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 March 31, 1998

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                               (I.R.S. Employer
of 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 May 15, 1998
----------------------------------------   -------------------------------------
Common Stock, par value $.0024 per share              9,853,161



<PAGE>


                            THE LEATHER FACTORY, INC.

                                    FORM 10-Q

                  FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1998


                                TABLE OF CONTENTS


                                                                        PAGE NO.
                                                                        --------

PART I.  FINANCIAL INFORMATION

  Item 1.  Financial Statements

    Consolidated Balance Sheets
    March 31, 1998 and December 31, 1997.................................  3

    Consolidated Statements of Loss
    Three months ended March 31, 1998 and 1997 ..........................  4

 Consolidated Statements of Cash Flows
 Three months ended March 31, 1998 and 1997 .............................  5

 Consolidated Statements of Stockholders' Equity and Comprehensive Loss
 Three months ended March 31, 1998 and 1997 .............................  6

 Notes to Consolidated Financial Statements ............................. 7-8



  Item 2.  Management's Discussion and Analysis of Financial
           Condition and Results of Operations ..........................9-13

PART II.  OTHER INFORMATION

  Item 6. Exhibits and Reports on Form 8-K ..............................  14


SIGNATURES ..............................................................  15


EXHIBIT INDEX ...........................................................16-17




                                       2
<PAGE>

<TABLE>
<CAPTION>

                      THE LEATHER FACTORY, INC.
                     CONSOLIDATED BALANCE SHEETS


                                                                 March 31,       December 31,
                                                                   1998             1997
                                                               -------------    -------------
<S>                                                                             <C>       

                            ASSETS                             (UNAUDITED)
CURRENT ASSETS:
    Cash                                                        $     13,963    $     70,496          
    Cash restricted for payment on revolving credit facility         355,751         319,133
    Accounts receivable-trade, net of allowance for
        doubtful accounts of $40,000 and $28,000
         in 1998 and 1997, respectively                            1,844,189       1,865,276
    Inventory                                                      7,032,041       7,279,702
    Prepaid income taxes                                             307,766         285,970
    Deferred income taxes                                            111,759         109,411
    Other current assets                                             494,839         385,199
                                                                ------------    ------------
                            Total current assets                  10,160,308      10,315,187
                                                                ------------    ------------

PROPERTY AND EQUIPMENT, at cost                                    2,561,861       2,534,839
  Less-accumulated depreciation and amortization                  (1,583,161)     (1,505,098)
                                                                ------------    ------------
                            Property and equipment, net              978,700       1,029,741

GOODWILL and other, net of accumulated amortization of
    $934,000 and $878,000 in 1998 and 1997, respectively           5,589,606       5,679,621
                                                                 ------------   ------------
                                                                $ 16,728,614    $ 17,024,549
                                                                 ============   ============
                     LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
   Accounts payable                                              $ 1,084,750    $    942,046
   Accrued expenses and other liabilities                            373,571         559,776
   Notes payable and current maturities of
        long-term debt                                             4,574,285       4,650,742
                                                                 ------------   ------------
                            Total current liabilities              6,032,606       6,152,564
                                                                 ------------   ------------

DEFERRED INCOME TAXES                                                127,477         136,611

NOTES PAYABLE AND LONG-TERM DEBT,
    net of current maturities                                      2,502,658       2,602,728

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, 9,853,161 shares issued in 1998 and 1997          23,648          23,648
    Paid-in capital                                                4,106,994       4,119,915
    Less:  Notes receivable - secured by common stock               (238,482)       (257,617)
           Unearned shares held by ESOP, 51,420 and 54,262
             shares in 1998 and 1997, respectively                  (259,510)       (273,851)
    Retained earnings                                              4,446,041       4,534,569
    Accumulated other comprehensive income                           (12,818)        (14,018)
                                                                ------------    ------------
                            Total stockholders' equity             8,065,873       8,132,646
                                                                 ------------   ------------
                                                                 $ 16,728,614   $ 17,024,549
                                                                 ============   ============
</TABLE>

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

                                       3
<PAGE>



                           THE LEATHER FACTORY, INC.
                        CONSOLIDATED STATEMENTS OF LOSS
                                  (UNAUDITED)
                   THREE MONTHS ENDED MARCH 31, 1998 AND 1997



                                                         1998          1997
                                                     -----------   ------------

NET SALES                                            $ 5,710,832    $ 6,459,892

COST OF SALES                                          3,296,138      3,896,081
                                                     -----------    -----------

            Gross Profit                               2,414,694      2,563,811

OPERATING EXPENSES                                     2,299,894      2,397,342
                                                     -----------    -----------

INCOME FROM OPERATIONS                                   114,800        166,469

OTHER (INCOME) EXPENSE:
    Interest expense                                     240,645        201,338
    Other, net                                            (7,761)          (844)
                                                     -----------    -----------
            Total other (income) expense                 232,884        200,494
                                                     -----------    -----------

INCOME (LOSS)  BEFORE INCOME TAXES                      (118,084)       (34,025)

PROVISION (BENEFIT)  FOR INCOME TAXES                    (29,556)         2,160
                                                     -----------    -----------
NET INCOME (LOSS)                                    $   (88,528)   $   (36,185)
                                                     ===========    ===========


EARNINGS (LOSS) PER COMMON SHARE                     $     (0.01)   $      --
                                                     ===========    ===========

EARNINGS (LOSS) PER COMMON SHARE--Assuming Dilution  $     (0.01)   $      -- 
                                                     ===========    ===========

DIVIDENDS PAID PER COMMON SHARE                      $      --      $      --   
                                                     ===========    ===========




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

                                       4
<PAGE>


<TABLE>
<CAPTION>

                           THE LEATHER FACTORY, INC.
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                                  (UNAUDITED)
                   THREE MONTHS ENDED MARCH 31, 1998 AND 1997

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

CASH FLOWS FROM OPERATING ACTIVITIES:
  Net loss                                                               $   (88,528)   $   (36,185)
  Adjustments to reconcile net income to net
   cash provided by (used in) operating activities-
     Depreciation & amortization                                             133,991        125,954
     Deferred financing costs                                                 53,038           --
     Deferred income taxes                                                   (12,217)       (13,134)
     Other                                                                     1,961         (1,623)
     Net changes in operating assets and liabilities:
       Accounts receivable-trade, net                                         21,087       (245,292)
       Inventory                                                             247,661        403,892
       Income taxes                                                          (21,796)        16,709
       Other current assets                                                 (109,640)        37,911
       Accounts payable                                                      142,704        260,957
       Accrued expenses and other liabilities                               (186,205)      (143,207)
                                                                         -----------    -----------
     Total adjustments                                                       270,584        442,167
                                                                         -----------    -----------

