Form 10-Q

                       SECURITIES AND EXCHANGE COMMISSION

                             Washington, D.C. 20549


(Mark One)

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

For the quarterly period ended September 30, 2001

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.

                                                     Shares outstanding as
                Class                                of November 14, 2001
----------------------------------------       ---------------------------------
Common Stock, par value $.0024 per share                   9,991,161

<PAGE>

Forward-Looking Statements

         This report contains  forward-looking  statements of management.  There
are certain  important risks that could cause results to differ  materially than
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    The recent downturn in the economy in the United States, as well as abroad,
     may cause our sales to decrease or not to increase.

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 recent acquisition
     of the assets of Tandy Leather.

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    Any  change in the  commercial  banking  environment  may affect us and our
     ability to borrow capital as needed.

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 SEPTEMBER 30, 2001


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


                                                                        PAGE NO.
                                                                        --------

PART I.   FINANCIAL INFORMATION

  Item 1.  Financial Statements

    Consolidated Balance Sheets
     September 30, 2001 and December 31, 2000..........................     4

    Consolidated Statements of Income
     Three and nine months ended September 30, 2001 and 2000...........     5

    Consolidated Statements of Cash Flows
     Nine months ended September 30, 2001 and 2000.....................     6

    Consolidated Statements of Stockholders' Equity
     Nine months ended September 30, 2001 and 2000.....................     7

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

  Item 2.  Management's Discussion and Analysis of Financial

    Condition and Results of Operations................................    11

  Item 3.  Quantitative and Qualitative Disclosures About Market Risk..    15

PART II.  OTHER INFORMATION

  Item 6.  Exhibits and Reports on Form 8-K............................    16


SIGNATURES.............................................................    16





                                       3
<PAGE>
<TABLE>
<CAPTION>

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

                            THE LEATHER FACTORY, INC.
                           CONSOLIDATED BALANCE SHEETS

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

                                                                           September 30,         December 31,
                                                                                2001                 2000
                                                                         -----------------    -----------------
                                                                            (UNAUDITED)
<S>                                                                      <C>                  <C>
                                    ASSETS
CURRENT ASSETS:
     Cash                                                                    $        --          $     234,141
     Cash restricted for payment on revolving credit facility                      358,583              390,467
     Accounts receivable-trade, net of allowance for doubtful accounts
         of $210,000 and $338,000 in 2001 and 2000, respectively                 2,836,959            2,191,996
     Inventory                                                                   9,466,025            9,205,898
     Prepaid income taxes                                                           50,955                 --
     Deferred income taxes                                                         140,111              130,802
     Other current assets                                                          712,643              710,085
                                                                         -----------------    -----------------
                             Total current assets                               13,565,276           12,863,389
                                                                         -----------------    -----------------

PROPERTY AND EQUIPMENT, at cost                                                  4,282,144            3,657,601
  Less-accumulated depreciation and amortization                                (2,837,597)          (2,494,732)
                                                                         -----------------    -----------------
                             Property and equipment, net                         1,444,547            1,162,869

GOODWILL, net of accumulated amortization of $1,528,000
     and $1,367,000 in 2001 and 2000, respectively                               4,591,352            4,765,092
OTHER INTANGIBLES, net of accumulated amortization of
     $167,000 and $100,000, in 2001 and 2000, respectively                         550,246              615,647
OTHER assets                                                                       280,473              279,082
                                                                         -----------------    -----------------
                                                                             $  20,431,894        $  19,686,079
                                                                         =================    =================

                     LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
     Accounts payable                                                        $   2,464,970        $   2,159,910
     Accrued expenses and other liabilities                                      1,005,761            1,290,613
     Income taxes payable                                                             --                 94,795
     Notes payable and current maturities of  long-term debt                     4,980,523            5,759,626
                                                                         -----------------    -----------------
                             Total current liabilities                           8,451,254            9,304,944
                                                                         -----------------    -----------------

DEFERRED INCOME TAXES                                                               64,337               72,473

NOTES PAYABLE AND LONG-TERM DEBT, net of current maturities                         13,008               13,025

COMMITMENTS AND CONTINGENCIES                                                         --                   --

STOCKHOLDERS' EQUITY:
     Preferred stock, $0.10 par value; 20,000,000
         shares authorized, none issued or outstanding                                --                   --
     Common stock, $0.0024 par value; 25,000,000 shares
         authorized, 9,991,161 and 9,908,161 shares issued
         and outstanding at 2001 and 2000, respectively                             23,979               23,780
     Paid-in capital                                                             4,030,508            3,946,608
     Retained earnings                                                           7,987,476            6,471,754
     Less: Notes receivable - secured by common stock                             (102,773)            (120,339)
     Accumulated other comprehensive loss                                          (35,895)             (26,166)
                                                                         -----------------    -----------------
                             Total stockholders' equity                         11,903,295           10,295,637
                                                                         -----------------    -----------------
                                                                             $  20,431,894        $  19,686,079
                                                                         =================    =================

