**UNITED      STATES**

**SECURITIES      AND EXCHANGE COMMISSION**

**Washington,      D.C. 20549**

**Form      10-Q**

**[X]      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES ACT OF      1934**

**[      ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE      ACT OF 1934**

**For      the transition period from _________ to __________**

|  |
|--|

**TANDY      LEATHER FACTORY, INC.**

| **Delaware**                                                                  |   | **75-2543540**                                                         |
|-------------------------------------------------------------------------------|--------|------------------------------------------------------------------------|
| (State                  or other jurisdiction of incorporate of organization) |   | (IRS                  Employer Identification                  Number) |

**3847      East Loop 820 South, Fort Worth, Texas 76119**

**(817)      496-4414**

| Class                                                      |   | Shares                  outstanding as of November 6, 2006 |
|------------------------------------------------------------|--------|------------------------------------------------------------|
| Common                  Stock, par value $0.0024 per share |   | 10,849,000                                                 |

----

**TANDY      LEATHER FACTORY, INC.**

**TABLE      OF CONTENTS**

|                                                                                                                                                 | PAGE                  NO. |
|------------------------------------------------------------------------------------------------------------------------------------------------------|---------------------------|
|                                                                                                                                                 |                      |
| **PART                  I. FINANCIAL INFORMATION**                                                                                                   |                      |
|                                                                                                                                                 |                      |
| Item                  1. Financial Statements                                                                                                        |                      |
|                                                                                                                                                 |                      |
| Consolidated                  Balance Sheets as of September 30, 2006 and December 31,                  2005                                         | 3                         |
|                                                                                                                                                 |                      |
| Consolidated                  Statements of Income for the three and nine months ended September                  30,                  2006 and 2005 | 4                         |
|                                                                                                                                                 |                      |
| Consolidated                  Statements of Cash Flows for the nine months ended September 30,                  2006 and                  2005       | 5                         |
|                                                                                                                                                 |                      |
| Consolidated                  Statements of Stockholders' Equity for                  the nine months ended September 30, 2006 and 2005              | 6                         |
|                                                                                                                                                 |                      |
| Notes                  to Consolidated Financial Statements                                                                                          | 7                         |
|                                                                                                                                                 |                      |
| 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                        |
|                                                                                                                                                 |                      |
| Item                  4. Controls and Procedures                                                                                                     | 15                        |
|                                                                                                                                                 |                      |
| **PART                  II. OTHER INFORMATION**                                                                                                      |                      |
|                                                                                                                                                 |                      |
| Item                  6. Exhibits                                                                                                                    | 15                        |
|                                                                                                                                                 |                      |
| **SIGNATURES**                                                                                                                                       | 15                        |
|                                                                                                                                                 |                      |

----

**Tandy      Leather Factory, Inc.**

**Consolidated      Balance Sheets**

|                                                                                                                          | **September                30,****2006****(unaudited)** |   | **December                31,****2005****(audited)** |
|-------------------------------------------------------------------------------------------------------------------------------|---------------------------------------------------------|--------|------------------------------------------------------|
| **ASSETS**                                                                                                                    |                                                    |   |                                                 |
| CURRENT                ASSETS:                                                                                                |                                                    |   |                                                 |
| Cash                                                                                                                          | $4,970,230                                              |   | $3,215,727                                           |
| Accounts                receivable-trade, net of allowance for doubtful accounts                                              |                                                    |   |                                                 |
|     of                $134,000 and $138,000 in 2006 and 2005, respectively                                | 2,427,790                                               |   | 2,178,848                                            |
| Inventory                                                                                                                     | 17,162,865                                              |   | 15,669,182                                           |
| Prepaid                income taxes                                                                                           | 213,095                                                 |   | -                                                    |
| Deferred                income taxes                                                                                          | 229,015                                                 |   | 273,872                                              |
| Other                current assets                                                                                           | 1,006,938                                               |   | 358,058                                              |
| Total                current assets                                                                                           | 26,009,933                                              |   | 21,695,687                                           |
|                                                                                                                          |                                                    |   |                                                 |
| PROPERTY                AND EQUIPMENT, at cost                                                                                | 6,757,607                                               |   | 6,424,091                                            |
| Less                accumulated depreciation and amortization                                                                 | (4,878,481)                                             |   | (4,664,614)                                          |
|                                                                                                                          | 1,879,126                                               |   | 1,759,477                                            |
|                                                                                                                          |                                                    |   |                                                 |
| GOODWILL                                                                                                                      | 751,082                                                 |   | 746,611                                              |
| OTHER                INTANGIBLES, net of accumulated amortization of                                                          |                                                    |   |                                                 |
|     $252,000                and                $223,000 in 2006 and 2005, respectively                    | 370,248                                                 |   | 398,967                                              |
| OTHER                assets                                                                                                   | 1,070,323                                               |   | 1,079,731                                            |
|                                                                                                                          | **$30,080,712**                                         |   | **$25,680,473**                                      |
|                                                                                                                          |                                                    |   |                                                 |
| **LIABILITIES                AND STOCKHOLDERS' EQUITY**                                                                       |                                                    |   |                                                 |
| CURRENT                LIABILITIES:                                                                                           |                                                    |   |                                                 |
| Accounts                payable-trade                                                                                         | $3,144,495                                              |   | $1,220,420                                           |
| Accrued                expenses and other liabilities                                                                         | 1,719,699                                               |   | 2,550,573                                            |
| Income                taxes payable                                                                                           | -                                                       |   | 199,581                                              |
| Current                maturities of capital lease obligations                                                                | 134,067                                                 |   | 134,067                                              |
| Total                current liabilities                                                                                      | 4,998,261                                               |   | 4,104,641                                            |
|                                                                                                                          |                                                    |   |                                                 |
| DEFERRED                INCOME TAXES                                                                                          | 218,371                                                 |   | 206,253                                              |
|                                                                                                                          |                                                    |   |                                                 |
| LONG-TERM                DEBT, net of current maturities                                                                      | -                                                       |   | -                                                    |
| CAPITAL                LEASE OBLIGATIONS, net of current maturities                                                           | 11,172                                                  |   | 111,722                                              |
|                                                                                                                          |                                                    |   |                                                 |
| COMMITMENTS                AND CONTINGENCIES                                                                                  |                                                    |   |                                                 |
|                                                                                                                          |                                                    |   |                                                 |
| STOCKHOLDERS'                EQUITY:                                                                                          |                                                    |   |                                                 |
| Preferred                stock, $0.10 par value; 20,000,000 shares authorized;                                                |                                                    |   |                                                 |
| none                issued or outstanding                                                                                     | -                                                       |   | -                                                    |
| Common                stock, $0.0024 par value; 25,000,000 shares authorized;                                                 |                                                    |   |                                                 |
|     10,837,000                and                10,741,835 shares issued at 2006 and 2005, respectively; |                                                    |   |                                                 |
|     10,831,141                and                10,735,976 outstanding at 2006 and 2005, respectively    | 26,008                                                  |   | 25,780                                               |
| Paid-in                capital                                                                                                | 5,173,407                                               |   | 4,988,445                                            |
| Retained                earnings                                                                                              | 19,541,650                                              |   | 16,172,475                                           |
| Treasury                stock                                                                                                 | (25,487)                                                |   | (25,487)                                             |
| Accumulated                other comprehensive income                                                                         | 137,330                                                 |   | 96,644                                               |
| Total                stockholders' equity                                                                                     | 24,852,908                                              |   | 21,257,857                                           |
|                                                                                                                          | **$30,080,712**                                         |   | **$25,680,473**                                      |

