UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549





Form
10-K





(Mark
One)


[X]      ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934


For the fiscal year ended December 31,
2008


OR





[ 
 ]      TRANSITION REPORT PURSUANT TO SECTION
13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934


For the transition period ________ to ________





Commission
      File Number 1-12368





Tandy Leather Factory,
  Inc.(exact
      name of registrant as specified in its
charter)





Delaware
                    
                    75-2543540(State
      or other jurisdiction of incorporation)
                    
                    (IRS
      Employer Identification Number)1900
      Southeast Loop 820, Fort Worth, TX  76140
                    
                    817/872-3200(Address
      of principal executive offices)
                    
                    (Registrant’s
      telephone number, including area code)


Securities
registered pursuant to Section 12(b) of the Act:


Title
      of Each Class
              
              Name of Each Exchange on Which
      RegisteredCommon
      Stock, par value $0.0024
              
              NYSE
      Amex





Securities registered pursuant to
Section 12(g) of the Act:NONE





Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act  Yes [  ]  No
[X]





Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act.  Yes
[  ]  No [X]





Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.  Yes [X]  No [  ]





Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [  ]





Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer.  See definition of
“accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange
Act.  (Check one):  Large accelerated filer
[  ]  Accelerated filer
[  ]  Non-accelerated filer [X]





Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act).  Yes [  ]  No [X]





The
aggregate market value of the common stock held by non-affiliates of the
registrant was approximately $22,193,469 at June 30, 2008 (the last business day
of its most recently completed second fiscal quarter).  At March 10,
2009, there were 10,664,555 shares of the registrant's common stock
outstanding.





DOCUMENTS
INCORPORATED BY REFERENCE





Portions
of the Registrant’s definitive Proxy Statement for the Annual Meeting of
Stockholders to be held on May 12, 2009, are incorporated by reference in Part
III of this report.








TABLE OF CONTENTS





Item
                  
                  PagePart
      11
                  Business
                  11A
                  Risk Factors
                  52
                  Properties
                  63
                  Legal Proceedings
                  74
                  Submission of Matters to a Vote of Security
      Holders
                  7Part
      II5
                  Market for Registrant’s Common Equity, Related Stockholder
      Matters and Issuer Purchases of Equity Securities
                  76
                  Selected Financial Data
                  87
                  Management’s Discussion and Analysis of Financial Condition
      and Results of Operations
                  87A
                  Quantitative and Qualitative Disclosures about Market
      Risk
                  128
                  Financial Statement and Supplementary
      Data
                  139
                  Change in and Disagreements with Accountants on
      Accounting and Financial Disclosure
                  289A
                  Controls and Procedures
                  289B
                  Other Information
                  28Part
      III10
                  Directors, Executive Officers and Corporate
      Governance
                  2811
                  Executive Compensation
                  2812
                  Security Ownership of Certain Owners and Management and
      Related Stockholder Matters
                  2813
                  Certain Relationships and Related Transactions and
      Director Independence
                  2814
                  Principal Accountant Fees and Services
                  28Part
      IV15
                  Exhibits, Financial Statement
    Schedules
                  29













PART
I





ITEM
1.  BUSINESS





General





We are a
retailer and wholesale distributor of a broad line of leather and related
products, including leather, leatherworking tools, buckles and adornments for
belts, leather dyes and finishes, saddle and tack hardware, and do-it-yourself
kits. We also manufacture leather lacing and kits.  During 2008, our
consolidated sales totaled $53.2 million of which approximately 13% were export
sales.  We maintain our principal offices at 1900 Southeast Loop 820,
Fort Worth, Texas 76140.  Our common stock trades on the NYSE Amex
(formerly the American Stock Exchange) under the symbol "TLF."





Our
company was founded in 1980 as Midas Leathercraft Tool Company, a Texas
corporation.  Midas' original business activity focused on the
distribution of leathercraft tools.  In addition, the founders of
Midas entered into a consulting agreement with Brown Group, Inc., a major
footwear retailer, as a result of their proposal to develop a multi-location
chain of wholesale stores known as "The Leather Factory."  In 1985,
Midas purchased the assets of The Leather Factory from Brown Shoe Group, which
then consisted of six wholesale stores.





In 1993,
we changed our name to "The Leather Factory, Inc.", then reincorporated in the
state of Delaware in 1994.  In 2005, we changed our name to Tandy
Leather Factory, Inc.





Our
Development in Recent Years





We have
expanded our wholesale chain by opening new stores and by numerous acquisitions
of small businesses in strategic geographic locations including the acquisition
of our Canadian distributor, The Leather Factory of Canada, Ltd., in
1996.  By 2000, we had grown to 27 Leather Factory stores located in
the United States and two Leather Factory stores in Canada.   In
November 2000, we acquired the operating assets of two subsidiaries of
Tandycrafts, Inc. to form Tandy Leather Company.  In 2002, we began
opening retail stores under the "Tandy Leather" name.  During that
year, Tandy Leather purchased four independent leathercraft retail stores and
opened another 10.  We also opened our thirtieth Leather Factory store
- our third in Canada.  In 2003, we opened 12 Tandy Leather retail
stores.  In 2004, we purchased three independent leathercraft retail
stores and opened an additional nine stores in the U.S.  We also
opened another store in Canada which is operating as a Tandy Leather retail
store.  In November 2004, we acquired all of the issued and
outstanding shares of capital stock of Heritan Ltd. and its parent, our primary
Canadian competitor, headquartered in Barrie, Ontario.  The
acquisition resulted in an additional three retail stores in Canada, bringing
the total locations in Canada to seven - three Leather Factory stores and four
Tandy Leather stores.  In 2005, we opened eight Tandy Leather retail
stores.  In 2006, we opened 11 Tandy Leather retail stores and
converted one wholesale store to a retail store.   In 2007, we
purchased one independent leathercraft store and opened an additional nine
retail stores – eight in the U.S. and one in Canada.  We also
purchased Mid-Continent Leather Sales, Inc., a competitor located in Oklahoma,
which became our thirtieth wholesale store.  In 2008, we opened one
retail store in the U.S. and one combination wholesale and retail store in
Northampton, United Kingdom.





At
December 31, 2008, we operated 30 wholesale stores – 29 operating under the
Leather Factory name (26 in the U.S. and three in Canada) and one operating
under the Mid-Continent Leather Sales name.  We also operated 73
retail stores operating under the Tandy Leather name (67 in the U.S. and six in
Canada) as well as one combination wholesale and retail store operating under
the Tandy Leather Factory name in the United Kingdom.  Finally, we
also own and operate Roberts, Cushman and Company, Inc., a distributor of custom
hat trims.





Our
growth, measured both by our net sales and net income, occurs as a result of the
increase in the number of stores we have and the increase from year to year of
the sales in our existing stores.  The following tables provide
summary information concerning the additions of facilities for our Leather
Factory wholesale stores and Tandy Leather retail stores in each of our fiscal
years from 1999 to 2008.








STORE
COUNT


YEARS
ENDED DECEMBER 31, 1999 through 2008





Leather Factory wholesale
      stores
              Tandy Leather retail
  storesYear
      Ended
              Opened
              Conversions(1)
              Total
              Opened (2)
              Closed
              TotalBalance
      Fwd
              
              
              22
              
              
              N/A1999
              4
              0
              26
              
              
              N/A2000
              2
              0
              28
              1*
              0
              12001
              2
              0
              30
              0
              0
              12002
              1
              (1)
              30
              14
              1*
              142003
              0
              0
              30
              12
              0
              262004
              0
              0
              30
              16
              0
              422005
              0
              0
              30
              8
              0
              502006
              0
              (1)
              29
              12
              0
              622007
              1^
              0
              30
              10
              0
              722008
              0
              0
              30
              1
              0
              73





(1)
Leather Factory wholesale store converted to a Tandy Leather retail
store.


(2)  Includes
conversions of Leather Factory wholesale stores to Tandy Leather retail
stores.


(*)  The
Tandy Leather operation began as a central mail-order fulfillment center in 2000
which was closed in 2002.


(^)  Wholesale
store operating as Mid-Continent Leather Sales





No single
customer’s purchases represent more than 5% of our total sales in
2008.  Sales to our five largest customers combined to represent 6.2%,
8.3% and 9.5%, respectively, of consolidated sales in 2008, 2007 and
2006.  While management does not believe the loss of one of these
customers would have a significant negative impact on our operations, it does
believe the loss of several of these customers simultaneously or a substantial
reduction in sales generated by them could temporarily affect our operating
results.





Our
Operating Divisions





We
service our customers primarily through the operation of four
divisions.  We identify those divisions based on management
responsibility and customer focus.  The Wholesale Leathercraft
division consists of thirty wholesale stores of which 27 are located in the
United States and three are located in Canada.  As of March 1, 2009,
the Retail Leathercraft division consists of 74 Tandy Leather retail stores of
which 68 are located in the United States and six are located in
Canada.  Both of these divisions sell leather and leathercraft-related
products.  The International Leathercraft division consists of all
stores, wholesale or retail, located outside of North
America.  Currently, we have one such store located in the United
Kingdom.  Our fourth business segment, referred to as “Other,”
consists of our hatband manufacturer, Roberts, Cushman & Company,
Inc.





1
 TABLE
OF CONTENTS


Wholesale
Leathercraft





The
Wholesale Leathercraft operation distributes its broad product line of leather
and leathercraft-related products in the United States and internationally
through Leather Factory stores.   This segment had net sales of
$26.4 million, $29.6 million and $31.0 million for 2008, 2007 and 2006,
respectively.  The wholesale stores operate under the name “The
Leather Factory”, with the exception of the one store we acquired in February
2007 which operates under the name “Mid-Continent Leather Sales.”





GeneralWe operate wholesale
stores in 20 states and three Canadian provinces.  The centers range
in size from 2,600 square feet to 19,800 square feet, with the average size of a
store being approximately 6,000 square feet.    The type of
premises utilized for our wholesale stores is generally light industrial
office/warehouse space in proximity to a major freeway or with other similar
access.  This type of location typically offers lower rents compared
to other more retail-oriented locations.





Business
StrategyThe Leather Factory business concept centers around the wholesale
distribution of leather and related accessories to retailers, manufacturers and
end users.  Our strategy is that a customer can purchase the leather,
related accessories and supplies necessary to complete his project from one
place.  The size and layout of the centers are planned to allow large
quantities of product to be displayed in an easily accessible and visually
appealing manner.  Leather is displayed by the pallet where the
customer can see and touch it, assessing first-hand the numerous sizes, styles
and grades offered.  The location of the stores is selected based on
the location of customers, so that delivery time to customers is
minimized.  A two-day maximum delivery time for phone, internet and
mail orders is our goal.





Our
wholesale stores serve customers through various means including walk-in
traffic, phone and mail order.  We also employ a distinctive marketing
tactic in that we maintain an internally-developed target customer mailing list
for use in our aggressive direct mail advertising campaigns.  We staff
our stores with experienced managers whose compensation is tied to the operating
profit of the store they manage.  Sales are generated by the selling
efforts of the store personnel, our direct mail advertising, our website
(www.tandyleatherfactory.com), our participation at trade shows and, on a
limited basis, the use of sales representative organizations.  The
sales representative organizations consist of companies located in specific
geographic areas that represent numerous companies in a similar
industry.  These organizations call on customers and show multiple
products from more than one vendor at a time.





Customers  Our
customer base consists of individuals, wholesale distributors, tack and saddle
shops, institutions (prisons and prisoners, schools, hospitals), western stores,
craft stores and craft store chains, other large volume purchasers,
manufacturers and retailers dispersed geographically throughout the
world.  Wholesale sales constitute the majority of our business,
although retail customers may purchase products from our wholesale
stores.  The Wholesale Leathercraft division’s sales generally do not
reflect significant seasonal patterns.





Our
Authorized Sales Center (“ASC”) program was developed to create a presence in
geographical areas where we do not have a wholesale store.  An
unrelated person operating an existing business who desires to become an ASC
must submit an application and upon approval, place a minimum initial
order.  There are also minimum annual purchase amounts to which the
ASC must adhere in order to maintain ASC status.  In exchange, the
benefits to the ASC are free advertising in various sale flyers produced and
distributed by us, price breaks on many products, advance notice of new
products, and priority shipping and handling on all orders.  Our
wholesale stores service 151 ASC's:  87 located in the U.S., 42
located in Canada, and 22 located outside North America.





Merchandise  Our
products are generally organized into thirteen categories.  We carry a
wide assortment of products including leather, lace, hand tools, kits and craft
supplies.  We operate a light manufacturing facility in Fort Worth
whose processes generally involve cutting leather into various shapes and
patterns using metal dies.  The factory produces approximately 20% of
our products and also assembles and repackages products as
needed.  Products manufactured in our factory are distributed through
our stores under the TejasTM
brand name.  We also distribute product under the Tandy LeatherTM
and Dr. Jackson'sTM
brands.  We develop new products through the ideas and referrals of
customers and store personnel as well as the tracking of fads and trends of
interest in the market.





We offer
an unconditional satisfaction guarantee to our customers.  Simply
stated, we will accept product returns for any reason.  We believe
this liberal policy promotes customer loyalty.  We offer credit terms
to our non-retail customers, upon receipt of a credit application and approval
by our credit manager.  Generally, our open accounts are net 30
days.





During
2008 and 2007, Wholesale Leathercraft division sales by product category were as
follows:





Product Category
              2008 Sales Mix
              
              2007 Sales MixBelts
      strips and straps
              2%
              
              3%Books,
      patterns, videos
              1%
              
              2%Buckles
              4%
              
              4%Conchos^
              5%
              
              4%Craft
      supplies
              6%
              
              4%Custom
      tools and hardware
              0%
              
              0%Dyes,
      finishes, glues
              6%
              
              5%Hand
      tools
              12%
              
              12%Hardware
              7%
              
              8%Kits
              8%
              
              7%Lace
              9%
              
              10%Leather
              36%
              
              37%Stamping
      tools
              4%
              
              4%100%
              
              100%





^A concho
is a metal adornment attached to clothing, belts, saddles, etc., usually made
into a pattern of some southwestern or geometric object.





In
addition to meeting ordinary operational requirements, our working capital
demands are a product of the need to maintain a level of inventory sufficient to
fill customer orders as they are received with minimal backorders and the time
required to collect our accounts receivable.  Because availability of
merchandise and prompt delivery time are important competitive factors for us,
we maintain higher levels of inventory than our smaller
competitors.  For additional information regarding our cash, inventory
and accounts receivable at the end of 2008 and 2007, see "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of
Operations."





SuppliersWe purchase merchandise
and raw materials from approximately 200 vendors dispersed throughout the United
States and in approximately 15 foreign countries.In 2008, our ten largest
vendors accounted for approximately 70% of our inventory purchases.





Because
leather is sold internationally, market conditions abroad are likely to affect
the price of leather in the United States.  Outbreaks of mad cow and
hoof-and-mouth disease (or foot-and-mouth disease) in any part of the world can
influence the price of the leather we purchase.  As such an occurrence
is beyond our control, we cannot predict when and to what extent we could be
affected in the future.  Aside from increasing purchases when we
anticipate price increases (or possibly delaying purchases if we foresee price
declines), we do not attempt to hedge our inventory costs.





Overall,
we believe that our relationships with suppliers are strong and do not
anticipate any material changes in these supplier relationships.  Due
to the number of alternative sources of supply, the loss of any of these
principal suppliers would not have a material impact on our
operations.





Operations  Hours
of operations vary by location, but generally range from 8:00 am to 6:00 pm
Monday through Friday, and from 9:00 am to 4:00 pm on Saturdays.  The
stores maintain uniform prices, except where lower prices are necessary to meet
local competition.





2
 TABLE
OF CONTENTS


CompetitionMost of our competition
comes in the form of small, independently-owned retailers who in most cases are
also our customers.  We estimate that there are a few hundred of these
small independent stores in the United States and Canada.  We compete
on price, availability of merchandise, and delivery time.  While there
is competition in connection with a number of our products, to our knowledge
there is no direct competition affecting our entire product line.  Our
large size relative to most competitors gives us the advantage of being able to
purchase large volumes and stock a full range of products.





DistributionThe wholesale stores
receive the majority of their inventory from our central warehouse located in
Fort Worth, Texas, although occasionally, merchandise is shipped directly from
the vendor.  Inventory is shipped to the stores from our central
warehouse once a week to meet customer demand without sacrificing inventory
turns.  Customer orders are filled as received, and we do not have
backlogs.





We
attempt to maintain the optimum number of items in our product line to minimize
out-of-stock situations against carrying costs involved with such an inventory
level.  We generally maintain higher inventories of imported items to
ensure a continuous supply.  The number of products offered changes
every year due to the introduction of new items and the discontinuance of
others.  We carry approximately 2,800 items in the current lines of
leather and leather-related merchandise.  All items are offered in all
stores.





Expansion  Our
wholesale store expansion across the United States has been fairly consistent
since we purchased the original six stores in 1985.  We opened our
thirtieth store in August 2002.  We converted one wholesale (Leather
Factory) store to a retail (Tandy Leather) store in 2006, reducing the number of
wholesale stores to29.  We acquired Mid-Continent Leather Sales in
2007, a wholesale store located in Oklahoma, increasing the number of wholesale
stores to 30.  While we do not believe there is a significant and
immediate opportunity for expansion of the Leather Factory distribution system
in terms of opening additional locations, we do believe expansion could be
achieved by acquiring companies in related areas/markets which offer
collaborative advantages based on the local markets and/or the product lines of
the businesses.





Retail
Leathercraft





Our
Retail Leathercraft division consists of a growing chain of retail stores
operating under the name, Tandy Leather.  Tandy Leather Company,
established in 1919 as Hinkley-Tandy Leather Company, is the oldest and
best-known supplier of leather and related supplies used in the leathercraft
industry.  We offer a product line of quality tools, leather,
accessories, kits and teaching materials.   This segment had net
sales of $25.2 million, $24.7 million and $22.5 million for 2008, 2007 and 2006,
respectively.





General     As
of March 1, 2009, the Tandy Leather retail chain has 74 stores located in 35
states and five Canadian provinces with plans to reach 100 to 120 stores as
opportunities arise over the next several years.  The stores range in
size from 1,200 square feet to 3,800 square feet, with the average size of a
store being approximately 2,000 square feet.   The type of
premises utilized for a retail store is generally an older strip shopping center
located at well-known crossroads, making the store easy to find.





