Form 10-Q

                       SECURITIES AND EXCHANGE COMMISSION

                             Washington, D.C. 20549


(Mark One)

[X]    Quarterly report pursuant to section 13 or 15(d) of the
       Securities Exchange Act of 1934

For the quarterly period ended September 30, 2000

or

[ ]    Transition report pursuant to section 13 or 15(d) of the
       Securities Exchange Act of 1934

For the transition period from                      to
                               --------------------    -----------------

Commission File Number 1-12368

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

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

                3847 East Loop 820 South, Ft. Worth, Texas 76119
               (Address of principal executive offices) (Zip code)

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

     Indicate  by check mark  whether the  registrant  (1) has filed all reports
required to by filed by Section 13 or 15(d) of the  Securities  Exchange  Act of
1934  during  the  preceding  12 months  (or for such  shorter  period  that the
registrant was required to file such reports),  and (2) has been subject to such
filing requirements for the past 90 days.

                                    Yes X  No
                                       ---   ---

      Indicate the number of shares  outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.

            Class                     Shares outstanding as of November 14, 2000
------------------------------        ------------------------------------------
Common Stock, par value $.0024                       9,883,161
per share

                                       1

<PAGE>

                           Forward-Looking Statements
                           --------------------------

The   disclosures  in  this  report  contain   forward-looking   statements  and
projections of management. There are certain important factors which could cause
results  to  differ   materially   than  those   anticipated   by  some  of  the
forward-looking  statements.  These  factors are  detailed  from time to time in
TLF's  reports  filed  with the  Securities  and  Exchange  Commission.  See the
Company's  1999  Annual  Report on Form 10-K for the most recent  discussion  of
these factors.









                                       2

<PAGE>

                            THE LEATHER FACTORY, INC.

                                    FORM 10-Q

                FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2000


                                TABLE OF CONTENTS
                                -----------------
                                                                        PAGE NO.
                                                                        --------

PART I.  FINANCIAL INFORMATION

  Item 1.  Financial Statements

    Consolidated Balance Sheets
     September 30, 2000 and December 31, 1999............................    4

    Consolidated Statements of Income
     Three and nine months ended September 30, 2000 and 1999.............    5

    Consolidated Statements of Cash Flows
     Nine months ended September 30, 2000 and 1999.......................    6

    Consolidated Statements of Stockholders' Equity
     Nine months ended September 30, 2000 and 1999.......................    7

    Notes to Consolidated Financial Statements...........................    8

  Item 2.  Management's Discussion and Analysis of Financial
            Condition and Results of Operations..........................    9

  Item 3.  Quantitative and Qualitative Disclosures About Market Risk....   12

PART II.  OTHER INFORMATION

  Item 6.  Exhibits and Reports on Form 8-K..............................   12


SIGNATURES...............................................................   13


EXHIBIT INDEX............................................................   14



                                       3
<PAGE>

<TABLE>

<CAPTION>

--------------------------------------------------------------------------------
                            THE LEATHER FACTORY, INC.
                           CONSOLIDATED BALANCE SHEETS
--------------------------------------------------------------------------------
                                                                           September 30,   December 31,
                                                                                2000           1999
                                                                           -------------   ------------
                                                                            (UNAUDITED)
<S>                                                                        <C>             <C>
                                    ASSETS

CURRENT ASSETS:
     Cash                                                                  $     113,897   $    134,465
     Cash restricted for payment on revolving credit facility                    224,094        317,904
     Accounts receivable-trade, net of allowance for doubtful accounts
         of $152,000 and $177,000 in 2000 and 1999, respectively               2,270,329      2,292,645
     Inventory                                                                 7,759,946      8,807,963
     Deferred income taxes                                                       138,416        160,165
     Other current assets                                                        508,602        533,841
                                                                           -------------   ------------
                             Total current assets                             11,015,284     12,246,983
                                                                           -------------   ------------

PROPERTY AND EQUIPMENT, at cost                                                3,288,072      3,143,594
  Less-accumulated depreciation and amortization                              (2,407,938)    (2,160,336)
                                                                           -------------   ------------
                             Property and equipment, net                         880,134        983,258

GOODWILL, net of accumulated amortization of $1,313,000
     and $1,160,000 in 2000 and 1999, respectively                             4,606,540      4,767,885
OTHER INTANGIBLES, net of accumulated amortization of
     $86,000 and $45,000, in 2000 and 1999, respectively                         175,777        191,048
OTHER assets                                                                      29,415         31,601
                                                                           -------------   ------------
                                                                             $16,707,150    $18,220,775
                                                                           =============   ============

