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, 2001

                                       OR

[ ]     TRANSITION  REPORT  PURSUANT  TO  SECTION  13 OR 15(d) OF THE SECURITIES
        EXCHANGE ACT OF    1934 [NO FEE REQUIRED]
        For the transition period ________ to ________

                         Commission File Number 1-12368

                            THE LEATHER FACTORY, INC.
             (Exact name of registrant as specified in its charter)

            Delaware                                            75-2543540
 (State or other jurisdiction                              (I.R.S. Employer
of incorporation or organization)                         Identification Number)

                            3847 East Loop 820 South
                             Fort Worth, Texas 76119
               (Address of principal executive offices) (Zip Code)

       Registrant's telephone number, including area code: (817) 496-4414

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

     Title of Each Class               Name of Each Exchange on Which Registered
     -------------------               -----------------------------------------
Common Stock, par value $.0024                   American Stock Exchange

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

         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. [X]

         The aggregate  market value of the common stock held by  non-affiliates
of the registrant was  approximately  $7,797,859 at March 11, 2002. At that date
there were 10,011,161 shares of Common Stock outstanding.

                       DOCUMENTS INCORPORATED BY REFERENCE

         Certain portions of the Registrant's definitive Proxy Statement for the
Annual Meeting of Stockholders  to be held on May 23, 2002, are  incorporated by
reference in Part III of this report.


<PAGE>

                                     PART I

ITEM 1.  BUSINESS.
-----------------

         As  used  in  this  Report,   the  terms  "we,"  "us,"  "our,"   "TLF,"
"management,"  and  the  "Company"  mean  The  Leather  Factory,  Inc.  and  its
subsidiaries (unless the context indicates a different meaning).

General

         The Leather Factory,  Inc. is a Delaware corporation whose common stock
trades on the American  Stock  Exchange  under the symbol "TLF." The Company was
first  incorporated  under  the  laws of the  State  of  Colorado  in  1984  and
reincorporated under the laws of the State of Delaware in June 1994.

         We are an international  marketer 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,  shoe  repair
supplies,   saddle  and  tack  hardware,   and  do-it-yourself  kits.  Also,  we
manufacture and distribute fancy hat trims, leather lacing and kits. The Company
distributes  its  products  through  30 sales  and  distribution  units  located
throughout  the U.S.  and Canada  and  through  its  subsidiary,  Tandy  Leather
Company,    via   2   retail    stores   and    mail/telephone/website    orders
(http://www.tandyleather.com).

         The Company  sells its products  worldwide and is managed on a business
entity  basis,  with  those  businesses  being  The  Leather  Factory  ("Leather
Factory"),  Tandy Leather  Company  ("Tandy" or "Tandy  Leather"),  and Roberts,
Cushman & Company,  Inc.  ("Cushman").  See Note 13 Segment  Information  to the
Consolidated  Financial  Statements  for  financial and  additional  information
concerning the Company's segments.

         We   frequently   introduce  new  products   either   through  our  own
manufacturing  capability  or by purchasing  from  vendors.  The Company holds a
substantial  number of  copyrights  for its  designs.  These  designs  have been
incorporated  throughout the Company's product line as a means of increasing its
competitive advantage.

         Late in 2001,  the Company  announced  its plans to open retail  stores
under the Tandy Leather name.  The Tandy  Leather  retail store concept  differs
from that of a traditional  Leather Factory store.  Tandy stores are designed to
attract  walk-in  retail  customers  primarily,  while Leather  Factory  stores,
although  they can and do service  retail  customers,  generally  tend to target
wholesale customers.

         As part of its original  strategy to develop a multi-location  chain of
wholesale  units,  the Company has made  numerous  acquisitions  in prior years.
These  acquisitions have included the purchase of six wholesale units from Brown
Group,  Inc. in 1985.  The Company  also  acquired  several  businesses  located
throughout the United States that distribute  shoe-related  supplies to the shoe
repair and shoe store  industry.  In 1995,  the  Company  purchased  Cushman,  a
leading  producer of hat trims. In 1996, the Company  acquired all of the issued
and outstanding capital stock of its Canadian  distributor,  The Leather Factory
of Canada,  Ltd. In November 2000, the Company  acquired the operating assets of
two  subsidiaries  of  Tandycrafts,  Inc.  to form  the  Tandy  Leather  Company
subsidiary.

         No single customer's purchases represent more than 10% of the Company's
total sales in 2001. Approximately 5% of our 2001 sales were export sales.

         The  Company's  principal  offices  are  located  at 3847 East Loop 820
South, Fort Worth, Texas 76119, and its phone number is (817) 496-4414.


                                       2
<PAGE>

Leather Factory Operations

         The Leather  Factory,  located in Fort Worth,  Texas,  distributes  its
broad  product line of leather and  leathercraft-related  products in the United
States and  internationally.  We  manufacture  some of our  products,  while the
majority of products are purchased from manufacturers.  The Leather Factory line
includes small finished  leather goods such as cigar cases,  wallets and western
accessories  distributed  under the name,  Royal  Crown  Custom  LeatherTM.  The
Leather  Factory  line  accounted  for  77.0%,  89.9%,  and  91.1% of the  total
consolidated net sales of the Company for 2001, 2000, and 1999, respectively.

         Business  Strategy.  We distribute Leather Factory products through its
30  sales/distribution  units ("Units") located in twenty states and Canada, and
through  its web  site.  The  location  of the  Units is  selected  based on the
location of  customers,  so that  delivery  time to  customers is  minimized.  A
two-day maximum delivery time is the Company's goal. In addition to offering its
customers  rapid  delivery,  Leather  Factory also offers a "one-stop  shopping"
concept for both leather and leathercraft  materials.  The Units are designed to
combine  the  economies  of  scale of  warehouse  locations  with the  marketing
efficiencies  that can be achieved  through  direct  mail.  The type of premises
utilized for the Unit locations is generally light  industrial  office/warehouse
space in proximity to a major freeway or with other similar access. This kind of
location  typically  offers lower rents  compared to other more  retail-oriented
locations.

         The size and  configuration  of the Units 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 of
leather and leather goods.

         Leather Factory Units serve  customers  through various means including
walk-in  traffic,  phone and mail order.  Both  wholesale  and retail  customers
purchase from these Units.  Authorized Sales Centers  (discussed below), as well
as  the  craft,  western  and  other  retail  establishments  located  in  close
geographic proximity to a particular Unit, are serviced from that Unit as well.

         We  staff  Leather  Factory  Units  with  experienced   managers  whose
compensation is tied to the operating  profit of their location.  Sales from the
Units are generated by the selling efforts of the location personnel themselves,
participation  by the Company at trade  shows,  the use of sales  representative
organizations and the aggressive use of direct mail advertising.

         Our primary  advertising  efforts are through  direct mail  advertising
aimed at specific market groups.  Like most direct mail  marketers,  our mailing
list is one of our  most  important  assets.  Over  the  years,  we  have  spent
considerable  time and money maintaining and updating this list. As a result, we
have  developed  what we  consider  to be the purest,  most  up-to-date,  unique
collection  of  leathercraft  customers'  names and purchase  information  found
anywhere  in the world.  Our  mailing  list has been the key to our sales in the
past and will continue to be the key in the future. We estimate that in 2002, we
will  produce and mail 80  different  direct mail pieces from a simple black and
white postcard to our 140-page full color catalog.

         Customers. Leather Factory's customer base is comprised of individuals,
wholesale distributors,  tack and saddle shops, shoe repair shops,  institutions
(prisons and prisoners,  schools,  hospitals),  dealer stores,  western  stores,
craft stores and craft store chains,  hat manufacturers and distributors,  other
large volume purchasers,  manufacturers,  and retailers dispersed geographically
throughout  the world.  Wholesale  sales  make up the  majority  of our  Leather
Factory  business,  while retail sales have  historically  been less than 10% of
Leather  Factory sales.  During the last few years,  retail sales have increased
somewhat,  resulting in a shift in our sales mix. In 1999, our sales mix was 85%
wholesale  and 15% retail.  In 2000 and 2001,  the mix was 80% wholesale and 20%


                                       3
<PAGE>

retail.  We are  continuing  efforts to attract  the retail  customer to Leather
Factory;  however,  the  strongest  market  for this  line  continues  to be the
wholesale  customer.  Leather Factory sales generally do not reflect significant
seasonal patterns.

         Leather Factory's Authorized Sales Center ("ASC") program was developed
to  generate  sales  in  geographical  areas  where we  currently  do not have a
sales/distribution  unit without the capital  investment  needed to open one. An
unrelated  person who desires to become an ASC must apply with  Leather  Factory
and upon approval,  place a minimum initial order. There are also minimum annual
purchase  amounts  set that  the ASC must  adhere  to in order to  maintain  ASC
status. In exchange, the ASC gets free advertising in certain sale flyers, price
breaks on many products,  advance notice of new products,  priority shipping and
handling on all orders, as well as various other benefits.

         Expansion.  We opened four new Leather  Factory Units in 1999,  and two
new Units in each of the years 2000 and 2001.  Our current plans are to continue
expansion  conservatively  by: (i) opening Units as and when such  additions are
determined feasible; and (ii) acquiring companies in related areas/markets which
offer  synergistic  aspects based on the locations  and/or  product lines of the
businesses.

Tandy Leather Operations

         Tandy Leather Company,  located in Fort Worth, Texas, bears the name of
the oldest and best-known  supplier of leather and related  supplies used in the
leathercraft industry.  Established in 1919, originally as Hinkley-Tandy Leather
Company,  Tandy Leather has been the primary  resource for over four generations
of  leathercrafters.  This  subsidiary  offers a product line of quality  tools,
leather, accessories, kits and teaching materials.

         As noted above,  we acquired the Tandy Leather assets in November 2000.
Tandy Leather  accounted for 17.7% and 1.9% of the total  consolidated net sales
of the Company for 2001 and 2000, respectively.

         Business  Strategy.  Tandy Leather sells its products through a central
call  center  that  handles   phone,   mail  and  fax  orders,   our  web  site,
www.tandyleather.com,  and  approximately  70 U.S.  authorized  dealers.  Orders
placed  through the call center and Internet are  processed and shipped from our
Fort Worth distribution center. Typically, 80% of our business arrives by phone,
fax or mail orders. The other 20% comes through the web site. Additionally,  our
products are sold in Canada through an existing Leather Factory location,  which
also  supports   approximately  75  Tandy  Leather  authorized  dealers  located
throughout the Canadian provinces.

         Tandy  Leather  did not own any  retail  stores  when its  assets  were
acquired by the Company. At one time, however, Tandy Leather owned approximately
350 retail stores located  throughout  the United States and Canada.  We believe
that Tandy  Leather  stores  are a viable  option for  growth,  and in 2002,  we
announced two Tandy Leather retail  locations -- Oklahoma City, Okla. and Boise,
Idaho.  The retail stores serve  walk-in,  mail and phone order  customers  from
convenient  locations in  established  retail areas.  Tandy  Leather  stores are
staffed by knowledgeable sales people whose compensation is based, in part, upon
the  profitability  of their store.  More  information  about expansion plans is
explained below.

         Sales by Tandy  Leather  are  driven  through  the  efforts of the call
center and store staff, trade shows, our 132-page catalog and a direct marketing
program  that  includes  sales  flyers  and  e-mail  announcements.  Maintaining
detailed  customer history allows us to target certain customer  segments in our
mailings.  We are in the process of expanding the information  maintained in the
Tandy Leather  customer  mailing list to match the detail  maintained by Leather
Factory,  as we believe we can more  effectively  market to  customer  groups by
tracking the additional  information.  This provides significant opportunity for
sales retention and growth.


                                       4
<PAGE>

         Tandy Leather has long been the entry point for new  customers  getting
into  leathercraft.  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 the retail stores.


         Customers.  Tandy's  customer  base is comprised  mostly of  individual
hobbyists  but  also  includes  a  number  of  resellers,  small  manufacturers,
institutions and dealers.  Individual  retail customers are our largest customer
segment, representing over 50% of Tandy Leather sales.

         Authorized Dealers represent another  significant  segment of our sales
at approximately  18%. Dealers are independent  retail businesses that have been
authorized to sell our products in their store and do business as "Tandy Leather
Dealers." This allows us to have our products  distributed  in  communities  and
countries where maintaining a physical presence would be cost prohibitive.

         Other important  customer  segments  include  youth-related  groups and
camps  representing   approximately  7%  of  sales  and  international  business
representing  about 5% of sales.  Tandy's sales,  when operating  strictly as an
order fulfillment house (phone,  fax, mail, and Internet orders),  are generally
consistent  quarter to quarter (25% per  quarter).  Its retail store  operations
historically  generated  slightly  more  sales in the 4th  quarter  of each year
(approximately  30%) and less in the 2nd quarter  (approximately  20%) while the
1st and 3rd quarters remained steady at 25%.

         Expansion.  In December 2001, The Leather Factory, Inc. announced plans
to expand the Tandy  Leather  line  through the  introduction  of Tandy  Leather
retail stores.  This expansion began with acquisitions of existing  leathercraft
stores in both January and February 2002. Tandy anticipates that it will add two
to five additional retail stores during 2002 by opening new stores and acquiring
existing leathercraft stores as opportunities arise with attractive terms.

Roberts, Cushman Subsidiary

         Cushman is located in Long Island  City,  N.Y.,  and produces and sells
headwear adornments (decorations that adorn the outside of a hat), manufacturing
made-to-order  trimmings for the headwear  industry for over 140 years.  Cushman
accounted for 5.3%,  8.2%, and 8.9% of the total  consolidated  net sales of the
Company for 2001, 2000, and 1999, respectively.

         Business Strategy.  Cushman has long been considered one of the leaders
in the field of  headwear  trimmings.  It  designs  and  manufactures  exclusive
trimmings for all type of hats.  Trims are sold to hat  manufacturers  directly.
Cushman does not employ an outside  sales force.  Instead,  customers  visit the
facilities in New York and,  with a Cushman  designer,  incorporate  their ideas
into a customized  product.  The customer is provided  samples or photographs of
each design  before they leave the  premises.  Customer  can use the sample as a
sales  tool to obtain  orders.  This  "design-on-site"  process is unique in the
industry.

         Customers.  Currently,  there  are  approximately  90 to  100  headwear
manufacturers  worldwide.  Cushman designs and manufactures trims for over 75 of
those  manufacturers,  supplying  customized  trims, as well as ribbons,  buckle
sets,  name pins,  feathers,  etc.  Our success in  developing  and  maintaining
long-standing  relationships  with our customers is due primarily to our ability
to deliver quality products in a timely manner.  Generally,  our delivery target
is  three  weeks  or  less.  Cushman's  backlog  of  in-house  orders  from  the
manufacturers  is  consistently  20-30 days.  Cushman's  sales  generally do not
reflect significant seasonal patterns.


