<PAGE>   1
[TANDY BRANDS ACCESSORIES, INC. LOGO]


                               ANNUAL REPORT 2001

<PAGE>   2



On the cover:

Early response to our new line of DOCKERS(R) women's
handbags, belts and personal leather goods has
been very enthusiastic. By combining the power of
this amazing brand with innovative designs and
superior materials, we have succeeded in placing
this merchandise line in major retail operations
across the country.

<PAGE>   3


                             LETTER TO SHAREHOLDERS


DEAR SHAREHOLDERS:

Fiscal 2001 was a challenging year for the company in many respects. The soft
economy pressured sales at the consumer level, resulting in difficult retail
conditions for all retailers. The uncertain economic environment particularly
affected our department store and chain retail customers, resulting in lower
than anticipated replenishment orders, causing pressure on our gross margins
and increasing customer allowances. In addition, the tough retail economy
accelerated the continuing consolidation of retailers, forcing some retailers to
sell their businesses and others to declare bankruptcy. This consolidation
clearly impacted Tandy Brands Accessories during fiscal 2001.

But, as we begin the new fiscal year, we are seeing positive responses to
several new programs that were initiated this past year. Among these is the
introduction of our new women's line of DOCKERS(R) hand-bags, personal leather
goods, and belts. This exclusive licensing agreement with Levi Strauss & Co.
gives us a powerful national brand, and, based on early retail results, we are
anticipating annualized sales for this label in the $10 to $13 million range for
fiscal 2002.

We are also enthusiastic about our growing presence inside the drug and grocery
retail markets. Although it is still a relatively small volume base at this
point, we are anticipating a fifty percent sales increase in the coming year.

There is a lot of excitement currently in the women's belt business. After
several seasons of slow sales, the women's and juniors' belt category has
exploded with accelerating consumer interest. We are at the front end of a new
surge in this important category.

In January of 2001 we finalized the acquisition of Stagg Industries, Inc. With
annual sales of approximately $9.5 million, Stagg gives us a nice addition to
our men's and boys' product distribution. Stagg's particular expertise in the
boys' classification provides a strong platform for significant expansion in
this important category. We are happy to report that Stagg's operations have
been smoothly integrated into our Yoakum, Texas, distribution center, and that
this acquisition was immediately accretive to our earnings.

The acquisition of Stagg included a licensing agreement with the WOOLRICH(R)
brand to market men's and women's accessories to the growing outdoor/sporting
goods retail arena. This is yet another avenue of retail distribution for us,
and we are particularly excited about our new line of WOOLRICH(R) handbags to
debut in January of 2002.

Our ROLFS(R) line of men's and women's accessories continued to do well in
better department stores across the United States. Belts, wallets, and handbags
in innovative designs and high quality leather are doing well for many of our
largest customers.

The company's line of all Italian men's belts has had a great deal of success
and 2002 will see an even larger distribution of this handsome merchandise to
upper-end stores throughout the country.

The outstanding effort of many Tandy Brands Accessories' associates in 2001
culminated in two prestigious awards. Target awarded our women's division with a
Vendor Award of Excellence for two separate accessory categories, and our men's
division received a Supplier of the Year award from Wal-Mart for outstanding
performance. These awards reflect our commitment to providing the best product
at the best price on a timely basis to each of our customers.

We believe that we have weathered the worst of the retail economic storm and
that we are all well positioned to enjoy improved performance for fiscal 2002.
We remain aggressive in our pursuit of new products and new brands, and we are
persistent in our work to "raise the bar" for our associates, customers and
shareholders. And, we are especially grateful for your support.


[PICTURE OF JAMES F. GAERTNER & J.S.B. JENKINS]

/s/ JAMES F. GAERTNER
James F. Gaertner (left)
Chairman of the Board

/s/ J.S.B. JENKINS

J.S.B. Jenkins (right)
President and Chief Executive Officer


                                                                               1
<PAGE>   4

Harmony of design, color, texture and
function can be found throughout our
women's line of ROLFS(R) personal leather
goods. Highlighted by extra details
and consumer-friendly features,
this beautiful collection continues
ROLFS(R) reputation for
exceptional value
and style.


2
<PAGE>   5

                                        Cool notes make for an upbeat collection
                                       of ROLFS(R) men's personal leather goods.
                                           This year's offering matches handsome
                                           detail with new textured leathers and
                                                 creative design. Long known for
                                             durability, the ROLFS(R) men's line
                                                continues to evolve as a leading
                                             brand of men's fashion accessories.
                                                     Recent expansions include a
                                                           growing line of men's
                                                                 belts under the
                                                                 ROLFS(R) brand.


                                                                               3
<PAGE>   6

                                               Pop goes the fashion. The women's
                                              and juniors' belt business is hot!
                                                  Driven by pop culture divas in
                                                  the entertainment business and
                                               other fashion trend-setters, this
                                                 category is selling well at all
                                                  levels of retail distribution.
                                                  Tandy Brands Accessories, Inc.
                                                 acts fast to spot and interpret
                                                          these concepts for our
                                                        customers and consumers.


4
<PAGE>   7

                                       Drum beats sound out an exciting grouping
                                     of color-matched women's accessories. Hats,
                                           scarves, bags and other complementary
                                    accessory items coordinate to provide strong
                                      visual statements for retail presentation.
                                       Our merchandising and design teams travel
                                       the globe to discover and source the best
                                                          in affordable fashion.


                                                                               5
<PAGE>   8

Tune into our new line of
boys' accessories. Topping
the chart this year is a strong
statement in camouflage for
boys' and girls' fashion.
Military buckles, nylon
pocket items, reversible
belts and metal grommets
add up to a cool response to
this fast-moving trend. Join
the ranks of an emerging
fashion classification.


6
<PAGE>   9

                        CONSOLIDATED STATEMENTS OF INCOME

                TANDY BRANDS ACCESSORIES, INC. AND SUBSIDIARIES
                    (In thousands, except per share amounts)

<Table>
<Caption>
                                                                                           YEAR ENDED JUNE 30,
                                                                                   2001           2000           1999
                                                                                ---------      ---------      ---------
<S>                                                                             <C>            <C>            <C>
Net sales .................................................................     $ 198,964      $ 189,951      $ 178,373
Cost of goods sold ........................................................       130,032        121,543        112,705
                                                                                ---------      ---------      ---------

  Gross margin ............................................................        68,932         68,408         65,668

Selling, general and administrative expenses ..............................        52,923         49,295         43,995
Depreciation and amortization .............................................         5,224          3,856          3,135
                                                                                ---------      ---------      ---------
  Total operating expenses ................................................        58,147         53,151         47,130
                                                                                ---------      ---------      ---------

Operating income ..........................................................        10,785         15,257         18,538

Interest expense ..........................................................        (3,584)        (3,236)        (3,011)
Royalty and other income and early terminations of license agreements .....            63          1,717            135

Income before provision for income taxes ..................................         7,264         13,738         15,662
Provision for income taxes ................................................         2,824          5,089          5,945
                                                                                ---------      ---------      ---------

  Net income ..............................................................     $   4,440      $   8,649      $   9,717
                                                                                =========      =========      =========

Earnings per common share .................................................     $     .79      $    1.50      $    1.70
                                                                                =========      =========      =========

Earnings per common share-assuming dilution ...............................     $     .79      $    1.49      $    1.67
                                                                                =========      =========      =========

Common shares outstanding .................................................         5,605          5,760          5,725
                                                                                =========      =========      =========

Common shares outstanding-assuming dilution ...............................         5,609          5,811          5,814
                                                                                =========      =========      =========
</Table>

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


                                                                               7
<PAGE>   10

                           CONSOLIDATED BALANCE SHEETS

                TANDY BRANDS ACCESSORIES, INC. AND SUBSIDIARIES
                             (Dollars in thousands)

<Table>
<Caption>
                                                                                                    JUNE 30,
                                                                                            2001                  2000
                                                                                          ---------             ---------
<S>                                                                                       <C>                   <C>
ASSETS
Current assets:
  Cash and cash equivalents .........................................................     $      79             $     661
  Accounts receivable, net of allowances of $1,671 and $1,101 .......................        34,459                31,105
  Inventories .......................................................................        62,335                55,340
  Other current assets ..............................................................         3,829                 3,530
                                                                                          ---------             ---------
    Total current assets ............................................................       100,702                90,636
                                                                                          ---------             ---------

Property, plant and equipment, at cost:
  Buildings .........................................................................         7,227                 6,708
  Leasehold improvements ............................................................         1,444                 1,339
  Machinery and equipment ...........................................................        17,780                14,270
                                                                                          ---------             ---------
                                                                                             26,451                22,317
  Accumulated depreciation ..........................................................       (11,963)               (9,305)
                                                                                          ---------             ---------
    Net property, plant and equipment ...............................................        14,488                13,012
                                                                                          ---------             ---------
Other assets:
  Goodwill, net of accumulated amortization of $6,121 and $5,208 ....................        13,215                11,410
  Other intangibles, net of accumulated amortization of $2,854 and $2,324 ...........         5,877                 6,035
  Other non-current assets ..........................................................         2,702                 1,500
                                                                                          ---------             ---------
    Total other non-urrent assets ...................................................        21,794                18,945
                                                                                          ---------             ---------
                                                                                          $ 136,984             $ 122,593
                                                                                          =========             =========

LIABILITIES AND STOCKHOLDERS EQUITY
Current liabilities:
  Accounts payable ..................................................................     $   9,408             $   6,547
  Accrued payroll and bonuses .......................................................         1,812                 1,824
  Accrued expenses ..................................................................         3,099                 2,180
                                                                                          ---------             ---------
    Total current liabilities .......................................................        14,319                10,551
                                                                                          ---------             ---------

