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, 2001

or

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

For the transition period from ____________ to ____________

Commission File Number 1-12368

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


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

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

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

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

                                    Yes X  No
                                       ---   ---

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

                 Class                     Shares outstanding as of May 14, 2001
----------------------------------------   -------------------------------------
Common Stock, par value $.0024 per share                  9,968,161

<PAGE>

Forward-Looking Statements

         This report contains  forward-looking  statements of management.  There
are certain  important risks that could cause results to differ  materially than
those anticipated by some of the forward-looking statements.  Some, but not all,
of the  important  risks which could cause actual  results to differ  materially
from those  suggested by the  forward-looking  statements  include,  among other
things,

o    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, and possible negative trends in the craft
     and western retail markets,

o    failure to realized the anticipated  benefits of the recent  acquisition of
     the assets of Tandy Leather,

o    customer  acceptance  of existing and new products,  or otherwise,  pricing
     pressures due to competitive industry conditions,

o    increases in prices for leather  (which is a world-wide  commodity) and the
     Company's inability to pass these increased costs on to customers,

o    change in tax or interest rates,

o    change in the commercial banking environment,

o    problems with the  importation  of the products that the Company buys in 22
     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 these countries of Most Favored Nation status
     with the United States of America, and

o    other  uncertainties,  all of which are  difficult  to predict  and many of
     which are beyond the control of the Company.

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



                                       2
<PAGE>

                            THE LEATHER FACTORY, INC.

                                    FORM 10-Q

                  FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2001


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


                                                                        PAGE NO.
                                                                        --------

PART I.  FINANCIAL INFORMATION

  Item 1.  Financial Statements

    Consolidated Balance Sheets
     March 31, 2001 and December 31, 2000...............................    4

    Consolidated Statements of Income
     Three months ended March 31, 2001 and 2000.........................    5

    Consolidated Statements of Cash Flows
     Three months ended March 31, 2001 and 2000.........................    6

    Consolidated Statements of Stockholders' Equity
     Three months ended March 31, 2001 and 2000.........................    7

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

  Item 2.  Management's Discussion and Analysis of Financial
            Condition and Results of Operations.........................   10

  Item 3.  Quantitative and Qualitative Disclosures About Market Risk...   13

PART II.  OTHER INFORMATION

  Item 6.  Exhibits and Reports on Form 8-K.............................   13

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





                                       3
<PAGE>
<TABLE>
<CAPTION>

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

                            THE LEATHER FACTORY, INC.
                           CONSOLIDATED BALANCE SHEETS

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

                                                                           March 31,     December 31,
                                                                              2001            2000
                                                                         ------------    ------------
                                                                          (UNAUDITED)
<S>                                                                      <C>             <C>
                                    ASSETS
CURRENT ASSETS:
     Cash                                                                $       --      $    234,141
     Cash restricted for payment on revolving credit facility                 355,402         390,467
     Accounts receivable-trade, net of allowance for doubtful accounts
         of $357,000 and $338,000 in 2001 and 2000, respectively            2,557,269       2,191,996
     Inventory                                                              8,383,248       9,205,898
     Deferred income taxes                                                    130,069         130,802
     Other current assets                                                     440,575         510,473
                                                                         ------------    ------------
                             Total current assets                          11,866,563      12,663,777
                                                                         ------------    ------------

PROPERTY AND EQUIPMENT, at cost                                             4,110,832       3,657,601
  Less-accumulated depreciation and amortization                           (2,607,512)     (2,494,732)
                                                                         ------------    ------------
                             Property and equipment, net                    1,503,320       1,162,869


GOODWILL, net of accumulated amortization of $1,423,000
     and $1,367,000 in 2001 and 2000, respectively                          4,894,074       4,964,704
OTHER INTANGIBLES, net of accumulated amortization of
     $125,000 and $100,000, in 2001 and 2000, respectively                    593,977         615,647
OTHER assets
                                                                              280,160         279,082
                                                                         ------------    ------------
                                                                         $ 19,138,094    $ 19,686,079
                                                                         ============    ============