----

**Tandy      Leather Factory, Inc.**

**Consolidated      Statements of Income**

**(Unaudited)**

**For      the Three and Nine Months Ended September 30, 2006 and      2005**

|                                        | **THREE                MONTHS** |   | **NINE                MONTHS** |
|---------------------------------------------|---------------------------------|--------|--------------------------------|
|                                        | **2006**                        |   | **2005**                       |   | **2006** |   | **2005** |
| NET                SALES                    | $12,559,593                     |   | $11,777,133                    |   | $40,366,325 |   | $36,666,348 |
|                                        |                            |   |                           |   |   |   |   |
| COST                OF SALES                | 5,488,179                       |   | 5,013,331                      |   | 17,458,476 |   | 15,845,392 |
|                                        |                            |   |                           |   |   |   |   |
| Gross                profit                 | 7,071,414                       |   | 6,763,802                      |   | 22,907,849 |   | 20,820,956 |
|                                        |                            |   |                           |   |   |   |   |
| OPERATING                EXPENSES           | 5,807,442                       |   | 5,865,676                      |   | 17,903,337 |   | 17,031,669 |
|                                        |                            |   |                           |   |   |   |   |
| INCOME                FROM OPERATIONS       | 1,263,972                       |   | 898,126                        |   | 5,004,512 |   | 3,789,287 |
|                                        |                            |   |                           |   |   |   |   |
| OTHER                INCOME (EXPENSE):      |                            |   |                           |   |   |   |   |
| Interest                expense             | -                               |   | -                              |   | - |   | (3,188) |
| Other,                net                   | 37,422                          |   | 80,185                         |   | 84,951 |   | 104,404 |
| Total                other income (expense) | 37,422                          |   | 80,185                         |   | 84,951 |   | 101,216 |
|                                        |                            |   |                           |   |   |   |   |
| INCOME                BEFORE INCOME TAXES   | 1,301,394                       |   | 978,311                        |   | 5,089,463 |   | 3,890,503 |
|                                        |                            |   |                           |   |   |   |   |
| PROVISION                FOR INCOME TAXES   | 410,975                         |   | 282,221                        |   | 1,720,288 |   | 1,357,522 |
|                                        |                            |   |                           |   |   |   |   |
| NET                INCOME                   | $890,419                        |   | $696,090                       |   | $3,369,175 |   | $2,532,981 |
|                                        |                            |   |                           |   |   |   |   |

| NET                INCOME PER COMMON SHARE-BASIC                  |  $0.08 |   |  $0.07 |   |  $0.31 |   |  $0.24 |
|-------------------------------------------------------------------|-------------|--------|-------------|--------|-------------|--------|-------------|
| NET                INCOME PER COMMON SHARE-DILUTED                |  $0.08 |   |  $0.06 |   |  $0.30 |   |  $0.23 |
|                                                              |        |   |        |   |        |   |        |
|                                                              |        |   |        |   |        |   |        |
| **Weighted                Average Number of Shares Outstanding:** |        |   |        |   |        |   |        |
| Basic                                                             | 10,818,130  |   | 10,679,389  |   | 10,788,720  |   | 10,626,857  |
| Diluted                                                           | 11,102,383  |   | 11,029,840  |   | 11,105,903  |   | 10,965,922  |