      Net cash provided by operating activities                              182,056        405,982
                                                                         -----------    -----------

CASH FLOWS FROM INVESTING ACTIVITIES:
  Purchases of property and equipment                                        (26,926)       (98,804)
  Other intangible costs                                                        --          (26,685)
                                                                         -----------    -----------

      Net cash used in investing activities                                  (26,926)      (125,489)
                                                                         -----------    -----------

CASH FLOWS FROM FINANCING ACTIVITIES:
  Proceeds from notes payable and long-term debt                           5,768,265        271,204
  Payments on notes payable and long-term debt                            (5,885,292)      (712,825)
  Increase in cash restricted for payment on revolving credit facility       (36,618)          --
  Payments received on notes secured by common stock                          19,135           --
  Deferred financing costs                                                   (77,153)          --
                                                                         -----------    -----------

      Net cash used in  financing activities                                (211,663)      (441,621)
                                                                         -----------    -----------

NET INCREASE (DECREASE) IN CASH                                              (56,533)      (161,128)

CASH, beginning of period                                                     70,496        488,192
                                                                         -----------    -----------

CASH, end of period                                                      $    13,963    $   327,064
                                                                         ===========    ===========

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
  Interest paid during the period                                        $   190,304    $   198,303
  Income taxes paid during the period, net of refunds                          4,457           --
                                                                                      

</TABLE>

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

                                       5

<PAGE>


<TABLE>
<CAPTION>

                                    THE LEATHER FACTORY, INC.
                         CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                                     AND COMPREHENSIVE LOSS
                                           (UNAUDITED)
                           THREE MONTHS ENDED MARCH 31, 1998 AND 1997



                                                           Notes                                
                            Common Stock                 Receivable                             Accumulated            
                         -------------------             ----------                                Other        Total        Compre-
                          Number     Par      Paid-in    - Secured by   Unearned     Retained   Comprehensive Stockholder's  hensive
                         of         Value     Capital    Common Stock  ESOP Shares   Earnings      Income       Equity       Income
                          Shares                                                                                             (Loss)
                         --------- --------- ----------- ------------- ------------ ----------- ------------- ------------ ---------
<S>                                                                             <C>  <C>          <C>          <C>         <C>    

BALANCE, December 31,      
1996                     9,853,161 $23,648   $4,130,796   $  (269,305) $ (326,184)   $4,464,277   $  (295)     $8,022,937
                                                                                                       
                                                                                                                          
Net loss                         -       -            -             -           -       (36,185)        -         (36,185) $(36,185)

Foreign currency   
translation adjustment           -       -            -             -           -             -    (3,779)         (3,779)   (3,779)
                         --------- --------- ----------- ------------ -----------   -----------  --------      ----------  --------

BALANCE, March 31, 1997  9,853,161 $23,648   $4,130,796   $  (269,305) $ (326,184)   $4,428,092  $ (4,074)    $ 7,982,973
                         ========= =======   ==========   ===========  ==========   ===========  ========     ===========
                                                                                                                           ---------
Comprehensive income (loss) for the three months ended March 31, 1997                                                      $(39,964)
                                                                                                                           =========
                                                                                                                       
BALANCE, December 31,                        
1997                    9,853,161   $23,648  $4,119,915   $ (257,617)  $ (273,851)  $4,534,569 $  (14,018)      8,132,646

Payments received on
notes secured by 
common stock
                                -         -           -       19,135            -            -          -          19,135

Allocation of 
suspended ESOP shares
committed to be 
released                        -         -     (12,921)           -       14,341            -          -           1,420

                                                                                                              
Net loss                        -         -           -            -            -      (88,528)         -         (88,528) $(88,528)

Foreign currency
translation adjustment,
net of tax of $735              -         -           -            -            -            -      1,200           1,200     1,200
                        --------- --------- -----------   ----------  -----------  -----------   --------      ----------
BALANCE, March 31, 
1998                    9,853,161   $23,648  $4,106,994   $ (238,482)   $(259,510)  $4,446,041   $(12,818)     $8,065,873
                        ========= ========= ===========   ==========    =========   ==========   ========      ==========

                                                                                                                           ---------
Comprehensive income (loss) for the three months ended March 31, 1998                                                     $ (87,328)
                                                                                                                           =========


</TABLE>






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

                                       6

<PAGE>



                            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 March 31,
1998 and December 31, 1997, and the results of operations and cash flows for the
three month periods ended March 31, 1998 and 1997. The results of operations for
the three  month  period 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 1997 Annual Report on Form 10-K ("Annual Report").


<TABLE>
<CAPTION>

2.  INVENTORY

The components of inventory consist of the following:
<S>                                                                             <C>      <C>   

                                                                         March 31,         December 31,
                                                                            1998                 1997
                                                                      ---------------     ---------------
                Finished goods held for sale                           $   5,744,464       $   5,833,002
                Raw materials and work in process                          1,287,577           1,446,700
                                                                      ===============     ===============
                                                                       $   7,032,041       $   7,279,702
                                                                      ===============     ===============



3.  EARNINGS PER SHARE

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

                                                             Three Months Ended March 31,
                                                               1998              1997
                                                         -----------------  ----------------
Numerator:
     Net loss                                            $       (88,528)    $     (36,185)
     Numerator for basic and diluted                     -----------------  ----------------
       earnings per share                                        (88,528)          (36,185)
                                      

Denominator:
     Denominator for basic and diluted
     earnings per share -- weighted-average shares              9,799,404         9,788,530

     Basic earnings per share                            $          (0.01)   $            - 
                                                         =================  ================
     Diluted earnings per share                          $          (0.01)   $            -
                                                         =================  ================                                     
                                                      
</TABLE>

Unexercised  employee and director stock options to purchase 585,000 and 516,000
shares of common  stock as of March 31,  1998 and 1997,  respectively,  were not
included in the computations of diluted EPS because the options' exercise prices
were  greater  than or equal to the  average  market  price of the common  stock
during the respective periods.