Other liabilities:
  Notes payable .....................................................................        47,400                41,075
  Other non-current liabilities .....................................................         1,130                 1,093
                                                                                          ---------             ---------
    Total other liabilities .........................................................        48,530                42,168
                                                                                          ---------             ---------

Commitments (Note 7)

Stockholders' equity:
  Preferred stock, $1 par value; 1,000,000 shares authorized; none issued ...........            --                    --
  Common stock, $1 par value; 10,000,000 shares authorized;
    5,882,926 shares and 5,808,968 shares issued and outstanding
    as of June 30, 2001 and 2000, respectively ......................................         5,883                 5,809
  Additional paid in capital ........................................................        22,572                22,426
  Retained earnings .................................................................        48,000                43,560
  Cumulative other comprehensive income .............................................          (670)                 (479)
  Treasury stock, at cost ...........................................................        (1,650)               (1,442)
                                                                                          ---------             ---------
    Total stockholders' equity ......................................................        74,135                69,874
                                                                                          ---------             ---------
                                                                                          $ 136,984             $ 122,593
                                                                                          =========             =========
</Table>

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

8
<PAGE>   11

                     CONSOLIDATED STATEMENTS OF CASH FLOWS

                 TANDY BRANDS ACCESSORIES, INC. AND SUBSIDIARIES
                                 (In thousands)

<Table>
<Caption>
                                                                                          YEAR ENDED JUNE 30,
                                                                                  2001           2000           1999
                                                                                ---------      ---------      ---------
<S>                                                                             <C>            <C>            <C>
Cash flows from operating activities:
  Net income ..............................................................     $   4,440      $   8,649      $   9,717
  Adjustments to reconcile net income to net cash
    provided by (used for) operating activities:
      Depreciation ........................................................         3,842          2,259          2,001
      Amortization ........................................................         1,443          1,379          1,287
      Deferred taxes ......................................................          (360)          (779)           677
      Other ...............................................................          (385)           (63)          (139)
  Change in assets and liabilities, net of effects from acquisition:
      Accounts receivable .................................................        (2,291)         2,970         (9,002)
      Accounts receivable purchased from AR Accessories Group, Inc. .......            --             --          3,053
      Inventories .........................................................        (3,737)           919        (12,693)
      Inventory purchased from AR Accessories Group, Inc ..................            --             --          5,137
      Other assets ........................................................        (1,734)        (1,607)           212
      Accounts payable ....................................................         1,962            712           (954)
      Accrued expenses ....................................................          (156)           191         (3,104)
                                                                                ---------      ---------      ---------
  Net cash provided by (used for) operating activities ....................         3,024         14,630         (3,808)
                                                                                ---------      ---------      ---------

Cash flows from investing activities:
  Purchases of property and equipment .....................................        (3,484)        (3,563)        (2,791)
  Acquisition of Stagg Industries, Inc. ...................................        (2,794)            --             --
  Purchase of assets of Torel, Inc. .......................................          (558)            --             --
  Purchase of assets of Frank Spielberg Sales, LLC ........................            --         (3,367)            --
                                                                                ---------      ---------      ---------
  Net cash used for investing activities ..................................        (6,836)        (6,930)        (2,791)
                                                                                ---------      ---------      ---------

Cash flows from financing activities:
  Sale of stock to stock purchase program .................................         1,222          1,441          1,392
  Exercise of employee stock options ......................................           128            190            279
  Purchase of treasury stock ..............................................        (1,641)        (2,500)            --
  Proceeds from borrowings ................................................       128,971         94,670         73,727
  Payments under borrowings ...............................................      (125,450)      (101,020)       (68,902)
                                                                                ---------      ---------      ---------
  Net cash provided by (used for) financing activities ....................         3,230         (7,219)         6,496
                                                                                ---------      ---------      ---------

Net increase (decrease) in cash and cash equivalents ......................          (582)           481           (103)
Cash and cash equivalents at beginning of period ..........................           661            180            283
                                                                                ---------      ---------      ---------

  Cash and cash equivalents at end of period ..............................     $      79      $     661      $     180
                                                                                =========      =========      =========

Supplemental disclosures of cash flow information:
  Cash paid during the year for:
    Interest ..............................................................     $   3,828      $   3,425      $   2,810
    Income taxes ..........................................................         3,304          5,824          4,699
</Table>

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


                                                                               9
<PAGE>   12

                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY

                TANDY BRANDS ACCESSORIES, INC. AND SUBSIDIARIES
                             (Dollars in thousands)

<Table>
<Caption>

                                                                  COMMON STOCK          ADDITIONAL
                                                            -----------------------      PAID IN        RETAINED
                                                              SHARES       AMOUNT        CAPITAL        EARNINGS
                                                            ---------     ---------     ----------     ---------
<S>                                                         <C>           <C>           <C>            <C>
Balance at June 30, 1998 ..............................     5,616,724     $   5,617     $  20,374      $  25,194

Comprehensive income:
  Net income ..........................................            --            --            --          9,717
  Other comprehensive income, net of tax:
    Currency translation adjustments ..................            --            --            --             --

Comprehensive income ..................................

Sale of stock to the Tandy Brands
  Accessories, Inc. Stock Purchase Program ............        87,335            87         1,305             --
Sale of unissued common stock to employees
  for exercise of stock options .......................        57,893            58           221             --
                                                            ---------     ---------     ---------      ---------

Balance at June 30, 1999 ..............................     5,761,952         5,762        21,900         34,911

Comprehensive income:
  Net income ..........................................            --            --            --          8,649
  Other comprehensive income, net of tax:
    Currency translation adjustments ..................            --            --            --             --

Comprehensive income ..................................

Sale of stock to the Tandy Brands
  Accessories, Inc. Stock Purchase Program ............        34,620            35           348             --
Sale of unissued common stock to employees
  for exercise of stock options .......................        12,396            12           178             --
Purchase of treasury stock ............................            --            --            --             --
                                                            ---------     ---------     ---------      ---------

Balance at June 30, 2000 ..............................     5,808,968         5,809        22,426         43,560

Comprehensive income:
  Net income ..........................................            --            --            --          4,440
  Other comprehensive income, net of tax:
    Currency translation adjustments ..................            --            --            --             --
    Cumulative effect of change in accounting
      principle-fair value of interest rate swap ......            --            --            --             --
    Fair value of interest rate swap ..................            --            --            --             --

Comprehensive income ..................................

Sale of stock to the Tandy Brands
  Accessories, Inc. Stock Purchase Program ............            --            --          (211)            --
Sale of unissued common stock to employees
  for exercise of stock options .......................        19,791            20           108             --
Issuance of stock pursuant to the purchase of
  assets of Torel, Inc. ...............................        54,167            54           249             --
Purchase of treasury stock ............................            --            --            --             --
                                                            ---------     ---------     ---------      ---------

Balance at June 30, 2001 ..............................     5,882,926     $   5,833     $  22,572      $  48,000
                                                            =========     =========     =========      =========

<Caption>

                                                            CUMULATIVE
                                                               OTHER              TREASURY STOCK             TOTAL
                                                            COMPREHENSIVE     -----------------------     STOCKHOLDERS
                                                               INCOME          SHARES         AMOUNT         EQUITY
                                                            -------------     --------      ---------     ------------
<S>                                                         <C>               <C>           <C>            <C>
Balance at June 30, 1998 ..............................       $    (344)            --      $      --      $  50,841

Comprehensive income:
  Net income ..........................................              --             --             --          9,717
  Other comprehensive income, net of tax:
    Currency translation adjustments ..................             (37)            --             --            (37)
                                                                                                           ---------
Comprehensive income ..................................                                                        9,680
                                                                                                           ---------
Sale of stock to the Tandy Brands
  Accessories, Inc. Stock Purchase Program ............              --             --             --          1,392
Sale of unissued common stock to employees
  for exercise of stock options .......................              --             --             --            279
                                                              ---------       --------      ---------      ---------

Balance at June 30, 1999 ..............................            (381)            --             --         62,192

Comprehensive income:
  Net income ..........................................              --             --             --          8,649
  Other comprehensive income, net of tax:
    Currency translation adjustments ..................             (98)            --             --            (98)
                                                                                                           ---------
Comprehensive income ..................................                                                        8,551
                                                                                                           ---------
Sale of stock to the Tandy Brands
  Accessories, Inc. Stock Purchase Program ............              --         91,058          1,058          1,441
Sale of unissued common stock to employees
  for exercise of stock options .......................              --             --             --            190
Purchase of treasury stock ............................              --       (247,150)        (2,500)        (2,500)
                                                              ---------       --------      ---------      ---------

Balance at June 30, 2000 ..............................            (479)      (156,092)        (1,442)        69,874

Comprehensive income:
  Net income ..........................................              --             --             --          4,440
  Other comprehensive income, net of tax:
    Currency translation adjustments ..................            (182)            --             --           (182)
    Cumulative effect of change in accounting
      principle-fair value of interest rate swap ......             308             --             --            308
    Fair value of interest rate swap ..................            (317)            --             --           (317)
                                                                                                           ---------
Comprehensive income ..................................                                                        4,249
                                                                                                           ---------
Sale of stock to the Tandy Brands
  Accessories, Inc. Stock Purchase Program ............              --        176,888          1,433          1,222
Sale of unissued common stock to employees
  for exercise of stock options .......................              --             --             --            128
Issuance of stock pursuant to the purchase of
  assets of Torel, Inc. ...............................              --             --             --            303
Purchase of treasury stock ............................              --       (232,807)        (1,641)        (1,641)
                                                              ---------       --------      ---------      ---------

Balance at June 30, 2001 ..............................       $    (670)      (212,011)     $  (1,650)     $  74,135
                                                              =========       ========      =========      =========
</Table>


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


10
<PAGE>   13

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                 TANDY BRANDS ACCESSORIES, INC. AND SUBSIDIARIES

NOTE l - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

THE COMPANY AND BASIS OF PRESENTATION

Tandy Brands Accessories, Inc. (the "Company") designs, manufactures and markets
fine leather goods, handbags and fashion accessories for men, women and
children. The Company sells its products to a variety of retail outlets,
including national chain stores, discount stores, major department stores,
specialty stores, catalog retailers, grocery stores, drug stores and the retail
exchange operations of the United States military.