                     LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES:
     Accounts payable                                                      $   1,047,635   $  1,805,918
     Accrued expenses and other liabilities                                    1,147,839        978,969
     Income taxes payable                                                        110,312        474,262
     Notes payable and current maturities of  long-term debt                   4,330,630      6,061,735
                                                                           -------------   ------------
                             Total current liabilities                         6,636,416      9,320,884
                                                                           -------------   ------------

DEFERRED INCOME TAXES                                                             73,173         97,780

NOTES PAYABLE AND LONG-TERM DEBT, net of current maturities                      103,992        121,686

COMMITMENTS AND CONTINGENCIES                                                          -              -

STOCKHOLDERS' EQUITY:
     Preferred stock, $0.10 par value; 20,000,000
         shares authorized, none issued or outstanding                                 -              -
     Common stock, $0.0024 par value; 25,000,000 shares
         authorized, 9,883,161 and 9,853,161 shares issued
         and outstanding at 2000 and 1999, respectively                           23,720         23,648
     Paid-in capital                                                           3,918,543      3,901,740
     Retained earnings                                                         6,122,869      4,930,434
     Less: Notes receivable - secured by common stock                           (144,602)      (153,416)
     Accumulated other comprehensive loss                                        (26,961)       (21,981)
                                                                           -------------   ------------
                              Total stockholders' equity                       9,893,569      8,680,425
                                                                           -------------   ------------
                                                                           $  16,707,150   $ 18,220,775
                                                                           =============   ============

</TABLE>


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


                                       4
<PAGE>

<TABLE>

<CAPTION>

--------------------------------------------------------------------------------
                            THE LEATHER FACTORY, INC.
                        CONSOLIDATED STATEMENTS OF INCOME
                                   (UNAUDITED)
             THREE and NINE MONTHS ENDED SEPTEMBER 30, 2000 and 1999
--------------------------------------------------------------------------------


                                                         THREE MONTHS                  NINE MONTHS
                                                      2000           1999           2000           1999
                                                 ------------   ------------   ------------   ------------
<S>                                              <C>            <C>            <C>            <C>

NET SALES                                        $  7,374,556   $  7,625,168   $ 22,382,518   $ 19,678,118

COST OF SALES                                       3,660,995      4,180,108     11,297,333     11,060,400
                                                 ------------   ------------   ------------   ------------

                 Gross profit                       3,713,561      3,445,060     11,085,185      8,617,718

OPERATING EXPENSES                                  3,012,409      2,723,615      8,609,705      7,546,169
                                                 ------------   ------------   ------------   ------------

INCOME FROM OPERATIONS                                701,152        721,445      2,475,480      1,071,549

OTHER EXPENSE:
         Interest expense                             135,316        183,403        449,416        581,297
         Other, net                                    14,547          4,701         30,753         (9,679)
                                                 ------------   ------------   ------------   ------------
                 Total other expense                  149,863        188,104        480,169        571,618
                                                 ------------   ------------   ------------   ------------

INCOME BEFORE INCOME TAXES                            551,289        533,341      1,995,311        499,931

PROVISION FOR INCOME TAXES                            236,190        260,776        802,876        312,849
                                                 ------------   ------------   ------------   ------------

NET INCOME                                       $    315,099   $    272,565   $  1,192,435   $    187,082
                                                 ============   ============   ============   ============



NET INCOME PER COMMON SHARE - Basic              $       0.03   $       0.03   $       0.12   $       0.02
                                                 ============   ============   ============   ============

NET INCOME PER COMMON SHARE--Assuming Dilution   $       0.03   $       0.03   $       0.12   $       0.02
                                                 ============   ============   ============   ============

</TABLE>



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


                                       5
<PAGE>

<TABLE>

<CAPTION>

--------------------------------------------------------------------------------
                            THE LEATHER FACTORY, INC.
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                   (UNAUDITED)
                  NINE MONTHS ENDED SEPTEMBER 30, 2000 and 1999
--------------------------------------------------------------------------------



