UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549


                                    Form 10-Q

(Mark One)

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

       For the quarterly period ended June 30, 1997

                                       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 August 14, 1997
------------------------------         ----------------------------------------
Common Stock, par value $.0024                     9,853,161
per share                                        



<PAGE>


                            THE LEATHER FACTORY, INC.

                                    FORM 10-Q

                  FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1997


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

                                                                       PAGE NO.
                                                                       --------
PART I. FINANCIAL INFORMATION

  Item 1. Financial Statements

    Consolidated Balance Sheets
      June 30, 1997 and December 31, 1996  ..............................      3

    Consolidated Statements of Income
      Three and six months ended
      June 30, 1997 and 1996  ...........................................      4

    Consolidated Statements of Cash Flow
      Six months ended June 30, 1997 and 1996 ...........................      5

    Consolidated Statement of Stockholders' Equity
      Six months ended June 30, 1997       ..............................      6

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


  Item 2. Management's Discussion and Analysis of Financial
        Condition and Results of Operations  ............................   8-11



PART II. OTHER INFORMATION

  Item 4. Submission of Matters to a Vote of Security Holders   .........     12

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


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


EXHIBIT INDEX............................................................  14-18






                                       2



<PAGE>



                            THE LEATHER FACTORY, INC.
                           CONSOLIDATED BALANCE SHEETS
<TABLE>
<S>                                                       <C>                   <C>    


                                                              June 30,           December 31,
                                                                1997                  1996
                                                          ----------------      ----------------
                                 ASSETS                     (UNAUDITED)
CURRENT ASSETS:
 Cash                                                                  
                                                          $     299,652         $   488,192
 Accounts receivable-trade, net of allowance for
     doubtful accounts of $48,000 and $54,000
      in 1997 and 1996, respectively                          2,352,701           1,947,698       
  Inventory                                                   7,267,265           7,737,320
 Prepaid income taxes                                           423,748             538,458
 Deferred income taxes                                          115,821             126,955
 Other current assets                                           486,713             542,809 
                                                            -----------         -----------   
                      Total current assets                   10,945,900          11,381,432   
                                                            -----------         -----------               
                                                       
                                          
PROPERTY AND EQUIPMENT, at cost                               2,842,318           2,672,253
  Less-accumulated depreciation and amortization             (1,421,079)         (1,273,609)
                                                            -----------         -----------
                           Property and equipment, net       1,421,239            1,398,644
                                                            

GOODWILL and other, net of accumulated amortization of
 $770,000 and $660,000 in 1997 and 1996, respectively        5,404,961            5,484,471
                                                            ----------          -----------
                                                         $  17,772,100          $18,264,547
                                                         =============          ===========                              
                                                          

                                                         
                  LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
 Accounts payable                                        $  1,259,425           $   940,549
 Accrued expenses and other liabilities                       540,817               597,007
 Notes payable and current maturities of
   long-term debt                                           7,682,154             8,549,366
                                                        -------------           -----------                
             Total current liabilities                      9,482,396            10,086,922
                                                        -------------           ----------- 
                                                    
DEFERRED INCOME TAXES                                         132,633               137,310
                                                                 

NOTES PAYABLE AND LONG-TERM DEBT,
 net of current maturities                                    85,684                 17,378
                                                                  

COMMITMENTS AND CONTINGENCIES

STOCKHOLDERS' EQUITY:
 Preferred stock, $0.10 par value; 20,000,000
   shares authorized, none issued or outstanding                   -                      -
                                                                       
 Common stock, $0.0024 par value; 25,000,000 shares 
 authorized, 9,853,161 shares issued in 1997 and 1996         23,648                 23,648                                     
 Paid-in capital                                           4,130,796              4,130,796
 Retained earnings                                         4,515,950              4,464,277
 Less: Notes receivable - secured by common stock           (269,305)              (269,305)         
 Cumulative translation adjustments                           (3,518)                  (295)
 Less:  Unearned shares held by ESOP, 64,631
   shares in 1997 and 1996                                  (326,184)              (326,184)
                      Total stockholders' equity           8,071,387              8,022,937
                                                       -------------            ------------
                                                       $   17,772,100            $18,264,547
                                                       =============            =========== 
          
</TABLE>
                     
                                                         
                                                                           
                                                         

    The accompanying notes are an integral part of these financialstatements.