</TABLE>

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

                                       4
<PAGE>
<TABLE>
<CAPTION>

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

                            THE LEATHER FACTORY, INC.
                        CONSOLIDATED STATEMENTS OF INCOME
                                   (UNAUDITED)
             THREE and NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000

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

                                                           THREE MONTHS                        NINE MONTHS
                                                        2001             2000             2001             2000
                                                 --------------   --------------   --------------   --------------
<S>                                              <C>              <C>              <C>              <C>
NET SALES                                           $ 9,198,401      $ 7,374,556      $27,930,907      $22,382,518

COST OF SALES                                         4,586,827        3,660,995       13,456,322       11,297,333
                                                 --------------   --------------   --------------   --------------

                 Gross profit                         4,611,574        3,713,561       14,474,585       11,085,185

OPERATING EXPENSES                                    3,823,038        3,012,409       11,533,970        8,619,243
                                                 --------------   --------------   --------------   --------------

INCOME FROM OPERATIONS                                  788,536          701,152        2,940,615        2,465,942

OTHER EXPENSE:
         Interest expense                               102,235          135,316          375,442          439,878
         Other, net                                      20,317           14,547           31,959           30,752
                                                 --------------   --------------   --------------   --------------
                 Total other expense                    122,552          149,863          407,401          470,630
                                                 --------------   --------------   --------------   --------------

INCOME BEFORE INCOME TAXES                              665,984          551,289        2,533,214        1,995,312

PROVISION FOR INCOME TAXES                              269,456          236,190        1,017,492          802,877
                                                 --------------   --------------   --------------   --------------

NET INCOME                                          $   396,528      $   315,099      $ 1,515,722      $ 1,192,435
                                                 ==============   ==============   ==============   ==============





NET INCOME PER COMMON SHARE - Basic                 $      0.04      $      0.03      $      0.15      $      0.12
                                                 ==============   ==============   ==============   ==============

NET INCOME PER COMMON SHARE--Assuming Dilution      $      0.04      $      0.03      $      0.15      $      0.12
                                                 ==============   ==============   ==============   ==============

</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)
                  NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000

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


                                                                              2001              2000
                                                                       --------------    --------------
<S>                                                                    <C>               <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net income                                                              $ 1,515,722       $ 1,192,435
  Adjustments to reconcile net income to net
   cash provided by operating activities-
     Depreciation & amortization                                              550,024           443,500
     Loss (gain) on disposal of assets                                           (333)            3,689
     Amortization of deferred financing costs                                  34,316            18,132
     Other                                                                    (27,174)           (7,837)
     Net changes in assets and liabilities:
       Accounts receivable-trade, net                                        (644,963)           22,316
       Inventory                                                             (260,127)        1,048,017
       Income taxes                                                          (145,750)         (363,950)
       Other current assets                                                    (2,558)           25,238
       Accounts payable                                                       305,060          (758,283)
       Accrued expenses and other liabilities                                (284,853)          168,870
                                                                       --------------    --------------
     Total adjustments                                                       (476,358)          599,692
                                                                       --------------    --------------

      Net cash provided by operating activities                             1,039,364         1,792,127
                                                                       --------------    --------------

CASH FLOWS FROM INVESTING ACTIVITIES:
  Purchase of property and equipment                                         (628,543)         (161,042)
  Proceeds from sales of assets                                                 2,000              --
  Increase in other assets                                                     (1,391)            1,088
  Other intangible costs                                                         --               2,186
                                                                       --------------    --------------

      Net cash used in investing activities                                  (627,934)
                                                                                               (157,768)
                                                                       --------------    --------------

CASH FLOWS FROM FINANCING ACTIVITIES:
  Net decrease in revolving credit loans                                     (722,814)       (1,530,281)
  Proceeds from notes payable and long-term debt                               18,676              --
  Payments on notes payable and long-term debt                                (74,981)         (218,519)
  Change in cash restricted for payment on revolving credit facility           31,883            93,810
  Payments received on notes secured by common stock                           17,566             8,814
  Deferred financing cost incurred                                               --             (25,626)
  Proceeds from issuance of common stock                                       84,099            16,875
                                                                       --------------    --------------

      Net cash used in financing activities                                  (645,571)       (1,654,927)
                                                                       --------------    --------------

NET DECREASE IN CASH                                                         (234,141)          (20,568)

CASH, beginning of period                                                     234,141           134,465
                                                                       --------------    --------------

CASH, end of period                                                       $      --         $   113,897
                                                                       ==============    ==============