                                                                             2000           1999
                                                                         -----------    -----------
<S>                                                                      <C>            <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net income                                                             $ 1,192,435    $   187,082
  Adjustments to reconcile net income to net
   Cash provided by (used in) operating activities-
     Depreciation & amortization                                             443,500        415,554
     Loss on disposal of assets                                                3,689           --
     Deferred financing costs                                                 18,132        189,472
     Deferred income taxes                                                    (2,858)       (43,815)
     Other                                                                    (4,979)           945
     Net changes in assets and liabilities:
       Accounts receivable-trade, net                                         22,316       (929,525)
       Inventory                                                           1,048,017     (1,376,808)
       Income taxes payable                                                 (363,950)       413,554
       Other current assets                                                   25,238       (249,255)
       Accounts payable                                                     (758,283)       544,793
       Accrued expenses and other liabilities                                168,870         96,009
                                                                         -----------    -----------

      Net cash provided by (used in) operating activities                  1,792,127       (751,994)
                                                                         -----------    -----------

CASH FLOWS FROM INVESTING ACTIVITIES:
  Purchase of property and equipment                                        (161,042)      (441,932)
  Proceeds from sale of assets                                                 1,088           --
  Other intangible costs                                                       2,186         (8,174)
                                                                         -----------    -----------

      Net cash used in investing activities                                 (157,768)      (450,106)
                                                                         -----------    -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
  Net increase (decrease) in revolving credit loans                       (1,530,281)     1,116,440
  Proceeds from notes payable and long-term debt                                --          217,493
  Payments on notes payable and long-term debt                              (218,519)      (342,446)
  Decrease in cash restricted for payment on revolving credit facility        93,810       (200,042)
  Payments received on notes secured by common stock                           8,814         41,763
  Deferred financing costs incurred                                          (25,626)       (14,118)
  Proceeds from issuance of common stock                                      16,875           --
                                                                         -----------    -----------

      Net cash (used in) provided by financing activities                 (1,654,927)       819,090
                                                                         -----------    -----------

NET (DECREASE) IN CASH                                                       (20,568)      (383,010)

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

CASH, end of period                                                      $   113,897    $   127,389
                                                                         ===========    ===========

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
  Interest paid during the period                                        $   453,645    $   511,332
  Income taxes paid during the period, net of (refunds)                    1,168,449        (56,326)

</TABLE>

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


                                       6
<PAGE>

<TABLE>

<CAPTION>

--------------------------------------------------------------------------------
                            THE LEATHER FACTORY, INC.
                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                                   (UNAUDITED)
                  NINE MONTHS ENDED SEPTEMBER 30, 2000 and 1999
--------------------------------------------------------------------------------




                                             Common Stock                                        Notes       Accumulated
                                      -------------------------                                receivable       Other
                                         Number         Par         Paid-in       Retained    -secured by   Comprehenvise
                                       Of shares       value        capital       earnings    common stock       Loss
                                      -----------   -----------   -----------   -----------   -----------    -----------
<S>                                   <C>           <C>           <C>           <C>           <C>            <C>
BALANCE, December 31, 1998              9,853,161   $    23,648   $ 3,901,740   $ 4,495,378   $  (224,750)   $   (25,738)

   Payments on notes receivable-
        secured by common stock              --            --            --            --          41,763           --

   Net Income                                --            --            --         187,082          --             --

   Translation adjustment                    --            --            --            --            --              586
                                      -----------   -----------   -----------   -----------   -----------    -----------

BALANCE, September 30, 1999             9,853,161   $    23,648   $ 3,901,740   $ 4,682,460   $  (182,987)   $   (25,152)
                                      ===========   ===========   ===========   ===========   ===========    ===========

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

BALANCE, December 31, 1998                                                        8,170,278

   Payments on notes receivable-
        secured by common stock                                                      41,763

   Net Income                                                                       187,082       187,082

   Translation adjustment                                                               586           586
                                                                                -----------
BALANCE, September 30, 1999                                                     $ 8,399,709
                                                                                ===========
                                                                                              -----------
    Comprehensive income for the nine months ended September 30, 1999                         $   187,668
                                                                                              ===========

                                             Common Stock                                        Notes       Accumulated
                                      -------------------------                                receivable       Other
                                         Number         Par         Paid-in       Retained    -secured by   Comprehenvise
                                       Of shares       value        capital       earnings    common stock       Loss
                                      -----------   -----------   -----------   -----------   -----------    -----------

BALANCE, December 31, 1999              9,853,161   $    23,648   $ 3,901,740   $ 4,930,434   $  (153,416)   $   (21,981)

