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, 1999 OR

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
    ACT OF1934 [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 chart er)

         Delaware                                         75-2543540
(State or other jurisdiction                    (I.R.S. Employer Identification
of incorporation or organization)                  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  $2,974,221  at March 10, 2000. At that date
there were 9,873,161 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 24, 2000, are  incorporated by
reference in Part III of this report.


<PAGE>



Forward-Looking Statements

         This report contains  forward-looking  statements of management.  There
are certain  important risks that could cause results to differ  materially than
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    changes from anticipated levels of sales, whether due to future national or
     regional economic and competitive  conditions,  including,  but not limited
     to, retail craft buying patterns, and possible negative trends in the craft
     and western retail markets,

o    customer  acceptance  of existing and new products,  or otherwise,  pricing
     pressures due to competitive industry conditions,

o    increases in prices for leather (which is a world-wide commodity),

o    change in tax or interest rates,

o    change in the commercial banking environment,

o    inability of the Company's significant trading partners to identify all Y2K
     issues,

o    problems with the  importation  of the products that the Company buys in 22
     countries around the world,  including,  but not limited to, transportation
     problems or changes in the  political  climate of the  countries  involved,
     including the  maintenance by these countries of Most Favored Nation status
     with the United States of America, and

o    other  uncertainties,  all of which are  difficult  to predict  and many of
     which are beyond the control of the Company.

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


                                       2


<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.  ("TLF" or the  "Company")  is a
Delaware  corporation  whose common stock trades on the American  Stock Exchange
under the symbol "TLF."

         TLF is an  international  wholesale  manufacturer  and distributor of a
broad  product  line of leather,  leatherworking  tools,  buckles and other belt
supplies, shoe care and repair supplies,  leather dyes and finishes,  adornments
for belts,  bags,  and garments,  saddle and tack hardware,  and  do-it-yourself
leathercraft kits. We also introduced small finished leather goods such as cigar
cases,  wallets and western  accessories  into our line  several  years ago. The
Company,  through its subsidiary,  Roberts, Cushman & Company, Inc. ("Cushman"),
produces and sells a related product line of hat trims (the decorative  piece of
material that adorns the outside of a hat).  The Company  frequently  introduces
new products  either through its 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.

         The  Company's  customer  base is  comprised  of over 40,000  customers
including  individuals,   institutions,   retailers,  wholesalers,   assemblers,
distributors,  and other manufacturers dispersed  geographically  throughout the
world.  Most  of  our  customers  are  wholesalers,   while  retail  sales  have
historically  comprised less than 10% of the Company's sales. In 1999,  however,
we saw the sales mix shift somewhat to an 85% wholesale,  15% retail mix, and we
expect this increase in retail sales to continue during 2000 as we earn more and
more of the  business  of the former  Tandycrafts  retail  customers.  See also,
"Competition."  Sales  of the  Company's  products  do not  reflect  significant
seasonal patterns.

         The   Company   primarily   distributes   its   products   through   26
sales/distribution  units  ("Units")  located in nineteen states and Canada plus
its  manufacturing  facility  and show room in New York.  The  location of these
Units is selected based on the location of its 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,  the Company also
offers  a  "one-stop   shopping"  concept  for  both  leather  and  leathercraft
materials. These Units service customers through various means including walk-in
traffic, phone and mail order. Both wholesale and retail customers purchase from
Units.  These same Units also service the  Authorized  Sales Centers  (discussed
below) as well as the craft, western and other retail establishments  located in
close geographic proximity.

         Our Authorized  Sales Center ("ASC")  program was developed to generate
sales in geographical  areas that we currently do not have a  sales/distribution
unit without  outlaying the capital  needed to open a unit. An unrelated  person
who  desires  to become an ASC must apply with the  Company  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.


                                       3

<PAGE>


         TLF operates two manufacturing  facilities - one in Fort Worth,  Texas,
that primarily  manufactures  product (suede lace, garment fringe,  leathercraft
and  craft-related  kits) that is sold through the Units, and one in Long Island
City, NY (Cushman),  that sells its product  directly to hat  manufacturers.  We
also purchase  products from other  manufacturers and distributors in twenty-two
countries.

         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.  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.

         Operating   Results.   The  Company's   strategic  efforts  to  improve
profitability significantly increased gross profit margins from 43.9% in 1998 to
an  all-time  high of 45.1% in 1999.  Net sales for 1999  were  $27,164,399,  up
$5,000,405  (22.5%) from fiscal 1998 while operating  expenses in 1999 increased
by  $1,456,375  due to the  increase  in  sales.  These  expenses  dropped  as a
percentage of sales by 2.0% over 1998. The dramatic improvement in profitability
resulted primarily from:

(1)      sales gains  primarily  due to  increase in market  share in the retail
         leathercraft market,

(2)      the  beginning  signs of  renewed  interest  in the craft  and  western
         markets, and

(3)      the opening of several new sales units in 1999.

         The results of  operations  in 1998 were  somewhat  disappointing  even
though gross profit margins showed  improvement and operating expenses decreased
over the prior year.  During 1998, total sales were $22,163,994  while operating
expenses were  $8,890,045.  See also  "Management's  Discussion  and Analysis of
Financial Condition and Results of Operations."

         Operating  results for the fourth  quarter of 1999 revealed even better
results in operating profit margins  compared to the total year.  Fourth quarter
1999  revenues  were up 39.9% from the same period last year,  and gross profits
were up 50.9%. Operating costs were up 23.7% from the fourth quarter of 1998 due
to the significant increase in sales;  however,  operating costs as a percentage
of sales decreased 4.7%.

         Corporate  History.  The Company is the  successor to certain  entities
that were  parties to a series of  transactions  including a merger in July 1993
which involved The Leather Factory, Inc., a Texas corporation ("TLF-Texas"), and
National Transfer & Register Corp. ("National"),  a Colorado corporation,  which
had no  operations  and whose  capital  stock was widely  held but had no active
trading market prior to the merger. The surviving entity changed its name to The
Leather  Factory,  Inc. and its business became that conducted by TLF-Texas.  In
the following year, the Company reincorporated in Delaware.

         As part of its strategy to develop a multi-location  chain of wholesale
units the  Company  has made  numerous  acquisitions  since  its  incorporation,
including  the purchase of six wholesale  units from Brown Group,  Inc., a major
footwear  retailer.  The Company has also acquired  several  businesses  located
throughout the United States that distribute  shoe-related  supplies to the shoe
repair and shoe store industry.  In addition,  the Company  purchased Cushman in
1995, a leading  producer of hat trims.  In March of 1996, the Company  acquired
all of the issued and outstanding capital stock of its Canadian distributor, The
Leather Factory of Canada, Ltd.

                                       4

<PAGE>


         Business  Strategy.  The Company  operates  through 26 Units  described
above that are designed to combine the economies of scale of warehouse locations
with the  marketing  efficiencies  that can be  achieved  through  direct  mail.
Walk-in traffic and mail order customers are served from the same location.  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 provides lower rental expense 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. The Company  maintains higher  inventories of certain
imported items to ensure a continuous supply.

         The  Company's  Units  are  staffed  by  experienced  managers  who are
primarily  compensated based upon 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.
In addition to  generating  mail order  business,  the purpose of the  Company's
direct mail program is to stimulate sales for the Units. The Company utilizes an
internally developed and maintained mailing list, which allows for very targeted
mailing to its various  customer  groups.  As for the utilization of direct mail
and rapid delivery, the Company locates Units in order to get merchandise in the
customers'  hands as soon as possible,  with the added  benefit of lower freight
cost.

         The  Company  attempts to maintain  the number of  stock-keeping  units
("SKU's")  in the primary  Leather  Factory line of  merchandise  at the optimum
number of items  necessary  to balance the  maintaining  of the proper  stock to
minimize  out-of-stock  situations with the carrying costs involved with such an
inventory  level.  The  number of SKU's has been  refined  over the years by the
introduction of new products and the  discontinuing  of selected  products.  The
Company maintains approximately 2,800 items in the current line of merchandise.

         Competition.  The Company sells its products in three highly fragmented
markets,  which include  leathercraft,  leather  accessories,  and retail craft.
Management  believes that the Company encounters  competition in connection with
certain product lines and in certain areas from different companies,  but has no
direct competition affecting the entire product line. The Company is larger than
most of its direct  competitors.  The fragmented  nature of these markets is the
primary reason for the lack of broad-based competition.

         On January 8, 1999,  Tandycrafts,  Inc., the Company's most significant
competitor,  announced  plans to close  its  leather  and  crafts  manufacturing
operations and 121 retail stores. As a result of the Tandycrafts  decision,  the
Company has experienced  tremendous growth in some markets.  See also "Expansion
and Acquisition Strategy" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations."

        The Company competes on price, availability of merchandise, and speed of
delivery.  The size of the Company  relative to most of its competitors  creates
competitive  advantage  in its ability to stock a full range of products as well
as in buying merchandise. The Company believes it has a competitive advantage on
price  in  most  product   lines  because  it  purchases  in  bulk  and  has  an
international network of suppliers that can provide quality merchandise at lower
costs.  Most of the Company's  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 the Company's  competitors  are also  customers,
relying on the Company as a supplier.


                                       5

<PAGE>


         Expansion and  Acquisitions.  In 1997 and 1998,  management  focused on
stabilizing  operations and obtaining long-term  financing,  and no acquisitions
were made. As a result of the improving  operating results and the opportunities
created by Tandycrafts'  announced closing of its 121 retail stores, the Company
opened four new Units during 1999.  The Company  plans to continue its expansion
by: (i)  adding  two to three  Units per year,  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.

         The Company's acquisition of businesses involved in the distribution of
shoe care and repair  supplies have been only marginally  profitable  because of
competitive  pressures.  The Company  believes that it can no longer  profitably
acquire businesses that sell shoe care and repair supplies as a means of gaining
a new Leather Factory  location as it has several times in the past. The Company
has  determined  that it is better to open new locations  than to purchase these
existing shoe-related businesses.

        Products/Customers.    The   Company's   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),  fancy hat trims in braids,  leather, and woven fabrics, shoe care and
repair supplies, leather finishes, and small finished leather goods.

