The Depository Trust Company IMPORTANT

The Depository Trust Company IMPORTANT B#: 3712-08 DATE July 11, 2008 TO: CATEGORY: FROM: ATTENTION: All Participants Dividends Supervisor, Stock Dividend Department Dividend Managers, Cashiers, and Reorganization Managers SUBJECT: Rights: Hancock Fabrics CUSIP: 409900107 Rights CONTRA CUSIP: 409900974 R/D: 06/17/08 Expires: 07/18/08 no later than 5:00 P.M. EST Rate: One Right for each 970 shares of common stock held. ********************WARNING TIME CRITICAL******************** Hancock Fabrics is issuing transferable rights ( Rights ) to holders of its common stock as of the close of business on the record date of June 17, 2008 (the Record Date ). Each holder is entitled to one Right for each 970 shares of common stock held. The Rights expire on 07/18/08 at 5:00 P.M. NYC time. Fractions are rounded down. DTC anticipates crediting participant accounts under CONTRA CUSIP 409900974 on 07/11/08. Participants can use this information to submit instructions to the Subscription Agent, Wunderlich Securities. DTC will not be exiting these Rights. The Rights will be held at the Subscription Agent, attn. to Jim Howard #901-251-2233, office pending direct participant instructions. DTC will delete all participant positions on the expiration date of 7/18/08. Please see attached documents; note that these documents were mailed to each beneficial holder by the company.

B# 3712-08 THE DIVIDEND POSITION AND ALLOCATION HISTORY (DPAL) OPTION, ACCESSED VIA THE PTS DIVIDEND ANNOUNCEMENTS INQUIRY FUNCTION (DIVA), SHOULD BE USED TO CONFIRM YOUR RECORD DATE POSITION HISTORY. IT IS IMPORTANT THAT PARTICIPANTS REFER TO THE DTC REORGANIZATION INQUIRY FOR PARTICIPANTS (RIPS), FUNCTION CODE 59, FOR INFORMATION REGARDING THE SUBSCRIPTION PRIVILEGE AND ANY EXTENSIONS TO THE EXPIRATION DATE. If participants have any questions regarding this Important Notice, they may contact DTC s Customer Help Center at (888) 382-2721.

ck Fabrics 1) IN /SCQVER 1~ June 23, 2008 To: Securities Dealers, Commercial Banks, Trust Companies, and Other Nominees This letter is being distributed to securities dealers, commercial banks, trust companies and other nominees in connection with the offering (the Rights Offering ) by Hancock Fabrics, Inc. of up to an aggregate of $20,000,000 principal amount of floating rate secured notes ( Notes ) accompanied by warrants ( Warrants ) to purchase up to 8,000,000 shares of common stock, par value $0.01 ( Common Stock ), at a subscription price of $1,000 (the Subscription Price ), pursuant to the exercise of transferable subscription rights ( Subscription Rights ) distributed to all holders of record of at least 970 shares of Hancock Fabrics, Inc. s Common Stock as of the close of business on June 17, 2008 (the Record Date ). The Subscription Rights are described in the enclosed prospectus and evidenced by a Subscription Certificate registered in your name or in the name of your nominee. Each beneficial owner of at least 970 shares of Common Stock registered in your name or the name of your nominee is entitled to one Subscription Right for each 970 shares of Common Stock owned by such beneficial owner. Stockholders will not receive fractional Subscription Rights. Instead, the total number of Subscription Rights issued to each Stockholder will be rounded down to the nearest full Subscription Right. We are asking you to contact your clients for whom you hold shares of Common Stock registered in your name or in the name of your nominee to obtain instructions with respect to the Subscription Rights. Enclosed are copies ofthe following documents for you to use: 1. Prospectus; 2. Form of Letter from Hancock Fabrics, Inc. to its Stockholders; 3. Instructions for Use of Hancock Fabrics, Inc. Subscription Certificates; 4. A form letter which may be sent to your clients for whose accounts you hold our Common Stock registered in your name or in the name of your nominee; 5. Beneficial Owner Election Form, on which you may obtain your clients instructions with regard to the Subscription Rights; 6. Nominee Holder Certification Form; and

