**Form
      10-Q**SECURITIES
      AND EXCHANGE COMMISSIONWashington,
      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, 2005or**[
      ] Transition report pursuant to section 13 of 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**
      (State
      or other jurisdiction of incorporation or organization)
    **75-2543540**
      (I.R.S.
      Employer 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
      by check mark whether the registrant is an accelerated
    filer.Yes
      [    ]
    No [ X ]Indicate
      the number of shares outstanding of each of the issuer’s classes of common
      stock, as of the latest practicable date.Class
      Common
      Stock, par value $0.0024 per share
    Shares
      outstanding as of May 10, 2005
      10,607,802
 
 
 1
 
 
 **THE
LEATHER FACTORY, INC.**
 
 FORM
10-Q
 
 FOR THE
QUARTERLY PERIOD ENDED MARCH 31, 2005
 
 
 **TABLE
OF CONTENTS**
 
 
 PAGE
      NO.**PART
      I. FINANCIAL INFORMATION**Item
      1. Financial StatementsConsolidated
      Balance SheetsMarch
      31, 2005 and December 31, 2004..........................................................................................
    3Consolidated
      Statements of IncomeThree
      months ended March 31, 2005 and
      2004..................................................................................
    4Consolidated
      Statements of Cash FlowsThree
      months ended March 31, 2005 and
      2004..................................................................................
    5Consolidated
      Statements of Stockholders' EquityThree
      months ended March 31, 2005 and
      2004..................................................................................
    6Notes
      to Consolidated Financial
      Statements......................................................................................
    7Item
      2. Management's Discussion and Analysis of FinancialCondition
      and Results of
      Operations.....................................................................................
    10Item
      3. Quantitative and Qualitative Disclosures About Market Risk
      ..................................
    16Item
      4. Controls and Procedures ..................................................................................
    16**PART
      II. OTHER INFORMATION**Item
      6. Exhibits
      ..........................................................................................................................
    16**SIGNATURES**......................................................................................................................................
    18
 
 
 2
 
  **The
Leather Factory, Inc.**
 **Consolidated
Balance Sheets**
 
 **March
      31,**
      **2005**
      **(unaudited)**
    
    **December
      31,**
      **2004**
      **(audited)****ASSETS**CURRENT
      ASSETS:Cash
    $2,467,091
    
    $2,560,202Accounts
      receivable-trade, net of allowance for doubtful accountsof
      $140,000 and $85,000 in 2005 and 2004, respectively
    2,545,218
    
    2,032,289Inventory
    13,127,058
    
    12,749,709Deferred
      income taxes
    209,166
    
    199,308Other
      current assets
    874,987
    
    629,723Total
      current assets
    19,223,520
    
    18,171,231PROPERTY
      AND EQUIPMENT, at cost
    6,202,266
    
    6,005,526Less
      accumulated depreciation and amortization
    (4,377,692)
    
    (4,100,961)1,824,574
    
    1,904,565GOODWILL,
      net of accumulated amortization of $768,000 and$758,000
      in 2005 and 2004, respectively
    742,084
    
    742,860OTHER
      INTANGIBLES, net of accumulated amortization of$195,000
      and $185,000 in 2005 and 2004, respectively
    427,686
    
    437,758OTHER
      assets
    999,252
    
    910,749**$23,217,116**
    
    **$22,167,163****LIABILITIES
      AND STOCKHOLDERS' EQUITY**CURRENT
      LIABILITIES:Accounts
      payable-trade
    $
      1,521,494
    
    $
      1,954,146Accrued
      expenses and other liabilities
    2,136,945
    
    1,682,003Income
      taxes payable
    533,561
    
    22,764Current
      maturities of capital lease obligations
    134,067
    
    134,067Total
      current liabilities
    4,326,067
    
    3,792,980DEFERRED
      INCOME TAXES
    240,897
    
    313,006LONG-TERM
      DEBT, net of current maturities
    -
    
    505,154CAPITAL
      LEASE OBLIGATIONS, net of current maturities
    212,273
    
    245,790COMMITMENTS
      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;10,601,661
      and 10,560,661 shares issued at 2005 and 2004,
    respectively;10,595,802
      and 10,554,711 outstanding at 2005 and 2004, respectively
    25,443
    
    25,345Paid-in
      capital
    4,852,251
    
    4,796,999Retained
      earnings
    13,507,982
    
    12,458,760Treasury
      stock
    (25,487)
    
    (25,487)Accumulated
      other comprehensive income
    77,690
    
    54,616Total
      stockholders' equity
    18,437,879
    
    17,310,233**$23,217,116**
    
    **$22,167,163**
  
 The
accompanying notes are an integral part of these financial
statements.
 
 3
  **The
Leather Factory, Inc.**
 **Consolidated
Statements of Income**
 **(Unaudited)**
 **For
the Three Months Ended March 31, 2005 and 2004**
 
 
 **2005**
    
    **2004****NET
      SALES**
    $
      12,707,516
    
    $12,180,877COST
      OF SALES
    5,550,233
    
    5,455,964Gross
      profit
    7,157,283
    
    6,724,913OPERATING
      EXPENSES
    5,587,736
    
    5,277,778INCOME
      FROM OPERATIONS
    1,569,547
    
    1,447,135OTHER
      EXPENSE:Interest
      expense
    3,188
    
    13,638Other,
      net
    15,465
    
    1,737Total
      other expense
    18,653
    
    15,375INCOME
      BEFORE INCOME TAXES
    1,550,894
    
    1,431,760PROVISION
      FOR INCOME TAXES
    501,672
    
    460,794NET
      INCOME
    $1,049,222
    
    $
      970,966NET
      INCOME PER COMMON SHARE - BASIC
    $0.10
    
    $
      0.09NET
      INCOME PER COMMON SHARE - DILUTED
    $0.10
    
    $
      0.09Weighted
      Average Number of Shares Outstanding:Basic
    10,584,244
    
    10,506,995Diluted
    10,911,103
    
    11,011,122
 
  The
accompanying notes are an integral part of these financial
statements.
 