        The  products  manufactured  in Fort  Worth  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 for wholesale distribution using the Company's  sales/distribution
units.  The Cushman  facility  manufactures hat trims and small finished leather
goods. Hat trims are sold to hat manufacturers and distributors directly.  Small
finished leather goods are sold to various  distributors  and retailers  through
attendance at trade shows and the use of sales representatives.

        The customer  groups served  include  wholesale  distributors,  tack and
saddle shops,  shoe-findings  customers,  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. No single customer's purchases represent more than
10% of the  Company's  total  sales.  Approximately  five  percent  (5%)  of the
Company's sales are export sales.

         Suppliers.   The  Company  currently  purchases   merchandise  and  raw
materials from approximately 200 vendors dispersed  throughout the United States
as well as in twenty-one foreign  countries.  In fiscal year 1999, the Company's
ten largest vendors accounted for approximately  fifty nine percent (59%) of its
total purchases.  Management  believes that its relationships with suppliers are
strong  and  does  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 the operations of the Company.


                                       6

<PAGE>


         Patents and  Copyrights.  The  Company  presently  owns 130  copyrights
covering 239 registered  works,  seven trademarks  covering seven names, and two
patents covering three products.  Registered  trademarks include a federal trade
name registration on The Leather Factory. The trademarks expire at various times
starting  in 2002 and  ending in 2008,  but can be  renewed  indefinitely.  Most
copyrights  granted or pending  are on metal  products,  such as  conchos,  belt
buckles,  etc., and instruction  books. 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. Management considers these intangibles to be valuable assets and
defends them as necessary.

         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, 1999,  the Company  employed 236 people,
with 232 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,
1999, 156 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 1999, 1998 and 1997
were 5.6%,  11.6%,  and 1.2%,  respectively,  of  eligible  compensation.  These
contributions  are  used to  purchase  shares  of the  Company's  Common  Stock.
Generally,  contributions  to the  ESOP  follow a  similar  pattern  as  overall
profitability.  On January 21, 1999, the Company made an additional contribution
to the Plan (for the 1998 plan  year) of  $262,000  in order for the ESOP to pay
the entire balance owed on securities  acquisition loans. Without the additional
contribution, the 1998 net contribution percentage would have been 3.7%.

         Overall, management believes that relations with employees are good.








                                       7



<PAGE>

<TABLE>
<CAPTION>


Item 2.   Properties.

         The Company leases all its premises. Detailed below are the lease terms
for the  Company's  locations.  The general  character of each location is light
industrial  office/warehouse  space.  The  Company  believes  that  all  of  its
properties are adequately covered by insurance.

  Location Name               Total Space (Sq. Ft.)     Minimum Annual Rent *        Lease Expiration
  -------------               ---------------------     -------------------          ----------------
<S>                                  <C>                   <C>                         <C>

  Chattanooga, TN                    9,040                 $    42,332                 May 2004
  Denver, CO                         5,879                      30,000                 September 2004
  Harrisburg, PA                     6,850                      37,352                 March 2002
  Fort Worth, TX                    61,000                     241,965                 March 2003
  Fresno, CA                         5,600                      42,336                 March 2002
  Des Moines, IA                     4,000                      30,718                 April 2004
  Phoenix, AZ                        4,500                      25,729                 March 2001
  Springfield, MO                    6,000                      24,000                 July 2003
  Spokane, WA                        5,400                      21,360                 February 2004
  Albuquerque, NM                    5,000                      30,000                 October 2003
  Salt Lake City, UT                 4,373                      21,600                 July 2004
  Baldwin Park, CA                   7,800                      53,400                 March 2000
  Tampa, FL                          5,238                      38,487                 January 2003
  San Antonio, TX                    5,600                      40,320                 October 2001
  Columbus, OH                       6,000                      39,075                 October 2000
  El Paso, TX                        5,000                      25,700                 August 2003
  Oakland, CA                        8,000                      54,000                 December 2003
  Grand Rapids, MI                   8,000                      40,774                 March 2004
  Wichita, KS                        5,150                      21,360                 May 2004
  New Orleans, LA                    5,130                      21,600                 August 2000
  Portland, OR                       5,232                      23,756                 April 2004
  Charlotte, NC                      6,202                      24,188                 February 2001
  Billings, MT                       2,600                      11,100                 April 2001
  Austin, TX                         3,800                      12,000                 Month to month
  Tucson, AZ                         3,600                      20,412                 May 2004
  Long Island City, NY              10,200                      67,888                 June 2003
  Winnipeg, Canada                   5,712                      16,610**               November 2002
                                  --------                 --------------
  Totals                           210,272                 $ 1,058,062
                                  ========                 ==============
</TABLE>
-----------

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


                                       8

<PAGE>


         The Company's  Fort Worth  location  includes the Fort Worth Unit,  the
Company's central warehouse, the light manufacturing facility, and the sales and
administrative/executive  offices.  The  Company  also  leases a 284 square foot
showroom  in the Denver  Merchandise  Mart for $4,896 per year.  This lease will
expire in October 2002.


Item 3.   Legal Proceedings.

         As  reported  previously,  the  Company,  as  successor-in-interest  to
National,  was a defendant  in a lawsuit  brought in July 1994 by Gary A. Bedini
and John C.  Bedini in the United  States  District  Court for the  District  of
Colorado.  The Company (as part of a reverse merger  transaction  with National)
was contractually indemnified against loss in this case by one of the additional
defendants,  Securities  Transfer  Corporation and certain related  entities and
individuals.

         On November  9, 1998,  this  lawsuit  was  settled  without any loss or
expense to the Company.

         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, 1999.


                                     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:

                                  1998                        1999
                                  ----                        ----
 Quarter Ended              High         Low             High       Low
 -------------              ----         ---             ----       ---
 March 31,                0.6250      0.4375           0.8750    0.2188
 June 30,                 0.6250      0.3750           0.7500    0.3750
 September 30,            0.6250      0.3750           0.7500    0.5625
 December 31,             0.4375      0.1250           1.1250    0.8125
-------------------------------------------------
    There were approximately 629 stockholders of record on March 10, 2000.

         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.


                                       9

<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." Data in prior years have not been restated to reflect  acquisitions
that occurred in subsequent years.

Income Statement Data                                                     Years Ended December 31,
                                         -----------------------------------------------------------------------------------------
                                              1999              1998               1997               1996              1995
                                         ---------------   ----------------   ---------------    ---------------   ---------------
<S>                                      <C>               <C>                <C>                <C>               <C>

Net sales                                   $27,164,399        $22,163,994       $25,399,116        $28,253,632       $31,447,849
Cost of sales                                14,907,768         12,428,324        14,844,376         17,689,973        18,446,378
                                         ---------------   ----------------   ---------------    ---------------   ---------------
     Gross profit                            12,256,631          9,735,670        10,554,740         10,563,659        13,001,471

Operating expenses                           10,346,420          8,890,045         9,365,673         10,869,359        10,363,159
                                         ---------------   ----------------   ---------------    ---------------   ---------------
Operating income (loss)                       1,910,211            845,625         1,189,067          (305,700)         2,638,312


Other (income) expense                          900,304            970,340           887,543          1,000,604           678,264
                                         ---------------   ----------------   ---------------    ---------------   ---------------

Income (loss) before income taxes             1,009,907          (124,715)           301,524        (1,306,304)         1,960,048
Income tax provision (benefit)                  574,851           (85,524)           231,232          (316,536)           786,744
                                         ---------------   ----------------   ---------------    ---------------   ---------------
Net income (loss)                               435,056           (39,191)            70,292          (989,768)         1,173,304
                                         ===============   ================   ===============    ===============   ===============
Earnings (loss) per share                          0.04             (0.00)              0.01             (0.10)              0.12
                                         ===============   ================   ===============    ===============   ===============
Earnings (loss) per share--
  assuming dilution                                0.04             (0.00)              0.01             (0.10)              0.12
                                         ===============   ================   ===============    ===============   ===============

Weighted average common
 shares outstanding for:

   Basic EPS                                  9,853,161          9,803,887         9,789,358          9,788,530         9,789,468
                                         ===============   ================   ===============    ===============   ===============
   Diluted EPS                                9,890,098          9,803,887         9,791,565          9,788,530         9,789,468
                                         ===============   ================   ===============    ===============   ===============




Balance Sheet Data                                                          As of December 31,
                                         -----------------------------------------------------------------------------------------
                                              1999              1998               1997               1996              1995
                                         ---------------   ----------------   ---------------    ---------------   ---------------
Total assets                                $18,220,775        $16,029,937       $17,024,549        $18,264,547       $19,333,376
                                         ---------------   ----------------   ---------------    ---------------   ---------------
Notes payable and current
    maturities of long term debt              6,061,735          6,139,327         4,650,742          8,549,366         1,296,359
                                         ---------------   ----------------   ---------------    ---------------   ---------------

Notes payable and long-term
    debt, net of current maturities             121,686             61,389         2,602,728             17,378         6,566,809
                                         ---------------   ----------------   ---------------    ---------------   ---------------
Total Stockholders' Equity                    8,680,425          8,170,278         8,132,646          8,022,937         9,282,305
                                         ===============   ================   ===============    ===============   ===============
</TABLE>

                                       10

<PAGE>

<TABLE>
<CAPTION>


Item 7. Management's  Discussion and Analysis of Financial Condition and Results
         of Operations.