Business
StrategyTandy Leather has long been known for its reputation in the leathercraft
industry and its commitment to promoting and developing the craft through
education and customer development.  Our commitment to this strategy
is evidenced by our re-establishment of the retail store chain throughout the
United States following our acquisition of the assets of Tandy Leather in
2000.  We continue to broaden our customer base by working with
various youth organizations and institutions where people are introduced to
leathercraft, as well as hosting classes in our stores.





The
retail stores serve walk-in, mail and phone order customers as well as orders
generated from our website, www.tandyleatherfactory.com.  Our retail
stores are staffed by knowledgeable sales people whose compensation is based, in
part, upon the profitability of their store.  Sales by Tandy Leather
are driven by the efforts of the store staff, trade shows, and our direct mail
and e-mail marketing program.





CustomersIndividual retail
customers are our largest customer group, representing more than 65% of Tandy
Leather's 2008 sales.  Youth groups, summer camps, schools and a
limited number of wholesale customers complete our customer
base.  Like the wholesale stores, the retail stores fill orders as
they are received, and there is no order backlog.  The retail stores
maintain reasonable amounts of inventory to fill these orders.  Tandy
Leather’s retail store operations historically generate slightly more sales in
the fourth quarter of each year (30-32%), while the other three quarters remain
fairly even at 23-25% per quarter.





Merchandise  Our
products are generally organized into thirteen categories.  We carry a
wide assortment of products including leather, hand tools, kits, dyes &
finishes and stamping tools.  During 2008 and 2007, Retail
Leathercraft division sales by product category were as follows:





Product Category
              2008 Sales Mix
              
              2007 Sales MixBelts
      strips and straps
              4%
              
              4%Books,
      patterns, videos
              3%
              
              3%Buckles
              4%
              
              4%Conchos
              4%
              
              4%Craft
      supplies
              4%
              
              3%Dyes,
      finishes, glues
              8%
              
              8%Hand
      tools
              15%
              
              16%Hardwre
              6%
              
              6%Kits
              11%
              
              11%Lace
              4%
              
              4%Leather
              31%
              
              31%Stamping
      tools
              6%
              
              6%100%
              
              100%





As
indicated above, the products sold in our retail stores are also sold in our
wholesale stores.  Therefore, the discussion above regarding products,
their sources and the working capital requirements for the Wholesale
Leathercraft division also apply to the Retail Leathercraft
division.  Sales at the retail stores are generally made through cash
transactions or through national credit cards.  We also sell on open
account to selected wholesale customers including schools and other institutions
and small retailers.  Our terms are generally net 30
days.  Like the wholesale stores, the retail stores have an
unconditional return policy.





OperationsHours of operation are
9:00 am to 6:00 pm Monday through Friday, and from 9:00 am to 4:00 pm on
Saturdays.  In addition, most of the stores stay open late one night a
week for leathercrafting classes taught in the stores.  Selling prices
are uniform throughout the retail store system.





CompetitionOur competitors are
generally small local craft stores that carry a limited line of leathercraft
products.  Several national retail chains that are customers in our
Wholesale Leathercraft division also carry leathercraft products on a very small
scale relative to their overall product line.  To our knowledge, our
retail store chain is the only one in existence solely specializing in
leathercraft.





DistributionThe retail stores
receive their inventory from our central warehouse located in Fort Worth,
Texas.  The stores generally restock their inventory once a week with
a shipment from the warehouse.  Retail Leathercraft’s inventory turns
are higher than Wholesale Leathercraft’s because the Wholesale Leathercraft
calculation includes the central warehouse inventory whereas the Retail
Leathercraft calculation includes only the inventory in the Tandy Leather retail
stores.





Expansion  We
intend to expand the Tandy Leather retail store chain to between 100 and 120
stores throughout North America as it makes financial sense to do so. 14 stores
were opened in 2002; 12 stores were opened in 2003; 16 were opened in 2004
(including four in Canada); eight were opened in 2005, 12 were opened in 2006,
ten were opened in 2007 and one was opened in 2008.  Of the 72 stores
opened to date, 11 were independent leathercraft stores that we
acquired.  Separately, these acquisitions are not
material.  The other 62 stores have been de novo stores opened by
us.  In 2009, we plan to open four retail stores. We have already
opened one and anticipate the remaining three to be opened in the middle to last
half of the year.





3
 TABLE
OF CONTENTS


International
Leathercraft





Our
International Leathercraft division consists of company-owned stores located
outside of North America.  Currently, we have one wholesale and retail
combination store located in Northampton, United Kingdom, which we opened in
February 2008.  It operates under the Tandy Leather Factory trade
name.  This segment had net sales of $836,000 in 2008.





Business
Strategy   The business concept for our International
Leathercraft division is a blending of our Leather Factory and Tandy Leather
business strategies – the wholesale distribution of leather and related
accessories to retailers, manufacturers and other businesses, as well as the
promotion and continuance of leathercraft through education and development of
the retail customers.  The store is located in a 6,600 square foot
building in a light industrial area.  We maintain sufficient inventory
so that our customers can purchase the leather, related accessories and supplies
necessary to complete their projects from one supplier.  The layout of
the store is such that large quantities of product can be displayed in an easily
accessible and visually appealing manner.  The store services walk-in,
mail and phone order customers as well as orders generated from its website,
www.tandyleatherfactory.co.uk.  Sales
are driven by the efforts of the store staff, trade shows, and our direct mail
and e-mail marketing programs.





Customers   The
growing customer base consists of individuals, wholesale distributors,
equine-related shops, cobblers, dealers, and retailers dispersed geographically
throughout the UK and Europe.  Retail sales generally occur via cash
transactions or through national credits cards.  We also sell on open
account to selected wholesale customers including dealers, manufacturers, and
retailers.  Like our USA stores, our UK store has an unconditional
return policy.





Merchandise   The
products sold in our UK store are also sold in our USA
stores.  Therefore, the discussion above regarding products, their
sources and the working capital requirements for the Wholesale and Retail
Leathercraft divisions also apply here.





Operations   Hours
of operation are 8:00 am to 5:00 pm Monday through Friday, and from 8:00 am to
2:00 pm on Saturdays.  Selling prices are consistent with the USA
store pricing, adjusted for currency fluctuation.





Distribution   The
UK store receives the majority of its inventory from our central warehouse
located in Fort Worth, Texas, although occasionally, merchandise is shipped
directly from the vendor.  Inventory is shipped from our warehouse to
the store several times per month to meet customer demand without sacrificing
inventory turns.  Customer orders are filled as received, and we do
not have backlogs.





Expansion   We
intend to expand further internationally although have no specific plans or time
frame at this time.  We will continue to grow our customer base
throughout Europe as well as other parts of the world so that we can support
additional stores.





Other





Roberts,
Cushman, founded in 1856, supplies made-to-order trimmings to the headwear
industry.  This segment had net sales of $745,000, $1.1 million, and
$1.7 million for 2008, 2007 and 2006, respectively.  This segment is
immaterial to our overall business strategy.





For more
information about our business and our reportable segments, see Item 7
“Management’s Discussion and Analysis of Financial Condition and Results of
Operations” on page 8.





Additional
Information





Compliance
With Environmental LawsOur compliance with
federal, state and local environmental protection laws has not had, and is not
expected to have, a material effect on our capital expenditures, earnings or
competitive position.





EmployeesAs of December 31, 2008,
we employed 458 people, 367 of whom were employed on a full-time
basis.  We are not a party to any collective bargaining
agreements.  Overall, we believe that relations with employees are
good.





Intellectual
Property     We own approximately 20 registered
trademarks, including federal trade name registrations for "The Leather Factory"
and "Tandy Leather Company."  We also own approximately 20 registered
foreign trademarks worldwide.





We own
approximately 500 registered copyrights in the United States covering more than
600 individual works relating to various products.  We also own
several United States patents for specific belt buckles and leather-working
equipment.  These rights are valuable assets, and we defend them as
necessary.





International
OperationsInformation regarding
our revenues from the United States and abroad and our long-lived assets are
found in Note 14 to our Consolidated Financial Statements, Segment
Information.





Our
Website and Availability of SEC Reports     We
file reports with the Securities and Exchange Commission
("SEC").  These reports include our Annual Report on Form 10-K,
Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and any amendments
to these filings.  The public may read any of these filings at the
SEC's Public Reference Room at 100 F Street, NE, Washington,
DC  20549.  In addition, the public may obtain information
on the operation of the Public Reference Room by calling the SEC at
1-800-SEC-0330.  Further, the SEC maintains an Internet site that
contains reports, proxy and information statements and other information
concerning us.  You can connect to this site at
http://www.sec.gov.





Our
corporate website is located at
http://www.tandyleatherfactory.com.  We make copies of our Annual
Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form
8-K, proxy statements and any amendments filed with or furnished to the SEC
available to investors on or through our website free of charge as soon as
reasonably practicable after we electronically file them with or furnish them to
the SEC.  Our SEC filings can be found on the Investor Relations page
of our website through the "SEC Filings" link.  In addition, certain
other corporate governance documents are available on this website through the
"Corporate Governance" link.





4
 TABLE
OF CONTENTS


Executive
Officers of the Registrant





The
following table sets forth information concerning our executive officers as of
March 27, 2009:





Name and Age
            Position
      and Business ExperienceDuring Past Five Years
            Served as OfficerSinceJ.
      Wray Thompson, 77
            Chairman
      of the Board since June 1993; Chief Executive Officer from June 1993 to
      December 2006
            1993Ronald
      C. Morgan, 61
            Chief
      Executive Officer since January 2007; President since January 2001; Chief
      Operating Officer since June 1993
            1993Jon
      W. Thompson, 47
            President
      since June 2008; Senior Vice President since June 1993
            2008Shannon
      L. Greene, 43
            Chief
      Financial Officer since May 2000
            2000Mark
      J. Angus, 48
            Senior
      Vice President since June 2008; Vice President of Merchandising since June
      1993
            2008Robin
      L. Morgan, 58
            Vice
      President of Administration since June 1993
            1993





Wray Thompsonhas served as
our Chairman of the Board since June 1993.  He served as Chief
Executive Officer from June 1993 to December 2006.  He also served as
President from June 1993 to January 2001.  Mr. Thompson was a
co-founder of the company.





Ronald C. Morgan has served as
our Chief Executive Officer since January 2007.  He has also served as
President and Chief Operating Officer from January 2001 to June 2008 and
director since June 1993.  Mr. Morgan was also a co-founder of
the company.  Mr. Morgan is married to Robin L. Morgan, our Vice
President.





Jon W. Thompson has served as
President and Chief Operating Officer since June 2008, following the resignation
of Ron Morgan.  He served as Senior Vice President from June 1993 to
June 2008.  Mr. Thompson is the son of Wray Thompson, Chairman of the
Board.





Shannon L. Greenehas served
as our Chief Financial Officer and Treasurer since May 2000 and director since
January 2001.  Ms. Greene is also our Chief Accounting
Officer.  Ms. Greene, a certified public accountant, also serves on
our 401(k) Plan committee.  Her professional affiliations include the
American Institute of Certified Public Accountants, the Texas Society of
Certified Public Accountants and its Fort Worth chapter, the Fort Worth
Association for Financial Professionals, and the Financial Executives
International.  She also sits on the Board of Directors of the U.S.
Chamber of Commerce.





Mark J. Angus has served as
Senior Vice President since June 2008, following Jon Thompson’s
resignation.  He served as Vice President of Merchandising since
January 1993.





Robin L. Morganhas served as
our Vice President of Administration and Assistant Secretary since June
1993.  She   serves as chairman of our 401(k) Plan
committee.  Ms. Morgan is married to Ronald C. Morgan, our
CEO.





All officers are elected annually by
the Board of Directors to serve for the ensuing year.





ITEM
1A.   RISK FACTORS





You
should carefully consider the following risk factors together with all of the
other information included in this annual report, including the financial
statements and related notes, when deciding to invest in us.  You
should be aware that the occurrence of any of the events described in this Risk
Factors section and elsewhere in this annual report could have a material
adverse effect on our business, financial position, results of operations and
cash flows.  Some, but not all, of the important risks which could
cause actual results to differ materially from those suggested by
forward-looking statements made by us include the following:





·
            We
      might fail to realize the anticipated benefits of the opening of Tandy
      Leather retail stores or we might be unable to obtain sufficient new
      locations on acceptable terms to meet our growth
      plans.  Further, we might fail to hire and train competent
      managers to oversee the stores
opened.





·
            Continued
      weakness in the economy in the United States, as well as abroad, may cause
      our sales to decrease or not to increase or adversely affect the prices
      charged for our products.  Also, hostilities, terrorism or other
      events could worsen this condition.




·
            Negative
      trends in general consumer-spending levels, including the impact of the
      availability and level of consumer debt and levels of consumer confidence
      could adversely affect our sales.




·
            Political
      considerations here and abroad could disrupt our sources of supplies from
      abroad or affect the prices we pay for
goods.





·
            Continued
      involvement by the United States in war and other military operations in
      the Middle East and other areas abroad could disrupt international trade
      and affect our inventory sources.





·
            As
      a result of the on-going threat of terrorist attacks on the United States,
      consumer buying habits could change and decrease our
  sales.




·
            Livestock
      diseases such as mad cow could reduce the availability of hides and
      leathers or increase their cost.  Also, the prices of hides and
      leathers fluctuate in normal times, and these fluctuations can affect
      us.




·
            If,
      for whatever reason, the costs of our raw materials and inventory
      increase, we may not be able to pass those costs on to our
      customers.




·
            Other
      factors could cause either fluctuations in buying patterns or possible
      negative trends in the craft and western retail markets. In addition, our
      customers may change their preferences to products other than ours, or
      they may not accept new products as we introduce
  them.




·
            Any
      change in the commercial banking environment may affect us and our ability
      to borrow capital as needed.





Other
uncertainties, which are difficult to predict and many of which are beyond our
control, may occur as well.








5
 TABLE
OF CONTENTS


ITEM
2.   PROPERTIES





We lease
all of our store locations premises, with the majority of our stores having
initial lease terms of approximately five years.  The leases are
generally renewable, with increases in lease rental rates in some
cases.  We believe that all of our properties are adequately covered
by insurance.  The properties leased by our Wholesale Leathercraft
(Leather Factory stores), Retail Leathercraft (Tandy Leather stores), and
International Leathercraft divisions are described in Item 1 in the description
of each segment.  We also lease a 284 square-foot showroom in the
Denver Merchandise Mart for $5,908 per year.  This lease will expire
in October 2011.





We own
our corporate headquarters, which includes our central warehouse and
manufacturing facility, the sales, advertising, administrative, and executive
offices, and the administrative offices of Roberts, Cushman.  The
facility consists of 191,000 square feet located on approximately 30
acres.





The
following table summarizes the locations of our leased premises as of December
31, 2008:





State
              Wholesale
      Leathercraft
              Retail
      Leathercraft
              InternationalAlabama
              -
              1
              -Alaska
              -
              1
              -Arizona
              2
              2
              -Arkansas
              -
              1
              -California
              3
              7
              -Colorado
              1
              3
              -Connecticut
              -
              1
              -Florida
              1
              3
              -Georgia
              -
              1
              -Idaho
              -
              1
              -Illinois
              1
              1
              -Indiana
              -
              2
              -Iowa
              1
              -
              -Kansas
              1
              -
              -Kentucky
              -
              1
              -Louisiana
              1
              -
              -Maryland
              -
              1
              -Massachusetts
              -
              1
              -Michigan
              1
              1
              -Minnesota
              -
              2
              -Missouri
              1
              2
              -Montana
              1
              -
              -Nebraska
              -
              1
              -Nevada
              -
              2
              -New
      Mexico
              1
              2
              -New
      York
              -
              1
              -North
      Carolina
              -
              2
              -Ohio
              1
              2
              -Oklahoma
              1
              2
              -Oregon
              1
              -
              -Pennsylvania
              1
              2
              -South
      Carolina
              -
              1
              -South
      Dakota
              -
              1
              -Tennessee
              1
              3
              -Texas
              5
              9
              -Utah
              1
              2
              -Virginia
              -
              1
              -Washington
              1
              2
              -Wisconsin
              -
              1
              -Wyoming
              -
              1





Canadian
      locations:Alberta
              1
              1
              -British
      Columbia
              -
              1
              -Manitoba
              1
              -
              -Nova
      Scotia
              -
              1
              -Ontario
              1
              2
              -Quebec
              -
              1
              -





International
      locations:United
      Kingdom
              -
              -
              1





6
 TABLE
OF CONTENTS





ITEM
3.   LEGAL PROCEEDINGS





We are
involved in litigation in the ordinary course of business but are not currently
a party to any material pending legal proceedings.





ITEM
4.   SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS





There
were no matters submitted to a vote of our security holders during the fourth
quarter of our fiscal year ended December 31, 2008.





PART II





ITEM
5.  MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS





Our
common stock is traded on the NYSE Amex using the symbol “TLF”.  The
high and low trading prices for each calendar quarter during the last two fiscal
years are as follows:





2008
              High
              Low
              
              2007
              High
              Low4th
      quarter
              $2.75
              $1.72
              
              4th
      quarter
              $7.15
              $2.703rd
      quarter
              $3.07
              $2.49
              
              3rd
      quarter
              $7.55
              $5.802nd
      quarter
              $3.37
              $2.63
              
              2nd
      quarter
              $7.50
              $6.851st
      quarter
              $3.32
              $2.30
              
              1st
      quarter
              $8.25
              $6.81





There
were approximately 526 stockholders of record on March 1,
2009.





We have
never declared or paid any cash dividends on the shares of our common
stock.   Our Board of Directors has historically followed a
policy of reinvesting our earnings in the expansion of our
business.  This policy is subject to change based on future industry
and market conditions, as well as other factors.





We did
not sell any shares of our equity securities during our fiscal year ended
December 31, 2008 that were not registered under the Securities
Act.