 
 4
  **The
Leather Factory, Inc.**
 **Consolidated
Statements of Cash Flows**
 **(Unaudited)**
 **For
the Three Months Ended March 31, 2005 and 2004**
 
 **2005**
    
    **2004**CASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      income
    $
      1,049,222
    
    $
      970,966Adjustments
      to reconcile net income to net cashprovided
      by operating activities -Depreciation
      and amortization
    118,431
    
    129,418Gain
      on disposal of assets
    (7,703)
    
    -Deferred
      income taxes
    (81,967)
    
    (19,774)Other
    24,511
    
    (9,766)Net
      changes in assets and liabilities, net of effect of business
      acquisitions:Accounts
      receivable-trade, net
    (512,929)
    
    (1,226,807)Inventory
    (377,349)
    
    (267,966)Income
      taxes
    510,797
    
    435,654Other
      current assets
    (245,264)
    
    (351,800)Accounts
      payable-trade
    (432,652)
    
    810,013Accrued
      expenses and other liabilities
    454,942
    
    112,810Total
      adjustments
    (549,182)
    
    (388,218)**Net
      cash provided by operating activities**
    **500,040**
    
    **582,748**CASH
      FLOWS FROM INVESTING ACTIVITIES:Purchase
      of property and equipment
    (29,030)
    
    (82,115)Payments
      in connection with businesses acquired
    -
    
    (125,452)Proceeds
      from sale of assets
    7,703
    
    -Decrease
      (increase) in other assets
    (88,503)
    
    14,076**Net
      cash used in investing activities**
    **(109,830)**
    
    **(193,491)**CASH
      FLOWS FROM FINANCING ACTIVITIES:Net
      decrease in revolving credit loans
    (505,154)
    
    (525,000)Payments
      on notes payable and long-term debt
    (33,517)
    
    (1,134)Payments
      received on notes secured by common stock
    -
    
    5,000Proceeds
      from exercise of stock options and warrants
    55,350
    
    82,140**Net
      cash used in financing activities**
    **(483,321)**
    
    **(438,994)**NET
      DECREASE IN CASH
    (93,111)
    
    (49,737)CASH,
      beginning of period
    2,560,202
    
    1,728,344CASH,
      end of period
    $2,467,091
    
    $
      1,678,607SUPPLEMENTAL
      DISCLOSURES OF CASH FLOW INFORMATION:Interest
      paid during the period
    $
      3,188
    
    $
      16,205Income
      tax paid during the period, net of (refunds)
    72,842
    
    44,914
  
 The
accompanying notes are an integral part of these financial
statements.
 
 
   5
  **The
Leather Factory, Inc.**
 **Consolidated
Statements of Stockholders' Equity**
 **For
the Three Months Ended March 31, 2005 and 2004**
 
 **Number
      of Shares**
    
    **Par
      Value**
    
    **Paid-in
      Capital**
    
    **Treasury**
      **Stock**
    
    **Retained
      Earnings**
    
    **Notes
      receivable**
      **secured
      by common stock**
    
    ****
      **Accumulated
      Other Comprenhensive Income (Loss)**
    
    **Total**
    
    **Comprehensive**
      **Income
      (Loss)**BALANCE,
      December 31, 2003
    10,487,961
    
    $25,171
    
    $4,673,158
    
    -
    
    $9,804,719
    
    $(20,000)
    
    $26,445
    
    $14,509,493Payments
      on notes receivable
      secured
      by common stock
    -
    
    -
    
    -
    
    -
    
    -
    
    5,000
    
    -
    
    5,000Shares
      issued - stock options
      exercised
    37,700
    
    90
    
    82,050
    
    -
    
    -
    
    -
    
    -
    
    82,140Net
      income
    -
    
    -
    
    -
    
    -
    
    970,966
    
    -
    
    -
    
    970,966
    
    $
      970,966Translation
      adjustment
    -
    
    -
    
    -
    
    -
    
    -
    
    -
    
    (10,906)
    
    (10,906)
    
    (10,906)BALANCE,
      March 31, 2004
    10,525,661
    
    $25,262
    
    $4,755,208
    
    -
    
    $10,775,684
    
    $(15,000)
    
    $15,539
    
    $15,556,693Comprehensive
      income for the threemonths
      ended March 31, 2004
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $960,606BALANCE,
      December 31, 2004
    10,560,661
    
    $25,345
    
    $4,796,999
    
    $(25,487)
    
    $12,458,760
    
    -
    
    $54,616
    
    $17,310,233Shares
      issued - stock options
      exercised
    41,000
    
    98
    
    55,252
    
    -
    
    -
    
    -
    
    -
    
    55,350Net
      income
    -
    
    -
    
    -
    
    -
    
    1,049,222
    
    -
    
    -
    
    1,049,222
    
    $1,049,222Translation
      adjustment
    -
    
    -
    
    -
    
    -
    
    -
    
    -
    
    23,074
    
    23,074
    
    23,074BALANCE,
      March 31, 2005
    10,601,661
    
    $25,443
    
    $4,852,251
    
    $(25,487)
    
    $13,507,982
    
    -
    
    $77,690
    
    $18,437,879Comprehensive
      income for the threemonths
      ended March 31, 2005
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $1,072,296
 
  The
accompanying notes are an integral part of these financial
statements.
 
   6
  **THE
LEATHER FACTORY, INC.**
 **NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 ****
 **1.
BASIS OF PRESENTATION AND CERTAIN SIGNIFICANT ACCOUNTING
POLICIES**
 
 In the
opinion of management, the accompanying consolidated financial statements for
The Leather Factory, Inc. and its consolidated subsidiaries (“TLF” or the
“Company”) contain all adjustments (consisting of normal recurring adjustments)
necessary to present fairly its financial position as of March 31, 2005 and
December 31, 2004, and its results of operations and cash flows for the
three-month periods ended March 31, 2005 and 2004. Operating results for the
three-month period ended March 31, 2005 are not necessarily indicative of the
results that may be expected for the year ending December 31, 2005. These
consolidated financial statements should be read in conjunction with the audited
consolidated financial statements and accompanying notes included in our Annual
Report on Form 10-K for the year ended December 31, 2004.
 
 The
preparation of financial statements in accordance with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those
estimates.
 