Results of Operations

                           Income Statement Comparison

         The following table sets forth, for the fiscal years indicated, certain
items  from the  Company's  Consolidated  Statements  of Income  expressed  as a
percentage of net sales:

                                                            1999               1998                1997
                                                        --------------     --------------     ---------------
<S>                                                     <C>                <C>                <C>

              Net Sales                                         100.0%             100.0%              100.0%
              Cost of sales                                      54.9               56.1                58.4
                                                        --------------     --------------     ---------------
              Gross profit                                       45.1               43.9                41.6
              Operating expenses                                 38.1               40.1                36.9
                                                        --------------     --------------     ---------------
              Operating income (loss)                             7.0                3.8                 4.7
              Other (income) expense, net                         3.3                4.4                 3.5
                                                        --------------     --------------     ---------------
              Income (loss) before
                income taxes                                      3.7              (0.6)                 1.2
              Income tax provision (benefit)                      2.1              (0.4)                 0.9
                                                        --------------     --------------     ---------------
              Net income (loss)                                   1.6 %            (0.2) %               0.3%
                                                        ==============     ==============     ===============



                        Analysis of 1999 Compared to 1998

                                           1999               1998            $ Change          % Change
                                       --------------    ---------------    --------------    --------------
Net sales                                $27,164,399        $22,163,994        $5,000,405            22.56%
Cost of sales                             14,907,768         12,428,324         2,479,444            19.95%
                                       --------------    ---------------    --------------
     Gross profit                         12,256,631          9,735,670         2,520,961            25.89%

Operating expenses                        10,346,420          8,890,045         1,456,375            16.38%
                                       --------------    ---------------    --------------
Operating income (loss)                    1,910,211            845,625         1,064,586           125.89%

Other (income) expense                       900,304            970,340          (70,034)           (7.21%)
                                       --------------    ---------------    --------------
Income (loss)
     before income taxes                   1,009,907          (124,715)         1,134,622          N/A
Income tax provision (benefit)               574,851           (85,524)           660,375          N/A
                                       --------------    ---------------    --------------

Net income (loss)                          $ 435,056         $ (39,191)         $ 474,247          N/A
                                       ==============    ===============    ==============
</TABLE>


Revenues

The Company  experienced  encouraging  growth in net sales during 1999 primarily
due to the absorption of a portion of  Tandycrafts'  abandoned  market share and
the early signs of renewed interest in the western apparel and craft markets. In
addition,  we  opened  four new  sales/distribution  units in 1999,  located  in
Portland,  OR,  Billings,  MT,  Austin,  TX,  and  Tucson,  AZ.  It has been our


                                       11

<PAGE>

experience  that the western and craft  industries  are subject to fads, to some
extent.  Movies,  entertainers,  etc.  have a great impact on the  popularity of
western  apparel  in  particular.  The key to  success  in the  craft  industry,
oversimplifying  of course,  is being the first  company  with a popular  idea -
whether it be wearable  art,  photo albums and  scrapbook  creations,  etc. As a
result,  the Company's  success in selling to these two industries  depends to a
point on the latest successful craft idea, what is popular at the box office, or
who won  Entertainer  of the Year.  We believe we are seeing the  beginnings  of
these two industries' popularity on the rise.

Partially  offsetting the sales  increases in retail,  western and craft markets
was the continued reduction of sales of certain low margin items. Because of the
historically  low  margins  earned  in our shoe  care/repair  product  line,  we
intentionally eliminated a large portion of the line. This reduced 1999 sales to
this industry by  approximately  $1 million from 1998. We  compensated  for this
reduction with the development and implementation of our new ASC program.

The ASC  program  began in April  1999,  and as of  December  31,  1999,  we had
approximately  80  approved  ASCs.  In 1999,  the ASCs  generated  sales of over
$900,000.  We are  pleased  with the  success  of this  program  and  anticipate
continued growth in 2000.

Sales in our institutional (prisons and prisoners, schools, hospitals, etc.) and
other  core  markets  (saddle  and  tack,   semi-professional  hobbyists,  small
manufacturers) are showing steady and positive growth trends as well.

Costs, Gross Profit, and Expenses

Cost of sales for 1999 totaled $14.9 million or 54.9% of sales.  The  percentage
increase  over 1998 was 20%. The impact of this  increase  becomes  evident when
compared to the 22.5% increase in sales.  The 2.5% gain in gross profit to sales
in 1999  resulted  in a gross  profit  percentage  of 45.1% - the highest in the
Company's  history -  compared  to 43.9% in 1998.  The most  significant  factor
supporting  this  improvement  is the increase in our retail  business as retail
sales historically produce the highest profit margins. This year, we experienced
a 70% jump in retail sales from 1998.

Operating  expenses  increased  $1.45  million or 16.4%  compared to 1998.  This
increase is a result of higher payroll costs  resulting from higher sales,  ESOP
contribution   (management's  desire  to  reward  employees  for  the  Company's
financial  improvement),  managers' bonuses as a result of higher profits earned
at the sales/distribution units, and professional fees.

Other (Income) Expense

Other expenses were down 7.2% from 1998. This reduction is primarily in interest
expense due to the  decrease  in average  outstanding  debt  balances in 1999 as
compared to 1998.

Provision (Benefit) for Income Taxes

The  provision  for federal and state income taxes was 57% of 1999 income before
taxes due to $420,000 of non-deductible  expenses,  principally  amortization of
goodwill.  Without these  non-deductible  expenses,  the Company's effective tax
rate approximates the Company's historical rate for combined federal,  state and
local income taxes of 40%.


                                       12

<PAGE>

<TABLE>
<CAPTION>


                        Analysis of 1998 Compared to 1997

                                           1998               1997            $ Change          % Change
                                       --------------    ---------------    --------------    --------------
<S>                                      <C>             <C>                 <C>                   <C>

Net sales                                $22,163,994        $25,399,116      $(3,235,122)          (12.74%)
Cost of sales                             12,428,324         14,844,376       (2,416,052)          (16.28%)
                                       --------------    ---------------    --------------
     Gross profit                          9,735,670         10,554,740         (819,070)           (7.76%)

Operating expenses                         8,890,045          9,365,673         (475,628)           (5.08%)
                                       --------------    ---------------    --------------
Operating income (loss)                      845,625          1,189,067         (343,442)            28.88%


Other (income) expense                       970,340            887,543            82,796             9.33%
                                       --------------    ---------------    --------------

Income (loss)
     before income taxes                   (124,715)            301,524         (426,239)          N/A
Income tax provision (benefit)              (85,524)            231,232         (316,756)          N/A
                                       --------------    ---------------    --------------

Net income (loss)                          $(39,191)            $70,292        $(109,483)          N/A
                                       ==============    ===============    ==============
</TABLE>

Revenues

         The  Company's  1998 net sales  decreased  12.7% to $22.2  million from
$25.4  million  in 1997.  The  decline  resulted  from  strategic  decisions  to
eliminate low margin items from the Company's  product  lines,  reduced sales to
the western apparel and crafts markets,  and lower export sales.  Sales of lower
margin items  (predominately  our shoe care/repair line) were down 43% from 1997
and  represented  less than 8% of total  revenues  in 1998.  Nearly  half of the
Company's  business is made up of sales to western  apparel and crafts  markets,
and 1998 sales in these markets were down 15% and 18%, respectively, compared to
1997, reflecting a continuation of negative industry trends.  However,  sales in
the  Company's  core  businesses  and  institutional   markets  remained  strong
throughout the year and registered an increase in revenues over 1997.

Costs, Gross Profit, and Expenses

         Cost of sales for 1998  totaled  $12.4  million or 56.1% of sales.  The
comparable  amount for 1997 was $14.8 million or 58.4%.  The  improvement in the
percentage was principally attributable to an improved product sales mix and the
Company's  strategic  efforts to  selectively  raise prices and eliminate  lower
margin  items  from its  product  lines.  As a result of the lower cost of sales
percentage,  gross  profit as a  percentage  of sales  improved in 1998 to 43.9%
compared to 1997 of 41.6%.

         Operating  expenses  decreased $476,000 or 5.1% to $8.9 million in 1998
from $9.4  million in 1997.  Approximately  half of the  decrease  in  operating
expenses  was the  result  of lower  payroll  costs,  reflecting  an  additional
reduction of personnel during 1998. Other decreases  included lower  advertising
costs, reduced accounting, legal and professional fees, and lower freight costs.

Other (Income) Expense

         Other expenses were $970,000 for 1998 compared to $888,000 during 1997.
Interest  expense was up $136,000 in 1998 as the  amortization of deferred costs
from the November 1997 debt  refinancing  offset reduced interest expense due to
lower borrowing levels during the year. Other income increased  $53,000 relative
to 1997 due to a gain from the sale of a trademark  in 1998 as opposed to a loss
recorded on the sale of real estate in Tampa, Florida in 1997.


                                       13

<PAGE>

Provision (Benefit) for Income Taxes

         The benefit for income  taxes was 69% of the loss before taxes in 1998.
The tax benefit  reflects a deduction for a  contribution  to the Company's ESOP
for tax  purposes in excess of its  treatment  in  arriving at net income.  This
amount is partly offset by certain  non-deductible  expenses totaling  $228,000,
principally the amortization of goodwill. Taking these two amounts into account,
the  Company's   effective  tax  rate  materially   approximates  the  Company's
historical rate for combined federal and state income taxes of 40%.


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 pay all amounts due by
the  Company  to  FINOVA  Capital  Corporation   ("FINOVA")  and  The  Schlinger
Foundation ("Schlinger") as discussed below.

         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 3 to the Consolidated Financial
Statements.

         Prior  to the  relationship  with  WFBC,  the  Company  had a Loan  and
Security  Agreement  with  FINOVA in which  FINOVA  agreed  to  provide a credit
facility of up to $9,136,000 in senior debt (the "Senior Debt  Facility").  This
Senior Debt  Facility was secured by all of the assets of the Company as well as
a pledge of 3,000,000  shares of the Company's  common stock,  par value $0.0024
("Common Stock"), collectively owned by two of the Company's executive officers.
The Company also had a $1,000,000  subordinated  promissory  note with Schlinger
(the "Subordinated Debenture") which was secured by a pledge of 2,666,666 shares
of the Company's Common Stock owned by another executive officer.

         The primary sources of liquidity and capital resources during 1999 were
borrowings  from the Debt  Facilities  with  FINOVA  and  WFBC,  and cash  flows
provided by operating activities.

         Cash flows from operations for 1999 were $236,000.  The largest portion
of the  operating  cash flow was  invested  in  inventory  to meet  demand  from
increased sales.

         Accounts  receivable  increased to $2.3 million and inventory increased
to  $8.8  million  at  December  31,  1999  from   $1,582,459  and   $6,956,606,
respectively,  at  December  31,  1998.  The aging of  accounts  receivable  has
increased  slightly  from 1998. We believe that this trend is temporary and is a
result  primarily of the speed at which  receivables  grew in a relatively short
period of time.  We continue to maintain a rather  tight  credit and  collection
policy and expect improved collection results in 2000.

