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, 2002

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 May 10, 2002
----------------------------------------   -------------------------------------
Common Stock, par value $.0024 per share                 10,041,161


<PAGE>

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

     This report  (particularly Item 2: Management's  Discussion and Analysis of
Financial  Condition  and  Results  of  Operations)   contains   forward-looking
statements of management.  In general,  these are  predictions or suggestions of
future events and statements or  expectations  of future trends or  occurrences.
There are certain  important risks that could cause results to differ materially
from those anticipated by some of the forward-looking statements.  Some, but not
all,  of the  important  risks  which  could  cause  actual  results  to  differ
materially from those suggested by the forward-looking statements include, among
other things:

o    Changes in the economic  recovery in the United States,  as well as abroad,
     from a recent downturn may cause our sales to decrease or not to increase.

o    Favorable trends in the arts and crafts industry may slow or reverse.

o    Although  the  Company   believes  that  it  has  fixed  recent   problems,
     reoccurrence of problems with our websites could result in lost sales.

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

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

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

o    If, for  whatever  reason,  the costs of our raw  materials  and  inventory
     increase,  we may  not be able to pass  those  costs  on to our  customers,
     particularly if the economy has not recovered from its downturn.

o    Other  factors  could  cause  either  fluctuations  in buying  patterns  or
     possible  negative  trends in the  craft and  western  retail  markets.  In
     addition, our customers may change their preferences to products other than
     ours, or they may not accept new products as we introduce them.

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

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

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

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

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

                                       2
<PAGE>

                            THE LEATHER FACTORY, INC.

                                    FORM 10-Q

                  FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2002


                                TABLE OF CONTENTS
                                -----------------


                                                                        PAGE NO.
                                                                        --------

PART I.  FINANCIAL INFORMATION

  Item 1.  Financial Statements

    Consolidated Balance Sheets
     March 31, 2002 and December 31, 2001 ...............................      4


    Consolidated Statements of Operations
     Three months ended March 31, 2002 and 2001..........................      5


    Consolidated Statements of Cash Flows
     Three months ended March 31, 2002 and 2001..........................      6


    Consolidated Statements of Stockholders' Equity
     Three months ended March 31, 2002 and2001...........................    7-8


    Notes to Consolidated Financial Statements...........................      9


  Item 2.  Management's Discussion and Analysis of Financial
            Condition and Results ofOperations...........................     12

  Item 3.  Quantitative and Qualitative Disclosures About Market Risk....     16

PART II.  OTHER INFORMATION

  Item 6.  Exhibits and Reports on Form8-K...............................     16


SIGNATURES...............................................................     17


                                       3
<PAGE>
<TABLE>
<CAPTION>

                                                                   4
--------------------------------------------------------------------------------

                            THE LEATHER FACTORY, INC.
                           CONSOLIDATED BALANCE SHEETS

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

                                                                           March 31,     December 31,
                                                                              2002            2001
                                                                         ------------    ------------
                                                                          (UNAUDITED)
<S>                                                                      <C>             <C>
                                     ASSETS
CURRENT ASSETS:
     Cash                                                                $     93,453    $    409,040
     Cash restricted for payment on revolving credit facility                 346,081         491,729
     Accounts receivable-trade, net of allowance for doubtful accounts
         of $177,000 and $191,000 in 2002 and 2001, respectively            2,742,873       2,297,953
     Inventory                                                              8,275,170       9,054,269
     Deferred income taxes                                                    165,481         128,111
     Other current assets                                                     945,471         479,390
                                                                         ------------    ------------
                             Total current assets                          12,568,529      12,860,492
                                                                         ------------    ------------

PROPERTY AND EQUIPMENT, at cost                                             4,313,668       4,201,368
  Less-accumulated depreciation and amortization                           (2,970,318)     (2,858,869)
                                                                         ------------    ------------
                             Property and equipment, net                    1,342,499       1,343,350

GOODWILL, net of accumulated amortization of $732,000
     and $1,583,000 in 2002 and 2001, respectively                            607,455      4,535,412
OTHER INTANGIBLES, net of accumulated amortization of
     $77,000 and $66,000, in 2002 and 2001, respectively                      497,871        476,908
OTHER assets
                                                                              296,079         333,012
                                                                         ------------    ------------
                                                                         $ 15,313,284    $ 19,548,323
                                                                         ============    ============

                      LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
     Accounts payable                                                    $  1,547,766    $  1,303,596
     Accrued expenses and other liabilities                                 1,116,555       1,171,152
     Income taxes payable                                                     387,396         52,662
     Notes payable and current maturities of long-term debt                 2,987,517       4,527,904
                                                                         ------------    ------------
                             Total current liabilities                      6,039,234       7,055,314
                                                                         ------------    ------------
DEFERRED INCOME TAXES                                                          62,727          61,647