The
following table provides information about purchases we have made of our common
stock during the quarter ended December 31, 2008:





ISSUER
      PURCHASES OF EQUITY SECURITIESPeriod
              (a)
      Total Number of Shares  Purchased
              (b)
      Average Price
                Paid
      per Share
              (c)
      Total Number of Shares Purchased as Part of Publicly Announced Plans or
      Programs
              (d)
      Maximum Number (or Approximate Dollar Value) of Shares that May Yet Be
      Purchased Under the Plans or ProgramsOctober
      1 through October 31
              194,610
              $2.67
              194,610
              292,180November
      1 through November 30
              73,332
              $2.35
              73,332
              218,848December
      1 through December 31
              56,595
              $1.96
              56,595
              -0-Total
              324,537(1)
              $2.47
              324,537
              -0-





(1)
            On
      September 9, 2008, our Board of Directors approved a limited stock
      repurchase plan whereby all non-officer participants in The Leather
      Factory, Inc. Stock Ownership Plan (the “ESOP”) would have the option of
      selling the shares of our common stock distributed to them upon
      termination of the ESOP back to us. The option remained open to the
      non-officer participants for a period of sixty days beginning on September
      26, 2008 and ending on November 25, 2008. The purchase price of the shares
      was calculated at a price-per-share equal to the closing price of a share
      of our common stock on the American Stock Exchange on the business day
      each non-officer participant notified the ESOP administrator of his or her
      intent to sell his or her shares to us. All of the 324,537 shares we
      repurchased between October 1 and December 31, 2008 were repurchased in
      connection with the termination of the
ESOP.





Stockholder
Return Performance Graph





The line
graph below compares the yearly percentage change in our cumulative five-year
total stockholder return on our common stock with the Standard & Poor’s
SmallCap 600 Index and the S&P Specialty Stores Index.  The graph
assumes that $100 was invested on December 31, 2003 in our common stock,
the Standard & Poor’s SmallCap 600 Index, and the S&P Specialty Stores
Index, and that all dividends were reinvested.  The returns shown on
the graph are not necessarily indicative of future performance.





COMPARISON
OF FIVE-YEAR CUMULATIVE TOTAL RETURNS


Tandy
Leather Factory, Inc.








Company
      Name / Index
                              Dec
      03
                              Dec
      04
                              Dec
      05
                              Dec
      06
                              Dec
      07
                              Dec
      08TANDY
      LEATHER FACTORY
                              100
                              73.35
                              141.53
                              166.74
                              67.56
                              44.42S&P
      SMALLCAP 600 INDEX
                              100
                              122.65
                              132.07
                              152.04
                              151.58
                              104.48S&P
      SPECIALTY STORES
                              100
                              105.20
                              124.25
                              151.04
                              110.87
                              70.30





Data
Source: Research Data Group, Inc., San Francisco, CA





7
 TABLE
OF CONTENTS





ITEM 6.  SELECTED FINANCIAL
DATA





The
selected financial data presented below are derived from and should be read in
conjunction with our Consolidated Financial Statements and related
notes.  This information should also be read in conjunction with "Item
7 - Management’s Discussion and Analysis of Financial Condition and Results of
Operations.”  Data in prior years has not been restated to reflect
acquisitions, if any, that occurred in subsequent years.





Income
      Statement Data,
                Years
      ended December 31,
              2008
              
              2007
              
              2006
              
              2005
              
              2004Net
      sales
              $53,237,094
              
              $55,317,002
              
              $55,199,021
              
              $50,719,574
              
              $46,146,284Cost
      of sales
              21,857,800
              
              23,644,599
              
              23,566,251
              
              21,964,530
              
              20,706,239Gross
      profit
              31,379,294
              
              31,672,403
              
              31,632,770
              
              28,755,044
              
              25,440,045Operating
      expenses
              27,200,150
              
              27,161,402
              
              24,565,056
              
              23,181,633
              
              21,181,599Operating
      income
              4,179,144
              
              4,511,001
              
              7,067,714
              
              5,573,411
              
              4,258,446Operating
      income per share - basic
              $0.38
              
              $0.41
              
              $0.65
              
              $0.52
              
              $0.40Operating
      income per shares - diluted
              $0.38
              
              $0.40
              
              $0.64
              
              $0.51
              
              $0.39Other
      (income) expense
              67,072
              
              (316,831)
              
              (98,391)
              
              (134,502)
              
              44,800Income
      (loss) before income taxes
              4,112,072
              
              4,827,832
              
              7,166,105
              
              5,707,913
              
              4,213,646Income
      tax provision (benefit)
              1,507,891
              
              1,739,701
              
              2,389,039
              
              1,994,199
              
              1,559,605Net
      income (loss)
              $2,604,181
              
              $3,088,131
              
              $4,777,066
              
              $3,713,714
              
              $2,654,041Earnings
      (loss) per share
              $0.24
              
              $0.28
              
              $0.44
              
              $0.35
              
              $0.25Earnings
      (loss) per share- assuming
      dilution
              $0.24
              
              $0.28
              
              $0.43
              
              $0.34
              
              $0.24Weighted
      average common shares outstanding for:Basic
      EPS
              10,931,306
              
              10,951,481
              
              10,643,004
              
              10,643,004
              
              10,543,994Diluted
      EPS
              11,015,657
              
              11,157,775
              
              10,976,240
              
              10,976,240
              
              10,957,518








Balance
      Sheet Data, as of December 31,
              2008
              
              2007
              
              2006
              
              2005
              
              2004Cash
      and certificates of deposit
              $10,821,298
              
              $6,810,396
              
              $6,739,981
              
              $3,215,727
              
              $2,560,202Total
      assets
              40,975,913
              
              37,651,506
              
              31,916,635
              
              25,680,473
              
              22,167,163Capital
      lease obligation, including current portion
              593,949
              
              -
              
              111,723
              
              245,789
              
              379,857Long-term
      debt, including current portion
              3,915,000
              
              4,050,000
              
              -
              
              -
              
              505,154Total
      Stockholders’ Equity
              $31,264,762
              
              $29,815,504
              
              $26,323,243
              
              $21,257,857
              
              $17,310,233








ITEM
7.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS





We intend
for the following discussion to provide you with information that will assist
you in understanding our financial statements, the changes in key items in those
financial statements from year to year and the primary factors that accounted
for those changes, as well as how particular accounting principles affect our
financial statements.  This discussion also provides information about
the financial results of the various segments of our business so you may better
understand how those segments and their results affect our financial condition
and results of operations as a whole.  Finally, we have identified and
discussed trends known to management that we believe are likely to have a
material effect.





This
discussion should be read in conjunction with our financial statements as of
December 31, 2008 and 2007 and the two years then ended and the notes
accompanying those financial statements.  You are also urged to
consider the information under the caption "Summary of Critical Accounting
Policies."





Summary





We are
the world's largest specialty retailer and wholesale distributor of leather and
leathercraft-related items.  Our operations are centered on operating
retail and wholesale stores.  We have built our business by offering
our customers quality products in one location at competitive
prices.  The key to our success is our ability to grow our base
business.  We grow that business by opening new locations and by
increasing sales in our existing locations.  We intend to continue to
expand both domestically, in the short-term, and internationally, in the
long-term.





We
operate in four segments.  First, Wholesale Leathercraft, consisting
of our Leather Factory stores and our national account group, is the largest
source of our revenues ($26.4 million in 2008).  This division has
generally offered steady but modest increases in sales.  Sales in 2008
declined 10.6%.  The wholesale stores’ sales declined 10% compared to
2007 and national account sales were down 12%.  Much of the sales
decline at the stores is attributed to an overall weakness in consumer spending,
which results in fewer purchases of our products by small
businesses.  The decline in national account sales is related to
weaker consumer spending as well as the expected decline in sales to one
customer who stopped purchasing from us in the first quarter of
2008.





Since
acquiring its assets in 2000, we have focused on re-establishing Tandy Leather
as the operator of retail leathercraft stores.  These retail stores
comprise our second segment, Retail Leathercraft.  Because of growth
here, this segment has experienced the greatest increases in sales ($25.2
million in 2008, up from $24.6 million in 2007).  Our business plan
calls for opening an average of 10-12 stores annually as we work toward a goal
of 100+ stores from 73 stores at the end of 2008.  We have slowed down
our new store openings in recent years due to the general economic conditions in
the U.S.  We plan to open 4 new stores in 2009, one of which was
opened in the first quarter.





Our third
segment is International Leathercraft, which consists of stores located outside
of North America.  Currently, we have one retail/wholesale combination
store located in the United Kingdom, which was opened in February
2008.  It is our intention to add more stores to this segment once we
have a large enough customer base to support additional stores.





We refer
to our fourth segment as “Other”.  It consists of Roberts, Cushman, a
supplier of trimmings for headwear.  Its operations are not material
to us.





On a
consolidated basis, a key indicator of costs, gross margin as a percent of total
net sales, held steady in 2007 and increased in 2008.  Operating
expenses as a percent of total net sales in 2008 increased 2.0% from
2007.  Operating expenses increased 4.6% as a percentage of total net
sales in 2007 when compared with 2006.  The increase in operating
expenses in 2007 was due to our delayed response to cut expenses on weaker than
expected sales, particularly in the second and third quarters.  We
were much more successful in our control of operating expenses in 2008, given
the continued weak sales environment.





We
reported consolidated net income for 2008 of $2.6
million.  Consolidated net income for 2007 and 2006 was $3.1 million
and $4.8 million, respectively.  We have used our cash flow to fund
our operations, to fund the opening of new Tandy Leather stores, to purchase
necessary property and equipment and make acquisitions of small competitors in
the retail and wholesale market.  In 2007, we incurred $4.0 million in
bank debt to purchase a 191,000 square foot building to house our corporate
headquarters and central support units.  We moved into that facility
in the first quarter of 2008.  At the end of 2009, our stockholders’
equity had increased to $31.3 million from $29.8 million the previous
year.





Comparing
the December 31, 2008 balance sheet with the prior year’s balance sheet, we
reduced our investment in inventory from $17.5 million to $16.0 million, while
total cash (including certificates of deposit and other short-term investments)
increased from $6.8 million from $10.8 million.





8
 TABLE
OF CONTENTS


Net
Sales





Net sales
for the three years ended December 31, 2008 were as follows:





Year
            Wholesale Leathercraft
            Retail Leathercraft
            InternationalLeathercraft
            Other
            Total Company
            Incr (Decr) from Prior
  Year2008
            $26,423,858
            $25,231,145
            $836,535
            $745,556
            $53,237,094
            (3.8)%2007
            $29,555,978
            $24,663,750
            -
            $1,097,274
            $55,317,002
            0.2%2006
            $31,068,188
            $22,520,461
            -
            $1,610,372
            $55,199,021
            8.8%





Our net
sales fell by 3.8% in 2008 when compared with 2007 and grew by 0.2% in 2007 when
compared with 2006.  The 2008 sales decline resulted primarily from
our Wholesale Leathercraft segment, offset somewhat by an increase in Retail
Leathercraft sales and the sales from our new International Leathecraft segment,
although sales at our retail stores have slowed down somewhat due to an overall
slowdown in consumer spending in 2007 and 2008.  The reduction in
sales in our wholesale stores is also the result of the overall economic
slowdown in the U.S.





Costs
and Expenses





In
general, our gross profit as a percentage of sales (our gross margin) fluctuates
based on the mix of customers we serve, the mix of products we sell and our
ability to source products globally.  Our negotiations with suppliers
for lower pricing are an on-going process, and we have varying degrees of
success in those endeavors.  Sales to retail customers tend to produce
higher gross margins than sales to wholesale customers due to the difference in
pricing levels.  Therefore, as retail sales increase in the overall
sales mix, higher gross margins tend to follow.  Finally, there is
significant fluctuation in gross margins between the various merchandise
categories we offer.  As a result, our gross margins can vary
depending on the mix of products sold during any given time period.





For 2008,
our cost of sales decreased as a percentage of total net sales when compared to
2007, resulting in an increase in consolidated gross profit margin from 57.3% to
58.9%.  Our total cost of sales as a percentage of our total net sales
held steady from 2006 to 2007, resulting in a consolidated gross profit margin
at 57.3% in both years.  Increases in gross margin are primarily due
to increased retail sales from year to year.





Our gross
margins for the three years ended December 31, 2008 were as
follows:





Year
            Wholesale Leathercraft
            RetailLeathercraft
            International Leathercraft
            Other
            TotalCompany2008
            56.5%
            61.6%
            68.4%
            44.1%
            58.9%2007
            55.7%
            59.7%
            -
            44.8%
            57.3%2006
            56.1%
            60.8%
            -
            32.1%
            57.3%





Our
operating expenses increased 2.0% as a percentage of total net sales to 51.1% in
2008 when compared with 49.1% in 2007.  This increase indicates that
our operating expenses grew faster than our sales during this
period.  However, 2008 operating expenses were only $38,000 higher
than those of 2007.  Significant expense fluctuations in 2008 compared
to 2007 are as follows:





Expense
              2008 amount
              Incr (decr) over 2007Employee
      compensation & benefits
              $14.0
      million
              $(160,000)Rent
      & utilities
              4.1
      million
              323,000Depreciation
      and amortization
              985,000
              350,000Advertising
              3.0
      million
              (400,000)Freight
      out – shipping product to customers
              1.5
      million
              (140,000)Property
      taxes
              260,000
              135,000Outside
      services
              260,000
              (240,000)





Our
operating expenses increased 4.6% as a percentage of total net sales to 49.1% in
2007 when compared with 44.5% in 2006.  Significant expense
fluctuations in 2007 compared to 2006 are as follows:





Expense
              2007 amount
              Incr (decr) over 2006Employee
      compensation & benefits
              $14.1
      million
              $800,000Rent
      & utilities
              3.8
      million
              300,000Depreciation
      and amortization
              635,000
              240,000Advertising
              3.4
      million
              400,000Legal
      & professional fees
              650,000
              350,000





Other
Income/Expense (net)





Other
Income/Expense consists primarily of currency exchange fluctuations, interest
income and interest expense.  In 2008, we had other expense (net) of
$67,000 compared to other income (net) of $317,000 in 2007.  We
received $230,000 for surface damage and additional access related to the oil
and gas lease associated with a portion of the land surrounding our corporate
facility.  We earned $141,000 in interest income on our cash and paid
$332,000 in interest expense on our bank debt.  We had a currency
exchange loss of $114,000 in 2008 compared to income of $9,000 in
2007.





In 2007,
we had other income (net) of $317,000 compared to other income (net) of $98,000
in 2006.  We received rental income of $150,000 from our new building
as we leased the building to the sellers for 90 days after
purchase.  We also received $100,000 as a signing bonus on an oil and
gas lease we signed related to a portion of the land we purchased.  We
earned $140,000 in interest income on our cash and paid $122,000 in interest
expense on our bank debt.  We had a currency exchange gain of $9,000
in 2007 compared to $52,000 in 2006.





Net
Income





During
2008, we earned net income of $2.6 million, a 16% decline over our net income of
$3.1 million earned during 2007.  The decline in net income was the
result of the decrease in gross profit and the decrease in other income,
partially offset by the reduction in income tax expense.





During
2007, we earned net income of $3.1 million, a 35% decline from our net income of
$4.8 million earned during 2006.  The decline in net income was the
result of the increase in operating expenses at a higher rate than that of our
sales, partially offset by the reduction in income tax expense.





9
 TABLE
OF CONTENTS





Wholesale
Leathercraft


The
increases in net sales, operating income, operating income increases (or
decreases) and operating income as a percentage of sales from our Wholesale
Leathercraft stores for the three years ended December 31, 2008 were as
follows:





Year
            Net
      SalesIncr
      (Decr)
              from Prior Yr
            Operating
              Income
            Operating
      Income
              Incr
      (Decr)from Prior Year
            Operating
      Income as a Percentage
              of Sales2008
            (10.6)%
            $1,842,526
            (34.8)%
            6.9%2007
            (3.7)%
            $2,826,710
            (41.3)%
            9.6%2006
            (0.1)%
            $4,814,240
            29.4%
            15.5%





Wholesale
Leathercraft, consisting of our 30 wholesale stores and our national account
group, accounted for 49.6% of our consolidated net sales in 2008, which compares
to 53.4% in 2007 and 56.2% in 2006.  The decrease in this division's
contribution to our total net sales is the result of the growth in Retail
Leathercraft and we expect this trend to continue.





Sales in
the wholesale stores decreased 10.4% in 2008 compared to sales in 2007 while the
sales decline in our national account group was 12.2%.  By customer
group, we had sales declines in all groups.  The most significant
decreases were in our wholesale and manufacturer groups.  The
customers of these groups are small businesses and have been significantly
affected by the weakness in our economy.  Our sales mix by customer
group in the Wholesale Leathercraft division was as follows:





Customer Group
              2008
              2007
              2006Retail
              26%
              23%
              25%Institution
              8%
              8%
              7%Wholesale
              41%
              42%
              39%National
      Accounts
              17%
              15%
              19%Manufacturers
              8%
              12%
              10%100%
              100%
              100%





The 2008
decrease in operating income as a percentage of divisional sales resulted from a
decrease of 9.2% in gross margin (as a percentage of sales) compared with 2007,
offset partially by a decrease of 3.9% in operating expenses as a percent of
sales.  Significant operating expense decreases occurred in employee
compensation and benefits ($670,000), outside services ($235,000) and freight
out ($200,000).  These decreases were partially offset by increases in
depreciation expense ($400,000) and property taxes ($230,000), both due to the
purchase of our corporate facility.





The 2007
increase in operating income as a percentage of divisional sales resulted from a
decrease of 0.6% in gross margin (as a percentage of sales) compared with 2006,
and an increase of 6.6% in operating expenses as a percent of
sales.  Significant operating expense increases occurred in employee
compensation and benefits ($500,000), depreciation expense ($200,000), legal and
professional fees ($300,000) and advertising costs ($200,000).  These
increases were partially offset by decreases in various insurance expenses
($100,000) and general supplies ($75,000).





Retail
Leathercraft





The
increases in net sales, operating income, operating income increases (or
decreases) and operating income as a percentage of sales from our Retail
Leathercraft stores for the three years ended December 31, 2008 were as
follows:





Year
            Net
      SalesIncrease
              from Prior Yr
            Operating
              Income
            Operating
      Income
              Incr
      (Decr)from Prior Year
            Operating
      Income as a Percentage
              of  Sales2008
            2.3%
            $2,188,282
            41.7%
            8.7%2007
            9.5%
            $1,544,320
            (33.2)%
            6.3%2006
            25.0%
            $2,310,073
            30.7%
            10.3%





Reflecting
the growth previously discussed, Retail Leathercraft accounted for 47.4% of our
total net sales in 2008, up from 44.6% in 2007 and 40.8% in 2006.