         Inventory turned 1.89 times during 1999,  improving over the 1998 ratio
of 1.74 times. However, this turn rate is still below management's goals of over
2 turns per year. Management believes the 1999 rate would have been higher if we
had not  intentionally  raised the inventory levels in the last half of the year
to meet anticipated demand as the Tandycrafts' store closings were completed. In
December 1999, we completed the  implementation  of our new  information  system
which is proving to be very helpful in the monitoring of inventory  levels as we
go forward.


                                       14

<PAGE>

<TABLE>
<CAPTION>

         Accounts  payable  increased  to $1.8 million at December 31, 1999 from
$1.0 million at the end of 1998 due to the increase in inventory  purchases  and
the more  favorable  terms  negotiated  with  certain  vendors.  The increase in
accounts payable created  approximately  $800,000 of operating cash flow for the
year to help  offset the  negative  effect on cash flow due to the  increase  in
accounts receivable and inventory.

         The Company's  current ratio remained  fairly  constant at December 31,
1999 and 1998 (1.31 and 1.28, respectively).  If, however,  accounting rules had
not required the Company's  debt with WFBC to be classified as short-term  (even
though the maturity is in November 2002), the current ratio at December 31, 1999
would have been 3.49.

         The largest use of cash beyond inventory, accounts receivable, and debt
payments  in  1999  was  for  capital   expenditures.   Cash  used  for  capital
expenditures totaled $254,000 and $138,000 for the years ended December 31, 1999
and 1998,  respectively.  Approximately 60% of 1999 capital spending was for new
computer  equipment  and software with the  remainder  split between  office and
warehouse fixtures, machinery and other equipment, and leasehold improvements.

         The Company's  Credit Facility  consists of a revolving credit facility
and one  term  note.  The  revolving  portion  is based  upon  the  level of the
Company's accounts  receivable and inventory.  At December 31, 1999, the Company
had additional borrowing availability of approximately $500,000. Continued sales
increases and operations  expansion will require larger  investments in accounts
receivable and  inventory.  Management  believes the current credit  facility in
place with WFBC,  combined with  operating  cash flow,  will be adequate to fund
operation and expansion needs.

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


      4th Qtr. `98            1st Qtr. `99            2nd Qtr. `99           3rd Qtr. `99           4th Qtr. `99
         FINOVA                  FINOVA                  FINOVA                 FINOVA                  WFBC
         ------                  ------                  ------                 ------                  ----
<S>                            <C>                     <C>                    <C>                    <C>

       $3,597,988              $3,481,246              $3,826,616             $4,714,428             $5,818,652

         Total  indebtedness  with WFBC (revolving  credit and one term loan) at
the end of 1999 and  FINOVA  (revolving  credit  and three  term  loans) and the
Subordinated Debenture at the end of 1998 are shown below:

                                                                           December 31,
                                           -----------------------------------------------------------------------------
                                                            1998                                  1999
                                           --------------------------------------    -----------------------------------
                                                                     Accrued                                 Accrued
                                               Principal            Interest            Principal            Interest
WFBC
         Revolving Line                                                                    $5,818,652           $49,762
         Term Loan                                                                            150,000             1,163
                                                                                     -----------------     -------------
                Subtotal                                                                    5,968,652            50,925
FINOVA
         Revolving Line                           $3,597,988             $27,137
         Term Loans                                1,520,000              13,451
                                           ------------------    ----------------
               Subtotal                            5,117,988              40,588
Subordinated Debenture                             1,000,000              11,194
                                           ------------------    ----------------    -----------------     -------------
                         TOTAL                    $6,117,988             $51,782           $5,968,652           $50,925
                                           ==================    ================    =================     =============
</TABLE>
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 15, Index to Consolidated Financial Statements.

Item 9.  Change In and Disagreements with Accountants on Accounting and
              Financial Disclosure.

         None


                                       15
<PAGE>

<TABLE>


<CAPTION>

                            THE LEATHER FACTORY, INC.

                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
                   ------------------------------------------



<S>                                                                             <C>                                <C>

Consolidated Balance Sheets at December 31, 1999 and 1998     .................................................... 17
Consolidated Statements of Operations for the Years Ended December 31, 1999, 1998 and 1997     ................... 18
Consolidated Statements of Cash Flows for the Years Ended December 31, 1999, 1998 and 1997     ................... 19
Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 1999, 1998 and 1997     ......... 20
Notes to Consolidated Financial Statements     ................................................................... 21


Financial Statement Schedules for the years ended December 31, 1999, 1998 and 1997:

         II - Valuation and Qualifying Accounts and Reserves     ................................................. 31

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     ............................................................................. 32-33


</TABLE>









                                       16

<PAGE>

<TABLE>

<CAPTION>

                                              THE LEATHER FACTORY, INC.
                                             CONSOLIDATED BALANCE SHEETS


                                                                              December 31,             December 31,
                                                                                  1999                     1998
                                                                           -------------------       -----------------
<S>                                                                               <C>                    <C>

                                 ASSETS
CURRENT ASSETS:
     Cash                                                                         $   134,465             $   510,399
     Cash restricted for payment on revolving credit facility                         317,904                 232,838
     Accounts receivable-trade, net of allowance for doubtful accounts of
         $177,000 and $52,000 in 1999 and 1998, respectively                        2,292,645               1,582,459
     Inventory                                                                      8,807,963               6,956,606
     Prepaid income taxes                                                                   -                 140,939
     Deferred income taxes                                                            160,165                 190,012
     Other current assets                                                             533,841                 239,157
                                                                           -------------------       -----------------
                                    Total current assets                           12,246,983               9,852,410
                                                                           -------------------       -----------------

PROPERTY AND EQUIPMENT, at cost                                                     3,143,594               2,671,827
  Less-accumulated depreciation and amortization                                   (2,160,336)             (1,813,378)
                                                                           -------------------       -----------------
                                    Property and equipment, net                       983,258                 858,449

GOODWILL, net of accumulated amortization of $1,160,000
     and $947,000 in 1999 and 1998, respectively                                    4,767,885               4,968,616
OTHER INTANGIBLES, net of accumulated amortization of
     $45,000 and $299,000, in 1999 and 1998, respectively                             191,048                 316,626
OTHER assets                                                                           31,601                  33,836
                                                                           -------------------       -----------------
                                                                                $  18,220,775           $  16,029,937
                                                                           ===================       =================

                  LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
     Accounts payable                                                           $   1,805,918            $  1,019,069
     Accrued expenses and other liabilities                                           978,969                 530,789
     Income taxes payable                                                             474,262                       -
     Notes payable and current maturities of long-term debt                         6,061,735               6,139,327
                                                                           -------------------       -----------------
                                    Total current liabilities                       9,320,884               7,689,185
                                                                           -------------------       -----------------

DEFERRED INCOME TAXES                                                                  97,780                 109,085

NOTES PAYABLE AND LONG-TERM DEBT, net of current maturities                           121,686                  61,389

COMMITMENTS AND CONTINGENCIES (Note 6)                                                      -                       -

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, 9,853,161 shares issued and outstanding                            23,648                  23,648
     Paid-in capital                                                                3,901,740               3,901,740
     Retained earnings                                                              4,930,434               4,495,378
     Less: Notes receivable - secured by common stock                                (153,416)               (224,750)
     Accumulated other comprehensive loss                                             (21,981)                (25,738)
                                                                           -------------------       -----------------
                                    Total stockholders' equity                      8,680,425               8,170,278
                                                                           -------------------       -----------------
                                                                                $  18,220,775           $  16,029,937
                                                                           ===================       =================
</TABLE>

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


                                       17

<PAGE>

<TABLE>

<CAPTION>

                                                 THE LEATHER FACTORY, INC.
                                            CONSOLIDATED STATEMENTS OF OPERATIONS
                                    FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997



                                                                          1999                1998                1997
                                                                   -------------------   ----------------   -----------------
<S>                                                                <C>                   <C>                <C>

NET SALES                                                                  27,164,399       $ 22,163,994        $ 25,399,116

COST OF SALES                                                              14,907,768         12,428,324          14,844,376
                                                                   -------------------   ----------------   -----------------

              Gross profit                                                 12,256,631          9,735,670          10,554,740

OPERATING EXPENSES                                                         10,346,420          8,890,045           9,365,673
                                                                   -------------------   ----------------   -----------------

INCOME FROM OPERATIONS                                                      1,910,211            845,625           1,189,067

OTHER INCOME (EXPENSE):
         Interest expense                                                   (923,092)        (1,003,649)           (867,548)
         Other,  net                                                          22,788             33,309            (19,995)
                                                                   -------------------   ----------------   -----------------
              Total other income (expense)                                  (900,304)          (970,340)           (887,543)
                                                                   -------------------   ----------------   -----------------

INCOME (LOSS)  BEFORE INCOME TAXES                                          1,009,907          (124,715)             301,524

PROVISION (BENEFIT) FOR INCOME TAXES                                          574,851           (85,524)             231,232
                                                                   -------------------   ----------------   -----------------
NET INCOME (LOSS)                                                         $   435,056       $   (39,191)          $   70,292
                                                                   ===================   ================   =================



NET INCOME (LOSS) PER COMMON SHARE                                         $     0.04        $    (0.00)          $     0.01
                                                                   ===================   ================   =================

NET INCOME (LOSS) PER COMMON SHARE--Assuming Dilution                      $     0.04        $    (0.00)          $     0.01
                                                                   ===================   ================   =================

</TABLE>









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

                                       18

<PAGE>

<TABLE>

<CAPTION>




                            THE LEATHER FACTORY, INC.
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
              FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997

                                                                                          1999              1998           1997
                                                                                    ----------------- ----------------- ------------
<S>                                                                                 <C>               <C>               <C>