   Payments on notes receivable
        secured by common stock              --            --            --            --           8,814           --

   Shares issued - employee
        Stock options exercised            30,000            72        16,803          --            --             --

   Net Income                                --            --            --       1,192,435          --             --

   Translation adjustment                    --            --            --            --            --           (4,980)
                                      -----------   -----------   -----------   -----------   -----------    -----------

BALANCE, September 30, 2000             9,883,161   $    23,720   $ 3,918,543   $ 6,122,869   $  (144,602)   $   (26,961)
                                      ===========   ===========   ===========   ===========   ===========    ===========

                                                                                              Comprehensive
                                                                                   Total      Income (Loss)
                                                                                -----------   -------------
BALANCE, December 31, 1999                                                        8,680,425

   Payments on notes receivable
        secured by common stock                                                       8,814

   Shares issued - employee
        Stock options exercised                                                      16,875

   Net Income                                                                     1,192,435     1,192,435

   Translation adjustment                                                            (4,980)       (4,980)
                                                                                -----------

BALANCE, September 30, 2000                                                     $ 9,893,569
                                                                                ===========
                                                                                              -----------
   Comprehensive income for the nine months ended September 30,  2000                         $ 1,187,455
                                                                                              ===========

</TABLE>

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

                                       7
<PAGE>

<TABLE>

<CAPTION>

                            THE LEATHER FACTORY, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.  BASIS OF PRESENTATION

In  the  opinion  of  the  Company,  the  accompanying   consolidated  financial
statements  contain  all  adjustments   (consisting  of  only  normal  recurring
adjustments)  necessary to present fairly its financial position as of September
30, 2000 and December 31, 1999, and the results of operations and cash flows for
the three and nine month periods ended  September 30, 2000 and 1999. The results
of  operations  for the  three-  and  nine-month  periods  are  not  necessarily
indicative  of the  results  to be  expected  for  the  full  fiscal  year.  The
consolidated  financial  statements  should  be read  in  conjunction  with  the
financial  statements  and  disclosures  contained in the Company's  1999 Annual
Report on Form 10-K ("Annual Report").

2.  INVENTORY

The components of inventory consist of the following:

                                                         As of
                                             ------------------------------
                                             September 30,    December 31,
                                                   2000            1999
                                             -------------    -------------
      Finished goods held for sale           $   6,730,193    $   7,629,995
      Raw materials and work in process          1,029,753        1,177,968
                                             -------------    -------------
                                             $   7,759,946    $   8,807,963
                                             =============    =============


3.  EARNINGS PER SHARE

The following table sets forth the computation of basic and diluted earnings per
share:

                                                             Three Months Ended           Nine Months Ended
                                                                September 30,               September 30,
                                                          ------------------------    -------------------------
                                                              2000          1999          2000          1999
                                                          -----------   -----------   -----------   -----------
<S>                                                       <C>           <C>           <C>           <C>
Numerator:
     Net  income (loss)                                   $   315,099   $   272,565   $ 1,192,435   $   187,082
                                                          -----------   -----------   -----------   -----------
     Numerator for basic and diluted earnings per share       315,099       282,532     1,192,435       187,082

Denominator:
     Weighted-average shares outstanding-basic              9,876,422     9,853,161     9,869,803     9,853,161

Effect of dilutive securities:
     Stock options                                            146,668        18,391       131,022         6,382
     13% convertible debentures                                  --         690,608          --            --
     Warrants                                                 176,074       100,714       170,807        42,829
                                                          -----------   -----------   -----------   -----------
Dilutive potential common shares                              322,742       809,713       301,830        49,211
                                                          -----------   -----------   -----------   -----------

     Denominator for diluted earnings per share-
     weighted-average shares                               10,199,164    10,662,874    10,171,633     9,902,372
                                                          ===========   ===========   ===========   ===========

     Basic earnings per share                             $      0.03   $      0.03   $      0.12   $      0.02
                                                          ===========   ===========   ===========   ===========

     Diluted earnings per share                           $      0.03   $      0.03   $      0.12   $      0.02
                                                          ===========   ===========   ===========   ===========

</TABLE>

Unexercised  stock options owned by certain  employees and directors to purchase
6,000 and  360,000  shares of common  stock as of  September  30, 2000 and 1999,
respectively,  were not  included in the  computations  of diluted  earnings per
share ("EPS") because the options' exercise prices were greater than or equal to
the average market price of the common stock during the respective periods.