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
  Interest paid during the period                                         $   365,660       $   453,645
  Income taxes paid during the period, net of (refunds)                   $   990,311       $ 1,168,449

</TABLE>

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

                                       6
<PAGE>
<TABLE>
<CAPTION>

--------------------------------------------------------------------------------
                            THE LEATHER FACTORY, INC.
                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                                   (UNAUDITED)
                  NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000
--------------------------------------------------------------------------------


                                              Common Stock                                           Notes         Accumulated
                                      ---------------------------                                  receivable         Other
                                         Number          Par          Paid-in        Retained     - secured by     Cumulative
                                       of shares        value         capital        Earnings     common stock        Loss
                                      ------------   ------------   ------------   ------------   ------------    ------------
<S>                                   <C>            <C>            <C>            <C>            <C>             <C>
BALANCE, December 31, 1999               9,853,161   $     23,648   $  3,901,740   $  4,930,434   $   (153,416)   $    (21,981)

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

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

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

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

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



BALANCE, December 31, 2000               9,908,161   $     23,780   $  3,946,608   $  6,471,754   $   (120,339)   $    (26,166)

 Payments on notes receivable -
    secured by common stock                   --             --             --             --           17,566            --

 Shares issued - employee
    Stock options exercised                 83,000            199         83,900           --             --              --

 Net Income                                   --             --             --        1,515,722           --              --

 Translation adjustment                       --             --             --             --             --            (9,729)
                                      ------------   ------------   ------------   ------------   ------------    ------------

BALANCE, September 30, 2001              9,991,161   $     23,979   $  4,030,508   $  7,987,476   $   (102,773)   $    (35,895)
                                      ============   ============   ============   ============   ============    ============


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

BALANCE, December 31, 1999                                          $  8,680,425

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

 Shares issued - employee
    Stock options exercised                                               16,875

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

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

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


BALANCE, December 31, 2000                                            10,295,637

 Payments on notes receivable -
    secured by common stock                                               17,566

 Shares issued - employee
    Stock options exercised                                               84,099

 Net Income                                                            1,515,722      1,515,722

 Translation adjustment                                                   (9,729)        (9,729)
                                                                    ------------

BALANCE, September 30, 2001                                         $ 11,903,295
                                                                    ============
                                                                                   ------------
 Comprehensive income for the nine months ended September 30, 2001                 $  1,505,993
                                                                                   ============

</TABLE>


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

                                       7
<PAGE>
<TABLE>
<CAPTION>

                            THE LEATHER FACTORY, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



1.  BASIS OF PRESENTATION

In  the  opinion  of  the  Company,  the  accompanying   consolidated  financial
statements  contain  all  adjustments   (consisting  of  only  normal  recurring
adjustments)  necessary to present fairly its financial position as of September
30, 2001 and December 31, 2000, and the results of operations and cash flows for
the three and nine month periods ended  September 30, 2001 and 2000. The results
of  operations  for the  three  and  nine  month  periods  are  not  necessarily
indicative  of the  results  to be  expected  for  the  full  fiscal  year.  The
consolidated  financial  statements  should  be read  in  conjunction  with  the
financial  statements  and  disclosures  contained in the Company's  2000 Annual
Report on Form 10-K ("Annual Report").

Certain   reclassifications  have  been  made  to  conform  the  2000  financial
statements to the presentation in 2001. The  reclassifications  had no effect on
net income.

2.  INVENTORY

The components of inventory consist of the following:

                                                             As of
                                            ------------------------------------
                                              September 30,       December 31,
                                                   2001               2000
                                            -----------------  -----------------
       Finished goods held for sale            $ 8,375,700        $ 8,175,429
       Raw materials and work in process         1,090,325          1,030,469
                                            -----------------  -----------------
                                               $ 9,466,025        $ 9,205,898
                                            =================  =================


3.  EARNINGS PER SHARE

The following table sets forth the computation of basic and diluted earnings per
share ("EPS"):

                                                            Three Months Ended             Nine Months Ended
                                                               September 30,                 September 30,
                                                       ---------------------------   ---------------------------
                                                            2001           2000           2001           2000
                                                       ------------   ------------   ------------   ------------
<S>                                                    <C>            <C>            <C>            <C>
Numerator:
  Net  income                                           $   396,528    $   315,099    $ 1,515,722    $ 1,192,435
                                                       ------------   ------------   ------------   ------------
  Numerator for basic and diluted earnings per share        396,528        315,099      1,515,722      1,192,435

Denominator:
  Weighted-average shares outstanding-basic               9,991,052      9,876,422      9,970,985      9,869,803

Effect of dilutive securities:
  Stock options                                             427,831        146,668        228,346        128,764
  Warrants                                                  237,976        176,074        201,027        170,807
                                                       ------------   ------------   ------------   ------------
Dilutive potential common shares                            665,807        322,742        429,373        299,571