                                       3

<PAGE>

                            THE LEATHER FACTORY, INC.
                        CONSOLIDATED STATEMENTS OF INCOME
                                   (UNAUDITED)
                THREE AND SIX MONTHS ENDED JUNE 30, 1997 AND 1996

<TABLE> 
<S>                                        <C>             <C>              <C>            <C>   

                                                THREE MONTHS                       SIX MONTHS
              
                                                1997           1996            1997           1996
                                           ------------   ------------      ----------     ----------
NET SALES                                  $  6,526,992   $  7,155,218     $12,986,884    $14,512,023

COST OF SALES                                 3,787,708      4,817,256       7,683,789      9,279,397
                                           ------------   ------------    ------------   ------------

           Gross Profit                       2,739,284      2,337,962       5,303,095      5,232,626

OPERATING EXPENSES                            2,304,413      3,007,498       4,701,755      5,761,090
                                           ------------   ------------    ------------   ------------


INCOME FROM OPERATIONS                          434,871       (669,536)        601,340       (528,464)


OTHER (INCOME) EXPENSE:
    Interest expense                            217,429        378,371         418,767        549,354

    Other, net                                    4,132         (2,047)          3,288         (7,144)
                                           ------------   ------------    ------------   ------------

        Total other (income) expense            221,561        376,324         422,055        542,210
                                           ------------   ------------    ------------   ------------


INCOME (LOSS)  BEFORE INCOME TAXES              213,310     (1,045,860)        179,285     (1,070,674)


PROVISION (BENEFIT)FOR INCOME TAXES             125,452       (234,897)        127,612       (237,717)
                                           ------------   ------------    ------------   ------------


NET INCOME (LOSS)                          $     87,858   $   (810,963)   $     51,673   $   (832,957)
                                           ============   ============    ============   ============

NET INCOME (LOSS)
 PER SHARE OF COMMON STOCK                 $       0.01   $      (0.08)   $       0.01   $      (0.09)
                                           ============   ============    ============   ============


WEIGHTED AVERAGE COMMON AND COMMON
    EQUIVALENT SHARES OUTSTANDING             9,788,530      9,788,530       9,788,530      9,788,530
                                           ============   ============    ============   ============


DIVIDENDS PAID PER SHARE                   $          -   $          -    $          -   $          -
                                           ------------   ------------    ------------   ------------
                                           ============   ============    ============   ============


</TABLE>











    The accompanying notes are an integral part of these financial statements

                                       4




                            THE LEATHER FACTORY, INC
                      CONSOLIDATED STATEMENTS OF CASH FLOW
                                   (UNAUDITED)
                     SIX MONTHS ENDED JUNE 30, 1997 AND 1996


<TABLE>
<S>                                                                            <C>             <C>    
  
                                                                                    1997           1996
                                                                               -----------    -----------
CASH FLOWS FROM OPERATING ACTIVITIES:                                            
  Net income (loss)                                                            $    51,673    $  (832,957)
  Adjustments to reconcile net income to net                     
   cash provided by (used in) operating activities-
     Depreciation & amortization                                                   257,532        380,409
    (Gain) loss on sales of assets                                                    --           (7,554)
     Deferred financing costs                                                         --          123,456
     Deferred income taxes                                                           6,457         (1,829)
     Other                                                                          (1,614)         1,839
     Net changes in assets and liabilities, net of effect of acquisitions:
       Accounts receivable-trade, net                                             (405,003)        70,662
       Inventory                                                                   470,055     (1,077,256)
       Income taxes                                                                114,710       (291,312)
       Other current assets                                                         56,096         15,770
       Accounts payable                                                            318,876        306,737
       Accrued expenses and other liabilities                                      (56,190)       (47,219)
                                                                               -----------    -----------
     Total adjustments                                                             760,919       (526,297)
                                                                               -----------    -----------

      Net cash provided by (used in) operating activities                          812,592     (1,359,254)
                                                                               -----------    -----------

CASH FLOWS FROM INVESTING ACTIVITIES:
  Purchase of property and equipment                                              (170,165)      (148,494)
  Proceeds from sales of assets                                                       --            7,444
  Cash paid for acquisitions, net of cash acquired                                    --         (300,000)
  Other intangible costs                                                           (32,061)          --
                                                                               -----------    -----------

      Net cash used in investing activities                                       (202,226)      (441,050)
                                                                               -----------    -----------