The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.

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

RECLASSIFICATIONS

Certain prior year amounts have been reclassified to conform to the fiscal 2001
presentation.

CASH AND CASH EQUIVALENTS
The Company considers cash on hand, deposits in banks and short-term investments
with original maturities of less than three months as cash and cash equivalents.

INVENTORIES

Inventories are stated at the lower of cost (principally standard cost which
approximates actual cost on a first-in, first-out basis) or market. Cost
includes materials, direct and indirect labor and factory overhead. Market, with
respect to raw materials, is replacement cost; and for work-in-process and
finished goods, it is net realizable value.

Inventories consist of the following:

<Table>
<Caption>
                                            JUNE 30,
                                      2001            2000
                                   -----------     -----------
<S>                                <C>             <C>
Raw materials ................     $ 4,325,000     $ 3,760,000
Work-in-process ..............         752,000         999,000
Finished goods ...............      57,258,000      50,581,000
                                   -----------     -----------
                                   $62,335,000     $55,340,000
                                   ===========     ===========
</Table>

PROPERTY AND EQUIPMENT

Property and equipment are carried at cost less accumulated depreciation.
Depreciation is calculated at the following rates using the straight-line
method:

<Table>
<S>                               <C>
     Buildings                    3%
     Leasehold improvements       The lesser of the life of the lease or asset
     Machinery and equipment      10% to 33 1/3%
</Table>

Maintenance and repairs are charged to expense as incurred. Renewals and
betterments which materially prolong the useful lives of the assets are
capitalized. The cost and the related accumulated depreciation of property
retired or sold are removed from the accounts, and gains or losses from
retirements and sales are recognized in the consolidated statements of income.

GOODWILL AND OTHER INTANGIBLES

Goodwill and other intangibles are amortized using the straight-line method over
their estimated useful lives ranging from three to forty years. The
weighted-average number of years over which goodwill and other intangibles are
amortized is 19 years. Goodwill and other intangibles are reviewed for
impairment based on estimated future undiscounted cash flows.


                                                                              11
<PAGE>   14

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                TANDY BRANDS ACCESSORIES, INC. AND SUBSIDIARIES

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

REVENUES

The Company recognizes revenue when merchandise is shipped to customers and
title to the goods has passed from the Company to the customer. Sales returns
and allowances are recorded at the time the amounts can be reasonably estimated
by the Company.

The Company performs periodic credit evaluations of its customers' financial
conditions and generally does not require collateral. Credit losses have
historically been within management's expectations.

MAJOR CUSTOMERS

Consolidated net sales to Wal-Mart accounted for approximately 38%, 38% and 39%
of the Company's sales in fiscal 2001, 2000 and 1999, respectively. Both men's
and women's accessories sales include revenues from Wal-Mart. Additionally,
consolidated net sales to Target accounted for approximately 10%, 6% and 6% of
the Company's sales in fiscal 2001, 2000 and 1999, respectively. Women's
accessories sales include revenues from Target. (See Note 14.) No other
customers accounted for 10% or more of total revenues.

STOCK-BASED COMPENSATION

The Company may, with the approval of its Board of Directors, grant stock
options for a fixed number of shares to employees with an exercise price equal
to the fair value of the shares at the date of grant. The Company accounts for
stock option grants in accordance with APB Opinion No. 25, "Accounting For Stock
Issued To Employees," and, accordingly, recognizes no compensation expense for
the stock option grants. The Company has adopted the disclosure-only provisions
as specified by Statement of Financial Accounting Standards ("SFAS") No. 123,
"Accounting For Stock-Based Compensation."

DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

In June 1998, the Financial Accounting Standards Board issued Statement No. 133,
"Accounting for Derivative Instruments and Hedging Activities," and its
amendments, Statements 137 and 138, in June 1999 and June 2000, respectively.
The Statement requires the Company to recognize all derivatives on the balance
sheet at fair value. Derivatives that are not hedges must be adjusted to fair
value through income. If the derivative is a hedge, depending on the nature of
the hedge, changes in the fair value of derivatives are either offset against
the change in fair value of assets, liabilities, or firm commitments through
earnings or recognized in other comprehensive income until the hedged item is
recognized in earnings. The ineffective portion of a derivative's change in fair
value will be immediately recognized in earnings. The adoption of Statement No.
133, as amended, on July 1, 2000, resulted in the cumulative effect of an
accounting change, net of tax, of approximately $308,000 in other comprehensive
income. The Company's risk management policy as it relates to derivative
investments is to mitigate, subject to market conditions, against interest rate
risk. The Company does not enter into any derivative investments for the purpose
of speculative investment. The Company's overall risk management philosophy is
reevaluated as business conditions arise.

IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS

In June 2001, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards No. 141, "Business Combinations," and No. 142,
"Goodwill and Other Intangible Assets," effective for fiscal years beginning
after December 15, 2001. Under the new rules, goodwill will no longer be
amortized but will be subject to annual impairment tests in accordance with the
Statements. Other intangible assets will continue to be amortized over their
useful lives.

The Company will apply the new rules on accounting for goodwill and other
intangible assets beginning in the first quarter of fiscal 2003. Application of
the nonamortization provisions of the Statement is expected to result in an
increase in net income of approximately $625,000 ($0.11 per share) per year.
During fiscal 2003, the Company will perform the first of the required
impairment tests of goodwill and indefinite lived intangible assets as of July
1, 2002, and has not yet determined what the effect of these tests will be on
the earnings and financial position of the Company.

In April 2001, the Emerging Issues Task Force ("EITF") issued a consensus EITF
No. 00-25, "Vendor Income Statement Characterization of Consideration from a
Vendor to a Retailer." EITF No. 00-25 requires that consideration from a vendor
to a reseller of the vendor's products is presumed to be a reduction of the
selling prices of the vendor's products and, therefore, should be characterized
as a reduction of revenue when recognized in the vendor's income statement. The
EITF is effective for fiscal quarters beginning after December 15, 2001.
Effects of the adoption are not expected to materially impact the Company's
consolidated financial position or statements of income, stockholders' equity
and cash flows.


12
<PAGE>   15

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                 TANDY BRANDS ACCESSORIES, INC. AND SUBSIDIARIES

NOTE 2 - ACQUISITIONS

On May 12, 1998, the Company purchased certain assets of AR Accessories Group,
Inc. ("AR") through an auction held in the Bankruptcy Court for the Eastern
District of Wisconsin. The assets included, but were not limited to, wholesale
accounts receivable, wholesale inventory, certain machinery and equipment, the
distribution center located in West Bend, Wisconsin, and related tradenames
including AMITY(R) and ROLFS(R). The cash purchase price of approximately
$18,976,000 was provided by drawing on existing bank lines. The related
tradenames acquired through the auction of approximately $5,866,000 are being
amortized over 20 years. The purchase of such assets did not constitute a
"business" for purposes of Rule 3-05 and Rule 11-01(d) of Regulation S-X of the
Securities and Exchange Commission. As a result, disclosure of pro forma
information giving effect to the purchase of certain assets of AR is not
presented.

On July 16, 1999, the Company purchased certain assets of Frank Spielberg Sales,
LLC ("Spielberg"), a handbag designer and marketer based in St. Louis, Missouri,
for approximately $3.4 million. The cash purchase price was provided by drawing
on existing bank lines. Spielberg supplies proprietary design, marketing and
sourcing expertise for handbags under department store private labels and direct
sales to retailers. The acquisition was accounted for under the purchase method
of accounting and the resultant goodwill of approximately $2,089,000 is being
amortized over 20 years. The pro forma effects of this acquisition are not
material.

On January 18, 2001, the Company acquired all of the outstanding common stock of
Stagg Industries, Inc. ("Stagg") for approximately $2,750,000 in cash plus
contingent consideration of up to $250,000. The cash purchase price was provided
by drawing on existing bank lines. Stagg is a distributor and marketer of men's
and children's belts, neckwear, small leather goods and other accessories to
various department stores and specialty retailers. In conjunction with the
purchase, the Company assumed certain liabilities of which $2,804,000 in bank
indebtedness was immediately retired. The purchase method of accounting was used
for this acquisition and the resultant goodwill of approximately $2,770,000 and
other intangibles related to consideration given for non-compete agreements of
approximately $250,000 are being amortized over 20 and 3 years, respectively.
The pro forma effects of this acquisition are not material.

On April 17, 2001, the Company acquired certain assets of Torel, Inc. ("Torel")
for an aggregate purchase price of $861,000 including acquisition-related costs.
The assets included, but were not limited to, wholesale accounts receivable,
wholesale inventory, certain machinery and equipment, and a 76,000 square foot
building located in Yoakum, Texas. The purchase price was comprised of $558,000
in cash and 54,167 shares of Company issued common stock valued at $303,000.
Torel is a manufacturer and distributor of men's belts and sporting goods
accessories. The purchase method of accounting was used for this acquisition and
the resultant intangibles related to consideration given for non-compete
agreements of approximately $100,000 are being amortized over 7 years. The pro
forma effects of this acquisition are not material.