                                       5
<PAGE>

         Expansion.  Cushman has been very successful  providing a very specific
product line directly to headwear  manufacturers.  Given the current conditions,
we do not believe that there is much room for expansion in the  industry,  other
than to capture  additional  market share. We have considered the possibility of
expanding  production  to other  leather  products.  However,  even  though  the
potential  products would be made from leather and therefore could be considered
somehow related, we have decided that Cushman's expansion into other products is
not feasible at this time.

Additional Information

         Products.  Our core business consists of  manufacturing,  importing and
distributing leather,  traditional leathercraft materials  (do-it-yourself kits,
stamping sets, and  leatherworking  tools),  craft-related  items (leather lace,
beads, and wearable art accessories),  hardware, metal garment accessories (belt
buckles, belt buckle designs, and conchos),  shoe care and repair supplies,  and
leather  finishes.  We attempt to maintain the optimum  number of  stock-keeping
units ("SKUs") in the Leather  Factory and Tandy Leather lines to balance proper
stock maintenance and minimizing  out-of-stock situations against carrying costs
involved with such an inventory level. We try to maintain higher  inventories of
certain imported items to ensure a continuous supply.

         The number of SKUs has been refined over the years by the  introduction
of new products and the discontinuing of selected products.  The Company carries
approximately  3,600 items in the current  lines of leather and  leather-related
merchandise  - 1,000 of which are  exclusively  Leather  Factory  products,  800
exclusively Tandy Leather and 1,800 carried by both Leather Factory and Tandy.

         The products  manufactured  by the Company  generally  involve  cutting
leather  into  various  shapes  and  patterns  using  metal  dies  ("clicking"),
fabrication, assembly, and packaging/repackaging tasks. Items made in Fort Worth
are primarily distributed under the TejasTM brand name through Leather Factory's
sales/distribution units.

         Cushman's hat bands are generally made from leather,  ribbon,  or woven
fabrics,  depending on the style of hat. They are made by cutting leather and/or
other materials into strips,  and enhancing the trim by attaching conchos and/or
three-piece  buckle sets,  braiding with other  materials,  finishing the end or
borders by  stitching  or by lacing with leather  lace.  Cushman  also  supplies
custom-designed  buckles and conchos separate from the bands, feathers for dress
hats, and name pins.

         Patents,  Copyrights.  We  presently  own 496  copyrights  covering 605
registered  works,  twenty  trademarks  covering  twenty names,  and two patents
covering  three  products.  Registered  trademarks  include  federal  trade name
registrations on The Leather Factory and Tandy Leather  Company.  The trademarks
expire at various times  starting in 2002 and ending in 2010, but can be renewed
indefinitely.  Most copyrights granted or pending are on metal products, such as
conchos,  belt buckles,  instruction  books, and kits. The expiration period for
the  copyrights  begins in 2062 and ends in 2072. The Company has patents on two
belt  buckles  and  certain  leather-working  equipment  known  as  the  "Speedy
Embosser."  The patents  expire in 2011.  We consider  these  intangibles  to be
valuable assets and defend them as necessary.

         Cushman's products are generally not copyrighted  initially as hundreds
of new trim designs are continually in process. Once a trim has been selected by
a manufacturer  for  production,  has been completed for a line of hats, and has
been a strong seller for the season,  selected  components in the trim are often
transferred to Leather Factory,  adapted to fit Leather  Factory's product line,
and  copyrighted.  Given that the apparel market designs and produces  styles at
least six months in advance of a particular  season,  Cushman's  product  design
contributes to Leather  Factory's  development of new products as we get insight
into what styles are expected to be popular in the near future.

         Suppliers.  We currently  purchase  merchandise  and raw materials from
approximately 200 vendors  dispersed  throughout the United States as well as in
21  foreign   countries.   In  2001,  the  ten  largest  vendors  accounted  for
approximately 65% of Leather Factory's and Tandy Leather's combined purchases.


                                       6
<PAGE>

         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 certain parts of the
world can influence the price of leather used in our  products.  We  experienced
this situation  during the early part of 2001 and believe we managed our leather
costs  satisfactorily  so as not to  significantly  affect our  customers or our
profits.  We did this by  anticipating  price  increases  and making  additional
purchases before the anticipated increases could take effect.

         As such an occurrence  is beyond the control of the Company,  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.

         Cushman   purchases   components   from   over  50   vendors,   located
predominately  in the United  States.  In 2001,  Cushman's  top ten  vendors (in
dollars purchased) represented approximately 50% of its total purchases.

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

         Competition.  We sell our leather and leathercraft-related  products in
three highly fragmented markets -- leathercraft, leather accessories, and retail
craft. We encounter  competition in connection with certain product lines and in
certain areas from different companies, but have no direct competition affecting
the entire product line. We compete on price,  availability of merchandise,  and
speed  of  delivery.  Our  size  relative  to  most of our  competitors  creates
competitive  advantage  in our ability to stock a full range of products as well
as in buying merchandise. We believe we have a competitive advantage on price in
most product lines because we purchase in bulk and have an international network
of suppliers that can provide  quality  merchandise at lower costs.  Most of our
competitors  do not have the  multiple  sources of supply  and  cannot  purchase
sufficient  quantities to compete along a broad range of products. In fact, some
of our competitors are also customers, relying on us as a supplier.

         Our Cushman line encounters some competition. However, we are not aware
of any single  company  whose  primary  product  line is the same as  Cushman's.
Cushman's market share has grown over the years because of its reputation in the
industry to deliver product timely.

Compliance With Environmental Laws

         Compliance by the Company with federal,  state and local  environmental
protection laws has not had, and is not expected to have, a material effect upon
capital expenditures, earnings or the competitive position of the Company.

Employees

         As of December 31, 2001, the Company employed 283 people, with 275 on a
full-time  basis.  The  Company  is not a  party  to any  collective  bargaining
agreement.   Eligible  employees   participate  in  The  Leather  Factory,  Inc.
Employees' Stock Ownership Plan and Trust ("ESOP"). As of December 31, 2001, 212
employees and former  employees were  participants  in or  beneficiaries  of the
ESOP.  The  Company  has  the  option  of  contributing  up to 15%  of  eligible
employees'  compensation  into the ESOP. Net  contributions  for 2001, 2000, and
1999 were 5.2%, 5.9%, and 5.6%,  respectively,  of eligible compensation.  These


                                       7
<PAGE>

contributions  are  used to  purchase  shares  of the  Company's  Common  Stock.
Generally,  contributions  to the  ESOP  follow a  similar  pattern  as  overall
profitability.

         Overall, management believes that relations with employees are good.

Executive Officers of the Registrant

The following  table sets forth  certain  information  concerning  the executive
officers of the Company.

                          Position and Business Experience           Served as
    Name and Age               During Past Five Years              Officer Since
    ------------               ----------------------              -------------
J. Wray Thompson, 70    Chief Executive Officer since June 1993.
                        President from June 1993 to January 2001.       1993

Ronald C. Morgan, 54    President since January 2001.  Chief
                        Operating Officer since June 1993               1993

Robin L. Morgan, 51     Vice President of Administration since
                        June 1993.                                      1993

Shannon L. Greene, 36   Chief Financial Officer since May 2000.
                        Controller from January 1998 to May 2000.
                        Assistant Controller from  September 1997 to
                        January 1998.                                   2000

Mr. and Mrs. Morgan are married.  All officers are elected annually by the Board
of Directors to serve for the ensuing year.


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<PAGE>
<TABLE>
<CAPTION>

ITEM 2.   PROPERTIES.
---------------------

         The Company  leases all of its premises.  Detailed  below are the lease
terms for the Company's locations.  The general character of the Leather Factory
("LF") Unit locations is light industrial  office/warehouse space. Tandy Leather
("TAN") retail store locations are generally found in retail strip centers.  The
Company believes that all of its properties are adequately covered by insurance.
The Cushman facility ("RCC") is its manufacturing  facility in Long Island City,
New York.

                           Total Space     Minimum Annual
Location Name               (Sq. Ft.)          Rent *         Lease Expiration     Lessee
-------------              -----------     --------------     ----------------     ------
<S>                        <C>             <C>                <C>                  <C>
Chattanooga, TN                  9,040      $    42,739       May 2004               LF
Denver, CO                       5,879           30,000       September 2004         LF
Harrisburg, PA                   6,850           40,056       March 2007             LF
Fort Worth, TX                 101,000          376,633       March 2003             LF
Fresno, CA                       5,600           44,245       March 2007             LF
Des Moines, IA                   4,000           30,718       April 2004             LF
Phoenix, AZ                      4,500           26,932       March 2006             LF
Springfield, MO                  6,000           24,000       July 2003              LF
Spokane, WA                      5,400           21,360       February 2004          LF
Albuquerque, NM                  5,000           30,655       October 2003           LF
Salt Lake City, UT               3,485           23,090       July 2004              LF
Baldwin Park, CA                 7,800           53,400       March 2005             LF
Tampa, FL                        5,238           41,254       March 2003             LF
San Antonio, TX                  5,600           42,352       October 2006           LF
Columbus, OH                     6,000           38,247       October 2006           LF
El Paso, TX                      5,000           28,252       August 2003            LF
Oakland, CA                      8,000           54,000       December 2003          LF
Grand Rapids, MI                 8,000           42,385       March 2004             LF
Wichita, KS                      5,150           21,360       May 2004               LF
New Orleans, LA                  5,130           23,310       August 2003            LF
Portland, OR                     5,232           31,615       April 2004             LF
Charlotte, NC                    6,202           29,025       February 2006          LF
Billings, MT                     2,600           12,000       April 2004             LF
Austin, TX                       3,800           23,250       April 2005             LF
Tucson, AZ                       3,600           20,110       May 2004               LF
Houston, TX                      4,250           25,305       November 2005          LF
Dallas, TX                       5,040           27,360       September 2005         LF
Chicago, IL                      6,100           31,147       August 2006            LF
Long Island City, NY            10,200           70,344       June 2003              RCC
Oklahoma City, OK                3,160           20,012       December 2006          TAN
Winnipeg, Manitoba, Canada       5,712           15,680**     November 2002          LF
Toronto, Ontario, Canada         5,614           22,159**     June 2006              LF
                              --------      -----------
Totals                         274,182      $ 1,362,995
                              ========      ===========
</TABLE>


*        Represents  the  average  minimum  annual  rent over the balance of the
         unexpired lease term.
**       As converted into U.S. dollars.

         The  Company's  Fort Worth  location  includes  the Fort Worth  Leather
Factory Unit, the Company's central warehouse and manufacturing facility,  Tandy
Leather's  offices  and  warehouse,  and the sales and  administrative/executive
offices.  The  Company  also  leases a 284  square-foot  showroom  in the Denver
Merchandise Mart for $5,364 per year. This lease will expire in October 2002.


                                       9
<PAGE>

ITEM 3.   LEGAL PROCEEDINGS.
---------------------------

         The Company is involved in  litigation  in the  ordinary  course of its
business but is 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 the  Company's  security
holders  during the fourth  quarter of the Company's  fiscal year ended December
31, 2001.


                                     PART II

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

         The  Common  Stock of the  Company  is  traded  on the  American  Stock
Exchange using the symbol TLF. The high and low prices for each calendar quarter
during the last two fiscal years are as follows:

                                  2001                        2000
                                  ----                        ----
 Quarter Ended              High        Low             High       Low
 -------------              ----        ---             ----       ---
 March 31,                $1.1250     $0.9000         $1.6875    $0.8125
 June 30,                 $2.2400     $0.9500         $1.5000    $0.9375
 September 30,            $3.0000     $1.8000         $1.4375    $0.9375
 December 31,             $2.3000     $1.7500         $1.5000    $0.9375

There were approximately 637 stockholders of record on March 11, 2002.

         There have been no cash  dividends  paid on the shares of the Company's
Common  Stock and  currently  dividends  cannot be declared or paid  without the
prior  written  consent of Wells Fargo  Business  Credit,  Inc.,  the  Company's
lender. The Board of Directors has historically followed a policy of reinvesting
the  earnings of the Company in the  expansion of its  business.  This policy is
subject to change  based on future  industry and market  conditions,  as well as
other factors beyond the control of the Company.


                                       10
<PAGE>
<TABLE>
<CAPTION>


ITEM 6.  SELECTED FINANCIAL DATA.

         The selected financial data presented below are derived from and should
be read in conjunction with the Company's  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." The financial impact of the acquisition of Tandy Leather Company in
November 2000 is included in the  information  presented for 2000 and 2001. Data
in prior years have not been restated to reflect  acquisitions  that occurred in
subsequent years.


Income Statement Data                                                Years Ended December 31,
                                                  -------------------------------------------------------------------------
                                                       2001           2000           1999           1998            1997
                                                  ------------   ------------   ------------   ------------    ------------
<S>                                               <C>            <C>             <C>           <C>             <C>
Net sales                                         $ 37,279,262   $ 30,095,264   $ 27,164,399   $ 22,163,994    $ 25,399,116


Cost of sales                                       17,934,935     15,147,547     14,907,768     12,428,324      14,844,376
                                                  ------------   ------------   ------------   ------------    ------------
Gross profit                                        19,344,327     14,947,716     12,256,631      9,735,670      10,554,740
Operating expenses                                  15,442,359     11,702,633     10,346,420      8,890,045       9,365,673
                                                  ------------   ------------   ------------   ------------    ------------
Operating income                                     3,901,968      3,245,084      1,910,211        845,625       1,189,067

Other expense                                          533,482        653,778        900,304        970,340         887,543
                                                  ------------   ------------   ------------   ------------    ------------
Income (loss) before income taxes                    3,368,486      2,591,305      1,009,907       (124,715)        301,524

Income tax provision (benefit)                       1,362,053      1,049,985        574,851        (85,524)        231,232
                                                  ------------   ------------   ------------   ------------    ------------
Net income (loss)                                 $  2,006,433   $  1,541,320   $    435,056   $    (39,191)   $     70,292
                                                  ============   ============   ============   ============    ============

Earnings (loss) per share                                 0.20           0.16           0.04          (0.00)           0.01
                                                  ============   ============   ============   ============    ============

Earnings (loss) per share-
  assuming dilution                                       0.19           0.15           0.04          (0.00)           0.01
                                                  ============   ============   ============   ============    ============

Weighted average common shares outstanding for:

   Basic EPS                                         9,976,071      9,875,606      9,853,161      9,803,887       9,789,358
                                                  ============   ============   ============   ============    ============

   Diluted EPS                                      10,382,874     10,182,803      9,890,098      9,803,887       9,791,565
                                                  ============   ============   ============   ============    ============




Balance Sheet Data                                                               As of December 31,
                                                  -------------------------------------------------------------------------
                                                       2001           2000           1999           1998            1997
                                                  ------------   ------------   ------------   ------------    ------------

Total assets                                      $ 19,548,323   $ 19,686,079   $ 18,220,775   $ 16,029,937    $ 17,024,549
                                                  ------------   ------------   ------------   ------------    ------------

Notes payable and current
    Maturities of long term debt                     4,527,904      5,759,626      6,061,735      6,139,327       4,650,742
                                                  ------------   ------------   ------------   ------------    ------------

Notes payable and long-term

    Debt, net of current maturities                      7,691         13,025        121,686         61,389       2,602,728
                                                  ------------   ------------   ------------   ------------    ------------

Total Stockholders' Equity                        $ 12,423,671   $ 10,295,637   $  8,680,425   $  8,170,278    $  8,132,646
                                                  ============   ============   ============   ============    ============

</TABLE>

                                       11

<PAGE>
<TABLE>
<CAPTION>



ITEM 7. MANAGEMENT'S  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
--------------------------------------------------------------------------------

OF OPERATIONS.
--------------

         The Company is a leading  provider of leather and  leathercraft-related
items and headwear  trims.  Its products are sold  worldwide  through  wholesale
distribution  channels  and  direct-to-consumer  channels  through  the  Leather
Factory  Units,  Tandy  Leather's  retail stores,  mail order and Internet,  and
directly to headwear  manufacturers  (Cushman  only).  As described  above,  the
Company is organized into three related  operating  segments:  Leather  Factory,
Tandy Leather, and Cushman.


