Form 10-Q

                       SECURITIES AND EXCHANGE COMMISSION

                             Washington, D.C. 20549


(Mark One)

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

For the quarterly period ended March 31, 1999

or

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

For the transition period from        to                  

Commission File Number 1-12368

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


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


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

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

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

                                                Yes X    No 

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

               Class                       Shares outstanding as of May 15, 1999
----------------------------------------   -------------------------------------
Common Stock, par value $.0024 per share                9,853,161


<PAGE>

<TABLE>

<CAPTION>

                            THE LEATHER FACTORY, INC.

                                    FORM 10-Q

                  FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1999


                                TABLE OF CONTENTS


                                                                                   PAGE NO.
                                                                                   --------
<S>                                                                             <C>  <C>

PART I.  FINANCIAL INFORMATION

  Item 1.  Financial Statements

    Consolidated Balance Sheets
     March 31, 1999 and December 31, 1998............................................ 3


    Consolidated Statements of Operations
     Three months ended March 31, 1999 and 1998...................................... 4


    Consolidated Statements of Cash Flows
     Three months ended March 31, 1999 and 1998...................................... 5


    Consolidated Statements of Stockholders' Equity and Comprehensive Loss
     Three months ended March 31, 1999 and 1998...................................... 6


    Notes to Consolidated Financial Statements....................................... 7


  Item 2.  Management's Discussion and Analysis of Financial
            Condition and Results of Operations...................................... 8-12

  Item 3.  Quantitative and Qualitative Disclosures About Market Risk                 12

PART II.  OTHER INFORMATION

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


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


EXHIBIT INDEX........................................................................ 14-15

</TABLE>


                                       2


<PAGE>

<TABLE>

<CAPTION>

                           THE LEATHER FACTORY, INC.
                           CONSOLIDATED BALANCE SHEETS



                                                                   March 31,     December 31,
                                                                    1999            1998
                                                                ------------    ------------
                                    ASSETS                        (UNAUDITED)
<S>                                                             <C>             <C>
CURRENT ASSETS:
     Cash                                                       $    445,886    $    510,399
     Cash restricted for payment on revolving credit facility        151,519         232,838
     Accounts receivable-trade, net of allowance for
         doubtful accounts of $76,000 and $52,000
          in 1999 and 1998, respectively                           1,540,142       1,582,459
     Inventory                                                     7,021,185       6,956,606
     Prepaid income taxes                                            131,376         228,939
     Deferred income taxes                                           107,430         102,012
     Other current assets                                            641,090         272,993
                                                                ------------    ------------
                            Total current assets                  10,038,628       9,886,246

PROPERTY AND EQUIPMENT, at cost                                    2,911,927       2,671,827
  Less-accumulated depreciation and amortization                  (1,892,630)     (1,813,378)
                                                                ------------    ------------
                            Property and equipment, net            1,019,297         858,449

GOODWILL and other, net of accumulated amortization of
     $1,364,000 and $1,246,000 in 1999 and 1998, respectively
                                                                   5,177,053       5,285,242
                                                                ------------    ------------
                                                                $ 16,234,978    $ 16,029,937
                                                                ============    ============
                     LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
     Accounts payable                                           $  1,351,176    $  1,019,069
     Accrued expenses and other liabilities                          498,416         530,789
     Notes payable and current maturities of
         long-term debt                                            5,991,790       6,139,327
                            Total current liabilities              7,841,382       7,689,185
                                                                ------------    ------------

DEFERRED INCOME TAXES                                                107,787         109,085

NOTES PAYABLE AND LONG-TERM DEBT,
     net of current maturities                                       197,206          61,389

COMMITMENTS AND CONTINGENCIES

STOCKHOLDERS' EQUITY:
     Preferred stock, $0.10 par value; 20,000,000
         shares authorized, none issued or outstanding                  --              --
     Common stock, $0.0024 par value; 25,000,000 shares
         authorized, 9,853,161 shares issued in 1999 and 1998         23,648          23,648
     Paid-in capital                                               3,901,740       3,901,740
     Retained earnings                                             4,403,187       4,495,378
                                                                                  
     Less:  Notes receivable - secured by common stock              (211,851)       (224,750)
     Accumulated other comprehensive loss                            (28,121)        (25,738)
                                                                ------------    ------------
                            Total stockholders' equity             8,088,603       8,170,278
                                                                $ 16,234,978    $ 16,029,937
                                                                ============    ============