  Denominator for diluted earnings per share-
  weighted-average shares                                10,656,859     10,199,164     10,400,358     10,169,374
                                                       ============   ============   ============   ============

  Basic earnings per share                              $      0.04    $      0.03    $      0.15    $      0.12
                                                       ============   ============   ============   ============

  Diluted earnings per share                            $      0.04    $      0.03    $      0.15    $      0.12
                                                       ============   ============   ============   ============

</TABLE>

                                       8
<PAGE>
<TABLE>
<CAPTION>

Unexercised  stock options owned by certain  employees and directors to purchase
2,000  and  6,000  shares of common  stock as of  September  30,  2001 and 2000,
respectively,  were not included in the  computations of diluted EPS because the
options'  exercise prices were greater than or equal to the average market price
of the common stock during the period.


4.  SEGMENT INFORMATION

SFAS  No.  131,  "Disclosures  about  Segments  of  an  Enterprise  and  Related
Information",  establishes  standards  for  public  companies  relating  to  the
reporting  of  financial  and  descriptive  information  about  their  operating
segments in  financial  statements.  Operating  segments  are  components  of an
enterprise  about which  separate  financial  information  is available  that is
evaluated  regularly  by chief  operating  decision  makers in  deciding  how to
allocate resources and in accessing performance.

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, 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 the Internet and mail-order,  and internationally  through
authorized  dealers;  and  Roberts,   Cushman  &  Company,   which  manufactures
decorative hat trims sold directly to hat manufactures and distributors.

The  Company  previously  defined  its  operations  as  consisting  of a  single
reporting  segment as provided  for under the  aggregation  criteria of SFAS No.
131. During 2000, the Company revised its presentation of segment information to
reflect the Company initiative to establish strategic business units.

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 "Tandy Leather
Company" column contains operating results beginning after its November 30, 2000
acquisition.

                                                      The Leather    Tandy Leather    Roberts,
                                                        Factory         Company     Cushman & Co       Total
                                                   --------------------------------------------------------------
<S>                                                <C>               <C>            <C>            <C>
For the quarter ended September 30, 2001
Net Sales                                            $  7,266,214    $  1,453,959   $    478,228   $  9,198,401
Gross Profit                                            3,656,235         827,881        127,458      4,611,574
Operating earnings                                        700,505          73,303         14,728        788,536
Interest expense                                                                                       (102,235)
Other, net                                                                                              (20,317)
                                                                                                   --------------
Income before income taxes                                                                              665,984
                                                                                                   --------------
     Depreciation and amortization                        130,711          24,267         38,330        193,308
     Total assets                                    $ 12,864,099    $  2,572,448   $  4,995,347   $ 20,431,894
                                                   --------------------------------------------------------------

For the quarter ended September 30, 2000
Net Sales                                            $  6,782,283            --     $    592,273   $  7,374,556
Gross Profit                                            3,437,633            --          275,928      3,713,561
Operating earnings                                        562,362            --          138,790        701,152
Interest expense                                                                                       (135,316)
Other, net                                                                                              (14,547)
                                                                                                   --------------
Income before income taxes                                                                              551,289
                                                                                                   --------------
     Depreciation and amortization                        114,335            --           38,518        152,853
     Total assets                                    $ 11,549,163            --     $  5,157,987   $ 16,707,150
                                                   --------------------------------------------------------------



                                       9
<PAGE>

                                                      The Leather    Tandy Leather    Roberts,
                                                        Factory         Company     Cushman & Co       Total
                                                   --------------------------------------------------------------
For the nine months ended September 30, 2001
Net Sales                                            $ 21,385,770    $  5,016,601   $  1,528,536   $ 27,930,907
Gross Profit                                           11,203,925       2,809,848        460,812     14,474,585
Operating earnings                                      2,761,863         127,401         51,351      2,940,615
Interest expense                                                                                       (375,442)
Other, net                                                                                              (31,959)
                                                                                                   --------------
Income before income taxes                                                                            2,533,214
                                                                                                   --------------
     Depreciation and amortization                        356,676          78,651        114,697        550,024
     Total assets                                    $ 12,864,099    $  2,572,448   $  4,995,347   $ 20,431,894
                                                   --------------------------------------------------------------

For the nine months ended September 30, 2000
Net Sales                                            $ 20,538,813            --     $  1,843,705   $ 22,382,518
Gross Profit                                           10,345,621            --          739,564     11,085,185
Operating earnings                                      2,080,955            --          384,987      2,465,942
Interest expense                                                                                       (439,878)
Other, net                                                                                              (30,752)
                                                                                                   ------------
Income before income taxes                                                                            1,995,312
                                                                                                   ------------
     Depreciation and amortization                        327,346            --          116,154        443,500
     Total assets                                    $ 11,549,163            --     $  5,157,987   $ 16,707,150
                                                   --------------------------------------------------------------