 *Inventory*
 
 Inventory
is stated at the lower of cost or market and is accounted for on the “first in,
first out” method. In addition, the value of inventory is periodically reduced
for slow-moving or obsolete inventory based on management's review of items on
hand compared to their estimated future demand. The components of inventory
consist of the following:
 
 **As
      of****March
      31, 2005**
    
    **December
      31, 2004**Finished
      goods held for sale
    $
      12,192,928
    
    $
      11,571,869Raw
      materials and work in process
    934,130
    
    1,177,840$
      13,127,058
    
    $
      12,749,709
 
 *Goodwill
and Other Intangibles*
 
 Statement
of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Other
Intangible Assets," prescribes a two-phase process for impairment testing of
goodwill, which is performed once annually, absent indicators of impairment
during the interim. The first phase screens for impairment, while the second
phase (if necessary) measures the impairment. The Company has elected to perform
the annual analysis during the fourth calendar quarter of each year. As of
December 31, 2004, management determined that the present value of the
discounted estimated future cash flows of the stores associated with the
goodwill is sufficient to support their respective goodwill balances. No
indicators of impairment were identified during the first quarter of
2005.
 
 Other
intangibles consist of the following:
 
 **As
      of March 31, 2005**
    
    **As
      of December 31, 2004****Gross**
    **Accumulated**
      **Amortization**
    **Net**
    
    **Gross**
    **Accumulated**
      **Amortization**
    **Net**Trademarks,
      Copyrights
    $
      544,369
    $183,684
    $360,685
    
    $544,369
    $174,611
    $369,758Non-Compete
      Agreements
    78,000
    10,999
    67,001
    
    78,000
    10,000
    68,000$
      622,369
    $194,683
    $427,686
    
    $622,369
    $184,611
    $437,758
 
 7
 The
Company recorded amortization expense of $10,073 during the first quarter of
2005 compared to $14,056 during the first quarter of 2004. 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 is as
follows:
 
 **Wholesale
      Leathercraft**
    **Retail
      Leathercraft**
    **Total**2005
    $5,954
    $32,837
    $38,7912006
    5,954
    32,337
    38,2912007
    5,954
    31,837
    37,7912008
    5,954
    30,337
    36,2912009
    5,954
    30,337
    36,291
 
 *Revenue
Recognition*
 
 The
Company's sales generally occur via two methods: (1) at the counter in the
Company's stores, and (2) shipment by common carrier. Sales at the counter are
recorded and title passes as transactions occur. Otherwise, sales are recorded
and title passes when the merchandise is shipped to the customer. The Company's
shipping terms are FOB shipping point.
 
 The
Company offers an unconditional satisfaction guarantee to its customers and
accepts all product returns. Net sales represent gross sales less negotiated
price allowances, product returns, and allowances for defective merchandise.
 
 *Recent
Accounting Pronouncements*
 
 In
December 2004, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 123R, "Share-Based
Payments." SFAS No. 123R is a revision of SFAS No. 123, "Accounting for Stock
Based Compensation," and supercedes APB Opinion No. 25. Among other items, SFAS
No. 123R eliminates the use of APB 25 and the intrinsic value method of
accounting, and requires companies to recognize the cost of employee services
received in exchange for awards of equity instruments, based on the grant date
fair value of those awards, in the financial statements. The effective date of
SFAS No. 123R for the Company was the third quarter of 2005.  On April 14,
2005, the Securities and Exchange Commission announced a delay in the required
effective date for public companies to the first annual reporting period
beginning after June 15, 2005.
 **2.
STOCK-BASED COMPENSATION**
  The
Company accounts for stock options granted to its directors and employees using
the intrinsic value method prescribed by APB No. 25 which requires compensation
expense be recognized for stock options when the quoted market price of the
Company’s common stock on the date of grant exceeds the option’s exercise price.
No compensation cost has been reflected in net income for the granting of
director and employee stock options as all options granted had an exercise price
equal to the quoted market price of the Company’s common stock on the date the
options were granted.
  Had
compensation cost for the Company’s stock options been determined consistent
with the SFAS 123 fair value approach, the Company’s net income and net income
per common share for the three months ended March 31, 2005 and 2004, on a pro
forma basis, would have been as follows:
 
 8
 **2005**
    
    **2004**Net
      income, as reported
    $1,049,222
    
    $970,966Add:
      Stock-based compensation expense included in reported net
      income
    -
    
    -Deduct:
      Stock-based compensation expense determined under fair value
      method
    27,780
    
    27,145Net
      income, pro forma
    $1,021,442
    
    $943,821Net
      income per share:Basic
      - as reported
    $0.10
    
    $0.09Basic
      - pro forma
    $0.10
    
    $0.09Diluted
      - as reported
    $0.10
    
    $0.09Diluted
      - pro forma
    $0.09
    
    $0.09
 
 The fair
values of stock options granted were estimated on the dates of grant using the
Black-Scholes option pricing model with the following weighted average
assumptions: risk-free interest rate of 4.0% and 3.125% for 2005 and 2004,
respectively; dividend yields of 0% for both periods; volatility factors of .366
for 2005 and .302 for 2004; and an expected life of the valued options of 5
years.
 
 **3.
EARNINGS PER SHARE**
 
 The
following table sets forth the computation of basic and diluted earnings per
share (“EPS”) for the three months ended March 31, 2005 and 2004:
 
 **2005**
    
    **2004**Net
      income
    $1,049,222
    
    $970,966Numerator
      for basic and diluted earnings per share
    $1,049,222
    
    $970,966Denominator
      for basic earnings per share - weighted-average shares
    10,584,244
    
    10,506,995Effect
      of dilutive securities:Stock
      options
    316,454
    
    462,562Warrants
    10,405
    
    41,565Dilutive
      potential common shares
    326,859
    
    504,127Denominator
      for diluted earnings per share - weighted-average shares
    10,911,103
    
    11,011,122Basic
      earnings per share
    $0.10
    
    $0.09Diluted
      earnings per share
    $0.10
    
    $0.09
 
 The net
effect of converting stock options and warrants to purchase 626,500 and 825,200
shares of common stock at exercise prices less than the average market prices
has been included in the computations of diluted EPS for the quarter ended March
31, 2005 and 2004, respectively.
 