</TABLE>

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



                                       3

<PAGE>

<TABLE>

<CAPTION>

                      CONSOLIDATED STATEMENTS OF OPERATIONS
                                   (UNAUDITED)
                   THREE MONTHS ENDED MARCH 31, 1999 AND 1998




                                                        1999            1998
                                                      -----------    -----------
<S>                                                   <C>            <C>

NET SALES                                             $ 5,513,000    $ 5,710,832

COST OF SALES                                           3,154,110      3,296,138
                                                      -----------    -----------

             Gross Profit                               2,358,890      2,414,694

OPERATING EXPENSES                                      2,238,516      2,299,894
                                                      -----------    -----------

INCOME FROM OPERATIONS                                    120,374        114,800

OTHER (INCOME) EXPENSE:
     Interest expense                                     229,867        240,645
     Other, net                                               683         (7,761)
                                                      -----------    -----------
             Total other (income) expense                 230,550        232,884
                                                      -----------    -----------

INCOME (LOSS)  BEFORE INCOME TAXES                       (110,176)      (118,084)

PROVISION (BENEFIT)  FOR INCOME TAXES                     (17,985)       (29,556)
                                                      -----------    -----------

NET INCOME (LOSS)                                     $   (92,191)   $   (88,528)
                                                      -----------    ===========



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

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

DIVIDENDS PAID PER COMMON SHARE                       $     --       $     --
                                                      ===========    ===========
                                                      
</TABLE>










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

                                       4

<PAGE>

<TABLE>

<CAPTION>

                            THE LEATHER FACTORY, INC.
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                   (UNAUDITED)
                   THREE MONTHS ENDED MARCH 31, 1999 AND 1998



                                                                           1999         1998
                                                                         ---------    --------- 
<S>                                                                      <C>          <C>
       
CASH FLOWS FROM OPERATING ACTIVITIES:                                 
  Net loss                                                               $ (92,191)   $ (88,528)
  Adjustments to reconcile net income to net
   cash provided by (used in) operating activities-
     Depreciation & amortization                                           132,673      133,991
     Deferred financing costs                                               62,942       53,038
     Deferred income taxes                                                  (6,716)     (12,217)
     Other                                                                  (2,383)       1,961
     Net changes in operating assets and liabilities:
       Accounts receivable-trade, net                                       42,317       21,087
       Inventory                                                           (64,579)     247,661
       Income taxes                                                         97,563      (21,796)
       Other current assets                                               (368,097)    (109,640)
       Accounts payable                                                    332,107      142,704
       Accrued expenses and other liabilities                              (32,373)    (186,205) 
                                                                         ---------    ---------
     Total adjustments                                                     193,454      270,584
                                                                         ---------    ---------

      Net cash provided by operating activities                            101,263      182,056
                                                                         ---------    ---------

CASH FLOWS FROM INVESTING ACTIVITIES:
  Purchases of property and equipment                                     (240,099)     (26,926)
  Other intangible costs                                                    (8,174)        --
                                                                         ---------    ---------

      Net cash used in investing activities                               (248,273)     (26,926)
                                                                         ---------    ---------

CASH FLOWS FROM FINANCING ACTIVITIES:
  Net increase (decrease) in revolving credit loans                       (118,574)      (4,597)
  Proceeds from notes payable and long-term debt                           217,493         --
  Payments on notes payable and long-term debt                            (110,639)    (112,430)
  Increase in cash restricted for payment on revolving credit facility      81,319      (36,618)
  Payments received on notes secured by common stock                        12,898       19,135
  Deferred financing costs                                                    --        (77,153)
                                                                         ---------    ---------

      Net cash provided by (used in) financing activities                   82,497     (211,663)
                                                                         ---------    ---------

NET INCREASE (DECREASE) IN CASH                                            (64,513)     (56,533)

CASH, beginning of period                                                  510,399       70,496
                                                                         ---------    ---------

CASH, end of period                                                      $ 445,886    $  13,963
                                                                         =========    =========

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
  Interest paid during the period                                        $ 169,554    $ 190,304
  Income taxes paid during the period, net of refunds                      (91,243)       4,457
</TABLE>