CASH FLOWS FROM OPERATING ACTIVITIES:
  Net income (loss)                                                                      $   435,056       $   (39,191)   $  70,292
  Adjustments to reconcile net income (loss) to net
   cash provided by operating activities-
     Depreciation and amortization                                                           567,452           527,443      523,551
    (Gain) loss on sales of assets                                                                 -            (9,118)      46,950
     Amortization of deferred financing costs                                                225,953           233,239       32,113
     Other                                                                                    13,426            (5,273)      17,995
     Net changes in assets and liabilities:
       Accounts receivable-trade, net                                                       (710,186)          282,817       82,422
       Inventory                                                                          (1,851,357)          323,096      457,618
       Income taxes                                                                          615,201            57,031      252,488
       Other current assets                                                                 (294,684)          115,140      155,310
       Accounts payable                                                                      786,849            77,023        1,497
       Accrued expenses and other liabilities                                                448,180           (28,987)     (37,231)
                                                                                    ----------------- ----------------- ------------
Total adjustments                                                                           (199,166)        1,572,411    1,532,713
                                                                                    ----------------- ----------------- ------------
      Net cash provided by operating activities
                                                                                             235,890         1,533,220    1,603,005
                                                                                    ----------------- ----------------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
  Purchase of property and equipment                                                        (254,274)         (137,828)    (239,578)
  Proceeds from sales of assets                                                                    -            10,000      257,306
 (Increase) decrease in other assets                                                           2,235            (2,934)       2,300
  Other intangible costs                                                                      (8,174)           (1,728)     (32,061)
                                                                                    ----------------- ----------------- ------------

      Net cash used in investing activities                                                 (260,213)         (132,490)     (12,033)
                                                                                    ----------------- ----------------- ------------

CASH FLOWS FROM FINANCING ACTIVITIES:
  Net increase (decrease) in revolving credit loans                                        2,220,664          (432,531)  (1,469,481)
  Proceeds from notes payable and long-term debt                                             150,000                 -    3,001,396
  Payments on notes payable and long-term debt                                            (2,605,453)         (620,223)  (3,083,189)
  (Increase) decrease in cash restricted for payment on revolving credit facility            (85,066)           86,295     (319,133)
  Payments received on notes receivable - secured by common stock                             71,334            32,867       11,688
  Deferred financing costs incurred                                                         (103,090)          (27,235)    (149,949)
                                                                                    ----------------- ----------------- ------------

      Net cash used in financing activities                                                 (351,611)         (960,827)  (2,008,668)
                                                                                    ----------------- ----------------- ------------

NET INCREASE (DECREASE) IN CASH                                                             (375,934)          439,903     (417,696)

CASH, beginning of year                                                                      510,399            70,496      488,192
                                                                                    ----------------- ----------------- ------------

CASH, end of year                                                                        $   134,465         $ 510,399    $  70,496
                                                                                    ================= ================= ============

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
  Interest paid during the period                                                        $   697,996         $ 787,148    $ 749,472
  Income taxes paid during the period, net of (refunds)                                      (57,681)         (117,609)     (38,101)

NON-CASH INVESTING ACTIVITIES:
 Computer equipment acquired under capital lease financing arrangements                  $   217,493         $       -    $ 129,108

</TABLE>


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


                                       19

<PAGE>

<TABLE>

<CAPTION>

                                                                 THE LEATHER FACTORY, INC.
                                                      CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                                                   FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997



                                   Common Stock                                Notes        Accumulated
                               ----------------------                        receivable         Other      Unearned
                                 Number      Par      Paid-in     Retained   - secured by   Comprehensive    ESOP
                               of shares    value     capital     earnings   common stock   Income (Loss)   shares        Total
                               ----------- --------- ----------- ----------- ------------  ------------- ------------ -----------
<S>                             <C>         <C>      <C>         <C>           <C>         <C>            <C>          <C>

BALANCE, December 31, 1996      9,853,161   $23,648  $4,130,796  $4,464,277    $(269,305)  $      (295)   $(326,184)   $8,022,937

  Payments on notes
  receivable -
       secured by common stock                                                                                    -        11,688
                                        -         -           -           -       11,688             -

  Allocation of suspended ESOP
     shares committed to be                                                                                  52,333         6,452
  released                              -         -     (45,881)          -            -             -

  Warrants issued to acquire
  100,000 shares of common                               35,000           -            -             -            -        35,000
  stock                                 -         -

  Net Income                                                                                                      -        70,292
                                        -         -           -      70,292            -             -

  Translation adjustment                -         -           -           -            -       (13,723)           -       (13,723)

                               ----------- --------- ----------- ----------- ------------ -------------- ----------   -----------

BALANCE, December 31, 1997      9,853,161   $23,648  $4,119,915  $4,534,569   $ (257,617)  $   (14,018)   $(273,851)   $8,132,646

  Comprehensive income for the year ended December 31, 1997  (See table below.)

  Payments on notes
  receivable -
       secured by common stock          -         -           -           -       32,867             -            -        32,867

  Allocation of suspended ESOP
     shares committed to be
      released                          -         -    (258,175)          -            -             -      273,851        15,676


  Warrants issued to acquire
     200,000 shares of common
     stock                              -         -      40,000           -            -             -            -        40,000


  Net Loss                              -         -           -     (39,191)           -             -            -       (39,191)

  Translation adjustment                -         -           -           -            -       (11,720)           -       (11,720)
                               ----------- --------- ----------- ----------- ------------ -------------- ----------   -----------
BALANCE, December 31, 1998      9,853,161   $23,648  $3,901,740  $4,495,378   $ (224,750)  $   (25,738)   $       -    $8,170,278



  Comprehensive loss for the year ended December 31, 1998  (See table below.)


  Payments on notes
  receivable -
       secured by common stock          -         -           -           -       71,334             -            -        71,334


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

  Translation adjustment                -         -           -           -            -         3,757            -         3,757
                               ----------- --------- ----------- ----------- ------------ -------------- ----------   -----------
  BALANCE, December 31, 1999    9,853,161   $23,648  $3,901,740  $4,930,434   $ (153,416)  $   (21,981)   $       -    $8,680,425
                               ==================================================================================================

Comprehensive income for the year ended December 31, 1999 (See table below.)



                                                                            Comprehensive
                                                                            Income (Loss)
                                                                           --------------

BALANCE, December 31, 1996

  Payments on notes
  receivable -
       secured by common stock


  Allocation of suspended ESOP
     shares committed to be
  released

  Warrants issued to acquire
  100,000 shares of common
  stock

  Net Income                                                                     70,292


  Translation adjustment                                                        (13,723)



BALANCE, December 31, 1997
                                                                           -------------
  Comprehensive income for the year ended December 31, 1997                    $ 56,569
                                                                           =============
  Payments on notes
  receivable -
       secured by common stock

  Allocation of suspended ESOP
     shares committed to be
      released


  Warrants issued to acquire
     200,000 shares of common
     stock


  Net Loss                                                                      (39,191)

  Translation adjustment                                                        (11,720)

BALANCE, December 31, 1998


                                                                           -------------
  Comprehensive loss for the year ended December 31, 1998                      $(50,911)
                                                                           =============

  Payments on notes
  receivable -
       secured by common stock


  Net Income                                                                    435,056


  Translation adjustment                                                          3,757

  BALANCE, December 31, 1999


                                                                           -------------
Comprehensive income for the year ended December 31, 1999                      $435,813
                                                                           =============
</TABLE>





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



                                       20


<PAGE>



                            THE LEATHER FACTORY, INC.
                              NOTES TO CONSOLIDATED
                              FINANCIAL STATEMENTS

                        DECEMBER 31, 1999, 1998 AND 1997




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 19 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:

                                                      1999             1998
                                                      ----             ----
        Finished goods held for sale                 $7,629,995       $5,564,406
        Raw Materials and work in process             1,177,968        1,392,200
                                                      ---------        ---------
                                                     $8,807,963       $6,956,606
                                                     ==========       ==========

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 $347,651;  $308,568;  and $303,867 for the years ended
December 31, 1999, 1998 and 1997, respectively.



                                       21

<PAGE>


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 $219,801 in 1999; $218,875 in 1998; and $219,684 in 1997
was recorded in operating expenses.




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 fifteen  months.
Such capitalized  costs are included in other current assets and totaled $29,635
and  $17,809 at  December  31, 1999 and 1998,  respectively.  Total  advertising
expense was $1,040,671 in 1999; $908,432 in 1998; and $1,002,623 in 1997.

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

The FASB has issued SFAS No. 121,  Accounting  for the  Impairment of Long-Lived
Assets and for  Long-Lived  Assets to be Disposed of. SFAS No. 121 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, 1999 and 1998, 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.


                                       22

<PAGE>


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".



Segment Reporting

In 1997,  the FASB  issued  SFAS  No.  131,  Disclosures  About  Segments  of an
Enterprise and Related Information.  SFAS No. 131 requires that a public company
report  annual and  interim  financial  and  descriptive  information  about its
reportable operating segments. Operating segments, as defined, are components of
an enterprise  about which separate  financial  information is available that is
evaluated  regularly by the chief  operating  decision-maker  in deciding how to
allocate resources and in assessing performance. SFAS No. 131 allows aggregation
of similar operating  segments into a single operating segment if the businesses
are considered similar under the criteria of this statement. Management believes
the Company meets the aggregation criteria for its operating segments.

Reclassification

Certain  reclassifications  have been made to  conform  1998 and 1997  financial
statements to the presentation in 1999. The  reclassifications  had no effect on
net income.


3.  NOTES PAYABLE AND LONG-TERM DEBT

On November 19, 1999, the Company  entered into a Credit and Security  Agreement
with Wells Fargo Business Credit, Inc. ("Wells Fargo"),  pursuant to which Wells
Fargo 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.

Proceeds of the closing of the Debt  Facility in the amount of  $6,954,828  were
used to pay all amounts  due and owing by the  Company  pursuant to the Loan and
Security  Agreement,  as amended,  by and between the Company and FINOVA Capital
Corporation ("FINOVA") and the subordinated  convertible debt (the "Subordinated
Debt")  between the  Company  and The  Schlinger  Foundation.  At  closing,  the
Company's  revolving line of credit and term loan  facilities with FINOVA in the
principal amounts of $4,721,925 and $1,171,667,  respectively, were satisfied in
their entirety,  as well as the Subordinated Debt with The Schlinger  Foundation
in the principal amount of $1,000,000.  The Company used the remaining  proceeds
to pay certain closing and financing costs.