                                                                              13
<PAGE>   16

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                 TANDY BRANDS ACCESSORIES, INC. AND SUBSIDIARIES

NOTE 3 - EARNINGS PER SHARE

The following sets forth the computation of basic and diluted earnings per share
(in thousands, except per share amounts):

<Table>
<Caption>
                                                                                  YEAR ENDED JUNE 30,
                                                                              2001       2000       1999
                                                                            ------     ------     ------
<S>                                                                         <C>        <C>        <C>
Numerator for basic and diluted earnings per share:
  Net income ..........................................................     $4,440     $8,649     $9,717
                                                                            ======     ======     ======

Denominator:
  Weighted-average shares outstanding .................................      5,592      5,745      5,708
  Contingently issuable shares ........................................         13         15         17
                                                                            ------     ------     ------
    Denominator for basic earnings per share-weighted-average shares ..      5,605      5,760      5,725

Effect of dilutive securities:
  Employee stock options ..............................................          3         42         75
  Director stock options ..............................................          1          9         14
                                                                            ------     ------     ------
    Dilutive potential common shares ..................................          4         51         89

Denominator for earnings per share assuming dilution-adjusted
  weighted-average shares .............................................      5,609      5,811      5,814
                                                                            ======     ======     ======

Earnings per share ....................................................     $  .79     $ 1.50     $ 1.70
                                                                            ======     ======     ======

Earnings per share-assuming dilution ..................................     $  .79     $ 1.49     $ 1.67
                                                                            ======     ======     ======
</Table>

Options to purchase approximately 756,000 shares of common stock at prices
ranging from $6.38-$19.75 per share were outstanding during fiscal year 2001 but
were not included in the computation of earnings per share-assuming dilution
because the options' exercise prices were greater than the average market price
of the common shares and, therefore, the effect would be antidilutive.

NOTE 4 - STOCK REPURCHASE PROGRAM

On October 17, 2000, the Company's Board of Directors approved a plan to
repurchase, from time to time in the open market or through negotiated
transactions, shares of the Company's common stock at an aggregate purchase
price of up to $2,000,000 (the "repurchase program"). This program is an
extension of the $4,000,000 stock repurchase plan the Company initiated on
October 20, 1999, and extended on April 26, 2000. Any open market purchases will
be at prevailing market prices. The timing of any repurchases will depend on
market conditions, market price, and managements assessment of the Company's
liquidity and cash flow needs. Any repurchased shares will be added to the
Company's treasury shares and may be used for the Company's stock plans and
other corporate purposes. The funds required for the repurchases will be
provided from the Company's current cash balances, operating cash flow, or the
Company's credit facility. During fiscal 2001 and 2000, the Company repurchased
232,807 and 247,150 shares of treasury stock under the repurchase program at a
cost of approximately $1,641,000 and $2,500,000, respectively. During fiscal
2001 and 2000, 176,888 and 91,058 shares of treasury stock were reissued to the
Company's employee stock purchase program, respectively.


14
<PAGE>   17

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                 TANDY BRANDS ACCESSORIES, INC. AND SUBSIDIARIES

NOTE 5 - CREDIT ARRANGEMENTS

On June 27, 2001, the Company entered into a committed secured revolving credit
facility ("credit facility") which expires on June 27, 2004, with certain
financial institutions for $80,000,000. Of this amount, $10,000,000 is a
sub-limit of the credit facility ("swing line") which may be used for same day
advances to be provided solely by the administrative agent (a financial
institution) of the credit facility. Both the credit facility and swing line
bear interest at various rates with short-term durations. The credit facility
may be used for borrowings and letters of credit. The credit facility is secured
by essentially all of the assets of the Company and its subsidiaries and
requires the maintenance of certain financial covenants which if not met, could
adversely impact the liquidity of the Company. The Company's existing credit
agreement currently contains covenants that restrict the payment of dividends.
The credit agreement also includes a commitment fee based on certain financial
performance objectives ranging from 25 to 37.5 basis points on the unused
balance. Principal payments on the credit facility are due on the expiration
date. At June 30, 2001, the Company had borrowings under the credit facility of
$44,000,000, bearing interest at 5.75%. At June 30, 2001, the Company had
borrowings under the swing line of $3,400,000, bearing interest at 6.75%. At
June 30, 2001, the Company had no letters of credit or bankers acceptances under
the credit facility. However, at June 30, 2001, the Company had a $5,000,000
standby letter of credit outstanding as security for letters of credit of
$4,942,000 issued by another bank which were used in conjunction with
merchandise procurement.

Prior to June 27, 2001, the Company had an unsecured line of credit with another
bank for $50,000,000. The line was used for borrowings or letters of credit that
bore interest at negotiated rates. Of this amount, $25,000,000 was an
uncommitted facility, which has no expiration date and was due on demand. The
$25,000,000 committed facility was comprised of a $15,000,000 term note and a
$10,000,000 committed revolving credit facility. At June 30, 2000, the Company
had borrowings under the committed facility of $25,000,000, bearing variable
rates of interest approximating 7.81%. At June 30, 2000, the Company had
borrowings under the uncommitted facility of $8,725,000, bearing variable rates
of interest approximating 7.81%. At June 30, 2000, the Company had letters of
credit under the uncommitted facility of $8,613,000, which were used in
conjunction with merchandise procurement. On June 27, 2001, the outstanding
balance of the $50,000,000 unsecured line of credit with another bank was paid
and terminated.

Prior to June 27, 2001,the Company had an unsecured line of credit with another
bank for $40,000,000. Of this amount, $15,000,000 was an uncommitted facility
that bore interest at various rates with short-term durations. The remaining
$25,000,000 was a committed facility that bore interest at negotiated rates.
Each facility was used for borrowings or letters of credit. At June 30, 2000,
the Company had total borrowings under such facilities of $7,350,000, bearing
interest at 8.26%. On June 27, 2001, the outstanding balance of the $40,000,000
unsecured line of credit with another bank was paid and terminated.

The Company also has a Canadian line of credit for approximately $660,000
secured by a letter of credit from a U.S. bank. At June 30, 2001 and 2000, there
were no borrowings under this line of credit.

The Company is subject to interest rate risk on its long-term debt. The Company
manages its exposure to changes in interest rates by the use of variable and
fixed interest rate debt. In addition, the Company has hedged its exposure to
changes in interest rates on a portion of its variable debt by entering into an
interest rate swap agreement to lock in a fixed interest rate for a portion of
these borrowings. During fiscal 1999, the Company entered into a five-year
interest rate swap agreement, which expires on November 17, 2003, converting
$15,000,000 of outstanding indebtedness from a variable to a fixed interest
rate. The average receive rate is based on a 90-day LIBOR rate. At June 30,
2001, the receive and pay rates related to the interest rate swap were 5.10% and
6.52%, respectively. Interest differentials to be paid or received because of
the swap agreement are reflected as an adjustment to interest expense over the
related debt period. The interest rate swap agreement represents a valid cash
flow hedge investment under Statement No. 133. As such, during fiscal 2001,
changes in the fair value of the interest rate swap were recognized to other
comprehensive income with the fair value at June 30, 2001, approximating
($15,000). The potential impact of market conditions on the fair value of the
Company's indebtedness is not expected to be material. Given that such lines of
credit bear interest at floating market interest rates, the fair value of
amounts borrowed thereunder approximates carrying value. On July 1, 2001, the
Company entered into a new interest rate swap agreement. (See Note 13.)

At June 30, 2001, the Company had borrowings under its credit lines of
$47,400,000 bearing a weighted-average interest rate of 5.82%.

At June 30, 2001, the Company had credit availability under its credit facility
of approximately $26.9 million.

Under the above credit facilities, future payments required for debt maturities
will be $47,400,000 in fiscal year 2004.


                                                                              15
<PAGE>   18

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                 TANDY BRANDS ACCESSORIES, INC. AND SUBSIDIARIES

NOTE 6 - INCOME TAXES

Significant components of the Company's deferred tax assets and liabilities as
of June 30, 2001 and 2000, are as follows:

<Table>
<Caption>
                                                 2001             2000
                                             -----------      -----------
<S>                                          <C>              <C>
Deferred tax assets:
  Accounts receivable valuation ........     $   406,000      $   335,000
  Inventory valuation ..................       1,785,000        1,486,000
  Other, net ...........................         654,000          580,000
                                             -----------      -----------
    Total deferred tax assets ..........       2,845,000        2,401,000
                                             -----------      -----------

Deferred tax liabilities:
  Goodwill and other intangibles .......        (846,000)        (884,000)
  Depreciation .........................        (147,000)         (25,000)
                                             -----------      -----------
    Total deferred tax liabilities .....        (993,000)        (909,000)
                                             -----------      -----------

Net deferred tax asset .................     $ 1,852,000      $ 1,492,000
                                             ===========      ===========
</Table>

Significant components of the provision for income taxes are as follows:

<Table>
<Caption>
                                            2001             2000             1999
                                        -----------      -----------      -----------
<S>                                     <C>              <C>              <C>
Current:
  Federal .........................     $ 2,918,000      $ 5,483,000      $ 4,676,000
  Foreign .........................          12,000           64,000           79,000
  State and local .................         254,000          321,000          513,000
                                        -----------      -----------      -----------
                                          3,184,000        5,868,000        5,268,000
                                        -----------      -----------      -----------

Deferred:
  Federal .........................        (333,000)        (740,000)         662,000
  State and local .................         (27,000)         (39,000)          15,000
                                        -----------      -----------      -----------
                                           (360,000)        (779,000)         677,000
                                        -----------      -----------      -----------

    Income tax provision ..........     $ 2,824,000      $ 5,089,000      $ 5,945,000
                                        ===========      ===========      ===========
</Table>

The following table reconciles the statutory federal income tax rate to the
effective income tax rate:

<Table>
<Caption>
                                                                   2001        2000        1999
                                                                   ----        ----        ----
<S>                                                                <C>         <C>         <C>
Statutory rate .............................................       34.0%       34.0%       34.0%
State and local taxes, net of federal income tax benefit ...        2.1%        1.4%        2.1%
Other, net .................................................        2.8%        1.6%        1.9%
                                                                   ----        ----        ----
                                                                   38.9%       37.0%       38.0%
                                                                   ====        ====        ====
</Table>


16
<PAGE>   19

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                 TANDY BRANDS ACCESSORIES, INC. AND SUBSIDIARIES

NOTE 7 - COMMITMENTS

The Company leases property which includes office, manufacturing and warehouse
facilities under operating leases, expiring through the year 2009 with varying
renewal and escalation clauses. Rental expense for fiscal 2001, 2000 and 1999
totaled $2,199,000, $1,814,000 and $1,648,000, respectively.