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

                                       5

<PAGE>

<TABLE>

<CAPTION>

                            THE LEATHER FACTORY, INC.
                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                             AND COMPREHENSIVE LOSS
                                   (UNAUDITED)
                   THREE MONTHS ENDED MARCH 31, 1999 AND 1998


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

BALANCE, December 31, 1997    9,853,161 $ 23,648  $4,119,915  $4,534,569  $  (273,851) $   (257,617)   $  (14,018)  $8,132,646

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

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

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

   Translation adjustment             -        -           -           -            -             -         1,200        1,200    
                              --------- --------  ---------- -----------  -----------  ------------  ------------   ----------

BALANCE, March 31, 1998       9,853,161   23,648  $4,106,994  $4,446,041  $  (259,510) $   (238,482) $    (12,818)  $8,065,873
                              ========= ========  ========== ===========  ===========  ============  ============   ==========  
                                                                                                                                 

Comprehensive income (loss) for the three months ended March 31, 1998 (see below)

BALANCE, December 31, 1998    9,853,161  $23,648  $3,901,740  $4,495,378  $         -  $   (224,750) $    (25,738)  $8,170,278

   Payments received on                                                                              
   notes secured by common            -        -           -           -            -        12,899             -       12,899
   stock

   Allocation of suspended                                                                           
   ESOP shares committed to           -        -           -           -            -             -             -            -
   be released

   Net loss                                                -     (92,191)           -             -                    (92,191)   
                                      -        -                                                                -

   Translation adjustment             -        -           -           -            -             -        (2,383)      (2,383)   
                              --------- --------  ---------- -----------  -----------  ------------  ------------   ----------

BALANCE, March 31, 1999       9,853,161  $23,648  $3,901,740  $4,403,187  $         -  $   (211,851) $    (28,121)  $8,088,603
                              ========= ========  ==========  ==========  ===========  ============  ============   ==========


                                                                          Comprehensive     
                                                                          Income (Loss)
                                                                          ------------
                                           
BALANCE, December 31, 1997                 
                                           
   Payments received on                    
   notes secured by common                 
   stock                                   
                                           
   Allocation of suspended                 
   ESOP shares committed to                
   be released                             
                                           
   Net loss                                                               $ (88,528)  
                                           
                                           
   Translation adjustment                                                     1,200   
                                           
                                           
BALANCE, March 31, 1998                    
                                           
                                           
                                                                          =========   
   Comprehensive income (loss) for the three months ended March 31, 1998  $ (87,328)   
                                                                          =========   
                                           
BALANCE, December 31, 1998                 
                                           
   Payments received on                    
   notes secured by common                 
   stock                                   
                                           
   Allocation of suspended                 
   ESOP shares committed to                
   be released                             
                                           
   Net loss                                                               $ (92,191)  
                                           
                                           
   Translation adjustment                                                    (2,383)  
                                           
                                           
BALANCE, March 31, 1999                                                             
                                           
                                                                          ---------   
   Comprehensive income (loss)for the three months ended March 31, 1999   $ (94,574)  
                                                                          =========   
                                           
</TABLE>

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


                                       6

<PAGE>

                            THE LEATHER FACTORY, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



1.  BASIS OF PRESENTATION

In  the  opinion  of  the  Company,  the  accompanying   consolidated  financial
statements  contain  all  adjustments   (consisting  of  only  normal  recurring
adjustments)  necessary to present fairly its financial position as of March 31,
1999 and December 31, 1998, and the results of operations and cash flows for the
three-month periods ended March 31, 1999 and 1998. The results of operations for
the  three-month  period are not  necessarily  indicative  of the  results to be
expected for the full fiscal year. The consolidated  financial statements should
be read in conjunction with the financial  statements and disclosures  contained
in the Company's 1998 Annual Report on Form 10-K ("Annual Report").