----

**Tandy      Leather Factory, Inc.**

**Consolidated      Statements of Cash Flows**

**(Unaudited)**

**For      the Nine Months Ended September 30, 2006 and 2005**

|                                                                                                           | **2006**    |   | **2005**    |
|----------------------------------------------------------------------------------------------------------------|-------------|--------|-------------|
| CASH                FLOWS FROM OPERATING ACTIVITIES:                                                           |        |   |        |
| Net                income                                                                                      | $3,369,175  |   | $2,532,981  |
| Adjustments                to reconcile net income to net cash provided by operating                activities |        |   |        |
|     Depreciation                & amortization                                         | 291,257     |   | 346,217     |
|     Gain                on                disposal of assets                               | (1,750)     |   | (9,145)     |
|     Non-cash                stock-based compensation                                       | 78,600      |   | -           |
|     Deferred                income                taxes                                    | 56,975      |   | (173,744)   |
|     Other                                                                                  | 36,215      |   | 35,123      |
| Net                changes in assets and liabilities:                                                          |        |   |        |
|     Accounts                receivable-trade, net                                          | (248,942)   |   | (375,163)   |
|     Inventory                                                                              | (1,493,683) |   | (4,784,330) |
|     Income                taxes                                                            | (412,676)   |   | (30,268)    |
|     Other                current assets                                                    | (648,880)   |   | (230,761)   |
|     Accounts                payable                                                        | 1,924,075   |   | 1,312,001   |
|     Accrued                expenses and other liabilities                                  | (830,874)   |   | 1,373,522   |
| Total                adjustments                                                                               | (1,249,683) |   | (2,536,548) |
|                                                                                                           |        |   |        |
| Net                cash provided by (used in) operating activities                                             | 2,119,492   |   | (3,567)     |
|                                                                                                           |        |   |        |
| CASH                FLOWS FROM INVESTING ACTIVITIES:                                                           |        |   |        |
| Purchase                of property and equipment                                                              | (382,187)   |   | (197,746)   |
| Proceeds                from sale of assets                                                                    | 1,750       |   | 9,145       |
| Decrease                (increase) in other assets                                                             | 9,408       |   | (168,567)   |
|                                                                                                           |        |   |        |
| Net                cash used in investing activities                                                           | (371,029)   |   | (357,168)   |
|                                                                                                           |        |   |        |
| CASH                FLOWS FROM FINANCING ACTIVITIES:                                                           |        |   |        |
| Net                increase (decrease) in revolving credit loans                                               | -           |   | (505,154)   |
| Payments                on capital lease obligations                                                           | (100,550)   |   | (100,551)   |
| Proceeds                from issuance of common stock                                                          | 106,590     |   | 174,413     |
|                                                                                                           |        |   |        |
| Net                cash provided by (used in) financing activities                                             | 6,040       |   | (431,292)   |
|                                                                                                           |        |   |        |
| NET                CHANGE IN CASH                                                                              | 1,754,503   |   | (792,027)   |
|                                                                                                           |        |   |        |
| CASH,                beginning of period                                                                       | 3,215,727   |   | 2,560,202   |
|                                                                                                           |        |   |        |
| CASH,                end of period                                                                             | $4,970,230  |   | $1,768,175  |
|                                                                                                           |        |   |        |
| SUPPLEMENTAL                DISCLOSURES OF CASH FLOW INFORMATION:                                              |        |   |        |
| Interest                paid during the period                                                                 | -           |   | $3,188      |
| Income                taxes paid during the period, net of (refunds)                                           | $1,833,737  |   | 1,541,134   |

----

**Tandy      Leather Factory, Inc.**

**Consolidated      Statements of Stockholders' Equity**

**For      the Nine Months Ended September 30, 2006 and 2005**

|                                                  |  **Number                of Shares** |   |  **Par                Value** |   |  **Paid-in                Capital** |   |  **Treasury****Stock** |   |  **Retained                Earnings** |   | **Accumulated                Other Comprehensive Income (Loss)** |   |   **Total** |   |  **Comprehensive****Income                (Loss)** |
|-------------------------------------------------------|-------------------------------------------|--------|------------------------------------|--------|------------------------------------------|--------|-----------------------------|--------|--------------------------------------------|--------|------------------------------------------------------------------|--------|-----------------------|--------|---------------------------------------------------------|
| BALANCE,                December 31, 2004             | 10,560,661                                |   | $25,345                            |   | $4,796,999                               |   | $(25,487)                   |   | $12,458,760                                |   | $54,616                                                          |   | $17,310,233           |   |                                                    |
|                                                  |                                      |   |                               |   |                                     |   |                        |   |                                       |   |                                                             |   |                  |   |                                                    |
| Shares                issued - stock optionsexercised |  159,674                             |   |  384                          |   |  174,029                            |   |  -                     |   |  -                                    |   |  -                                                          |   | 174,413               |   |                                                    |
|  Net                income                       | -                                         |   | -                                  |   | -                                        |   | -                           |   | 2,532,981                                  |   | -                                                                |   | 2,532,981             |   | $2,532,981                                              |
|  Translation                adjustment           | -                                         |   | -                                  |   | -                                        |   | -                           |   | -                                          |   | 38,756                                                           |   | 38,756                |   | 38,756                                                  |
| BALANCE,                September 30, 2005            | 10,720,335                                |   | $25,729                            |   | $4,971,028                               |   | $(25,487)                   |   | $14,991,741                                |   | $93,372                                                          |   | $20,056,383           |   |                                                    |

| Comprehensive                income for the nine months ended September 30, 2005 | $2,571,737 |
|----------------------------------------------------------------------------------|------------|

| BALANCE,                December 31, 2005                                               | 10,741,835   |   | $25,780   |   | $4,988,445    |   | $(25,487) |   | $16,172,475 |   | $96,644  |   | $21,257,857   |   |       |
|-----------------------------------------------------------------------------------------|--------------|--------|-----------|--------|---------------|--------|-----------|--------|-------------|--------|----------|--------|---------------|--------|------------|
|                                                                                    |         |   |      |   |          |   |      |   |        |   |     |   |          |   |       |
|  Shares                issued - stock options andwarrants                exercised |  95,165 |   |  228 |   |  106,362 |   |  -   |   |  -     |   |  -  |   |  106,590 |   |       |
|  Stock-based                compensation                                           | -            |   | -         |   | 78,600        |   | -         |   | -           |   | -        |   | 78,600        |   |       |
|  Net                income                                                         | -            |   | -         |   | -             |   | -         |   | 3,369,175   |   | -        |   | 3,369,175     |   | $3,369,175 |
|  Translation                adjustment                                             | -            |   | -         |   | -             |   | -         |   | -           |   | 40,686   |   | 40,686        |   | 40,686     |
| BALANCE,                September 30, 2006                                              | 10,837,000   |   | $26,008   |   | $5,173,407    |   | $(25,487) |   | $19,541,650 |   | $137,330 |   | $24,852,908   |   |       |

| Comprehensive                income for the nine months ended September 30, 2006 | $3,409,861 |
|----------------------------------------------------------------------------------|------------|