                     LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
     Accounts payable                                                    $  2,003,398    $  2,159,910
     Accrued expenses and other liabilities                                   801,510       1,290,613
     Income taxes payable                                                     287,908          94,795
     Notes payable and current maturities of  long-term debt                5,109,239       5,759,626
                                                                         ------------    ------------
                             Total current liabilities                      8,202,055       9,304,944
                                                                         ------------    ------------

DEFERRED INCOME TAXES                                                          69,847          72,473

NOTES PAYABLE AND LONG-TERM DEBT, net of current maturities                    21,553          13,025

COMMITMENTS AND CONTINGENCIES                                                    --              --

STOCKHOLDERS' EQUITY:
     Preferred stock, $0.10 par value; 20,000,000
         shares authorized, none issued or outstanding                           --              --
     Common stock, $0.0024 par value; 25,000,000 shares
         authorized, 9,968,161 and 9,908,161 shares issued
         and outstanding at 2001 and 2000, respectively                        23,924          23,780

     Paid-in capital                                                        4,006,201       3,946,608
     Retained earnings                                                      6,969,037       6,471,754
     Less: Notes receivable - secured by common stock                        (118,589)       (120,339)
     Accumulated other comprehensive loss                                     (35,934)        (26,166)
                                                                         ------------    ------------
                             Total stockholders' equity                    10,844,639      10,295,637
                                                                         ------------    ------------
                                                                         $ 19,138,094    $ 19,686,079
                                                                         ============    ============
</TABLE>


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

                                       4
<PAGE>

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

                            THE LEATHER FACTORY, INC.
                        CONSOLIDATED STATEMENTS OF INCOME
                                   (UNAUDITED)
                   THREE MONTHS ENDED MARCH 31, 2001 AND 2000

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


                                                           2001         2000
                                                        ----------   ----------

NET SALES                                               $9,372,613   $7,405,557

COST OF SALES                                            4,488,397    3,834,966
                                                        ----------   ----------

                           Gross profit                  4,884,216    3,570,591

OPERATING EXPENSES                                       3,908,877    2,778,389
                                                        ----------   ----------

INCOME FROM OPERATIONS                                     975,339      792,202

OTHER EXPENSE:
    Interest expense                                       148,593      169,195
    Other, net                                               7,291        5,342
                                                        ----------   ----------
                           Total other expense             155,884      174,537
                                                        ----------   ----------

INCOME BEFORE INCOME TAXES                                 819,455      617,665

PROVISION FOR INCOME TAXES                                 322,172      233,723
                                                        ----------   ----------

NET INCOME                                              $  497,283   $  383,942
                                                        ==========   ==========





NET INCOME (LOSS) PER COMMON SHARE                      $     0.05   $     0.04
                                                        ==========   ==========

NET INCOME (LOSS) PER COMMON SHARE--Assuming Dilution   $     0.05   $     0.04
                                                        ==========   ==========







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

                                       5
<PAGE>
<TABLE>
<CAPTION>

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

                            THE LEATHER FACTORY, INC.
                      CONSOLIDATED STATEMENTS OF CASH FLOW
                                   (UNAUDITED)
                   THREE MONTHS ENDED MARCH 31, 2001 AND 2000

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


                                                                           2001         2000
                                                                         ---------    ---------
<S>                                                                      <C>          <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net income                                                             $ 497,283    $ 383,942
  Adjustments to reconcile net income to net
   cash provided by operating activities-
     Depreciation & amortization                                           193,643      141,242
     Amortization of deferred financing costs                               11,438       15,235
     Other                                                                 (11,662)       8,866
     Net changes in assets and liabilities:
       Accounts receivable-trade, net                                     (365,273)     153,382
       Inventory                                                           822,650      596,150
       Income taxes                                                        193,113     (187,309)
       Other current assets                                                 69,898     (224,649)
       Accounts payable                                                   (156,510)    (463,634)
       Accrued expenses and other liabilities                             (489,104)    (268,789)
                                                                         ---------    ---------
     Total adjustments                                                     268,193     (229,506)
                                                                         ---------    ---------

      Net cash provided by operating activities                            765,476      154,436
                                                                         ---------    ---------