CASH FLOWS FROM FINANCING ACTIVITIES:
  Proceeds from notes payable and long-term debt                                   302,957      2,750,000
  Payments on notes payable and long-term debt                                  (1,101,863)    (1,323,223)
                                                                               -----------    -----------

      Net cash provided by (used in)  financing activities                        (798,906)     1,426,777
                                                                               -----------    -----------

NET INCREASE (DECREASE) IN CASH                                                   (188,540)      (373,527)

CASH, beginning of period                                                          488,192        477,159
                                                                               -----------    -----------

CASH, end of period                                                            $   299,652    $   103,632
                                                                               ===========    ===========

 SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
  Interest paid during the period                                              $   422,555    $   203,806
  Income taxes paid during the period, net of refunds                                6,445         57,685


</TABLE>


    The accompanying notes are an integral part of these financial statements

                                       5

<PAGE>


                            THE LEATHER FACTORY, INC.
                 CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
                                   (UNAUDITED)
                         SIX MONTHS ENDED JUNE 30, 1997

<TABLE>
<S>                                                                     <C>              <C>         <C>          <C>    

                       Common Stock                                          Notes       Cumulative
                                                                          receivable
                   ---------------------
                      Number                  Paid-in        Retained     - secured by   Translation  Unearned
                   of Shares  Par Value       Capital        Earnings    common stock    Adjustments ESOP            
                                                                                                       Shares      Total
                 ----------   ----------  --------------  -------------  --------------  ----------  -----------  ----------
BALANCE, December
31, 1996          9,853,161   $  23,648   $   4,130,796   $  4,464,277   $  (269,305)    $   (295)   $  (326,184) $ 8,022,937

Translation 
adjustment                -          -               -              -              -       (3,223)           -         (3,223)

Net income                -          -               -         51,673              -            -            -         51,673 
                 ----------    ----------  --------------  -------------  -------------   ----------  -----------    ----------
BALANCE,  June
30, 1997          9,853,161    $  23,648   $   4,130,796   $  4,515,950   $  (269,305)     (3,518)   $  (326,184  $ 8,071,387

                 ==========    ==========  ==============  =============  =============   ==========   ===========  ==========


</TABLE>























    The accompanying notes are an integral part of these financial statements

                                       6

<PAGE>


                            THE LEATHER FACTORY, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



1.  Basis of Presentation



         In the opinion of the Company, the accompanying  consolidated financial
statements  contain  all  adjustments   (consisting  of  only  normal  recurring
adjustments)  necessary to present fairly its financial  position as of June 30,
1997 and December 31, 1996, and the results of operations and cash flows for the
three  and six month  periods  ended  June 30,  1997 and 1996.  The  results  of
operations for the three and six month periods are not necessarily indicative of
the results to be expected for the full fiscal year. The consolidated  financial
statements   should  be  read  in  conjunction  with  the  financial   statement
disclosures contained in the Company's 1996 Annual Report to Stockholders.



2.  Inventories


       The components of inventory consist of the following:

                                                          June 30,  December 31,
                                                             1997         1996
                                                       ----------   ----------
Finished goods held for sale                           $5,904,072   $6,516,517
Raw materials and work in process                       1,363,193    1,220,803
                                                       ==========   ==========
                                                       $7,267,265   $7,737,320
                                                       ==========   ==========




3.  Notes Payable and Long-Term Debt

        As previously reported in the Company's 1996 Annual Report on Form 10-K,
and  Quarterly  Report on Form 10-Q for the period  ended  March 31,  1997,  the
Company has certain  financing  arrangements  with  NationsBank  of Texas,  N.A.
("NationsBank") which mature on August 31, 1997.

Management   believes  that  the   restructuring  of  the  Company's   financing
arrangements on a favorable,  long term basis will be  accomplished.  Currently,
new senior and mezzanine lenders are performing due diligence procedures. In the
event the  alternative  financing  cannot be arranged,  the Company  would enter
negotiations  with  NationsBank to restructure the existing loans. If neither of
these  strategies  were  successful,  the Company  could  experience  a material
adverse impact.

                                       7




<PAGE>


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


General
-------

         The Leather Factory,  Inc. ("the Company") is a leading one stop source
for leather,  traditional  leathercraft  materials  involving  such  products as
do-it-yourself  kits,  stamping sets, and  leatherworking  tools,  craft-related
items  including  various  types  of  leather  lace,  beads,  and  wearable  art
accessories,  hardware,  metal garment  accessories  such as belt buckles,  belt
buckle  designs and  conchos,  shoe  repairing  supplies  and leather  finishes.
Moreover,  the Company is a manufacturer  and  distributor  of hat trims,  cigar
cases and cigar  accessories.  These  products  are  distributed  primarily on a
wholesale level.