7. Return Envelope addressed to Wunderlich Securities, Inc., as Subscription Agent. Your prompt action is requested. The Subscription Rights will expire at 5:00 P.M., Eastern Time, on July 18, 2008 (the Expiration Date ). To exercise Subscription Rights, properly completed and executed Subscription Certificates and payment in full for all Subscription Rights exercised must be delivered to the Subscription Agent as indicated in the prospectus prior to the Expiration Date. Additional copies of the enclosed materials may be obtained by contacting Jim Harwood with Wunderlich Securities, Inc. at (901) 251-2233. Sincerely, Robert W. Driskell Senior Vice President and Chief Financial Officer

FORM OF LETTER TO CLIENTS To Our Clients: Enclosed for your consideration are the Prospectus, dated June 19, 2008 (the Prospectus ), and Instructions for Use of Hancock Fabrics, Inc. Subscription Certificates relating to the offering (the Rights Offering ) by Hancock Fabrics, Inc (the Company ). Holders of record of Common Stock at the close of business on June 17, 2008 (the Record Date ) will receive one transferable subscription right (the Subscription Rights ) for each 970 shares of Common Stock held by them as of the close of business on the Record Date. An aggregate of up to 20,000 Subscription Rights exercisable to purchase an aggregate of up to $20,000,000 principal amount of floating rate secured notes ( Notes ) and warrants to purchase up to 8,000,000 shares of the Company s Common Stock ( Warrants ) are being distributed in connection with the Rights Offering. Each Subscription Right is exercisable, upon payment of $1,000 in cash (the Subscription Price ), to purchase one Note in the principal amount of $1,000 accompanied by a Warrant to purchase 400 shares of Common Stock. See Prospectus Summary and The Rights Offering in the Prospectus. Also enclosed is a Beneficial Owner Election Form, which you should use to instruct us regarding the exercise of Subscription Rights in connection with the Rights Offering. The Rights are evidenced by Rights certificates (the Subscription Certificates ). The Rights will expire if not exercised by 5:00 p.m., Eastern Time, on July 18, 2008 ( Expiration Date ). As described below, we must receive any instructions to exercise rights on your behalf prior to the Expiration Date. THE MATERIALS ENCLOSED ARE BEING FORWARDED TO YOU AS THE BENEFICIAL OWNER OF COMMON STOCK CARRIED BY US IN YOUR ACCOUNT BUT NOT REGISTERED IN YOUR NAME. EXERCISES OF RIGHTS MAY BE MADE ONLY BY US AS THE RECORD OWNER AND PURSUANT TO YOUR INSTRUCTIONS. Accordingly, we request that you complete the enclosed Beneficial Owner Election Form in order to instruct us as to whether you wish us to elect to subscribe for any Notes and Warrants to which you are entitled pursuant to the terms and subject to the conditions set forth in the enclosed Prospectus. However, we urge you to read the Prospectus and other enclosed materials carefully before instructing us to exercise your Rights. If you wish to have us, on your behalf, exercise the Rights for any Notes and Warrants to which you are entitled, please so instruct us by timely completing, executing, and returning to us the Beneficial Owner Election Form attached to this letter. Your instructions to us should be forwarded as promptly as possible in order to permit us to exercise Rights on your behalf in accordance with the provisions of the Rights Offering. The Rights Offering will expire at 5:00 p.m., Eastern Time, on the Expiration Date. Once you have exercised your Subscription Rights, your exercise may not be revoked. With respect to any instructions to exercise (or not to exercise) Rights, the enclosed Beneficial Owner Election Form must be completed and returned such that it will be actually

received by us by 5:00 p.m., Eastern Time, on July 15, 2008, three business days prior to the scheduled Expiration Date of the Rights Offering ofjuly 18, 2008. ANY QUESTIONS OR REQUESTS FOR ASSISTANCE CONCERNING THE RIGHTS OFFERING SHOULD BE DIRECTED TO JIM HARWOOD WITH WUNDERLICH SECURITIES, INC. AT (901) 251-2233.