NOTES PAYABLE AND LONG-TERM DEBT, net of current maturities                     6,657           7,691

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, 10,011,161 and 9,991,161 shares issued
         and outstanding at 2002 and 2001, respectively                        24,027          23,979
     Paid-in capital                                                        4,043,585       4,030,508
     Retained earnings                                                      5,228,661       8,478,187
     Less: Notes receivable - secured by common stock                         (51,203)        (71,939)
     Accumulated other comprehensive loss                                     (40,404)        (37,064)
                                                                         ------------    ------------
                             Total stockholders' equity                     9,204,666      12,423,671
                                                                         ------------    ------------
                                                                         $ 15,313,284    $ 19,548,323
                                                                         ============    ============
</TABLE>



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

                                       4
<PAGE>
<TABLE>
<CAPTION>

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

                            THE LEATHER FACTORY, INC.
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                                   (UNAUDITED)
                   THREE MONTHS ENDED MARCH 31, 2002 AND 2001

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

                                                                               2002            2001
                                                                          ------------    ------------
<S>                                                                       <C>             <C>
NET SALES                                                                 $ 10,203,951    $  9,372,613

COST OF SALES                                                                4,835,356       4,488,397
                                                                          ------------    ------------

                           Gross profit                                      5,368,595       4,884,216

OPERATING EXPENSES                                                           4,175,136       3,908,877
                                                                          ------------    ------------

INCOME FROM OPERATIONS                                                       1,193,459         975,339

OTHER EXPENSE:
    Interest expense                                                            89,869         148,593
    Other, net                                                                  16,355           7,291
                                                                          ------------    ------------
                           Total other expense                                 106,224         155,884
                                                                          ------------    ------------

INCOME BEFORE INCOME TAXES and CUMULATIVE EFFECT OF CHANGE
  IN ACCOUNTING PRINCIPLE                                                    1,087,235         819,455

PROVISION FOR INCOME TAXES                                                     327,930         322,172
                                                                          ------------    ------------

INCOME BEFORE CUMULATIVE EFFECT OF CHANGE IN
   ACCOUNTING PRINCIPLE                                                        759,305         497,283

CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE,
  NET OF INCOME TAXES                                                       (4,008,831)           --
                                                                          ------------    ------------

NET INCOME (LOSS)                                                         $ (3,249,526)   $    497,283
                                                                          ============    ============

 NET INCOME PER COMMON SHARE - BASIC:
      INCOME BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE   $       0.08    $       0.05
      CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE, NET                   (0.40)           --
                                                                          ------------    ------------

      NET INCOME PER COMMON SHARE                                         $      (0.32)   $       0.05
                                                                          ============    ============

 NET INCOME PER COMMON SHARE - ASSUMING DILUTION:
      INCOME BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE   $       0.07    $       0.05
      CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE, NET                   (0.37)           --
                                                                          ------------    ------------

      NET INCOME PER COMMON SHARE - DILUTED                               $      (0.30)   $       0.05
                                                                          ============    ============
</TABLE>


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

                                       5
<PAGE>
<TABLE>
<CAPTION>

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

                            THE LEATHER FACTORY, INC.
                      CONSOLIDATED STATEMENTS OF CASH FLOW
                                   (UNAUDITED)
                   THREE MONTHS ENDED MARCH 31, 2002 AND 2001

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


                                                                             2002           2001
                                                                         -----------    -----------
<S>                                                                      <C>            <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net income (loss)                                                      $(3,249,526)   $   497,283
  Adjustments to reconcile net income (loss) to net
   cash provided by operating activities-
     Depreciation & amortization                                             122,993        193,643
     Amortization of deferred financing costs                                 37,038         11,438
     Other                                                                   (39,630)       (11,662)
     Cumulative effect of change in accounting principle                   4,008,831           --
     Net changes in assets and liabilities:
       Accounts receivable-trade, net                                       (444,920)      (365,273)
       Inventory                                                             878,308        822,650
       Income taxes                                                          334,734        193,113
       Other current assets                                                 (465,286)        69,898
       Accounts payable                                                      244,169       (156,510)
       Accrued expenses and other liabilities                                (54,597)      (489,104)
                                                                         -----------    -----------
     Total adjustments                                                     4,621,640        268,193
                                                                         -----------    -----------
      Net cash provided by operating activities                            1,372,114        765,476
                                                                         -----------    -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
  Purchase of property and equipment                                         (97,622)      (453,230)
  Payments in connection with businesses acquired                           (227,747)          --
  Increase in other assets                                                      (421)        (1,078)
                                                                         -----------    -----------
      Net cash used in investing activities                                 (325,790)      (454,308)
                                                                         -----------    -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
  Net decrease in revolving credit loans                                  (1,521,777)      (635,354)
  Proceeds from notes payable and long-term debt                                --           18,676
  Payments on notes payable and long-term debt                               (19,643)       (25,182)
  Decrease in cash restricted for payment on revolving credit facility       145,648         35,064
  Payments received on notes secured by common stock                          20,736          1,750
  Proceeds from issuance of common stock                                      13,125         59,737
                                                                         -----------    -----------
      Net cash used in financing activities                               (1,361,911)      (545,309)
                                                                         -----------    -----------
NET DECREASE IN CASH                                                        (315,587)      (234,141)