 **4.
SEGMENT INFORMATION**
 
 The
Company identifies its segments based on the activities of three distinct
operations:
 
 ***a.***
    ***Wholesale
      Leathercraft,***which consists of a chain of warehouse distribution units operating under
      the name,*The
      Leather Factory*,
      located in the United States and Canada;
 
 ***b.***
    ***Retail
      Leathercraft,***which
      consists of a chain of retail stores operating under the name,*Tandy
      Leather Company*,
      located in the United States and Canada; and
 
 ***c.***
    ***Other***,
      which is a manufacturer of decorative hat trims sold directly to hat
      manufacturers.
 
 9
 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.
 **Wholesale
       Leathercraft**
    **Retail**
      **Leathercraft**
    **Other**
    **Total****For
      the quarter ended March 31, 2005**Net
      sales
    $7,913,892
    $4,285,606
    $508,018
    $12,707,516Gross
      profit
    4,372,578
    2,661,030
    123,675
    7,157,283Operating
      earnings
    1,168,982
    386,718
    13,847
    1,569,547Interest
      expense
    (3,188)
    -
    -
    (3,188)Other,
      net
    (12,661)
    (2,804)
    -
    (15,465)Income
      before income taxes
    1,153,133
    383,914
    13,847
    1,550,894Depreciation
      and amortization
    86,388
    29,712
    2,332
    118,432Fixed
      asset additions
    13,940
    12,998
    2,092
    29,030Total
      assets
    $19,004,908
    $3,472,224
    $739,984
    $23,217,116
 
 **For
      the quarter ended March 31, 2004**Net
      sales
    $
      8,443,091
    $
      3,166,738
    $
      571,048
    $
      12,180,877Gross
      profit
    4,575,838
    1,926,649
    222,426
    6,724,913Operating
      earnings
    1,078,409
    301,567
    67,159
    1,447,135Interest
      expense
    (13,638)
    -
    -
    (13,638)Other,
      net
    (1,803)
    66
    -
    (1,737)Income
      before income taxes
    1,062,968
    301,633
    67,159
    1,431,760Depreciation
      and amortization
    102,028
    25,153
    2,237
    129,418Fixed
      asset additions
    39,737
    38,043
    4,335
    82,115Total
      assets
    $16,731,246
    $
      3,079,605
    $
      928,663
    $
      20,739,514
 
 Net sales
for geographic areas were as follows for the three months ended March 31, 2005
and 2004:
 
 **2005**
    **2004**United
      States
    $11,354,776
    $
      11,285,857Canada
    925,654
    478,011All
      other countries
    427,086
    417,009$12,707,516
    $
      12,180,877
 
 Geographic
sales information is based on the location of the customer. No single foreign
country accounted for any material amount of the Company's consolidated net
sales for the three-month periods ended March 31, 2005 and 2004. The Company
does not have any significant long-lived assets outside of the United
States.
 
 **Item
2.**  **Management’s
Discussion and Analysis of Financial Condition**
 ****  **and
Results of Operations.**
 
 **Our
Business**
 
 We are
the world’s largest specialty retailer and wholesale distributor of leather and
leathercraft related items. We market our products to our growing list of
customers through company-owned retail stores and wholesale distribution
centers. We are a Delaware corporation and our common stock trades on the
American Stock Exchange under the symbol “TLF”. We operate our business in three
segments: **Wholesale
Leathercraft** , which
operates under the trade name, *The
Leather Factory;*  **Retail
Leathercraft** , which
operates under the trade name, *Tandy
Leather Company;* and **Other** . See
Note 4 to the Consolidated Financial Statements for additional information
concerning our segments, as well as our foreign operations.
 
 10
 We
operate 30 company-owned Leather Factory wholesale distribution centers in 20
states and three Canadian provinces. Our business concept centers around the
wholesale distribution of leather and related items, including leatherworking
tools, buckles and belt adornments, leather dyes and finishes, saddle and tack
hardware, and do-it-yourself kits, to retailers, manufacturers, and end
users.
 
 Tandy
Leather, the oldest and best-known supplier of leather and related supplies used
in the leathercraft industry, has been the primary leathercraft resource for
decades. Products include quality tools, leather, accessories, kits and teaching
materials. In 2002, we began expanding Tandy Leather’s industry presence by
opening retail stores. As of May 1, 2005, we have opened 44 Tandy Leather retail
stores located throughout the United States and Canada.
 
 Our
“Other” segment consists of Roberts, Cushman and Co., a wholly-owned subsidiary
that custom designs and manufactures decorative hat trims for headwear
manufacturers.
 
 **Critical
Accounting Policies**
 
 A
description of our critical accounting policies appears in "Item 2. Management's
Discussions and Analysis of Financial Condition and Results of Operations" in
our Annual Report on Form 10-K for the year ended December 31,
2004.
 
 **Forward-Looking
Statements**
 
 Certain
statements contained in this report and other materials we file with the
Securities and Exchange Commission, as well as information included in oral
statements or other written statements made or to be made by us, other than
statements of historical fact, are forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. Forward-looking statements
generally are accompanied by words such as “may,” “will,” “could,” “should,”
“anticipate,” “believe,” “budgeted,” “expect,” “intend,” “plan,” “project,”
“potential,” “estimate,” “continue,” or “future” variations thereof or other
similar statements. 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:
 