<TABLE>

<CAPTION>

At  December  31,  1999 and  1998,  the  amounts  outstanding  under  the  above
agreements and other long-term debt consisted of the following:

                                                                                          1999            1998
                                                                                          ----            ----
<S>                                                                                      <C>              <C>

Credit and Security  Agreement with Wells Fargo -  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 plus 1/2% (9.0% at December 31,
         1999); matures November 30, 2002                                                $5,818,652                -

         Term Note dated November 19, 1999 in the original  principal  amount of
         $150,000 -- $30,000 monthly  principal  payments plus interest at prime
         plus 1/2% (9.0% at December 31, 1999); matures May 1, 2000
                                                                                            150,000                -


                                       23

<PAGE>


Loan and Security Agreement with FINOVA - collateralized by all of the assets of
the  Company as well as a pledge of  3,000,000  shares of the  Company's  common
stock collectively owned by two of the Company's executive officers;  payable as
follows:

     Promissory  Note  (Revolving  Credit  Loan)  dated  November  21, 1997 --
     interest due monthly at prime plus 1%; repaid November 30, 1999                              -       $3,597,988

     Promissory  Note  (Term Loan A) dated  November  21,  1997 in the  original
     principal amount of $400,000 -- $6,667 monthly principal payments plus
     interest at prime plus .75%; repaid November 30, 1999                                        -          320,000

     Promissory  Note  (Term Loan C) dated  November  21,  1997 in the  original
     principal amount of $1,500,000 -- $25,000 monthly principal payments
     plus interest at prime plus 3%; repaid November 30, 1999                                     -        1,200,000

Subordinated Debenture in the original principal amount of $1,000,000; partially
convertible;  secured by a pledge of 2,666,666  shares of the  Company's  common
stock owned by another executive officer - monthly interest
payments at 13%; repaid November 30, 1999                                                         -        1,000,000

Capital  Leases  secured by computer  equipment - total  monthly  principal  and
interest payments of $9,324 at approximately 12% interest; maturing in
February through August of 2002                                                             214,769           82,728
                                                                                     --------------    --------------
                                                                                          6,183,421        6,200,716
Less - Current maturities (see below)                                                     6,061,735        6,139,327
                                                                                     --------------    --------------
                                                                                           $121,686       $   61,389
                                                                                     ==============    ==============
</TABLE>

The  current  portion  of  long-term  debt for 1999  includes  the  Wells  Fargo
Revolving  Credit Loan of $5,818,652,  although this  obligation does not mature
until November 30, 2002. The  classification of this debt was attributable to an
accounting rule that requires a revolving  credit agreement that includes both a
subjective  acceleration  clause and a requirement  to maintain an  arrangement,
whereby cash collections from the borrower's  customers directly reduce the debt
outstanding,  to be classified as a short-term  obligation (Emerging Issues Task
Force Issue 95-22).  A covenant of the Credit Facility is that  collections from
customers are to be deposited into a cash collateral  account that directly pays
down the  Revolving  Credit  Loan.  The balance in this  account  comprises  the
restricted cash on the Company's balance sheet.  Because of this arrangement and
the  fact  that  the  credit  agreement  contains  a  clause  that  would  allow
acceleration of payment of the debt in case of a "material adverse change", this
rule applies. Management does not believe that any such acceleration will occur.

The  Company  periodically  has  outstanding  letters  of credit  for  inventory
purchase  commitments  with terms  ranging from sight to 90 days. As of December
31, 1999, there were no letters of credit outstanding.

Pursuant to the Credit and  Security  Agreement  with Wells  Fargo,  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, 1999 was $508,410.

The terms of the Credit  Facility  contain  various  covenants which among other
things  require the  Company to maintain a certain  level of income and book net
worth, limit capital  expenditures,  and require the maintenance of certain debt
service  coverage  ratios.  Other covenants  prohibit the Company from incurring
indebtedness  except as  permitted  by the terms of the  Credit  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.

Scheduled  maturities of the Company's  notes payable and long-term  debt are as
follows:

                              2000                            $  243,083
                              2001                               108,661
                              2002                             5,831,677
                              2003                                     -
                                                           -------------
                                                             $ 6,183,421
                                                           =============

                                       24

<PAGE>

<TABLE>

<CAPTION>


4.  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  death,  disability  or
retirement. Vested benefits are payable upon termination of employment.

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.  Contributions made during 1994 and
1995 in the amount of $99,962 and $226,222, respectively, represented securities
acquisition loans. In accordance with SOP 93-6,  securities purchased with these
loans were recorded as unearned ESOP shares.  The unearned ESOP share account is
reduced by the cost of the shares  when they are  committed  to be  released  to
participants  as payments are made on the loans using the principal and interest
method.  Compensation  expense is measured  using the average  fair market value
when  shares  are  committed  to  be  released  to  the  employee.  The  Company
contributed   $208,214;   $125,408;   and  $50,910  in  cash  as  current   year
contributions  to the  plan  during  1999,  1998  and  1997,  respectively,  and
recognized compensation expense related to these payments of $208,214;  $42,046;
and $53,968 in 1999, 1998, and 1997, respectively.  Furthermore,  on January 21,
1999, the Company made an additional  contribution to the Plan for December 1998
in the  amount  of  $261,920.  As a result  of this  contribution,  the  Company
recognized an additional compensation expense of $10,538 during 1998 relating to
the Plan.

The  following  table  summarizes  the number of shares held by the Plan and the
market value as of December 31, 1999, 1998 and 1997:

                                No. of Shares                             Market Value
                                -------------                             ------------
                          1999      1998      1997            1999         1998         1997
                          -----     ----      ----            ----          ---         ----
<S>                    <C>        <C>        <C>         <C>             <C>           <C>

       Allocated        598,132   692,606    652,609        $486,281     $ 173,152     $ 326,305
       Unearned               -         -     54,262               -             -        27,131
                      ------------------------------     ---------------------------------------
        Total           598,132   692,606    706,871        $486,281     $ 173,152     $ 353,436
                      ==============================     =======================================

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


5.  INCOME TAXES


The provision for income taxes consists of the following:

                                              1999                 1998                1997
                                              ----                 ----                ----
      Current provision (benefit):
                   Federal                  $ 370,053           $ (60,240)          $ 174,469
                    State                     207,171             (12,340)             39,918
                                         ------------        ------------        ------------
                                              577,224             (72,580)            214,387
                                         ------------        ------------        ------------
      Deferred provision (benefit):
                   Federal                    (2,373)             (10,900)             14,185
                    State                           -              (2,044)              2,660
                                         ------------        ------------        ------------
                                              (2,373)             (12,944)             16,845
                                         ------------        ------------        ------------
                                            $ 574,851           $ (85,524)          $ 231,232
                                         ============        ============        ============


</TABLE>


                                       25

<PAGE>

<TABLE>
<CAPTION>

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

                                                                        1999                1998
                                                                        ----                ----
<S>                                                              <C>                   <C>

Deferred income tax assets:
          Allowance for doubtful accounts                                $ 66,453              $ 18,562
          Capitalized inventory costs                                      85,175                71,366
          Accrued expenses, reserves, and other                             8,537                12,084
          Net operating loss carryforwards                                      -                88,000
                                                                 -----------------     -----------------

          Total deferred income tax assets                                160,165               190,012
                                                                 -----------------     -----------------

Deferred income tax liabilities:
          Property and equipment depreciation                              83,598                99,332
          Goodwill and other intangible assets amortization                11,337                 9,753
          Tax effect of translation adjustment and other                    2,845                     -
                                                                 -----------------     -----------------

          Total deferred income tax liabilities                            97,780               109,085
                                                                 -----------------     -----------------

          Net deferred tax asset (liability)                             $ 62,385              $ 80,927
                                                                 =================     =================

The effective tax rate differs from the statutory rate as follows:
                                                                       1999      1998     1997
                                                                       ----      ----     ----
               Statutory rate                                           34%      (34%)     34%
               State and local taxes                                    20%       (7%)     10%
               Non-deductible goodwill amortization                      8%       67%      26%
               ESOP transaction                                          0%     (112%)      0%
               Other                                                    (5%)      17%       7%
                                                                       ----      ----     ----
               Effective rate                                           57%     (69%)      77%
                                                                       ====     =====     ====

6.  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 March 2000 to September
2004.  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, 1999, 1998
and 1997, was $1,047,882; $1,017,491; and $1,036,892, respectively.

Capital Leases

The Company leases certain  computer  equipment under capital lease  agreements.
Assets  subject to the  agreements  totaling  $346,601  and $129,108 and related
accumulated  depreciation  of $108,608  and $42,838 are included in property and
equipment as of December 31, 1999 and 1998, respectively.

Commitments

Future minimum lease payment under capital and noncancelable operating leases at
December 31, 1999 were as follows:
                                                                              Capital        Operating
                                                                               Leases          Leases
                                                                               ------          ------
     Year ending December 31:
                                     2000                                     $ 108,898      $ 980,561
                                     2001                                       111,058        878,762
                                     2002                                        32,837        837,270
                                     2003                                             -        511,697
                                     2004                                             -        143,759
                                                                           -------------   -----------
     Total minimum lease payments                                               252,793     $3,352,049
                                                                                           ===========
     Less amount representing interest                                           38,024
                                                                           -------------
     Present value of net minimum capital lease payments                        214,769
     Less current installments of minimum capital lease payments                 93,083
                                                                           -------------
     Long-term capital lease obligations, excluding current installments      $ 121,686
                                                                           =============
</TABLE>

                                       26
<PAGE>

<TABLE>
<CAPTION>


Litigation

The  Company  has  litigation  in  the  ordinary  course  of  its  business  and
operations. The Company does not expect the outcome of any current litigation to
have a material impact on its financial position and results of operations.

7.       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 1999, 1998 and 1997,  sales to the Company's five largest  customers
represented 19%, 18% 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, 1999 and 1998,  29% and 24%,  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.

