The objective of this study was to evaluate the potential of F1 and F2 hybrids by comparing them with parents for yield, fiber quality characteristics and heterosis values under drought stress conditions. In this study, eight cotton lines/varieties and 15 F1 and 15 F2 hybrids obtained by crossing five lines and three testers in the line x tester mating design during 2001 and 2002 cotton growing season, totally 38 genotypes (8 parent, 15 F1 hybrids and 15 F2 hybrids) were planted in randomized complete block design (RCBD) with three replications in 2003. At this study seed cotton yield, lint percentage and fiber quality characteristics such as fiber length, fineness, strength, elongation, uniformity and spinning consistency index (SCI) were investigated. The result of this study showed that the variances among the genotypes were significant for lint percentage, fiber fineness, fiber strength and spinning consistency index. Similarly, variance for fiber fineness was significant among parents, F1 and F2 hybrids. In relative performance, F1 and F2 hybrids, on an average produced 9.74 and 3.41% more yield than the parents, respectively. Though, F2 hybrid population have shown -5.77% inbreeding depression, nevertheless 6 of the 15 F2 hybrid populations had higher yield than F1 hybrids indicating that potential in F2 hybrids exists to replace F1 hybrids crop development under drought stress conditions. In lint percentage, fiber length and fiber strength; average of F1 and F2 hybrids were higher than average of parental genotypes. Especially, in fiber fineness F2 hybrids were slightly higher than average of parental genotypes, but F1 hybrids were lower than both F2 and parent