TR>
<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">By:</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top"><DIV style="font-size: 1pt; border-top: 1px solid #000000">&nbsp;</DIV>
</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><U>As amended June&nbsp;9, 2005 and June&nbsp;7, 2006</U>
</DIV>



<P align="center" style="font-size: 10pt"><!-- Folio -->11<!-- /Folio -->
</DIV>

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<DIV style="font-family: 'Times New Roman',Times,serif">




<DIV align="center" style="font-size: 10pt; margin-top: 18pt"><B>STOCK OPTION AGREEMENT<BR>
PURSUANT TO THE HANCOCK FABRICS, INC.<BR>
2001 STOCK INCENTIVE PLAN</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<B>HANCOCK FABRICS, INC.</B>, a Delaware corporation (the &#147;Company&#148;), hereby grants to v1 (the
&#147;Optionee&#148;) an option (&#147;Option&#148;) to purchase a total of v2 shares of $.01 par value common stock of
the Company (the &#147;Shares&#148;), at the price determined as provided herein, and in all respects subject
to the terms, definitions and provisions of the <B>2001 STOCK INCENTIVE </B>PLAN (the &#147;Plan&#148;) adopted by
the Company which is incorporated herein by reference.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;1.&nbsp;Nature of the Option. This Option is not intended to be an &#147;incentive stock option&#148; within
the meaning of section 422 of the Internal Revenue Code of 1986, as amended.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;2.&nbsp;Option Price. The option price is $v3 for each Share.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;3.&nbsp;Exercise of Option. This Option shall be exercisable only in accordance with the
provisions of the Plan, and only by written notice which shall:
</DIV>

<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left">(a)</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>state the election to exercise the Option, the number of Shares in respect of
which it is being exercised, the person in whose name the stock certificate or
certificates for such Shares is to be registered, his or her address and Social
Security Number (or if more than one, the names, addresses and Social Security Numbers
of such persons);</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left">(b)</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>contain such representations and agreements as to the holder&#146;s investment
intent with respect to such Shares as may be required by the Company pursuant to the
Plan or this Agreement;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left">(c)</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>be signed by the person or persons entitled to exercise the Option, and if the
Option is being exercised by any person or persons other than the Optionee, be
accompanied by proof, satisfactory to the Company, of the right of such person or
persons to exercise the Option;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left">(d)</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>be in writing and delivered in person or by certified mail to the Secretary of
the Company; and</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left">(e)</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>be accompanied by payment in full (including applicable withholding taxes, if
any, as described in Section&nbsp;8 of this Agreement). Payment of the purchase price shall
be in cash, currency, by certified or bank cashier&#146;s check and/or Shares, or a
combination thereof pursuant to the provisions of the Plan.</TD>
</TR>

</TABLE>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Unless the sale of Shares pursuant to this Option has been registered under the Securities Act
of 1933 on Form S-8 or successor form, the certificate or certificates for Shares as to which the
Option shall be exercised shall contain the following legend:
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 2%">&#147;THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933 AND HAVE BEEN ACQUIRED FOR INVESTMENT PURPOSES ONLY AND NOT
WITH A
</DIV>

<P align="center" style="font-size: 10pt"><!-- Folio -->12<!-- /Folio -->
</DIV>

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<P><HR noshade><P>
<H5 align="left" style="page-break-before:always">&nbsp;</H5><P>

<DIV style="font-family: 'Times New Roman',Times,serif">



<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 2%">VIEW TO THE DISTRIBUTION THEREOF, AND SUCH SECURITIES MAY NOT BE SOLD OR TRANSFERRED
UNLESS SUCH SALE OR TRANSFER IS REGISTERED UNDER SUCH ACT OR THE COMPANY RECEIVES AN
OPINION OF COUNSEL FOR THE HOLDER OF THESE SECURITIES SATISFACTORY TO THE COMPANY
STATING THAT SUCH SALE OR TRANSFER IS EXEMPT FROM THE REGISTRATION REQUIREMENTS OF
THE ACT, AND UNLESS SUCH SALE OR TRANSFER IS AUTHORIZED UNDER APPLICABLE STATE LAW.&#148;
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;4.&nbsp;Extent of Exercise. This Option shall be exercisable at any time in such amounts and at
such times as are set forth below:
</DIV>