FORM OF BENEFICIAL OWNER ELECTION FORM I (We) acknowledge receipt of your letter and the enclosed materials relating to the offering of rights ( Rights ) to purchase floating rate secured notes ( Notes ) accompanied by warrants ( Warrants ) to purchase shares of common stock, par value $0.01 per share (the Common Stock ), of Hancock Fabrics, Inc. (the Company ). In this form, I (we) instruct you whether to exercise the Rights distributed with respect to the Common Stock held by you for my (our) account, pursuant to the terms and subject to the conditions set forth in the prospectus dated June 19, 2008 (the Prospectus ). BOX 1. 0 Please DO NOT EXERCISE my (our) Rights forthe Notes and Warrants. BOX 2. 0 Please EXERCISE my (our) Rights for me (us) and purchase on my (our) behalf $ principal amount of the Notes accompanied by Warrants. I (We) understand that the exercise price of the Rights is equal to the principal amount of the Notes set forth above. Accordingly, the EXERCISE PRICE for each $1,000 principal amount of the Notes is $ BOX 3. 0 Payment in the following amount IS ENCLOSED: BOX 4. 0 Please DEDUCT PAYMENT from the following account maintained by you as follows: Type of Account: Account No.: Amount to be deducted: Signature: Date: (Print name) Signature: Date: (Print name)

FORM OF NOMINEE HOLDER CERTIFICATION The undersigned, a bank, broker, trustee, depository or other nominee holder of rights ( Rights ) to purchase floating rate secured notes ( Notes ) accompanied by warrants ( Warrants ) to purchase shares of common stock, par value $0.01 per share ( Common Stock ), of Hancock Fabrics, Inc. (the Company ) pursuant to the Rights Offering described and provided for in the Company s prospectus dated June 19, 2008 (the Prospectus ), hereby certifies to the Company and to Wunderlich Securities, Inc. as Subscription Agent for the Rights Offering, that the undersigned has subscribed for the principal amount of Notes accompanied by Warrants specified below pursuant to the Rights (as described in the Prospectus) on behalf of beneficial owners of Rights who have subscribed for the Notes accompanied by Warrants (as described in the Prospectus). 1. The undersigned owned shares of Common Stock of the Company on behalfof beneficial owners as ofthe close ofbusiness on, 2008, the record date. 2. Pursuant to Rights issued in the Rights Offering, the undersigned hereby subscribes for $ principal amount of Notes accompanied by Warrants. Name of Bank, Broker, Trustee, Depository or Other Nominee By: Name: Title:

SUBSCRIPTION CERTIFICATE Certificate No.: Name of Registered Holder Address of Registered Holder Subscription Rights TERMS AND CONDITIONS OF THE RIGHTS OFFERING ARE SET FORTH IN THE COMPANY S PROSPECTUS, DATED JUNE 19, 2008, AND ARE INCORPORATED HEREIN BY REFERENCE. COPIES OF THE PROSPECTUS ARE AVAILABLE UPON REQUEST FROM WUNDERLICH SECURITIES, INC., THE SUBSCRIPTION AGENT. HANCOCK FABRICS, INC. A Delaware Corporation SUBSCRIPTION CERTIFICATE Evidencing the number of Subscription Rights stated above, each right representing the right to purchase one $1,000 principal amount of floating rate secured note ( Note ) and a warrant ( Warrant ) to purchase 400 shares of common stock at an exercise price equal to the greater of (i) $1.00 and (ii) the volume weighted average trading price for the 30 days prior to the 3 rd business day before the date of issuance of the warrants. Subscription Price: $1,000 VOID IF NOT EXERCISED BEFORE 5:00 P.M., EASTERN TIME ON JULY 18, 2008. THIS CERTIFIES THAT the registered owner whose name is inscribed herein is the owner of the number of Subscription Rights set forth above, each of which entitles the owner to subscribe for and purchase one Note and one Warrant of Hancock Fabrics, Inc., a Delaware corporation, on the terms and subject to the conditions set forth in the Prospectus and the instructions relating hereto. The Subscription Rights represented by this Subscription Certificate may be exercised by completing Section 1 hereof. Special delivery restrictions may be specified by completing Section 2 hereof. Dated: June 19, 2008 Jane F. Aggers President Robert W. Driskell Secretary