</TABLE>

        Net sales for geographic areas were as follows:
                                               Quarter ended September 30,
                                                   2001              2000
                                       -------------------- -----------------
          United States                        $ 8,631,554       $ 6,965,365
          All other countries                      566,847           409,191
                                       -------------------- -----------------
                                               $ 9,198,401       $ 7,374,556
                                       ==================== =================



                                             Nine months ended September 30,
                                                   2001              2000
                                       -------------------- -----------------
          United States                        $26,324,849       $21,309,022
          All other countries                    1,606,058         1,073,496
                                       -------------------- -----------------
                                               $27,930,907       $22,382,518
                                       ==================== =================




5.       RECENT ACCOUNTING PRONOUNCEMENTS

In June 2001 the Financial Accounting Standards Board (FASB) issued Statement of
Financial  Accounting  Standards  (SFAS)  No. 141 and 142.  SFAS 141,  "Business
Combinations"  requires  that the purchase  method of accounting be used for all
business  combinations  initiated  after June 30,  2001.  Use of the  pooling of
interests method of accounting will be prohibited. The Company does not have any
pending acquisitions that will be impacted by this new rule.

SFAS 142,  "Goodwill and Other  Intangible  Assets"  changes the  accounting for
goodwill  from  an   amortization   method  to  an   impairment-only   approach.
Amortization  of  goodwill  will cease  January 1,  2002,  the date the  Company
expects to adopt this  standard.  Subsequently,  the Company's  goodwill will be
tested at least annually for  impairment.  As of September 30, 2001, the Company
had  $4.6  million  of  goodwill  with  annual   amortization   expected  to  be
approximately  $225,000  for 2001.  The Company  does not  believe  there is any
goodwill impairment at this time.


                                       10
<PAGE>

Intangible  assets other than goodwill will continue to be amortized  over their
useful  lives and  reviewed  for  impairment  in  accordance  with SFAS No. 144,
"Accounting  for the  Impairment  or Disposal of  Long-Lived  Assets." SFAS 144,
issued by FASB in October  2001,  addresses  accounting  and  reporting  for the
impairment of disposal of long-lived assets, including the disposal of a segment
of business.  SFAS 144 requires that those long-lived  assets be measured at the
lower of carrying  amount or fair value less cost to sell,  whether  reported in
continuing operations or in discontinued operations.  The provisions of SFAS 144
will be adopted by the Company effective January 1, 2002, applied prospectively.
At this time,  we are  reviewing  the impact of SFAS 144 but do not expect it to
have a material effect on the Company.






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

General
-------

The  Leather  Factory,  Inc.  ("TLF,"  the  "Company"  or  "we")  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  ("LF"),  Tandy Leather  Company  ("Tandy
Leather"), and Roberts,  Cushman & Company, Inc. ("Cushman").  See Note 4 to the
Consolidated  Financial  Statements  for additional  information  concerning the
Company's segments.

The Leather Factory is an international  wholesale  manufacturer and distributor
of a broad product line of leather, leatherworking tools, buckles and other belt
supplies,  shoe-care and repair supplies, leather dyes and finishes,  adornments
for belts,  bags,  and garments,  saddle and tack hardware,  and  do-it-yourself
leathercraft  kits.  LF also  carries a product line of small  finished  leather
goods such as cigar cases, wallets and western accessories distributed under the
name "Royal Crown Custom Leather".  Tandy Leather sells the same products as LF.
Cushman  produces  and sells a  related  product  line of hat  trims in  braids,
leather and woven fabrics.

As  previously  disclosed,  the Company  acquired  the  operating  assets of two
subsidiaries  of  Tandycrafts,  Inc. on November 30, 2000 to form Tandy  Leather
Company as a subsidiary  of the Company.  Further  details  regarding  the Tandy
Leather  acquisition,  including the consideration paid, are provided in Note 12
to the Consolidated  Financial Statements contained in the Company's 2000 Annual
Report on Form 10-K and the Company's  Current Report on Form 8-K filed with the
Securities and Exchange  Commission on December 15, 2000, as amended on February
14, 2001.