  *Ø*
    *We
      may fail to realize the anticipated benefits of the opening of Tandy
      Leather retail stores or we may be unable to obtain sufficient new
      locations on acceptable terms to meet our growth plans. Also, other retail
      initiatives may not be successful.*
  When we
acquired the assets of Tandy Leather in late 2000, there was only a single Tandy
Leather distribution center and no retail outlets. In 2002, we began a program
of developing Tandy Leather retail stores, and through March 31, 2005, we have
added forty-four Tandy Leather stores and closed the distribution center. We
believe that these store openings and acquisitions have been successful, but
there can be no assurance that this success will continue or that we will be
able to find additional locations for new stores or existing leathercraft stores
to acquire on economically viable terms. Because, in recent years, the expansion
of Tandy Leather has produced much of the increase in our profits, disruption of
this expansion would likely slow or stop this increase in profits.
  *Ø*
    *Recent
      declines in sales to national accounts by our Wholesale
      Leathercraft operation could
continue.*
  11
 Sales to
national accounts by our Wholesale Leathercraft operation decreased in 2004 and
were also down in the first three months of 2005. We are working to reverse this
trend, but, if it continues, our consolidated net income could be
reduced.
  *Ø*
    *Political
      considerations here and abroad could disrupt our sources of supplies from
      abroad or affect the prices we pay for goods. Continued involvement by the
      United States in war and other military operations in the Middle East and
      other areas abroad could disrupt international trade and affect our
      inventory sources.*
  Recent
political discussions have suggested that the United States should impose
barriers on the importation of certain goods. We rely heavily on imported goods
as sources of the inventory we sell. Tariffs, taxes and limits on these imports
could affect our ability to obtain inventory or increase the price we pay for
inventory. If these disruptions occur, our operations could be adversely
affected.
  Also, the
involvement of the United States in the war in Iraq and the anti-terrorist
activities in Afghanistan have produced political uncertainty and, in certain
countries, resentment against the United States and its citizens and companies.
These issues may also affect our ability to obtain products from
abroad.
  *Ø*
    *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.*
  The
prices of hides and leathers fluctuate in normal times, and these fluctuations
can affect our business. Livestock diseases such as mad cow could reduce the
availability of hides and leathers or increase their cost. Our ability to pass
increased costs on to our customers is limited. If our costs increase and we are
unable to pass the cost on to our customers, we will experience reduced
operating income from existing operations.
  *Ø*
    *We
      believe that the recent rise in oil and natural gas prices will increase
      the costs of the goods that we sell, including the costs of shipping those
      goods from the manufacturer to our stores and
    customers.*
  Various
oils used to manufacture certain leather and leathercrafts are derived from
petroleum and natural gas. Also, the carriers who transport our goods rely on
petroleum-based fuels to power their ships, trucks and trains. They are likely
to pass their increased costs on to us. We are unsure how much of this increase
we will be able to pass on to our customers.
  *Ø*
    *The
      recent economy downturn in the United States, as well as abroad, may cause
      our sales to decrease or not to increase or adversely affect the prices
      charged for our products. Also, hostilities, terrorism or other events
      could worsen this condition.*
  Recently,
the world economy has shown signs of recovering from an economic slump. However,
this recovery is not yet complete, and there can be no assurance that increased
oil and gas prices, terrorism, or other factors will not impede this recovery.
Continuation or worsening of the economic condition in the United States or
internationally is likely to limit or decrease our profits.
  In
addition, terrorism or the threat of terrorist attacks in the United States or
against United States interests abroad could cause consumer buying habits to
change and decrease our sales. We believe that major disruptions (such as
terrorist attacks) could reduce consumer spending, particularly purchases of
non-essential products such as ours.
  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.
  We assume
no obligation to update or otherwise revise our forward-looking statements even
if experience or future changes make it clear that any projected results,
express or implied, will not be realized .
 
 12
 **Results
of Operations**
 
 The
following tables present selected financial data of each of our three segments
for the quarters ended March 31, 2005 and 2004:
 
 **Quarter
      Ended March 31, 2005**
    
    **Quarter
      Ended March 31, 2004****Sales**
    
    **Operating**
      **Income**
    
    **Sales**
    
    **Operating**
      **Income**Wholesale
      Leathercraft
    $7,913,892
    
    $1,168,982
    
    $
      8,443,091
    
    $1,078,409Retail
      Leathercraft
    4,285,606
    
    386,718
    
    3,166,738
    
    301,567Other
    508,018
    
    13,847
    
    571,048
    
    67,159Total
      Operations
    $12,707,516
    
    $1,569,547
    
    $
      12,180,877
    
    $1,447,135
 
 Consolidated
net sales for the quarter ended March 31, 2005 increased $527,000, or 4.3%,
compared to the same period in 2004. Retail Leathercraft contributed $1.1
million to the increase, while Wholesale Leathercraft and Other reported
decreases of $529,000 and $63,000, respectively. Operating income on a
consolidated basis for the quarter ended March 31, 2005 was up 8.5% or $122,000
over the first quarter of 2004.
 
 The
following table shows in comparative form our consolidated net income for the
first quarters of 2005 and 2004:
 **2005**
    
    **2004**
    **%
      change**Net
      income
    $1,049,222
    
    $970,966
    8.1%
 
 While
Wholesale Leathercaraft recorded 62.2% of our sales in the quarter, both
Wholesale Leathercraft and Retail Leathercraft segments contributed
significantly to the improvement in our consolidated net income. Additional
information appears below for each segment.
 
 **Wholesale
Leathercraft**
 
 Our
Wholesale Leathercraft operation consists of 30 distribution centers and our
National Account group. The following table presents the combined sales mix by
customer categories for the quarters ended March 31, 2005 and 2004:
 **Quarter
      ended****Customer
      Group**
    **03/31/05**
    
    **03/31/04**RETAIL(end
      users, consumers, individuals)
    24%
    
    23%INSTITUTION(prisons,
      prisoners, hospitals, schools, youth organizations, etc.)
    6%
    
    7%WHOLESALE(resellers
      & distributors, saddle & tack shops, authorized dealers,
      etc.)
    45%
    
    45%MANUFACTURERS
    8%
    
    6%NATIONAL
      ACCOUNTS
    17%
    
    19%100%
    
    100%
 
 Net sales
decreased 6.3%, or $529,000, for the first quarter of 2005 as
follows:
 
 **Quarter
      Ended**
      **03/31/05**
    
    **Quarter
      Ended****03/31/04**
    
    **$**
      **change**
    **%**
      **change**Distribution
      centers
    $6,648,952
    
    $6,741,294
    
    $(92,342)
    (1.4)%National
      account group
    1,264,940
    
    1,701,797
    
    (436,857)
    (25.7)%$7,913,892
    
    $8,443,091
    
    $(529,199)
    (6.3)%
 
 13
 In our
distribution centers, we achieved a modest sales gain in our MANUFACTURERS
customer group while sales to our other customer groups were down slightly,
compared to the first quarter of 2004. Sales to our RETAIL customer group
decreased somewhat as expected due to the continued expansion of the Tandy
Leather store chain. Sales to our saddle and tack customers and our small
distributor customers (part of our WHOLESALE group) were up approximately 7% and
20%, respectively, over sales to those same customer groups a year ago even
through sales to the WHOLESALE group overall was down 1%. Sales to our national
account customers continues to decline as discussed in our previous filings. We
are analyzing our relationships with these customers in order to better
determine how to successfully service the accounts going forward. It is
possible, however, that we will not be successful in changing this negative
sales trend in the future.
 