Results of Operations

         The following  tables  present  selected  financial data of each of the
Company's three segments for the years ended December 31, 2001, 2000 and 1999:

                                  2001                         2000                         1999
                       -------------------------    -------------------------    -------------------------
<S>                   <C>           <C>             <C>          <C>             <C>          <C>

                                       Operating                    Operating                    Operating
                           Sales        Income          Sales        Income          Sales        Income
                           -----       ---------        -----       ---------        -----       ---------
Leather Factory        $ 28,711,006 $  3,719,157    $ 27,060,406 $  2,991,804    $ 24,735,229 $  1,924,631
Tandy Leather*            6,606,090      281,998         575,635      (43,724)           --           --
Cushman                   1,962,166      (99,547)      2,459,223      297,004       2,429,170      (14,420)
                       ------------ ------------    ------------ ------------    ------------ ------------

Total Operations       $ 37,279,262 $  3,901,968    $ 30,095,264 $  3,245,084    $ 27,164,399 $  1,910,211
                       ============ ============    ============ ============    ============ ============
</TABLE>

*The Tandy Leather assets were acquired in November 2000.

                        Analysis of 2001 Compared to 2000

         Consolidated  net  sales for 2001  increased  $7.2  million,  or 23.9%,
compared  to 2000.  Tandy  contributed  $6.0  million  to the  increase  as 2001
included a full year of Tandy's  operations,  while 2000 only included  December
operations.  Leather  Factory added an additional $1.7 million in sales in 2001,
partially  offset  by a sales  decline  at  Cushman  of  $500,000.  The  Company
experienced  an increase  in  operating  income of 20.2% from 2000 to 2001,  due
primarily to an overall improvement in gross profit margins.

                               2001          2000       $ Change      % Change
                           -----------   -----------   -----------   -----------

Net sales                  $37,279,262   $30,095,264   $ 7,183,998       23.87%
Cost of sales               17,934,935    15,147,547     2,787,388       18.40%
                           -----------   -----------   -----------
     Gross profit           19,344,327    14,947,716     4,396,610       29.41%

Operating expenses          15,442,359    11,702,633     3,739,727       31.96%
                           -----------   -----------   -----------
Operating income             3,901,968     3,245,084       656,883       20.24%

Other (income) expense         533,482       653,778      (120,296)     (18.40%)
                           -----------   -----------   -----------

Income before income taxes   3,368,486     2,591,305       777,180       29.99%
Income tax provision         1,362,053     1,049,986       312,068       29.72%
                           -----------   -----------   -----------

Net income                 $ 2,006,433   $ 1,541,320   $   465,111       30.18%
                           ===========   ===========   ===========



                                       12
<PAGE>

Leather Factory Operations

         Net   sales   for   Leather   Factory,   which  is   comprised   of  30
sales/distribution Units as of December 2001, increased 6.1%. The four new Units
opened in late 2000 and 2001  contributed a significant  portion  (77.8%) of the
sales increase; while same Unit sales increased 22.2% from 2000 to 2001.

         We monitor sales via several different  categories - one being customer
groups. Our customer groups are generally defined as follows:

      Customer Group                        Group Characteristics
      --------------                        ---------------------

      Retail                   End users, consumers, individuals

      Institution              Prisons, prisoners, hospitals, schools, YMCA, Boy
                               Scouts, etc.
      Wholesale                Saddle & tack stores, resellers and distributors,
                               shoe-findings and repair shops, dealers, etc.
      Craft                    Craft stores (individually owned) and craft store
                               chains
      Midas                    Small manufacturers
      ASC                      Authorized Sales Centers
      Export                   Foreign customers (outside the United States)

         The majority of the overall sales increase was to our Craft  customers.
Our Retail sales,  while holding steady at 20% of our total sales,  increased in
dollars by 8% over last year's retail sales.  We  experienced  sales declines in
our  Institution  and Midas markets,  but compensated by gains in the Wholesale,
ASC, and Export groups.

         Operating income for the Leather Factory line increased by $728,000 and
improved the operating  margin to net sales from 11.1% in 2000 to 12.9% in 2001.
The increase in operating  income  results from improved gross profit margins as
well  as a  slight  improvement  in  operating  efficiency.  Operating  expenses
decreased  slightly  (0.42%) as a percentage of sales.  Management's  target for
Leather Factory's operating expenses as a percentage of sales is 40% or less and
that target was met for 2001.

         Gross margin as a percentage of sales improved by 1.75 points primarily
as a result of the  changes  we made in  sourcing  product  --  purchasing  from
different  vendors at a lower price. Our product mix is made up of approximately
2,800 items that can be grouped into categories as follows:


>>       Liquids      >>       Hardware      >>       Thread
>>       Tools        >>       Leather       >>       Books & Videos
>>       Buckles      >>       Accents       >>       Kits

         Leather  represents  approximately 40% of our inventory (in dollars) at
any given time and also represents  approximately 40% of our sales.  However, we
earn the smallest  amount of gross  profit  margin on the leather we sell -- for
2001 and 2000,  gross profit margin on leather sold was  approximately  38%. The
improvement in our margins comes from the items sold from the other  categories.
These other  categories  earned gross profit margins ranging from 49.4% to 64.0%
in 2001,  and 49.8% to 56.9% in 2000.  The  fluctuation  in gross margins occurs
primarily as a result of the mix of product  categories sold and the correlating
profit margins of those categories.

Tandy Leather Operations

         Tandy Leather was acquired by the Company in November  2000;  therefore
our results for 2000 only included one month's  operation for Tandy Leather.  In
2001, Tandy operated strictly as an order fulfillment house for orders generated
via phone,  fax,  mail  order,  and  Internet.  Our 2001  sales  target was $7.0


                                       13
<PAGE>

million,  based on Tandy's annual sales prior to acquisition.  Tandy missed that
target  by  $394,000.  However,  we  discovered  early in the year  that some of
Tandy's  sales were at very low profit  margins and, in a few cases,  were below
cost. We quickly  adjusted  selling prices to eliminate these  low-margin  sales
problems and as a result, gave up some sales from customers who were not willing
to pay the new prices. As a result, even though Tandy's 2001 sales were slightly
below  expectation,  we  improved  gross  profit  margins by over 12  percentage
points.

         Currently,   Tandy  tracks  its  sales  by  customer  groups  -  Retail
(individual  hobbyists  primarily),  Dealers  (which is  comparable  to  Leather
Factory's  Authorized  Sales  Centers),  Institution  (prisons,  prisoners,  and
hospitals),   Youth  (schools,   camps,  etc.),  and  Wholesale  (resellers  and
manufacturers).  While  we do not  have  enough  financial  history  to  compare
categorical  sales in 2001 to prior  years,  our 2001  sales were made up of the
following mix: Retail 53%; Dealers 18%, Wholesale 14%, Institution 8%, Youth 7%.

         Operating  expenses  as a  percentage  of  sales  were  held  virtually
constant  from  2000 to 2001 at  51.8%.  While  Tandy's  cost of  operations  is
expected  to be higher  than that of Leather  Factory  due to the  higher  costs
associated with targeting the retail market as compared to the wholesale market,
we still  believe that Tandy can operate more  efficiently  and will continue to
work toward that end.

         In the first  quarter  of 2002,  Tandy  opened 2 retail  stores via the
acquisition of existing  leathercraft  stores in Oklahoma and Idaho.  Management
has announced its plans to continue the expansion of Tandy's  retail store chain
throughout 2002 and beyond, as new store or acquisition  opportunities arise and
the domestic retail leathercraft market can support new stores. We are committed
to a  conservative  growth  plan in that the  Company's  profits  and  financial
stability are not going to be sacrificed for the sake of quick growth.

Cushman

         Cushman's  sales were down 20% in 2001,  even though we believe that we
continue to gain market share from our competitors  because of our commitment to
timely delivery of quality product.  The primary reason for this decrease is not
caused by a  reduction  in number  of trims  produced,  but in the type of trims
produced.

         The  popularity of the straw hat, which is a more casual hat versus the
felt hat,  is  increasing  every year due in part to price paid by the  consumer
(straw hats are less  expensive  than felt) and in part to the  fashion  trends.
Historically,  straw hats were worn in the spring and summer  seasons while felt
hats were the hat of choice in the fall and winter. Now it is acceptable to wear
straw hats year round.  The global  warming  theory may also  contribute to this
shift in the headwear  trend as straw hats are cooler to wear than felt hats. As
a result, the trims being requested by the manufacturers are made from materials
other than leather.  Leather trims are the most expensive, but generally are not
put on straw hats.  Therefore,  even though we produced as many trims in 2001 as
we did in 2000, the selling price of these  non-leather trims is much lower than
that of the leather trims.

         Operating  income  decreased  significantly  due primarily to a drop in
gross profit margin. In 2001, we sold some trims at substantially-reduced prices
for two reasons:  (1) the market  conditions and trends in the headwear industry
in general,  and (2) to clear out some of our  inventory  that does not fit with
the fashion trends  developing.  We reduced our personnel  costs late in 2001 to
help offset the low gross profit  margins.  Assuming  the  headwear  industry in
general and the hat and trim  preferences  in particular  continue their current
trends, we believe we are in a position  internally to achieve better results in
the future.


                                       14
<PAGE>
<TABLE>
<CAPTION>



                        Analysis of 2000 Compared to 1999

         Consolidated  net  sales for 2000  increased  $2.9  million,  or 10.8%,
compared to 1999.  Leather  Factory  contributed  $2.3 million to the  increase;
sales by Tandy  Leather  contributed  $575,000 in December  2000,  and Cushman's
sales held steady for the year. The Company experienced an increase in operating
income of 69.9% from 1999 to 2000 due  primarily  to the sales  increase  and an
improvement in gross profit margins.

                                 2000          1999        $ Change      % Change
                             -----------   -----------    ----------    ----------
<S>                          <C>           <C>            <C>           <C>
Net sales                    $30,095,264   $27,164,399    $2,930,864        10.79%


Cost of sales                 15,147,547    14,907,768       239,779         1.61%
                             -----------   -----------    ----------
     Gross profit             14,947,716    12,256,631     2,691,085        21.96%

Operating expenses            11,702,633    10,346,420     1,356,213        13.11%
                             -----------   -----------    ----------
Operating income               3,245,084     1,910,211     1,334,872        69.88%


Other (income) expense           653,778       900,304      (246,525)      (27.38%)
                             -----------   -----------    ----------

Income before income taxes     2,591,305     1,009,907     1,581,399       156.59%
Income tax provision           1,049,986       574,851       475,134        82.65%
                             -----------   -----------    ----------

Net income                   $ 1,541,320   $   435,056    $1,106,263       254.28%
                             ===========   ===========    ==========
</TABLE>

Leather Factory Operations

         Net   sales   for   Leather   Factory,   which  is   comprised   of  28
sales/distribution  units as of December 31, 2000, increased 9.4% over 1999. The
four units opened mid-1999 and two units opened late in 2000  contributed  46.1%
of the growth, while same store sales increased 39.7% from 1999 to 2000. We also
transferred  our small  finished  leather goods division from Cushman to Leather
Factory  in the  spring  of 1999 and that  division's  sales  were  14.2% of the
Leather Factory sales increase in 2000.

         The primary sales growth was generated from the retail  customer market
(individual  hobbyists).  Retail sales in 2000 increased 35% from 1999. In years
past, we focused our marketing efforts primarily toward the wholesale  customer.
Beginning  in 1999,  we began to  specifically  target  retail  customers in our
direct mail advertising program as well as in our sales/distribution units. As a
result, we have experienced significant growth in this market.

         Our ASC program generated sales of approximately  $1.7 million in 2000,
with 145 approved ASC's in the program as of December 31, 2000. This compares to
80 approved  ASCs as of December 31, 1999  contributing  sales of  approximately
$900,000  in  1999.  Our  export  sales  decreased  slightly  in 2000 as well as
specific wholesale categories (shoe care/repair  primarily),  but were offset by
increases  in  sales  in  our  other  core  markets  (saddle  and  tack,   small
manufacturers, etc).

         Operating  income from  Leather  Factory  operations  increased by $1.1
million  and  improved  the  operating  margin to net sales from 6.8% in 1999 to
10.4% in 2000.  The increase in operating  income  results from  improved  gross
profit  margins.  Gross margin as a percentage of sales  improved by 4.5 points.
This large  improvement was the result of the increase in retail sales as retail
sales  historically  produce higher profit margins than that of wholesale sales.
Operating  expenses increased by $1.15 million or 11.8% of sales. This is due to
increases  in  payroll  costs  (increased  number  of  employees  due to the new
sales/distribution units opened in 2000, and increase in managers' bonuses based
on profits earned at the units) and advertising costs (increased  efforts toward
retail customers via direct mailing pieces.)

                                       15
<PAGE>

Tandy Leather Operations

         Tandy  Leather was acquired in November 2000 and therefore was included
in the  Company's  consolidated  financial  statements  for December  2000 only.
Tandy's sales were $575,000, gross profit was 43.8%, and operating expenses were
51.4% as a percentage of sales.  Tandy had an operating  loss of $44,000 for the
month.

Cushman

         Sales of hat trims  increased  4% from 1999 to 2000 even  though  total
2000 sales were even with sales in 1999 at $2.4 million.  (Approximately $70,000
in sales of  various  finished  leather  goods are  included  in the 1999  sales
totals.  These  products have  subsequently  been  transferred  to a division of
Leather  Factory.)  In addition to our quality  hatbands  sold in 2000,  we have
captured a significant portion of the buckle market for headwear adornments.

         Operating income  increased  $243,000 and improved the operating margin
by almost 10% over 1999.  The  increase  in  operating  income was the result of
improved gross profit margins and a reduction in uncollectible  accounts written
off.  In  1999,  one  of  Cushman's   customers  went  out  of  business  rather
unexpectedly  and as a result,  Cushman  recorded  an  unusually  large bad debt
write-off.  A small portion of the amount  written off was recovered in 2000 and
had no other unusual write-offs of accounts during 2000.  Cushman's gross profit
margins increased  approximately 6% due to the introduction of  non-manufactured
trims into its product --  specifically,  Cushman began selling  finished  (i.e.
requires  no  manufacturing  on its part)  feathers,  buckles,  etc. to headwear
manufacturers. Cushman earns higher margins on this type of product.