The Company has entered into licensing agreements with other companies for the
purpose of using their trademarks on the Company's products. Royalty expense
related thereto for fiscal 2001, 2000 and 1999 totaled $984,000, $1,354,000 and
$1,534,000, respectively.

Future minimum rental and royalty commitments as of June 30, 2001, are as
follows:

<Table>
<Caption>
FISCAL YEAR                                 AMOUNT
-----------                              -----------
<S>                                      <C>
2002..........................           $ 2,852,000
2003..........................             2,693,000
2004..........................             1,919,000
2005..........................               978,000
2006..........................             1,026,000
Thereafter....................             2,531,000
                                         -----------
                                         $11,999,000
                                         ===========
</Table>

NOTE 8 - TERMINATIONS OF LICENSE AGREEMENTS

On November 9, 1999, the Company and Jones Apparel Group amended their existing
licensing agreement. Under the amended agreement the Company will continue to
design and market men's belts and personal leather goods as well as women's
small leather goods under various JONES NEW YORK(R) brands but will no longer
design and market women's handbags under any JONES NEW YORK(R) brands. As
compensation for the early termination of women's handbag license rights, Jones
Apparel Group paid the Company $1,500,000 in cash, of which a portion was used
to wind down functions related to the license arrangements. Consequently, the
results for fiscal 2000 include a one-time benefit, net of related costs, of
$1,000,000 from the amendment of this licensing agreement.

On March 3, 2000, the Company and Jones Apparel Group amended their existing
licensing agreement. Under the amended agreement the Company will continue to
design and market men's small leather goods and belts under various JONES NEW
YORK(R) brands but will no longer design and market women's small leather goods
under any JONES NEW YORK(R) brands. As compensation for the early termination of
the small leather goods license rights, Jones Apparel Group paid the Company
$800,000 in cash. Additionally, Jones Apparel Group reimbursed the Company for
its on-hand small leather goods inventory of approximately $950,000.
Consequently, the results for fiscal 2000 include a one-time benefit, net of
related costs, of $600,000 from the termination of this licensing agreement.


                                                                              17
<PAGE>   20

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                 TANDY BRANDS ACCESSORIES, INC. AND SUBSIDIARIES

NOTE 9 - EMPLOYEE STOCK OPTIONS

The Company has adopted various stock option incentive plans for officers and
key management employees. All options will be granted at the market price as of
the date of grant and have a contractual life of ten years. Options are
generally exercisable annually at a rate of 33% per year beginning one year
after the grant date. At June 30, 2001 and 2000, the number of shares available
for grant were 325,264 and 448,054, respectively. The following table reflects
the employee stock option transactions subsequent to June 30, 1998:

<Table>
<Caption>
                                          NUMBER       WEIGHTED-AVERAGE
                                        OF SHARES       EXERCISE PRICE
                                        ---------      ----------------
<S>                                     <C>            <C>
Outstanding at June 30, 1998 ......      435,879            $11.08

Options granted ...................      122,500            $17.25
Options exercised .................      (50,150)           $ 4.38
Options canceled or expired .......      (12,875)           $13.80
                                         -------
Outstanding at June 30, 1999 ......      495,354            $13.22

Options granted ...................      149,500            $15.45
Options exercised .................       (8,200)           $ 7.97
Options canceled or expired .......      (34,700)           $16.07
                                         -------
Outstanding at June 30, 2000 ......      601,954            $13.96

Options granted ...................      169,500            $ 8.38
Options exercised .................      (15,526)           $ 2.74
Options canceled or expired .......           --            $   --
                                         -------
Outstanding at June 30, 2001 ......      755,928            $12.94
                                         =======

Exercisable at June 30, 2001 ......      453,750            $13.52
                                         =======
</Table>

The following table as of June 30, 2001, segregates outstanding options into
groups based on price ranges of less than and more than $10 per share:

<Table>
<Caption>
                                                       $6.38-$9.25    $10.33-$19.75
                                                       -----------    -------------
<S>                                                    <C>            <C>
All outstanding options:
  Number of shares ...............................         286,900         469,028
  Weighted-average exercise price ................     $      8.17     $     15.86
  Weighted-average remaining contractual life ....       8.1 years       6.3 years

Exercisable options:
  Number of shares ...............................         114,720         339,030
  Weighted-average exercise price ................     $      7.84     $     15.45
</Table>

Pro forma information regarding net income and earnings per share is required by
SFAS No. 123, "Accounting for Stock-Based Compensation," and has been determined
as if the Company had accounted for its stock options under the fair value
method of that statement. 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 for fiscal 2001, 2000 and 1999: dividend yield of
0.0%; expected volatility of 0.356%, 0.375% and 0.55% for fiscal 2001, 2000 and
1999, respectively; a risk-free interest rate of 6.69%, 7.25% and 6.42% for
fiscal 2001, 2000 and 1999, respectively; and an expected holding period of
seven years. Using these assumptions for the options granted during fiscal 2001,
2000 and 1999, the weighted-average grant date fair value of such options was
$4.36, $8.80 and $10.87, respectively.


18
<PAGE>   21

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                 TANDY BRANDS ACCESSORIES, INC. AND SUBSIDIARIES

NOTE 9 - EMPLOYEE STOCK OPTIONS (continued)

The Black-Scholes valuation models are used in estimating the fair value of
traded options that have no vesting restrictions and are fully transferable. In
addition, option valuation models require the input of highly subjective
assumptions, including the expected stock price volatility and the average life
of options. Because the Company's stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
managements opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its stock options.

For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense on a straight-line basis over the options' vesting
period. The Company's pro forma information follows:

<Table>
<Caption>
                                                     2001          2000          1999
                                                  ---------     ---------     ---------
<S>                                               <C>           <C>           <C>
Net income:
  As reported ...............................     $   4,440     $   8,649     $   9,717
  Pro forma .................................     $   3,715     $   7,939     $   9,137

Earnings per share:
  As reported ...............................     $    0.79     $    1.50     $    1.70
  Pro forma .................................     $    0.66     $    1.38     $    1.60

Earnings per share-assuming dilution:
  As reported ...............................     $    0.79     $    1.49     $    1.67
  Pro forma .................................     $    0.66     $    1.37     $    1.57
</Table>

NOTE 10 - NON-EMPLOYEE DIRECTOR STOCK PLANS

In fiscal 1995, the stockholders of the Company adopted the Tandy Brands
Accessories, Inc. 1995 Stock Deferral Plan for Non-Employee Directors (the
"Deferral Plan"). The Deferral Plan was established to provide non-employee
directors an equity interest in the Company in order to attract and retain
well-qualified individuals to serve as non-employee directors and to enhance the
identity of interests between the non-employee directors and the stockholders of
the Company. The Deferral Plan provides the directors with an election to defer
the receipt of their annual and committee chair retainer fees until a future
date determined by each director. The payment of such fees will be in the form
of shares of the Company's common stock. The shares are calculated by dividing
the deferred cash amount by the average closing price of the stock for each day
of the period during which such cash amount would have been paid but for the
deferral election. The Company records compensation expense for the amount of
the directors' retainer fees. The Company benefits from cash retained when
directors elect to defer their retainer fees and receive stock. The Deferral
Plan provides for the granting of up to 50,000 shares of the Company's common
stock to non-employee directors. The Deferral Plan became active in May 1996.
During fiscal 2001, 2000 and 1999, there were 5,084, 6,258 and 6,673 shares
issued to directors, respectively. Amounts recorded as compensation expense
related to the Deferral Plan for fiscal 2001, 2000 and 1999 were $30,080,
$25,447 and $65,021, respectively.

The Company offers other stock incentive plans for non-employee directors. In
conjunction with these plans, 95,258 options were outstanding as of June 30,
2001. The options range in price from $6.50 to $19.00 and are generally
exercisable at a rate of 33% per year beginning one year after the grant date.
During fiscal 2001, 2000 and 1999, options totaling 4,112, 4,125 and 23,227 were
exercised, respectively.

NOTE 11 - EMPLOYEE BENEFIT PLANS

The Tandy Brands Accessories, Inc. Employees Investment Plan (the "401(k) Plan")
is open to substantially all full-time employees who have completed one year of
service. Under the 401(k) Plan, an eligible employee may contribute up to 10% of
their annual compensation to the 401(k) Plan on a pre-tax basis. The Company, at
its discretion, matches 100% of employee contributions up to 5% of their
compensation. The 401(k) Plan allows participant investment direction of both
employee and matching employer contributions from a variety of investment
alternatives, one of which is the Company's common stock. All contributions made
to the Plan prior to July 1, 2000, are fully vested and are held in a fund
invested primarily in Company common stock.


                                                                              19
<PAGE>   22

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                 TANDY BRANDS ACCESSORIES, INC. AND SUBSIDIARIES

NOTE 11 - EMPLOYEE BENEFIT PLANS (continued)

The Tandy Brands Accessories, Inc. Stock Purchase Program (the "Program") is
open to all full-time employees who are enrolled in the Tandy Brands
Accessories, Inc. Employees Investment Plan. Under the Program, participant's
may contribute 5% or l0% of their earnings, with the Company matching 25% or 50%
of each participant's contribution depending on their length of employment.
The Program purchases treasury stock, if available (see Note 4), or unissued
common stock directly from the Company at monthly average market prices. The
participant's shares are fully vested upon purchase, the employee may withdraw
at any time and the shares purchased under the Program are distributed to
participants annually.