8.  EARNINGS PER SHARE

The following table sets forth the computation of basic and diluted earnings per share:
                                                                1999               1998             1997
                                                                ----               ----             ----
<S>                                                     <C>               <C>               <C>

Numerator:
      Net income (loss)                                   $     435,056     $     (39,191)    $      70,292
                                                        ----------------  ----------------- ----------------
      Numerator for basic and diluted earnings per
      share                                                     435,056           (39,191)           70,292


Denominator:
      Denominator for basic earnings per share --
      weighted-average shares                                 9,853,161          9,803,887        9,789,358

Effect of dilutive securities:
      Stock options                                               5,019                  -               25
      Warrants                                                   31,918                  -            2,182
                                                        ----------------  ----------------- ----------------
Dilutive potential common shares                                 36,937                  -            2,207
                                                        ----------------  ----------------- ----------------


                                       27

<PAGE>


      Denominator for diluted earnings per share --
      adjusted weighted-average shares and assumed
      conversions                                             9,890,098          9,803,887        9,791,565
                                                        ================  ================= ================

      Basic earnings per share                           $         0.04    $         (0.00)   $        0.01

                                                        ================  ================= ================

      Diluted earnings per share                         $         0.04    $         (0.00)   $        0.01
                                                        ================  ================= ================



For  additional  disclosures  regarding  the  employee  stock  options  and  the
warrants,  see note 9.  Unexercised  employee  and  director  stock  options  to
purchase  150,000 and 543,000 shares of common stock as of December 31, 1999 and
1998,  respectively,  were not included in the  computations of diluted earnings
per share  ("EPS")  because the  options'  exercise  prices were greater than or
equal to the  average  market  prices of the common  stock and,  therefore,  the
effect would be  antidilutive.  The net effect of  converting  stock  options to
purchase  447,000  shares of common stock at option prices less than the average
market prices has been included in the  computation  of diluted EPS for the year
ended December 31, 1999.


9.  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.

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, 1999,  1998 and 1997,  there were 647,000;
557,000; and 534,000;  respectively,  in un-optioned shares available for future
grants.

A summary of stock option  transactions  for the years ended  December 31, 1999,
1998 and 1997, is as follows:

                                                 1999                     1998                     1997
                                       -----------------------    ----------------------   ----------------------
                                                     Weighted                  Weighted                 Weighted
                                                     Average                   Average                   Average
                                         Option      Exercise       Option     Exercise      Option     Exercise
                                         Shares       Price         Shares      Price        Shares       Price
                                       ------------ -----------   ----------- -----------   ----------  ----------
   Outstanding at January 1                543,000      $0.758       566,000      $0.874      510,000     $ 2.653
   Granted *                                10,000       0.690       108,000       0.500      456,000       0.805
   Forfeited or expired                  (100,000)       0.656     (131,000)       1.047        -           -
   Exchanged *                              -           -             -           -         (400,000)       3.063
   Exercised                                -           -             -           -             -           -
                                       ------------ -----------   ----------- -----------   ----------  ----------
   Outstanding at December 31              453,000      $0.779       543,000      $0.758      566,000     $ 0.874
                                       ============ ===========   =========== ===========   ==========  ==========

   Exercisable at end of year              318,000      $0.813       255,000      $0.838      190,000     $ 0.908
                                       ============ ===========   =========== ===========   ==========  ==========
   Weighted-average fair value of
    options granted during year             $ 0.45                    $ 0.31                   $ 0.31
                                       ============               ===========               ==========

</TABLE>

                                       28

<PAGE>

<TABLE>
<CAPTION>


* In 1997, options  originally granted in 1995 were canceled and reissued.  This
action was taken to provide  incentive  to and in order to retain the  Company's
key management  personnel in light of the severe decline in the market price for
the Company's common stock.

The  following  table  summarizes  outstanding  options  into groups  based upon
exercise price ranges at December 31, 1999:

                                        Options Outstanding                        Options Exercisable
                               -------------------------------------    --------------------------------------
<S>                            <C>           <C>          <C>             <C>           <C>        <C>

                                             Weighted     Weighted                       Weighted    Weighted
                                              Average     Average                        Average     Average
                                  Option     Exercise     Maturity           Option      Exercise    Maturity
   Exercise Price Range           Shares       Price      (Years)            Shares       Price      (Years)
   --------------------
                               ------------- ----------  -----------      ------------- ----------- -----------
       $0.75 or Less                 97,000    $ 0.578         8.21             32,000      $0.590        8.10


    More than $0.75 and
      Less Than $1.00               350,000      0.813         6.25            280,000       0.813        6.25

      More than $1.00                 6,000      2.021         6.42              6,000       2.021        6.42
                               ------------- ----------  -----------      ------------- ----------- -----------
                                    453,000    $ 0.779         6.67            318,000     $ 0.813        6.44
                               ============= ==========  ===========      ============= =========== ===========


Pro forma information  regarding net income (loss) and earnings (loss) 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 5.88% in 1999;  5.00% in 1998;  and  6.64% in 1997;  dividend
yields of 0% for all years;  volatility factors of .851 for 1999; .693 for 1998,
and .550 for 1997; and an expected life of the valued options of 5 years for all
years other than the  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:

                                                                1999              1998              1997
                                                            ------------    ------------       ------------
Pro forma net income (loss)                                   $  277,780      $ (310,098)        $  (76,117)

Pro forma net income (loss) per common share                  $     0.03      $    (0.02)        $   (0.01)

Pro forma net income (loss) per common share--Assuming
Dilution                                                      $     0.03      $    (0.02)        $   (0.01)

</TABLE>

Warrants

In connection with the issuance of the Subordinated  Debenture discussed in note
3 above,  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.  The fair value for
these warrants was estimated at the date of grant using the Black Scholes option
pricing model with the following  assumptions:  risk-free interest rate of 6.5%;
dividend yield of 0%; volatility factor of .550; and an expected life of 3 years

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. The fair value for these warrants was estimated at
the  date of grant  using  the  Black  Scholes  option  pricing  model  with the
following  weighted-average  assumptions:   risk-free  interest  rate  of  5.0%;
dividend  yield of 0%;  volatility  factor of .645;  and an  expected  life of 3
years.


                                       29

<PAGE>

<TABLE>
<CAPTION>


Notes Receivable Secured by Common Stock

During 1996,  the Company  purchased  certain  notes from  NationsBank  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 1997, are due from certain  individuals  including officers
and other  members  of  management,  require  monthly  payments,  and  mature on
December 31, 2000.


10.  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.


11.  QUARTERLY FINANCIAL DATA (UNAUDITED)

                                           First           Second             Third           Fourth
            1999                         Quarter          Quarter           Quarter          Quarter
-----------------------------  ----------------------------------------------------------------------
<S>                                  <C>              <C>                <C>              <C>

Net sales                            $ 5,513,000      $ 6,539,950        $7,625,169       $7,486,280
Gross profit                           2,358,889        2,813,768         3,445,060        3,638,914
Net income (loss)                       (92,191)            6,708           272,565          247,974
Net income (loss) per
common share:
           Basic                          (0.01)                -              0.03             0.02
          Diluted                         (0.01)                -              0.03             0.02
Weighted average number
of common shares
outstanding:
           Basic                       9,853,161        9,853,161         9,853,161        9,853,161
          Diluted                      9,853,161        9,859,988         9,889,734        9,934,809

                                           First           Second             Third           Fourth
            1998                         Quarter          Quarter           Quarter          Quarter
-----------------------------  ----------------------------------------------------------------------
Net sales                            $ 5,710,832      $ 5,471,463       $ 5,628,895      $ 5,352,804
Gross profit                           2,414,694        2,426,840         2,482,248        2,411,888
Net income (loss)                       (88,528)                              5,914           76,967
                                                         (33,544)
Net income (loss) per common share:
           Basic                          (0.01)                -                 -             0.01
          Diluted                         (0.01)                -                 -             0.01
Weighted average number
of common shares
outstanding:
           Basic                       9,799,404        9,802,259         9,805,385        9,808,501
          Diluted                      9,799,404        9,802,259         9,805,385        9,808,501

</TABLE>





                                       30

<PAGE>

<TABLE>

<CAPTION>



                            THE LEATHER FACTORY, INC.
                  SCHEDULE II - ALLOWANCE FOR DOUBTFUL ACCOUNTS
                  YEARS ENDED DECEMBER 31, 1999, 1998 and 1997


                                                                      1999             1998             1997
                                                                      ----             ----             ----
<S>                                                                <C>                <C>            <C>

           Balance at beginning of year                               $ 52,000       $ 28,000       $ 54,000
             Additions (reductions) charged to income                  157,000          3,000         (4,000)
             Balances written off, net of recoveries                  (32,000)         21,000        (22,000)
                                                                   -------------------------------------------
           Balance at end of year                                     $ 177,000      $ 52,000       $ 28,000
                                                                   ===========================================


</TABLE>




















                                       31

<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, 1999 and 1998,  and the related  consolidated
statements of operations,  stockholders'  equity, and cash flows for each of the
two years then ended. 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  generally   accepted  auditing
standards. 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,  1999 and 1998,  and the  consolidated
results  of its  operations  and its cash  flows for each of the two years  then
ended, in conformity with generally accepted accounting principles. 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 8, 2000


                                       32

<PAGE>



                         REPORT OF INDEPENDENT AUDITORS



The Board of Directors
The Leather Factory, Inc.

We  have  audited  the  accompanying   consolidated   statements of  operations,
stockholders'  equity, and cash flows of The Leather Factory,  Inc. for the year
ended  December  31,  1997.  Our audit 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
audit.

We conducted our audit in accordance with auditing standards  generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable  assurance about whether the financial  statements are free
of material misstatement. 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 audit  provides a  reasonable  basis for our
opinion.

In our opinion, the consolidated  financial statements referred to above present
fairly,  in all material  respects,  the consolidated  results of operations and
cash flows of The Leather Factory, Inc. for the year ended December 31, 1997, 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.


ERNST & YOUNG LLP


Fort Worth, Texas
March 4, 1998


                                       33

<PAGE>


                                    PART III


Item 10.  Directors and Executive Officers of the Registrant.

         Information  required by this item is  incorporated by reference to the
material  appearing  under the heading  "Election of Directors"  and  "Executive
Officers of the Company" in the Proxy  Statement for the 2000 Annual  Meeting of
Stockholders.

Item 11.  Executive Compensation.

         Information  required by this item is  incorporated by reference to the
material  appearing  under the  heading  "Executive  Compensation"  in the Proxy
Statement for the 2000 Annual Meeting of Stockholders.