CASH, beginning of period                                                    409,040        234,141
                                                                         -----------    -----------
CASH, end of period                                                      $    93,453    $      --
                                                                         ===========    ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
  Interest paid during the period                                        $    59,283    $   148,337
  Income taxes paid during the period, net of (refunds)                       25,172        135,248
</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)
                   THREE MONTHS ENDED MARCH 31, 2002 AND 2001
--------------------------------------------------------------------------------



                                        Common Stock                                                 Notes
                                  ----------------------------                                     receivable
                                     Number           Par           Paid-in         Retained      - secured by
                                   of shares         value          capital         earnings      common stock
                                 ------------    ------------    ------------    ------------    ------------
<S>                              <C>             <C>             <C>             <C>             <C>
BALANCE, December 31, 2000          9,908,161    $     23,780    $  3,946,608    $  6,471,754    $   (120,339)


  Payments on notes
  receivable -
    secured by common stock              --              --               --             --             1,750

  Shares issued - employee
    Stock options exercised            60,000             144           59,593           --              --


  Net Income                             --              --               --          497,283            --


  Translation adjustment                 --              --               --             --              --
                                 ------------    ------------    ------------    ------------    ------------
BALANCE, March 31, 2001             9,968,161    $     23,924     $  4,006,201   $  6,969,037    $   (118,589)
                                 ============    ============    ============    ============    ============

Comprehensive income for the three months ended March 31, 2001



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


   Payments on notes
   receivable -
   secured by common stock               --              --               --             --            20,736

   Shares issued - employee
   Stock options exercised             20,000              48           13,077           --              --

   Net loss                              --              --               --       (3,249,526)           --

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

                                 ------------    ------------    ------------    ------------    ------------
BALANCE, March 31, 2002            10,011,161    $     24,027    $  4,043,585    $  5,228,661    $    (51,203)
                                 ============    ============    ============    ============    ============

Comprehensive loss for the three months ended March 31, 2002
</TABLE>



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

                                       7
<PAGE>

--------------------------------------------------------------------------------
                            THE LEATHER FACTORY, INC.
            CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY CONTINUED
                                   (UNAUDITED)
                   THREE MONTHS ENDED MARCH 31, 2002 AND 2001
--------------------------------------------------------------------------------



                                  Accumulated
                                     Other
                                   Cumulative                    Comprehensive
                                      Loss           Total       Income (Loss)
                                 ------------    ------------    ------------
BALANCE, December 31, 2000       $    (26,166)     10,295,637


  Payments on notes
  receivable -
    secured by common stock              --             1,750

  Shares issued - employee
    Stock options exercised              --            59,737


  Net Income                             --           497,283         497,283


  Translation adjustment               (9,768)         (9,768)         (9,768)
                                 ------------    ------------
BALANCE, March 31, 2001          $    (35,934)   $ 10,844,639
                                 ============    ============
                                                                 ------------
Comprehensive income for the three months ended March 31, 2001   $    487,515
                                                                 ============


BALANCE, December 31, 2001    $    (37,064)     12,423,671


   Payments on notes
   receivable -
   secured by common stock            --            20,736

   Shares issued - employee
   Stock options exercised            --            13,125

   Net loss                           --        (3,249,526)        (3,249,526)

   Translation adjustment
                                    (3,340)         (3,340)            (3,340)
                              ------------    ------------
BALANCE, March 31, 2002       $    (40,404)   $  9,204,666
                              ============    ============
                                                                 ------------
Comprehensive loss for the three months ended March 31, 2002     $ (3,252,866)
                                                                 ============

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

                                       8
<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 those of a normal  recurring
nature)  considered  necessary to present  fairly its  financial  position as of
March 31, 2002 and  December 31, 2001,  and the results of  operations  and cash
flows for the three-month  periods ended March 31, 2002 and 2001. The results of
operations for the  three-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 2001 Annual Report on Form 10-K ("Annual
Report").