Warrants (see note 9 to consolidated  financial statements in the Annual Report)
to acquire 100,000 shares of common stock were not included in the  computations
of diluted EPS because the exercise  price was greater  than the average  market
price of the common stock during the quarter ended March 31, 1998.

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
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.


                                       7

<PAGE>


4.  IMPACT OF NEW ACCOUNTING STANDARDS


As of January 1, 1998,  the Company  adopted  Statement of Financial  Accounting
Standards ("SFAS") 130, Reporting Comprehensive Income. SFAS 130 establishes new
rules for the reporting and display of comprehensive  income and its components;
however,  the  adoption of this  Statement  had no impact on the  Company's  net
income  or  stockholders'   equity.   Statement  130  requires  items  of  other
comprehensive  income such as unrealized  gains or losses on  available-for-sale
securities,  foreign  currency  translation  adjustments,  and  minimum  pension
liability  adjustments  to be included in  comprehensive  income.  The Company's
foreign  currency   translation   adjustments  which  previously  were  reported
separately in  stockholders'  equity have been  included in other  comprehensive
income. Prior year financial statements have been reclassified to conform to the
requirements of SFAS 130.


In June 1997, the Financial  Accounting Standards Board ("FASB") issued SFAS No.
131, Disclosures about Segments of an Enterprise and Related  Information.  SFAS
131 establishes  annual and interim  reporting  requirements for an enterprise's
operating  segments and related  disclosures  about its  products and  services,
geographical  areas in which it operates and major  customers.  Statement 131 is
effective for fiscal years beginning after December 15, 1997, and therefore, the
Company will adopt the new requirements retroactively in 1998 if applicable. The
Company  operates in one broad  industry  and  historically  has not  identified
separate  segments of its business.  Management  has not completed its review of
Statement 131, but does not anticipate  that the adoption of this statement will
have a significant effect on the Company's disclosures.

















                                       8

<PAGE>



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 40,000  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. The Company's products are distributed
primarily through twenty-two  sales/distribution  units in the United States and
Canada or through its subsidiary,  Roberts, Cushman & Company, Inc. ("Cushman"),
in New York. Cushman manufactures and distributes; hat trims in braids, leather,
and woven fabrics;  small finished leather goods, such as, cigar cases,  picture
frames, wallets and other 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 Loss expressed as a
percentage of net sales:


                                                       Quarterly Period Ended
                                                            March 31,
                                                        1998         1997
                                                       ----------  ----------

                Net sales                               100.0%        100.0%
                Cost of sales                            57.7          60.3
                                                       ------         -----
                Gross profit                             42.3          39.7
                Operating expenses                       40.3          37.1
                                                       ------         -----
                Income from operations                    2.0           2.6
                Interest expense, net                     4.1           3.1
                                                       ------         -----
                Loss before income taxes                 (2.1)         (0.5)
                (Benefit) provision for income taxes     (0.5)          0.0
                                                       ------         -----
                Net loss                                 (1.6)%         (.5)%
                                                       ======         =====
                



Revenues

         Net sales decreased 11.6% to $5,710,832  during the quarter ended March
31, 1998 from  $6,459,892  generated in the first  quarter last year.  Decreased
unit sales directly to and through  manufacturers and distributors to the retail
craft and western markets account for approximately 40% and 37%, respectively of
the decline.  Negative  trends have  persisted  since mid 1995 in these  markets
generally  because of weak overall industry  conditions.  It appears the rate of
decline in sales of  western-related  products has slowed and may be stabilizing
yet long term trends are difficult to predict at this point.

                                       9

<PAGE>


         The remaining  decline in sales is a result of strategic  merchandising
decisions  implemented  by the  Company.  Prices were  selectively  raised where
appropriate  or  various  low  margin  products  are being  eliminated  from the
Company's line entirely. These merchandising decisions account for approximately
$176,000  of the  decline in sales but have had a positive  impact on cash flows
and operating results.

         The sales of the  Company are not  seasonal  and the quarter to quarter
comparisons over the past year reflect rather uniform declines of ten percent on
average.  When adjusted for the planned  reductions  mentioned  above, the first
quarter  decline  in  sales  due  to  continued  negative  external  forces  was
approximately  8.9%. The Company is working diligently to reverse these negative
trends through emphasizing its growing markets and introduction of new products.

     The first  quarter  reduction  in the  adjusted  decline  rate was achieved
through  modest gains in the  Company's  export  sales,  finished  leather goods
sales, and sales to the saddle and tack industry. During the second quarter, the
Company is implementing a new export  financing  program to encourage  continued
growth in its export  sales,  has  introduced  new saddle and tack hardware that
sold  out its  first  week  in  stock,  is  planning  the  opening  of its  23rd
sales/distribution  unit in Portland  this fall,  and is preparing for the first
national sales meeting of the Company's managers from around the country held in
over two  years.  Management  believes  the  Company  can  gradually  offset the
declines in the craft and western markets through these programs such that sales
should be flat by the end of 1998 in spite of these  conditions and is poised to
take full advantage of  opportunities  if and when  conditions  improve in these
markets.


Costs, Gross Profit, and Expenses

         Cost of sales as a  percentage  of  revenue  was  57.7%  for the  first
quarter of 1998 as  compared  to 60.3% for the same  quarter in 1997.  This 2.6%
reduction resulted from the Company's strategic efforts to selectively  increase
prices and eliminate low margin products as discussed above.

         The lower relative cost of sales  percentage meant that gross profit as
a  percentage  of sales  improved to 42.3% for the three  months ended March 31,
1998 as  compared  to only  39.7%  for the same  period in 1997.  The  Company's
strategic  goals include  emphasis on improving  gross margins so when sales are
off 11.6% as the Company's were during the first quarter,  gross profit declines
by only a fraction of that amount. This was the case for 1998's first quarter as
gross profit dollars decreased $149,117 compared to 1997's first quarter or only
5.8%.

         Operating  expenses  decreased $97,448 or 4.1% to $2,299,894 during the
first quarter of 1998 from  $2,397,342  during the quarter ended March 31, 1997.
The decrease in the dollar amount of operating expenses between the two quarters
resulted  primarily  from lower freight cost, a decrease in bad debt  write-offs
due to tighten credit policies,  and a reduction in  non-recurring  professional
fees with regard to the search for financing sources in 1997.