----

**TANDY      LEATHER FACTORY, INC.**

**NOTES      TO CONSOLIDATED FINANCIAL STATEMENTS**

**1.      BASIS OF PRESENTATION AND CERTAIN SIGNIFICANT ACCOUNTING      POLICIES**

*Inventory*
*.      *

|                                             | **As                of**              |
|--------------------------------------------------|---------------------------------------|
|                                             | **September                30, 2006** |   | **December                31, 2005** |
| Inventory                on hand:                |                                  |   |   |
| Finished                goods held for sale      | $16,164,887                           |   | $14,035,384 |
| Raw                materials and work in process | 661,493                               |   | 984,878 |
| Inventory                in transit              | 336,485                               |   | 648,920 |
|                                             | $17,162,865                           |   | $15,669,182 |

*Goodwill      and Other Intangibles*

|                                  | **As                of September 30, 2006** |                            | **As                of December 31, 2005** |
|---------------------------------------|---------------------------------------------|---------------------------------|--------------------------------------------|
|                                  |  **Gross**                             | **Accumulated****Amortization** |  **Net**                              |   |  **Gross** | **Accumulated****Amortization** |  **Net** |
| Trademarks,                Copyrights | $544,369                                    | $238,121                        | $306,248                                   |   | $544,369 | $210,902 | $333,467 |
| Non-Compete                Agreements | 78,000                                      | 14,000                          | 64,000                                     |   | 78,000 | 12,500 | 65,500 |
|                                  | $622,369                                    | $252,121                        | $370,248                                   |   | $622,369 | $223,402 | $398,967 |

|   | **Wholesale                Leathercraft** | **Retail                Leathercraft** | **Total** |
|--------|-------------------------------------------|----------------------------------------|-----------|
| 2006   | $5,954                                    | $32,337                                | $38,291   |
| 2007   | 5,954                                     | 31,837                                 | 37,791    |
| 2008   | 5,954                                     | 30,337                                 | 36,291    |
| 2009   | 5,954                                     | 30,337                                 | 36,291    |
| 2010   | 5,954                                     | 30,337                                 | 36,291    |

*Revenue      Recognition*
*.*

*Recent      Accounting Pronouncements.*
*“Exchanges      of Nonmonetary Assets, an Amendment of APB Opinion No. 29”*

*“Accounting      Changes and Error Corrections, a replacement of APB Opinion No. 20 and      Statement No. 3” *

----

**2.**
**STOCK-BASED      COMPENSATION**

*Accounting      for Stock Issued to Employees*
*Accounting      for Stock-Based Compensation*

|                                                                                                          | **Three                  Months Ended****September                  30, 2005** |   | **Nine                  Months Ended****September                  30, 2005** |
|---------------------------------------------------------------------------------------------------------------|--------------------------------------------------------------------------------|--------|-------------------------------------------------------------------------------|
| Net                  income, as reported                                                                      | $696,090                                                                       |   | $2,532,981                                                                    |
| Add:                  Stock-based compensation expense included in reported net                  income       | -                                                                              |   | -                                                                             |
| Deduct:                  Stock-based compensation expense determined under fair value                  method | 30,734                                                                         |   | 92,201                                                                        |
| Net                  income, pro forma                                                                        | $665,356                                                                       |   | $2,440,780                                                                    |
|                                                                                                          |                                                                           |   |                                                                          |
| Net                  income per share:                                                                        |                                                                           |   |                                                                          |
| Basic                  - as reported                                                                          | $0.07                                                                          |   | $0.24                                                                         |
| Basic                  - pro forma                                                                            | $0.06                                                                          |   | $0.23                                                                         |
|                                                                                                          |                                                                           |   |                                                                          |
| Diluted                  - as reported                                                                        | $0.06                                                                          |   | $0.23                                                                         |
| Diluted                  - pro forma                                                                          | $0.06                                                                          |   | $0.22                                                                         |

|                                           | **Weighted                Average****Exercise                Price** | **#                of****Shares** | **Weighted                Average Remaining Contractual Term (in years)** | **Aggregate                Intrinsic Value** |
|------------------------------------------------|----------------------------------------------------------------------|-----------------------------------|---------------------------------------------------------------------------|----------------------------------------------|
| Outstanding,                January 1, 2006    | $1.930                                                               | 421,000                           |                                                                      |                                         |
| Granted                                        | 6.330                                                                | 6,000                             |                                                                      |                                         |
| Cancelled                                      | -                                                                    | -                                 |                                                                      |                                         |
| Exercised                                      | 1.353                                                                | 78,800                            |                                                                      |                                         |
| Outstanding,                September 30, 2006 | $2.010                                                               | 348,200                           | 5.18                                                                      | $390,416                                     |
| Exercisable,                September 30, 2006 | $1.730                                                               | 323,500                           | 5.09                                                                      | $315,716                                     |

|                                                                           | **September                30, 2006** | **September                30, 2005** |
|--------------------------------------------------------------------------------|---------------------------------------|---------------------------------------|
| Weighted                average grant-date fair value of stock options granted | $11,160                               | $11,814                               |
| Total                fair value of stock options vested                        | $101,728                              | $114,363                              |
| Total                intrinsic value of stock options exercised                | $63,481                               | $99,879                               |