Financial Condition

         At December 31, 2000, the Company had inventory of $9.2 million and net
property and equipment of $1.2 million.  Goodwill and other  intangibles (net of
amortization and  depreciation)  were $4.8 million and $615,000,  with the Tandy
Leather asset acquisition  resulting in the addition of $250,000 in artwork. Net
total  assets  were  $19.7  million.   Current  liabilities  were  $9.3  million
(including  current  maturities  of  long-term  indebtedness),  while  long-term
liabilities  were  $13,000.  Total  stockholders'  equity at the end of 2000 had
increased to $10.3  million,  principally as a result of the $1.5 million of net
income recorded by the Company during 2000.

         During 2001,  net cash  provided  from  operating  activities  was $2.0
million.  The Company applied $1.2 million to reduce the outstanding  balance on
its credit facility described below, leaving an outstanding principal balance of
$4.5 million as of December 31, 2001.

         At December 31, 2001, the Company had inventory of $9.0 million and net
property and equipment of $1.3 million.  Goodwill and other  intangibles (net of
amortization and depreciation) were $4.5 million and $529,000, respectively. The
Company also holds $250,000 in a leather artwork  collection,  most of which was
created by Al Stohlman, a legendary leathercrafter.  Net total assets were $19.5
million.  Current  liabilities  were $7.1  million  (including  $4.5  million of
current maturities of long-term debt), while long-term  liabilities were $8,000.
Total  stockholders'  equity at the end of 2001 had increased to $12.4  million,
principally  as a result  of the $2.0  million  of net  income  recorded  by the
Company during 2001.

         As a result of various  acquisitions made during the Company's history,
the Company has recorded  goodwill on its balance sheet and has  amortized  this
goodwill  through  the end of  2001.  In June  2001,  the  Financial  Accounting
Standards Board ("FASB") issued a new accounting rule regarding the amortization
of goodwill (SFAS No. 142, Goodwill and Other Intangible Assets). As a result of
that pronouncement, effective January 1, 2002, the amortization of goodwill (and
other intangible  assets with indefinite  lives) will cease and goodwill will be
subject to an impairment test based on its fair value.

                                       16
<PAGE>

         The  majority  of the  goodwill  ($4.5  million)  as  presented  on our
consolidated  balance  sheet at December 31, 2001 is  Cushman's.  Given that the
Cushman's  goodwill  makes up the majority  (80%) of its separate  balance sheet
assets  and the  current  trends  of the  industry  in which  Cushman  operates,
management has reason to believe that, while projected cash flows have more than
substantiated  the  balance in prior  years,  it is likely that we will incur an
impairment  write-down of the goodwill balance based on a fair value assessment.
We are unable to  determine  an amount at this time.  The  Company has engaged a
business  valuation  firm to  determine  Cushman's  fair  value and  anticipates
determining  the  write-down  amount,  if any,  prior to the filing of the first
quarter 2002 Form 10-Q.

Capital Resources and Liquidity

         On November  19, 1999,  the Company  entered into a Credit and Security
Agreement with Wells Fargo Business Credit, Inc. ("WFBC"),  in which WFBC agreed
to provide a credit  facility of up to $8,650,000 (the "Credit  Facility").  The
Credit Facility has a three-year term and is secured by all of the assets of the
Company.  The initial  borrowings from WFBC were used to refinance the Company's
funded indebtedness outstanding at that time.

         On November 30, 2000, the Company  entered into the First  Amendment to
the  Credit and  Security  Agreement  ("Amendment  1") with  WFBC.  There,  WFBC
consented to the Tandy Leather  transaction and amended certain  financial tests
to reflect the  acquisition  of the Tandy  Leather  assets,  to make  previously
contemplated  extensions of these tests, and to raise the standards  required in
those tests based on the  Company's  improved  financial  performance  since the
credit agreement was originally signed.

         On February 7, 2001, the Company  entered into the Second  Amendment to
the Credit and Security Agreement ("Amendment 2") with WFBC. There, WFBC granted
a special  accommodation  advance  of a maximum  of  $300,000  to be used by the
Company as needed through July 2001. At the time of Amendment 2, the Company was
anticipating  significant cash  requirements for payment of income taxes and the
annual ESOP contribution and manager bonuses.  However,  the Company was able to
generate  adequate  cash flow from its  operations  to meet  these  annual  cash
payments and the special accommodation advance was not needed or drawn.

         On June 14, 2001, the Company  entered into the Third  Amendment to the
Credit and Security Agreement ("Amendment 3") with WFBC. There, WFBC reduced the
interest rate on the revolving credit facility from prime + 1/2% to prime (4.75%
at December 31, 2001). In addition,  the capital expenditure limit was increased
from $500,000 to $650,000 for 2001 to permit  additional  expenditures  incurred
following the acquisition of Tandy Leather. Amendment 3 also waived all defaults
that occurred  because our capital  expenditures  exceeded  $500,000  before the
amendment was put into place.

         The  Company  is  currently  in  compliance   with  all  covenants  and
conditions contained in the Credit Facility and has no reason to believe that it
will  not  continue  to  operate  in  compliance  with the  provisions  of these
financing  arrangements.  The  principal  terms  and  conditions  of the  Credit
Facility are  described in further  detail in Note 5 Notes Payable and Long-Term
Debt to the Consolidated Financial Statements.

         The Company  borrows and repays funds under  revolving  credit terms as
needed. Principal balances at the end of each quarter are shown below:

        4th Qtr. `00   1st Qtr. `01   2nd Qtr. `01   3rd Qtr. `01   4th Qtr. `01
        ------------   ------------   ------------   ------------   ------------
        $  5,650,965   $  5,015,611   $  4,462,957   $  4,928,151   $  4,500,422


                                       17
<PAGE>
<TABLE>
<CAPTION>


         Total indebtedness with WFBC (revolving credit line) at the end of 2000
and 2001 are shown below:

                                                 December 31,
                   --------------------------------------------------------------------------
                                   2000                                     2001
                   -----------------------------------    -----------------------------------
                       Principal      Accrued Interest        Principal      Accrued Interest
                   ----------------   ----------------    ----------------   ----------------
<S>                <C>                <C>                 <C>                <C>

  Revolving Line   $      5,650,965   $         50,951    $      4,500,422   $         19,657
                   ================   ================    ================   ================
</TABLE>

         The primary source of liquidity and capital  resources  during 2001 was
cash flow provided by operating activities.  Cash flows from operations for 2001
were $2.0 million.  The largest portion of the operating cash flow was generated
from net income.

         Consolidated  accounts  receivable remained virtually unchanged at $2.3
million at December  31, 2001  compared to $2.2  million at December  31,  2000.
Average days to collect accounts  improved  considerably from 57.30 days in 2000
to 47.86 days in 2001 on a consolidated basis. Individually, Leather Factory and
Cushman's days to collect accounts improved by 4.43 and 5.52 days, respectively.
Tandy's  days to collect  accounts was 51.68 days for 2001.  Management  expects
Tandy's average days to collect in 2002 to improve as we continue to collect the
delinquent accounts obtained in the Tandy Leather acquisition.

         Inventory  decreased  to $9.0  million at  December  31, 2001 from $9.2
million at December 31, 2000.  Consolidated  inventory  turned 4.08 times during
2001, which is an improvement over 2000 (3.64 times) and 1999 (3.45 times).  The
2000 rate did not include the impact of Tandy  Leather due to the timing of that
transaction.  Separately,  Tandy's inventory turned 4.79 times in 2001,  Leather
Factory's  inventory  turned  3.96  times in 2001 and  3.56  times in 2000,  and
Cushman's inventory turned 3.86 times in 2001 and 4.79 times in 2000.

         Accounts  payable  decreased  to $1.3 million at December 31, 2001 from
$2.2 million at the end of 2000. The trade payables  assumed in connection  with
the Tandy Leather  acquisition at the end of 2000, which caused the December 31,
2000  accounts  payable  balance  to be  higher  than  normal  by  approximately
$400,000,  have been paid entirely.  In addition,  Leather Factory and Cushman's
outstanding  payables decreased from 2000 to 2001 by an additional $500,000 as a
result of stronger cash flow generated from operations.

         The  Company's  current  ratio  improved at December  31, 2001 to 1.82,
compared to 1.38 at December 31, 2000.

         The  largest  use of cash in 2001 was for debt  reduction  and  various
capital expenditures. Capital expenditures totaled $630,000 and $378,000 for the
years ended December 31, 2001 and 2000,  respectively.  Capital  expenditures in
2001 included  $225,000  incurred  following the Tandy Leather  acquisition  for
leasehold  improvements and additional  equipment needed for operations.  Of the
remaining 2001 capital spending,  approximately  75% was for computer  equipment
and software,  including a rather large data warehouse  implementation  project,
and 25% was for office  furniture  and  equipment,  and  warehouse  fixtures and
machinery.


                                       18
<PAGE>
<TABLE>
<CAPTION>

The  following  table  summarizes  by  years  our  contractual  obligations  and
commercial commitments as of December 31, 2001:

                                                               Payments Due by Periods
                                        --------------------------------------------------------------------
            Contractual                                   Less           1-3           4-5         After 5
            Obligations                    Total      Than 1 Year       Years         Years         Years
            -----------                 -----------   -----------    -----------   -----------   -----------
<S>                                     <C>           <C>            <C>           <C>           <C>
   Long-Term Debt                       $ 4,500,422   $ 4,500,422*          --            --            --
   Capital Lease Obligations                 36,566        28,564    $     8,002          --            --
   Operating Leases                       3,471,864     1,360,546      1,869,380   $   241,938          --
                                        -----------   -----------    -----------   -----------   -----------
   Total Contractual Cash Obligations   $ 8,008,852   $ 5,889,532    $ 1,877,382   $   241,938   $      --
                                        ===========   ===========    ===========   ===========   ===========
</TABLE>

*The existing  credit  facility with WFBC matures in November 2002. On March 20,
2002, the Company entered into a Credit and Security  Agreement with Wells Fargo
Bank Minnesota,  N.A. ("Wells Fargo"),  which replaced the borrowing arrangement
with WFBC.  See Note 5 Notes  Payable  and  Long-Term  Debt to the  Consolidated
Financial Statements for additional details.


Critical Accounting Policies

         Generally   accepted   accounting   principles   require   the  use  of
management's  judgments and estimates in addition to the rules and  requirements
imposed by the accounting  pronouncements.  More detailed  information about the
accounting  policies  we use is  contained  in Note 2,  Summary  of  Significant
Accounting  Policies,  to our Consolidated  Financial Statements include in this
Form 10-K. Other accounting policies not discussed here are described there, and
readers should review that information  carefully.  We have summarized below the
accounting policies that we believe are most critical to an understanding of the
preparation of our financial statements.

         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,  The 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 is "off balance sheet".

         In 2000, we revised the presentation of our financial  information from
a single segment to three segments:  Leather Factory, Tandy Leather and Cushman.
This information is found in Note 13, Segment  Information,  to our Consolidated
Financial  Statements.  Segment  information  permits  readers to review summary
information on the operating results and financial condition of these segments.

         The inventory shown on our balance sheet 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. If, however, the market value of
inventory is less than what we paid for it, the lower market value is recorded
on the balance sheet.

         We have  indicated  above  that a change in the  accounting  rules will
necessitate  a change in 2002 in how we report  goodwill on our  balance  sheet.
This may cause an impairment  write-down of our  investment in Cushman.  We have
retained an independent  firm to make a valuation of Cushman to see if this step
will be required. Until that valuation is received, we will not know the amount,
if any of this write-down. If a write-down is made, the amount of the write-down
will reduce the net income to be reported by the Company in 2002.


                                       19
<PAGE>

Forward-Looking Statements

         "Item 1. Business" and "Item 7. Management's Discussion and Analysis of
Financial   Condition  and  Results  of   Operations"  of  this  report  contain
forward-looking  statements of management.  In general, these are predictions or
suggestions  of  future  events  and  statements  or   expectations   of  future
occurrences.  There are  certain  important  risks that could  cause  results to
differ  materially  from  those  anticipated  by  some  of  the  forward-looking
statements.  Some, but not all, of the important  risks which could cause actual
results  to  differ  materially  from  those  suggested  by the  forward-looking
statements include, among other things:

o        The recent  downturn  in the economy in the United  States,  as well as
         abroad, may cause our sales to decrease or not to increase.

o        As a result of the  terrorist  activities  on and after  September  11,
         2001, consumer buying habits could change and decrease our sales.

o        If terrorists choose to target livestock in the United States or abroad
         for chemical,  biological or other attacks, our sources of raw material
         and  inventory  could  decrease,  or  these  items  could  become  more
         expensive.

o        The prices of hides and leathers also  fluctuate in normal  times,  and
         these fluctuations can affect the Company.

o        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,
         particularly if the economy has not recovered from its downturn.

o        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.

o        The  Company  currently  buys in 22  countries  around the world.  War,
         terrorism,  changes in the internal affairs or international  relations
         of these countries (such as events that might affect their Most Favored
         Nation   status  with  the  United   States  of   America)   and  other
         uncertainties can disrupt our purchases from abroad.

o        We  might  fail to  realize  the  anticipated  benefits  of the  recent
         acquisition  of the  assets  of Tandy  Leather,  the  opening  of Tandy
         Leather  retail  stores  or  other  retail  initiatives  might  not  be
         successful.

o        Tax or interest rates might increase. In particular, interest rates are
         likely to increase at some point from their  present low levels.  These
         increases  will increase our costs of borrowing  funds as needed in our
         business.

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

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

The Company does not intend to update forward-looking statements.


                                       20
<PAGE>

ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
--------------------------------------------------------------------

         The Company's  Credit Facility  includes loans with interest rates that
vary with changes in the prime rate. An increase of one percentage  point in the
prime rate would not have a material impact on the Company's future earnings.

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
----------------------------------------------------

         The Financial  Statements and Financial Statement Schedule are filed as
a part of this report. See page 22, Index to Consolidated Financial Statements.

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

         None


                                       21
<PAGE>

                            THE LEATHER FACTORY, INC.