         Additional  reductions in payroll  related expense were made during the
first quarter,  but these savings were  reinvested in redesigning  the Company's
sales  strategy  that  should pay a return in the  remainder  of the year.  This
strategy included  reorganizing the management of our  sales/distribution  units
into geographical regions, delaying the 1998 catalog until we had time to listen
to our  customers,  and putting our key people on the road to  personally  visit
customers.  Each region of the country is now headed by a senior manager who has
extensive knowledge of our products and the leathercraft industry.  These region
managers are on the road a  substantial  amount of time,  working with our field
managers in order to be more attentive to our customer's needs.


                                       10

<PAGE>



Other (Income) Expense

         Other  expenses  increased  $32,390 or 16.2% to $232,884  for the first
quarter of 1998 from $200,494 during the same quarter in 1997. This increase was
primarily due to higher  interest  expense  resulting from the  amortization  of
deferred  financing costs offset somewhat by lower actual interest expense.  The
lower actual interest  expense  resulted from reduced levels of indebtedness but
was partly mitigated by a higher effective  interest rate from that available to
the Company during the first quarter of 1997.


Net Loss

         The net loss of the Company  increased $52,343 to a net loss of $88,528
during the first  quarter  compared  to a net loss of $36,185  for the quarter a
year ago. The increased  loss  resulted  from the factors noted above  regarding
sales, gross profit, operating and other expenses.



Capital Resources and Liquidity
-------------------------------
         The primary sources of liquidity and capital resources during the first
quarter of 1998 were funds  provided by  operating  activities  in the amount of
$182,056 and borrowings on the Company's  revolving  credit facility with FINOVA
Capital Corporation ("FINOVA").

         With the decline in sales,  the Company is reducing its  investment  in
accounts  receivable  and  inventory  which  along with  non-cash  expenses  for
depreciation, amortization and deferred financing cost continued to give rise to
significant  operating cash flows despite the essentially flat operating results
for  the  quarter  ended  March  31,  1998.  Accounts  receivable  decreased  to
$1,844,189  and  inventory  decreased  to  $7,032,041  at March  31,  1998  from
$1,865,276 and  $7,279,702,  respectively,  at December 31, 1997. The sum of the
cash flows from these reductions and all non-cash  expenses  included in the net
loss for the quarter totaled $445,521.

         Inventory  turned at an annual rate of only 1.84 times during the first
quarter of 1998,  which is below the 1997 first  quarter  rate of 2.07 times and
the  ratio  of 1.98  times  for all of 1997.  This  decrease  in the  turn  rate
indicates  that further  reductions in inventory are needed as of March 31, 1998
for the current level of sales. The implementation of new information systems in
the Company's  Fort Worth  location is providing  useful  information  that will
assist in monitoring of inventory  levels for the rest of 1998. This same system
is currently being installed in the San Antonio  location and is scheduled to be
installed  in all of the  Company's  sales/distribution  units by the end of the
year.

         The  revolving  credit  facility with FINOVA is based upon the level of
the Company's accounts receivable and inventory.  At March 31, 1998 and December
31,  1997,  the Company had  additional  availability  on the  revolving  credit
facility of approximately $468,500 and $377,000,  respectively. As the Company's
sales and operations expand requiring larger investments in accounts  receivable
and  inventory,  the Company could have almost  $3,000,000  in additional  funds
available under the revolving credit facility.


                                       11

<PAGE>



         As discussed in the Company's  previously  filed, 1997 Annual Report on
Form 10-K,  the FINOVA  loan and  security  agreement  dated  November  21, 1997
contains certain financial covenants which include a requirement to maintain: 1)
a  certain  level  of  earnings  before   interest,   taxes,   depreciation  and
amortization ("EBITDA"); 2) a senior debt service coverage ratio; and 3) a total
debt service  coverage  ratio.  The start date for measuring these covenants was
originally,  January 1, 1998, with the first quarterly measurement period ending
on March 31, 1998.

         The  Company's   strategic   objectives  have  developed   slower  than
projected,  and therefore,  EBITDA in January and February were below the target
amounts.  Under the EBITDA based formulas, the Company did not meet the required
ratios in January or February  despite strong actual  operating cash flows.  The
Company  did meet the  ratios in March,  but not for the  quarterly  measurement
period then ended.  The Company would have  significantly  exceeded the required
ratios if actual  operating  cash  flows plus  interest  and taxes had been used
instead of EBITDA for the starting point of the calculations.

         Prior to the March 31  measurement  date,  the Company  requested  that
FINOVA  delay  the  measurement  start  date  until  March 1, 1998 and amend the
required  EBITDA  thresholds  for 1998 to account for the  January and  February
shortfalls.  FINOVA  agreed to the  Company's  request.  The  Company and FINOVA
entered  into an Amendment to the Loan and  Security  Agreement  dated,  May 13,
1998,  effective as of March 31, 1998. The amendment  deletes the original start
date, first quarterly  measurement  period, and the original EBITDA requirements
for 1998. These were replaced as follows:

         Start Date:                                        March 1, 1998
         First Quarterly
           Measurement Date:                                June 30, 1998
         EBITDA Requirement for
           the first six months of 1998:   $500,000
           the second six months of 1998:  $740,000

         The AMENDMENT TO LOAN AND SECURITY AGREEMENT  dated, May 13, 1998, is 
             ----------------------------------------
filed as Exhibit 4.15 to this Form 10-Q.
           
         The largest uses of cash beyond debt  payments in the first  quarter of
1998 were for the  payment of  deferred  financing  costs  related to the FINOVA
transaction closed on November 21, 1997 and capital  expenditures.  The deferred
financing  cost paid  during  the  quarter  totaled  $77,153,  and cash used for
capital  expenditures  totaled  $26,926.  The capital  expenditures  principally
relate to the new computer  system  installed in Fort Worth,  and the  warehouse
fixtures   purchased   in   the   move   of   the   Company's   Tampa,   Florida
sales/distribution unit.

         The Company  believes that the current sources of liquidity and capital
resources  will be sufficient to fund current  operations and the opening of new
sales/distribution  units.  In 1998, the funding for the opening of new units is
expected  to  be  provided  by  operating  leases,  cash  flows  from  operating
activities,  and the Company's  Revolving Credit Loan with FINOVA.  In addition,
the Company anticipates  funding for completion of the computer  installation in
the remaining locations to be provided by capital leases.