In June 2001,  the FASB issued  Statements  of  Financial  Accounting  Standards
("SFAS") No. 142, Goodwill and Other Intangible  Assets.  This standard requires
companies  to stop  amortizing  goodwill  and  certain  intangible  assets  with
indefinite useful lives. Instead,  goodwill and intangible assets deemed to have
indefinite  useful lives will be subject to an annual review of impairment.  The
new standard was effective for The Leather  Factory,  Inc.  ("TLF") in the first
quarter of 2002. Upon adoption of SFAS No. 142, TLF recorded a one-time, noncash
charge of  approximately $4 million to reduce the carrying value of its goodwill
relating  to its  subsidiary,  Roberts,  Cushman  & Co.,  Inc.  This  charge  is
non-operational  in  nature  and  is  reflected  as a  cumulative  effect  of an
accounting change in the accompanying consolidated statement of operations.  For
additional discussion on the impact of adopting SFAS No. 142, see Note 5.

Certain   reclassifications  have  been  made  to  conform  the  2001  financial
statements to the presentation in 2002. The  reclassifications  had no effect on
net income.

2.  INVENTORY

The components of inventory consist of the following:
                                                                As of
                                                     ---------------------------
                                                       March 31,    December 31,
                                                          2002           2001
                                                     ------------   ------------
      Finished goods held for sale                   $  7,333,112   $  8,025,845
      Raw materials and work in process                   942,058      1,028,424
                                                     ------------   ------------
                                                     $  8,275,170   $  9,054,269
                                                     ============   ============

3.  EARNINGS PER SHARE

The following table sets forth the computation of basic and diluted earnings per
share ("EPS"):
                                                         Three Months Ended March 31,
                                                         ----------------------------
                                                              2002            2001
                                                         ------------    ------------
<S>                                                      <C>             <C>
Numerator:
    Net income (loss)                                    $ (3,249,526)   $    497,283
                                                         ------------    ------------
    Numerator for basic and diluted earnings per share     (3,249,526)        497,283

Denominator:
    Denominator for basic earnings per share -
     Weighted-average shares                               10,001,717       9,949,494

Effect of dilutive securities:
    Stock options                                             482,800          92,424
    Warrants                                                  247,196         162,690
                                                         ------------    ------------
Dilutive potential common shares                              729,996         255,114
                                                         ------------    ------------

    Denominator for diluted earnings per share -
      weighted-average shares                              10,731,713      10,204,608
                                                         ============    ============

    Basic earnings per share                             $      (0.32)   $       0.05
                                                         ============    ============
    Diluted earnings per share                           $      (0.30)   $       0.05
                                                         ============    ============
</TABLE>

                                       9
<PAGE>
<TABLE>
<CAPTION>

The net effect of  converting  stock  options to  purchase  844,000  and 442,000
shares of common stock at option prices less than the average  market prices has
been included in the computations of diluted EPS for the quarter ended March 31,
2002 and 2001, respectively.


4.  SEGMENT INFORMATION

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

The Company's  reportable  operating segments have been determined as separately
identifiable  business units. The Company measures segment earnings as operating
earnings, defined as income before interest and income taxes.

                                                The Leather     Tandy Leather    Roberts,
                                                  Factory         Company      Cushman & Co        Total
                                               ------------    ------------    ------------    ------------
<S>                                            <C>             <C>             <C>             <C>
For the quarter ended March 31, 2002
Net sales                                      $  7,824,517    $  1,877,874    $    501,560    $ 10,203,951
Gross profit                                      4,126,872       1,073,579         168,144       5,368,595
Operating earnings                                  975,727         141,501          76,231       1,193,459
Interest expense                                    (89,655)           (214)           --           (89,869)
Other, net                                          (15,854)           (501)           --           (16,355)
                                                                                               ------------
Income  before  income  taxes &  change  in
accounting principle                                870,218         140,786          76,231       1,087,235
                                                                                               ------------
     Depreciation and amortization                  132,946          23,703           3,382         160,031
     Fixed asset additions                           71,529          25,513             580          97,622
                                               ------------    ------------    ------------    ------------
     Total assets                              $ 11,928,363    $  2,530,336    $    854,585    $ 15,313,284
                                               ------------    ------------    ------------    ------------


For the quarter ended March 31, 2001
Net sales                                      $  7,103,792    $  1,775,116    $    493,705    $  9,372,613
Gross profit                                      3,764,419         978,310         141,487       4,884,216
Operating earnings (loss)                         1,003,701         (19,664)         (8,698)        975,339
Interest expense                                   (148,593)           --              --          (148,593)
Other, net                                           (7,444)            153            --            (7,291)
                                                                                               ------------
Income (loss) before income taxes                   847,664         (19,511)         (8,698)        819,455
                                                                                               ------------
     Depreciation and amortization                  131,044          35,861          38,176         205,081
     Fixed asset additions                          280,076         172,434             720         453,230
                                               ------------    ------------    ------------    ------------
     Total assets                              $ 10,852,853    $  3,213,420    $  5,071,821    $ 19,138,094
                                               ------------    ------------    ------------    ------------
</TABLE>