                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS



Consolidated Balance Sheets at December 31, 2001 and 2000   ................. 23
Consolidated Statements of Operations for the Years Ended
  December 31, 2001, 2000, and 1999                 ..........................24
Consolidated Statements of Cash Flows for the Years Ended
  December 31, 2001, 2000, and 1999                 ..........................25
Consolidated Statements of Stockholders' Equity for the Years Ended
  December 31, 2001, 2000, and 1999                 ..........................26
Notes to Consolidated Financial Statements          ......................... 27


         Financial  Statement  Schedules for the years ended  December 31, 2001,
         2000, and 1999:

         II - Valuation and Qualifying Accounts and Reserves  ................40

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

Reports of Independent Auditors  .............................................41







                                       22
<PAGE>
<TABLE>
<CAPTION>

                            THE LEATHER FACTORY, INC.
                           CONSOLIDATED BALANCE SHEETS


                                                                        December 31,    December 31,
                                                                             2001            2000
                                                                        ------------    ------------
<S>                                                                     <C>             <C>

                                ASSETS
CURRENT ASSETS:
    Cash                                                                $    409,040    $    234,141
    Cash restricted for payment on revolving credit facility                 491,729         390,467
    Accounts receivable-trade, net of allowance for doubtful accounts
        of $191,000 and $338,000 in 2001 and 2000, respectively            2,297,953       2,191,996
    Inventory                                                              9,054,269       9,205,898
    Deferred income taxes                                                    128,111         130,802
    Other current assets                                                     479,390         710,085
                                                                        ------------    ------------
                           Total current assets                           12,860,492      12,863,389
                                                                        ------------    ------------

PROPERTY AND EQUIPMENT, at cost                                            4,201,368       3,657,601
  Less-accumulated depreciation and amortization                          (2,858,869)     (2,494,732)
                                                                        ------------    ------------
                           Property and equipment, net                     1,342,499       1,162,869

GOODWILL, net of accumulated amortization of $1,583,000
         and $1,367,000 in 2001 and 2000, respectively                     4,535,412       4,765,092
OTHER INTANGIBLES, net of accumulated amortization of
         $188,000 and $100,000, in 2001 and 2000, respectively               529,452         615,647
OTHER assets                                                                 280,468         279,082
                                                                        ------------    ------------
                                                                        $ 19,548,323    $ 19,686,079
                                                                        ============    ============

                 LIABILITIES AND STOCKHOLDERS' EQUITY
         Accounts payable                                               $  1,303,596       $2159,910
         Accrued expenses and other liabilities                            1,171,152       1,290,613
         Income taxes payable                                                 52,662          94,795
         Notes payable and current maturities of long-term debt            4,527,904       5,759,626
                                                                        ------------    ------------
                           Total current liabilities                       7,055,314       9,304,944
                                                                        ------------    ------------


DEFERRED INCOME TAXES                                                         61,647          72,473

NOTES PAYABLE AND LONG-TERM DEBT, net of current maturities                    7,691          13,025


COMMITMENTS AND CONTINGENCIES                                                   --              --

STOCKHOLDERS' EQUITY:
         Preferred stock, $0.10 par value; 20,000,000

             shares authorized, none issued or outstanding                      --              --
         Common stock, $0.0024 par value; 25,000,000 shares
             authorized, 9,991,161 and 9,908,161 shares issued

             and outstanding at 2001 and 2000, respectively                   23,979          23,780
         Paid-in capital                                                   4,030,508       3,946,608
         Retained earnings                                                 8,478,187       6,471,754

         Less: Notes receivable - secured by common stock                    (71,939)       (120,339)
         Accumulated other comprehensive loss                                (37,064)        (26,166)
                                                                        ------------    ------------
                           Total stockholders' equity                     12,423,671      10,295,637
                                                                        ------------    ------------
                                                                        $ 19,548,323    $ 19,686,079
                                                                        ============    ============
</TABLE>

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

                                       23
<PAGE>
<TABLE>
<CAPTION>

                            THE LEATHER FACTORY, INC.
                        CONSOLIDATED STATEMENTS OF INCOME
              FOR THE YEARS ENDED DECMEBER 31, 2001, 2000 AND 1999



                                                      2001            2000            1999
                                                 ------------    ------------    ------------
<S>                                              <C>             <C>             <C>
NET SALES                                        $ 37,279,262    $ 30,095,264    $ 27,164,399

COST OF SALES                                      17,934,935      15,147,547      14,907,768
                                                 ------------    ------------    ------------

             Gross profit                          19,344,327      14,947,717      12,256,631

OPERATING EXPENSES                                 15,442,359      11,702,633      10,346,420
                                                 ------------    ------------    ------------

INCOME FROM OPERATIONS                              3,901,968       3,245,084       1,910,211

OTHER EXPENSE:
         Interest expense                            (458,558)       (617,400)       (923,092)
         Other, net                                   (74,924)        (36,379)         22,788
                                                 ------------    ------------    ------------
             Total other expense                     (533,482)       (653,779)       (900,304)
                                                 ------------    ------------    ------------

INCOME BEFORE INCOME TAXES                          3,368,486       2,591,305       1,009,907

PROVISION FOR INCOME TAXES                          1,362,053       1,049,985         574,851
                                                 ------------    ------------    ------------

NET INCOME                                       $  2,006,433    $  1,541,320    $    435,056
                                                 ============    ============    ============





NET INCOME PER COMMON SHARE                      $       0.20    $       0.16    $       0.04
                                                 ============    ============    ============

NET INCOME PER COMMON SHARE--Assuming Dilution   $       0.19    $       0.15    $       0.04
                                                 ============    ============    ============
</TABLE>



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

                                       24

<PAGE>
<TABLE>
<CAPTION>

                            THE LEATHER FACTORY, INC.
                      CONSOLIDATED STATEMENTS OF CASH FLOW
                                   (UNAUDITED)
              FOR THE YEARS ENDED DECEMBER 31, 2001, 2000, AND 1999


                                                                                      2001           2000           1999
                                                                                  -----------    -----------    -----------
<S>                                                                               <C>            <C>            <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net income                                                                      $ 2,006,433    $ 1,541,320    $   435,056
  Adjustments to reconcile net income to net
   cash provided by operating activities-
     Depreciation and amortization                                                    730,153        582,778        567,452
     Loss on disposal of assets                                                         5,588          5,089           --
     Amortization of deferred financing costs                                          45,753         44,804        225,953
     Other                                                                            (19,033)          (128)        13,426
Net changes in assets and liabilities, net of effects of business acquisitions:
       Accounts receivable-trade, net                                                (105,957)       368,848       (710,186)
        Inventory                                                                     151,629      1,562,274     (1,851,357)
       Income taxes                                                                   (42,133)      (379,467)       615,201
       Other current assets                                                           230,695         83,990       (294,684)
       Accounts payable                                                              (856,314)      (137,686)       786,849
       Accrued expenses and other liabilities                                        (119,461)       230,732        448,180
                                                                                  -----------    -----------    -----------
     Total adjustments                                                                 20,920      2,361,234       (199,166)
                                                                                  -----------    -----------    -----------

      Net cash provided by operating activities                                     2,027,353      3,902,554        235,890
                                                                                  -----------    -----------    -----------

CASH FLOWS FROM INVESTING ACTIVITIES:

  Purchase of property and equipment                                                 (629,773)      (377,840)      (254,274)
  Payments in connection with business acquired                                          --       (2,999,159)          --
  Proceeds from sale of assets                                                          3,200          2,484           --
  (Increase) decrease in other assets                                                  (1,386)         2,519          2,235
  Other intangible costs                                                                 --             --           (8,174)
                                                                                  -----------    -----------    -----------


      Net cash used in investing activities                                          (627,959)    (3,371,996)      (260,213)
                                                                                  -----------    -----------    -----------

CASH FLOWS FROM FINANCING ACTIVITIES:

  Net increase (decrease) in revolving credit loans                                (1,150,543)      (167,687)     2,220,664
  Proceeds from notes payable and long-term debt                                         --             --          150,000
  Payments on notes payable and long-term debt                                       (105,189)      (243,083)    (2,605,453)
  Increase in cash restricted for payment on revolving creditfacility                (101,262)       (72,563)       (85,066)
  Payments received on notes secured by common stock                                   48,400         33,077         71,334
  Deferred financing costs incurred                                                      --          (25,626)       (103,090)
  Proceeds from issuance of common stock                                               84,099         45,000           --
                                                                                  -----------    -----------    -----------

      Net cash used in financing activities                                        (1,224,495)      (430,882)      (351,611)
                                                                                  -----------    -----------    -----------


NET INCREASE (DECREASE) IN CASH                                                       174,899         99,676       (375,934)

CASH, beginning of period                                                             234,141        134,465        510,399
                                                                                  -----------    -----------    -----------

CASH, end of period                                                               $   409,040    $   234,141    $   134,465
                                                                                  ===========    ===========    ===========

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
  Interest paid during the period                                                 $   443,925    $   572,577    $   697,996
  Income taxes paid during the period, net of (refunds)                             1,414,404      1,424,648        (57,681)

NON-CASH INVESTING ACTIVITIES:
  Equipment acquired under capital lease financing arrangements                   $    18,676    $      --      $   217,493
</TABLE>



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


                                       25
<PAGE>
<TABLE>
<CAPTION>


                            THE LEATHER FACTORY, INC.
                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                                   (UNAUDITED)
              FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999




                                               Common Stock
                                      ----------------------------                                        Notes
                                         Number           Par            Paid-in        Retained      - secured by
                                       of shares         value           capital        earnings      common stock
                                      ------------    ------------    ------------    ------------    ------------
<S>                                   <C>             <C>             <C>             <C>             <C>
BALANCE, December 31, 1998               9,853,161    $     23,648    $  3,901,740    $  4,495,378    $   (224,750)
   Payments on notes
   receivable -
     Secured by common  stock                 --              --              --              --            71,334

   Net Income                                 --              --              --           435,056            --

   Translation adjustment                     --              --              --              --              --
                                      ------------    ------------    ------------    ------------    ------------

BALANCE, December 31, 1999               9,853,161    $     23,648    $  3,901,740    $  4,930,434    $   (153,416)

Comprehensive income for the year ended December 31, 1999


   Payments on notes
   receivable -
        secured by common stock               --              --              --              --            33,077

   Shares issued - stock
        options exercised                   55,000             132          44,868            --              --

   Net Income                                 --              --              --         1,541,320            --

   Translation adjustment                     --              --              --              --              --
                                      ------------    ------------    ------------    ------------    ------------

BALANCE, December 31, 2000               9,908,161    $     23,780    $  3,946,608    $  6,471,754    $   (120,339)

Comprehensive income for the year ended December 31, 2000


  Payments on notes
   receivable -
        secured by common stock               --              --              --              --            48,400
   Shares issued - stock
        options exercised                   83,000             199          83,900            --              --

   Net Income                                 --              --              --         2,006,433            --

   Translation adjustment                     --              --              --              --              --
                                      ------------    ------------    ------------    ------------    ------------

   BALANCE, December 31, 2001            9,991,161    $     23,979    $  4,030,508    $  8,478,187    $    (71,939)
                                      ============    ============    ============    ============    ============

Comprehensive income for the year ended December 31, 2001




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


                                       26
<PAGE>

                           THE LEATHER FACTORY, INC.
                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                              (UNAUDITED) CONTINUED
              FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999






                                       Accumulated
                                          Other                      Comprehensive
                                       Cumulative                       Income
                                          Loss           Total          (Loss)
                                      ------------    ------------    ------------
BALANCE, December 31, 1998            $    (25,738)   $  8,170,278
   Payments on notes
   receivable -
     Secured by common  stock                 --            71,334

   Net Income                                 --           435,056         435,056

   Translation adjustment                    3,757           3,757           3,757
                                      ------------    ------------

BALANCE, December 31, 1999            $    (21,981)   $  8,680,425
                                                                      ------------
    Comprehensive income for the year ended December 31, 1999         $    438,813
                                                                      ============

   Payments on notes
   receivable -
        secured by common stock               --            33,077

   Shares issued - stock
        options exercised                     --            45,000

   Net Income                                 --         1,541,320       1,541,320

   Translation adjustment                   (4,185)         (4,185)         (4,185)
                                      ------------    ------------

BALANCE, December 31, 2000            $    (26,166)   $ 10,295,637
                                                                      ------------
   Comprehensive income for the year ended December 31, 2000          $  1,537,135
                                                                      ============

  Payments on notes
   receivable -
        secured by common stock               --            48,400
   Shares issued - stock
        options exercised                     --            84,099

   Net Income                                 --         2,006,433       2,006,433

   Translation adjustment                  (10,898)        (10,898)        (10,898)
                                      ------------    ------------

   BALANCE, December 31, 2001         $    (37,064)   $ 12,423,671
                                      ============    ============
                                                                      ------------
   Comprehensive income for the year ended December 31, 2001          $  1,995,535
                                                                      ============
</TABLE>

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

                                       27
<PAGE>


                            THE LEATHER FACTORY, INC.
                              NOTES TO CONSOLIDATED
                              FINANCIAL STATEMENTS

                        DECEMBER 31, 2001, 2000, and1999




1.  ORGANIZATION AND NATURE OF OPERATIONS

The Leather  Factory,  Inc. and  subsidiaries  (the "Company") is engaged in the
manufacture and distribution of a broad product line of leather,  leather crafts
and finished goods,  western apparel and related  accessory  items.  The Company
operates  sales/distribution  units in 20 states and Canada.  Numerous customers
including   retailers,   wholesalers,   assemblers,   distributors   and   other
manufacturers   geographically  disbursed  throughout  the  world  purchase  the
Company's products. The Company also has light manufacturing facilities in Texas
and New York.


2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Consolidation

The consolidated  financial  statements  include the accounts of the Company and
its  subsidiaries,  all of  which  are  wholly-owned.  Significant  intercompany
accounts and transactions have been eliminated in consolidation.

Inventory

The Company's  inventory is valued at the lower of first-in,  first-out  cost or
market and consists of the following at December 31:

                                                    2001         2000
                                                 ----------   ----------
             Finished goods held for sale        $8,025,845   $8,175,429
             Raw Materials and work in process    1,028,424    1,030,469
                                                 ----------   ----------
                                                 $9,054,269   $9,205,898


Property and Equipment

Property and  equipment are stated at cost.  Expenditures  for  maintenance  and
repairs are charged to expense when incurred. The cost of assets retired or sold
and the  related  amounts  of  accumulated  depreciation  are  removed  from the
accounts,  and any  gain  or  loss  is  included  in the  statement  of  income.
Depreciation  is determined  using the  straight-line  method over the estimated
useful lives as follows:

           Leasehold improvements             5-7 years
           Equipment                          5-10 years
           Furniture and fixtures             5-7 years
           Automobiles                        5 years

Depreciation  expense was $460,741,  $358,787;  and $347,651 for the years ended
December 31, 2001, 2000 and 1999, respectively.

Goodwill

Goodwill  resulting  from  business  purchases  accounted for using the purchase
method of accounting is being amortized on a straight-line  basis over estimated
useful lives ranging from ten to forty years.

The Company assesses the  recoverability of goodwill by determining  whether the
asset  balance can be recovered  over its  remaining  life through  undiscounted
future operating cash flows of the acquired asset. The amount of impairment,  if
any, is measured based on projected discounted future operating cash flows.

Amortization expense of $223,894 in 2001, $208,411 in 2000; and $208,913 in 1999
was recorded in operating expenses.


                                       28
<PAGE>

Advertising Costs

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 $162,495
and  $40,579 at  December  31, 2001 and 2000,  respectively.  Total  advertising
expense was $2,023,527; $1,353,520 in 2000; and $1,040,671 in 1999.