                                       12

<PAGE>


Cautionary Statement
--------------------

         The disclosures under "-Results of Operations"; "-Capital Resources and
Liquidity";  and in the Notes to Consolidated  Financial  Statements as provided
elsewhere   herein  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.  Some of the important  factors which could cause actual  results to
differ materially from those in the forward-looking  statements  include,  among
other things:  changes from anticipated  levels of sales,  whether due to future
national or regional  economic and competitive  conditions,  including,  but not
limited to, retail craft buying patterns,  possible negative trends in the craft
and western  retail  markets,  customer  acceptance  or not of existing  and new
products,   and  pricing  pressures  due  to  competitive  industry  conditions.
Additional  factors  that  may  result  in  different  actual  results  include:
increased prices for leather,  which is a world-wide commodity,  that can not be
passed on to customers for some reason,  change in tax rates, change in interest
rates,  change  in  the  commercial  banking  environment,   problems  with  the
importation  of the products  which the Company buys in 14 countries  around the
world, including,  but not limited to, transportation problems or changes in the
political climate of the countries  involved,  including the maintenance by said
countries of Most Favored  Nation status with the United States of America,  and
other uncertainties, all of which are difficult to predict and many of which are
beyond the control of the Company.













                                       13

<PAGE>
                                                   

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

        On February 6, 1998,  the Company filed a Current  Report on Form 8-K of
The  Leather  Factory,   Inc.  (Commission  file  No.  1-12368)  to  report  the
refinancing of all of its indebtedness  owed to Nationsbank of Texas,  N.A. on a
long-term basis with new lenders on November 21, 1997. The report  discloses the
terms and  conditions  of its New  Senior  Debt  Facility  with  FINOVA  Capital
Corporation and its New Subordinated Debenture to the Schlinger Foundation .
















                                       14

<PAGE>


                                   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: May  15, 1998                  /s/ Wray Thompson
                                     -----------------
                                     Wray Thompson
                                     Chairman of the Board, President,
                                     and Chief Executive Officer



Date: May  15, 1998                  /s/ Anthony C. Morton
                                     ---------------------
                                     Anthony C. Morton
                                     Chief Financial Officer,
                                     Treasurer and Director
                                     (Chief Accounting Officer)











                                       15



<PAGE>

                   THE LEATHER FACTORY, INC. AND SUBSIDIARIES
                                  EXHIBIT INDEX
         Exhibit
         Number                       Description
         -------                      -----------
          3.1     Certificate of  Incorporation  of The Leather  Factory,  Inc.,
                  filed as Exhibit  3.1 to the  Registration  Statement  on Form
                  SB-2  of  The  Leather  Factory,  Inc.  (Commission  File  No.
                  33-81132) filed with the Securities and Exchange Commission on
                  July 5, 1994, and incorporated by reference herein.

          3.2     Bylaws of The Leather  Factory,  Inc., filed as Exhibit 3.2 to
                  the  Registration  Statement  on  Form  SB-2  of  The  Leather
                  Factory,  Inc.  (Commission  File No. 33-81132) filed with the
                  Securities  and  Exchange  Commission  on  July 5,  1994,  and
                  incorporated by reference herein.

          4.1     Sixth Amendment to Second Restated Loan Agreement effective as
                  of April 30, 1997, by and between The Leather Factory, Inc., a
                  Delaware Corporation, and NationsBank of Texas, N.A., filed as
                  Exhibit  4.14 to the  Quarterly  Report  on  Form  10-Q of The
                  Leather Factory, Inc. (Commission File No. 1-12368) filed with
                  the  Securities  and Exchange  Commission on May 15, 1997, and
                  incorporated by reference herein.

          4.2     Forbearance  Agreement effective as of August 31, 1997, by and
                  between The Leather Factory, Inc., a Delaware Corporation, and
                  NationsBank  of  Texas,  N.A.,  filed as  Exhibit  4.15 to the
                  Quarterly  Report on Form 10-Q of The  Leather  Factory,  Inc.
                  (Commission  File No.  1-12368)  filed with the Securities and
                  Exchange  Commission on November 14, 1997, and incorporated by
                  reference herein.

          4.3     Loan and Security  Agreement  dated  November 21, 1997, by and
                  between The Leather Factory, Inc., a Delaware corporation, The
                  Leather  Factory,  Inc.,  a  Texas  corporation,  The  Leather
                  Factory,  Inc.,  an  Arizona  corporation,  Hi-Line  Leather &
                  Manufacturing  Company,  a  California  corporation,  Roberts,
                  Cushman & Company,  Inc., a New York  corporation,  and FINOVA
                  Capital  Corporation,  filed  as  Exhibit  4.1 to the  Current
                  Report on Form 8-K of The Leather  Factory,  Inc.  (Commission
                  File No.  1-12368)  filed  with the  Securities  and  Exchange
                  Commission on February 6, 1998, and  incorporated by reference
                  herein.

          4.4     Revolving  Note  (Revolving  Credit  Loan) dated  November 21,
                  1997, in the principal  amount of  $7,000,000,  payable to the
                  order of FINOVA Capital Corporation, which matures December 1,
                  1999 filed as Exhibit 4.2 to the Current Report on Form 8-K of
                  The Leather Factory,  Inc. (Commission File No. 1-12368) filed
                  with the  Securities  and Exchange  Commission  on February 6,
                  1998, and incorporated by reference herein.

          4.5     Term Loan A Note (Term Loan A) dated November 21, 1997, in the
                  principal  amount of $400,000,  payable to the order of FINOVA
                  Capital  Corporation,  which matures December 1, 1999 filed as
                  Exhibit 4.3 to the  Current  Report on Form 8-K of The Leather
                  Factory,  Inc.  (Commission  File No.  1-12368) filed with the
                  Securities  and Exchange  Commission on February 6, 1998,  and
                  incorporated by reference herein.

          4.6     Term Loan B Note (Term Loan B) dated November 21, 1997, in the
                  principal  amount of $236,000,  payable to the order of FINOVA
                  Capital  Corporation,  which matures December 1, 1999 filed as
                  Exhibit 4.4 to the  Current  Report on Form 8-K of The Leather
                  Factory,  Inc.  (Commission  File No.  1-12368) filed with the
                  Securities  and Exchange  Commission on February 6, 1998,  and
                  incorporated by reference herein.