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

Income Statement Comparison


                                       11
<PAGE>
<TABLE>
<CAPTION>

The following table sets forth, for the interim periods indicated, certain items
from the Company's  Consolidated  Statements of Income expressed as a percentage
of net sales and the  increase  (decrease)  in dollars and percent  from 2000 to
2001:

                                                    % of Net Sales
                                                  Three months ended
                                                     September 30,                         Change in $ and %
                                           ----------------------------------     ------------------------------------
                                                2001               2000              $ Change            % Change
                                           ----------------    --------------     ----------------    ----------------
<S>                                        <C>                 <C>                <C>                 <C>
Net sales                                      100.0%             100.0%               $1,823,846           24.73%
Cost of sales                                   49.9               49.6                   925,832           25.29
                                           ----------------    --------------     ----------------
Gross Profit                                    50.1               50.4                   898,014           24.18
Operating expenses                              41.6               40.9                   810,629           26.91
                                           ----------------    --------------     ----------------
Income from operations                           8.5                9.5                   87,385            12.46
Interest expense and other                       1.3                2.0                  (27,310)          (18.22)
                                           ----------------    --------------     ----------------
Income before income taxes                       7.2                7.5                   114,695           20.80
Income tax provision                             2.9                3.2                    33,265           14.08
                                           ----------------    --------------     ----------------
Net income                                       4.3%               4.3%                  $81,430           25.84%
                                           ================    ==============     ================

                                                    % of Net Sales
                                                  Nine months ended
                                                     September 30,                         Change in $ and %
                                           ----------------------------------     ------------------------------------
                                                2001               2000              $ Change            % Change
                                           ----------------    --------------     ----------------    ----------------
Net sales                                      100.0%             100.0%               $5,548,389           24.79%
Cost of sales                                   48.2               50.5                 2,158,989           19.11
                                           ----------------    --------------     ----------------
Gross Profit                                    51.8               49.5                 3,389,400           30.58
Operating expenses                              41.3               38.5                 2,914,727           33.82
                                           ----------------    --------------     ----------------
Income from operations                          10.5               11.0                   474,673           19.25
Interest expense and other                       1.4                2.1                   (63,230)         (13.44)
                                           ----------------    --------------     ----------------
Income before income taxes                       9.1                8.9                   537,903           26.96
Income tax provision                             3.6                3.6                   214,616           26.73
                                           ----------------    --------------     ----------------
Net income                                      5.5%               5.3%                  $323,287           27.11
                                           ================    ==============     ================
</TABLE>


Revenues

We continued our growth trend as the third quarter of 2001 produced consolidated
sales  totaling  $9.2 million  compared to $7.4 million for the third quarter of
2000. Tandy Leather's sales of $1.45 million  accounted for 80% of the increase.
Sales for the nine months  ended  September  30, 2001 are up $5.5 million or 25%
over the first nine months of 2000.  Tandy's sales  contributed  $5.0 million to
the increase.

Our retail  sales were strong in the current  quarter,  increasing  15% over the
second  quarter  of 2001 and 6% over the  third  quarter  of 2000.  On an annual
basis,  retail sales are up 7% over last year. As we discussed  previously,  our
catalog was released in July 2001. Historically,  retail sales are strong in the
quarter  in  which  the  catalog  is  distributed.  This  year  proved  to be no
exception.  Sales to our small manufacturer  market group are showing promise as
we  experienced  a 26% increase to these  customers in the current  quarter over
last year.  Sales  trends to this market  group are  difficult to predict as the
timing of orders from manufacturing facilities varies from year to year. We have
been  successful  in adding new  customers  to this market group and are pleased
with the potential revenue to be earned in the future.


                                       12
<PAGE>

Craft sales  continued a growth trend into this  quarter.  Third  quarter  sales
increased 38% over sales in the third quarter a year ago. Annual craft sales are
up 35% over 2000.  We continue to look for and design new products for our craft
programs as a way of generating  continuing revenue from this customer base. Our
traditional wholesale and Authorized Sales Center ("ASC") sales dropped slightly
in the current quarter  compared to a year ago. We believe that this decrease is
due to the softening of the economy in general as the small retailers  generally
are the first  businesses  to reduce their  spending in this  situation.  We are
working  with this  market  group to  enhance  advertising  efforts  in hopes of
generating sales.

Costs, Gross Profit, and Expenses

Our cost of sales as a percentage  of revenue was 49.9% for the third quarter of
2001 as compared to 49.6% for the same  quarter in 2000.  This  translates  into
gross profit  margins of 50.1% and 50.4% for the quarters  ended  September  30,
2001 and 2000,  respectively.  The slight  decrease in gross  profit  margin was
primarily due to the variations in leather prices during the last six months. As
previously discussed, we purchased extra quantities of leather in the early part
of the year in order to avoid potential rising leather prices as a result of the
hoof and mouth disease  scare in Europe.  We believe we acted  appropriately  in
order to "hedge"  against  rising  prices.  Since then,  hide prices have fallen
below those  before the scare.  Our  inventory is valued at the lower of cost or
market  and the price we paid for  leather  in the  spring of 2001 is now higher
than  current  market  price.  Therefore,  we dropped  the value of our  leather
inventory at the end of the third quarter to match market price and as a result,
our cost of goods increased slightly.  Management is not concerned with the 0.3%
decrease  in gross  profit  margin  compared to a year ago as we believe we were
successful in avoiding significant price spikes in an unusually volatile leather
market.