Revenue Recognition

Sales are recorded when goods are shipped to customers.

Income Taxes

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

Earnings Per Share

The  Company  computes   earnings  (loss)  per  share  in  accordance  with  the
requirements of Statement of Financial  Accounting  Standards No. 128,  Earnings
per Share ("SFAS 128"). SFAS No. 128 requires the disclosure of both "basic" and
"diluted"  earnings per share.  Basic earnings per share is computed by dividing
income available to common stockholders by the weighted average number of common
shares  outstanding.  Diluted  earnings per share is computed by dividing income
available to common stockholders by the weighted average number of common shares
outstanding  increased for potentially dilutive common shares outstanding during
the period. The dilutive effect of stock options, warrants and their equivalents
is  calculated  using the treasury  stock  method.  Unearned  shares held by the
Employees'  Stock  Ownership Plan are deemed not to be outstanding  for earnings
per share calculations.

Accounting Estimates

The consolidated  financial statements include estimates and assumptions made by
management  that  affect the  reported  amounts of assets and  liabilities,  the
reported  amounts of revenues  and  expenses and the  disclosure  of  contingent
assets and liabilities. Actual results could differ from those estimates.

Long-Lived Assets

SFAS No.  121,  Accounting  for the  Impairment  of  Long-Lived  Assets  and for
Long-Lived Assets to be Disposed of, requires that long-lived assets and certain
identifiable  intangible  assets be  reviewed  for  impairment  whenever  events
indicate  that the  carrying  amount  of an asset  may not be  recoverable.  The
Company  determined  that as of December 31, 2001 and 2000, it had no long-lived
assets that met the impairment criteria of SFAS No. 121.

Stock-Based Compensation

SFAS No. 123,  Accounting for Stock-Based  Compensation,  establishes  financial
accounting and reporting standards for stock-based employee  compensation plans.
As  permitted  by SFAS No.  123,  the  Company  has  elected to  continue to use
Accounting  Principles  Board  Opinion No. 25,  Accounting  for Stock  Issued to
Employees  ("APB 25") and related  Interpretations,  in accounting for its stock
option plans.

Foreign Currency Translation

Foreign currency translation  adjustments arise from activities of the Company's
Canadian  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.

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".


                                       29
<PAGE>
<TABLE>
<CAPTION>

3.       OTHER CURRENT ASSETS

Other current assets consisted of the following at December 31:

                                                  2001         2000
                                               ----------   ----------
             Accounts receivable - employees   $   40,550   $  106,370
             Accounts receivable - other           29,546      360,029
             Prepaid expenses                     349,242      177,535
             Other                                 60,052       66,151
                                               ----------   ----------
                                               $  479,390   $  710,085
                                               ==========   ==========


4.  ACCRUED EXPENSES AND OTHER LIABILITIES

Accrued  expenses and other  liabilities  consisted of the following at December
31:
                                                  2001         2000
                                               ----------   ----------
             Accrued bonuses                   $  706,696   $  784,528
             Accrued payroll                      146,730      118,138
             Accrued ESOP contribution             25,000       86,000
             Sales and payroll taxes payable       55,482       52,851
             Other                                237,244      249,096
                                                ----------   ----------
                                                $1,171,152   $1,290,613
                                                ==========   ==========

5.  NOTES PAYABLE AND LONG-TERM DEBT

On November 19, 1999, the Company entered into a Credit and Security  Agreement,
as amended,  with Wells Fargo Business Credit, Inc. ("WFBC"),  pursuant to which
WFBC agreed to provide a credit  facility of up to $8,650,000 in debt (the "Debt
Facility").  The  Debt  Facility  has a  three-year  term  and is  made  up of a
revolving  credit  facility and a $150,000 term note.  The term note was paid in
full on May 1, 2000.

At  December  31,  2001 and  2000,  the  amounts  outstanding  under  the  above
agreements and other long-term debt consisted of the following:

                                                                                     2001         2000
                                                                                  ----------   ----------
<S>                                                                               <C>          <C>
Credit and Security Agreement with WFBC - collateralized by all of the assets of
the Company; payable as follows:

         Revolving Note dated November 19, 1999 in the maximum principal amount
         of $8,500,000 with revolving features as more fully described below -
         interest due monthly at prime (4.75% at December 31, 2001);
         matures November 30, 2002                                                $4,500,422   $5,650,965

Capital Leases secured by computer equipment - total monthly principal and
interest payments of $9,896 at approximately 12% interest; maturing in
February 2002 to February 2004                                                        35,173      121,686
                                                                                  ----------   ----------
                                                                                   4,535,595    5,772,651
Less - Current maturities (see below)                                              4,527,904    5,759,626
                                                                                  ----------   ----------
                                                                                  $    7,691   $   13,025
</TABLE>

The  Company  periodically  has  outstanding  letters  of credit  for  inventory
purchase  commitments  with terms  ranging from sight to 90 days. As of December
31, 2001, there were no letters of credit outstanding.

Pursuant to the Credit and Security  Agreement with WFBC,  the overall  combined
borrowings under the Revolving Credit Loan and outstanding balance on letters of
credit is limited to a combined amount of $8,500,000.  Of the $8,500,000  limit,
letters of credit cannot exceed  $500,000.  The unused  portion of the letter of
credit limit can be utilized for  borrowings,  up to the limits  imposed for the
indebtedness.   Total  borrowings  under  this  arrangement  are  subject  to  a
percentage of trade accounts receivable and inventory reduced by the outstanding
balance of letters of credit and any required  reserves.  The unused  portion of
the credit  facility at December 31, 2001 and 2000 was  $757,173  and  $884,759,
respectively.

The terms of the Debt  Facility  contain  various  covenants  which  among other
things  require the  Company to maintain a certain  level of income and book net
worth and limit capital expenditures.  Other covenants prohibit the Company from
incurring  indebtedness  except as permitted by the terms of the Debt  Facility,
from  declaring or paying cash dividends upon any of its stock and from entering
into  any new  business  or  making  material  changes  in any of the  Company's
business objectives, purposes or operations.


                                       30
<PAGE>
<TABLE>
<CAPTION>

Scheduled maturities of the Company's notes payable and long-term debt are as
follows:
               2002               $4,527,904
               2003                    6,557
               2004                    1,134
               2005                     --
                                  ----------
                                  $4,535,595

On March 20, 2002, the Company entered into a Credit and Security Agreement with
Wells Fargo Bank Minnesota,  N.A. ("Wells Fargo"),  which replaced the Company's
previous  borrowing  arrangement  with WFBC. The Credit  Facility  consists of a
maximum  revolving line of credit of $7,500,000.  The revolver bears interest at
prime and matures on November 30, 2004. The agreement contains covenants similar
to that of the WFBC  Debt  Facility  regarding  net  income  and book net  worth
levels,  capital  expenditure limits, and the prohibition of declaring or paying
cash dividends.


6.  EMPLOYEE BENEFIT PLAN

The Company has 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.  Under  the  Plan,  the  Company  makes  annual  cash  or  stock
contributions  to a trust  for the  benefit  of  eligible  employees.  The trust
invests in shares of the  Company's  common  stock.  The amount of the Company's
annual  contribution is  discretionary.  Benefits under the Plan are 100% vested
after three years of service and are payable upon  termination  of employment as
defined  by the Plan.  In the  event of death,  disability  or  retirement,  the
participant's accrued benefit becomes 100% non-forfeitable and is distributed as
defined by the Plan.

The  Company  applies  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  2001,  2000  and  1999,
respectively,  the Company contributed $277,892,  $249,017; and $208,214 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, 2001, 2000, and 1999: .

                        No. of Shares                          Market Value
                        -------------                          ------------
               2001         2000         1999         2001         2000         1999
            ----------   ----------   ----------   ----------   ----------   ----------
<S>         <C>          <C>          <C>          <C>          <C>          <C>
Allocated      895,928      808,539      598,132   $1,863,530   $  808,539   $  486,281
Unearned          --           --           --           --           --           --
            ------------------------------------   ------------------------------------
 Total         895,928      808,539      598,132   $1,863,530   $  808,539   $  486,281
            ====================================   ====================================
</TABLE>

The Company currently offers no postretirement or postemployment benefits to its
employees.


7.  INCOME TAXES

The provision for income taxes consists of the following:
                                          2001           2000           1999
                                      -----------    -----------    -----------
      Current provision:
           Federal                    $ 1,154,847    $   849,994    $   370,053
           State                          218,717        191,070        207,171
                                      -----------    -----------    -----------
                                        1,373,564      1,041,064        577,224
                                      -----------    -----------    -----------
      Deferred provision (benefit):
          Federal                         (11,299)         7,418         (2,373)
          State                              (212)         1,503           --
                                      -----------    -----------    -----------
                                          (11,511)         8,921         (2,373)
                                      -----------    -----------    -----------
                                      $ 1,362,053    $ 1,049,985    $   574,851
                                      ===========    ===========    ===========


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


                                       31
<PAGE>
<TABLE>
<CAPTION>

                                                                2001         2000
                                                              ---------    ---------
<S>                                                           <C>          <C>
Deferred income tax assets:
          Allowance for doubtful accounts                     $  28,450    $  33,621
          Capitalized inventory costs                            90,942       88,575
          Accrued expenses, reserves, and other                   8,719        8,606
                                                              ---------    ---------

          Total deferred income tax assets                      128,111      130,802
                                                              ---------    ---------

Deferred income tax liabilities:
          Property and equipment depreciation                    55,750       63,395
          Goodwill and other intangible assets amortization      12,577       11,643
          Tax effect of translation adjustment and other         (6,680)      (2,565)
                                                              ---------    ---------

          Total deferred income tax liabilities                  61,647       72,473
                                                              ---------    ---------

          Net deferred tax asset                              $  66,464    $  58,329
                                                              =========    =========
</TABLE>


The effective tax rate differs from the statutory rate as follows:
                                                           2001    2000    1999
                                                          -----   -----   -----
    Statutory rate                                          34%     34%     34%
    State and local taxes                                    3%      7%     20%
    Non-deductible goodwill amortization                     2%      3%      8%
    Other                                                    1%     (3%)    (5%)
                                                          -----   -----   -----
    Effective rate                                          40%     41%     57%
                                                          =====   =====   =====


8.  COMMITMENTS AND CONTINGENCIES

Operating Leases

The Company's primary office facility and warehouse are leased under a five-year
lease  agreement  that  expires  in  March  2003.   Rental  agreements  for  the
sales/distribution  units  expire on dates  ranging  from  October 2002 to March
2007.  The  Company's  lease  agreement for the  manufacturing  facility in Long
Island City, New York, expires on June 30, 2003.

Rent expense on all operating leases for the years ended December 31, 2001, 2000
and 1999, was $1,299,582, $1,106,171; and $1,047,882, respectively.

Capital Leases

The Company leases certain  computer  equipment under capital lease  agreements.
Assets  subject to the  agreements  totaling  $365,252  and $346,601 and related
accumulated  depreciation  of $249,470 and $177,929 are included in property and
equipment as of December 31, 2001 and 2000, respectively.

Commitments

Future minimum lease payments under capital and  noncancelable  operating leases
at December 31, 2001 were as follows:



                                       32
<PAGE>
<TABLE>
<CAPTION>

                                                                        Capital     Operating
                                                                        Leases       Leases
<S>                                                                   <C>          <C>
    Year ending December 31:
                                    2002                              $   28,564   $1,360,546
                                    2003                                   6,859      962,731
                                    2004                                   1,143      536,531
                                    2005                                    --        370,118
                                    2006 and thereafter                     --        241,938
                                                                      -----------------------
Total minimum lease payments                                              36,566   $3,471,864
                                                                                   ==========
Less amount representing interest                                          1,393
                                                                      ----------
Present value of net minimum capital lease payments                       35,173
Less current installments of minimum capital lease payments               27,482
                                                                      ----------
Long-term capital lease obligations, excluding current installments   $    7,691
                                                                      ==========
</TABLE>

Litigation

The Company is involved in various  litigation that arise in the ordinary course
of its  business  and  operations.  There are no such  matters  pending that the
Company expects to have a material impact on its financial  position and results
of operations.


9.       SIGNIFICANT BUSINESS CONCENTRATIONS AND RISK

Major Customers

The Company's  revenues are derived from a diverse group of customers  primarily
involved  in the sale of leather  crafts and  western  apparel  items.  While no
single  customer  accounts  for  more  than  10% of the  Company's  consolidated
revenues in 2001, 2000 and 1999,  sales to the Company's five largest  customers
represented 15%, 14% and 19%,  respectively,  of consolidated  revenues in those
years.  While  management  does not believe  the loss of one of these  customers
would have a negative  impact on the Company's  operations,  it does believe the
loss of several of these customers  simultaneously or a substantial reduction in
sales  generated  by them  could  temporarily  affect  the  Company's  operating
results.

Major Vendors

The  Company  purchases  a  significant  portion of its  inventory  through  one
supplier.  Due to the number of  alternative  sources  of  supply,  loss of this
supplier would not have an adverse impact on the Company's operations.

Credit Risk

Due to the large number of customers  comprising  the Company's  customer  base,
concentrations of credit risk with respect to customer  receivables are limited.
At  December  31, 2001 and 2000,  23% and 18%,  respectively,  of the  Company's
consolidated  accounts  receivable  were due from  three  nationally  recognized
retail chains.  The Company does not generally  require  collateral for accounts
receivable,  but performs  periodic  credit  evaluations  of its  customers  and
believes the allowance  for doubtful  accounts is adequate.  It is  management's
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 the
Company's results of operations and financial condition.


                                       33
<PAGE>
<TABLE>
<CAPTION>

10.  EARNINGS PER SHARE

The following table sets forth the computation of basic and diluted earnings per
share:
                                                         2001          2000          1999
                                                     -----------   -----------   -----------
<S>                                                  <C>           <C>           <C>
Numerator:
      Net income                                     $ 2,006,433   $ 1,541,320   $   435,056
      Numerator for basic and diluted earnings per          --            --            --
      share                                            2,006,433     1,541,320       435,056

Denominator:
      Denominator for basic earnings per share -
      weighted-average shares                          9,976,181     9,875,606     9,853,161

Effect of dilutive securities:
      Stock options                                      265,621       134,300         5,019
      Warrants                                           207,504       172,897        31,918
                                                     -----------   -----------   -----------
Dilutive potential common shares                         473,125       307,197        36,937
                                                     -----------   -----------   -----------
      Denominator for diluted earnings per share -
      adjusted weighted-average shares and assumed
      conversions                                     10,449,306    10,182,803     9,890,098
                                                     ===========   ===========   ===========

      Basic earnings per share                       $      0.20   $      0.16   $      0.04
                                                     ===========   ===========   ===========

      Diluted earnings per share                     $      0.19   $      0.15   $      0.04
                                                     ===========   ===========   ===========
</TABLE>

For  additional  disclosures  regarding  the  employee  stock  options  and  the
warrants,  see note 11. The net effect of  converting  stock options to purchase
844,000  and  452,000  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, 2001 and 2000, respectively.