CASH FLOWS FROM INVESTING ACTIVITIES:
  Purchase of property and equipment                                      (453,230)     (30,961)
  Increase in other assets                                                  (1,078)        --
  Other intangible costs                                                      --            426
                                                                         ---------    ---------

      Net cash used in investing activities                               (454,308)     (30,535)
                                                                         ---------    ---------

CASH FLOWS FROM FINANCING ACTIVITIES:
  Net decrease in revolving credit loans                                  (635,354)     (84,692)
  Proceeds from notes payable and long-term debt
                                                                            18,676         --
  Payments on notes payable and long-term debt                             (25,182)    (112,212)
  Decrease in cash restricted for payment on revolving credit facility      35,064       90,661
  Payments received on notes secured by common stock                         1,750        3,188
  Proceeds from issuance of common stock                                    59,737       10,000
                                                                         ---------    ---------

      Net cash used in financing activities                               (545,309)     (93,055)
                                                                         ---------    ---------

NET INCREASE (DECREASE) IN CASH                                           (234,141)      30,846

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

CASH, end of period                                                      $    --      $ 165,311
                                                                         =========    =========

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
  Interest paid during the period                                        $ 148,337    $ 157,391
  Income taxes paid during the period, net of (refunds)                    135,248      409,631

</TABLE>



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

                                       6
<PAGE>
<TABLE>
<CAPTION>

--------------------------------------------------------------------------------
                            THE LEATHER FACTORY, INC.
                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                                   (UNAUDITED)
                   THREE MONTHS ENDED MARCH 31, 2001 AND 2000
--------------------------------------------------------------------------------


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

   Payments on notes receivable -
        secured by common stock            --             --             --             --            3,188            --

   Shares issued - employee
        Stock options exercised          20,000             48          9,952           --             --              --

   Net Income                              --             --             --          383,942           --              --

   Translation adjustment                  --             --             --             --             --              (144)
                                   ------------   ------------   ------------   ------------   ------------    ------------

BALANCE, March 31, 2000               9,873,161   $     23,696   $  3,911,692   $  5,314,376   $   (150,228)   $    (22,125)
                                   ============   ============   ============   ============   ============    ============


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

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

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

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

   Translation adjustment                  --             --             --             --             --            (9,768)
                                   ------------   ------------   ------------   ------------   ------------    ------------

BALANCE, March 31, 2001               9,968,161   $     23,924   $  4,006,201   $  6,969,037   $   (118,589)   $    (35,934)
                                   ============   ============   ============   ============   ============    ============


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

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

   Payments on notes receivable -
        secured by common stock                                         3,188

   Shares issued - employee
        Stock options exercised                                        10,000

   Net Income                                                         383,942        383,942

   Translation adjustment                                                (144)          (144)
                                                                 ------------

BALANCE, March 31, 2000                                          $  9,077,411
                                                                 ============
                                                                                ------------
   Comprehensive income for the three months ended March 31, 2000               $    383,798
                                                                                ============

BALANCE, December 31, 2000                                         10,295,637

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

   Shares issued - employee
        Stock options exercised                                        59,737

   Net Income                                                         497,283        497,283

   Translation adjustment                                              (9,768)        (9,768)
                                                                 ------------

BALANCE, March 31, 2001                                          $ 10,844,639
                                                                 ============

                                                                                ------------
   Comprehensive income for the three months ended March 31, 2001               $    487,515
                                                                                ============

</TABLE>

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

                                       7
<PAGE>
<TABLE>
<CAPTION>

                            THE LEATHER FACTORY, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


1.  BASIS OF PRESENTATION

In  the  opinion  of  the  Company,  the  accompanying   consolidated  financial
statements  contain  all  adjustments   (consisting  of  only  normal  recurring
adjustments)  necessary to present fairly its financial position as of March 31,
2001 and December 31, 2000, and the results of operations and cash flows for the
three-month periods ended March 31, 2001 and 2000. 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 2000 Annual Report on Form 10-K ("Annual Report").