<TABLE>

<CAPTION>

2.  INVENTORY

The components of inventory consist of the following:

                                                     March 31,      December 31,
                                                          1999         1998
                                                     -----------    -----------
<S>                                                  <C>            <C>

    Finished goods held for sale                     $ 5,729,822    $ 5,564,406
    Raw materials and work in process                  1,291,363      1,392,200
                                                     -----------    -----------
                                                     $ 7,021,185    $ 6,956,606
                                                     ===========    ===========

3.  EARNINGS PER SHARE

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

                                                       Three Months Ended March 31,
                                                     -------------------------------
                                                        1999               1998
                                                     ------------       ------------
  Numerator:
     Net loss                                        $  (92,191)        $  (88,528)
     Numerator for basic and diluted                 -----------        ----------- 
       earnings per share                               (92,191)           (88,528)
                                                     -----------        ----------- 

  Denominator:
     Denominator for basic and diluted
     earnings per share -- weighted-average shares     9,853,161          9,799,404

     Basic earnings per share                        $    (0.01)        $    (0.01)
                                                     ===========        ===========
     Diluted earnings per share                      $    (0.01)        $    (0.01)
                                                     ===========        ===========

</TABLE>

Unexercised  stock options owned by employees,  directors and others to purchase
443,000  and  585,000  shares  of common  stock as of March  31,  1999 and 1998,
respectively,  were not included in the  computations of diluted EPS because the
options'  exercise prices were greater than or equal to the average market price
of the common stock during the respective periods.

Warrants (see Note 9 to consolidated  financial statements in the Annual Report)
to acquire 300,000 shares of common stock were not included in the  computations
of diluted EPS because the exercise  price was greater  than the average  market
price of the common stock during the quarter ended March 31, 1999.

The 13% convertible debt (see Note 3 to consolidated financial statements in the
Annual Report) was not included in the computation of diluted earnings per share
because the interest cost (net of tax) per assumed converted share was more than
basic earnings per share and, therefore, the effect would be antidilutive.


                                       7

<PAGE>


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

General

The Leather Factory,  Inc. (the "Company") is the premier distributor of leather
and leathercraft  products to over 40,000 customers  ranging from the individual
hobbyist to large retail  chains.  Customer  groups  served  include:  wholesale
distributors,  tack and saddle  shops,  shoe-findings  customers,  institutions,
prisons and prisoners,  dealer stores,  western  stores,  craft stores and craft
store chains, hat manufacturers and distributors, other large volume purchasers,
manufacturers,  and retailers.  The Company's products are distributed primarily
through 22  sales/distribution  units in the United States and Canada or through
its  subsidiary,  Roberts,  Cushman & Company,  Inc.  ("Cushman"),  in New York.
Cushman  manufactures and distributes:  hat trims in braids,  leather, and woven
fabrics; and small finished leather goods, such as, cigar cases, picture frames,
wallets and other accessories.

Results of Operations

                           Income Statement Comparison

The following table sets forth, for the interim periods indicated, certain items
from  the  Company's  Consolidated  Statements  of  Operations  expressed  as  a
percentage of net sales:


                                                       Quarterly Period Ended
                                                              March 31,
                                                    ----------------------------
                                                         1999            1998
                                                    -------------  -------------
       Net sales                                         100.0%         100.0%
       Cost of sales                                     57.2            57.7
                                                    -------------  -------------
       Gross profit                                      42.8            42.3
       Operating expenses                                40.6            40.3
                                                    -------------  -------------
       Income from operations                             2.2             2.0
       Interest expense, net                              4.2             4.1
                                                    -------------  -------------
       Loss before income taxes                          (2.0)           (2.1)
       (Benefit) provision for income taxes              (0.3)           (0.5)
                                                    -------------  -------------
       Net loss                                          (1.7)%          (1.6)%
                                                    =============  =============

      

Revenues

Net sales  decreased 3.5% to $5,513,000  during the quarter ended March 31, 1999
from  $5,710,832  in the same period of last year.  First  quarter  sales to the
Company's core business and institutional  customers continued the steady growth
shown over the past year and were up nearly 33% compared to the first quarter of
1998. However,  these gains were more than offset by continuation of the planned
reduction  in sales of  low-margin  products  and by an expected  drop in crafts
market sales (down 67% and 45%,  respectively,  from the first quarter of 1998).
Crafts sales were negatively affected by inventory  liquidations by Tandycrafts,
Inc. as it continues the closings of its 121 Tandy Leather retail stores.  Tandy
Leather stores had offered a selection of products that overlapped many products
sold by the Company.

                                       8

<PAGE>


The sales of the Company are not seasonal.  Sales to core business customers and
institutions  have shown a steady increase since the beginning of last year, and
first  quarter  1999 total  sales  were up 3.0% over the fourth  quarter of 1998
despite the first quarter drop in crafts sales and the  continuing  reduction in
sales of low-margin products discussed above.