For the nine months ended September 30, 2001, our gross profit margin gained 2.3
percentage  points  against  gross  profit  margins  for the nine  months  ended
September  30, 2000.  We continue to believe that the  retail/wholesale  mix and
faster  response to product cost changes  contributes  to the  improvement.  The
Company's   point-of-sale   computer  system  provides  timely   information  to
management   concerning  selling  prices  and  margins  being  attained  at  the
distribution  units.  This  information  is  useful  to  manage  inventory  more
efficiently (i.e. selling prices, cost changes, product usage, etc.)

Operating expenses were $811,000 higher in the third quarter of 2001 than in the
same  quarter of 2000.  Tandy  Leather  contributed  $755,000 of this  increase.
Excluding  the effect of Tandy  Leather,  operating  expenses as a percentage of
sales increased less than 2% from last year's totals.  Tandy Leather's operating
efficiency  held at 52% of sales in the third  quarter of 2001,  the same as the
second quarter of 2001.  LF's  operating  expenses were up slightly in the third
quarter of 2001 - primarily the result of increased  employee  benefit costs and
continued  advertising efforts to expand current markets. We continue to monitor
the operating  efficiencies  of the Company  overall and have  implemented  some
cost-cutting  measures  in the  early  part of the  fourth  quarter  in order to
achieve our operating goals.

Our operating expenses  year-to-date are up approximately $3.0 million over last
year. Tandy Leather's  contribution to this increase  totaled $2.7 million.  The
increase in advertising expenses throughout the year contributes the significant
portion of the additional increase.

Other (Income) Expense

Other expenses were down 18.2% in the third quarter of 2001 compared to the same
quarter of 2000.  This  reduction is  primarily  in interest  expense due to the
decrease in interest  rates in 2001 as compared to 2000.  The floating  interest
rate paid on the  Company's  debt  decreased  nine times  during the nine months
ended  September 30, 2001 from 10% to 6%. In the first nine months of 2000,  the
interest rate increased four times, from 9% to 10%.


                                       13
<PAGE>

For the nine months ended September 30, 2001, other expenses  decreased  $63,000
over the same period in 2000.  The  decrease in interest  costs  account for the
majority of the decrease as the  company's  debt balance and the interest  rates
continue to decline.


Net Income

The Company  reported  net income of $396,000  during the third  quarter of 2001
compared  to net income of $315,000  for the same period a year ago.  Net income
for the nine  months  ended  September  30,  2001 was $1.5  million  versus $1.2
million for the nine months  ended  September  30,  2000.  The  improvement  was
principally  due to the increase in gross profit margin,  offset somewhat by the
increase in operating expenses.

Effect of September 11, 2001

During the first ten to fifteen  days after the attacks on  September  11, 2001,
our sales decreased slightly. Although it may be too early to predict a definite
trend,  sales in the early part of the fourth quarter suggest a promising return
to pre-September 11th levels.

Also in the wake of the September 11 attacks, we have encountered some delays in
the delivery of domestic mail.  Several of our sales flyers were up to two weeks
late in reaching  customers,  and, for a brief period,  there were delays in the
delivery of orders to customers because of suspended air travel.  However, these
delays appear to have been temporary, and currently, management believes mailing
and delivery  schedules are being met by the U.S. Postal Service and the freight
carriers.

At this time,  management does not believe that the events of September 11th and
thereafter had or will have a material impact on the Company.

Because  terrorists have only targeted  humans,  anthrax does not appear to be a
threat to any of the Company's product sources.  However, an outbreak of mad cow
disease or other similar  disease in livestock herds here or abroad could result
in significant negative effects on the Company's product availability or prices.


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

Our primary  sources of liquidity and capital  resources  during the first three
quarters of 2001 were funds  provided by operating  activities  in the amount of
$1,039,000  and the  Company's  Credit and Security  Agreement  with Wells Fargo
Business Credit,  Inc. ("WFBC").  The largest portion of the operating cash flow
was used to pay down debt balances, and purchase property and equipment. Capital
expenditures  of $629,000  through  September 30, 2001  consisted of $330,000 in
computer equipment,  $172,000 in equipment and leasehold improvements related to
the  Tandy  acquisition,   and  $127,000  in  various  equipment  and  furniture
purchases.

The primary sources of liquidity and capital  resources during the third quarter
of 2001 were funds  provided by the  Company's  Credit and  Security  Agreement.
Operating  activities  in the third quarter used cash in the amount of $478,000,
due to an increase in  inventory  and a decrease  in accounts  payable.  This is
caused  by the  extra  leather  purchases  made in the  second  quarter  of 2001
required to be paid for in the third quarter.