----

**3.      EARNINGS PER SHARE**

|                                            | **Three                Months Ended**                                                            |             | **Nine                Months Ended** |
|-------------------------------------------------|--------------------------------------------------------------------------------------------------|------------------|--------------------------------------|
|                                            | **September                30,**                                                                 |             | **September                30,**     |
|                                            |                                                                                             | **2006**         |                                 | **2005** |   | **2006** |   | **2005** |
| Numerator:                                      |                                                                                             |             |                                 |   |   |   |   |   |
|                                            | Net                income                                                                        | $890,419         |                                 | $696,090 |   | $3,369,175 |   | $2,532,981 |
|                                            | Numerator                for basic and diluted earnings per share                                | 890,419          |                                 | 696,090 |   | 3,369,175 |   | 2,532,981 |
| Denominator:                                    |                                                                                             |             |                                 |   |   |   |   |   |
|                                            | Weighted-average                shares outstanding-basic                                         | 10,818,130       |                                 | 10,679,389 |   | 10,788,720 |   | 10,626,857 |
|                                            |                                                                                             |             |                                 |   |   |   |   |   |
| Effect                of dilutive securities:   |                                                                                             |             |                                 |   |   |   |   |   |
|                                            | Stock                options                                                                     | 241,192          |                                 | 311,817 |   | 266,034 |   | 314,561 |
|                                            | Warrants                                                                                         | 43,061           |                                 | 38,634 |   | 51,149 |   | 24,504 |
| Dilutive                potential common shares |                                                                                             | 284,253          |                                 | 350,451 |   | 317,183 |   | 339,065 |
|                                            | Denominator                for diluted earnings per share-weighted-average                shares |  11,102,383 |                                 |  11,029,840 |   |  11,105,903 |   |  10,965,922 |
|                                            |                                                                                             |             |                                 |   |   |   |   |   |
|                                            | Basic                earnings per share                                                          | $0.08            |                                 | $0.07 |   | $0.31 |   | $0.24 |
|                                            | Diluted                earnings per share                                                        | $0.08            |                                 | $0.06 |   | $0.30 |   | $0.23 |

**4.      SEGMENT INFORMATION**

| ***a.  *** | ***Wholesale                Leathercraft,***                which consists of a chain of warehouse distribution units operating                under                the name, *The                Leather Factory*,                located in the United States and Canada; |
|----------------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ***b.  *** | ***Retail                Leathercraft,***                which consists of a chain of retail stores operating under the name,                *Tandy                Leather Company*,                located in the United States and Canada; and |
|----------------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ***c.  *** | ***Other***,                which is a manufacturer of decorative hat trims sold directly to                hat                manufacturers. |
|----------------------|-----------------------------------------------------------------------------------------------------------------------------------------------|

----

|                                                        | **Wholesale                Leathercraft** | **Retail****Leathercraft** | **Other** | **Total**   |
|-------------------------------------------------------------|-------------------------------------------|----------------------------|-----------|-------------|
| **For                the quarter ended September 30, 2006** |                                      |                       |      |        |
| Net                sales                                    | $7,113,181                                | $5,121,556                 | $324,856  | $12,559,593 |
| Gross                profit                                 | 3,847,911                                 | 3,095,207                  | 128,296   | 7,071,414   |
| Operating                earnings                           | 910,942                                   | 362,744                    | (9,714)   | 1,263,972   |
| Interest                expense                             | -                                         | -                          | -         | -           |
| Other,                net                                   | 37,805                                    | (1,664)                    | 1,281     | 37,422      |
| Income                before income taxes                   | 948,747                                   | 361,080                    | (8,433)   | 1,301,394   |
|                                                        |                                      |                       |      |        |
| Depreciation                and amortization                | 60,975                                    | 37,112                     | 1,697     | 99,784      |
| Fixed                asset additions                        | 100,403                                   | 52,009                     | -         | 152,412     |
| Total                assets                                 | $24,558,634                               | $5,192,664                 | $329,414  | $30,080,712 |

| **For                the quarter ended September 30, 2005** |        |       |     |        |
|-------------------------------------------------------------|-------------|------------|----------|-------------|
| Net                sales                                    | $7,257,583  | $4,197,712 | $321,838 | $11,777,133 |
| Gross                profit                                 | 4,098,119   | 2,573,510  | 92,173   | 6,763,802   |
| Operating                earnings                           | 652,726     | 242,499    | 2,901    | 898,126     |
| Interest                expense                             | -           | -          | -        | -           |
| Other,                net                                   | 80,522      | (337)      | -        | 80,185      |
| Income                before income taxes                   | 733,248     | 242,162    | 2,901    | 978,311     |
|                                                        |        |       |     |        |
| Depreciation                and amortization                | 76,346      | 32,788     | 1,406    | 110,540     |
| Fixed                asset additions                        | 78,428      | 35,137     | 1,066    | 114,631     |
| Total                assets                                 | $21,935,588 | $4,160,349 | $775,449 | $26,871,386 |