                                       10
<PAGE>
<TABLE>
<CAPTION>

Net sales for geographic areas were as follows:

                                        Three months ended
                                  March 31, 2002   March 31, 2001
                                  -------------------------------
     United States                $    9,662,434   $    8,869,011
     All other countries                 541,517          503,602
                                  -------------------------------
                                  $   10,203,951   $    9,372,613
                                  ===============================


5.  GOODWILL and OTHER INTANGIBLES

As discussed in Note 1, in January  2002,  the Company  adopted SFAS 142,  which
requires  companies to stop amortizing  goodwill and certain  intangible  assets
with indefinite lives.  Instead, it requires that goodwill and intangible assets
deemed to have indefinite  useful lives be reviewed for impairment upon adoption
(January 1, 2002) and annually thereafter.

Under SFAS 142, goodwill  impairment is deemed to exist if the net book value of
a reporting unit exceeds its estimated fair value. The Company's reporting units
are generally the same as the operating segments  identified in Note 4 - Segment
Information.  The new  methodology in SFAS 142 differs from the Company's  prior
policy,  which  was  permitted  under  earlier  accounting  standards,  of using
undiscounted  cash flows of the  acquired  asset to  determine  if  goodwill  is
recoverable.

Upon adoption of SFAS 142, the Company  recorded a one-time,  non-cash charge of
approximately  $4  million in the first  quarter of 2002 to reduce the  carrying
value of its goodwill. This charge in non-operational in nature and is reflected
as a cumulative effect of an accounting change in the accompanying  consolidated
statements of operations.

The SFAS 142 goodwill  impairment is associated  solely with goodwill  resulting
from the  acquisition of Roberts,  Cushman & Co., Inc.  ("Cushman") in 1995. The
current  fair value of Cushman and its assets was  estimated  by an  independent
third party using projected  discounted  future operating cash flows. The amount
of the impairment  primarily  reflects the decline in Cushman's  sales since the
acquisition occurred.

A summary of changes in the  Company's  goodwill  during the quarter ended March
31, 2002 by business segment is as follows:

                     January 1,     Acquisitions &                        March 31,
                        2002         Adjustments       Impairments           2002
                   --------------   --------------    --------------    --------------
<S>                <C>              <C>               <C>               <C>
Leather Factory    $      332,630             (191)             --      $      332,439
Tandy Leather             193,951           81,065              --      $      275,016
Roberts, Cushman        4,008,831             --          (4,008,831)             --
                   --------------   --------------    --------------    --------------
Total              $    4,535,412           80,874        (4,008,831)   $      607,455
                   ==============   ==============    ==============    ==============
</TABLE>

As of March 31, 2002 and December 31, 2001, the Company's  intangible  assts and
related accumulated amortization consisted of the following:

                                     As of March 31, 2002
                         ------------------------------------------
                                         Accumulated
                             Gross      Amortization        Net
                         ------------   ------------   ------------
Trademarks, Copyrights   $    542,744   $     74,873   $    467,871
Non-Compete Agreements         32,000          2,000         30,000
                         ------------   ------------   ------------
                         $    574,744   $     76,873   $    497,871
                         ============   ============   ============


                                       11
<PAGE>

                                  As of December 31, 2001
                         ------------------------------------------
                                         Accumulated
                             Gross      Amortization        Net
                         ------------   ------------   ------------
Trademarks, Copyrights   $    542,744   $     65,836   $    476,908
                         ============   ============   ============

The Company recorded amortization expense of $11,352 during the first quarter of
2002 compared to $20,426  during the first  quarter of 2001.  The Company has no
intangible  assets not  subject  to  amortization  under SFAS 142.  Based on the
current  amount of  intangible  assets  subject to  amortization,  the estimated
amortization expense for each of the succeeding 5 years are as follows:

                        Leather      Tandy
                        Factory     Leather     Cushman      Total
                       ---------   ---------   ---------   ---------
                2002   $   5,809   $  40,339   $       0   $  46,148
                2003       5,809      41,004           0      46,813
                2004       5,809      41,004           0      46,813
                2005       5,809      31,004           0      36,813
                2006       5,809      30,339           0      36,148

During the first quarter of 2002, the Company acquired the following  intangible
assets:

                                                           Amortization Period
                                                           -------------------
        Non-Compete Agreements          $32,000                3 years

The 2001 results on a historical basis do not reflect the provision of SFAS 142.
Had the Company  adopted SFAS 142 on January 1, 2001,  the historical net income
and basic and diluted net income per common share would have been changed to the
adjusted amounts indicated below:

                                        Three Months Ended March 31, 2001
                               -------------------------------------------------
                                                  Earnings per     Earnings per
                                Net Income       Share - Basic   Share - Diluted
                               ---------------  ---------------  ---------------
Reported net income            $       497,283  $          0.05  $          0.05
Addback goodwill amortization           51,282             0.01             --
                               ---------------  ---------------  ---------------
Adjusted net income            $       548,565  $          0.06  $          0.05
                               ===============  ===============  ===============



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

General
-------

The Leather  Factory,  Inc.  ("TLF" or the "Company") is a Delaware  corporation
whose common stock trades on the American Stock Exchange under the symbol "TLF".
The Company is managed on a business entity basis,  with those  businesses being
The Leather Factory ("Leather  Factory"),  Tandy Leather Company ("Tandy"),  and
Roberts,  Cushman & Company,  Inc.  ("Cushman").  See Note 4 to the Consolidated
Financial  Statements  for  additional   information  concerning  the  Company's
segments.

Leather Factory, founded in 1980 by Wray Thompson and Ron Morgan, is the premier
distributor of leather products to customers worldwide. Products are distributed
primarily  through 30 sales units located in twenty states and Canada.  Products
include leather, leatherworking tools, buckles and adornments for belts, leather
dyes  and  finishes,  shoe  repair  supplies,  saddle  and  tack  hardware,  and
do-it-yourself kits.


                                       12
<PAGE>
<TABLE>
<CAPTION>

Tandy,  acquired  in  November  2000,  is the most  recognized  supplier  in the
leathercraft  industry.  From its  founding in 1919,  Tandy has been the primary
resource  for  leathercrafters  world  wide.  Products  include  quality  tools,
leather,  accessories,  kits and teaching materials and are distributed  through
three company-owned retail stores and its central distribution facility.

Cushman,  whose  origins  date  back  to  the  mid-1800's,  custom  designs  and
manufactures a product line of decorative hat trims for headwear manufacturers.


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

The following tables present selected financial data of each of the Company's
three segments for the quarters ended March 31, 2002 and 2001:

                   Quarter Ended March 31, 2002    Quarter Ended March 31, 2001
                   ----------------------------    ----------------------------
                                     Operating                       Operating
                      Sales            Income         Sales            Income
                   -----------      -----------    -----------      -----------
Leather Factory    $ 7,824,517      $   975,727    $ 7,103,792      $ 1,003,701
Tandy                1,877,874          141,501      1,775,116          (19,664)
Cushman                501,560           76,231        493,705           (8,698)
                   -----------      -----------    -----------      -----------
Total Operations   $10,203,951      $ 1,193,459    $ 9,372,613      $   975,339
                   ===========      ===========    ===========      ===========


Consolidated net sales for the quarter ended March 31, 2002 increased  $831,000,
or 8.9%,  compared  to the same  period  in 2001.  Leather  Factory  contributed
$720,000 to the increase due primarily to continued growth in our sales to craft
store customers.  Tandy added $103,000 of additional sales while Cushman's sales
held virtually steady.  The Company  experienced an increase in operating income
of 22.4% from 2001 to 2002.
                                                                % of Net Sales
                                                            Quarterly period ended
                                                                   March 31,              Change in $ and %
                                                          -------------------------   -------------------------
                                                              2002          2001        $ Change     % Change
                                                          -----------   -----------   -----------   -----------
<S>                                                       <C>           <C>           <C>           <C>
Net sales                                                      100.00%       100.00%  $   831,338          8.87%
Cost of sales                                                   47.39         47.89       346,959          7.73
                                                          -----------   -----------   -----------
Gross profit                                                    52.61         52.11       484,379          9.92
Operating expenses                                              40.92         41.71       266,259          6.81
                                                          -----------   -----------   -----------
Income from operations                                          11.69         10.40       218,120         22.36
Interest expense and other                                       1.04          1.66       (49,659)       (31.86)
                                                          -----------   -----------   -----------
Income  before  income  taxes and  cumulative  effect of
change in accounting principle                                  10.65          8.74       267,779         32.68
Income tax provision                                             3.21          3.44         5,757          1.79
                                                          -----------   -----------   -----------
Net income tax before cumulative effect of change in
accounting principle                                             7.44          5.30       262,022         52.69
Cumulative effect of change in accounting principle            (39.29)         --      (4,008,831)          N/A
                                                          -----------   -----------   -----------
Net income (loss)                                             (31.85%)         5.30%   (3,746,809)     (753.46%)
                                                          ===========   ===========   ===========
</TABLE>


                                       13
<PAGE>
<TABLE>
<CAPTION>

Leather Factory Operations

Net sales from Leather Factory's 30 sales/distribution units increased 10.2% for
the first  quarter of 2002.  The two units  opened in the third  quarter of 2001
contributed  23.5% of the sales  increase.  Same store sales increased 7.8% over
the first quarter of 2001.