          4.7     Term Loan C Note (Term Loan C) dated November 21, 1997, in the
                  principal amount of $1,500,000, payable to the order of FINOVA
                  Capital  Corporation,  which matures December 1, 1999 filed as
                  Exhibit 4.5 to the  Current  Report on Form 8-K of The Leather
                  Factory,  Inc.  (Commission  File No.  1-12368) filed with the
                  Securities  and Exchange  Commission on February 6, 1998,  and
                  incorporated by reference herein. .
         
          4.8     Subordination  Agreement  dated   November 21, 1997,  by   and
                  between   FINOVA   Capital   Corporation,    The   Schlinger
                  Foundation,   The   Leather   Factory,   Inc.,   a  Delaware
                  corporation,  The Leather Factory, Inc.,  a Texas corporation,
                  The Leather Factory,  Inc.,  an Arizona  corporation,  Hi-Line
                  Leather & Manufacturing  Company,  a  California  corporation,
                  and Roberts,  Cushman & Company, Inc.,  a New York corporation
                  filed  as Exhibit  4.6 to  the  Current  Report on Form 8-K of
                  The Leather  Factory,  Inc.    (Commission  File No.  1-12368)
                  filed   with  the  Securities  and  Exchange   Commission  on
                  February 6, 1998, and incorporated by reference herein.




                   THE LEATHER FACTORY, INC. AND SUBSIDIARIES
                                  EXHIBIT INDEX
                                   (CONTINUED)


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


       4.9        Pledge  Agreement  dated  November  21,  1997,  by and between
                  Ronald  C.  Morgan  and Robin L.  Morgan  and  FINOVA  Capital
                  Corporation filed as Exhibit 4.7 to the Current Report on Form
                  8-K of The Leather Factory, Inc. (Commission File No. 1-12368)
                  filed with the Securities and Exchange  Commission on February
                  6, 1998, and incorporated by reference herein.

      4.10        Patent  Security  Agreement  dated  November 21, 1997,  by and
                  between The Leather Factory, Inc., a Delaware corporation, The
                  Leather  Factory,  Inc.,  a  Texas  corporation,  The  Leather
                  Factory,  Inc.,  an  Arizona  corporation,  Hi-Line  Leather &
                  Manufacturing  Company,  a  California  corporation,  Roberts,
                  Cushman & Company,  Inc., a New York  corporation,  and FINOVA
                  Capital Corporation filed as Exhibit 4.8 to the Current Report
                  on Form 8-K of The Leather Factory,  Inc. (Commission File No.
                  1-12368) filed with the Securities and Exchange  Commission on
                  February 6, 1998, and incorporated by reference herein.

      4.11        Trademark  Security  Agreement dated November 21, 1997, by and
                  between The Leather Factory, Inc., a Delaware corporation, The
                  Leather  Factory,  Inc.,  a  Texas  corporation,  The  Leather
                  Factory,  Inc.,  an  Arizona  corporation,  Hi-Line  Leather &
                  Manufacturing  Company,  a  California  corporation,  Roberts,
                  Cushman & Company,  Inc., a New York  corporation,  and FINOVA
                  Capital Corporation filed as Exhibit 4.9 to the Current Report
                  on Form 8-K of The Leather Factory,  Inc. (Commission File No.
                  1-12368) filed with the Securities and Exchange  Commission on
                  February 6, 1998, and incorporated by reference herein.

      4.12        Copyright  Security  Agreement dated November 21, 1997, by and
                  between The Leather Factory, Inc., a Delaware corporation, The
                  Leather  Factory,  Inc.,  a  Texas  corporation,  The  Leather
                  Factory,  Inc.,  an  Arizona  corporation,  Hi-Line  Leather &
                  Manufacturing  Company,  a  California  corporation,  Roberts,
                  Cushman & Company,  Inc., a New York  corporation,  and FINOVA
                  Capital  Corporation  filed  as  Exhibit  4.10 to the  Current
                  Report on Form 8-K of The Leather  Factory,  Inc.  (Commission
                  File No.  1-12368)  filed  with the  Securities  and  Exchange
                  Commission on February 6, 1998, and  incorporated by reference
                  herein.

      4.13        Promissory Note  (Subordinated  Debenture)  dated November 14,
                  1997, in the principal  amount of  $1,000,000,  payable to the
                  order of The Schlinger  Foundation,  which matures December 1,
                  1999 filed as Exhibit  4.11 to the Current  Report on Form 8-K
                  of The Leather  Factory,  Inc.  (Commission  File No. 1-12368)
                  filed with the Securities and Exchange  Commission on February
                  6, 1998, and incorporated by reference herein.

      4.14        Pledge and Security  Agreement dated November 14, 1997, by and
                  between The Schlinger  Foundation  and J. Wray  Thompson,  Sr.
                  filed as Exhibit 4.12 to the Current Report on Form 8-K of The
                  Leather Factory, Inc. (Commission File No. 1-12368) filed with
                  the  Securities  and Exchange  Commission on February 6, 1998,
                  and incorporated by reference herein.

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

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

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



                                       17

<PAGE>










                                  EXHIBIT 4.15









<PAGE>


                    AMENDMENT TO LOAN AND SECURITY AGREEMENT
                    ---------------------------------------

         This AMENDMENT TO LOAN AND SECURITY AGREEMENT (this "Amendment"), dated
as of May 13, 1998, is among THE LEATHER FACTORY,  INC., a Delaware corporation,
THE LEATHER FACTORY,  INC., a Texas corporation,  THE LEATHER FACTORY,  INC., an
Arizona  corporation,  HI-LINE  LEATHER &  MANUFACTURING  COMPANY,  a California
corporation  and  ROBERTS,  CUSHMAN  &  COMPANY,  INC.,  a New York  corporation
(hereinafter   referred  to  individually  as  "Borrower"  and  collectively  as
"Borrowers"), and FINOVA CAPITAL CORPORATION, a Delaware corporation ("FINOVA").

                                 R E C I T A L S
                                 ---------------

         A.  Borrowers  and FINOVA are  parties to a certain  Loan and  Security
Agreement dated as of November 21, 1997, as amended (the "Loan Agreement").

         B.  Borrowers  and FINOVA  desire to amend the Loan  Agreement  to make
certain  changes in the covenants  and to correct  certain  matters,  all as set
forth below.