Results of Operations


         Analysis of Second Quarter 1997 Compared to Second Quarter 1996

                           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:

                                               Quarterly Period Ended
                                                        June 30,
                                                    1997      1996
                                                   ------    ------

Net sales                                           100.00%  100.0%  
Cost of sales                                        58.0     67.3
                                                     -----    -----
Gross profit                                         42.0     32.7
Operating expenses                                   35.3     42.0
                                                     -----    -----
Income (loss) from operations                         6.7     -9.3
Interest expense, net                                 3.4      5.3
                                                     -----    -----
Income (loss) before income taxes                     3.3    -14.6
Provision for income taxes                            1.9     -3.3
                                                     -----    -----
Net income (loss)                                     1.4%   -11.3%
                                                     =====    =====

Revenues
-------

         The  Company's  net sales  decreased by 8.8% to  $6,526,992  during the
second  fiscal  quarter  ended June 30, 1997 from  $7,155,218  generated  in the
second  quarter of 1996.  The 8.8%  decrease  in  revenues  resulted  from minor
decreases in six sales  categories  that were  partially  offset by increases in
five  categories.  Sales  to the  craft  and  western  markets  appear  to  have
stabilized.
         The Company is  continuing  efforts to develop new products and sell to
new markets and expects these efforts to gradually  replace some of the declines
that have been experienced in current markets.


Costs, Gross Profit, and Expenses
---------------------------------

         The Company's cost of sales decreased by 21.4% to $3,787,708 during the
second fiscal quarter ended June 30, 1997 from  $4,817,256 in the second quarter
of 1996.  Approximately  70.9% of this 21.4% reduction  resulted from efforts by
Company management to increase manufacturing productivity, obtain better product
sourcing  and sell into  higher  margin  markets.  The  balance of the  decrease
resulted from non-recurring items that occurred in the second quarter of 1996.

         Operating expenses decreased $703,085 or 23.4% to $2,304,413 during the
second fiscal quarter of 1997 from $3,007,498  during the quarter ended June 30,
1996.  Approximately  56.1% of this 23.4%  decrease  resulted  from a determined


                                       8
<PAGE>




effort by Company  management to reduce expenses and improve  efficiency so that
cost  levels are more in line with  current  sales  levels.  The  balance of the
decrease resulted from  non-recurring  items that occurred in the second quarter
of 1996.


Other (Income) Expense
---------------------

         Other expenses  decreased  $154,763 or 41.1% to $221,561 for the second
fiscal  quarter  of 1997 from  $376,324  during the same  quarter in 1996.  This
decrease  resulted  primarily  from the write-off of the commitment and facility
fees attributable to the acquisition financing commitments which expired in July
1996.  Actual interest expense increased $34,282 due to higher interest rates on
existing debt and a reduction in discounts taken for early invoice payment.


Net Income

         Net income  increased to $87,858  during the second  fiscal  quarter of
1997 from a net loss of $810,963  during the quarter  ended June 30,  1996.  The
increased net income resulted from the factors noted above  regarding  revenues,
costs and expenses.


                   Analysis of Six Months Ended June 30, 1997
                        to Six Months Ended June 30, 1996

                           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:

                                                      Six Months Ended
                                                         June 30,
                                                       1997      1996
                                                      ------    ------

Net sales                                             100.0%    100.0%
Cost of sales                                          59.2      63.9
                                                      ------    ------
Gross profit                                           40.8      36.1
Operating expenses                                     36.2      39.7
                                                      ------    ------
Income (loss) from operations                           4.6
-3.6
Interest expense, net                                   3.2       3.7
                                                      ------    ------
Income (loss) before income taxes                       1.4      -7.3
Provision for income taxes                              1.0      -1.6
                                                      ------    ------
Net income (loss)                                       0.4%     -5.7%
                                                      ======    ======


Revenues
--------

         The Company's net sales  decreased by 10.5% to  $12,986,884  during the
six months June 30, 1997 from $14,512,023  generated in the same period of 1996.
The decrease in revenues was primarily due to reduced sales of western  hatbands
and to the retail craft industry.  Sales to the craft and western markets appear
to have stabilized.
         The Company is  continuing  efforts to develop new products and sell to
new markets and expects these efforts to gradually  replace some of the declines
that have been experienced in current markets.