Growth in
net sales for Retail Leathercraft division in 2008 and 2007 resulted primarily
from our expansion program.  Expansion during 2008 and 2007 consisted
of the opening of 1 and 10 new stores, respectively.





Our sales
mix by customer group in the Retail Leathercraft division was as
follows:





Customer Group
              2008
              2007
              2006Retail
              65%
              63%
              65%Institution
              9%
              8%
              8%Wholesale
              25%
              27%
              26%National
      Accounts
              0%
              0%
              0%Manufacturers
              1%
              2%
              1%100%
              100%
              100%





Operating
income as a percentage of sales increased to 8.7% for 2008 compared to 6.3% for
2007.  Gross margin improved to 61.6% in 2008 from 59.7% in
2007.  Operating expenses as a percent of sales in 2008 decreased by
0.6%, from 53.5% for 2007 to 52.9% for 2008 as operating expenses grew at a
slower pace than that of sales and gross margin.





Operating
income as a percentage of sales decreased to 6.3% for 2007 compared to 10.3% for
2006.  Gross margin fell to 59.7% in 2007 from 60.8% in
2006.  Operating expenses as a percent of sales in 2007 decreased by
3.0%, from 50.5% for 2006 to 53.5% for 2007 as operating expenses grew at a
faster pace than that of sales and gross margin.





We intend
to continue the expansion of Tandy Leather’s retail store chain in 2009 by
opening approximately 4 new stores, one of which was opened in the first
quarter.  We remain committed to a conservative expansion plan for
this division that minimizes risks to our profits and maintains financial
stability.  In the current economic environment in the U.S., it is
possible that we will change our plans for store openings in 2009 if we
determine that the U.S. retail sector can not support additional store openings
at that time.





International
Leathercraft





International
Leathercraft consists of all stores located outside of North
America.  Currently, that represents one retail/wholesale combination
store located in the United Kingdom.  International Leathercraft
accounted for 1.6% of our total sales in 2008.  Operating income was
$54,000 in 2008.  We expect this segment to become a larger part of
our total operations as time progresses.





Other





Roberts,
Cushman accounted for 1.4% of our total sales in 2008 compared with 2.0% and
2.9% in 2007 and 2006, respectively.  Operating income was $94,000 in
2008 compared to operating income of $140,000 in 2007 and an operating loss of
$57,000 in 2006.  Roberts, Cushman's sales and profits are immaterial
to us as a whole.




10
 TABLE
OF CONTENTS


Financial
Condition




At
December 31, 2008, we held $10.8 million of cash and certificates of deposit,
$16.0 million of inventory, accounts receivable of $1.2 million, and $10.3
million of property and equipment.  Goodwill and other intangibles
(net of amortization and depreciation) were $966,000 and $355,000,
respectively.  Net total assets were $40.9 million.  Current
liabilities were $5.1 million (including $468,000 of current maturities of
long-term debt), while long-term debt was $4.0 million.  Total
stockholders’ equity at the end of 2008 was $31.2 million.





At
December 31, 2007, we held $6.8 million of cash, $17.5 million of inventory,
accounts receivable of $2.5 million, and $7.0 million of property and
equipment.  Goodwill and other intangibles (net of amortization and
depreciation) were $990,000 and $384,000, respectively.  Net total
assets were $37.6 million.  Current liabilities were $3.8 million
(including $135,000 of current maturities of long-term debt), while long-term
debt was $3.9 million.  Total stockholders’ equity at the end of 2007
was $29.8 million.





Specific
ratios on a consolidated basis at the end of each year ended December 31 were as
follows:





2008
                2007
                2006Solvency
      Ratios:Quick
      Ratio
                Cash+Accts
      Rec/Total Current Liabilities
                2.37
                2.48
                1.74Current
      Ratio
                Total
      Current Assets/Total Current Liabilities
                5.72
                7.47
                5.19Current
      Liabilities to Net Worth
                Total
      Current Liabilities/Net Worth
                0.16
                0.13
                0.20Current
      Liabilities to Inventory
                Total
      Current Liabilities/Inventory
                0.32
                0.22
                0.31Total
      Liabilities to Net Worth
                Total
      Liabilities/Net Worth
                0.31
                0.26
                0.21Fixed
      Assets to Net Worth
                Fixed
      Assets/Net Worth
                0.33
                0.23
                0.07Efficiency
      Ratios:Collection
      Period (Days Outstanding)
                Accounts
      Receivable/Credit Sales x 365
                54.89
                63.42
                53.43Inventory
      Turnover
                Sales/Average
      Inventory
                3.18
                3.19
                3.36Assets
      to Sales
                Total
      Assets/Sales
                0.77
                0.68
                0.58Sales
      to Net Working Capital
                Sales/Current
      Assets - Current Liabilities
                2.22
                2.27
                2.45Accounts
      Payable to Sales
                Accounts
      Payable/Sales
                0.02
                0.03
                0.03Profitability
      Ratios:Return
      on Sales (Profit Margin)
                Net
      Profit After Taxes/Sales
                0.05
                0.06
                0.09Return
      on Assets
                Net
      Profit After Taxes/Total Assets
                0.06
                0.08
                0.15Return
      on Net Worth (Return on Equity)
                Net
      Profit After Taxes/Net Worth
                0.08
                0.10
                0.18




Capital
Resources and Liquidity





On July
31, 2007, we entered into a Credit Agreement and Line of Credit Note with
JPMorgan Chase Bank, N.A., pursuant to which the bank agreed to provide us with
a credit facility of up to $5,500,000 to facilitate our purchase and remodel of
real estate consisting of a 195,000 square foot building situated on 30 acres of
land located at 1900 SE Loop 820 in Fort Worth, Texas.  Proceeds in
the amount of $4,050,000 were used to fund the initial purchase of the
property.  On April 30, 2008, that amount was rolled into a ten-year
term note, and we began making monthly debt service payments in May
2008.





We are
currently in compliance with all covenants and conditions contained in the
JPMorgan Chase Credit Agreement and have no reason to believe that we will not
continue to operate in compliance with the provisions of these financing
arrangements.  The principal terms and conditions of the Credit
Agreement are described in further detail in Note 6 to the Consolidated
Financial Statements, Notes
Payable and Long-Term Debt.





Reflecting
the borrowing and reduction of bank indebtedness during the periods, our
financing activities for 2008, 2007 and 2006 provided (required) net cash of
$1.1 million, $4.0 million, and $69,000, respectively.





Our
primary source of liquidity and capital resources during 2008 was cash flow
provided by operating activities.  Cash flow from operations for 2008
and 2007 was $7.8 million and $2.5 million, respectively, the largest portion
being generated from net income.  This net income was partially offset
by the decrease in accrued expenses in 2007 and the decrease of accounts
receivable and inventory in 2008.  Cash flow from operations in 2006
was $3.9 million.





Consolidated
accounts receivable decreased significantly to $1.2 million at December 31, 2008
compared to $2.5 million at December 31, 2007.  Average days to
collect accounts improved from 63.4 days in 2007 to 54.9 days in 2008 on a
consolidated basis.  As evidenced by the significant reduction in our
accounts receivable at the end of 2008, we have tightened our credit policy and
are aggressively monitoring our customer accounts to ensure
collectibility.  We believe the trend in our collections is the result
of the overall slowdown in the U.S. economy.  Many of our customers
with open accounts are very small businesses, and they tend to feel the effects
of an economic slowdown more severely than larger businesses.





Inventory
decreased from $17.5 million at the end of 2007 to $16.0 million at December 31,
2008.  We expect our inventory to slowly trend upward as we continue
our expansion of the Tandy Leather store chain.  In 2009, we expect
minimal increases in our inventory due to the expected weaknesses in our sales
and the limited number of retail stores we plan to open.  We attempt
to manage our inventory levels to avoid tying up excessive capital while
maintaining sufficient inventory in order to service our current customer demand
as well as plan for our expected store growth and expansion.  We
believe our investment in inventory at the end of 2008 was at a very reasonable
level given our expansion plans as it was in line with our internal targets of
optimum inventory levels.





Consolidated
inventory turned 3.18 times during 2008, virtually the same as in 2007 at 3.19
times.  We compute our inventory turnover rates as sales divided by
average inventory.





By
operating division, inventory turns are as follows:





Segment
              2008
              2007
              2006Wholesale
      Leathercraft
              2.14
              2.37
              2.40Retail
      Leathercraft
              6.05
              5.87
              6.99International
      Leathercraft
              4.61
              n/a
              n/aRoberts,
      Cushman
              17.75
              25.88
              7.15Wholesale
      Leathercraft stores only
              7.14
              6.87
              7.48





Retail
Leathercraft inventory turns are significantly higher than that of Wholesale
Leathercraft because its inventory consists only of the inventory at the
stores.  The retail stores have no warehouse (backstock) inventory to
include in the turnover computation as the stores get their product from the
central warehouse.  Wholesale Leathercraft’s turns are expected to be
slower because the central warehouse inventory is part of this division and its
inventory is held as the backstock for all of the stores.





Accounts
payable decreased slightly to $1.1 million at the end of 2008 compared to $1.5
million at the end of 2007.





As
discussed above, the largest use of operating cash in 2008 was in the reduction
of accounts payable.  Cash paid for capital expenditures totaled $2.8
million and $1.7 million for the years ended December 31, 2008 and 2007,
respectively.  Total capital expenditures (both cash and non-cash)
totaled $3.6 million and $5.8 million for the years ended December 31, 2008 and
2007, respectively.  In 2007, the primary capital expenditure was the
purchase of the land and building to house our corporate offices and central
support departments for $4.5 million.  Other capital expenditures were
factory machines and dies ($110,000); fixtures and equipment for the new Tandy
Leather retail stores ($105,000), various store fixtures and computer equipment
at existing stores ($85,000), computer system upgrade for advertising department
($100,000), computer equipment for future stores ($125,000); and miscellaneous
computer and other office equipment ($250,000).  In 2008, the primary
capital expenditure was the remodel and retrofit of the building for $3.2
million.  Other capital expenditures were factory machines and dies
($55,000) and computer equipment ($415,000).  Although we intend to
continue opening or acquiring new Tandy Leather retail stores and therefore
expenditures related to this expansion should continue into 2009, we do expect
our 2009 capital expenditures to be substantially less than that of 2008 as the
expenditures related to our building have been completed.


11
 TABLE
OF CONTENTS


Cash
applied toward stock repurchases in 2008 totaled $802,898.





We
believe that cash flow from operations will be adequate to fund our operations
in 2009, while also funding our limited expansion plans.  At this
time, we know of no trends or demands, commitments events or uncertainties that
will or are likely to materially affect our liquidity, capital resources or
results of operations.  In addition, we anticipate that this cash flow
will enable us to meet the contractual obligations and commercial
commitments.  We could defer expansion plans if required by
unanticipated drops in cash flow.  In particular, because of the
relatively small investment required by each new retail store, we have
flexibility in when we make most expansion expenditures.





Off-Balance
Sheet Arrangements





We did
not have any off-balance sheet arrangements during 2008, 2007 and 2006, and we
do not currently have any such arrangements.





Contractual
Obligations





The
following table summarizes by years our contractual obligations and commercial
commitments as of December 31, 2008 (not including related interest
expense):





Payments
      Due by PeriodsContractual Obligations
              Total
              Less
      than1
      Year
              2
      - 3Years
              4
      -5Years
              More
      than5
      YearsLong-Term
      Debt(1)
              $3,915,000
              $202,500
              $405,000
              $405,000
              $2,902,500Capital
      Lease Obligations
              593,949
              265,111
              328,838
              --
              --Operating
      Leases(2)
              7,480,217
              2,468,217
              3,602,368
              1,303,148
              106,484Total
      Contractual Obligations
              $11,989,166
              $2,935,828
              $4,336,206
              $1,708,148
              $3,008,984


____________________


(1)  Our
loan from JPMorgan Chase matures in May 2018.


(2)  These
are our leased facilities.





Summary
of Critical Accounting Policies





We strive
to report our financial results in a clear and understandable manner, although
in some cases accounting and disclosure rules are complex and require us to use
technical terminology.  We follow generally accepted accounting
principles in the U.S. in preparing our consolidated financial
statements.  These principles require us to make estimates and apply
judgments that affect our financial position and results of
operations.  We continually review our accounting policies, how they
are applied and how they are reported and disclosed in our financial
statements.  Following is a summary of our more significant accounting
policies and how they are applied in preparation of the financial
statements.





Basis of
Consolidation.  We report our financial information on a
consolidated basis.  Therefore, unless there is an indication to the
contrary, financial information is provided for the parent company, Tandy
Leather Factory, Inc., and its subsidiaries as a whole.  Transactions
between the parent company and any subsidiaries are eliminated for this
purpose.  We own all of the capital stock of our subsidiaries, and we
do not have any subsidiaries that are not consolidated.  None of our
subsidiaries are “off balance sheet.”





Revenue
Recognition.  We recognize revenue for retail (over the
counter) sales as transactions occur and other sales upon shipment of our
products, provided that there are no significant post-delivery obligations to
the customer and collection is reasonably assured, which generally occurs upon
shipment.  Net sales represent gross sales less negotiated price
allowances, product returns, and allowances for defective
merchandise.





Allowance for Accounts
Receivable.  We reduce accounts receivable by an allowance for
amounts that may become uncollectible in the future.  This allowance
is an estimate based primarily on our evaluation of the customer's financial
condition, past collection history, and the aging of the account.  If
the financial condition of any of our customers deteriorates, resulting in an
impairment or inability to make payments, additional allowances may be
required.





Inventory.  Inventory
is stated at the lower of cost or market and is accounted for on the “first in,
first out” method.  This means that sales of inventory treat the
oldest item of identical inventory as being the first sold.  In
addition, we regularly reduce the value of our inventory for slow-moving or
obsolete inventory.  This reduction is based on our review of items on
hand compared to their estimated future demand.  If actual future
demand is less favorable than what we project, additional write-downs may be
necessary.  Goods shipped to us are recorded as inventory owned by us
when the risk of loss shifts to us from the supplier.





Goodwill.  We
periodically analyze the remaining goodwill on our balance sheet to determine
the appropriateness of its carry value.  As of December 31, 2008, we
determined that the present value of the discounted estimated future cash flows
of the stores associated with the goodwill is sufficient to support their
respective goodwill balances.  If actual results of these stores
differ significantly from our projections, such difference could affect the
present value calculation in the future resulting in an impairment of all or
part of the goodwill currently carried on our balance sheet.





Forward-Looking
Statements





Certain
statements contained in this annual report and other materials we file with the
SEC, or in other written or oral statements made or to be made by us, other than
statements of historical fact, are “forward-looking statements” as defined in
the Private Securities Litigation Reform Act of 1995. Forward-looking statements
give our current expectations or forecasts of future events. Words such as
“may,” “assume,” “forecast,” “position,” “predict,” “strategy,” “expect,”
“intend,” “plan,” “estimate,” “anticipate,” “believe,” “project,” “budget,”
“potential,” or “continue,” and similar expressions are used to identify
forward-looking statements. They can be affected by assumptions used or by known
or unknown risks or uncertainties. Consequently, no forward-looking statements
can be guaranteed. Actual results may vary materially. You are cautioned not to
place undue reliance on any forward-looking statements. You should also
understand that it is not possible to predict or identify all such factors and
should not consider the following list to be a complete statement of all
potential risks and uncertainties. Factors that could cause our actual results
to differ materially from the results contemplated by such forward-looking
statements including the risk factors described in Item 1A, “Risk Factors,” of
this Annual Report on Form 10-K. Management cautions that forward-looking
statements are not guarantees, and our actual results could differ materially
from those expressed or implied in the forward-looking statements.  We
do not intend to update forward-looking statements.





ITEM
7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK





We face
exposure to financial market risks, including adverse movement in foreign
current exchange rates and changes in interest rates.  These exposures
may change over time and could have a material impact on our financial
results.  We do not use or invest in market risk sensitive instruments
to hedge any of these risks or for any other purpose.





Foreign
Currency Exchange Rate Risk





Our
primary foreign currency exposure is related to our subsidiaries in Canada and
the United Kingdom as those subsidiaries have local currency revenue and local
currency operating expenses.   Changes in the currency exchange
rates impact the U.S. dollar amount of revenue and expenses.  See Note
14 to the Consolidated Financial Statements,Segment Information, for
financial information concerning our foreign activities.





Interest
Rate Risk





We are
subject to market risk associated with interest rate movements on certain
outstanding debt.  However, our current credit agreement with JPMorgan
Chase includes a fixed interest rate.  Therefore, changes in the prime
rate do not impact us in this area.





12
 TABLE
OF CONTENTS


ITEM
8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY
DATA





Tandy
Leather Factory, Inc.


Consolidated
Balance Sheets


December
31, 2008 and 2007








December
      31,
                2008
              
              December
      31,
                2007ASSETSCURRENT
      ASSETS:Cash
              $7,810,298
              
              $6,310,396Short-term
      investments, including certificates of deposit
              3,011,000
              
              500,000Accounts
      receivable-trade, net of allowance for doubtful accountsof
      $43,000 and $104,000 in 2008 and 2007, respectively
              1,180,349
              
              2,538,816Inventory
              16,011,147
              
              17,473,352Deferred
      income taxes
              229,501
              
              256,938Other
      current assets
              777,550
              
              1,102,836Total
      current assets
              29,019,845
              
              28,182,338PROPERTY
      AND EQUIPMENT, at cost
              15,340,732
              
              11,793,317Less
      accumulated depreciation and amortization
              (5,019,885)
              
              (4,794,505)10,320,847
              
              6,998,812GOODWILL
              966,655
              
              990,536OTHER
      INTANGIBLES, net of accumulated amortization of$367,000
      and $313,000 in 2008 and 2007, respectively
              355,492
              
              384,134OTHER
      assets
              313,074
              
              1,095,686$40,975,913
              
              $37,651,506LIABILITIES
      AND STOCKHOLDERS' EQUITYCURRENT
      LIABILITIES:Accounts
      payable-trade
              $1,148,577
              
              $1,497,564Accrued
      expenses and other liabilities
              3,182,194
              
              2,072,640Income
      taxes payable
              271,122
              
              67,150Current
      maturities of capital lease obligation
              265,111
              
              -Current
      maturities of long-term debt
              202,500
              
              135,000Total
      current liabilities
              5,069,504
              
              3,772,354DEFERRED
      INCOME TAXES
              600,309
              
              148,648CAPITAL
      LEASE OBLIGATION, net of current maturities
              328,838
              
              -LONG-TERM
      DEBT, net of current maturities
              3,712,500
              
              3,915,000COMMITMENTS
      AND CONTINGENCIES
              -
              
              -STOCKHOLDERS'
      EQUITY:Preferred
      stock, $0.10 par value; 20,000,000 sharesauthorized,
      none issued or outstanding
              -
              
              -Common
      stock, $0.0024 par value; 25,000,000 sharesauthorized,
      10,994,951 and 10,982,951 shares issued at 2008 and 2007,10,664,555
      and 10,977,092 outstanding at 2008 and 2007, respectively
              26,388
              
              26,359Paid-in
      capital
              5,464,443
              
              5,419,477Retained
      earnings
              26,641,853
              
              24,037,672Treasury
      stock at cost (330,396 shares at 2008; 5,859 shares at
    2007)
              (828,385)
              
              (25,487)Accumulated
      other comprehensive income
              (39,537)
              
              357,483Total
      stockholders' equity
              31,264,762
              
              29,815,504$40,975,913
              
              $37,651,506











The
accompanying notes are an integral part of these financial
statements.