Total Company contributions to these plans were approximately $921,000,
$1,406,000 and $1,129,000 in fiscal 2001, 2000 and 1999, respectively.

NOTE 12 - PREFERRED STOCK AND PREFERRED SHARE PURCHASE RIGHTS

PREFERRED STOCK

The Company's Board of Directors is authorized to approve the issuance of
preferred stock without further stockholder approval. The Board of Directors of
the Company is also authorized to determine, without any further action by the
holders of the Company's common stock, the dividend rights, dividend rate,
conversion or exchange rights, voting rights, rights and terms of redemption,
liquidation preferences and sinking fund terms of any series of preferred stock,
the number of shares constituting any series of preferred stock and the
designation thereof. No shares of preferred stock have been issued.

In connection with the adoption of its Preferred Share Purchase Rights Plan (the
"Rights Plan"), the Company has designated and reserved for issuance upon
exercise of such rights 150,000 shares of Series A Junior Participating
Cumulative Preferred Stock.

Should the Board of Directors elect to exercise its authority to issue any
additional series of preferred stock, the rights, preferences and privileges of
holders of the Company's common stock would be made subject to the rights,
preferences and privileges of such additional series.

PREFERRED SHARE PURCHASE RIGHTS

Prior to the spin-off of the Company, the Board of Directors authorized the
Rights Plan. In conjunction with the spin-off, each share of the Company's
common stock was distributed with one preferred share purchase right
(collectively, the "Rights") which entitles the registered holder to purchase
from the Company one one-hundredth (1/100) of a share of Series A Junior
Participating Cumulative Preferred Stock at a price of $36 per one one-hundredth
of a share, subject to adjustment. The Rights Plan is designed to deter coercive
or unfair takeover tactics and to prevent an acquirer from gaining control of
the Company without offering a fair price to all of the Company's stockholders.
The Rights will cause substantial dilution to a person or group that attempts to
acquire the Company on terms not approved by the Company's Board of Directors,
except pursuant to an offer conditioned upon a substantial number of Rights
being acquired. The description and terms of the Rights are set forth in a
Rights Agreement between the Company and BankBoston N.A., as Rights Agent.

On November 2, 1999, the Board of Directors renewed the Company's stockholder
Rights Plan. A new amended and restated plan was adopted in the normal course of
updating and extending the predecessor stockholder Rights Plan, which was
scheduled to expire on December 31, 2000, and not in response to any acquisition
proposal. The expiration date of the Rights Plan has been extended to October
19, 2009. The amended plan was altered to reflect prevailing stockholder Rights
Plan terms, such as lowering the share ownership level which triggers the
exercise of the Rights and eliminating the continuing director provision. The
amended plan provides for an increase in the exercise price of the Rights under
the plan from $36.00 to $70.00. Accordingly, the Company filed the amended and
restated plan on Form 8-K with the Securities and Exchange Commission on
November 2, 1999.

NOTE 13 - SUBSEQUENT EVENT

On July 1, 2001, the Company entered into a three-year interest rate swap
agreement with the administrative agent (see Note 5), which expires on June 27,
2004, converting $30,000,000 of outstanding indebtedness from a variable to a
fixed interest rate. The average receive rate is based on a 90-day LIBOR rate.
At July 1, 2001, the receive and pay rates related to the interest rate swap
were 3.79% and 5.60%, respectively. In connection with the new swap agreement,
the $15,000,000 swap agreement dated November 17, 1998, was assigned to the
administrative agent and terminated by the Company.


20
<PAGE>   23

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                 TANDY BRANDS ACCESSORIES, INC. AND SUBSIDIARIES

NOTE 14 - DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION

The Company sells its products to a variety of retail outlets, including mass
merchants, national chain stores, major department stores, men's and women's
specialty stores, catalog retailers, grocery stores, drug stores and the retail
exchange operations of the United States military. The Company and its
corresponding customer relationships are organized along men's and women's
product lines. As a result, the Company has two reportable segments: (1) men's
accessories consisting of belts, wallets, suspenders and other small leather
goods and (2) women's accessories consisting of belts, wallets, handbags, socks,
scarves, hats and hair accessories. General corporate expenses are allocated to
each segment based on the respective segment's asset base. Depreciation and
amortization expense related to assets recorded on the Company's corporate
accounting records are allocated to each segment as described above. Management
measures profit or loss on each segment based upon income or loss before taxes
utilizing the accounting policies consistent in all material respects with those
described in Note 1. No intersegment revenue is recorded.

Information regarding operations and assets by segment are as follows:

<Table>
<Caption>
                                                             YEAR ENDED JUNE 30,
                                                     2001           2000           1999
                                                  ---------      ---------      ---------
<S>                                               <C>            <C>            <C>
Revenue from external customers:
  Men's accessories .........................     $ 111,935      $ 111,332      $ 105,909
  Women's accessories .......................        87,029         78,619         72,464
                                                  ---------      ---------      ---------
                                                  $ 198,964      $ 189,951      $ 178,373
                                                  =========      =========      =========

Operating income/(loss)(1):
  Men's accessories .........................     $  11,336      $  14,296      $  13,769
  Women's accessories .......................          (551)           961          4,769
                                                  ---------      ---------      ---------
                                                     10,785         15,257         18,538

Interest expense ............................        (3,584)        (3,236)        (3,011)
Other income(2) .............................            63          1,717            135
                                                  ---------      ---------      ---------

Income before income taxes ..................     $   7,264      $  13,738      $  15,662
                                                  =========      =========      =========

Depreciation and amortization expense:
  Men's accessories .........................     $   3,170      $   2,348      $   2,190
  Women's accessories .......................         2,054          1,508            945
                                                  ---------      ---------      ---------
                                                  $   5,224      $   3,856      $   3,135
                                                  =========      =========      =========

Capital expenditures:
  Men's accessories .........................     $     909      $     266      $     957
  Women's accessories .......................           839          1,573            266
  Corporate .................................         2,386          1,945          1,568
                                                  ---------      ---------      ---------
                                                  $   4,134      $   3,784      $   2,791
                                                  =========      =========      =========

Total assets:
  Men's accessories .........................     $  70,464      $  61,546      $  63,261
  Women's accessories .......................        50,388         45,948         45,281
  Corporate .................................        16,132         15,099         11,596
                                                  ---------      ---------      ---------
                                                  $ 136,984      $ 122,593      $ 120,138
                                                  =========      =========      =========
</Table>

(1) Operating income/(loss) consists of net sales less cost of sales and
    specifically identifiable selling, general and administrative expenses.

(2) Other income includes royalty income on corporate tradenames, the early
    terminations of license agreements (see Note 8) and other income not
    specifically identifiable to a segment.


                                                                              21
<PAGE>   24

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                 TANDY BRANDS ACCESSORIES, INC. AND SUBSIDIARIES

NOTE 15 - RELATED PARTY TRANSACTIONS

During fiscal 2001, 2000 and 1999, the Company purchased inventory of
approximately $47,798,000, $41,775,000 and $30,700,000, respectively, from a
supplier who is a principal shareholder of the Company. The merchandise is
purchased at amounts which the Company believes approximate fair market value.
Although the potential exposure for product flow interruption may be significant
in the event of the loss of such supplier, this exposure is mitigated in that
the inventory may be purchased from various other sources.

NOTE 16 - SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)

The summarized quarterly financial data (in thousands, except per share amounts)
for the two years ended June 30, 2001, is set forth below:

<Table>
<Caption>
                                                             FIRST       SECOND        THIRD       FOURTH
                                                            QUARTER      QUARTER      QUARTER      QUARTER
                                                            --------     --------     -------    --------
<S>                                                         <C>          <C>          <C>          <C>
FISCAL 2001
Net sales .............................................     $ 54,184     $ 56,757     $ 42,444     $ 45,579
Gross profit ..........................................       18,896       20,190       14,869       14,977
Income before income taxes ............................        3,328        4,636          633       (1,333)
Net income ............................................        2,035        2,848          388         (831)
Earnings per common share .............................     $    .36     $    .51     $    .07     $   (.15)
Earnings per common share-assuming dilution ...........     $    .36     $    .51     $    .07     $   (.15)

FISCAL 2000
Net sales .............................................     $ 53,256     $ 57,566     $ 39,686     $ 39,443
Gross profit ..........................................       18,884       21,665       14,021       13,838
Income before income taxes ............................        4,522        8,000        1,096          120
Net income ............................................        2,768        4,893          671          317
Earnings per common share .............................     $    .48     $    .84     $    .12     $    .06
Earnings per common share-assuming dilution ...........     $    .47     $    .83     $    .12     $    .06
</Table>

Income before income taxes includes the net benefit realized from the early
terminations of license agreements of $1,000,000 and $600,000 recognized during
the second and third quarters of fiscal 2000, respectively.



22
<PAGE>   25

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                 TANDY BRANDS ACCESSORIES, INC. AND SUBSIDIARIES


To the Board of Directors of Tandy Brands Accessories, Inc.


We have audited the accompanying consolidated balance sheets of Tandy Brands
Accessories, Inc. and subsidiaries as of June 30, 2001 and 2000, and the related
consolidated statements of income, stockholders' equity and cash flows for each
of the three years in the period ended June 30, 2001. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the 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 audits provide a reasonable basis for our
opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Tandy Brands
Accessories, Inc. and subsidiaries at June 30, 2001 and 2000, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended June 30, 2001, in conformity with accounting
principles generally accepted in the United States.