<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left">(a)</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>Exercisable to the extent of 25% of the Shares covered hereby on or after the
first anniversary of the date of grant set forth below (&#147;Date of Grant&#148;); exercisable
to the extent of an additional 25% of the Shares covered hereby on or after the second
anniversary of the Date of Grant; exercisable to the extent of an additional 25% of the
Shares covered hereby on or after the third anniversary of the Date of Grant; and
exercisable to the extent of the remaining 25% of the Shares covered hereby on or after
the fourth anniversary of the Date of Grant.</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left">(b)</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>Notwithstanding paragraph 4(a) hereof, the entire unexercised portion of this
Option shall be exercisable on or after the date of Optionee&#146;s Retirement (as defined
in the Plan), death or Disability (as defined in the Plan).</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left">(c)</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>Notwithstanding paragraphs 4(a) and 4(b) hereof, no portion of this Option
shall be exercisable any earlier than the date the Plan is approved by the stockholders
of the Company.</TD>
</TR>

</TABLE>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;5.&nbsp;Restrictions on Exercise. This Option may not be exercised if the issuance of such Shares
upon such exercise would constitute a violation of any applicable federal or state securities laws
or other law or regulation. As a condition to the exercise of this Option, the Company may require
the Optionee to make any representation and warranty to the Company as may be required by any
applicable law or regulation or may otherwise be appropriate.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;6.&nbsp;Nontransferability of Option.
</DIV>

<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left">(a)</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>Except as provided in paragraph 6(b), this Option may not be sold, assigned,
transferred, exchanged, pledged, hypothecated, or otherwise encumbered, other than by
will or by the laws of descent and distribution. Except as provided in paragraph 6(b),
during the lifetime of the Optionee this Option is exercisable only by the Optionee.
The terms of this Option shall be binding upon the executors, administrators, heirs,
successors and assigns of the Optionee.</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left">(b)</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>The Optionee may transfer this Option, with the permission of the Committee in
its sole discretion, to a member of the Optionee&#146;s Immediate Family by satisfying all
of the following terms and conditions:</TD>
</TR>

</TABLE>
</DIV>
<P align="center" style="font-size: 10pt"><!-- Folio -->13<!-- /Folio -->
</DIV>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always">&nbsp;</H5><P>

<DIV style="font-family: 'Times New Roman',Times,serif">


<DIV style="margin-top: 6pt"><TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">



</TABLE>
</DIV>

<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="6%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left">(1)</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>the Optionee and the transferee execute and deliver to the
Company an assignment in form and substance satisfactory to the Company and its
counsel;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="6%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left">(2)</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>the transferee agrees to be subject to all of the terms and
conditions of this Agreement and the Plan; and</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="6%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left">(3)</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>The transferee shall have no right to further assign or
transfer this Option.</TD>
</TR>

</TABLE>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;7.&nbsp;Term of Option. This Option may not be exercised more than ten (10)&nbsp;years from the date of
grant of this Option and may be exercised during such term only in accordance with the Plan and the
terms of this Agreement.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;8.&nbsp;Withholding. Prior to the issuance of Shares under this Option, the Optionee shall remit
to the Company an amount sufficient to satisfy the minimum statutory federal, state or local
withholding tax requirements. The Optionee may satisfy the withholding requirement in whole or in
part by electing to have the Company withhold Shares having a value equal to the amount required to
be withheld. The value of the Shares to be withheld shall be the fair market value, as determined
by the Committee, of the stock on the date that the amount of tax to be withheld is determined (the
&#147;Tax Date&#148;). Such election must be made prior to the Tax Date, must comply with all applicable
securities law and other legal requirements, as interpreted by the Committee, and may not be made
unless approved in advance by the Committee, in its discretion. The Company reserves the right to
make whatever further arrangements it deems appropriate for the withholding of any taxes in
connection with any transaction contemplated by this Agreement or the Plan.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;9.&nbsp;Merger. This Agreement supersedes any other agreement, written or oral, between the
parties with respect to the subject matter hereof.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;10.&nbsp;Optionee Acknowledgment. Optionee acknowledges receipt of a copy of the Plan, which is
annexed hereto, and represents that he or she is familiar with the terms and provisions thereof,
and hereby accepts this Option subject to all the terms and provisions thereof. Optionee hereby
agrees to accept as binding, conclusive and final decisions or interpretations of the Committee
upon any questions arising under the Plan.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt">DATE OF GRANT: <U>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</U>
</DIV>

<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="55%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="30%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="10%">&nbsp;</TD>
</TR>
<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom">
    <TD valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3" valign="top" align="left">HANCOCK FABRICS, INC.</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR style="font-size: 10pt">
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">By:</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Its:</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3" valign="top" align="left">Agreed to and accepted this ___ day of <U>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</U>, 200_.</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3" valign="top" align="left" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3" valign="top" align="left">v1</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>



<P align="center" style="font-size: 10pt"><!-- Folio -->14<!-- /Folio -->
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