HANCOCK FABRICS INC
SECOND AMENDMENT TO CREDIT AGREEMENT
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<TYPE>EX-10
<SEQUENCE>2
<FILENAME>hancock8k122104secamend.txt
<DESCRIPTION>SECOND AMENDMENT TO CREDIT AGREEMENT
<TEXT>
                                                                    Exhibit 10.1

                      SECOND AMENDMENT TO CREDIT AGREEMENT


     THIS SECOND AMENDMENT TO CREDIT AGREEMENT (the "Second  Amendment") is made
as of December  16,  2004,  by and between  HANCOCK  FABRICS,  INC.,  a Delaware
corporation   (the   "Borrower"),   and  SOUTHTRUST  BANK,  an  Alabama  banking
corporation  (the "Bank").  Capitalized  terms used herein but not defined shall
have the meanings ascribed to such terms in the Credit Agreement, as amended (as
hereinafter defined).

     WHEREAS,  pursuant to that certain Credit  Agreement  between  Borrower and
Bank dated as of March 26, 2002 (the "Credit Agreement"), Bank made available to
Borrower,  subject to the terms and conditions thereof,  the Syndicated Loan and
the Money Market Loan in the aggregate principal amount of up to $25,000,000.00;
and

     WHEREAS,  pursuant to that  certain  First  Amendment  to Credit  Agreement
between Borrower and Bank dated as of October 14, 2004 (the "First  Amendment"),
the Credit Agreement was amended in order to provide for a temporary increase in
the Commitment from up to  $25,000,000.00  to up to  $30,000,000.00  (the Credit
Agreement,  as amended by the First  Amendment,  hereinafter  referred to as the
"Credit Agreement, as amended"); and

     WHEREAS,  Borrower and Bank have agreed to amend the Credit  Agreement,  as
amended, in order to amend certain of the financial covenants contained therein,
as more specifically hereinafter set forth.

     NOW,  THEREFORE,  in consideration of One Dollar ($1.00) and other good and
valuable   consideration,   the  receipt  and   adequacy  of  which  are  hereby
acknowledged, the parties agree that the Credit Agreement, as amended, is hereby
amended as of the date of this Second Amendment, as follows:

     1. The Credit Agreement,  as amended, is hereby amended by deleting Section
5.06 in its entirety, and by substituting the following new Section 5.06 in lieu
thereof:

          SECTION  5.06.  Fixed  Charges  Coverage.  At the end of  each  Fiscal
     Quarter  from the Fiscal  Quarter  ending  January  31,  2005  through  and
     including the Fiscal  Quarter  ending January 31, 2006, the ratio of Income
     Available for Fixed Charges for the period of 4 consecutive Fiscal Quarters
     then ended to  Consolidated  Fixed  Charges for the period of 4 consecutive
     Fiscal Quarters then ended,  shall be greater than 1.35 to 1.00. At the end
     of each Fiscal Quarter thereafter,  the ratio of Income Available for Fixed
     Charges  for the  period of 4  consecutive  Fiscal  Quarters  then ended to
     Consolidated  Fixed Charges for the period of 4 consecutive Fiscal Quarters
     then ended, shall be greater than 1.40 to 1.00.

     2. As a  condition  to the  effectiveness  of  this  Second  Amendment  (a)
Borrower shall have paid to Bank a modification fee in the amount of $62,500.00;
(b)  Borrower  shall  have  provided  to Bank the  resolutions  of the  board of
directors of Borrower as to the  amendments  contemplated  herein;  (c) Borrower
shall have paid directly or reimbursed Bank for all of Bank's fees and expenses,
including,  but not limited to, any and all filing  fees,  recording  fees,  and
expenses  and fees of Bank's  legal  counsel,  incurred in  connection  with the

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preparation,  amendment,  modification or enforcement of this Second  Amendment,
the  Credit  Agreement,  as  amended,  and any and all  documents  executed  and
delivered in connection herewith or therewith;  (d) Borrower shall have executed
and  delivered  to Bank all further  documents  and perform all other acts which
Bank deems  necessary or  appropriate to perfect or protect its security for the
Loans;  and (e) Borrower shall have delivered to Bank such other  documentation,
if any, as may be requested by Bank to satisfy Bank that this Second  Amendment,
and all other documents and instruments  executed by Borrower in connection with
this Second  Amendment or in furtherance  hereof have each been duly authorized,
executed and delivered on behalf of Borrower,  and constitute  valid and binding
obligations of Borrower.

     3. Borrower  represents and warrants to Bank that all  representations  and
warranties given by Borrower in the Credit Agreement,  as amended,  are true and
correct as of the date  hereof,  except to the extent  affected  by this  Second
Amendment.  Borrower  represents  and warrants to Bank that  Borrower is in full
compliance  with  all of the  covenants  of  Borrower  contained  in the  Credit
Agreement, as amended, except to the extent affected by this Second Amendment.

     4. Except as heretofore or herein expressly  modified,  or as may otherwise
be inconsistent with the terms of this Second Amendment (in which case the terms
and conditions of this Second  Amendment shall govern),  all terms of the Credit
Agreement,  as amended, and all documents and instruments executed and delivered
in  furtherance  thereof  shall be and remain in full force and effect,  and the
same are hereby ratified and confirmed in all respects.



                                    * * * * *





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     IN WITNESS  WHEREOF,  this  Second  Amendment  has been duly  executed  and
delivered as of the day and year first above written.


WITNESS:                                    BORROWER:

                                            HANCOCK FABRICS, INC.


 /s/ Larry D. Fair                          By:  /s/ Bruce D. Smith
---------------------------------------        ---------------------------------
Print Name:  Larry D. Fair                       Its: Chief Financial Officer
           ----------------------------         --------------------------------


                                            BANK:

                                            SOUTHTRUST BANK


                                            By:  /s/ Hal Clemmer
---------------------------------------        ---------------------------------
Print Name:                                 Its:  Senior Vice President
           ----------------------------         --------------------------------



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