The following  table  presents  TLF's sales mix by customer  categories  for the
quarters ended March 31, 2002 and 2001:


                                                                                                    Quarter ended
Customer Group                                                                                  3/31/02        3/31/01
--------------                                                                                 ----------    ----------
<S>                                                                                            <C>           <C>
RETAIL (end users, consumers, individuals)                                                             21%           21%
INSTITUTION (prisons, prisoners, hospitals, schools, YMCA, Boy Scouts, etc.)                            7             8
WHOLESALE (saddle & tack stores, resellers & distributors, shoe repair shops, dealers, etc.)           32            32
CRAFT (craft stores (individually owned) and craftstore chains)                                        26            21
MIDAS (small manufacturers)                                                                             7            11
ASC (Authorized Sales Centers)                                                                          7             7
                                                                                               ----------    ----------
                                                                                                      100%          100%
                                                                                               ==========    ==========
</TABLE>

Our sales to our CRAFT  customers  continue to gain  momentum as the majority of
the sales increase  gained this quarter was from this customer  group.  The arts
and crafts  industry in general is booming  domestically  and Leather Factory is
benefiting as a result.  Various  publications  and articles have been published
recently  to support  the theory  that the crafts  industry  is expected to show
solid growth during the remainder of the decade.  The sales decline to our MIDAS
customer   group  was  caused  by  a  general   slow-down  in  orders  from  the
manufacturers  due to  the  slow-down  in  orders  received  from  their  retail
customers.

Operating  income for TLF  decreased  $34,500  or 3.4% of sales for the  current
quarter  compared  to 2001.  Operating  expenses as a  percentage  of sales were
40.3%, which is slightly higher than management's target of 40.0%. The Company's
expected  contribution to the ESOP for the benefit of employees was increased in
the first quarter,  as management believes the employees should benefit from the
Company's operational successes. As a result of the additional ESOP contribution
amount,  the operating  expenses and operating  income  amounts were  negatively
impacted when compared to the first quarter of 2001.

Tandy Leather Operations

Net  sales  for  Tandy,  which  consisted  of two  retail  stores  and a central
distribution  center as of March 31, 2002,  increased 5.8% for the first quarter
of 2002 over the same quarter  last year.  The two retail  stores  opened in the
current quarter added $175,000 in sales while the central distribution  center's
sales  decreased  by  $72,500.  The  central  distribution  center's  sales  are
generated by phone,  fax, mail order and Internet  orders.  The sales decline at
this facility was the result of reduction in Internet  orders  received due to a
technical problem with the website (www.tandyleather.com) during the latter part
of March.  Although  we believe we have fixed this  problem at the end of April,
the problem may affect Internet sales reported by Tandy in the second quarter.

Operating income for Tandy increased $161,000 in the current quarter as a result
of an  increase  in gross  profit  margin  of 2% and a  reduction  in  operating
expenses of 6%. Tandy's  operating  expenses were less than 50% of sales for the
first time since the  acquisition.  Management  is pleased with the  improvement
while hoping to continue  this trend of  streamlining  operating  expenses.  The
retail  stores tend to operate more  efficiently  than the central  distribution
center.  Therefore,  as more  retail  stores are added,  the  overall  operating
efficiency of Tandy should improve.


                                       14
<PAGE>

Roberts, Cushman Operations

Net sales for Cushman  increased $7,800 for the first quarter of 2002, a minimal
improvement. However, even though the sales were virtually flat, Cushman's gross
profit  margin  improved  almost 5%  compared to the first  quarter of 2001.  As
previously  discussed  in the 2001 Annual  Report,  we  intentionally  sold some
inventory at a low gross margin in 2001 in order to position  Cushman to achieve
better financial  results in the future.  We believe that the first quarter 2002
financial results add evidence to support the appropriateness of that decision.

Operating income for Cushman increased $85,000 as a result of the improvement in
the gross margins and also the reduction of operating expenses. We operated with
fewer  personnel in the current  quarter - an adjustment made by management late
in 2001 in order to compensate for flat sales.

In 2001, operating expenses included $30,000 of amortization of goodwill that is
not  included  in 2002  due to the  change  in  accounting  principle  regarding
goodwill  (SFAS No.  142).  The  reduction  of  goodwill  in the  first  quarter
eliminated all goodwill  recorded on our books for Cushman.  Further  discussion
regarding  this  accounting  rule is  contained  in  Note 5 to the  Consolidated
Financial Statements.


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

The change in accounting  principle  discussed above had significant  effects on
our  consolidated  balance sheet at March 31, 2002.  Total  goodwill was reduced
from $4,535,412 at the end of 2001 to $607,455. This reduction was the principal
cause of the  reduction in total assets from  $19,548,323  at the end of 2001 to
$15,313,284  at the end of the first  quarter  of 2002 (a  reduction  of 21.7%).
Total stockholders'  equity was reduced from $12,423,671 at December 31, 2001 to
$9,204,666  at March 31, 2002 (a reduction of 25.9%).  This  reduction  was also
attributable to the change in accounting principle, but the effect was partially
offset by operating results from the first quarter of this year.