                                       8
<PAGE>

The 13% convertible debt (see note 3 to consolidated financial statements in the
Annual Report) was not included in the computation of diluted earnings per share
for the nine months ended  September  30, 1999 because the interest cost (net of
tax) per assumed  converted  share was more than basic  earnings  per share and,
therefore,  the  effect  would  be  antidilutive.  For the  three  months  ended
September 30, 1999, the interest cost (net of tax) per assumed  converted  share
was less than  basic EPS,  therefore  having a  dilutive  effect,  and have been
included in the computation of diluted EPS.

Item 2.  Management's Discussion and Analysis of Financial Condition
         and Results of Operations.

General
-------

The Leather Factory,  Inc. (the "Company") is the premier distributor of leather
and leathercraft  products to over 65,000 customers  ranging from the individual
hobbyist to large retail  chains.  Customer  groups  served  include:  wholesale
distributors,  tack and saddle  shops,  shoe-findings  customers,  institutions,
prisons and prisoners,  dealer stores,  western  stores,  craft stores and craft
store chains, hat manufacturers and distributors, other large volume purchasers,
manufacturers,  and retailers. Our products are distributed primarily through 28
sales/distribution  units  in the  United  States  and  Canada  or  through  our
subsidiary,  Roberts,  Cushman & Company,  Inc. ("Cushman") in New York. Cushman
manufactures  and  distributes  a related  product  line of hat trims in braids,
leather,  and woven  fabrics.  We also  carry a line of small  finished  leather
goods, including cigar cases, wallets and western accessories.

Results of Operations
---------------------

Income Statement Comparison

The following table sets forth, for the interim periods indicated, certain items
from the Company's  Consolidated  Statements of Income expressed as a percentage
of net sales and the  increase  (decrease)  in dollars and percent  from 1999 to
2000:

                                    % of Net Sales
                                 Three months ended
                                    September 30,           Change in $ and %
                              ------------------------  ------------------------
                                 2000           1999     $ Change      % Change
                              ----------    ----------  ----------    ----------
Net sales                       100.0%         100.0%   $ (250,612)      (3.29)%
Cost of sales                    49.6           54.8      (519,113)     (12.42)
                              ----------    ----------  ----------
Gross Profit                     50.4           45.2       268,500        7.79
Operating expenses               40.9           35.7       288,794       10.60
                              ----------    ----------  ----------
Income from operations            9.5            9.5       (20,293)      (2.80)
Interest expense and other        2.0            2.5       (38,242)     (20.33)
                              ----------    ----------  ----------
Income before income taxes        7.5            7.0        17,948        3.37
Income tax provision              3.2            3.4       (24,586)      (9.43)
                              ----------    ----------  ----------
Net income                        4.3%           3.6%      $42,534       15.61
                              ==========    ==========  ==========

                                    % of Net Sales
                                  Nine months ended
                                    September 30,           Change in $ and %
                              ------------------------  ------------------------
                                 2000           1999     $ Change      % Change
                              ----------    ----------  ----------    ----------
Net sales                       100.0%        100.0%    $2,704,400       13.74%
Cost of sales                    50.5           56.2       236,933        2.14
                              ----------    ----------  ----------
Gross Profit                     49.5           43.8     2,467,467       28.63
Operating expenses               38.5           38.4     1,063,536       14.09
                              ----------    ----------  ----------
Income from operations           11.0            5.4     1,403,931      131.02
Interest expense and other        2.1            2.9       (91,449)     (16.00)
                              ----------    ----------  ----------
Income before income taxes        8.9            2.5     1,495,380      299.12
Income tax provision              3.6            1.6       490,028      156.63
                              ----------    ----------  ----------
Net income                        5.3%           0.9%   $1,005,353      537.39
                              ==========    ==========  ==========


                                       9
<PAGE>

Revenues

Sales decreased  slightly  overall (3.3%),  totaling $7.37 million for the third
quarter of 2000 compared to $7.63 million for the third quarter of 1999. For the
nine months  ended  September  30, 2000 and 1999,  sales are up $2.7  million or
13.7%.  Domestic  retail  sales  increased  27% and 40%,  respectively,  for the
current  quarter and nine months over these same  periods of 1999.  Our Canadian
sales unit  continues to exceed sales goals as its  quarterly  and  year-to-date
sales  increases  were  42% and 75%,  respectively  for the  nine  months  ended
September 30, 2000 compared to those same periods ended  September 30, 1999. Our
Authorized Sales Center ("ASC") program,  which began in April 1999, contributed
comparable  sales increases of 45% quarter to quarter and over 100% current year
to prior year.