13
 TABLE
OF CONTENTS





Tandy
Leather Factory, Inc.


Consolidated
Statements of Income


For
the Years Ended December 31, 2008, 2007 and 2006








2008
              
              2007
              
              2006NET
      SALES
              $53,237,094
              
              $55,317,002
              
              $55,199,021COST
      OF SALES
              21,857,800
              
              23,644,599
              
              23,566,251Gross
      Profit
              31,379,294
              
              31,672,403
              
              31,632,770OPERATING
      EXPENSES
              27,200,150
              
              27,161,402
              
              24,565,056INCOME
      FROM OPERATIONS
              4,179,144
              
              4,511,001
              
              7,067,714OTHER
      (INCOME) EXPENSE:Interest
      expense
              332,107
              
              122,209
              
              -Other,
      net
              (265,035)
              
              (439,040)
              
              (98,391)Total
      other expense
              67,072
              
              (316,831)
              
              (98,391)INCOME
      BEFORE INCOME TAXES
              4,112,072
              
              4,827,832
              
              7,166,105PROVISION
      FOR INCOME TAXES
              1,507,891
              
              1,739,701
              
              2,389,039NET
      INCOME
              $2,604,181
              
              $3,088,131
              
              $4,777,066NET
      INCOME PER COMMON SHARE – BASIC
              $0.24
              
              $0.28
              
              $0.44NET
      INCOME PER COMMON SHARE – DILUTED
              $0.24
              
              $0.28
              
              $0.43Weighted
      Average Number of Shares Outstanding:Basic
              10,931,306
              
              10,951,481
              
              10,807,316Diluted
              11,015,657
              
              11,157,775
              
              11,113,855











The
accompanying notes are an integral part of these financial
statements.


14
 TABLE
OF CONTENTS





Tandy
Leather Factory, Inc.


Consolidated
Statements of Cash Flows


For
the Years Ended December 31, 2008, 2007 and 2006





2008
              
              2007
              
              2006CASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      income
              $2,604,181
              
              $3,088,131
              
              $4,777,066Adjustments
      to reconcile net income to net cashprovided
      by operating activities -Depreciation
      and amortization
              985,549
              
              634,291
              
              392,915Loss
      (Gain) on disposal of assets
              13,385
              
              50,114
              
              (3,750)Non-cash
      stock-based compensation
              30,495
              
              19,340
              
              101,080Deferred
      income taxes
              479,098
              
              (63,893)
              
              23,222Other
              (373,139)
              
              241,182
              
              (15,696)Net
      changes in assets and liabilities, net of effect ofbusiness
      acquisitions:Accounts
      receivable-trade, net
              1,358,467
              
              119,293
              
              (420,431)Inventory
              1,462,205
              
              156,052
              
              (1,500,176)Income
      taxes
              203,972
              
              7,758
              
              (140,189)Other
      current assets
              325,286
              
              (27,946)
              
              (731,200)Accounts
      payable-trade
              (348,987)
              
              (327,726)
              
              556,226Accrued
      expenses and other liabilities
              1,109,554
              
              (1,351,369)
              
              873,437Total
      adjustments
              5,245,885
              
              (542,904)
              
              (864,562)Net
      cash provided by operating activities
              7,850,066
              
              2,545,227
              
              3,912,504CASH
      FLOWS FROM INVESTING ACTIVITIES:Purchase
      of property and equipment
              (2,845,548)
              
              (1,705,367)
              
              (471,753)Payments
      in connection with businesses acquired
              -
              
              (771,417)
              
              -Purchases
      of certificates of deposit
              (3,109,000)
              
              -
              
              -Proceeds
      from maturities of certificates of deposit
              98,000
              
              -
              
              -Purchases
      of marketable securities
              -
              
              (500,000)
              
              -Proceeds
      from sale of marketable securities
              500,000
              
              -
              
              -Proceeds
      from sale of assets
              42,114
              
              32,281
              
              3,750Purchase
      of intangible assets
              (24,708)
              
              -
              
              -Decrease
      (increase) in other assets
              122,140
              
              (26,276)
              
              10,320Net
      cash used in investing activities
              (5,217,002)
              
              (2,970,779)
              
              (457,683)CASH
      FLOWS FROM FINANCING ACTIVITIES:Payments
      on notes payable and long-term debt
              (135,000)
              
              -
              
              -Payments
      on capital lease obligations
              (209,764)
              
              (111,723)
              
              (134,067)Repurchase
      of common stock (treasury stock)
              (802,898)
              
              -
              
              -Proceeds
      from issuance of common stock and warrants
              14,500
              
              107,780
              
              203,410Net
      cash provided by (used in) financing activities
              (1,133,162)
              
              (3,943)
              
              69,343NET
      INCREASE IN CASH
              1,499,902
              
              (429,495)
              
              3,524,164CASH,
      beginning of period
              6,310,396
              
              6,739,891
              
              3,215,727CASH,
      end of period
              $7,810,298
              
              $6,310,396
              
              $6,739,891SUPPLEMENTAL
      DISCLOSURES OF CASH FLOW INFORMATION:Interest
      paid during the period
              $332,107
              
              $122,209
              
              $
      -Income
      tax paid during the period, net of (refunds)
              878,110
              
              1,830,688
              
              2,282,113NON-CASH
      INVESTING ACTIVITIES:Equipment
      acquired under capital lease financing arrangements
              $803,713
              
              -
              
              -Land
      and building acquired with long-term debt
              -
              
              $4,050,000
              
              -





The
accompanying notes are an integral part of these financial
statements.


15
 TABLE
OF CONTENTS


Tandy
Leather Factory, Inc.


Consolidated
Statements of Stockholders' Equity


For
the Years Ended December 31, 2008, 2007 and 2006








Number
      of Shares
            
            Par
      Value
            
            Paid-in
      Capital
            
            Treasury
              Stock
            
            Retained
              Earnings
            
            Accumulated
      Other Comprehensive Income (Loss)
            
            Total
            
            Comprehensive
              Income
      (Loss)BALANCE,
      December 31, 2005
            10,735,976
            
            $25,780
            
            $4,988,445
            
            $(25,487)
            
            $16,172,475
            
            $96,645
            
            $21,257,857Shares
      issued - stock options andwarrants
      exercised
            143,233
            
            344
            
            203,066
            
            -
            
            -
            
            -
            
            203,410Stock-based
      compensation
            -
            
            -
            
            101,080
            
            -
            
            -
            
            -
            
            101,080Net  income
            -
            
            -
            
            -
            
            -
            
            4,777,066
            
            -
            
            4,777,066
            
            $4,777,066Translation
      adjustment
            -
            
            -
            
            -
            
            -
            
            -
            
            (16,170)
            
            (16,170)
            
            (16,170)BALANCE,
      December 31, 2006
            10,879,209
            
            $26,124
            
            $5,292,591
            
            $(25,487)
            
            $20,949,541
            
            $80,475
            
            $26,323,243Comprehensive
      income for the year ended December 31, 2006
            $4,760,896Shares
      issued - stock options andwarrants
      exercised
            97,883
            
            235
            
            107,545
            
            -
            
            -
            
            -
            
            107,780Stock-based
      compensation
            -
            
            -
            
            19,341
            
            -
            
            -
            
            -
            
            19,341Net  income
            -
            
            -
            
            -
            
            -
            
            3,088,131
            
            -
            
            3,088,131
            
            $3,088,131Translation
      adjustment
            -
            
            -
            
            -
            
            -
            
            -
            
            277,009
            
            277,009
            
            277,009BALANCE,
      December 31, 2007
            10,977,092
            
            $26,359
            
            $5,419,477
            
            $(25,487)
            
            $24,037,672
            
            $357,484
            
            $29,815,504Comprehensive
      income for the year ended December 31, 2007
            $3,365,140Shares
      issued - stock options exercised
            12,000
            
            29
            
            14,471
            
            -
            
            -
            
            -
            
            14,500Stock-based
      compensation
            -
            
            -
            
            30,495
            
            -
            
            -
            
            -
            
            30,495Purchase
      of treasury stock
            (324,537)
            
            -
            
            -
            
            (802,898)
            
            -
            
            -
            
            (802,898)Net  income
            -
            
            -
            
            -
            
            -
            
            2,604,181
            
            -
            
            2,604,181
            
            $2,604,181Translation
      adjustment
            -
            
            -
            
            -
            
            -
            
            -
            
            (397,021)
            
            (397,021)
            
            (397,021)BALANCE,
      December 31, 2008
            10,664,555
            
            $26,388
            
            $5,464,443
            
            $(828,385)
            
            $26,641,853
            
            $(39,537)
            
            $31,264,762Comprehensive
      income for the year ended December 31, 2008
            $2,207,160








The
accompanying notes are an integral part of these financial
statements.


16
 TABLE
OF CONTENTS








TANDY
LEATHER FACTORY, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


DECEMBER
31, 2008, 2007, and 2006





1.  DESCRIPTION
OF BUSINESS





Our
primary line of business is the sale of leather, leather crafts and related
supplies.  We sell our products via company-owned stores throughout
the United States, Canada, and the United Kingdom.  Numerous customers
including retailers, wholesalers, assemblers, distributors and other
manufacturers are geographically disbursed throughout the world.  We
also have light manufacturing facilities in Texas.





2.  SIGNIFICANT
ACCOUNTING POLICIES





·
            Management
      estimates and reporting





The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires us to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and reported amounts of revenues and expenses during the periods
presented.  Actual results could differ from those
estimates.  Assets and liabilities with reported amounts based on
significant estimates include trade accounts receivables, inventory
(slow-moving), and deferred income taxes.





·
            Principles
      of consolidation





Our
consolidated financial statements include the accounts of Tandy Leather Factory,
Inc. and its wholly owned subsidiaries, The Leather Factory, L.P. (a Texas
limited partnership) and its corporate partners, Tandy Leather Company, L.P. (a
Texas limited partnership) and its corporate partners, Mid-Continent Leather
Sales, Inc. (an Oklahoma corporation), Roberts, Cushman & Company, Inc. (a
Texas corporation), The Leather Factory of Canada, Ltd. (a Canadian
corporation), and Tandy Leather Factory UK Limited (a UK
corporation).  All intercompany accounts and transactions have been
eliminated in consolidation.





·
            Foreign
      currency translation





Foreign
currency translation adjustments arise from activities of our Canadian and
United Kingdom operations.  Results of operations are translated into
U.S. dollars using the average exchange rates during the period, while assets
and liabilities are translated using period-end exchange
rates.  Foreign currency translation adjustments of assets and
liabilities are recorded in stockholders’ equity.  Gains and losses
resulting from foreign currency translations are reported in the statements of
income under the caption “Other (Income) Expense”, net, for all periods
presented.  We recognized a foreign currency translation loss of
$114,000 in 2008 and transaction gains of $9,000 and $52,000 in 2007 and 2006,
respectively.





·
            Revenue
      recognition





Our sales
generally occur via two methods:  (1) at the store counter, and (2)
shipment by common carrier.  Sales at the counter are recorded and
title passes as transactions occur.  Otherwise, sales are recorded and
title passes when the merchandise is shipped to the
customer.  Shipping terms are normally FOB shipping
point.


Sales tax
is excluded from revenue.





We offer
an unconditional satisfaction guarantee to all customers and accept all product
returns.  Net sales represent gross sales less negotiated price
allowances, product returns, and allowances for defective
merchandise.





·
            Discounts





We
maintain four price levels on a consistent basis:  retail, wholesale,
business, and distributor.  Gross sales are reported after deduction
of discounts.  We do not pay slotting fees or make other payments to
resellers.  Several customers require us to participate in their
cooperative advertising programs.  These programs are a negotiated
percentage of their purchases and are accounted for as a reduction of
sales.





·
            Expense
      categories





Cost of
goods sold includes inbound freight and duty charges from vendors to our central
warehouse, freight and handling charges to move merchandise from our central
warehouse to our stores, and manufacturing overhead, as
appropriate.





Operating
expenses include all selling, general and administrative costs including wages
and related employee expenses (payroll taxes, health benefits, savings plans,
etc.), advertising, outbound freight charges (to ship merchandise to customers),
rent, and utilities.





·
            Property
      and equipment, net of accumulated depreciation and
      amortization





Property
and equipment are stated at cost.  Depreciation is computed using the
straight-line method over the estimated useful lives of the assets, which are
five to ten years for equipment, five to seven years for furniture and fixtures,
five years for vehicles, and forty years for buildings and related
improvements.  Leasehold improvements are amortized over the lesser of
the life of the lease or the useful life of the asset.  Repairs and
maintenance costs are expensed as incurred.





·
            Inventory





Inventory
is valued at the lower of first-in, first-out cost or market.  In
addition, the value of inventory is periodically reduced for slow-moving or
obsolete inventory based on management's review of items on hand compared to
their estimated future demand.





·
            Impairment
      of long-lived assets





Potential
impairments of long-lived assets are reviewed annually or when events and
circumstances warrant an earlier review.  In accordance with SFAS No.
144, impairment is determined when estimated future undiscounted cash flows
associated with an asset are less than the asset’s carrying value.





17
 TABLE
OF CONTENTS


·
            Earnings
      per share





Basic
earnings per share are computed based on the weighted average number of common
shares outstanding during the period.  Diluted earnings per share
includes, to the extent inclusion of such shares would be dilutive to earnings
per share, the effect of outstanding options and warrants, computed using the
treasury stock method.





BASIC
              2008
              
              2007
              
              2006Net
      income (loss)
              $2,604,181
              
              $3,088,131
              
              $4,777,066Weighted
      average common shares outstanding
              10,931,306
              
              10,951,481
              
              10,807,316Earnings
      per share – basic
              $0.24
              
              $0.28
              
              $          0.44DILUTEDNet
      income (loss)
              2,604,181
              
              3,088,131
              
              $
      4,777,066Weighted
      average common shares outstanding
              10,931,306
              
              10,951,481
              
              10,807,316Effect
      of assumed exercise of stock options and warrants
              84,351
              
              206,294
              
              306,539Weighted
      average common shares outstanding, assuming dilution
              11,015,657
              
              11,157,775
              
              11,113,855Earnings
      per share - diluted
              $0.24
              
              $0.28
              
              $          0.43Outstanding
      options and warrants excluded as anti-dilutive
              80,500
              
              11,500
              
              -





For
additional disclosures regarding the employee stock options and the warrants,
see Note 12. The net effect of converting stock options and warrants to purchase
232,200, 275,200 and 446,500 shares of common stock at option prices less than
the average market prices has been included in the computations of diluted EPS
for the years ended December 31, 2008, 2007 and 2006, respectively.




·
            Goodwill
      and other intangibles





Statement
of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Other
Intangible Assets," prescribes a two-phase process for impairment testing of
goodwill, which is performed once annually, absent indicators of
impairment.  The first phase screens for impairment, while the second
phase (if necessary) measures the impairment.  We periodically analyze
goodwill remaining on the balance sheet to determine the appropriateness of its
carrying value and have elected to perform the annual analysis during the fourth
calendar quarter of each year.  As of December 31, 2008, we determined
that the present value of the discounted estimated future cash flows of the
stores associated with the goodwill is sufficient to support their respective
goodwill balances.  Under SFAS 142, goodwill impairment is deemed to
exist if the net book value of a reporting unit exceeds its estimated fair
value.  Our reporting units are generally the same as the operating
segments identified in Note 14 – Segment Information.





A summary
of changes in our goodwill for the years ended December 31, 2008 and 2007 is as
follows:





Leather Factory
              
              Tandy Leather
              
              TotalBalance,
      December 31, 2006
              $362,733
              
              $383,406
              
              $746,139Acquisitions
      and adjustments
              225,000
              
              -
              
              225,000Foreign
      exchange gain/loss
              19,397
              
              -
              
              19,397Impairments
              -
              
              -
              
              -Balance,
      December 31, 2007
              $607,130
              
              $383,406
              
              $990,536Acquisitions
      and adjustments
              -
              
              -
              
              -Foreign
      exchange gain/loss
              (23,871)
              
              -
              
              (23,871)Impairments
              -
              
              -
              
              -Balance,
      December 31, 2008
              583,259
              
              $383,406
              
              966,655





As of
December 31, 2008 and 2007, our intangible assets and related accumulated
amortization consisted of the following:





As
      of December 31, 2008Gross
              
              Accumulated
      Amortization
              
              NetTrademarks,
      Copyrights
              $544,369
              
              $319,776
              
              $224,593Non-Compete
      Agreements
              177,708
              
              46,809
              
              130,899$722,077
              
              366,585
              
              $355,492





As
      of December 31, 2007Gross
              
              AccumulatedAmortization
              
              NetTrademarks,
      Copyrights
              $544,369
              
              $283,485
              
              $260,884Non-Compete
      Agreements
              153,000
              
              29,750
              
              123,250$697,369
              
              $313,235
              
              $384,134





Excluding
goodwill, we have no intangible assets not subject to amortization under SFAS
142.  Amortization of intangible assets of $53,350 in 2008, $51,542 in
2007, and $38,291 in 2006 was recorded in operating expenses.  The
weighted average amortization period is 15 years for trademarks and copyrights,
and 4.22 years from non-compete agreements.  Based on the current
amount of intangible assets subject to amortization, the estimated amortization
expense for each of the succeeding 5 years are as follows:





Leather Factory
              Tandy Leather
              Total2009
              $29,190
              $30,337
              $59,5272010
              29,190
              30,337
              59,5272011
              26,204
              30,337
              56,5412012
              1,250
              30,337
              31,5872013
              -
              30,337
              30,337





During
2007 and 2008, we acquired non-compete agreements in the amounts of $75,000 and
$24,708, respectively.