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

         Information  required by this item is  incorporated by reference to the
material  appearing under the heading "Security  Ownership of Certain Beneficial
Owners and Management" and "Certain Transactions" in the Proxy Statement for the
2000 Annual Meeting of Stockholders.

Item 13.  Certain Relationships and Related Transactions.

         Information  required by this item is  incorporated by reference to the
material  appearing  under  the  heading  "Certain  Transactions"  in the  Proxy
Statement for the 2000 Annual Meeting of Stockholders.


                                     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 16, 1999,  the Company  filed a report on Form 8-K (Items 5
and 7(c)) describing the Credit and Security Agreement with WFBC.


                                       34

<PAGE>


                                   SIGNATURES

         In accordance  with 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 15, 2000                        By:  /s/ Wray Thompson
        --------------                         ---------------------------------
                                                       Wray Thompson
                                               Chairman of the Board, President,
                                               Chief Executive Officer, and
                                               Chief Accounting Officer

         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                  Chairman of the Board       March 15, 2000
-----------------------------
Wray Thompson


/s/ Ronald C. Morgan                Director                    March 15, 2000
-----------------------------
Ronald C. Morgan


/s/ Robin L. Morgan                 Director                    March 15, 2000
-----------------------------
Robin L. Morgan


/s/ William M. Warren               Director                    March 15, 2000
-----------------------------
William M. Warren


/s/ H.W. Markwardt                  Director                    March 15, 2000
-----------------------------
H. W. Markwardt


/s/ Joseph R. Mannes                Director                    March 15, 2000
-----------------------------
Joseph R. Mannes


/s/ Anthony C. Morton               Director                    March 15, 2000
-----------------------------
Anthony C. Morton


/s/ John Tittle, Jr.                Director                    March 15, 2000
-----------------------------
John Tittle, Jr.



                                       35

<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.

         4.1      Loan and Security  Agreement  dated  November 21, 1997, by and
                  between The Leather Factory, Inc., a Delaware corporation, The
                  Leather  Factory,  Inc.,  a  Texas  corporation,  The  Leather
                  Factory,  Inc.,  an  Arizona  corporation,  Hi-Line  Leather &
                  Manufacturing  Company,  a  California  corporation,  Roberts,
                  Cushman & Company,  Inc., a New York  corporation,  and FINOVA
                  Capital  Corporation,  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 February 6, 1998, and  incorporated by reference
                  herein.

         4.2      Revolving  Note  (Revolving  Credit  Loan) dated  November 21,
                  1997, in the principal  amount of  $7,000,000,  payable to the
                  order of FINOVA Capital Corporation, which matures December 1,
                  1999 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 February 6,
                  1998, and incorporated by reference herein.

         4.3      Term Loan A Note (Term Loan A) dated November 21, 1997, in the
                  principal  amount of $400,000,  payable to the order of FINOVA
                  Capital  Corporation,  which matures December 1, 1999 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 February 6, 1998,  and
                  incorporated by reference herein.

         4.4      Term Loan C Note (Term Loan C) dated November 21, 1997, in the
                  principal amount of $1,500,000, payable to the order of FINOVA
                  Capital  Corporation,  which matures December 1, 1999 filed as
                  Exhibit 4.5 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 February 6, 1998,  and
                  incorporated  by  reference   herein.

         4.5      Subordination  Agreement  dated  November  21,  1997,  by  and
                  between FINOVA Capital Corporation,  The Schlinger Foundation,
                  The Leather Factory, Inc., a Delaware corporation, The Leather
                  Factory, Inc., a Texas corporation, The Leather Factory, Inc.,
                  an  Arizona  corporation,   Hi-Line  Leather  &  Manufacturing
                  Company,  a California  corporation,  and  Roberts,  Cushman &
                  Company,  Inc., a New York corporation filed as Exhibit 4.6 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 February 6, 1998, and  incorporated by
                  reference herein.

         4.6      Pledge  Agreement  dated  November  21,  1997,  by and between
                  Ronald  C.  Morgan  and Robin L.  Morgan  and  FINOVA  Capital
                  Corporation filed as Exhibit 4.7 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 February
                  6, 1998, and incorporated by reference herein.

         4.7      Patent  Security  Agreement  dated  November 21, 1997,  by and
                  between The Leather Factory, Inc., a Delaware corporation, The
                  Leather  Factory,  Inc.,  a  Texas  corporation,  The  Leather
                  Factory,  Inc.,  an  Arizona  corporation,  Hi-Line  Leather &
                  Manufacturing  Company,  a  California  corporation,  Roberts,
                  Cushman & Company,  Inc., a New York  corporation,  and FINOVA
                  Capital Corporation filed as Exhibit 4.8 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
                  February 6, 1998, and incorporated by reference herein.





                                       36

<PAGE>

                   THE LEATHER FACTORY, INC. AND SUBSIDIARIES
                            EXHIBIT INDEX (CONTINUED)
        Exhibit
        Number                 Description
        -------                -----------

         4.8      Trademark  Security  Agreement dated November 21, 1997, by and
                  between The Leather Factory, Inc., a Delaware corporation, The
                  Leather  Factory,  Inc.,  a  Texas  corporation,  The  Leather
                  Factory,  Inc.,  an  Arizona  corporation,  Hi-Line  Leather &
                  Manufacturing  Company,  a  California  corporation,  Roberts,
                  Cushman & Company,  Inc., a New York  corporation,  and FINOVA
                  Capital Corporation filed as Exhibit.4.9 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
                  February 6, 1998, and incorporated by reference herein.

         4.9      Copyright  Security  Agreement dated November 21, 1997, by and
                  between The Leather Factory, Inc., a Delaware corporation, The
                  Leather  Factory,  Inc.,  a  Texas  corporation,  The  Leather
                  Factory,  Inc.,  an  Arizona  corporation,  Hi-Line  Leather &
                  Manufacturing  Company,  a  California  corporation,  Roberts,
                  Cushman & Company,  Inc., a New York  corporation,  and FINOVA
                  Capital  Corporation  filed  as  Exhibit  4.10 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 February 6, 1998, and  incorporated by reference
                  herein.

         4.10     Promissory Note  (Subordinated  Debenture)  dated November 14,
                  1997, in the principal  amount of  $1,000,000,  payable to the
                  order of The Schlinger  Foundation,  which matures December 1,
                  1999 filed as Exhibit  4.11 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 February
                  6, 1998, and incorporated by reference herein.

         4.11     Pledge and Security  Agreement dated November 14, 1997, by and
                  between The Schlinger  Foundation  and J. Wray  Thompson,  Sr.
                  filed as Exhibit 4.12 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 February 6, 1998,
                  and incorporated by reference herein.

         4.12     Amendment to Loan and Security  Agreement  dated May 13, 1998,
                  by  and  between  The  Leather   Factory,   Inc.,  a  Delaware
                  corporation,  The Leather Factory,  Inc., a Texas corporation,
                  The Leather  Factory,  Inc., an Arizona  corporation,  Hi-Line
                  Leather &  Manufacturing  Company,  a California  corporation,
                  Roberts, Cushman & Company, Inc., a New York corporation,  and
                  FINOVA Capital Corporation effective as of March 31,1998 filed
                  as Exhibit  4.15 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 on May 15, 1998, and
                  incorporated by reference herein.

         4.13     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.

         4.14     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.

         4.15     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.



                                       37
<PAGE>



                   THE LEATHER FACTORY, INC. AND SUBSIDIARIES
                            EXHIBIT INDEX (CONTINUED)
     Exhibit
      Number                  Description
      ------                  -----------

         4.16     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.

         4.17     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.

         10.1     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.

         16       Letter  addressed to the  Securities  and Exchange  Commission
                  dated  August 5, 1998,  from the  Company's  former  auditors,
                  Ernst & Young  LLP,  relative  to  their  agreement  with  the
                  statements  made in Item 4 of to the  Current  Report  on Form
                  8-K/A  of The  Leather  Factory,  Inc.  (Commission  File  No.
                  1-12368) filed with the Securities and Exchange  Commission on
                  August 6, 1998, and incorporated by reference herein.

         21.1     Subsidiaries of the Company,  filed as Exhibit No. 22.1 to the
                  1995 Annual Report on Form 10-KSB of The Leather Factory, Inc.
                  (Commission File No.  1-12368),  filed with the Securities and
                  Exchange Commission on March 28, 1996, and incorporated herein
                  by reference.

         *23.1    Consent of Hein + Associates LLP dated March 27, 2000.

         *23.2    Consent of Ernst & Young LLP dated March 27, 2000.

         *27.1    Financial Data Schedule
   ------------
  *Filed herewith.







                                       38


<PAGE>


















                                  EXHIBIT 23.1


















                                       39

<PAGE>







                         CONSENT OF INDEPENDENT AUDITORS



We consent to the incorporation by reference in the Registration Statement (Form
S-8 No.  33-81214)  pertaining to the Employee Stock Ownership Plan and Trust of
The  Leather  Factory,  Inc.  and  the  Registration  Statement  (Form  S-8  No.
333-07147) pertaining to the 1995 Stock Option Plan of The Leather Factory, Inc.
of our report dated February 8, 2000, with respect to the consolidated financial
statements  and  schedule of The Leather  Factory,  Inc.  included in the Annual
Report (Form 10-K) for the year ended December 31, 1999.



 HEIN + ASSOCIATES LLP


 Dallas, Texas
 March 27, 2000














                                       40

<PAGE>














                                  EXHIBIT 23.2

















                                       41


<PAGE>









                    CONSENT OF INDEPENDENT AUDITORS



We consent to the incorporation by reference in the Registration Statement (Form
S-8 No.  33-81214)  pertaining to the Employee Stock Ownership Plan and Trust of
The  Leather  Factory,  Inc.  and  the  Registration  Statement  (Form  S-8  No.
333-07147) pertaining to the 1995 Stock Option Plan of The Leather Factory, Inc.
of our  report  dated  March 4,  1998,  with  respect  to the 1997  consolidated
financial  statements and schedule of The Leather Factory,  Inc. included in the
Annual Report (Form 10-K) for the year ended December 31, 1999.



ERNST & YOUNG LLP


Fort Worth, Texas
March 27, 2000

















                                       42

<PAGE>













                                  EXHIBIT 27.1