11.  STOCKHOLDERS' EQUITY

Stock Option Plans

1995 Stock Option Plan
----------------------
In  connection  with its 1995 Stock Option Plan for officers and key  management
employees, the Company has outstanding options to purchase its common stock. The
plan provides for the granting of either  qualified  incentive  stock options or
non-qualified  options at the  discretion of the  Compensation  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.
The Company has reserved  1,000,000  shares of common  stock for issuance  under
this plan.

1995 Director Non-Qualified Stock Option Plan
---------------------------------------------
In  connection  with its  1995  Director  Non-qualified  Stock  Option  Plan for
non-employee  directors,  the Company has  outstanding  options to purchase  its
common stock. The plan provides for the granting of non-qualified options at the
discretion of the Compensation 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.  The Company has  reserved  100,000  shares of
common stock for issuance under this plan.


                                       34
<PAGE>
<TABLE>
<CAPTION>

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,  at December 31, 2001,  2000 and 1999,  there were 116,000;
587,000; and 647,000;  respectively,  in un-optioned shares available for future
grants.

A summary of stock option transactions for the years ended December 31, 2000,
1999, and 1998, is as follows:

                                         2001                     2000                     1999
                                 ----------------------   ----------------------   ----------------------
                                               Weighted                 Weighted                 Weighted
                                               Average                  Average                  Average
                                   Option      Exercise     Option      Exercise     Option      Exercise
                                   Shares       Price       Shares       Price       Shares       Price
                                 ---------    ---------   ---------    ---------   ---------    ---------
<S>                              <C>          <C>         <C>          <C>         <C>          <C>
Outstanding at January 31          458,000    $   0.814     453,000    $   0.779     543,000        0.758
Granted                            477,000        1.361      60,000        0.958      10,000        0.690
Forfeited or expired                (6,000)       0.751        --           --      (100,000)       0.656
Exchanged                             --           --          --           --          --           --
Exercised                          (83,000)       0.761     (55,000)       0.676        --           --
                                 ---------    ---------   ---------    ---------   ---------    ---------
Outstanding at December 31         846,000    $   1.128     458,000    $   0.814     453,000    $   0.779
                                 =========    =========   =========    =========   =========    =========
Exercisable at end of year         844,000    $   1.123     358,000    $   0.820     318,000    $   0.813
                                 =========    =========   =========    =========   =========    =========
Weighted-average fair value of
 Options granted during year     $    0.81                $    0.61                $    0.45
                                 =========                =========                =========


The  following  table  summarizes  outstanding  options  into groups  based upon
exercise price ranges at December 31, 2001:

                                        Options Outstanding                      Options Exercisable
                                 ----------------------------------    ----------------------------------
                                               Weighted   Weighted                  Weighted     Weighted
                                               Average    Average                    Average     Average
                                   Option      Exercise   Maturity       Option     xercise      Maturity
 Exercise Price Range              Shares       Price      (Years)       Shares      Price       (Years)
 --------------------            ---------    ---------   ---------    ---------   ---------    ---------
   $0.75 or Less                    42,000    $   0.584        6.29       42,000   $   0.584         6.29


More than $0.75 and
  Less Than $1.00                  315,000        0.832        4.54      315,000       0.832         4.54

  More than $1.00                  489,000        1.365        9.67      487,000       1.358         9.69
                                 ---------    ---------   ---------    ---------   ---------    ---------
                                   846,000    $   1.128        7.59      844,000   $   1.123         7.60
                                 =========    =========   =========    =========   =========    =========
</TABLE>


Pro forma information regarding net income and earnings per share is required by
SFAS No. 123, and has been  determined  as if the Company had  accounted for its
stock options under the fair value method.  The fair value for these options was
estimated at the date of grant using the Black Scholes option pricing model with
the following weighted-average assumptions: risk-free interest rates of 3.50% in
2001;  5.75% in 2000;  and 5.88% in 1999;  dividend  yields of 0% for all years;


                                       35
<PAGE>
<TABLE>
<CAPTION>

volatility  factors of .780 for 2001,  .821 for 2000,  and .851 for 1999; and an
expected  life of the valued  options  of 5 years for all years  other than some
exchanged  options  reissued in 1997 which had an expected  remaining  life of 4
years.

Option valuation models require the input of highly subjective assumptions,
including the expected stock price volatility, and changes in these input
assumptions can materially affect the fair value estimate they produce. Because
of this, it is management's opinion that existing models do not necessarily
provide a reliable single measure of fair value for the Company's stock options.
For pro forma disclosures, the estimated fair values determined by the model are
being amortized to expense on a straight-line basis over the options vesting
period as adjusted for estimated forfeitures. The Company's pro forma
information follows:

                                                               2001          2000          1999
                                                           -----------   -----------   -----------
<S>                                                        <C>           <C>           <C>
Pro forma net income                                       $ 1,977,894   $ 1,419,693   $   277,780

Pro forma net income per common share                      $      0.20   $      0.14   $      0.03

Pro forma net income per common share--Assuming Dilution   $      0.19   $      0.14   $      0.03
</TABLE>


Warrants
--------
In connection with the issuance of a Subordinated  Debenture in 1997,  which has
since then been  satisfied  in its  entirety,  the  Company  issued  warrants to
acquire  up to  100,000  shares  of Common  Stock at $.54 per  share to  certain
unrelated individuals. The warrants may be exercised at anytime until expiration
on November 21, 2002.

Warrants to acquire up to 200,000 shares of common stock at approximately  $0.44
per share were issued in conjunction with a consulting agreement to an unrelated
individual  in August 1998.  The  warrants  may be  exercised  at anytime  until
expiration on August 3, 2003.

Notes Receivable Secured by Common Stock
----------------------------------------
During 1996, the Company  purchased  certain notes from a financial  institution
that are  collateralized  by the Company's  common stock.  These notes relate to
shares  issued under the Company's  1993  Non-Qualified  Incentive  Stock Option
Plan.  These  notes,  as  renewed  in  2000,  are due from  certain  individuals
including  officers and other members of management,  require monthly  payments,
and have maturity dates of December 31, 2002.


12.      BUSINESS ACQUISITION

In  November  2000,  the  Company  acquired  the  assets,   primarily   accounts
receivable,  inventory,  fixtures, and equipment,  of TLC Direct, Inc. and Tandy
Leather Dealer,  Inc. (dba Tandy Leather Company),  a distributor of leather and
related  products  located  in Fort  Worth,  Texas.  Additionally,  the  Company
acquired the exclusive  right to certain  trademarks  associated  with the Tandy
Leather  business.  The total  purchase  price for the operating and  intangible
assets was approximately $3.3 million, subject to adjustment. The purchase price
was paid in the form of cash, funded with proceeds from the Company's  revolving
credit  facility (see note 5), and the  assumption of certain  liabilities.  The
transaction  was accounted for under the purchase  method of accounting  and the
purchase price was allocated to the net assets acquired based on their estimated
fair  values.  The excess of cost over the fair  value of net  assets  acquired,
before adjustment,  totaled approximately  $410,000 and was recorded as goodwill
as of the  acquisition  date. The purchase price  adjustment,  as defined in the
Asset  Purchase  Agreement  between  the  buyer  and  seller,  was  computed  at
approximately  $200,000 and subsequently  reduced the goodwill amount previously
recorded.  The  operations  of the acquired  business  have been included in the
company's financial statements beginning December 1, 2000.

The  following  pro forma  information  (unaudited)  has been prepared as if the
acquisition  of Tandy Leather had occurred at the beginning of each of the years
ended December 31, 2000 and 1999. Such information is not necessarily reflective
of the actual results that would have occurred had the  acquisition  occurred on
those dates.


                                       36
<PAGE>
<TABLE>
<CAPTION>

                                                           2000         1999
                                                           ----         ----
Net Sales                                              $36,708,000  $43,996,000
Net Income (loss)                                      $ 1,637,000  $(4,327,000)
Net Income (loss) per common share                     $      0.17  $     (0.44)
Net Income (loss per common share - assuming dilution  $      0.16  $     (0.44)

13.      SEGMENT INFORMATION

SFAS  No.  131,  "Disclosures  about  Segments  of  an  Enterprise  and  Related
Information",  establishes  standards  for  public  companies  relating  to  the
reporting  of  financial  and  descriptive  information  about  their  operating
segments in  financial  statements.  Operating  segments  are  components  of an
enterprise  about which  separate  financial  information  is available  that is
evaluated  regularly  by chief  operating  decision  makers in  deciding  how to
allocate resources and in accessing performance.

The Company  identifies  its segments  based on the activities of three distinct
businesses:  The Leather  Factory,  which sells  product to both  wholesale  and
retail customers, consists of a chain of sales/distribution units located in the
United States and Canada; Tandy Leather Company,  which sells product throughout
the United States via the Internet and mail-order,  and internationally  through
authorized  dealers;  and  Roberts,   Cushman  &  Company,   which  manufactures
decorative hat trims sold directly to hat manufactures and distributors.

The  Company  previously  defined  its  operations  as  consisting  of a  single
reporting  segment as provided  for under the  aggregation  criteria of SFAS No.
131. During 2000, the Company revised its presentation of segment information to
reflect the Company initiative to establish strategic business units.

The Company's  reportable  operating segments have been determined as separately
identifiable  business units. The Company measures segment earnings as operating
earnings, defined as income before interest and income taxes. The "Tandy Leather
Company" column for the year ended December 31, 2000 contains  operating results
beginning after its November 30, 2000 acquisition.

                                         The Leather    Tandy Leather     Roberts,       Cushman
                                          Factory          Company          & Co          Total
                                       ------------    ------------    ------------    ------------
<S>                                    <C>             <C>             <C>             <C>
For the year ended December 31, 2001
Net Sales                              $ 28,711,006    $  6,606,090    $  1,962,166    $ 37,279,262
Gross Profit                             15,074,323       3,708,691         561,313      19,344,327
Operating earnings                        3,719,517         281,998         (99,547)      3,901,968
Interest expense                           (457,549)         (1,009)           --          (458,558)
Other, net                                  (74,799)           (125)           --           (74,924)
                                                                                       ------------
Income before income taxes                3,187,169         280,864         (99,547)      3.368,486
                                                                                       ------------
     Depreciation and amortization          474,114         103,118         152,921         730,153
     Fixed Asset Additions                  454,809         172,434           2,530         629,773
     Total assets                      $ 12,322,754    $  2,333,639    $  4,891,930    $ 19,548,323
                                       ------------    ------------    ------------    ------------
For the year ended December 31, 2000
Net Sales                              $ 27,060,406    $    575,635    $  2,459,223    $ 30,095,264
Gross Profit                             13,735,454         252,453         959,810      14,947,717
Operating earnings (loss)                 2,991,804         (43,724)        297,004       3,245,084
Interest expense                           (617,400)           --              --          (617,400)
Other, net                                  (36,280)           --               (99)        (36,379)
                                                                                       ------------
Income (loss) before income taxes         2,338,124         (43,724)        296,905       2,591,305
                                                                                       ------------
     Depreciation and amortization          423,313           4,895         154,570         582,778
     Fixed Asset Additions                  332,319          37,477           8,044         377,840
     Total assets                      $ 10,783,149    $  3,688,976    $  5,213,954    $ 19,686,079
                                       ------------    ------------    ------------    ------------
For the year ended December 31, 1999
Net Sales                              $ 24,735,228            --      $  2,429,171    $ 27,164,399
Gross Profit                             11,449,475            --           807,156      12,256,631
Operating earnings (loss)                 1,924,631            --           (14,420)      1,910,211
Interest expense                           (923,092)           --              --          (923,092)
Other, net                                   23,093            --              (305)         22,788
                                                                                       ------------
Income (loss) before income taxes         1,024,632            --           (14,725)      1,009,907
                                                                                       ------------
     Depreciation and amortization          411,995            --           155,457         567,452
     Fixed Asset Additions                  248,264            --             6,010         254,274
     Total assets                      $ 12,707,527            --      $  5,513,248    $ 18,220,775
                                       ------------    ------------    ------------    ------------
</TABLE>

                                       37
<PAGE>

Net sales for geographic areas was as follows:
                                             2001          2000          1999
                                         -----------   -----------   -----------
     United States                       $35,193,935   $28,964,542   $25,847,946
     All other countries                   2,085,327     1,130,722     1,316,453
                                         -----------   -----------   -----------
                                         $37,279,262   $30,095,264   $27,164,399
                                         ===========   ===========   ===========

Geographic sales information is based on the location of the customer. Net sales
from no single foreign  country was material to the Company's  consolidated  net
sales for the years ended December 31, 2001, 2000 and 1999.

14.      RECENT ACCOUNTING PRONOUNCEMENTS

In June 2001 the Financial  Accounting  Standards Board ("FASB") issued SFAS No.
141,  Business  Combinations  ("SFAS 141"), and SFAS No. 142, Goodwill and Other
intangible Assets ("SFAS 142").

SFAS 141  requires  that  the  purchase  method  of  accounting  be used for all
business combinations initiated after June 30, 2001. SFAS 141 also specifies the
criteria  intangible  assets acquired in a purchase method business  combination
must meet to be reported and  recognized  apart from  goodwill.  The adoption of
SFAS 141 had no impact on the Company's consolidated financial statements.

SFAS 142  changes  the  accounting  for  goodwill  and other  intangible  assets
subsequent to their initial recognition. Under SFAS 142, goodwill and intangible
assets other than goodwill with indefinite lives are no longer amortized, rather
they will be subject to a periodic  impairment  test based on their fair  value.
Intangible  assets with lives  restricted by contractual,  legal, or other means
will continue to be amortized over their useful lives.  Amortization of goodwill
and other  intangible  assets with indefinite  lives will cease January 1, 2002,
the date the  Company  is  required  to adopt  this  standard.  The  Company  is
currently  evaluating  the impact of adopting  this new standard  and  currently
cannot estimate the effect on the Company's  consolidated  financial  statements
beyond discontinuing amortization.

In August 2001,  the FASB issued SFAS No. 144,  Accounting for the Impairment of
Disposal of Long-Lived  Assets  ("SFAS 144"),  which  addresses  accounting  and
reporting for the impairment or disposal of long-lived  assets and  discontinued
operations.  SFAS 144  requires  that  long-lived  assets to be  disposed  of be
measured  at the  lower of  carrying  amount  or fair  value  less cost to sell,
whether  reported in  continuing  operations  or  discontinued  operations.  The
Company will adopt the provision of SFAS 144 effective January 1, 2002,  applied
prospectively.  Adoption of this new standard is not expected to have a material
effect on the Company's consolidated financial statements.

15.  FAIR VALUE OF FINANCIAL INSTRUMENTS

Cash, accounts receivable-trade and accounts payable
----------------------------------------------------
The carrying  amount  approximates  fair value because of the short  maturity of
those instruments.

Notes payable and long-term debt
--------------------------------
The interest  rates on the Company's  notes payable and long-term debt fluctuate
with  changes in the prime  rate and are the rates  currently  available  to the
Company;  therefore, the carrying amount of those instruments approximates their
fair value.