 Operating
income for Wholesale Leathercraft increased $91,000 for the current quarter
compared to 2004, an improvement of 8.4%. Operating expenses as a percentage of
sales were 40.5%, almost in line with our target of 40% of sales, down $300,000
from the first quarter of 2004. With the exception of professional fees
pertaining to our compliance efforts with Sarbanes-Oxley Act of 2002 Section
404, the majority of our operating expenses decreased this quarter due to
ongoing cost containment efforts.
 
 **Retail
Leathercraft**
 
 Our
Retail Leathercraft operation consists of 44 Tandy Leather retail stores at
March 31, 2004, compared to 29 stores at March 31, 2004. Net sales were up
approximately 35% for the first quarter of 2005 over the same quarter last year.
A store is categorized as "new" if it was operating less than half of the
comparable period in the prior year.
 
 **#
      Stores**
    **Qtr
      ended**
      **03/31/05**
    **Qtr
      ended**
      **03/31/04**
    **$
      Incr**
      **(decr)**
    **%
      Incr**
      **(decr)**Same
      (existing) store sales
    29
    $3,218,445
    $3,166,738
    $
      51,707
    1.63%New
      store sales
    15
    1,067,161
    -
    1,067,161
    N/ATotal
      sales
    44
    $4,285,606
    $3,166,738
    $1,118,868
    35.33%
 
 First
quarter sales were solid even though we were expecting stronger sales from the
existing stores. The first two months of the quarter were virtually flat
compared to the same two months of 2004. The quarter ended with strong sales
increases in both our RETAIL and WHOLESALE customer groups. The retail stores
opened prior to January 1, 2005 averaged approximately $34,000 in sales per
month for the first quarter of 2005.
 
 The
following table presents sales mix by customer categories for the quarters ended
March 31, 2005 and 2004 for our Retail Leathercraft operation:
 **Quarter
      ended****Customer
      Group**
    **03/31/05**
    
    **03/31/04**RETAIL(end
      users, consumers, individuals)
    73%
    
    74%INSTITUTION(prisons,
      prisoners, hospitals, schools, youth organizations, etc.)
    4
    
    4WHOLESALE(resellers
      & distributors, saddle & tack shops, authorized dealers,
      etc.)
    22
    
    20NATIONAL
      ACCOUNTS
    -
    
    -MANUFACTURERS
    1
    
    2100%
    
    100%
 
 Operating
income as a percentage of sales decreased from 9.5% in the first quarter of 2004
to 9.0% in the first quarter of 2005, although it increased $85,000. Our gross
margin improved as expected from 60.8% to 62.1% due to the new selling prices
effective with our annual catalog that was distributed in November 2004.
Operating expenses as a percentage of sales increased from 51.3% to 53.1% due to
the new stores whose sales have not achieved adequate leverage of sales against
their operating expenses.
 
 14
 **Other
(Roberts, Cushman)**
 
 Sales
decreased $63,000 or 11.0% for the first quarter of 2005. Gross profit margins
and operating income decreased $99,000 and $59,000, respectively. A decrease in
the sales of non-manufactured items, which carry a higher gross margin, caused
the decrease in gross profit. Operating expenses decreased $40,000 due to a
reduction in administrative overhead.
 
 **Other
Expenses**
 
 Interest
expense in the first quarter of 2005 ($3,000) was down from the first quarter of
2004 ($13,500) due to the decrease in our outstanding debt balance.
 
 **Capital
Resources, Liquidity and Financial Condition**
 
 On our
consolidated balance sheet, total assets increased from $22.1 million at
year-end 2004 to $23.2 million at March 31, 2005. Our accounts receivable and
inventory accounted for the majority of the increase. Total stockholders’ equity
increased from $17.3 million at December 31, 2004 to $18.4 million at March 31,
2005. Most of the increase was from earnings in the first quarter of this year.
Our current ratio fell slightly from 4.79 at December 31, 2004 to 4.44 at March
31, 2005.
 
 Our
investment in inventory increased by $377,000 at March 31, 2005 from year-end
2004. Inventory turnover decreased to an annualized rate of 3.93 times during
the first quarter of 2005, from 4.34 times for the first quarter of 2004.
Inventory turnover was 3.87 times for all of 2004. We compute our inventory
turns as sales divided by average inventory. Inventory management is a
significant factor in our financial position and, as we continue our expansion
of the Tandy Leather store chain, we expect our inventory to slowly trend
upward. We strive to maintain the optimal amount of inventory throughout the
system in order to fill customer orders timely without tying up too much working
capital. At the end of the first quarter, our total inventory on hand was
slightly lower than our internal targets for optimal inventory
levels.
 
 Our
investment in accounts receivable was $2.5 million at March 31, 2005, up
$512,000 from $2.0 million at year-end 2004. This is a result of an increase in
credit sales during the quarter ended March 31, 2005 as compared to that of the
quarter ended December 31, 2004 and a slight increase in the average days
outstanding on our accounts. The average days to collect accounts for the first
quarter of 2005 slowed from the fourth quarter of 2004 from 43.6 days to 51.8
days primarily as a result of the accounts receivable obtained via an
acquisition completed in December 2004.
 
 Accounts
payable decreased $432,000 to $1.5 million at the end of the first quarter, due
primarily to the decrease in inventory purchases during the quarter. Accrued
expenses and other liabilities increased $455,000. The increase is due to the
accrual recorded for inventory enroute to us as of the end of the quarter in the
amount of $1.0 million, offset by a reduction in accrued bonuses and various
other expense accruals. The bonuses accrued at the end of December 2004 were
paid in March 2005.
 