SECTION 1. EXERCISE AND SUBSCRIPTION The undersigned irrevocably exercises Subscription Rights to subscribe for Notes and Warrants as indicated below on the terms and subject to the conditions specified in the Prospectus, the receipt of which is hereby acknowledged. (a) (b) Number of Subscription Rights subscribed: Total Subscription Price (total number of Subscription Rights subscribed for multiplied by the Subscription Price of $1,000): METHOD OF PAYMENT (CHECK ONE) O o Certified check or bank draft (cashier s check) drawn on a U.S. bank or money order, payable to Wunderlich Securities, Inc., as Subscription Agent. Wire transfer of immediately available funds directed to the account maintained by Wunderlich Securities, Inc., Subscription Agent for Hancock Fabrics, Inc. at Wachovia Bank, ABA # 053000219, Account No. 2000041008548. If the amount enclosed or transmitted is not sufficient to pay the purchase price for all Subscription Rights that are stated to be subscribed for, or if the number of Subscription Rights being subscribed for is not specified, the number of Subscription Rights subscribed for will be assumed to be the maximum number that could be subscribed for upon payment of such amount. If the amount enclosed or transmitted exceeds the purchase price for all Subscription Rights that the undersigned has the right to subscribe for (such excess amount, the Subscription Excess ) the Subscription Agent will return the Subscription Excess to the subscriber without interest or deduction. SECTION 2. SPECIAL ISSUANCE OR DELIVERY INSTRUCTIONS FOR SUBSCRIPTION RIGHTS HOLDERS: (a) To be completed ONLY if the Notes and Warrants are to be issued in a name other than that of the registered holder. See the Instructions. DO NOT FORGET TO COMPLETE THE GUARANTEE OF SIGNATURE(S) SECTION BELOW. Name in which to be issued: Soc. Sec. #/Tax ID #: Address: (b) To be completed ONLY if the certificate representing Notes and Warrants are to be sent to the registered holder at an address other than that show above. See the Instructions. DO NOT FORGET TO COMPLETE THE GUARANTEE OF SIGNATURE(S) SECTION BELOW Name: Address: 2

ACKNOWLEDGMENT - THE SUBSCRIPTION ORDER FORM IS NOT VALID UNLESS YOU SIGN BELOW I/We acknowledge receipt of the Prospectus and understand that, after delivery to the Subscription Agent for Hancock Fabrics, Inc., I/we may not modify or revoke this Subscription Certificate. Under penalties of perjury, I/we certify that the information contained herein, including the social security number or taxpayer identification number given above, is correct. The signature below must correspond with the name of the registered holder exactly as it appears on the books of the Company s transfer agent without any alteration or change whatsoever. Signature(s) of Registered Holder: Date: If signature is by trustee(s), executor(s), administrator(s), guardian(s), attorney(s)-in-fact, agent(s), officer(s) of a corporation or another acting in a fiduciary or representative capacity, please provide the following information (please print). See the Instructions. Name: Capacity: Soc. Sec. #/Tax ID # Address: Phone: GUARANTEE OF SIGNATURE(S) All Subscription Rights Holders who specify special issuance or delivery instructions must have their signatures guaranteed by an Eligible Institution, as defined in Rule 1 7Ad- 15 of the Securities Exchange Act of 1934, as amended. See the Instructions. Authorized Signature: Name of Firm: Name: Title: Soc. Sec. #/Tax ID #: Address: Phone: 3

YOU MUST HAVE YOUR SIGNATURE GUARANTEED IF YOU WISH TO HAVE YOUR SHARES DELIVERED TO AN ADDRESS OTHER THAN YOUR OWN OR TO A STOCKHOLDER OTHER THAN YOURSELF. Signature Guaranteed: By: Name of Bank or Firm: TIN: BACKUP WITHHOLDING CERTIFICATIONS TAXPAYER I.D. NUMBER. The Taxpayer Identification Number shown above (TIN) is my correct taxpayer identification number. o BACKUP WITHHOLDING. I am not subject to backup withholding either because I have not been notified that I am subject to backup withholding as a result of a failure to report all interest or dividends, or the Internal Revenue Service has notified me that I am no longer subject to backup withholding. o EXEMPT RECIPIENTS. I am an exempt recipient under the Internal Revenue Service Regulations. o NONRESIDENT ALIENS. I am not a United States person, or if I am an individual, I am neither a citizen nor a resident of the United States. SIGNATURE: I certify under penalties of perjury the statements checked in this section. Signature: Date: (See Federal Income Tax Consequences - Information Reporting and Backup Withholding in the Hancock Fabrics, Inc. Prospectus dated June 19, 2008 for information concerning this certification and U.S. federal income tax withholding that may apply. 4