The Company also uses a revolving  credit facility under the Credit and Security
Agreement to manage cash flow. In an attempt to apply all available  cash to the
balance on this revolving credit facility, we had a zero balance of unrestricted
cash at September 30, 2001. At the same date,  the Company had in excess of $1.1
million in available credit under the revolving credit facility.


                                       14
<PAGE>

The Company's  investment in accounts  receivable  was $2.8 million at September
30, 2001,  up $645,000 from $2.2 million at year-end  2000.  Credit sales in the
current year are on pace to exceed the 2000 totals by  approximately $3 million.
As of September 30, 2001,  days to collect  dropped by almost 3 days compared to
2000. We closely monitor the purchasing and payment  activities of customers who
have been granted credit by us for  indications of possible  delinquency.  Given
the state of the  national  economy,  our  credit  policies  have  been  further
tightened in an attempt to avoid potential problems in collecting accounts.

Inventory  increased  $260,000 to $9.5 million at  September  30, 2001 from $9.2
million at year-end 2000.  Inventory turnover increased to an annualized rate of
4.32  times  during  the first  nine  months of 2001,  an  improvement  over the
turnover  of 3.64  times  for all of  2000.  Compared  to  annualized  inventory
turnover  rates of 4.26 times in the first quarter of 2001 and 4.12 times in the
second  quarter,  the  fluctuations  in the rates are in line with  management's
expectations  following the  intentional  increase in inventory  during the past
several quarters.

Accounts  payable  increased 14% to $2.5 million at the end of the third quarter
from the end of 2000.  Compared to the end of the second quarter 2001, the total
dropped  6%.  These  relationships  are  consistent  with  previous  discussions
concerning the fluctuations in inventory over the last several quarters.

Under the Credit and  Security  Agreement,  WFBC  agreed to provide a  revolving
credit  facility of up to $8,500,000.  On November 30, 2000, the Company entered
into the First  Amendment to the Credit and Security  Agreement  ("Amendment 1")
with WFBC.  There,  WFBC consented to the Tandy leather  transaction and amended
certain  financial tests to reflect the acquisition of the Tandy Leather assets,
to make  previously  contemplated  extensions  of these tests,  and to raise the
standards  required  in those tests based on the  Company's  improved  financial
performance since the credit agreement was originally signed.

As  previously  disclosed,  on February 7, 2001,  the Company  entered  into the
Second Amendment to the Credit and Security Agreement ("Amendment 2") with WFBC.
There, WFBC granted a special  accommodation advance of a maximum of $300,000 to
be used by the Company as needed  through July 2001. At the time of Amendment 2,
the Company was anticipating significant cash requirements for payment of income
taxes and annual ESOP contribution and manager bonuses. However, the Company was
able to generate  adequate  cash flow from its  operations  to meet these annual
cash payments, and the special accommodation advance was not needed.

Also disclosed previously,  on June 14, 2001, the Company entered into the Third
Amendment to the Credit and Security Agreement ("Amendment 3") with WFBC. There,
WFBC reduced the interest  rate on the  revolving  credit  facility from prime +
1/2% to prime  (6.75%  at June 30,  2001 and 6.0% at  September  30,  2001).  In
addition,  the capital expenditure limit was increased from $500,000 to $650,000
for 2001 to  accommodate  the  additional  expenditures  incurred  following the
acquisition of Tandy Leather.

The revolving credit facility with WFBC is based upon the level of the Company's
accounts receivable and inventory.  At September 30, 2001 and December 31, 2000,
the available and unused portion of the credit facility was  approximately  $1.1
million and $885,000, respectively.

We believe that the current  sources of liquidity and capital  resources will be
sufficient  to fund  current  operations  and the opening of any  potential  new
sales/distribution  units. In 2001, the funding for the opening of any new units
is  expected  to be  provided by  operating  leases,  cash flows from  operating
activities,  and the  revolving  credit  facility.  Two new  units,  located  in
Toronto,  Ontario,  and Chicago,  Illinois,  were opened in the third quarter of
2001. Historically,  the Company invests approximately $125,000 in opening a new
unit.  However,  both  units  were  opened at  substantially  lower  costs  than
expected.


                                       15
<PAGE>

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

        None




                                   SIGNATURES

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

                                         THE LEATHER FACTORY, INC.
                                               (Registrant)


Date:  November 14, 2001                By:   /s/ Wray Thompson
                                              --------------------------
                                              Wray Thompson
                                                   Chairman of the Board and
                                                   Chief Executive Officer

Date:  November 14, 2001                By:   /s/ Shannon L. Greene
                                              ----------------------
                                              Shannon L. Greene
                                                   Chief Financial Officer and
                                                   Treasurer  (Chief Accounting
                                                   Officer)














                                       16