·
            Fair
      value of financial Instruments





The
principal financial instruments held consist of accounts receivable, accounts
payable, notes payable and long-term debt.  The carrying value of
accounts receivable and accounts payable approximate their fair value due to the
relatively short-term nature of the accounts.  The terms of the
long-term debt are considered reasonable for this type of financing; therefore,
the carrying amount approximates fair value.




18
 TABLE
OF CONTENTS


·
            Deferred
      taxes





Deferred
income taxes result from temporary differences in the basis of our assets and
liabilities reported for book and tax purposes.





·
            Stock-based
      compensation – Change in Accounting
Principle





We had
two stock option plans which provided for stock option grants to officers, key
employees and directors.  Both plans expired in the 4th quarter
of 2005.  The expiration of the plans have no effect on the options
previously granted.  Options outstanding and exercisable were granted
at a stock option price which was not less than the fair market value of our
Common Stock on the date the option was granted and no option has a term in
excess of ten years.  Additionally, options vest and become
exercisable either six months from the option grant date or in equal
installments over a five year period.  Prior to fiscal 2006, we
accounted for stock-based compensation using the intrinsic value method
prescribed in Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees, and related Interpretations and provided the required pro
forma disclosures of SFAS No. 123, Accounting for Stock-Based
Compensation.





On
January 1, 2006, we adopted SFAS No. 123(R), “Share-Based Payment,” and elected
to adopt the standard using the modified prospective transition
method.  Under this transition method, compensation cost associated
with stock options recognized in 2006 includes:  (1) amortization
related to the remaining unvested portion of all share based payments granted
prior to, but not vested as of December 31, 2005, based on the grant date fair
value estimated in accordance with the original pro forma footnote disclosure
provisions of FASB Statement No. 123 and (2) amortization related to all share
based payments granted subsequent to December 31, 2005, based on the grant date
fair value estimated in accordance with the provisions of FASB Statement No.
123(R).  Accordingly, stock compensation award expense is recognized
over the requisite service period using the straight-line attribution
method.  Previously reported amounts have not been
restated.





We
recognized share based compensation expense of approximately $30,000, $19,000,
and $101,000 for the years ended December 31, 2008, 2007 and 2006, respectively,
as a component of operating expenses.




During
the years ended December 31, 2008 and 2007, the stock option activity under our
stock option plans was as follows:





Weighted
      Average
                ExercisePrice
              #of
                shares
              Weighted
      Average Remaining
                Contractual
      Term(in
      years)
              Aggregate
                Intrinsic
      ValueOutstanding,
      January 1, 2007
              $2.05
              296,200Granted
              -
              -Cancelled
              -
              -Exercised
              1.81
              (59,500)Outstanding,
      December 31, 2007
              $2.11
              236,700
              4.23
              $270,780Exercisable,
      December 31, 2007
              $1.97
              220,770
              4.11
              $237,740





Weighted
      Average
                ExercisePrice
              #of
                shares
              Weighted
      Average Remaining
                Contractual
      Term(in
      years)
              Aggregate
                Intrinsic
      ValueOutstanding,
      January 1, 2008
              $2.11
              236,700Granted
              -
              -Cancelled
              -
              -Exercised
              1.21
              (12,000)Outstanding,
      December 31, 2008
              $2.16
              224,700
              3.09
              $262,001Exercisable,
      December 31, 2008
              $215
              220,770
              3.07
              $259,461





Other
information pertaining to option activity during the twelve month periods ended
December 31, 2008, 2007 and 2006 are as follows:





2008
                2007
                2006Weighted
      average grant-date fair value of stock options granted
                N/A
                N/A
                N/ATotal
      fair value of stock options vested
                $30,500
                $30,500
                $89,915Total
      intrinsic value of stock options exercised
                $8,779
                $62,280
                $90,780





As of
December 31, 2008, there was $3,000 of total unrecognized compensation cost
related to nonvested stock options, which is expected to be recognized in
2009.





Stock
options to purchase our common stock are granted at prices at or above the fair
market value on the date of grant.  For employees, options become
exercisable in five equal installments beginning a year from the date of
grant.  For non-employee directors, options become exercisable six
months after the date of grant.  All options expire 10 years from the
date of grant.





Cash
received from the exercise of stock options and warrants for the years ended
December 31, 2008, 2007 and 2006 was $14,500, $107,780, and $203,410,
respectively.





The fair
value of each stock option granted is estimated on the date of grant using the
BSM option valuation model.  The assumptions used to calculate the
fair value of options granted are evaluated and revised, as necessary, to
reflect market conditions and our experience.  Compensation expense is
recognized only for those options expect to vest, with forfeitures estimated at
the date of grant based on our historical experience and future
expectations.





·
            Comprehensive
      income





Comprehensive
income represents all changes in stockholders’ equity, exclusive of transactions
with stockholders.  The accumulated balance of foreign currency
translation adjustments is presented in the consolidated financial statements as
“accumulated other comprehensive income or loss”.





·
            Shipping
      and handling costs





All
shipping and handling costs incurred by us are included in operating expenses on
the statements of income.  These costs totaled approximately
$1,500,000, $1,641,000 and $1,611,000 for the years ended December 31, 2008,
2007 and 2006, respectively.





·
            Advertising





With the
exception of catalog costs, advertising costs are expensed as
incurred.  Catalog costs are capitalized and expensed over the
estimated useful life of the particular catalog in question, which is typically
twelve to eighteen months.  Such capitalized costs are included in
other current assets and totaled $137,000 and $218,000 at December 31, 2008 and
2007, respectively.  Total advertising expense was $3,036,346 in 2008;
$3,440,762 in 2007; and $3,087,943 in 2006.





We agree
to list the names and addresses of our Authorized Sales Centers (ASCs) in
certain mailing pieces produced.  The inclusion of these names and
addresses are at our sole discretion.  The production and distribution
of direct mailings is the primary method of advertising we use and normally
consists of 95 to 100 unique mailing pieces annually.  Generally, the
ASCs are listed in six to eight of those pieces.  We believe that the
inclusion of these ASC locations in the flyers has no impact on our financial
statements.





·
            Cash
      flows presentation





For
purposes of the statement of cash flows, we consider all highly liquid
investments with initial maturities of three months or less from the date of
purchase to be cash equivalents.





·
            Reclassifications





Certain
reclassifications have been made to the 2007 financial statements to conform to
the 2008 presentation.


19
 TABLE
OF CONTENTS


3.  SHORT-TERM
INVESTMENTS





All
current fixed maturity securities are classified as “available for sale” and are
reported at carrying value, which approximates fair value.  We have
determined that our investment securities are available to support current
operations and, accordingly, have classified such securities as current assets
without regard to contractual maturities.  Investments at December 31,
2008 consisted of certificates of deposit.  Investments at December
31, 2007 consisted of auction rate securities.  The contractual
maturities of the certificates of deposit as of December 31, 2008 are shown
below.  Actual maturities may differ from the contractual maturities
because debtors may have the right to call obligations with or without call
penalties.





Due
      within one year
              $2,417,000Due
      between one and five years
              99,000Due
      between five and ten years
              99,000Due
      between ten and fifteen years
              198,000Due
      between fifteen and twenty years
              198,000$3,011,000





4.  VALUATION
AND QUALIFYING ACCOUNTS





·
            Allowance
      for uncollectible accounts





We
maintain allowances for bad debts based on factors such as the composition of
accounts receivable, the age of the accounts, historical bad debt experience,
and our evaluation of the financial condition and past collection history of
each customer.  Accounts are written off as they are deemed
uncollectible based on a periodic review of accounts.  Our allowance
for doubtful accounts was $43,014 and $104,634, respectively, at December 31,
2008 and 2007.  The following is a roll forward of the allowance for
doubtful accounts:





Year
      ended:
            Balance
      at beginning of year
            Reserve
      "purchased" during year
            Additions
      (reductions)
              charged
      to costs and expenses
            Foreign
      exchange gain/loss
            Write-offs
            Balance
      at end of yearDecember
      31, 2008
            $104,634
            -
            65,921
            (2,768)
            (124,773)
            $43,014December
      31, 2007
            $149,172
            (11,918)
            98,508
            3,192
            (134,320)
            $104,634December
      31, 2006
            $137,587
            -
            85,439
            241
            (74,095)
            $149,172





·
            Sales
      returns and defective merchandise





Product
returns are generally recorded directly against sales as those returns
occur.  Historically, the amount of returns is immaterial and as a
result, no reserve is recorded in the financial statements.





·
            Slow-moving
      and obsolete inventory





The
majority of inventory items maintained by us have no restrictive shelf
life.  We review all inventory items annually to determine what items
should be eliminated from the product line.  Items are selected for
several reasons:  (1) the item is slow-moving; (2) the supplier is
unable to provide an acceptable quality or quantity; or (3) to maintain a
freshness in the product line.  Once an item has been selected to
discontinue, we devalue the cost of the item by 25% of its original value each
quarter until its value has been reduced to zero.  Reductions in
inventory for slow-moving and obsolete inventory are recorded directly against
inventory.





5.  BALANCE
SHEET COMPONENTS





December
      31, 2008
              
              December
      31, 2007INVENTORYOn
      hand:Finished
      goods held for sale
              $14,867,830
              
              $16,482,845Raw
      materials and work in process
              415,644
              
              633,188Inventory
      in transit
              727,673
              
              357,319TOTAL
              $16,011,147
              
              $17,473,352PROPERTY AND EQUIPMENTBuilding
              $5,160,522
              
              $3,060,194Land
              1,451,132
              
              1,451,132Leasehold
      improvements
              669,329
              
              1,163,947Equipment
      and machinery
              5,725,442
              
              4,431,432Furniture
      and fixtures
              2,288,328
              
              1,238,731Vehicles
              45,979
              
              69,713Construction
      in progress
              -
              
              378,16815,340,732
              
              11,793,317Less:  accumulated
      depreciation
              (5,019,885)
              
              (4,794,505)TOTAL
              $10,320,847
              
              $6,998,812OTHER CURRENT ASSETSAccounts
      receivable – employees
              $42,217
              
              $38,972Accounts
      receivable – other
              126,074
              
              265,400Prepaid
      expenses
              575,295
              
              588,004Payments
      for merchandise not received
              33,964
              
              210,460TOTAL
              $777,550
              
              $1,102,836OTHER ASSETSSecurity
      deposits - utilities, locations, etc.
              $61,074
              
              $74,057Leather
      art collection
              252,000
              
              252,000Long-term
      portion of note receivable
              -
              
              109,157Computer
      software not implemented yet
              -
              
              660,472TOTAL
              $313,074
              
              $1,095,686ACCRUED EXPENSES AND OTHER
      LIABILITIESAccrued
      bonuses
              $1,068,426
              
              $760,113Accrued
      payroll
              327,816
              
              220,555Deferred
      revenue
              488,305
              
              421,908Sales
      and payroll taxes payable
              169,985
              
              177,786Inventory
      in transit
              727,673
              
              357,318Other
              399,989
              
              134,960TOTAL
              $3,182,194
              
              $2,072,640





Depreciation
expense was $932,199, $577,405, and $348,797 for the years ended December 31,
2008, 2007 and 2006, respectively.


20
 TABLE
OF CONTENTS


6.  NOTES
PAYABLE AND LONG-TERM DEBT





On July
31, 2007, we entered into a Credit Agreement and Line of Credit Note with
JPMorgan Chase Bank, N.A., pursuant to which the bank agreed to provide us with
a credit facility of up to $5,500,000 to facilitate our purchase of real estate
consisting of a 195,000 square foot building situated on 30 acres of land
located at 1900 SE Loop 820 in Fort Worth, Texas.  Under the terms of
the Line of Credit Note, we could borrow from time to time until April 30, 2008,
up to the lesser of $5,500,000 or 90% of the cost of the property and make
monthly interest payments.  On April 30, 2008, the principal balance
was rolled into a 10-year term note with an interest rate of 7.10% per
annum.





Proceeds
in the amount of $4,050,000 were used to fund the purchase of the property from
Standard Motor Products, Inc. under an Agreement of Purchase and Sale, dated
June 25, 2007, which closed on July 31, 2007. No further borrowings were
drawn.





At
December 31, 2008 and 2007, the amount outstanding under the above agreement
consisted of the following:





2008
                
                2007Credit
      Agreement with JPMorgan Chase Bank – collateralized by real estate;
      payable as follows:Line
      of Credit Note dated July 31, 2007, converted to a 10-year term note on
      April 30, 2008; $16,875 monthly principal payments plus interest at 7.1%
      per annum;
                  matures
      April 30, 2018
                $  3,915,000
                
                $  4,050,0003,915,000
                
                4,050,000Less
      - Current maturities
                (202,500)
                
                (135,000)$3,712,500
                
                $3,915,000





The terms
of the credit facility contain various covenants which among other things
require the Company to maintain a debt service coverage ratio of not less than
1.2 to 1.0.  Scheduled maturities of the Company’s notes payable and
long-term debt are as follows:





2009
              $202,5002010
              202,5002011
              202,5002012
              202,5002013
              202,5002014
      and thereafter
              2,902,500$3,915,000








7.  CAPITAL
LEASE OBLIGATIONS





We lease
certain HVAC equipment under a capital lease agreement.  The asset
subject to the agreement totaling $803,713 is included in Property and Equipment
as of December 31, 2008.  Accumulated depreciation on the asset at
that date was $60,278.  Amortization of the capitalized cost is
charged to depreciation expense.





At
December 31, 2008, the amounts outstanding under capital lease obligation
consisted of the following:





2008Capital
      Lease secured by certain HVAC equipment – total monthly principal payments
      of $24,328, 5.7% interest, maturing February 2011
              $632,538Less
      amount representing interest
              38,589Total
      obligation under capital lease
              593,949Less
      - Current maturities
              265,111$328,838





8.  EMPLOYEE
BENEFIT AND SAVINGS PLANS





We had an
Employee Stock Ownership Plan (the "Plan") for employees with at least one year
of service (as defined by the Plan) and who have reached their 21st
birthday.  In December 2006, the Board of Directors decided to
terminate the Plan effective December 31, 2006.  As a result, all
participants became 100% vested in their accounts.  No further
contributions were made to the Plan and the accounts were fully distributed to
participants in 2008.





We apply
Statement of Position 93-6 (SOP 93-6), "Employers’ Accounting for Employee Stock
Ownership Plans," of the Accounting Standards Division of the American Institute
of CPAs.   During 2008, 2007, and 2006, respectively, we
contributed $0; $0; and $225,350 in cash as current year contributions to the
plan and recognized compensation expense related to these payments.





The
following table summarizes the number of shares held by the Plan and the market
value as of December 31, 2008, 2007, and 2006:





Number of Shares
              
              Market Value2008
              2007
              2006
              
              2008
              2007
              2006Allocated
              -
              844,381
              929,069
              
              -
              $2,761,126
              $7,497,587Unearned
              -
              -
              -
              
              -
              -
              -Total
              -
              844,381
              929,069
              
              -
              $2,761,126
              $7,497,587





We have a
401(k) plan to provide retirement benefits for our employees.  As
allowed under Section 401(k) of the Internal Revenue Code, the plan provides
tax-deferred salary contributions for eligible employees and allows employees to
contribute a percentage of their annual compensation to the Plan on a pretax
basis.  Employee contributions are limited to a maximum annual amount
as set periodically by the Internal Revenue Code.  In 2008 and 2006,
we matched pretax employee contributions up to 50% on the first 4% of eligible
earnings that are contributed by employees.  In 2007, we matched
pretax employee contributions up to 100% on the first 3% of eligible earnings
and 50% on the next 2% of eligible earnings.





Year Ended December 31,
            Maximum
      Matching
              Contribution per
    Participant*
            Total
      Matching
              Contribution2008
            $4,600
            $120,0252007
            $9,000
            $240,7742006
            $4,400
            $108,565





** Due to the annual limit on
eligible earnings imposed by the Internal Revenue





The plan
allows employees who meet the age requirements and reach the plan contribution
limits to make a catch-up contribution.  The catch-up contributions
are not eligible for matching contributions.  In addition, the plan
provides for discretionary matching contributions as determined by the Board of
Directors.  There were no discretionary matching contributions made in
2008, 2007 or 2006.





We
currently offer no postretirement or postemployment benefits to our
employees.





21
 TABLE
OF CONTENTS


9.  INCOME
TAXES





The
provision for income taxes consists of the following:





2008
              
              2007
              
              2006Current
      provision:Federal
              $826,157
              
              $1,494,181
              
              $2,167,141State
              202,636
              
              309,413
              
              198,6761,028,793
              
              1,803,594
              
              2,365,817Deferred
      provision (benefit):Federal
              429,854
              
              (57,153)
              
              19,447State
              49,244
              
              (6,740)
              
              3,775479,098
              
              (63,893)
              
              23,222$1,507,891
              
              $1,739,701
              
              $2,389,039








Income
before income taxes is earned in the following tax jurisdictions:





2008
              
              2007
              
              2006United
      States
              $3,716,554
              
              $4,407,361
              
              $6,560,994United
      Kingdom
              (176,257)
              
              -
              
              -Canada
              571,775
              
              420,471
              
              605,111$4,112,072
              
              $4,827,832
              
              $7,166,105





The
income tax effects of temporary differences that give rise to significant
portions of deferred income tax assets and liabilities are as
follows:





2008
              
              2007Deferred income tax assets:Allowance
      for doubtful accounts
              $13,351
              
              $29,360Capitalized
      inventory costs
              128,591
              
              144,099Warrants
      and stock-based compensation
              55,739
              
              42,989Accrued
      expenses, reserves, and other
              87,559
              
              83,478Total
      deferred income tax assets
              285,240
              
              299,926Deferred income tax
      liabilities:Property
      and equipment depreciation
              549,465
              
              78,567Goodwill
      and other intangible assets amortization
              106,583
              
              113,069Total
      deferred income tax liabilities
              656,048
              
              191,636Net
      deferred tax asset (liability)
              $(370,808)
              
              $108,290





The net
deferred tax liability is classified on the balance sheets as
follows:





2008
              
              2007Current
      deferred tax assets
              $229,501
              
              $256,938Long-term
      deferred tax liabilities
              (600,309)
              
              (148,648)Net
      deferred tax asset (liability)
              $370,808
              
              $108,290





The
effective tax rate differs from the statutory rate as follows:





2008
              2007
              2006Statutory
      rate
              
              34%
              34%
              34%State
      and local taxes
              
              9%
              6%
              2%Other
              
              (6%)
              (4%)
              (3%)Effective
      rate
              
              37%
              36%
              33%





The
Company files a consolidated U.S. income tax return as well as state tax returns
on a consolidated, combined or stand-alone basis, depending on the
jurisdiction.  The Company is no longer subject to U.S. federal income
tax examinations by tax authorities for years prior to the tax year ended
December 2006.  Depending on the jurisdiction, the Company is no
longer subject to state examinations by tax authorities for years prior to the
December 2005 and December 2006 tax years.