Costs, Gross Profit, and Expenses

Cost of sales as a percentage of revenue was 57.2% for the first quarter of 1999
as  compared to 57.7% for the same  quarter in 1998.  This  one-half  percentage
point reduction resulted from continuation of the Company's strategic efforts to
eliminate  low-margin  products as discussed  above.  The lower relative cost of
sales meant that gross profit as a percentage of sales improved to 42.8% for the
three months  ended March 31, 1999,  as compared to 42.3% for the same period in
1998.

Operating  expenses  decreased  $61,378 or 2.7% to  $2,238,516  during the first
quarter of 1999 from  $2,299,894  during the quarter  ended March 31, 1998.  The
decrease in  operating  expenses  between the two  quarters  reflects  continued
efforts to reduce  overhead costs and resulted  mainly from a decrease in salary
and  payroll-related  costs, lower advertising  expenditures,  and lower utility
costs.

Other (Income) Expense

Other  expenses  decreased  $2,334 or 1.0% to $230,550 for the first  quarter of
1999 from $232,884  during the same quarter in 1998.  The decrease is mainly due
to lower interest  rates on borrowings  which  benefited from  reductions in the
prime rate in the latter half of 1998.

Net Loss

The  Company  reported  a net loss of $92,191  during the first  quarter of 1999
compared to a net loss of $88,528 for the same period a year ago. The  increased
loss was  principally  due to the reduced  gross  profit from lower sales in the
first quarter of 1999.

Capital Resources and Liquidity
-------------------------------

The primary sources of liquidity and capital  resources during the first quarter
of 1999 were funds  provided by operating  activities in the amount of $101,263,
borrowings   from  the  Company's   Senior  Debt  Facility  with  FINOVA  and  a
Subordinated  Debenture  with The Schlinger  Foundation,  and capital  leases to
finance investment in new computer equipment.

The Company's  investment in net accounts receivable was $1,540,142 at March 31,
1999,  down $42,317 from  $1,582,459 at year-end 1998 despite a 3.0% increase in
sales over the fourth  quarter of 1998.  The  decrease  in  accounts  receivable
reflects a significant  reduction in the amount of receivables more than 60 days
old as the Company continues to upgrade its product mix and uses new information
systems to reduce sales to slower paying customers.  Inventory increased $64,579
to $7,021,185 at March 31, 1999 from  $6,965,606 at year-end  1998.  Inventories
were increased to support the increase in sales over the fourth quarter of 1998,
but inventory turnover improved to an annual rate of 1.81 times during the first
quarter  of 1999,  which is above the ratio of 1.74  times for all of 1998.  New
information  systems  assisted  in  monitoring  sales and  inventory  levels and
contributed to improved inventory management.

The largest uses of cash beyond debt  payments in the first quarter of 1999 were
for capital expenditures, which totaled $240,099 and were principally related to
the Company's new computer systems.


                                       9

<PAGE>


As  discussed in Note 3 of the  Company's  1998 Annual  Report on Form 10-K,  on
November 21, 1997, the Company  entered into a Loan and Security  Agreement with
FINOVA  Capital  Corporation  ("FINOVA"),  pursuant  to which  FINOVA  agreed to
provide a credit  facility of up to  $9,136,000 in senior debt (the "Senior Debt
Facility"),   containing   a   revolving   credit   facility   and  term  notes.
Simultaneously  with the closing of the Senior Debt  Facility,  the Company also
issued to The  Schlinger  Foundation at face value  $1,000,000  in  subordinated
convertible debt (the "Subordinated Debenture").

The  revolving  credit  facility  with  FINOVA  is based  upon the  level of the
Company's accounts receivable and inventory.  At March 31, 1999 and December 31,
1998, the Company had additional  availability on the revolving  credit facility
of approximately $647,000 and $475,000, respectively. As the Company's sales and
operations  expand  requiring  larger  investments  in accounts  receivable  and
inventory,  the Company could have in excess of  $1,000,000 in additional  funds
available under the revolving credit facility.