/s/ ERNST & YOUNG LLP

Fort Worth, Texas
August 10, 2001

                                                                              23

<PAGE>   26

         MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
                              RESULTS OF OPERATIONS

                 TANDY BRANDS ACCESSORIES, INC. AND SUBSIDIARIES

GENERAL

Tandy Brands Accessories, Inc. (the "Company") is a leading designer,
manufacturer and marketer of branded men's, women's and children's accessories,
including belts and small leather goods such as wallets. The Company's product
line also includes handbags, socks, scarves, gloves, hats, hair accessories and
suspenders. The Company's merchandise is marketed under a broad portfolio of
nationally recognized licensed and proprietary brand names, including
DOCKERS(R), JONES NEW YORK(R), FLORSHEIM(R), PERRY ELLIS(R), ROLFS(R),
HAGGAR(R), WOOLRICH(R), JORDACHE(R), BUGLE BOY(R), CANTERBURY(R), PRINCE
GARDNER(R), PRINCESS GARDNER(R), AMITY(R), DON LOPER(R), ACCESSORY DESIGN
GROUP(R), TEX TAN(R) and TIGER(R), as well as private brands for major retail
customers. The Company sells its products through all major retail distribution
channels throughout the United States and Canada, including mass merchants,
national chain stores, department stores, men's and women's specialty stores,
catalogs, grocery and drug stores.

The Company seeks increased accessory sales and earnings through a variety of
means, including increased sales through the Company's current operating units
as well as growth through acquisition of similar businesses. During the third
and fourth quarters of fiscal 2001, the Company acquired all of the outstanding
common stock of Stagg Industries, Inc. ("Stagg") and purchased certain assets of
Torel, Inc. ("Torel"), respectively. See Note 2 to the consolidated financial
statements.

Sales and gross margin data from the Company's segments for fiscal 2001 compared
to the previous two fiscal years were as follows:

<Table>
<Caption>
                                                       YEAR ENDED JUNE 30,
                                                  2001        2000        1999
                                                --------    --------    --------
                                                    (Dollars in thousands)
<S>                                             <C>         <C>         <C>
Net sales:
  Men's accessories .........................   $111,935    $111,332    $105,909
  Women's accessories .......................     87,029      78,619      72,464
                                                --------    --------    --------
Total net sales .............................   $198,964    $189,951    $178,373
                                                ========    ========    ========

Gross margin:
  Men's accessories .........................   $ 43,748    $ 44,216    $ 42,110
  Women's accessories .......................     25,184      24,192      23,558
                                                --------    --------    --------
Total gross margin ..........................   $ 68,932    $ 68,408    $ 65,668
                                                ========    ========    ========

Gross margin as percentage of sales:
  Men's accessories .........................       39.1%       39.7%       39.8%

  Women's accessories .......................       28.9%       30.8%       32.5%

  Total .....................................       34.7%       36.0%       36.8%
</Table>

See Note 14 to the consolidated financial statements for certain other financial
information with regard to the Company's men's and women's accessories segments.

24
<PAGE>   27

         MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
                             RESULTS OF OPERATIONS

                TANDY BRANDS ACCESSORIES, INC. AND SUBSIDIARIES


FISCAL 2001 COMPARED TO FISCAL 2000

NET SALES

Net sales increased $9.0 million, or 4.7%, in fiscal 2001 as compared to fiscal
2000. The overall increase was attributable to higher sales volume in existing
women's product lines and sales from Stagg Industries, Inc., acquired during
fiscal 2001. Net sales of men's accessories increased 0.5% in fiscal 2001
compared to fiscal 2000. The increase was due to sales of $4.2 million
contributed from the Company's acquisition of Stagg, which offset sales
shortfalls experienced by the Company's core men's business due to the weak
department store and chain retail environment as well as the discontinuation of
business of several retail customers as a result of industry consolidation,
store closures and bankruptcies. Net sales of women's accessories increased
10.7% in fiscal 2001 as compared to fiscal 2000. The increase was due to higher
mass merchant accessories sales and $2.0 million in initial shipments of
DOCKERS(R) women's belts, small leather goods and handbags.

GROSS MARGIN

Gross margins increased $524,000, or 0.8%, in fiscal 2001 as compared to fiscal
2000. As a percentage of sales, gross margins decreased 1.3% in fiscal 2001
compared to fiscal 2000. Men's gross margins decreased $468,000, or 1.1%, which
was offset by an increase in women's gross margins of $992,000, or 4.1%,
respectively, in fiscal 2001 as compared to fiscal 2000. As a percentage of
sales, men's and women's gross margins decreased 0.6% and 1.9%, respectively, in
fiscal 2001 as compared to fiscal 2000. This overall decrease was the result of
a greater sales mix of mass merchant sales and a 30.3% increase in customer
allowances and discounts as compared to the prior fiscal year. The rise in
customer allowances and discounts during fiscal 2001 was attributable to
increased competition with substantial pricing pressure in the retail
environment, especially in the sales of women's accessories to the Company's
mass merchant customers.

OPERATING EXPENSES

Selling, general and administrative expenses increased $3.6 million, or 7.4%, in
fiscal 2001. As a percentage of sales, selling, general and administrative
expenses increased 0.6%. The increase resulted from the recording of $650,000 of
additional bad debt expense related to the bankruptcy of a significant customer
during the fourth quarter of fiscal 2001 as well as a $575,000 increase in
advertising expense in fiscal 2001 as compared to the same period in the prior
year.

Interest expense for the fiscal year ended 2001 increased $0.3 million, as
compared to the same period for the prior year. The increase is primarily
related to higher average debt levels in fiscal 2001.

Depreciation and amortization expenses were approximately $5.2 million in fiscal
2001, compared to approximately $3.9 million in fiscal 2000. The 35.5% increase
was primarily attributable to depreciation on capital expenditures related to
leasehold improvements and equipment for the new distribution facility in
Dallas, Texas, for women's accessories as well as additional computer hardware
and software applications.

The effective tax rates for fiscal 2001 and fiscal 2000 were 38.9% and 37.0%,
respectively. The effective tax rate in fiscal 2001 increased due primarily to
higher effective tax rates on state and local taxes.

Net income for fiscal 2001 decreased 48.7% to $4.4 million, or $0.79 per diluted
share, compared to net income of $8.7 million, or $1.49 per diluted share, for
fiscal 2000. On March 3, 2000 and November 9, 1999, the Company negotiated an
early termination of its JONES NEW YORK(R) handbag and small leather goods
licensing agreements, respectively. See Note 8 to the consolidated financial
statements. Excluding the net benefit of the early license termination realized
during the second and third quarter of fiscal 2000, net income for the twelve
months ended fiscal 2000 was $7.6 million, or $1.32 per diluted share. The
decrease in fiscal 2001 net income was primarily due to a lower margin sales mix
of women's accessories and increased sales allowances and discounts.


FISCAL 2000 COMPARED TO FISCAL 1999

NET SALES

Net sales increased $11.6 million, or 6.5%, in fiscal 2000 as compared to fiscal
1999. The overall increase was attributable to higher sales volume in existing
men's product lines and sales from the purchase of assets of Spielberg. Although
the Company achieved consistent core growth in men's accessories, the overall
sales increase did not offset decreases in women's small leather goods sales
resulting in a 4.2% decrease in women's core product sales as compared to the
prior fiscal year. The lower than expected sales were caused primarily by a
decline in small leather goods reorders by our customers as a result of soft
holiday retail sales and decreased women's accessories trend item sales as
compared to the same period last year. Additionally, sales were impacted by the
discontinuation of business of several retail customers as a result of industry
consolidation, store closures, bankruptcies, as well as delays in replenishment
orders from a key mass merchant customer incurred during the fourth quarter of
fiscal 2000. These sales pressures


                                                                              25
<PAGE>   28

         MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
                              RESULTS OF OPERATIONS

                 TANDY BRANDS ACCESSORIES, INC. AND SUBSIDIARIES


were primarily concentrated on our women's accessory business including our
small leather goods, belts and trend item product categories. During fiscal
2000, the Spielberg handbag sales contributed $9.2 million to the overall $11.6
million sales increase which was offset partially by decreases in women's core
business sales. The remaining sales increase was attributable to sales growth
from the Company's existing men's businesses.

GROSS MARGIN

Gross margins increased $2.7 million, or 4.2%, in fiscal 2000 as compared to
fiscal 1999. As a percentage of sales, gross margins decreased 0.8% in fiscal
2000 compared to fiscal 1999. This overall decrease was the result of a greater
sales mix of mass merchant and private label handbag sales and larger inventory
markdowns as compared to the prior fiscal year. Additionally, fiscal 2000 gross
margins were impacted by inventory markdowns of approximately $1,651,000, of
which $895,000 was recognized during the fourth quarter as compared to $511,000
in fiscal 1999. The markdowns related primarily to women's fashion trend items.
Management closely monitors fashion trend items and anticipates additional
inventory markdowns if market indicators in fashion trends justify further
reserves. Men's and women's gross margins increased $2.1 million, or 5.0%, and
$0.6 million, or 2.7%, respectively, in fiscal 2000 as compared to fiscal 1999.
As a percentage of sales, men's and women's gross margins decreased 0.1% and
1.7%, respectively, in fiscal 2000 as compared to fiscal 1999. The men's gross
margin decrease was attributable to a higher sales mix of mass merchant sales
compared to the prior year. The women's gross margin decrease was the result of
the liquidation of JONES NEW YORK(R) handbag inventory due to the early
termination of the JONES NEW YORK(R) license, increased sales of private label
handbags (see Note 8 to the consolidated financial statements), higher mass
merchant sales and inventory markdowns as compared to the same periods in the
prior year.

OPERATING EXPENSES

Selling, general and administrative expenses increased $5.6 million, or 12.8%,
in fiscal 2000. As a percentage of sales, selling, general and administrative
expenses increased 1.4%. The increase resulted from the timing of the wind down
of the JONES NEW YORK(R) handbag product line, the launch of the ROLFS(R)
handbag line, increased advertising allowances as well as increased levels of
selling, general and administrative expenses in anticipation of higher sales
volume.