 During
the first quarter of 2005, cash flow provided by operating activities was
$500,000. The net income generated for the quarter accounted for the majority of
the cash flow, offset by increases in accounts receivable and inventory. Cash
flow used in investing activities totaled $110,000, $88,000 of which pertains to
the purchase and additional development of a new computer system. Once the
system is usable for point-of-sale and inventory management, we intend to
reclassify the cost to property and equipment. Equipment purchased during the
quarter totaled $29,000. Cash flow used by financing activities was $483,000,
consisting of payments on our revolving credit facility and note payable during
the quarter totaling $538,000, partially offset by proceeds from stock option
exercises by employees totaling $55,000.
 
 At March
31, 2004, our bank debt totaled $1.3 million. At March 31, 2005, the balance was
zero.
 
 15
 We expect
to fund our operating and liquidity needs as well as our current expansion of
Tandy Leather's retail store chain from a combination of current cash balances,
internally generated funds and our revolving credit facility with JPMorgan Chase
Bank, which is based upon the level of our accounts receivable and inventory. At
March 31, 2005, the available and unused portion of the credit facility was
approximately $3.0 million.
 
 
 **Item
3. Quantitative and Qualitative Disclosures About Market
Risk**
 
 For
disclosures about market risk affecting the Company, see Item 7A "Quantitative
and Qualitative Disclosures About Market Risk" in our Annual Report on Form 10-K
for our fiscal year ended December 31, 2004. We believe that our exposure to
market risks has not changed significantly since December 31, 2004.
 
 **Item
4. Controls and Procedures**
 
 At the
end of the first quarter of 2005, our President, Chief Executive Officer and
Chief Financial Officer evaluated the effectiveness of the design and operation
of our disclosure controls and procedures pursuant to Rule 13a-15(b) under the
Securities and Exchange Act of 1934, as amended. Based upon this evaluation and
notwithstanding the limitations contained in the final paragraph of this Item 4,
they concluded that, as of March 31, 2005, our disclosure controls and
procedures offer reasonable assurance that the information required to be
disclosed by us in the reports we file under the Exchange Act is recorded,
processed, summarized, and reported within the time period specified in the
rules and forms adopted by the Securities and Exchange Commission.
 
 During
the period covered by this report, there has been no change in our internal
controls over financial reporting that materially affected, or is reasonably
likely to materially affect, these controls.
 
 *Limitations
on the Effectiveness of Controls.* Our
management, including the President, Chief Executive Officer and Chief Financial
Officer, does not expect that our disclosure controls and procedures or our
internal controls will prevent all error and all fraud. A well conceived and
operating control system is based in part upon certain assumptions about the
likelihood of future events and can provide only reasonable, not absolute,
assurance that the objectives of the control system are met. Further, the design
of a control system must reflect the fact that there are resource constraints,
and the benefits of controls must be considered relative to their costs.
 
 16
 **PART
II. OTHER INFORMATION**
 
 **Item
6. Exhibits**
 
 **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
    Financial
      Advisor's Warrant Agreement, dated February 12, 2003, between The Leather
      Factory, Inc. and Westminster Securities Corporation, filed as Exhibit 4.1
      to Form 10-Q filed by The Leather Factory, Inc. with the Securities and
      Exchange Commission on May 14, 2003 and incorporated by reference
      herein.4.2
    Capital
      Markets Services Engagement Agreement, dated February 12, 2003, between
      The Leather Factory, Inc. and Westminster Securities Corporation, filed as
      Exhibit 4.2 to Form 10-Q filed by The Leather Factory, Inc. with the
      Securities and Exchange Commission on May 14, 2003 and incorporated by
      reference herein.4.3
    Financial
      Advisor's Warrant Agreement, dated February 24, 2004, between The Leather
      Factory, Inc. and Westminster Securities Corporation, filed as Exhibit 4.1
      to Form 10-Q filed by The Leather Factory, Inc. with the Securities and
      Exchange Commission on May 14, 2004 and incorporated by reference
      herein.4.4
    Capital
      Markets Services Engagement Agreement, dated February 24, 2004, between
      The Leather Factory, Inc. and Westminster Securities Corporation, filed as
      Exhibit 4.2 to Form 10-Q filed by The Leather Factory, Inc. with the
      Securities and Exchange Commission on May 14, 2004 and incorporated by
      reference herein.10.5
    Credit
      Agreement, dated as of October 6, 2004, made by The Leather Factory, Inc.,
      a Delaware corporation, and Bank One, National Association, filed as
      Exhibit 10.1 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 November 5, 2004 and incorporated by reference
      herein.10.6
    Line
      of Credit Note, dated October 6, 2004, in the principal amount of up to
      $3,000,000 given by The Leather Factory, Inc., a Delaware corporation as
      borrower, payable to the order of Bank One, National Association, filed as
      Exhibit 10.2 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 November 5, 2004 and incorporated by reference
      herein.14.1
    Code
      of Business Conduct and Ethics of The Leather Factory, Inc., adopted by
      the Board of Directors on February 26, 2004, filed as Exhibit 14.1 to
      Annual Report on Form 10-K of The Leather Factory, Inc. (Commission File
      No. 1-12368) filed with the Securities and Exchange Commission on March
      29, 2004 and incorporated by reference herein.21.1
    List
      of Subsidiaries of the Company, filed as Exhibit 21.1 to the Annual Report
      on Form 10-K of The Leather Factory, Inc. for the year ended December 31,
      2002 filed with the Securities and Exchange commission on March 28, 2003,
      and incorporated by reference herein.*31.1
    13a-14(a)
      Certification by Wray Thompson, Chairman of the Board and Chief Executive
      Officer*31.2
    13a-14(a)
      Certification by Shannon Greene, Chief Financial Officer and
      Treasurer*32.1
    Certification
      Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of
      the Sarbanes-Oxley Act of 2002______________*Filed
      herewith.
 