The Senior Debt Facility  contains  certain  financial  covenants  which include
requirements to 1) maintain a certain level of earnings before interest,  taxes,
depreciation and amortization ("EBITDA"), 2) limit capital expenditures,  and 3)
maintain certain debt service coverage ratios.  Decreases in sales, earnings and
cash flow  during  1998 and in January  and  February  of 1999  resulted in debt
service coverage ratios falling below target amounts in the financial  covenants
of the Senior Debt Facility for the 12-month period ending March 31, 1999. Prior
to the March 31 measurement  date,  the Company  requested that FINOVA amend the
targets in the financial covenants,  and FINOVA agreed to the Company's request.
The Company and FINOVA  entered into an  amendment to the Senior Debt  Facility,
dated May 13, 1999,  effective as of March 31, 1999.  The amendment  reduces the
targets  for the  12-month  period  ending  March 31,  1999 for the Senior  Debt
Coverage  Ratio from 1.35 to 1.25 and for the Total Debt Service  Coverage Ratio
for the same period from 1.10 to 1.05. The amendment is filed as Exhibit 4.14 to
this Form 10-Q.

The Company believes that the current sources of liquidity and capital resources
will be  sufficient  to fund current  operations  and the opening of several new
sales/distribution  units.  In 1999, the funding for the opening of new units is
expected  to  be  provided  by  operating  leases,  cash  flows  from  operating
activities,  the  Senior  Debt  Facility  and  the  Subordinated  Debenture.  In
addition,   the  Company  anticipates  funding  for  software  to  complete  the
installation  of new  systems in  remaining  locations  will be provided by cash
flows from operating activities.

The Company's Senior Debt Facility and Subordinated Debenture mature on December
1, 1999, and  management  intends to pursue  negotiations  with FINOVA and other
potential  investors/lenders  in 1999 to extend or  replace  the  maturing  debt
facilities. Management believes it will be able to secure the required financing
prior to the maturity of these  obligations.  However,  in the event of a future
material adverse change in the Company's operations, FINOVA could accelerate its
debt or otherwise determine not to renew the notes. In such a circumstance,  the
Company would pursue other sources of financing. If other financing could not be
secured, the Company could experience a material adverse impact.

Year 2000 Issue
---------------

The Year 2000 ("Y2K") problem arose because many computer  programs use only the
last two digits to refer to a year.  As a  consequence,  unless  modified,  many
computer  systems will  interpret  "00" as 1900 rather than the year 2000.  This
issue is believed to affect virtually all  organizations  and failure to address
the problem  could  result in system  failures and the  generation  of erroneous
data. Each company's  potential costs and uncertainties  will depend on a number
of factors  including but not limited to its software,  hardware,  the nature of
its industry,  and the  sophistication  of its manufacturing and process control
systems.

                                       10

<PAGE>


The  Company has  developed a  comprehensive  Y2K  readiness  plan to ensure its
systems will be Y2K compliant prior to the year 2000. Pursuant to this plan, the
Company conducted  preliminary  reviews of its critical  information  technology
("IT") systems as well as its non-IT systems.  The majority of systems that were
found to be defective  in this review,  including  the  Company's  point of sale
("POS")  software used for invoicing and inventory  maintenance in the Company's
Texas locations, have now been replaced or upgraded.

The  installation  of the POS system in the Company's  remaining 19 distribution
units was delayed  until after the  conversion  and testing of the Y2K compliant
version of the software.  The conversion in Fort Worth and other Texas locations
is complete. Installation in remaining locations is scheduled to be completed by
October 31, 1999.

The Company has  appointed a Y2K  committee  composed of senior  executives  and
middle management.  This committee is charged with testing systems for potential
Y2K problems missed in the preliminary review and remediation process as well as
assessing potential risks from the Company's trading partners' Y2K failures. The
committee's  work is in process,  and the committee will report  periodically to
the Company's  Board of Directors.  Testing is scheduled to be completed by June
30, 1999.

The Company  has  managed  its Y2K  compliance  program  using  mostly  internal
salaried staff.  For this reason and the fact that much of the replacement  cost
of non-compliant IT systems would have been incurred anyway,  it is difficult to
quantify the actual Y2K remediation  costs. The Company  invested  approximately
$262,782 for new computer  systems and software in 1998 and the first quarter of
1999. This investment includes systems upgrades that will facilitate  completion
of the Y2K  compliance  program.  Management  believes  that the majority of the
total expected  system  remediation  cost has already been incurred.  Additional
software  purchases  and  licenses are  expected to cost  approximately  $70,000
during the remainder of the year.