         NOW,  THEREFORE,  in consideration of the mutual  agreements  contained
herein,  and subject to the terms and  conditions  hereof,  Borrowers and FINOVA
agree as follows:

         1.  Definitions.  All capitalized  terms used but not elsewhere defined
herein  shall have the  respective  meanings  ascribed to such terms in the Loan
Agreement, as amended by this Amendment.

         2. Amendments to Loan Agreement.  Section 6.1.13 (Financial  Covenants)
of the Schedule to the Loan Agreement is hereby amended as set forth below:

                  (a)      EBITDA   is  hereby  deleted  in its entirety and the
                  following is substituted in lieu thereof:

                           EBITDA.   Borrower  shall  maintain  Earnings  Before
                  Interest,  Taxes,  Depreciation  and  Amortization of not less
                  than (i) Five Hundred  Thousand and No/100 Dollars  ($500,000)
                  for the first six month  period of the first Loan  Year,  (ii)
                  Seven Hundred Forty Thousand and No/100 Dollars ($740,000) for
                  the second six month period of the first Loan Year, (iii) Nine
                  Hundred  Thousand and No/100 Dollars  ($900,000) for the first
                  six month  period of each  Loan Year  thereafter  and (iv) One
                  Million Fifty Thousand and No/100 Dollars ($1,050,000) for the
                  second six month period of each Loan Year thereafter.



<PAGE>


                                                           
                  (b) Senior Debt Service  Coverage  Ratio is hereby  deleted in
                  its entirety and the following is substituted in lieu thereof:

                           Senior Debt Service  Coverage  Ratio.  As of the last
                  day  of  each  calendar  quarter  ended  March  31,  June  30,
                  September  30 or  December  31  commencing  with the  calendar
                  quarter  ended  June  30,  1998,   Borrower's  Operating  Cash
                  Flow/Actual for the  consecutive  12-month period ending as of
                  such last day must be at least 1.35 times the amount necessary
                  to meet Borrower's  Senior  Contractual  Debt Service for such
                  12-month period;  provided however,  that, with respect to the
                  calculations  set forth  herein for the  period  from March 1,
                  1998  through  December 31, 1998,  Borrower's  Operating  Cash
                  Flow/Actual  and  Senior  Contractual  Debt  Service  shall be
                  determined  beginning as of March 1, 1998 (the "Start  Date")*
                  and be measured as follows: (x) the time period from the Start
                  Date through June 30, 1998, shall be for such amounts for such
                  period,  (y) the time  period  from  the  Start  Date  through
                  September 30, 1998, shall be for such amounts for such period,
                  and (z) the time period from the Start Date  through  December
                  31,  1998,  shall be for such  amounts for such  period;  and,
                  provided further,  that all such determinations  shall be made
                  on a consolidated basis.

                  (c) Total Debt Service Coverage Ratio is hereby deleted in its
                  entirety and the following is substituted in lieu thereof:

                           Total Debt Service Coverage Ratio. As of the last day
                  of each calendar quarter ended March 31, June 30, September 30
                  or December 31 commencing with the calendar quarter ended June
                  30,  1998,  Borrower's  Operating  Cash  Flow/Actual  for  the
                  consecutive 12-month period ending as of such last day must be
                  at least 1.10 times the amount  necessary  to meet  Borrower's
                  Total  Contractual  Debt  Service  for such  12-month  period;
                  provided  however,  that, with respect to the calculations set
                  forth  herein  for the  period  from  March 1,  1998,  through
                  December 31, 1998,  Borrower's  Operating Cash Flow/Actual and
                  Total  Contractual Debt Service shall be determined  beginning
                  as of the Start Date and be measured as follows:  (x) the time
                  period from the Start Date through June 30, 1998, shall be for
                  such  amounts  for such  period,  (y) the time period from the
                  Start  Date  through  September  30,  1998,  shall be for such
                  amounts for such period and (z) the time period from the Start
                  Date through  December 31, 1998, shall be for such amounts for
                  such   period;   and,   provided   further,   that   all  such
                  determinations shall be made on a consolidated basis.

         3. Conditions to  Effectiveness.  The  effectiveness  of this Amendment
shall be subject to the  satisfaction  of all of the  following  conditions in a
manner, form and substance satisfactory to FINOVA:

                  (a) Representations and Warranties. All of the representations
         and  warranties of Borrowers set forth in the Loan  Documents  shall be
         true and correct in all material respects.

                  (b)  Approvals.  The approval  and/or  consent shall have been
         obtained  from all persons  whose  approval or consent is  necessary or
         required  to enable  Borrowers  to enter  into this  Amendment  and the
         documents delivered in connection herewith and therewith and to perform
         its obligations hereunder and thereunder;

                  (c)  Material  Adverse  Change.  No event shall have  occurred
         since  December 31, 1997 which has had or reasonably  could be expected
         to have a material adverse effect.


------------------------------
*    NOTE:  The definition of Start Date should be modified to correspond with
     the relevant fiscal quarter in which the closing occurs.

                                        2

<PAGE>


                  (d)  Performance;   No  Default.   Each  Borrower  shall  have
         performed and complied with all agreements and conditions  contained in
         the Loan Documents to be performed by or complied with by such Borrower
         prior to the date hereof, and no Event of Default then shall exist.

                  (e)  Proceedings  and  Documents.   All  corporate  and  other
         proceedings  in  connection  with the  execution  and  delivery of this
         Amendment  by Borrowers  shall be  satisfactory  to FINOVA,  and FINOVA
         shall have  received  all such  counterpart  originals  or certified or
         other copies of evidence of such as FINOVA may request.

                  (f) Payment of Fees and  Expenses.  Borrowers  shall have paid
         all fees and  expenses  of  FINOVA  incurred  in  connection  with this
         Amendment,  including,  without  limitation,  (i)  attorneys'  fees and
         expenses and (ii) $3,000 amendment fee.

         4. References. From and after the Effective Date, all references in the
Loan Agreement to (i) the "Loan and Security Agreement" shall be deemed to refer
to the Loan  Agreement  as amended  hereby  and (ii) a term  defined in the Loan
Agreement  shall be deemed to refer to such  deferred  term as  amended  by this
Amendment.

         5.       Representations and Warranties.

                  (a)  Each  Borrower   hereby   confirms  to  FINOVA  that  the
         representations  and  warranties  set  forth in  Section  5 of the Loan
         Agreement,  as amended by this  Amendment,  are true and correct in all
         material  respects  as of the date  hereof,  and  shall be deemed to be
         remade as of the date hereof.