FORM OF INSTRUCTIONS FOR USE OF HANCOCK FABRICS, INC. SUBSCRIPTION CERTIFICATES The following instructions relate to a rights offering (the Rights Offering ) by Hancock Fabrics, Inc., a Delaware corporation (the Company ), to the holders of its common stock, par value $0.01 per share ( Common Stock ), as described in the Company s prospectus dated June 19, 2008 (the Prospectus ). Holders of record of Common Stock at the close of business on June 17, 2008 (the Record Date ) will receive one transferable subscription right (the Subscription Rights ) for each 970 shares of Common Stock held by them as ofthe close of business on the Record Date. An aggregate of up to 20,000 Subscription Rights exercisable to purchase an aggregate of up to $20,000,000 principal amount of floating rate secured notes ( Notes ) and warrants to purchase up to 8,000,000 shares of the Company s Common Stock ( Warrants ) are being distributed in connection with the Rights Offering. Each Subscription Right is exercisable, upon payment of $1,000 in cash (the Subscription Price ), to purchase one Note in the principal amount of $1,000 accompanied by a Warrant to purchase 400 shares of Common Stock. See Prospectus Summary and The Rights Offering in the Prospectus. No fractional Subscription Rights or cash in lieu thereofwill be issued or paid. The total number of Subscription Rights issued to each stockholder will be rounded down to the nearest full Subscription Right. The Subscription Rights will expire at 5:00 p.m., Eastern Time, on July 18, Expiration Date ). 2008 (the The number of Subscription Rights to which you are entitled is printed on the face of your Subscription Certificate. You should indicate your wishes with regard to the exercise of your Subscription Rights by completing the appropriate section on your Subscription Certificate and returning the Subscription Certificate to the Subscription Agent in the envelope provided. THE SUBSCRIPTION AGENT MUST RECEIVE YOUR SUBSCRIPTION CERTIFICATE ON OR BEFORE THE EXPIRATION DATE. IN ADDITION, THE SUBSCRIPTION AGENT MUST RECEIVE PAYMENT OF THE SUBSCRIPTION PRICE FOR ALL SUBSCRIPTION RIGHTS EXERCISED ON OR BEFORE THE EXPIRATION DATE. ONCE A HOLDER OF SUBSCRIPTION RIGHTS HAS EXERCISED THE SUBSCRIPTION RIGHTS, SUCH EXERCISE MAY NOT BE REVOKED. 1. SUBSCRIPTION RIGHTS. To exercise Subscription Rights, properly complete and execute your Subscription Certificate and send it, together with payment in full of the Subscription Price to the Subscription Agent. Delivery of the Subscription Certificate must be made by mail, by hand delivery or by overnight delivery. FACSIMILE DELIVERY OF THE SUBSCRIPTION CERTIFICATE WILL NOT BE ACCEPTED AND WILL NOT CONSTITUTE VALID DELIVERY. All payments must be made in United States dollars by (i) certified check or bank draft (cashier s check) drawn on a U.S. bank or money order payable to Wunderlich Securities, Inc., as Subscription Agent or (ii) wire transfer of immediately available funds. Banks, brokers, trusts, depositaries or other nominee holders of the Subscription Rights who exercise the Subscription Rights on behalf of beneficial owners of Subscription Rights will 5