 17
 
 
 **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
13, 2005    By: /s/
Wray Thompson
 Wray
Thompson
 Chairman
of the Board and Chief Executive Officer
 
 Date: May
13, 2005  By: /s/Shannon
L. Greene
 Shannon L.
Greene
 Chief Financial
Officer and Treasurer (Chief Accounting Officer)
 
  18
  **EXHIBIT
31.1**
 **RULE
13a-14(a) CERTIFICATION**
  
  I, **Wray
Thompson** , certify
that:
  1. I have
reviewed this quarterly report on Form 10-Q of The Leather Factory,
Inc.;
  2. Based
on my knowledge, this report does not contain any untrue statement of a material
fact or omit to state a material fact necessary to make the statements made, in
light of the circumstances under which such statements were made, not misleading
with respect to the period covered by this report;
  3. Based
on my knowledge, the financial statements, and other financial information
included in this report, fairly present in all material respects the financial
condition, results of operations and cash flows of the registrant as of, and
for, the periods presented in this report;
  4. The
registrant’s other certifying officer and I are responsible for establishing and
maintaining disclosure controls and procedures (as defined in Exchange Act Rules
13a-15(e) and 15d-15(e)) *[language
intentionally omitted SEC Rel. 33-8238]* for the
registrant and have:
  (a)
Designed such disclosure controls and procedures, or caused such disclosure
controls and procedures to be designed under our supervision, to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this report is being prepared;
  (b) *[Left
blank intentionally SEC Rel. No. 33-8238]* ;
  (c)
Evaluated the effectiveness of the registrant’s disclosure controls and
procedures and presented in this report our conclusions about the effectiveness
of the disclosure controls and procedures, as of the end of the period covered
by this report based on such evaluation; and
  (d)
Disclosed in this report any change in the registrant’s internal control over
financial reporting that occurred during the registrant’s first fiscal quarter
that has materially affected, or is reasonably likely to materially affect, the
registrant’s internal control over financial reporting; and
  5. The
registrant’s other certifying officer and I have disclosed, based on our most
recent evaluation of internal control over financial reporting, to the
registrant’s auditors and the audit committee of the registrant’s board of
directors (or persons performing the equivalent functions):
  (a) All
significant deficiencies and material weaknesses in the design or operation of
internal control over financial reporting which are reasonably likely to
adversely affect the registrant’s ability to record, process, summarize and
report financial information; and
  (b) Any
fraud, whether or not material, that involves management or other employees who
have a significant role in the registrant’s internal controls over financial
reporting.
  
 Date:  May 13,
2005
 /s/
Wray Thompson
 Wray
Thompson
 President
and Chief Executive Officer
 (principal
executive officer)
  19
 
 **Exhibit
31.2**
 **RULE
13a-14(a) CERTIFICATION**
 
 I, **Shannon
L. Greene** , certify
that:
  1. I have
reviewed this quarterly report on Form 10-Q of The Leather Factory,
Inc.;
  2. Based
on my knowledge, this report does not contain any untrue statement of a material
fact or omit to state a material fact necessary to make the statements made, in
light of the circumstances under which such statements were made, not misleading
with respect to the period covered by this report;
  3. Based
on my knowledge, the financial statements, and other financial information
included in this report, fairly present in all material respects the financial
condition, results of operations and cash flows of the registrant as of, and
for, the periods presented in this report;
  4. The
registrant’s other certifying officer and I are responsible for establishing and
maintaining disclosure controls and procedures (as defined in Exchange Act Rules
13a-15(e) and 15d-15(e)) *[language
intentionally omitted SEC Rel. 33-8238]* for the
registrant and have:
  (a)
Designed such disclosure controls and procedures, or caused such disclosure
controls and procedures to be designed under our supervision, to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this report is being prepared;
  (b) *[Left
blank intentionally SEC Rel. No. 33-8238]* ;
  (c)
Evaluated the effectiveness of the registrant’s disclosure controls and
procedures and presented in this report our conclusions about the effectiveness
of the disclosure controls and procedures, as of the end of the period covered
by this report based on such evaluation; and
  (d)
Disclosed in this report any change in the registrant’s internal control over
financial reporting that occurred during the registrant’s first fiscal quarter
that has materially affected, or is reasonably likely to materially affect, the
registrant’s internal control over financial reporting; and
  5. The
registrant’s other certifying officer and I have disclosed, based on our most
recent evaluation of internal control over financial reporting, to the
registrant’s auditors and the audit committee of the registrant’s board of
directors (or persons performing the equivalent functions):
  (a) All
significant deficiencies and material weaknesses in the design or operation of
internal control over financial reporting which are reasonably likely to
adversely affect the registrant’s ability to record, process, summarize and
report financial information; and
  (b) Any
fraud, whether or not material, that involves management or other employees who
have a significant role in the registrant’s internal controls over financial
reporting.
  
 Date:  May 13,
2005
 /s/
Shannon L. Greene
 Shannon
L. Greene
 Chief
Financial Officer and Treasurer
 (principal
financial and accounting officer)
  20
   **EXHIBIT
32.1**
 
 
 **Certification
Pursuant to 18 U.S.C. Section 1350,**
 **as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002**
 
 In
connection with the Quarterly Report on Form 10-Q of The Leather Factory, Inc.
for the quarter ended March 31, 2005 as filed with the United States Securities
and Exchange Commission on the date hereof (the "Report"), Wray Thompson, as
Chairman and Chief Executive Officer, and Shannon L. Greene, as Treasurer and
Chief Financial Officer, each hereby certifies, pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,
that:
 
 i.
    The
      Report fully complies with the requirements of section 13(a) or 15(d) of
      the Securities Exchange Act of 1934; and
 ii.
    The
      information contained in the Report fully presents, in all material
      respects, the financial condition and results of operations of the Company
      as of the dates and for the periods expressed in the
    Report.
 
 
 May 13,
2005    By: /s/
Wray Thompson
 **Wray Thompson**
 ****   **Chairman
of the Board and Chief Executive Officer**
 
 ****May 13, 2005 By: /s/
Shannon L. Greene
 **Shannon L.
Greene**
 **Chief Financial Officer and
Treasurer**
 
  21