|                                                            | **Wholesale                Leathercraft** | **Retail****Leathercraft** | **Other**  | **Total**   |
|-----------------------------------------------------------------|-------------------------------------------|----------------------------|------------|-------------|
| **For                the nine months ended September 30, 2006** |                                      |                       |       |        |
| Net                sales                                        | $23,250,338                               | $15,858,835                | $1,257,152 | $40,366,325 |
| Gross                profit                                     | 12,930,486                                | 9,634,035                  | 343,328    | 22,907,849  |
| Operating                earnings                               | 3,675,658                                 | 1,323,105                  | 5,749      | 5,004,512   |
| Interest                expense                                 | -                                         | -                          | -          | -           |
| Other,                net                                       | 102,089                                   | (18,419)                   | 1,281      | 84,951      |
| Income                before income taxes                       | 3,777,747                                 | 1,304,686                  | 7,030      | 5,089,463   |
|                                                            |                                      |                       |       |        |
| Depreciation                and amortization                    | 180,289                                   | 106,651                    | 4,317      | 291,257     |
| Fixed                asset additions                            | 228,880                                   | 153,146                    | 162        | 382,188     |
| Total                assets                                     | $24,558,634                               | $5,192,664                 | $329,414   | $30,080,712 |

| **For                the nine months ended September 30, 2005** |        |        |       |        |
|-----------------------------------------------------------------|-------------|-------------|------------|-------------|
| Net                sales                                        | $22,836,542 | $12,577,621 | $1,252,185 | $36,666,348 |
| Gross                profit                                     | 12,673,675  | 7,787,996   | 359,285    | 20,820,956  |
| Operating                earnings                               | 2,682,884   | 1,043,951   | 62,452     | 3,789,287   |
| Interest                expense                                 | (3,188)     | -           | -          | (3,188)     |
| Other,                net                                       | 91,623      | 12,781      | -          | 104,404     |
| Income                before income taxes                       | 2,771,319   | 1,056,732   | 62,452     | 3,890,503   |
|                                                            |        |        |       |        |
| Depreciation                and amortization                    | 246,862     | 93,342      | 6,013      | 346,217     |
| Fixed                asset additions                            | 131,443     | 61,891      | 4,412      | 197,746     |
| Total                assets                                     | $21,935,588 | $4,160,349  | $775,449   | $26,871,386 |

| **Three                months ended September 30,** | **2006**    | **2005**    |
|-----------------------------------------------------|-------------|-------------|
| United                States                        | $11,151,670 | $10,631,856 |
| Canada                                              | 953,224     | 828,840     |
| All                other countries                  | 454,699     | 316,437     |
|                                                | $12,559,593 | $11,777,133 |

| **Nine                months ended September 30,** | **2006**    | **2005**    |
|----------------------------------------------------|-------------|-------------|
| United                States                       | $35,981,135 | $32,904,863 |
| Canada                                             | 3,098,839   | 2,599,185   |
| All                other countries                 | 1,286,351   | 1,162,300   |
|                                               | $40,366,325 | $36,666,348 |

----

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

**Our      Business**

**Wholesale      Leathercraft**
*The      Leather Factory,*
**Retail      Leathercraft**
*Tandy      Leather Company,*
**Other**

**Critical      Accounting Policies**

**Forward-Looking      Statements**

| *Ø  * | *We                believe that the recent rise in oil and natural gas prices will increase                the costs of the goods that we sell, including the costs of shipping                those                goods from the manufacturer to our stores and                customers.* |
|----------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

**Results      of Operations**

*Quarters      Ended September 30, 2006 and 2005*

|                                  | **Quarter                Ended****September                30, 2006** |   | **Quarter                Ended****September                30, 2005** |   |  **Incr                (Decr)** |
|---------------------------------------|-----------------------------------------------------------------------|--------|-----------------------------------------------------------------------|--------|--------------------------------------|
| **Sales**                             |                                                                  |   |                                                                  |   |                                 |
| Wholesale                Leathercraft | $7,113,181                                                            |   | $7,257,583                                                            |   | $(144,402)                           |
| Retail                Leathercraft    | 5,121,556                                                             |   | 4,197,712                                                             |   | 923,844                              |
| Other                                 | 324,856                                                               |   | 321,838                                                               |   | 3,018                                |
| Total                Operations       | $12,559,593                                                           |   | $11,777,133                                                           |   | $782,460                             |
|                                  |                                                                  |   |                                                                  |   |                                 |
| **Operating                Income**   |                                                                  |   |                                                                  |   |                                 |
| Wholesale                Leathercraft | $910,942                                                              |   | $652,726                                                              |   | $258,216                             |
| Retail                Leathercraft    | 362,744                                                               |   | 242,499                                                               |   | 120,245                              |
| Other                                 | (9,714)                                                               |   | 2,901                                                                 |   | (12,615)                             |
| Total                Operations       | $1,263,972                                                            |   | $898,126                                                              |   | $365,846                             |

|                      | **2006** |   | **2005** | **%                Change** |
|---------------------------|----------|--------|----------|-----------------------------|
| Net                income | $890,419 |   | $696,090 | 27.9%                       |

----

**Wholesale      Leathercraft**

|                                            | **Quarter                Ended****09/30/06** |   | **Quarter                Ended****09/30/05** |   |  **$                Change** |  **%                Change** |
|-------------------------------------------------|----------------------------------------------|--------|----------------------------------------------|--------|-----------------------------------|-----------------------------------|
| Distribution                centers             | $5,968,100                                   |   | $5,970,814                                   |   | $(2,713)                          | (0.1)%                            |
| Center                converted to retail store | -                                            |   | 106,550                                      |   | (106,550)                         | (100.0)                           |
| National                account group           | 1,145,081                                    |   | 1,180,220                                    |   | (35,139)                          | (3.0)                             |
|                                            | $7,113,181                                   |   | $7,257,584                                   |   | $(144,402)                        | (2.0)%                            |

|                                                                                                                                     | **Quarter                Ended** |
|------------------------------------------------------------------------------------------------------------------------------------------|----------------------------------|
| **Customer                Group**                                                                                                        | **09/30/06**                     |   | **09/30/05** |
| RETAIL                (end                users, consumers, individuals)                                                                 | 23%                              |   | 22% |
| INSTITUTION                (prisons,                prisoners, hospitals, schools, youth organizations, etc.)                            | 7                                |   | 7 |
| WHOLESALE                (resellers                & distributors, saddle & tack shops, authorized dealers,                etc.) | 39                               |   | 45 |
| MANUFACTURERS                                                                                                                            | 11                               |   | 10 |
| NATIONAL                ACCOUNTS                                                                                                         | 20                               |   | 16 |
|                                                                                                                                     | 100%                             |   | 100% |