be required to certify to the Subscription Agent and the Company on a Nominee Holder Certification Form as to the aggregate number of Subscription Rights that have been exercised by each beneficial owner of Subscription Rights on whose behalf such nominee holder is acting. In the event such certification is not delivered in respect of a Subscription Certificate, the Subscription Agent shall for all purposes be entitled to assume that such certificate is exercised on behalf of a single beneficial owner. ACCEPTANCE OF PAYMENTS. Payments will be deemed to have been received by the Subscription Agent only upon the receipt by the Subscription Agent of any certified check or bank draft (cashier s check) drawn on a U.S. bank, money order or immediately available funds transferred through a wire transfer. CONTACTING THE SUBSCRIPTION AGENT. The address, telephone and facsimile numbers of the Subscription Agent, Wunderlich Securities, Inc. are as follows: If by Hand Delivery, Overnight Delivery, First Class Mail or Registered Mail: Wunderlich Securities, Inc. 6000 Poplar Avenue, Suite 210 Memphis,TN 38119 Attention: Jim Harwood Telephone: (901) 251-2233 Facsimile: (901) 251-1349 PARTIAL EXERCISE. If you exercise less than all of the Subscription Rights evidenced by your Subscription Certificate, the Subscription Agent will issue to you a new Subscription Certificate evidencing the unexercised Subscription Rights. However, if you choose to have a new Subscription Certificate sent to you, you may not receive any such new Subscription Certificate in sufficient time to permit exercise of the Subscription Rights being exercised, or if you do not deliver the dollar amount sufficient to purchase the number of shares subscribed for, you will be deemed to have exercised the Subscription Right with respect to the maximum number of whole Subscription Rights which may be exercised for the Subscription Price payment you deliver. 2. DELIVERY OF NOTES AND WARRANTS, ETC. The following deliveries and payments to you will be made to the address shown on the face of your Subscription Certificate unless you provide instructions to the contrary on your Subscription Certificate. (a) SUBSCRIPTION RIGHTS. As soon as practicable after the valid exercise of Subscription Rights and the Expiration Date, the Subscription Agent will mail to each exercising Subscription Rights holder (i) evidence of the Notes, and (ii) Warrant certificates, each purchased pursuant to the Subscription Rights. (b) EXERCISE PAYMENTS. As soon as practicable after the Expiration Date and after all prorations and adjustments contemplated by the terms of the Rights Offering have been effected, the Subscription Agent will mail to each Subscription Rights holder any excess funds received 6

(without interest or deduction) in payment of the Subscription Price for shares that are subscribed forbut not allocated to such Subscription Rights holder. 3. TO HAVE A SUBSCRIPTION CERTIFICATE DIVIDED INTO SMALLER DENOMINATIONS. To have a Subscription Certificate divided into certificates for smaller numbers of Subscription Rights, send your Subscription Certificate, together with complete instructions (including specification of the whole number of Subscription Rights you wish to be evidenced by each new Subscription Certificate) signed by you, to the Subscription Agent, allowing three to five days for the Subscription Certificates to be issued and returned so that they can be used prior to the Expiration Date. Alternatively, you may ask a bank or broker to effect such actions on your behalf. As a result of delays in the mail, the time of the transmittal, the necessary processing time and other factors, you may not receive the new Subscription Certificates in time to enable you to complete an exercise by the Expiration Date. Neither Hancock Fabrics, Inc. nor the Subscription Agent will be liable to you for any such delays. 4. EXECUTION. (a) EXECUTION BY REGISTERED HOLDER. The signature on the Subscription Certificate must correspond with the name of the registered holder exactly as it appears on the face of the Subscription Certificate without any alteration or change whatsoever. Persons who sign the Subscription Certificate in a representative or other fiduciary capacity must indicate their capacity when signing and, unless waived by the Subscription Agent in its sole and absolute discretion, must present to the Subscription Agent satisfactory evidence of their authority so to act. (b) EXECUTION BY PERSON OTHER THAN REGISTERED HOLDER. If the Subscription Certificate is executed by a person other than the holder named on the face of the Subscription Certificate, prior evidence of authority of the person executing the Subscription Certificate must accompany the name unless the Subscription Agent, in its discretion, dispenses with proof of authority. (c) SIGNATURE GUARANTEES. Your signature must be guaranteed by an Eligible Guarantor Institution if you specify special issuance or delivery instructions. 5. METHOD OF DELIVERY. The method of delivery of Subscription Certificates and the payment of the Subscription Price to the Subscription Agent will be at the election and risk of the Subscription Rights holder. If sent by mail, it is recommended that they be sent by registered mail, properly insured, with return receipt requested, and that a sufficient number of days be allowed to ensure delivery to the Subscription Agent prior to the Expiration Date. 7