2.  INVENTORY

The components of inventory consist of the following:

                                                               As of
                                                    ---------------------------
                                                     March 31,     December 31,
                                                        2001           2000
                                                    -----------    ------------
             Finished goods held for sale           $ 7,331,130    $ 8,175,429
             Raw materials and work in process        1,052,118      1,030,469
                                                    -----------    -----------
                                                    $ 8,383,248    $ 9,205,898
                                                    ===========    ============


3.  EARNINGS PER SHARE

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

                                                                       Three Months Ended March 31,
                                                                       ----------------------------
                                                                           2001            2000
                                                                       -----------     -----------
<S>                                                                    <C>             <C>
              Numerator:
                  Net income                                           $   497,283     $   383,942
                                                                       -----------     -----------
                  Numerator for basic and diluted earnings per share       497,283         383,942

              Denominator:
                  Denominator for basic earnings per share -
                    Weighted-average shares                              9,949,494       9,859,754

              Effect of dilutive securities:
                  Stock options                                             92,424         101,236
                  Warrants                                                 162,690         160,216
                                                                       -----------     -----------
              Dilutive potential common shares                             255,114         261,452
                                                                       -----------     -----------

                  Denominator for diluted earnings per share -
                    weighted-average shares                             10,204,608      10,121,206
                                                                       ===========     ===========

                  Basic earnings per share                             $      0.05     $      0.04
                                                                       ===========     ===========
                  Diluted earnings per share                           $      0.05     $      0.04
                                                                       ===========     ===========

</TABLE>

Unexercised  stock options owned by certain  employees and directors to purchase
16,000  and  6,000  shares  of  common  stock as of  March  31,  2001 and  2000,
respectively,  were not included in the  computations of diluted EPS because the
options'  exercise prices were greater than or equal to the average market price
of the common stock during the period.


                                       8
<PAGE>
<TABLE>
<CAPTION>

4.  SEGMENT INFORMATION


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

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

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

The Company's  reportable  operating segments have been determined as separately
identifiable  business units. The Company measures segment earnings as operating
earnings, defined as income before interest and income taxes. The "Tandy Leather
Company" column contains operating results beginning after its November 30, 2000
acquisition.

                                        The Leather    Tandy Leather     Roberts,
                                          Factory         Company      Cushman & Co       Total
                                       ------------    ------------    ------------    ------------
<S>                                    <C>             <C>             <C>             <C>
For the quarter ended March 31, 2001
Net Sales                              $  7,103,792    $  1,775,116    $    493,705    $  9,372,613
Gross Profit                              3,764,419         978,310         141,487       4,884,216
Operating earnings (loss)                 1,003,701         (19,664)         (8,698)        975,339
Interest expense                           (148,593)           --              --          (148,593)
Other, net                                   (7,444)            153            --            (7,291)
                                                                                       ------------
Income (loss) before income taxes           883,620         (19,511)        (44,654)        819,455
                                                                                       ------------
     Depreciation and amortization          131,044          35,861          38,176         205,081
     Total assets                      $ 10,852,853    $  3,213,420    $  5,071,821    $ 19,138,094
                                       ------------    ------------    ------------    ------------

For the quarter ended March 31, 2000
Net Sales                              $  6,847,545            --      $    558,012    $  7,405,557
Gross Profit                              3,368,265            --           202,326       3,570,591
Operating earnings (loss)                   678,633            --           113,569         792,202
Interest expense                           (169,195)           --              --          (169,195)
Other, net                                   (5,342)           --              --            (5,342)
                                                                                       ------------
Income (loss) before income taxes           588,666            --            28,999         617,665
                                                                                       ------------
     Depreciation and amortization          117,327            --            39,150         156,477
     Total assets                      $ 12,259,079            --      $  5,233,368    $ 17,492,447
                                       ------------    ------------    ------------    ------------



Net sales for geographic areas was as follows:                               Three months ended
                                                                      March 31, 2001  March 31, 2000
                                                                      --------------  --------------
United States                                                          $  8,869,011    $  7,093,710
All other countries                                                         503,602         311,847
                                                                       ------------    ------------
                                                                       $  9,372,613    $  7,405,557
                                                                       ============    ============