The Company believes because of the nature of its operations and the steps taken
as  discussed  above that the Y2K issue  will not have a material  impact on the
Company's results of operations, liquidity, or financial condition. Specifically
the Company does not  anticipate  any disruption in its ability to provide goods
or services to its customers. Actual results may differ from the forward-looking
statements  contained in this  discussion and there can be no guarantee that the
failure  of  certain  systems  will not have a  material  adverse  effect on the
Company.

In the unlikely  event that  unforeseen Y2K problems are not remedied prior to a
disruption in normal business operations, the Company would in most instances be
able to temporarily  revert to manual  processes  that the Company  successfully
used  prior to  automating  many  routine  tasks.  Because  of the nature of the
leathercraft  industry and the numerous sources of supply,  the Company does not
expect any significant disruption that would hinder its ability to provide goods
and services as a result of any of its vendors or trading partners failing to be
ready for the year 2000.

                                       11



<PAGE>


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

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


Item 3. Quantitative and Qualitative Disclosures About Market Risk.

The Company's Senior Debt 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
    --------

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

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




                                       12


<PAGE>




                                   SIGNATURES

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

                                            THE LEATHER FACTORY, INC.          
                                                  (Registrant)                 
                                                                               
                                                                               
Date:  May 14, 1999                            /s/ Wray Thompson               
                                            ----------------------------       
                                            Wray Thompson                      
                                            Chairman of the Board, President,  
                                            Chief Executive Officer, and Chief 
                                             Accounting Officer                
                                                                               
                                          







                                       13



<PAGE>


                   THE LEATHER FACTORY, INC. AND SUBSIDIARIES
                                  EXHIBIT INDEX
 
     Exhibit               
     Number                     Description
     -------                    -----------

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

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

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

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

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

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

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

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

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


                                       14

<PAGE>



                   THE LEATHER FACTORY, INC. AND SUBSIDIARIES
                            EXHIBIT INDEX (CONTINUED)
     Exhibit        
      Number                  Description
     -------                  -----------

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

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

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

       4.12        Amendment to Loan and Security  Agreement dated May 13, 1998,
                   by  and  between  The  Leather  Factory,   Inc.,  a  Delaware
                   corporation,  The Leather Factory, Inc., a Texas corporation,
                   The Leather Factory,  Inc., an Arizona  corporation,  Hi-Line
                   Leather & Manufacturing  Company,  a California  corporation,
                   Roberts, Cushman & Company, Inc., a New York corporation, and
                   FINOVA  Capital  Corporation  effective  as of March  31,1998
                   filed as Exhibit 4.15 to the Quarterly Report on Form 10-Q of
                   The Leather Factory, Inc. (Commission File No. 1-12368) filed
                   with the Securities and Exchange  Commission on May 15, 1998,
                   and incorporated by reference herein.

       4.13        The Leather Factory,  Inc. Stock Purchase Warrant for 200,000
                   shares  common  stock,  $.0024  par value  issued to Evert I.
                   Schlinger  dated August 3, 1998 and  terminating on August 3,
                   2003,  filed as Exhibit 4.13 to the Quarterly  Report on Form
                   10-Q  of The  Leather  Factory,  Inc.  (Commission  File  No.
                   1-12368) filed with the  Securities  and Exchange  Commission
                   November 12, 1998, and incorporated by reference herein.

      *4.14        Second Amendment to Loan and Security Agreement dated May 13,
                   1999, by and between  The Leather  Factory,  Inc., a Delaware
                   corporation, The Leather Factory, Inc.,  a Texas corporation,
                   The Leather Factory,  Inc., an Arizona  corporation,  Hi-Line
                   Leather & Manufacturing  Company,  a California  corporation,
                   Roberts,  Cushman & Company,  Inc., a  New York  corporation,
                   and  FINOVA Capital Corporation  effective  as  of  March 31,
                   1999.

       10.1        Letter Agreement for Consulting Services dated July 24, 1998,
                   by and  between  The  Leather  Factory,  Inc.  and  Evert  I.
                   Schlinger,  filed as Exhibit 4.13 to the Quarterly  Report on
                   Form 10-Q of The Leather Factory,  Inc.  (Commission File No.
                   1-12368) filed with the  Securities  and Exchange  Commission
                   November 12, 1998, and incorporated by reference herein.

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

      *27.1        Financial Data Schedule


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

                                       15