The sales  decline for the third  quarter of 2000  occurred in our craft  sales.
During the third  quarter of 1999,  we  implemented  a new program  with a large
retail craft  customer.  The initial  order of  merchandise  for the new program
totaled approximately $800,000, which was shipped to the customer's chain stores
as well as its  warehouses.  Given that the program has a bi-annual  term (every
other year),  there was no new "initial" order in the current quarter of 2000 to
compare to last year's. On a year-to-date basis, however, our current year craft
sales remain slightly ahead of the 1999 totals.

Costs, Gross Profit, and Expenses

Cost of sales as a percentage of revenue was 49.6% for the third quarter of 2000
as compared to 54.8% for the same quarter in 1999.  This  translates  into gross
profit margins of 50.4% and 45.2% for the quarters ended  September 30, 2000 and
1999,  respectively.  This  improvement  is  primarily  the result of  continued
increases  in  retail  sales  which,  in  turn,  produce  higher  margins.   The
improvement in gross profit  margins has been offset  slightly by an increase in
leather costs in the third quarter of 2000.  Management perceives the reason for
the  cost  increase  is due to a  shortage  of  supply,  both  domestically  and
worldwide. The company has historically been slow to increase selling prices due
to temporary  fluctuations  in leather costs as they tend to stabilize  within a
moderately short time period.

For the nine months ended  September  30, 2000,  the gross profit  margin was up
5.7% over 1999 to 49.5%.  Our  sales  mix  continues  to hold at 20%  retail/80%
wholesale for the year, versus a 15%/85% mix in 1999. The $1 million increase in
retail sales for the nine months ended  September 30, 2000 over this same period
in 1999 accounted for the improvement in gross margin. While we may experience a
slight  softening of gross profit  margins in the fourth  quarter of 2000 due to
the increase in leather prices as discussed above,  management expects the sales
mix and gross  margins to maintain  the trends of a higher ratio of retail sales
to wholesale and the resulting stronger margins.

Operating expenses were $289,000 higher in the third quarter of 2000 than in the
third quarter of 1999. The rise in operating  expenses was caused by an increase
in accrued sales unit managers' incentive  (resulting from the higher sales unit
profits),  increases in accrued contribution to the ESOP (due to the improvement
in the company's  financial  results),  advertising  costs (due to a increase in
advertising  pieces  produced and  distributed  over last year) and a charitable
contribution of discontinued merchandise.

On a year-to-date basis, operating expenses are up approximately $1 million over
last  year.  As a  percentage  of  sales,  these  expenses  remain  in  line  at
approximately  38.4% of sales.  The $1 million increase is a result of increases
in advertising efforts to the retail customer base and employee costs (incentive
pay, ESOP contributions,  etc.) Management  believes that these expenses,  while
perhaps  increasing  in  dollars  as  sales  increase,  will  hold  steady  as a
percentage  to sales.  Incentive  pay to sales unit  managers  will  continue to
increase as the sales units' profits increase.  As long as the company continues
to  enjoy  improving   financial   success,   it  will  continue  to  contribute
significantly to the ESOP in order to share that success with its employees.

                                       10
<PAGE>

Other (Income) Expense

Other expenses  decreased $38,000 to $150,000 for the third quarter of 2000 from
$188,000  during  the same  quarter  in 1999 due to lower  interest  costs.  The
company's  average debt balance for the nine months ended September 30, 2000 was
$5.3 million while the average debt balance for the same period ended  September
30, 1999 was $6.7 million.

For the nine months ended  September 30, 2000,  other expenses were down $91,000
over the same period in 1999.  The  decrease in interest  costs  account for the
majority of the decrease as the company's debt balance continues to decline.

Net Income

The  Company  reported  net  income of  $315,000  for the third  quarter of 2000
compared to net income of $272,000  for the same period a year ago. The increase
in net income was due  primarily  to lower  interest  costs and lower income tax
expense.  The  increase  in gross  profit  margins was  basically  offset by the
increase in operating expenses as discussed above.