22
 TABLE
OF CONTENTS


10.  COMMITMENTS
AND CONTINGENCIES





Operating
Leases





We lease
our store locations under five-year lease agreements that expire on dates
ranging from April 2009 to April 2016.  Rent expense on all operating
leases for the years ended December 31, 2008, 2007, and 2006, was $2,575,642,
$2,682,574 and $2,495,380, respectively.





Future
minimum lease payments under noncancelable operating leases at December 31, 2008
were as follows:





Year
      ending December 31:2009
              $2,468,2172010
              2,061,7102011
              1,540,6582012
              995,6352013
              307,5132014
      and thereafter
              106,484Total
      minimum lease payments
              $7,480,217





Litigation





We are
involved in various litigation that arise in the ordinary course of business and
operations.  There are no such matters pending that we expect to have
a material impact on our financial position and operating results.





11.  SIGNIFICANT
BUSINESS CONCENTRATIONS AND RISK





Major
Customers





Our
revenues are derived from a diverse group of customers primarily involved in the
sale of leathercrafts.  While no single customer accounts for more
than 6% of our consolidated revenues in 2008, 2007 and 2006, sales to our five
largest customers represented 6.2%, 8.3% and 9.5%, respectively, of consolidated
revenues in those years.  While we do not believe the loss of one of
these customers would have a significant negative impact on our operations, we
do believe the loss of several of these customers simultaneously or a
substantial reduction in sales generated by them could temporarily affect our
operating results.





Major
Vendors





We
purchase a significant portion of our inventory through one
supplier.  Due to the number of alternative sources of supply, loss of
this supplier would not have an adverse impact on our operations.





Credit
Risk





Due to
the large number of customers comprising our customer base, concentrations of
credit risk with respect to customer receivables are limited.  At
December 31, 2008 and 2007, 21% and 38%, respectively, of our consolidated
accounts receivable were due from two nationally recognized retail
chains.  We do not generally require collateral for accounts
receivable, but we do perform periodic credit evaluations of our customers and
believe the allowance for doubtful accounts is adequate.  It is our
opinion that if any one or a group of customer receivable balances should be
deemed uncollectable, it would not have a material adverse effect on our results
of operations and financial condition.





We
maintain our cash in bank deposit accounts that, at times, may exceed federally
insured limits.  We have not experienced any losses in such
accounts.  We believe we are not exposed to any significant credit
risk on our cash and cash equivalents.





12.  STOCKHOLDERS'
EQUITY








a)
            Stock
      Option Plans





·
            2007 Director
      Non-Qualified Stock Option
Plan





The 2007
Director Non-Qualified Stock Option Plan was adopted by the Board of Directors
effective March 22, 2007 subject to stockholder approval at the Company’s 2007
Annual Meeting of Stockholders.  Pursuant to the plan, options to
acquire an aggreagate of 100,000 common shares may be granted to each individual
who is serving as an outside Director of the Company on the date of grant, at
the rate of 3,000 shares of Common Stock on March 22 of each calendar
year.  No options have been awarded as of December 31, 2008 as the
Form S-8, Registration Statement under the Securities Act of 1933, has not been
filed with the Securities and Exchange Commission yet.








·
            1995 Stock Option
      Plan





In
connection with the 1995 Stock Option Plan for officers and key management
employees, we have outstanding options to purchase our common
stock.  The plan provides for the granting of either qualified
incentive stock options or non-qualified options at the discretion of the Stock
Option Committee of the Board of Directors.  Options are granted at
the fair market value of the underlying common stock at the date of grant and
vest over a five-year period.  We reserved 1,000,000 shares of common
stock for issuance under this plan.  The plan expired in the 4th
quarter of 2005 with 20,000 ungranted options remaining.





·
            1995 Director
      Non-Qualified Stock Option
Plan





In
connection with the 1995 Director Non-qualified Stock Option Plan for
non-employee directors, we have outstanding options to purchase our common
stock.  The plan provides for the granting of non-qualified options at
the discretion of the Directors Stock Option Committee of the Board of
Directors.  Options are granted at the fair market value of the
underlying common stock at the date of grant and vest after six
months.  We reserved 100,000 shares of common stock for issuance under
this plan.  The plan expired in the 4th quarter of 2005 with 18,000
ungranted options remaining.





·
            Stock Option
      Summary





All
options expire ten years from the date of grant and are exercisable at any time
after vesting.  Of the combined 1,100,000 shares available for
issuance under the two plans, due to the expiration of the plan in 2005, there
are no un-optioned shares available for future grants.





23
 TABLE
OF CONTENTS


A summary
of stock option transactions for the years ended December 31, 2008, 2007, and
2006, is as follows:





2008
              
              2007
              
              2006Weighted
              
              
              
              Weighted
              
              
              
              WeightedAverage
              
              
              
              Average
              
              
              
              AverageOption
              
              Exercise
              
              Option
              
              Exercise
              
              Option
              
              ExerciseShares
              
              Price
              
              Shares
              
              Price
              
              Shares
              
              PriceOutstanding
      at January 1
              
              236,700
              
              $2.11
              
              296,200
              
              $2.05
              
              421,000
              
              $1.93Granted
              
              -
              
              -
              
              -
              
              -
              
              -
              
              -Forfeited
      or expired
              
              -
              
              -
              
              -
              
              -
              
              -
              
              -Exchanged
              
              -
              
              -
              
              -
              
              -
              
              -
              
              -Exercised
              
              (12,000)
              
              1.21
              
              (59,500)
              
              1.81
              
              (124,800)
              
              1.63Outstanding
      at December 31
              
              224,700
              
              $2.16
              
              236,700
              
              $2.11
              
              296,200
              
              $2.05Exercisable
      at end of year
              
              222,700
              
              $2.15
              
              220,700
              
              $1.97
              
              266,200
              
              $1.82Weighted-average
      fair value ofoptions
      granted during year
              
              -
              
              
              
              -
              
              
              
              -





The
following table summarizes outstanding options into groups based upon exercise
price ranges at December 31, 2008:





Options
      Outstanding
                          
                          Options
      ExercisableWeighted
                          
                          Weighted
                          
                          
                          
                          Weighted
                          
                          WeightedAverage
                          
                          Average
                          
                          
                          
                          Average
                          
                          AverageOption
                          
                          Exercise
                          
                          Maturity
                          
                          Option
                          
                          Exercise
                          
                          MaturityExercise Price
      Range
                          
                          Shares
                          
                          Price
                          
                          (Years)
                          
                          Shares
                          
                          Price
                          
                          (Years)$0.75
      or Less
                          
                          2,000
                          
                          $0.690
                          
                          0.74
                          
                          2,000
                          
                          $0.690
                          
                          0.74$0.76
      to $1.125
                          
                          42,000
                          
                          0.943
                          
                          1.70
                          
                          42,000
                          
                          0.943
                          
                          1.70$1.126
      to $1.69
                          
                          105,700
                          
                          1.350
                          
                          2.39
                          
                          105,700
                          
                          1.350
                          
                          2.39$1.70
      to $2.55
                          
                          2,000
                          
                          1.900
                          
                          2.74
                          
                          2,000
                          
                          1.900
                          
                          2.74$2.56
      to $3.84
                          
                          12,000
                          
                          3.270
                          
                          5.31
                          
                          10,000
                          
                          3.248
                          
                          5.24$3.85-$4.96
                          
                          61,000
                          
                          4.241
                          
                          4.91
                          
                          61,000
                          
                          4.241
                          
                          4.91224,700
                          
                          $2.160
                          
                          3.09
                          
                          222,700
                          
                          $2.150
                          
                          3.07




b)
            Warrants





Warrants
to acquire up to 100,000 shares of common stock at $3.10 per share were issued
in conjunction with a consulting agreement to an unrelated entity in February
2003.  The warrants expired on February 12, 2008.





Warrants
to acquire up to 50,000 shares of common stock at $5.00 per share were issued in
conjunction with a consulting agreement to an unrelated entity in February
2004.  The warrants expired on February 24, 2009.





A summary
of warrant transactions for the years ended December 31, 2008, 2007, and 2006,
is as follows:





2008
              
              2007
              
              2006Weighted
              
              
              
              Weighted
              
              
              
              WeightedAverage
              
              
              
              Average
              
              
              
              AverageWarrant
              
              Exercise
              
              Warrant
              
              Exercise
              
              Warrant
              
              ExerciseShares
              
              Price
              
              Shares
              
              Price
              
              Shares
              
              PriceOutstanding
      at January 1
              
              27,500
              
              $3.620
              
              98,300
              
              $3.650
              
              140,000
              
              $3.7786Granted
              
              -
              
              -
              
              -
              
              -
              
              -
              
              -Forfeited
      or expired
              
              -
              
              -
              
              -
              
              -
              
              -
              
              -Exchanged
              
              -
              
              -
              
              -
              
              -
              
              -
              
              -Exercised
              
              -
              
              -
              
              (70,800)
              
              3.658
              
              (41,700)
              
              4.089Outstanding
      at December 31
              
              27,500
              
              $3.620
              
              27,500
              
              $3.620
              
              98,300
              
              $3.650Exercisable
      at end of year
              
              27,500
              
              $3.620
              
              27,500
              
              $3.620
              
              98,300
              
              $3.650Weighted-average
      fair value ofwarrants
      granted during year
              
              -
              
              
              
              -
              
              
              
              -





The
following table summarizes outstanding warrants into groups based upon exercise
price ranges at December 31, 2008:





Warrants
      Outstanding
                          
                          Warrants
      ExercisableWeighted
                          
                          Weighted
                          
                          
                          
                          Weighted
                          
                          WeightedAverage
                          
                          Average
                          
                          
                          
                          Average
                          
                          AverageExercise
                          
                          Maturity
                          
                          
                          
                          Exercise
                          
                          MaturityExercise Price
      Range
                          
                          Warrant
                          
                          Price
                          
                          (Years)
                          
                          Warrant
                          
                          Price
                          
                          (Years)$3.00
      or Less
                          
                          -
                          
                          -
                          
                          -
                          
                          -
                          
                          -
                          
                          -More
      than $3.00 andLess
      Than  $5.00
                          
                          20,000
                          
                          $3.10
                          
                          0.12
                          
                          20,000
                          
                          $3.10
                          
                          0.12$5.00
      or More
                          
                          7,500
                          
                          5.00
                          
                          1.15
                          
                          7,500
                          
                          5.00
                          
                          1.1527,500
                          
                          $3.62
                          
                          0.40
                          
                          27,500
                          
                          $3.62
                          
                          0.40







c)
            Stock
      Repurchase Program




On
September 9, 2008, our Board of Directors approved a limited stock repurchase
plan whereby all non-officer participants in Tandy Leather Factory, Inc. Stock
Ownership Plan (the “ESOP”) would have the option of selling the shares of our
common stock distributed to them upon termination of the ESOP back to us. The
option remained open to the non-officer participants for a period of sixty days
beginning on September 26, 2008 and ending on November 25, 2008. The purchase
price of the shares was calculated at a price-per-share equal to the closing
price of a share of our common stock on the American Stock Exchange on the
business day each non-officer participant notified the ESOP administrator of his
or her intent to sell his or her shares to us. We repurchased a total of 324,537
shares at a total purchase price of $802,898 in the fourth quarter of
2008.





24
 TABLE
OF CONTENTS


13.  BUSINESS
ACQUISITIONS





On
January 31, 2007, we acquired all of the issued and outstanding shares of
capital stock of Mid-Continent Leather Sales, Inc., an Oklahoma
corporation.  The total purchase price was $575,000 which was funded
with cash generated from operations.  For financial reporting
purposes, the transaction was accounted for under the purchase method, effective
February 1, 2007.  We also entered into a non-compete agreement with
the former owner totaling $75,000 for a period of five years.  This
company is included in our Wholesale Leathercraft segment.





14.  SEGMENT
INFORMATION





We
identify our segments based on the activities of four distinct
operations:





a.
            Wholesale
      Leathercraft, which consists of a chain of warehouse distribution
      units operating under the name, The Leather Factory,
      located in North America;





b.
            Retail
      Leathercraft, which consists of a chain of retail stores operating
      under the name, Tandy
      Leather Company, located in North
  America;





c.
            International
      Leathercraft, sells to both wholesale and retail
      customers.  It carries the same products as North American
      stores.  We started this operation in February 2008 and have one
      store located in Northampton, United Kingdom;
  and




d.
            Other,
      which consists of Roberts, Cushman and Co., a producer of decorative hat
      trims sold directly to hat
manufacturers.





Our
reportable operating segments have been determined as separately identifiable
business units and we measure segment earnings as operating earnings, defined as
income before interest and income taxes.





Wholesale
      Leathercraft
                    Retail
      Leathercraft
                    International
      Leathercraft
                    Other
                    TotalFor
      the year ended December 31, 2008Net
      Sales
                    $26,423,858
                    $25,231,145
                    $836,535
                    $745,556
                    $53,237,094Gross
      Profit
                    14,935,331
                    15,543,293
                    571,735
                    328,935
                    31,379,294Operating
      earnings
                    1,842,526
                    2,188,282
                    54,532
                    93,804
                    4,179,144Interest
      expense
                    332,107
                    -
                    -
                    -
                    332,107Other,
      net
                    (501,697)
                    5,872
                    230,790
                    -
                    (265,035)Income
      before income taxes
                    2,012,116
                    2,182,410
                    (176,258)
                    93,804
                    4,112,072Depreciation
      and amortization
                    844,305
                    126,326
                    13,443
                    1,475
                    985,549Fixed
      asset additions
                    3,481,851
                    74,550
                    92,859
                    -
                    3,649,260Total
      assets
                    $33,657,764
                    $6,404,198
                    $778,721
                    $135,230
                    $40,975,913For
      the year ended December 31, 2007Net
      Sales
                    $29,555,979
                    $24,663,751
                    -
                    $1,097,272
                    $55,317,002Gross
      Profit
                    16,446,853
                    14,733,478
                    -
                    492,071
                    31,672,402Operating
      earnings
                    2,826,710
                    1,544,320
                    -
                    139,971
                    4,511,001Interest
      expense
                    122,209
                    -
                    -
                    -
                    122,209Other,
      net
                    (425,145)
                    (11,975)
                    -
                    (1,920)
                    (439,040)Income
      before income taxes
                    3,129,646
                    1,556,295
                    -
                    141,891
                    4,827,832Depreciation
      and amortization
                    485,506
                    143,123
                    -
                    5,662
                    634,291Fixed
      asset additions
                    5,538,803
                    207,455
                    -
                    9,109
                    5,755,367Total
      assets
                    $32,217,748
                    $5,272,466
                    -
                    $161,292
                    37,651,506For
      the year ended December 31, 2006Net
      Sales
                    $31,068,188
                    $22,520,461
                    -
                    $1,610,372
                    $55,199,021Gross
      Profit
                    17,463,398
                    13,690,030
                    -
                    479,342
                    31,632,770Operating
      earnings
                    4,814,240
                    2,310,073
                    -
                    (56,599)
                    7,067,714Interest
      expense
                    -
                    -
                    -
                    -
                    -Other,
      net
                    118,381
                    (21,220)
                    -
                    1,230
                    98,391Income
      before income taxes
                    4,932,621
                    2,288,853
                    -
                    (55,369)
                    7,166,105Depreciation
      and amortization
                    245,838
                    141,070
                    -
                    6,007
                    392,915Fixed
      asset additions
                    298,689
                    172,902
                    -
                    162
                    471,753Total
      assets
                    $26,529,796
                    $5,112,188
                    -
                    $274,651
                    $31,916,635





Net sales
for geographic areas was as follows:





2008
              2007
              2006United
      States
              $46,316,115
              $48,756,696
              $49,188,609Canada
              4,740,722
              4,698,510
              4,287,180All
      other countries
              2,180,257
              1,861,796
              1,723,232$53,237,094
              $55,317,002
              $55,199,021





Geographic
sales information is based on the location of the customer.  Net sales
from no single foreign country, except for Canada, was material to our
consolidated net sales for the years ended December 31, 2008, 2007 and
2006.  We do not have any significant long-lived assets outside of the
United States.





25
 TABLE
OF CONTENTS


15.  RECENT
ACCOUNTING PRONOUNCEMENTS





In
September 2006, the Financial Accounting Standards Board (“FASB”) issued
SFAS No. 157, Fair Value
Measurements (“SFAS 157”). SFAS 157 defines fair value, creates a
framework within GAAP for measuring fair value, and expands disclosures about
fair value measurements. In defining fair value, SFAS 157 emphasizes a
market-based measurement approach that is based on the assumptions that market
participants would use in pricing an asset or liability. SFAS 157 does not
require any new fair value measurements, but does generally apply to other
accounting pronouncements that require or permit fair value measurements. In
February 2008, FASB issued FSP FAS 157-2, Effective Date of FASB Statement
No. 157, which delays for one year the effective date of SFAS 157
for most nonfinancial assets and nonfinancial liabilities. Nonfinancial
instruments affected by this deferral include assets and liabilities such as
reporting units measured at fair value in a goodwill impairment test and
nonfinancial assets acquired and liabilities assumed in a business combination.
Effective January 1, 2008, we adopted SFAS 157 for financial assets and
financial liabilities recognized at fair value on a recurring basis. The
adoption of SFAS 157 for these items did not have a material impact on our
financial position, results of operations and cash
flows.