</TABLE>


                                       9
<PAGE>

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

General
-------

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

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

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


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

Income Statement Comparison

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

                                 % of Net Sales
                             Quarterly period ended
                                   March 31,               Change in $ and %
                             ----------------------   --------------------------
                               2001         2000          $ Change     % Change
                             ---------    ---------   --------------   ---------
Net sales                     100.0%       100.0%       $ 1,967,056      26.56%
Cost of sales                  47.9         51.8            653,431      17.04
                             ---------    ---------   --------------
Gross Profit                   52.1         48.2          1,313,625      36.79
Operating expenses             41.7         37.5          1,130,488      40.69
                             ---------    ---------   --------------
Income from operations         10.4         10.7            183,137      23.12
Interest expense and other      1.7          2.4            (18,653)    (10.69)
                             ---------    ---------   --------------
Income before income taxes      8.7          8.3            201,790      32.67
Income tax provision            3.4          3.2             88,449      37.84
                             ---------    ---------   --------------
Net income                      5.3%         5.1%       $   113,341      29.52
                             =========    =========   ==============

Revenues

The Company produced another quarter of strong sales,  totaling $9.4 million for
the first  quarter of 2001  compared to $7.4  million  for the first  quarter of
2000.  Tandy Leather's  sales of $1.8 million  accounted for the majority of the
increase.  Two new sales units opened since  October 2000  contributed  sales of
$215,000 in the first quarter of 2001.  Our retail sales  continue to climb each
quarter, producing a 22% increase over first quarter 2000 retail sales. Sales to
our craft customers generated $190,000 in sales above the first quarter of 2000,
primarily  due to expanded  programs to our largest  accounts.  Leather is again
becoming a popular  item in crafts  and  fashion.  New  products  combined  with
additional  items being sold to the major  retailers have resulted in our crafts
sales trending upward.

                                       10
<PAGE>

Our sales to the shoe  care/repair  market continue its  intentional  decline as
historically, this market does not meet the Company's gross margins targets. The
sales decrease to this market for the first quarter of 2001 was offset by steady
increases  in  sales  to  other  wholesale  customer  markets,   such  as  small
manufacturers.  Our Authorized  Sales Center ("ASC")  program  generated  strong
sales again in the current  quarter - an 18% increase  over this same category a
year ago.  Export  sales,  institutional  sales  (prisons,  prisoners,  schools,
hospitals),  and other wholesale sales remained  relatively constant compared to
last year at this time.

Costs, Gross Profit, and Expenses

Cost of sales as a percentage of revenue was 47.9% for the first quarter of 2001
as compared to 51.8% for the same quarter in 2000.  This  translates  into gross
profit  margins of 52.1% and 48.2% for the  quarters  ended  March 31,  2001 and
2000,  respectively.  This  improvement is primarily the result of the continued
change in our sales mix and our aggressive  purchasing of product. Over the past
several  years,  our retail to  wholesale  ratio has shifted  from  10%/90% to a
20%/80%  mix.  For the first  quarter of 2001,  our retail sales were 22% of our
total sales.  As retail sales  historically  produce the highest profit margins,
the growth of retail  business  has  positively  impacted  our cost of sales and
gross profit percentages.

Operating  expenses were $1,130,000  higher in the first quarter of 2001 than in
the first quarter of 2000. Tandy Leather contributed  $998,000 of this increase.
As a  percentage  of sales,  excluding  the impact of Tandy  Leather,  operating
expenses  increased less than 1% of sales from last year's totals.  The increase
is due primarily to increases in advertising expenses. Retail sales historically
bring higher  margins;  however,  they also  require an increase in  advertising
efforts.  Direct mail pieces must be distributed  more often and with more color
to get the attention of the retail customer. Higher mailing frequency along with
the increase in postal rates have  accounted for the majority of the increase in
our advertising  costs.  Tandy Leather presently  operates less efficiently than
TLF as  operating  expenses  were 56% of sales  for the  first  quarter  of 2001
compared  to 38% for TLF.  Management  is working  diligently  to improve  Tandy
Leather's operating efficiency and believes a ratio more consistent with that of
TLF can be achieved.