**Retail      Leathercraft **

|                                                 | **#****Stores** | **Qtr                Ended****09/30/06** | **Qtr                Ended****09/30/05** | **$                Incr****(Decr)** | **%                Incr****(Decr)** |
|------------------------------------------------------|-----------------|------------------------------------------|------------------------------------------|-------------------------------------|-------------------------------------|
| Same                (existing) store sales           | 46              | $4,327,423                               | $4,164,818                               | $162,605                            | 3.9%                                |
| Store                converted from wholesale center | 1               | 116,322                                  | -                                        | 116,322                             | N/A                                 |
| New                store sales                       | 15              | 677,811                                  | 32,894                                   | 644,917                             | N/A                                 |
| Total                sales                           | 62              | $5,121,556                               | $4,197,712                               | $923,844                            | 22.0%                               |

|                                                                                                                                     | **Quarter                Ended** |
|------------------------------------------------------------------------------------------------------------------------------------------|----------------------------------|
| **Customer                Group**                                                                                                        | **09/30/06**                     |   | **09/30/05** |
| RETAIL                (end                users, consumers, individuals)                                                                 | 62%                              |   | 64% |
| INSTITUTION                (prisons,                prisoners, hospitals, schools, youth organizations, etc.)                            | 8                                |   | 6 |
| WHOLESALE                (resellers                & distributors, saddle & tack shops, authorized dealers,                etc.) | 30                               |   | 28 |
| NATIONAL                ACCOUNTS                                                                                                         | -                                |   | - |
| MANUFACTURERS                                                                                                                            | -                                |   | 2 |
|                                                                                                                                     | 100%                             |   | 100% |

----

**Other      (Roberts, Cushman) **

**Other      Expenses **

*Nine      Months Ended September 30, 2006 and 2005*

|                                  | **Nine                Months Ended****September                30, 2006** |   | **Nine                Months Ended****September                30, 2005** |   |  **Incr                (Decr)** |
|---------------------------------------|---------------------------------------------------------------------------|--------|---------------------------------------------------------------------------|--------|--------------------------------------|
| **Sales**                             |                                                                      |   |                                                                      |   |                                 |
| Wholesale                Leathercraft | $23,250,338                                                               |   | $22,836,542                                                               |   | $413,796                             |
| Retail                Leathercraft    | 15,858,835                                                                |   | 12,577,621                                                                |   | 3,281,214                            |
| Other                                 | 1,257,152                                                                 |   | 1,252,185                                                                 |   | 4,967                                |
| Total                Operations       | $40,366,325                                                               |   | $36,666,348                                                               |   | $3,699,977                           |
|                                  |                                                                      |   |                                                                      |   |                                 |
| **Operating                Income**   |                                                                      |   |                                                                      |   |                                 |
| Wholesale                Leathercraft | $3,675,658                                                                |   | $2,682,884                                                                |   | $992,774                             |
| Retail                Leathercraft    | 1,323,105                                                                 |   | 1,043,951                                                                 |   | 279,154                              |
| Other                                 | 5,749                                                                     |   | 62,451                                                                    |   | (56,703)                             |
| Total                Operations       | $5,004,512                                                                |   | $3,789,287                                                                |   | $1,215,225                           |

|                      | **2006**   |   | **2005**   | **%                change** |
|---------------------------|------------|--------|------------|-----------------------------|
| Net                income | $3,369,175 |   | $2,532,981 | 33.0%                       |

**Wholesale      Leathercraft**

|                                            | **Nine                Months Ended 09/30/06** |   | **Nine                Months Ended 09/30/05** |   | **$                Change** | **%                Change** |
|-------------------------------------------------|-----------------------------------------------|--------|-----------------------------------------------|--------|-----------------------------|-----------------------------|
| Distribution                centers             | $19,548,188                                   |   | $18,823,270                                   |   | $724,918                    | 3.9%                        |
| Center                converted to retail store | 28,641                                        |   | 284,909                                       |   | (256,268)                   | (89.9)%                     |
| National                account group           | 3,673,509                                     |   | 3,728,363                                     |   | (54,854)                    | (1.5)%                      |
|                                            | $23,250,338                                   |   | $22,836,542                                   |   | $413,796                    | 1.8%                        |

|                                                                                                                                     | **Nine                Months Ended** |
|------------------------------------------------------------------------------------------------------------------------------------------|--------------------------------------|
| **Customer                Group**                                                                                                        | **09/30/06**                         |   | **09/30/05** |
| RETAIL                (end                users, consumers, individuals)                                                                 | 23%                                  |   | 22% |
| INSTITUTION                (prisons,                prisoners, hospitals, schools, youth organizations, etc.)                            | 7                                    |   | 7 |
| WHOLESALE                (resellers                & distributors, saddle & tack shops, authorized dealers,                etc.) | 39                                   |   | 42 |
| MANUFACTURERS                                                                                                                            | 11                                   |   | 9 |
| NATIONAL                ACCOUNTS                                                                                                         | 20                                   |   | 20 |
|                                                                                                                                     | 100%                                 |   | 100% |