In
February 2007, FASB issued SFAS No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities — including an amendment of FASB Statement
No. 115. This statement permits entities to choose to measure many
financial instruments and certain other items at fair value. This statement is
effective for financial statements issued for fiscal years beginning after
November 15, 2007, including interim periods within that fiscal year. We
did not elect the fair value option for any of our existing financial
instruments.  The adoption of SFAS 159  did not have a
material impact on our financial position, results of operations and cash
flows.





In
December 2007, FASB issued SFAS No. 141 (revised 2007), Business Combinations (“SFAS
141R”). SFAS 141R defines a business combination as a transaction or other event
in which an acquirer obtains control of one or more businesses. Under SFAS 141R,
all business combinations are accounted for by applying the acquisition method
(previously referred to as the purchase method), under which the acquirer
measures all identified assets acquired, liabilities assumed, and noncontrolling
interests in the acquiree at their acquisition date fair values. Certain forms
of contingent consideration and certain acquired contingencies are also recorded
at their acquisition date fair values. SFAS 141R also requires that most
acquisition related costs be expensed in the period incurred. SFAS 141R is
effective for us in January 2009. SFAS 141R will change our accounting
for business combinations on a prospective basis.





In
December 2007, FASB issued SFAS No. 160, Noncontrolling Interests in
Consolidated Financial Statements – an amendment of ARB No. 51
(“SFAS 160”). SFAS 160 requires a company to recognize noncontrolling interests
(previously referred to as “minority interests”) as a separate component in the
equity section of the consolidated statement of financial position. It also
requires the amount of consolidated net income specifically attributable to the
noncontrolling interest be identified in the consolidated statement of income.
SFAS 160 also requires changes in ownership interest to be accounted for
similarly, as equity transactions; and when a subsidiary is deconsolidated, any
retained noncontrolling equity investment in the former subsidiary and the gain
or loss on the deconsolidation of the subsidiary be measured at fair value. SFAS
160 is effective for us in January 2009. We are currently evaluating the
impact, if any, SFAS 160 will have on our financial position, results of
operations and cash flows.





In
March 2008, FASB issued SFAS No. 161, Disclosures about Derivative
Instruments and Hedging Activities (“SFAS 161”). SFAS 161 requires a
company with derivative instruments to disclose information that should enable
financial statement users to understand how and why a company uses derivative
instruments, how derivative instruments and related hedged items are accounted
for under SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, and how derivative instruments and
related hedged items affect a company’s financial position, financial
performance, and cash flows. SFAS 161 is effective for us in
January 2009.





16.  QUARTERLY
FINANCIAL DATA (UNAUDITED)





First
                                  Second
                                  Third
                                  Fourth2008
                                  
                                  Quarter
                                  Quarter
                                  Quarter
                                  QuarterNet
      sales
                                  
                                  $13,260,160
                                  $13,847,964
                                  $12,251,990
                                  $13,876,980Gross
      profit
                                  
                                  7,741,022
                                  8,011,652
                                  7,143,157
                                  8,483,463Net
      income
                                  
                                  584,498
                                  655,250
                                  421,014
                                  943,419Net
      income per common share:Basic
                                  
                                  0.05
                                  0.06
                                  0.04
                                  0.09Diluted
                                  
                                  0.05
                                  0.06
                                  0.04
                                  0.09Weighted
      average number of common shares outstanding:Basic
                                  
                                  10,977,092
                                  10,981,378
                                  10,988,092
                                  10,779,703Diluted
                                  
                                  11,067,863
                                  11,076,340
                                  11,073,942
                                  10,845,517First
                                  Second
                                  Third
                                  Fourth2007
                                  
                                  Quarter
                                  Quarter
                                  Quarter
                                  QuarterNet
      sales
                                  
                                  $14,507,805
                                  $13,376,987
                                  $12,806,333
                                  $14,625,877Gross
      profit
                                  
                                  8,597,953
                                  7,685,669
                                  6,941,634
                                  8,447,147Net
      income
                                  
                                  1,346,355
                                  396,692
                                  171,606
                                  1,173,478Net
      income per common share:Basic
                                  
                                  0.12
                                  0.04
                                  0.02
                                  0.11Diluted
                                  
                                  0.12
                                  0.04
                                  0.02
                                  0.11Weighted
      average number of common shares outstanding:Basic
                                  
                                  10,893,359
                                  10,915,061
                                  10,945,661
                                  10,974,222Diluted
                                  
                                  11,150,246
                                  11,114,466
                                  11,129,757
                                  11,160,034








26
 TABLE
OF CONTENTS










REPORT OF
INDEPENDENT REGISTERED
 PUBLIC
ACCOUNTING FIRM
 
 
 To the
Board of Directors and Stockholders
 Tandy
Leather Factory, Inc. and Subsidiaries
 
 We have
audited the accompanying consolidated balance sheets of Tandy Leather Factory,
Inc. and Subsidiaries (the Company) as of December 31, 2008 and 2007, and the
related consolidated statements of income, stockholders’ equity and cash flows
for each of the years in the three-year period ended December 31,
2008.  The Company’s management is responsible for these financial
statements.  Our responsibility is to express an opinion on these
financial statements based on our audits.
 
 We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States).  Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement.  The
Company is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting.  Our audit included
consideration of internal control over financial reporting as a basis for
designing audit procedures that are appropriate in the circumstances, but not
for the purpose of expressing an opinion on the effectiveness of the Company’s
internal control over financial reporting.  Accordingly, we express no
such opinion.  An audit also includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation.  We believe that our audits provide a reasonable basis
for our opinion.
 
 In our
opinion, the financial statements referred to above present fairly, in all
material respects, the consolidated financial position of the Tandy Leather
Factory, Inc. and Subsidiaries as of December 31, 2008, and 2007 and the
consolidated results of its operations and its cash flows for each of the years
in the three-year period ended December 31, 2008, in conformity with accounting
principles generally accepted in the United States of America.
 
  
 WEAVER
AND TIDWELL, L.L.P.
 
 Fort
Worth, Texas
 March 31,
2009





27
 TABLE
OF CONTENTS







ITEM
9.  CHANGE IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE





None.








ITEM
9A.  CONTROLS AND PROCEDURES





Evaluation of Disclosure
Controls and Procedures.  Our management, with the
participation of our Chief Executive Officer and Chief Financial Officer,
evaluated the design and operation of our “disclosure controls and procedures”
(as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act
of 1934, as amended) as of the end of the period covered by this
report.  Based upon their evaluation of these disclosure controls and
procedures, our Chief Executive Officer and Chief Financial Officer have
concluded that the disclosure controls and procedures were effective as of the
date of such evaluation in ensuring that information required to be disclosed in
the reports that we file or submit under the Exchange Act is (1) recorded,
processed, summarized and reported in a timely manner, and (2) accumulated and
communicated to our management, including our principal executive and principal
financial officers, as appropriate, to allow timely decisions regarding required
disclosure.





Management’s
Report on Internal Control over Financial Reporting





Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting.  Our internal control system was
designed to provide reasonable assurance to management and the board of
directors regarding the effectiveness of our internal control processes over the
preparation and fair presentation of our published financial
statements.





All
internal control systems, no matter how well designed, have inherent
limitations.  Therefore, even those systems determined effective can
provide only reasonable assurance with respect to financial statement
preparation and presentation.





We have
assessed the effectiveness of our internal controls over financial reporting as
of December 31, 2008.  In making this assessment, we used the criteria
set forth by the Committee of Sponsoring Organizations of the Treadway
Commissions (COSO) in Internal
Control – Integrated Framework.Based on our assessment, we believe that,
as of December 31, 2008, our internal control over financial reporting is
effective based on that criteria.





This
annual report does not include an auditor’s attestation report regarding the
effectiveness of our internal control over financial reporting and our
independent registered public accounting firm has not attested to management’s
report on our internal control over financial reporting.  Management’s
report was not subject to attestation by the company’s registered public
accounting firm pursuant to temporary rules of the Securities and Exchange
Commission that permit us to provide only management’s report in this annual
report.





Changes in internal
control.  There was no change in our internal control over
financial reporting that occurred during the fiscal quarter ended December 31,
2008 that has materially affected, or is reasonably likely to materially affect,
our internal control over financial reporting.








ITEM
9B.  OTHER INFORMATION





None








PART
III





Certain
information required by Part III is omitted from this annual report as we will
file a proxy statement for our 2009 Annual Meeting of Stockholders, pursuant to
Regulation 14A of the Securities Exchange Act of 1934, as amended, not later
than 120 days after the end of our fiscal year covered by this report, and
certain information included in that proxy statement is incorporated herein by
reference.





ITEM
10.  DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE
GOVERNANCE





The
information required by this item is contained under the heading "Executive
Officers of the Registrant" in Part I of this Annual Report on Form 10-K, and
the remainder is contained in our proxy statement for our 2009 Annual Meeting of
Stockholders under the heading "Election of Directors," and is incorporated
herein by reference.  Information relating to filings on Forms 3, 4
and 5 will be contained in our 2009 proxy statement under the heading "Section
16(a) Beneficial Ownership Reporting Compliance," and is incorporated herein by
reference.  Information required by this item pursuant to Items
401(h), 401(i) and 401(j) of Regulation S-K relating to an audit committee
financial expert, the identification of the audit committee of our board of
directors and procedures of security holders to recommend nominees to our board
of directors will be contained in our 2009 proxy statement under the heading
"Corporate Governance" and is incorporated herein by reference.





We have
adopted a written code of ethics that applies to our employees, including our
principal executive officer principal financial officer, principal accounting
officer, controller, or persons performing similar functions.  It is
available on our website (http://www.tandyleatherfactory.com).





ITEM
11.  EXECUTIVE COMPENSATION





The
information required by this item is contained in our proxy statement for our
2009 Annual Meeting of Stockholders under the heading "Report of the
Compensation Committee,” which is incorporated herein by reference.





ITEM
12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER MATTERS





The
information required by this item is contained in our proxy statement for our
2009 Annual Meeting of Stockholders under the headings "Stock Ownership by
Directors and Executive Officers” and “Principal Holders of Stock,” which is
incorporated herein by reference.





ITEM
13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE





The
information required by this item is contained in our proxy statement for our
2009 Annual Meeting of Stockholders under the heading “Other Relationships
Involving Directors, Executive Officers, or their Associates” and is
incorporated herein by reference.





ITEM
14.  PRINCIPAL ACCOUNTANT FEES AND SERVICES





The
information required by this item is contained in our proxy statement for our
2009 Annual Meeting of Stockholders under the headings "Audit Committee” and
“Report of the Audit Committee” and is incorporated herein by
reference.





28
 TABLE
OF CONTENTS


PART
IV





ITEM
15.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES





(a)           The
following are filed as part of this Annual Report on Form 10-K:





1. Financial Statements





The following consolidated financial
statements are included in Item 8:





·
            Consolidated
      Balance Sheets at December 31, 2008 and
2007


·
            Consolidated
      Statements of Income for the years ended December 31, 2008, 2007 and
      2006


·
            Consolidated
      Statements of Cash Flows for the years ended December 31, 2008, 2007 and
      2006


·
            Consolidated
      Statements of Stockholders' Equity for the years ended December 31, 2008,
      2007 and 2006





2.  Financial Statement
Schedules





All
financial statement schedules are omitted because the required information is
not present or not present in sufficient amounts to require submission of the
schedule or because the information is reflected in the consolidated financial
statements or notes thereto.





3.  Exhibits





The
exhibits listed in the Exhibit Index immediately preceding such exhibits are
filed as part of this Annual Report on Form 10-K.







SIGNATURES





Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the Registrant has duly caused this Annual Report on Form 10-K to be
signed on its behalf by the undersigned, thereunto duly authorized.





TANDY LEATHER
FACTORY, INC.




Dated: March 31, 2009
                By:Ronald
      C. MorganChief
      Executive OfficerBy:Shannon
      L. GreeneChief
      Financial Officer, Chief Accounting Officer and
  Treasurer





In
accordance with the Securities Exchange Act of 1934, this Report has been signed
below by the following persons on behalf of Tandy Leather Factory, Inc. and in
the capacities and on the dates indicated.





Signature
                    Title
                    Date/s/
      Wray Thompson
                    Chairman
      of the Board and Director
                    March
      31, 2009Wray
      Thompson/s/
      Ronald C. Morgan
                    Chief
      Executive Officer and Director
                    March
      31, 2009Ronald
      C. Morgan/s/
      Shannon L. Greene
                    Chief
      Financial Officer, Chief Accounting Officer, Treasurer and
      Director
                    March
      31, 2009Shannon
      L. Greene/s/
      Jon W. Thompson
                    President
      and Chief Operating Officer
                    March
      31, 2009Jon
      W. Thompson/s/
      Mark J. Angus
                    Senior
      Vice President
                    March
      31, 2009Mark
      J. Angus/s/
      T. Field Lange
                    Director
                    March
      31, 2009T.
      Field Lange/s/
      Joseph R. Mannes
                    Director
                    March
      31, 2009Joseph
      R. Mannes/s/
      L. Edward Martin III
                    Director
                    March
      31, 2009L.
      Edward Martin III/s/
      Robin L. Morgan
                    Vice
      President and Assistant Secretary
                    March
      31, 2009Robin
      L. Morgan/s/
      Michael A. Nery
                    Director
                    March
      31, 2009Michael
      A. Nery/s/
      William M. Warren
                    Secretary
                    March
      31, 2009William
      M. Warren


29
 TABLE
OF CONTENTS





TANDY
      LEATHER FACTORY, INC. AND SUBSIDIARIES
                  EXHIBIT
      INDEXExhibit
                  Number
                Description3.1
                Certificate
      of Incorporation of The Leather Factory, Inc., and Certificate of
      Amendment to Certificate of Incorporation of The Leather Factory, Inc.
      filed as Exhibit 3.1 to Form 10-Q filed by Tandy Leather Factory, Inc.
      with the Securities and Exchange Commission on August 12, 2005 and
      incorporated by reference herein.3.2
                Bylaws
      of The Leather Factory, Inc., filed as Exhibit 3.2 to the Registration
      Statement on Form SB-2 of The Leather Factory, Inc. (Commission File No.
      33-81132) filed with the Securities and Exchange Commission on July 5,
      1994 and incorporated by reference herein.4.1
                Financial
      Advisor’s Warrant Agreement, dated February 24, 2004, between The Leather
      Factory, Inc. and Westminster Securities Corporation filed as Exhibit 4.1
      to Form 10-Q filed by The Leather Factory, Inc. with the Securities and
      Exchange Commission on May 14, 2004 and incorporated by reference
      herein.10.1
                Consultation
      Agreement, dated January 1, 2008, between Tandy Leather Factory, Inc. and
      J. Wray Thompson, filed as Exhibit 10.1 to Form 8-K filed with the
      Securities and Exchange Commission on April 1, 2008 and incorporated by
      reference herein.10.2
                2007
      Director Non-qualified Stock Option Plan of Tandy Leather Factory, Inc.
      dated March 22, 2007, filed as an Exhibit to Tandy Leather Factory, Inc.’s
      Definitive Proxy Statement, filed with the Securities and Exchange
      Commission on April 18, 2007 and incorporated by reference
      herein.10.3
                Agreement
      of Purchase and Sale, dated June 25, 2007, by and between Standard Motor
      Products, Inc. and Tandy Leather Factory, L.P., filed as Exhibit 10.4 to
      Form 8-K filed with the Securities and Exchange Commission on August 6,
      2007 and incorporated by reference herein.10.4
                Credit
      Agreement, dated July 31, 2007, by and between The Leather Factory, L.P.
      and JPMorgan Chase Bank, N.A., filed as Exhibit 10.2 to Tandy Leather
      Factory’s Current Report on Form 8-K filed with the Securities and
      Exchange Commission on August 6, 2007 and incorporated by reference
      herein.10.5
                Line
      of Credit Note, dated July 31, 2007, by and between The Leather Factory,
      L.P. and JPMorgan Chase Bank, N.A., filed as Exhibit 10.1 to Tandy Leather
      Factory’s Current Report on Form 8-K filed with the Securities and
      Exchange Commission on August 6, 2007 and incorporated by reference
      herein.10.6
                Deed
      Of Trust, Assignment of Leases and Rents, Security Agreement and Financing
      Statement, dated as of July 31, 2007, by and among The Leather Factory,
      L.P., Randall B. Durant and JPMorgan Chase Bank, N.A., filed as Exhibit
      10.3 to Tandy Leather Factory’s Current Report on Form 8-K filed with the
      Securities and Exchange Commission on August 6, 2007 and incorporated by
      reference herein.10.7
                Consultation
      Agreement, dated as of January 1, 2008, by and between Tandy Leather
      Factory, Inc. and J. Wray Thompson, filed as Exhibit 10.1 to Tandy Leather
      Factory’s Current Report on Form 8-K filed with the Securities and
      Exchange Commission on April 7, 2008 and incorporated by reference
      herein.10.8
                Consultation
      Agreement, dated as of January 1, 2009, by and between Tandy Leather
      Factory, Inc. and J. Wray Thompson, filed as Exhibit 10.1 to Tandy Leather
      Factory’s Current Report on Form 8-K filed with the Securities and
      Exchange Commission on February 17, 2009 and incorporated by reference
      herein.14.1
                Code
      of Business Conduct and Ethics of The Leather Factory, Inc., adopted by
      the Board of Directors on February 26, 2004, filed as Exhibit 14.1 to the
      Annual Report on Form 10-K of The Leather Factory, Inc. (Commission File
      No. 1-12368) filed with the Securities and Exchange Commission on March
      29, 2004 and incorporated by reference herein.21.1
                Subsidiaries
      of Tandy Leather Factory, Inc. filed as Exhibit 21.1 to the Annual Report
      on Form 10-K of The Leather Factory, Inc. for the year ended December 31,
      2002 filed with the Securities and Exchange Commission on March 28, 2003,
      and incorporated by reference herein.*23.1
                Consent
      of Weaver & Tidwell LLP dated March 31, 2009*31.1
                Certification
      by the Chief Executive Officer and President pursuant to Rule 13a-14(a) or
      15d-14(a) under the Securities Exchange Act of 1934*31.2
                Certification
      by the Chief Financial Officer and Treasurer pursuant to Rule 13a-14(a) or
      15d-14(a) under the Securities Exchange Act of 1934*32.1
                Certification
      Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of
      the Sarbanes-Oxley Act of 2002_________________*Filed
      herewith.





30