The Company's  investment in accounts  receivable  was $2.7 million at March 31,
2002,  up $445,000  from $2.3 million at year-end  2001.  This is a result of an
increase in credit sales during the quarter  ended March 31, 2002 as compared to
that of the  quarter  ended  December  31,  2001.  The  average  days to collect
accounts improved slightly over the first quarter of 2001 to 47.2 days.  Tandy's
average days to collect experienced the most improvement, from 51.7 days in 2001
to 42.9 days for the first quarter of 2002.

Inventory decreased $779,000 to $8.3 million at March 31, 2002 from $9.1 million
at year-end 2001.  Inventory  turnover  increased to an annualized  rate of 4.71
times during the first quarter of 2002, an improvement over the turnover rate of
4.11 times for the first quarter of 2001 and 4.08 times for all of 2001. Tandy's
inventory turnover rate accounts for the improvement due to the drastic decrease
in its inventory  levels from March 31, 2001 to March 31, 2002 while  supporting
the  same  sales  level.  Management  believes  Tandy is  operating  with a more
realistic  inventory level currently although we do have the ability to transfer
merchandise  from Leather  Factory to Tandy almost  immediately  if necessary to
support sales requirements.

Notes payable and current maturities of long-term debt decreased from $4,527,904
at the end of 2001 to $2,987,518 at March 31, 2002.  Accounts payable  increased
$244,000  to $1.5  million at the end of the first  quarter,  due  primarily  to
management's  success  in  obtaining  longer  credit  terms with  several  large
vendors.  The Company's current ratio improved from 1.82 at December 31, 2001 to
2.08 at March 31, 2002.

The primary sources of liquidity and capital  resources during the first quarter
of 2002 were funds provided by operating  activities in the amount of $1,372,000
and the  Company's  Credit and  Security  Agreement  with Wells  Fargo  Business
Credit,  Inc.  ("WFBC").  The Company used its first quarter operating cash flow
and  additional  funds on hand at the  beginning of the quarter to pay down debt
balances ($1,547,766),  purchase equipment ($97,622), and purchase the assets of
two existing leathercraft stores ($227,747).


                                       15
<PAGE>

Approximately  25% of the 2002 capital  spending was for computer  equipment and
software  for the new  Tandy  retail  stores,  25%  was for  inventory  scanning
equipment for the existing Leather Factory stores,  30% was for various computer
workstation and software upgrades in existing locations and departments, and 20%
was for various  furniture and fixtures.  The two  leathercraft  stores acquired
created Tandy's two retail stores in Oklahoma City, OK and Boise, ID. The assets
purchased  in the  two  transactions  were  inventory  and  miscellaneous  store
fixtures.

As previously disclosed,  on March 20, 2002, the Company entered into an Amended
and Restated Credit and Security Agreement with Wells Fargo Bank Minnesota, N.A.
("Wells Fargo"),  which replaced the Company's  previous  borrowing  arrangement
with WFBC.  The  agreement  provides  for a revolving  credit  facility of up to
$7,500,000  and  contains  similar  covenants  as  that  of  the  previous  WFBC
agreement. The significant difference between the two agreements is that the new
agreement  has a  provision  regarding  the value of  inventory  included in the
borrowing base calculation that is more favorable to the Company.

The  revolving  credit  facility with Wells Fargo is based upon the level of the
Company's  accounts  receivable and inventory.  At March 31, 2002, the available
and unused portion of the credit facility was  approximately  $3,122,000.  Wells
Fargo has granted a waiver of any  noncompliance  with our  financial  covenants
arising from the change in accounting principle described above.

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 Tandy retail stores or Leather  Factory  sales/distribution  units. In 2002,
the funding for the opening of any new  locations  is expected to be provided by
operating leases, cash flows from operating activities, and the revolving credit
facility.


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. 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

     None

(b)  Reports on Form 8-K

On March  20,  2002,  the  Company  filed a report  on Form 8-K  (Items 5 and 7)
describing  the Amended and Restated  Credit and Security  Agreement  with Wells
Fargo Bank Minnesota, N.A.


                                       16
<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 14, 2002                              By: /s/ Wray Thompson
                                                    --------------------------
                                                    Wray Thompson
                                                    Chairman of the Board and
                                                    Chief Executive Officer

Date:  May 14, 2002                              By: /s/ Shannon L. Greene
                                                    ----------------------
                                                    Shannon L. Greene
                                                    Chief Financial Officer and
                                                    Treasurer  (Chief Accounting
                                                    Officer)

                                       17