                  (b)      Each Borrower represents and warrants to FINOVA that:

                           (i) such  Borrower  has full power and  authority  to
                  execute  and  deliver  this  Amendment  and  to  perform  such
                  Borrower's obligations hereunder,

                           (ii) upon the  execution  and delivery  hereof,  this
                  Amendment  will be valid,  binding and  enforceable  upon such
                  Borrower in accordance with its terms,

                           (iii) the  execution  and delivery of this  Amendment
                  does not and will not  contravene,  conflict with,  violate or
                  constitute  a default  under (A) the Loan  Agreement,  (B) any
                  Loan  Document,  (C) any  applicable  law,  rule,  regulation,
                  judgment,  decree  or order  or any  agreement,  indenture  or
                  instrument  to which such  Borrower  is a party or is bound or
                  which is binding upon or  applicable  to all or any portion of
                  such Borrower's property,

                           (iv) no Event of Default exists,

                           (v) such Borrower's property is free and clear of all
                  Liens other than Permitted Liens,

                           (vi) such  Borrower  has no  Indebtedness  except (A)
                  such Borrower's Obligations and (B) Subordinated Debt,

                           (vii)  all  balance   sheets,   all   statements   of
                  operations  and of changes in  financial  position,  and other
                  financial data which have been or shall hereafter be furnished
                  to  FINOVA  for the  purposes  of or in  connection  with this
                  Amendment  have been and will be prepared in  accordance  with
                  GAAP consistently  applied throughout the periods involved and
                  do and will  present  fairly the  financial  condition  of the
                  entities  involved as of the dates  thereof and the results of
                  their operations for the periods covered thereby, and

                                       3

<PAGE>

                           (viii) no  material  litigation  (including,  without
                  limitation,  derivative actions),  arbitrations,  governmental
                  investigation  or  proceeding  or inquiry  shall,  on the date
                  hereof,  be  pending  which was not  previously  disclosed  in
                  writing to FINOVA and no material  adverse  development  shall
                  have   occurred   in  any   litigation   (including,   without
                  limitation,   derivative  actions),  arbitration,   government
                  investigations,  or proceeding or inquiry previously disclosed
                  to FINOVA in writing.

         6. Costs and Expenses. Borrowers agree to reimburse FINOVA for all fees
and expenses  incurred in the  preparation,  negotiation  and  execution of this
Amendment,  including,  without limitation,  the reasonable fees and expenses of
counsel for FINOVA.

         7. No Further Amendments;  Ratification of Liability. Except as amended
hereby,  the Loan Agreement and each of the other Loan Documents shall remain in
full force and effect in accordance with their respective  terms.  Each Borrower
hereby ratifies and confirms its  liabilities,  obligations and agreements under
the  Loan  Agreement  and the  other  Loan  Documents,  all as  amended  by this
Amendment,  and the Liens created thereby,  and acknowledges  that (i) it has no
defenses,  claims or set-offs to the enforcement by FINOVA of such  liabilities,
obligations and  agreements,  (ii) FINOVA has fully performed all obligations to
Borrowers  which it may have had or has on and as of the date  hereof  and (iii)
other than as specifically set forth herein,  FINOVA does not waive, diminish or
limit any term or condition  contained  in the Loan  Agreement or the other Loan
Documents. FINOVA's agreement to the terms of this Amendment shall not be deemed
to establish or create a custom or course of dealing among FINOVA and Borrowers.

         8.  Counterparts.  This  Amendment  may be  executed  in  one  or  more
counterparts,  each of which shall be deemed an original, and all of which, when
taken together, shall constitute one and the same instrument.

         9. Further Assurances.  Each Borrower covenants and agrees that it will
at any time and from time to time do, execute,  acknowledge and deliver, or will
cause to be done, executed,  acknowledged and delivered,  all such further acts,
documents and  instruments  as reasonably  may be required by FINOVA in order to
effectuate fully the intent of this Amendment.

         10.  Governing  Law.  This  Amendment,   including  without  limitation
enforcement of the  obligations,  shall be  interpreted  in accordance  with the
internal  laws (and not the  conflict  of laws  rules)  of the State of  Arizona
governing contracts to be performed entirely within such state.

         11.  Severability.  If any term or provision  of this  Amendment or the
application  thereof to any party or  circumstance  shall be held to be invalid,
illegal or  unenforceable  in any respect by a court of competent  jurisdiction,
the validity,  legality and enforceability of the remaining terms and provisions
of this Amendment shall not in any way be affected or impaired thereby,  and the
affected term or provision shall be modified to the minimum extent  permitted by
law so as most fully to achieve the intention of this Amendment.

         12.  Captions.   The  captions  in  this  Amendment  are  inserted  for
convenience of reference only and in no way define,  describe or limit the scope
or intent of this Amendment or any of the provisions hereof.

         13. Successors.  This Amendment shall be binding upon each Borrower and
FINOVA and their respective  representatives,  successors and assigns, and shall
inure to the sole  benefit of each  Borrower  and  FINOVA  and their  respective
representatives, successors and assigns.

         14.  Effective Date. Upon execution by each of the parties hereto,  the
amendments herein shall be deemed to take effect as of March 31, 1998.

                [remainder of this page intentionally left blank]












                                       4


<PAGE>


         IN WITNESS  WHEREOF,  this Amendment has been executed and delivered by
each of the parties  hereto by a duly  authorized  officer of each such party on
the date first set forth above.

                    THE  LEATHER  FACTORY,  INC.,  a Delaware  corporation,  THE
                    LEATHER  FACTORY,  INC.,  a Texas  corporation,  THE LEATHER
                    FACTORY,  INC., an Arizona  corporation,  HI-LINE  LEATHER &
                    MANUFACTURING COMPANY, a California corporation, and ROBERTS
                    CUSHMAN & COMPANY, INC., a New York corporation

                             By:      /s/Anthony C. Morton
                                      -----------------------------------------
                             Name:     Anthony C. Morton
                             Title:   Chief Financial Officer & Treasurer

                             FINOVA CAPITAL CORPORATION, a Delaware corporation

                             By:      /s/Kenneth Sepp
                                      -----------------------------------------
                             Name:    Kenneth Sepp
                             Title:   V.P.






<PAGE>














                                  EXHIBIT 27.1