Interest expense for the fiscal year ended 2000 increased $0.2 million, as
compared to the same period for the prior year. The increase is primarily
related to higher weighted-average interest rates as compared to the same period
in the prior year.

Depreciation and amortization expenses were approximately $3.5 million in fiscal
2000, compared to approximately $3.1 million in fiscal 1999. The 12.2% increase
was primarily attributable to capital expenditures related to the Company's
management information and distribution software systems installed during fiscal
1999 and the amortization of goodwill recorded in connection with the Spielberg
acquisition.

The effective tax rates for fiscal 2000 and fiscal 1999 were 37.0% and 38.0%,
respectively. The effective tax rate in fiscal 2000 decreased due to a lower
effective tax rate on state and local taxes.

Net income for fiscal 2000 decreased 11.0% to $8.7 million, or $1.49 per diluted
share, compared to net income of $9.7 million, or $1.67 per diluted share, for
fiscal 1999. On March 3, 2000 and November 9, 1999, the Company negotiated an
early termination of its JONES NEW YORK(R) handbag and small leather goods
licensing agreements, respectively. See Note 8 to the consolidated financial
statements. Excluding the net benefit of the early license termination realized
during the second and third quarter of fiscal 2000, net income for the twelve
months decreased 21.4% to $7.6 million, or $1.32 per diluted share, from the
same period in the prior year.


LIQUIDITY AND CAPITAL RESOURCES

During fiscal 2001, the Company's operating activities provided cash of $3.0
million compared to $14.6 million for fiscal 2000. The decrease was attributable
to lower net income and higher inventory and customer display purchases.

The Company used cash for investing activities of $6.8 million in fiscal 2001
compared to $6.9 million in fiscal 2000. During the third and fourth quarters of
fiscal 2001, the Company acquired all of the outstanding common stock of Stagg
Industries, Inc. and purchased certain assets of Torel, Inc. using cash of $2.8
million and $0.6 million, respectively. See Note 2 to the consolidated financial
statements. During fiscal 2001, the Company invested a total of $3.5 million in
additional property and equipment. Capital expenditures for fiscal 2001 included
additional equipment for the Company's distribution facility in Dallas, Texas,
as well as additional hardware and software applications.

The Company's primary sources of liquidity for its various expenditures have
been cash flows from operations and borrowings under bank credit arrangements.
The Company has an $80,000,000 committed secured revolving credit facility which
can be


26
<PAGE>   29

         MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
                              RESULTS OF OPERATIONS

                 TANDY BRANDS ACCESSORIES, INC. AND SUBSIDIARIES


used for general corporate purposes, including working capital requirements,
acquisition activities and funding of letters of credit. The credit facility
secured by essentially all of the assets of the Company and its subsidiaries
requires the maintenance of certain financial covenants, which if not met, could
adversely impact the liquidity of the Company. See Note 5 to the consolidated
financial statements. The Company also has a Canadian line of credit for
approximately $660,000 secured by a letter of credit from a U.S. bank. As of
June 30, 2001, the Company had credit availability under its credit facilities
of approximately $26.9 million.

The Company examines the carrying value of its excess of cost over net assets
acquired (Goodwill) and other intangible assets as current events and
circumstances warrant to determine whether there are any impairment losses. If
indicators of impairment were present in intangible assets used in operations
and future cash flows were not expected to be sufficient to recover the assets'
carrying amount, an impairment loss would be charged to expense in the period
identified. No event has been identified that would indicate an impairment of
the value of material intangible assets recorded in the consolidated financial
statements.

The Company has never paid a cash dividend on its common stock. The Company
currently intends to retain its earnings for the foreseeable future to provide
funds for the expansion of its business. The Company's existing credit agreement
currently contains covenants that restrict the payment of dividends.

See Note 1 to the consolidated financial statements for a discussion of the
impact of recently issued accounting standards.

See Note 4 to the consolidated financial statements for a discussion of the
Company's stock repurchase program.

The Company believes it has adequate financial resources and access to
sufficient credit facilities to satisfy its future working capital needs.


SEASONALITY

The Company's quarterly sales and net income results are fairly consistent
throughout the fiscal year, with a seasonal increase during the second quarter.


INFLATION

Although the Company's operations are affected by general economic trends, the
Company does not believe that inflation has had a material effect on the
operating results of the Company during the past three fiscal years.


FORWARD-LOOKING STATEMENTS

This Management's Discussion and Analysis of Financial Condition and Results of
Operations and other sections of this annual report contain forward-looking
statements that are based on current expectations, estimates and projections
about the industry in which the Company operates, management's beliefs and
assumptions made by management. In addition, other written or oral statements
which constitute forward-looking statements may be made by, or on behalf of, the
Company. Words such as "expects", "anticipates", "intends", "plans", "believes",
"seeks", "estimates", or variations of such words and similar expressions are
intended to identify such forward-looking statements. These statements are not
guarantees of future performance and involve certain risks, uncertainties and
assumptions which are difficult to predict. Therefore, actual outcomes and
results may differ materially from what is expressed or forecasted in such
forward-looking statements. The Company undertakes no obligation to update
publicly any forward-looking statements, whether as a result of new information,
future events or otherwise.

                                                                              27

<PAGE>   30

                             SELECTED FINANCIAL DATA

                 TANDY BRANDS ACCESSORIES, INC. AND SUBSIDIARIES
                    (In thousands, except per share amounts)

<Table>
<Caption>
                                                                 YEAR ENDED JUNE 30,
                                                  2001       2000       1999       1998       1997
                                                --------   --------   --------   --------   --------
<S>                                             <C>        <C>        <C>        <C>        <C>
INCOME STATEMENT DATA:
Net sales ...................................   $198,964   $189,951   $178,373   $135,041   $102,507
Gross profit ................................     68,932     68,408     65,668     48,921     38,258
Operating income ............................     10,785     15,257     18,538     13,002      8,385
Interest expense ............................      3,584      3,236      3,011      1,517      1,242
Net income ..................................      4,440      8,649      9,717      7,237      4,564
Net income per share:
  Earnings per share ........................   $   0.79   $   1.50   $   1.70   $   1.30   $   0.84
  Earnings per share-assuming dilution ......   $   0.79   $   1.49   $   1.67   $   1.27   $   0.83
</Table>

<Table>
<Caption>
                                                       JUNE 30,
                                   2001       2000       1999       1998       1997
                                 --------   --------   --------   --------   --------
<S>                              <C>        <C>        <C>        <C>        <C>
BALANCE SHEET DATA:
Working capital ..............   $ 86,383   $ 80,085   $ 80,847   $ 56,334   $ 43,354
Total assets .................    136,984    122,593    120,138    108,020     65,364
Long-term debt ...............     47,400     41,075     47,425     35,000     15,850
Stockholders equity ..........     74,135     69,874     62,192     50,841     42,129
</Table>

Net income includes the net pre-tax benefit arising from the early terminations
of licensing agreements of $1,600,000 in fiscal 2000.


                           PRICE RANGE OF COMMON STOCK
          Quoted by quarter for the two fiscal years ended June 30,2001


<Table>
<Caption>
FISCAL 2001     HIGH    LOW     FISCAL 2000     HIGH            LOW
<S>             <C>     <C>     <C>             <C>             <C>
September.....  $9.38   $6.69   September....   $17.50          $12.13
December......  $7.63   $5.75   December.....   $14.75          $12.63
March.........  $7.94   $6.00   March........   $14.75          $ 8.50
June..........  $6.42   $5.00   June.........   $ 9.44          $ 6.00
</Table>

As of August 10, 2001, there were approximately 1,006 stockholders of record.

28

<PAGE>   31

                                                            [PHOTO OF DIRECTORS]

DIRECTORS

Dr. James F. Gaertner
Chairman of the Board
President
Sam Houston State University

J.S.B. Jenkins
President and Chief Executive Officer
Tandy Brands Accessories, Inc.

C.A. Rundell, Jr.
Private Investor

Gene Stallings
Collegiate and Professional Football
Coach, Rancher, Author
and Private Investor

Marvin J. Girouard
Chairman and Chief Executive Officer
Pier 1 Imports, Inc.

Colombe M. Nicholas
Private Investor

Roger R. Hemminghaus
Chairman Emeritus
Ultramar Diamond Shamrock


OFFICERS

J.S.B. Jenkins
President and Chief Executive
Officer

Jerry W. Wood
Executive Vice President

Stanley T. Ninemire
Senior Vice President and
Chief Financial Officer

W. Mike Baggett
Secretary


CORPORATE DATA

Corporate Offices
690 East Lamar Boulevard
Suite 200
Arlington, Texas 76011
817-548-0090
www.tandybrands.com

Annual Meeting
9:00 a.m., October 16, 2001
Embassy Suites Outdoor World
2401 Bass Pro Drive
Grapevine, TX 76051
972-724-2600

Common Stock Transfer Agent
  and Registrar
EquiServe
www.equiserve.com
781-575-3120

Corporate Counsel
Winstead Sechrest & Minick P.C.

The Company's common stock is
traded on the NASDAQ National
Market System under the trading
symbol TBAC.

The Company's Form 10-K Report
for the year ended June 30, 2001,
as filed with the Securities and
Exchange Commission, is available
without charge upon request to
Stanley T. Ninemire at the address
of the Corporate Offices.


On the back cover:

Noteworthy news: Men's all-Italian-made belts have
orchestrated a major success in hundreds of department
stores throughout the U.S.A. and Canada. The attention
to detail and superior craftsmanship found in each of
these unique men's dress belts create a look and feel of
upper-end quality.



<PAGE>   32

                                [PHOTO OF BELTS]








                                                           [TANDY BRANDS LOGO]

                                                        690 East Lamar Boulevard
                                                                Suite 200
                                                         Arlington, Texas 76011
                                                              817-548-0090
                                                           www.tandybrands.com