The Company has experienced some recent  increases in its costs of leather,  and
we anticipate that leather prices paid by us may increase further as a result of
the foot and mouth and mad cow  diseases  in Europe.  The Company is taking some
steps to address price increases  (described  below),  but the Company's  profit
margins may be adversely affected, despite these efforts.

Other (Income) Expense

Other  expenses  were down 10.7% from  2000.  This  reduction  is  primarily  in
interest  expense due to the decrease in average  outstanding  debt balances and
lower average interest rates in 2001 as compared to 2000.



                                       11
<PAGE>

Net Income

The Company  reported  net income of $497,000  during the first  quarter of 2001
compared  to net  income  of  $384,000  for the  same  period  a year  ago.  The
significant  improvement  was principally due to the higher gross profit margins
earned on the increased retail sales.

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

The primary sources of liquidity and capital  resources during the first quarter
of 2001 were funds  provided by operating  activities  in the amount of $765,000
and the  Company's  Credit and  Security  Agreement  with Wells  Fargo  Business
Credit,  Inc. ("WFBC").  The largest portion of the operating cash flow was used
to pay  down  debt  balances,  other  liabilities,  and  purchase  property  and
equipment.  Approximately  48% of 2001  capital  spending  was for new  computer
equipment and software with the remainder split between  leasehold  improvements
and equipment.

The Company also uses a revolving  credit facility under the Credit and Security
Agreement to manage cash flow.  Because extra cash was applied to the balance on
this  revolving  credit  facility,  the  Company  recorded  a  zero  balance  of
unrestricted cash at March 31, 2001. At the same date, however,  the Company had
in excess of $1 million in available credit under the revolving credit facility.

The Company's  investment in accounts  receivable  was $2.5 million at March 31,
2001,  up $365,000  from $2.2 million at year-end  2000.  This is a result of an
increase in credit  sales in the later part of the quarter  ended March 31, 2001
as compared to that of quarter  ended  December  31, 2000.  Inventory  decreased
$823,000 to $8.4 million at March 31, 2001 from $9.2  million at year-end  2000.
Inventory  turnover  increased  to an  annualized  rate of 4.26 times during the
first quarter of 2001, an improvement over the turnover of 3.64 times for all of
2000. Management believes a realistic turnover rate is between 3.5 and 4.5 turns
per  year  and is  pleased  with the rate  for the  first  quarter.  Because  of
uncertainties  following the foot and mouth disease and mad cow scare in Europe,
we are attempting to maintain a certain amount of stability in availability  and
price by purchasing  larger  quantities of leather in bulk. This step may reduce
the number of inventory turns in the next several quarters.

Accounts  payable  decreased  7.25%  to $2.0  million  at the  end of the  first
quarter, due primarily to the operating cash flow generated from the decrease in
inventory levels for the quarter.

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

The revolving credit facility with WFBC is based upon the level of the Company's
accounts receivable and inventory.  At March 31, 2001 and December 31, 2000, the
available and unused portion of the credit facility was approximately $1,013,000
and $885,000, respectively.

The Company believes that the current sources of liquidity and capital resources
will be sufficient to fund current  operations  and the opening of any potential
new  sales/distribution  units.  In 2001, the funding for the opening of any new
units is expected to be provided by operating leases,  cash flows from operating
activities, and the revolving credit facility.



                                       12
<PAGE>

Item 3.  Quantitative and Qualitative Disclosures About Market Risk.

The Company's Credit Facility  includes loans with interest rates that vary with
changes in the prime rate. An increase of one percentage point in the prime rate
would not have a material impact on the Company's future earnings.

PART II. OTHER INFORMATION

Item 6. Exhibits and Reports on Form 8-K

(a) Exhibits
    --------

None.

(b) Reports on Form 8-K
    -------------------

On February 14, 2001,  the Company  amended its Current  Report on Form 8-K that
was originally filed on December 15, 2000. This amendment included the Financial
Statements of Businesses  Acquired and Pro Forma  Financial  Information  (Items
7(a) & (b))  pertaining  to the  acquisition  of the  assets  of  Tandy  Leather
Company.



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

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




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