Net income for the nine months ended  September 30, 2000 was  $1,192,000  versus
$187,000  for the nine months  ended  September  30,  1999.  The  increase of $1
million  was due to the  significant  improvement  in gross  profit  margin.  As
discussed  above,  sales for the year are up $2.7  million  while  cost of goods
increased only $237,000 resulting in an improvement gross profit of $2.5 million
over last year. Operating expense increases of $1 million and income tax expense
increases of $490,000 were absorbed easily by the gross profit increase.

Capital Resources, Liquidity and Financial Condition
----------------------------------------------------

The primary sources of liquidity and capital  resources during the third quarter
of 2000 were funds provided by operating activities  (primarily the reduction of
inventory) in the amount of $657,000,  for a  year-to-date  total of $1,792,000.
The largest  portion of the  operating  cash flow was  applied to debt  service,
trade payables and income taxes.

The Company's  investment in accounts  receivable was $2.27 million at September
30,  2000,  virtually  unchanged  from $2.29  million at year-end  1999. A large
portion of the  increase in sales for the first  three  quarters of the year has
been in cash sales (versus credit sales). Inventory decreased $1 million to $7.8
million at  September  30, 2000 from $8.8  million at year-end  1999.  Inventory
turnover  improved  slightly  during the quarter to an  annualized  rate of 1.82
times for the first three  quarters of 2000 (compared to 1.77  (annualized)  for
the first half of 2000) which is slightly  lower than the turnover of 1.89 times
for all of 1999. Although management is pleased with the $1 million reduction of
inventory  since  December 31, 1999,  it continues to focus efforts on a further
reduction  of  inventory  levels  in  order  to  increase  inventory   turnover.
Management  believes  that  this  can be  achieved  without  affecting  customer
service.

Accounts  payable  decreased  42% from December 31, 1999 to $1.05 million at the
end of the third quarter,  due primarily to the decrease in inventory  levels at
September 30, 2000.

As previously disclosed, on November 22, 1999, the Company entered into a Credit
and Security Agreement with Wells Fargo Business Credit, Inc. ("WFBC"), pursuant
to which WFBC agreed to provide a credit  facility of up to  $8,650,000  in debt
(the "Credit  Facility").  The Credit Facility has a three-year term and is made
up of a revolving  credit  facility and a $150,000 term note.  The term note was
paid in full in May 2000.

                                       11
<PAGE>

The revolving credit facility with WFBC is based upon the level of the Company's
accounts receivable and inventory.  At September 30, 2000 and December 31, 1999,
the  available  and  unused  portion of the credit  facility  was  approximately
$988,000 and $508,000, respectively.

The Company believes that the current sources of liquidity and capital resources
will be sufficient to fund current  operations  and the opening of any potential
new sales/distribution  units. In 2000, the funding for the opening of new units
is  expected  to be  provided by  operating  leases,  cash flows from  operating
activities,  and the Credit Facility. As previously disclosed, two new units are
to be opened in the fourth quarter of 2000.  Historically,  the Company  invests
approximately  $125,000 in opening a new unit.  However,  management expects the
two units  opening in the  fourth  quarter of 2000 will  require  slightly  less
capital to open.

Item 3.  Quantitative and Qualitative Disclosures About Market Risk.

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

PART II. OTHER INFORMATION

Item 6. Exhibits and Reports on Form 8-K

(a) Exhibits
    --------

A list of  exhibits  required to be filed as part of this report is set forth in
the Exhibit Index, which immediately  precedes such exhibits and is incorporated
herein by reference.

(b) Reports on Form 8-K - None.
    -------------------


                                   SIGNATURES

Pursuant to the  requirements  of the  Securities  and Exchange Act of 1934, the
registrant  has duly  caused  this  report  to be  signed  on its  behalf by the
undersigned thereunto duly authorized.

                                           THE LEATHER FACTORY, INC.
                                           (Registrant)


Date:  November 14, 2000                   By: /s/ Wray Thompson
                                               ---------------------------------
                                                   Wray Thompson
                                                   Chairman of the Board,
                                                   President, and
                                                   Chief Executive Officer

Date:  November 14, 2000                   By: /s/ Shannon L. Greene
                                               ---------------------------------
                                                   Shannon L. Greene
                                                   Chief Financial Officer and
                                                   Treasurer  (Chief Accounting
                                                   Officer)


                                       12
<PAGE>

                   THE LEATHER FACTORY, INC. AND SUBSIDIARIES
                                  EXHIBIT INDEX

     Exhibit
      Number           Description
     -------           -----------

      *27.1            Financial Data Schedule


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





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