----

**Retail      Leathercraft **

|                                                 |  **#                Stores** | **Nine                Months Ended****09/30/06** | **Nine                Months Ended****09/30/05** | **$                Incr****(Decr)** | **%                Incr****(Decr)** |
|------------------------------------------------------|-----------------------------------|--------------------------------------------------|--------------------------------------------------|-------------------------------------|-------------------------------------|
| Same                (existing) store sales           | 52                                | $13,008,836                                      | $12,117,898                                      | $890,938                            | 7.4%                                |
| Store                converted from wholesale center | 1                                 | 332,998                                          | -                                                | 332,998                             | N/A                                 |
| New                store sales                       | 9                                 | 2,517,001                                        | 459,723                                          | 2,057,278                           | N/A                                 |
| Total                sales                           | 62                                | $15,858,835                                      | $12,577,621                                      | $3,281,214                          | 26.1%                               |

|                                                                                                                                     | **Nine                Months Ended** |
|------------------------------------------------------------------------------------------------------------------------------------------|--------------------------------------|
| **Customer                Group**                                                                                                        | **09/30/06**                         |   | **09/30/05** |
| RETAIL                (end                users, consumers, individuals)                                                                 | 65%                                  |   | 69% |
| INSTITUTION                (prisons,                prisoners, hospitals, schools, youth organizations, etc.)                            | 9                                    |   | 7 |
| WHOLESALE                (resellers                & distributors, saddle & tack shops, authorized dealers,                etc.) | 25                                   |   | 23 |
| NATIONAL                ACCOUNTS                                                                                                         | -                                    |   | - |
| MANUFACTURERS                                                                                                                            | 1                                    |   | 1 |
|                                                                                                                                     | 100%                                 |   | 100% |

**Other      (Roberts, Cushman) **

**Other      Expenses **

**Capital        Resources, Liquidity and Financial Condition**

----

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

**Item      4. Controls and Procedures **

**PART      II. OTHER INFORMATION**

**Item      6. Exhibits**

| **Exhibit****Number**           |  **Description**                                                                                                                                                                                                                                                                                                                                                                                                                     |
|---------------------------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3.1                             | Certificate                of Incorporation of The Leather Factory, Inc., and Certificate of                Amendment to Certificate of Incorporation of The Leather Factory,                Inc.                filed as Exhibit 3.1 to Form 10-Q filed by Tandy Leather Factory,                Inc.                with the Securities and Exchange Commission on August 12, 2005 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.                                                                       |
| *31.1                           | 13a-14(a)                Certification by Wray Thompson, Chairman of the Board and Chief Executive                Officer                                                                                                                                                                                                                                                                                                                 |
| *31.2                           | 13a-14(a)                Certification by Shannon Greene, Chief Financial Officer and                Treasurer                                                                                                                                                                                                                                                                                                                            |
| *32.1                           | Certification                Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section                906 of                the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                      |
| ______________                  |                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| *Filed                herewith. |                                                                                                                                                                                                                                                                                                                                                                                                                                      |

**SIGNATURES**

|                                   | **TANDY                LEATHER FACTORY, INC.**                                                 |
|----------------------------------------|------------------------------------------------------------------------------------------------|
|                                   | (Registrant)                                                                                   |
|                                   |                                                                                           |
| Date:                November 10, 2006 | By:                /s/                Wray Thompson                                            |
|                                   | Wray                Thompson                                                                   |
|                                   | Chairman                and Chief Executive Officer                                            |
|                                   |                                                                                           |
| Date:                November 10, 2006 | By:                /s/                Shannon L. Greene                                        |
|                                   | Shannon                L. Greene                                                               |
|                                   | Chief                Financial Officer and Treasurer (Chief Accounting                Officer) |

----

**EXHIBIT      31.1**

**RULE      13a-14(a) CERTIFICATION **

**Wray      Thompson**

*[language      intentionally omitted SEC Rel. 33-8238 and 33-8618]*

*[Left      blank intentionally SEC Rel. No. 33-8238 and 33-8618]*

| Date:                November 10, 2006 | /s/                Wray Thompson                    |
|----------------------------------------|-----------------------------------------------------|
|                                   | Wray                Thompson                        |
|                                   | Chairman                and Chief Executive Officer |
|                                   | (principal                executive officer)        |

----

**EXHIBIT      31.2**

**RULE      13a-14(a) CERTIFICATION**

**Shannon      L. Greene**

*[language      intentionally omitted SEC Rel. 33-8238 and 33-8618]*

*[Left      blank intentionally SEC Rel. No. 33-8238 and 33-8618]*

| Date:                November 10, 2006 | /s/                Shannon L. Greene                        |
|----------------------------------------|-------------------------------------------------------------|
|                                   | Shannon                L. Greene                            |
|                                   | Chief                Financial Officer and Treasurer        |
|                                   | (principal                financial and accounting officer) |

----

**EXHIBIT      32.1**

**Certification      Pursuant to 18 U.S.C. Section 1350,**

**as      Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of      2002**

| i.   | The                Report fully complies with the requirements of section 13(a) or 15(d)                of                the Securities Exchange Act of 1934;                and |
|----------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ii.   | The                information contained in the Report fully presents, in all material                respects, the financial condition and results of operations of the                Company                as of the dates and for the periods expressed in the                Report. |
|-----------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| Date:                November 10, 2006 | By:                /s/                Wray Thompson                     |
|----------------------------------------|-------------------------------------------------------------------------|
|                                   | **Wray                Thompson**                                        |
|                                   | **Chairman                of the Board and Chief Executive Officer**    |
|                                   |                                                                    |
| Date:                November 10, 2006 | By:                /s/                Shannon L. Greene                 |
|                                   | **Shannon                L. Greene**                                    |
|                                   | **Chief                Financial Officer and                Treasurer** |

----