                                       38
<PAGE>
<TABLE>
<CAPTION>



16.  QUARTERLY FINANCIAL DATA (UNAUDITED)
                                           First        Second         Third        Fourth
                   2001                   Quarter       Quarter       Quarter       Quarter
--------------------------------------  -----------------------------------------------------
<S>                                     <C>           <C>           <C>           <C>
Net sales                               $ 9,372,613   $ 9,359,893   $ 9,198,401   $ 9,348,355
Gross profit                              4,884,216     4,978,795     4,611,574     4,869,742
Net income                                  497,283       621,910       396,529       490,711

Net income per common share:
                  Basic                        0.05          0.06          0.04          0.05
                 Diluted                       0.05          0.06          0.04          0.05
Weighted average number of common
shares outstanding:
                  Basic                   9,949,494     9,971,952     9,991,052     9,991,161
                 Diluted                 10,204,608    10,329,817    10,656,859    10,656,968

                                           First        Second         Third        Fourth
                   2000                   Quarter       Quarter       Quarter       Quarter
--------------------------------------  -----------------------------------------------------
Net sales                               $ 7,405,557   $ 7,602,405   $ 7,374,556   $ 7,712,746
Gross profit                              3,570,591     3,801,033     3,713,560     3,862,533
Net income                                  383,942       493,394       315,099       348,885

Net income per common share:
                  Basic                        0.04          0.05          0.03          0.04
                 Diluted                       0.04          0.05          0.03          0.03
Weighted average number of common
shares outstanding:
                  Basic                   9,859,754     9,873,161     9,876,422     9,887,509
                 Diluted                 10,121,206    10,187,427    10,199,164    10,217,418

</TABLE>



                                       39
<PAGE>



                            THE LEATHER FACTORY, INC.
                  SCHEDULE II - ALLOWANCE FOR DOUBTFUL ACCOUNTS
                  YEARS ENDED DECEMBER 31, 2001, 2000, and 1999


                                              2001         2000         1999
                                            ---------    ---------    ---------
Balance at beginning of year                $ 338,000    $ 177,000    $  52,000
Reserve "purchased" during year (Tandy)          --        248,000         --
  Additions charged to income                  17,000       22,000      157,000
  Balances written off, net of recoveries    (164,000)    (109,000)     (32,000)
                                            ---------    ---------    ---------
Balance at end of year                      $ 191,000    $ 338,000    $ 177,000
                                            =========    =========    =========








                                       40
<PAGE>

                         REPORT OF INDEPENDENT AUDITORS



The Board of Directors
The Leather Factory, Inc.

         We have audited the  accompanying  consolidated  balance  sheets of The
Leather  Factory,  Inc.  as of  December  31,  2001 and  2000,  and the  related
consolidated statements of operations,  stockholders' equity, and cash flows for
each of the three years in the period ended  December 31, 2001.  Our audits also
included  the  financial  statement  schedule  referred  to in the index at Item
14(a).  These financial  statements and schedule are the  responsibility  of the
Company's  management.  Our  responsibility  is to  express  an opinion on these
financial statements and schedule based on our audits.

         We conducted our audits in accordance with auditing standards generally
accepted in the United States.  Those standards require that we plan and perform
the audits to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.  An
audit also includes  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 consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
The Leather  Factory,  Inc. at December 31, 2001 and 2000, and the  consolidated
results of its  operations and its cash flows for each of the three years in the
period  ended  December 31,  2001,  in  conformity  with  accounting  principles
generally  accepted in the United  States.  Also,  in our  opinion,  the related
financial statement schedule, when considered in relation to the basic financial
statements  taken as a whole,  presents  fairly  in all  material  respects  the
information set forth therein.


Hein + Associates LLP


Dallas, Texas
February 4, 2002


                                       41
<PAGE>

                                    PART III

Item 10.  Directors and Executive Officers of the Registrant.

         Information  required by this item with regard to executive officers in
included in Part I, Item 1 of this report under the heading "Executive  Officers
of the Registrant", which information is incorporated herein by reference.

         Information  required  by this  item  regarding  the  Directors  of the
Company and compliance with Section 16(a) of the Securities Exchange Act of 1934
is set forth in the Company's  Proxy  Statements  for its 2002 Annual Meeting of
Stockholders (the "Proxy  Statement") under the heading "Election of Directors",
which information is incorporated herein by reference. This Proxy Statement will
be filed with the  Commission  pursuant to Regulation 14A within 120 days of the
year ended December 31, 2001.

Item 11.  Executive Compensation.

         Information concerning executive compensation is set forth in the Proxy
Statement  under the heading  "Executive  Compensation",  which is  incorporated
herein by  reference.  This Proxy  Statement  will be filed with the  Commission
pursuant to Regulation 14A within 120 days of the year ended December 31, 2001.

Item 12.  Security Ownership of Certain Beneficial Owners and Management.

         Information  concerning security ownership of certain beneficial owners
and management is set forth in the Proxy Statement  under the heading  "Security
Ownership of Certain  Beneficial  Owners and Management",  which is incorporated
herein by  reference.  This Proxy  Statement  will be filed with the  Commission
pursuant to Regulation 14A within 120 days of the year ended December 31, 2001.

Item 13.  Certain Relationships and Related Transactions.

         Information  concerning certain  relationships and related transactions
is set forth in the Proxy  Statement under the heading  "Certain  Transactions",
which is  incorporated  herein by reference.  This Proxy Statement will be filed
with the Commission pursuant to Regulation 14A within 120 days of the year ended
December 31, 2001.


                                     PART IV

Item 14.  Exhibits, Financial Statement Schedules and Reports on Form 8-K.

         (a)      1. Financial statements and financial statement schedules
                  ---------------------------------------------------------

         The financial  statements and schedule listed in the accompanying index
to consolidated financial statements at Item 8 are filed as part of this Report.

                  2. Exhibits
                  -----------

         The  exhibits  listed  on  the   accompanying   Exhibit  Index,   which
immediately  precedes such exhibits,  are filed or  incorporated by reference as
part of this Report and such Exhibit Index.

         (b)      Reports on Form 8-K
                  -------------------

         On December 20, 2001,  the Company  filed a Current  Report on Form 8-K
(Items 5 and 9), dated December 20, 2001. This report  described plans to expand
the Tandy Leather  operations through retail stores. A related press release was
included.


                                       42
<PAGE>

                                   SIGNATURES

         Pursuant to the  requirements  of Section 13 or 15(d) of the Securities
Exchange Act of 1934,  the Company caused this Report to be signed on its behalf
by the undersigned, thereunto duly authorized.

                                           THE LEATHER FACTORY, INC.
                                           (Registrant)

Date:   March 20, 2002                     By:  /s/ Wray Thompson
        --------------                          -----------------
                                                Wray Thompson
                                           Chairman of the Board and Chief
                                           Executive Officer

Date:   March 20, 2002                     By:  /s/ Shannon L. Greene
       ---------------                          ---------------------
                                                 Shannon L. Greene
                                           Chief Financial 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 the Company and in the
capacities and on the dates indicated.

Signature & Title                                                 Date

/s/ Wray Thompson                                                 March 20, 2002
------------------------------
Wray Thompson, Chairman of the Board

/s/ Ronald C. Morgan                                              March 20, 2002
------------------------------
Ronald C. Morgan, Director

/s/ Robin L. Morgan                                               March 20, 2002
------------------------------
Robin L. Morgan, Director

/s/ William M. Warren                                             March 20, 2002
------------------------------
William M. Warren, Director

/s/ H. W. Markwardt                                               March 20, 2002
------------------------------
H. W. Markwardt, Director

/s/ Joseph R. Mannes                                              March 20, 2002
------------------------------
Joseph R. Mannes, Director

/s/ Anthony C. Morton                                             March 20, 2002
------------------------------
Anthony C. Morton, Director

/s/ Shannon L. Greene                                             March 20, 2002
------------------------------
Shannon L. Greene, Director

/s/ Michael A. Markwardt                                          March 20, 2002
------------------------------
Michael A. Markwardt, Director


                                       43
<PAGE>

                   THE LEATHER FACTORY, INC. AND SUBSIDIARIES
                                  EXHIBIT INDEX
       Exhibit
       Number                               Description
       ------                               -----------
         3.1      Certificate of  Incorporation  of The Leather  Factory,  Inc.,
                  filed as Exhibit  3.1 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.

         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.

         10.1     The Leather  Factory,  Inc. Stock Purchase Warrant for 200,000
                  shares  common  stock,  $.0024  par  value  issued to Evert I.
                  Schlinger  dated August 3, 1998 and  terminating  on August 3,
                  2003,  filed as Exhibit 4.13 to the  Quarterly  Report on Form
                  10-Q  of  The  Leather  Factory,  Inc.  (Commission  File  No.
                  1-12368)  filed with the  Securities  and Exchange  Commission
                  November 12, 1998, and incorporated by reference herein.

         10.2     Credit and Security  Agreement dated November 22, 1999, by and
                  between The Leather Factory, Inc., a Delaware corporation, The
                  Leather  Factory,  Inc.,  a  Texas  corporation,  The  Leather
                  Factory,  Inc.,  an Arizona  corporation,  Roberts,  Cushman &
                  Company,  Inc., and Hi-Line Leather & Manufacturing  and Wells
                  Fargo  Business  Credit,  Inc.,  filed as  Exhibit  4.1 to the
                  Current  Report  on  Form  8-K of The  Leather  Factory,  Inc.
                  (Commission  File No.  1-12368)  filed with the Securities and
                  Exchange  Commission on December 16, 1999, and incorporated by
                  reference herein.

         10.3     Revolving  Note  (Revolving  Credit  Loan) dated  November 22,
                  1999, in the principal  amount of  $8,500,000,  payable to the
                  order of Wells Fargo  Business  Credit,  Inc.,  which  matures
                  November 30, 2002,  filed as Exhibit 4.2 to the Current Report
                  on Form 8-K of The Leather Factory,  Inc. (Commission File No.
                  1-12368) filed with the Securities and Exchange  Commission on
                  December 16, 1999, and incorporated by reference herein.

         10.4     Term Note dated November 22, 1999, in the principal  amount of
                  $150,000, payable to the order of Wells Fargo Business Credit,
                  Inc.,  which matures May 1, 2000,  filed as Exhibit 4.3 to the
                  Current  Report  on  Form  8-K of The  Leather  Factory,  Inc.
                  (Commission  File No.  1-12368)  filed with the Securities and
                  Exchange  Commission on December 16, 1999, and incorporated by
                  reference herein.

         10.5     Copyright  Security  Agreement dated November 22, 1999, by and
                  between The Leather Factory, Inc., a Delaware corporation, The
                  Leather  Factory,  Inc.,  a  Texas  corporation,  The  Leather
                  Factory,  Inc.,  an Arizona  corporation,  Roberts,  Cushman &
                  Company,  Inc., and Hi-Line Leather & Manufacturing  and Wells
                  Fargo  Business  Credit,  Inc.,  filed as  Exhibit  4.4 to the
                  Current  Report  on  Form  8-K of The  Leather  Factory,  Inc.
                  (Commission  File No.  1-12368)  filed with the Securities and
                  Exchange  Commission on December 16, 1999, and incorporated by
                  reference herein.


                                       44
<PAGE>

         10.6     First  Amendment  to  Credit  and  Security   Agreement  dated
                  November 30, 2000, by and between The Leather Factory,  Inc. a
                  Delaware  corporation,  The  Leather  Factory,  Inc.,  a Texas
                  corporation,   The   Leather   Factory,   Inc.,   an   Arizona
                  corporation, Roberts, Cushman & Company, Inc., Hi-Line Leather
                  &  Manufacturing,  and  Tandy  Leather  Company,  Inc.  (f/k/a
                  Leather  Tan  Acquisition,  Inc.)  and  Wells  Fargo  Business
                  Credit,  Inc.  filed as Exhibit 99.1 to the Current  Report on
                  Form 8-K of The Leather  Factory,  Inc.  (Commission  File No.
                  1-12368) filed with the Securities and Exchange  Commission on
                  December 15, 2000, and incorporated by reference herein.

         10.7     Second  Amendment  to  Credit  and  Security  Agreement  dated
                  February 7, 2001, by and between The Leather  Factory,  Inc. a
                  Delaware  corporation,  The  Leather  Factory,  Inc.,  a Texas
                  corporation,   The   Leather   Factory,   Inc.,   an   Arizona
                  corporation, Roberts, Cushman & Company, Inc., Hi-Line Leather
                  &  Manufacturing,  and  Tandy  Leather  Company,  Inc.  (f/k/a
                  Leather  Tan  Acquisition,  Inc.)  and  Wells  Fargo  Business
                  Credit,  Inc.  filed an Exhibit  4.1 to the Form 10-Q filed by
                  The Leather  Factory,  Inc. with the  Securities  and Exchange
                  Commission on August 14, 2001, and  incorporated  by reference
                  herein.

         10.8     Third Amendment to Credit and Security Agreement and Waiver of
                  Defaults  dated June 14,  2001,  by and  between  The  Leather
                  Factory,  Inc. a Delaware  corporation,  The Leather  Factory,
                  Inc.,  a Texas  corporation,  The Leather  Factory,  Inc.,  an
                  Arizona corporation, Roberts, Cushman & Company, Inc., Hi-Line
                  Leather &  Manufacturing,  and  Tandy  Leather  Company,  Inc.
                  (f/k/a Leather Tan Acquisition, Inc.) and Wells Fargo Business
                  Credit,  Inc.  filed an Exhibit  4.2 to Form 10-Q filed by The
                  Leather  Factory,   Inc.  with  the  Securities  and  Exchange
                  Commission on August 14, 2001, and  incorporated  by reference
                  herein.

         10.9     Letter Agreement for Consulting  Services dated July 24, 1998,
                  by  and  between  The  Leather  Factory,  Inc.  and  Evert  I.
                  Schlinger,  filed as Exhibit 4.13 to the  Quarterly  Report on
                  Form 10-Q of The Leather  Factory,  Inc.  (Commission File No.
                  1-12368)  filed with the  Securities  and Exchange  Commission
                  November 12, 1998, and incorporated by reference herein.

         10.10    Asset  Purchase  Agreement  dated  November 30, 2000, by Tandy
                  Leather Company, Inc. (f/k/a Leather Tan Acquisition, Inc.), a
                  Texas corporation,  TLC Direct, Inc., a Texas corporation, and
                  Tandy  Leather  Dealer,  Inc., a Texas  corporation,  filed as
                  Exhibit  No.  2.1 to the  Current  Report  on Form  8-K of The
                  Leather Factory, Inc. (Commission File No. 1-12368) filed with
                  the Securities  and Exchange  Commission on December 15, 2000,
                  and incorporated herein by reference.

         *21.1    Subsidiaries of the Company.

         *23.1    Consent of Hein + Associates LLP dated March 19, 2002.

 ------------
 *Filed herewith.



                                       45