                                       9

<PAGE>


Costs, Gross Profit, and Expenses
---------------------------------

         The Company's  cost of sales  decreased by 17.2% to $7,683,789  for the
six months of 1997 as  compared to  $9,279,397  for the same six months in 1996.
Approximately 81.2% of this decrease resulted from efforts by Company management
to increase manufacturing productivity,  obtain better product sourcing and sell
into  higher  margin  markets.   The  balance  of  the  decrease  resulted  from
non-recurring items that occurred in the second quarter of 1996.

         Operating expenses  decreased  $1,059,335 or 18.4% to $4,701,755 during
the first six months of 1997 from $5,761,090 during the same six months of 1996.
Approximately  70.9% of this 18.4% decrease resulted from a determined effort by
Company management to reduce expenses and improve efficiency so that cost levels
are more in line with current sales levels. The balance of the decrease resulted
from non-recurring items that occurred in the second quarter of 1996.


Other (Income) Expense
----------------------

         Other  expenses  decreased  $120,155 or 22.2% to $422,055 for the first
six months  ended June 30,  1997 from  $542,210  during the same period in 1996.
This  decrease  resulted  primarily  from the  write-off of the  commitment  and
facility  fees  attributable  to the  acquisition  financing  commitments  which
expired in July 1996.  Actual interest expense  increased  $75,069 due to higher
interest  rates on existing  debt and a reduction in  discounts  taken for early
invoice payment.


Net Income
----------

         Net income  increased  to  $51,673  during the first six months of 1997
from a net loss of  $832,957  during the six months  ended  June 30,  1996.  The
increased net income resulted from the factors noted above  regarding  revenues,
costs and expenses.


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

         The primary source of funds for the Company during the first quarter of
1997 resulted  from funds  generated by a $470,055  reduction in inventory.  The
current  inventory turn rate of 2.05 indicates that  additional  funds should be
available as management  continues its efforts to adjust  inventory levels to be
more in line with the 2.25,  2.32 and 2.84 turn rates during 1996, 1995 and 1994
respectively.

        The  availability  of funds under the  Company's  credit  facility  with
NationsBank of Texas, N.A. ("NationsBank") continues to be the primary source of
liquidity and capital resources.

Background of Agreement with Bank.  
---------------------------------------- 
The NationsBank  financingarrangements,  which include a working capital line of
credit and a term facility,  are governed by the Second  Restated Loan Agreement
dated July 24, 1995 as amended (the "Loan Agreement"). The Company presently has
outstanding  principal  balances on its working  capital  line of credit and its
term facility of $5,125,000  and  $2,500,000,  respectively.  From June 30, 1996
through  December  31,  1996,  the  Company  had been in default  under  certain
financial covenants  contained in the Loan Agreement.  These financial covenants
related to the following ratio tests:

        (1) Current Assets to Current Liabilities;
        (2) Total Liabilities to Tangible Net Worth;
        (3) Senior Funded Debt to Earnings Before Interest, Taxes, Depreciation 
            and Amortization ("EBITDA"); and
        (4) Cash Flow Ratio.

    On August 14, 1996,  effective  June 30, 1996,  NationsBank  and the Company
entered into an amendment to the Loan  Agreement  pursuant to which  NationsBank
agreed to forbear the exercising of their legal rights due to the aforementioned
events of  default  under  the Loan  Agreement  until  September  30,  1996 (the
"Forbearance  Period").  NationsBank  also waived a default  under the Borrowing
Base and the element of the Borrowing  Base which gave rise to the default,  the
net income test, was eliminated as part of said Borrowing Base.


                                       10

<PAGE>


     On September  30, 1996,  NationsBank  and the Company  entered into another
amendment  to the Loan  Agreement  whereby  NationsBank  agreed  to  extend  the
Forbearance Period until December 31, 1996 (the "Extended  Forbearance Period").
NationsBank  and the Company  also agreed to decrease  the amount of the working
capital  line of credit  from $10  million  to $7.5  million.  Additionally  the
Company  agreed to grant  NationsBank  a lien on its facility  located in Tampa,
Florida.

    The Company  remained in default  under the  financial  covenants  described
above.

    December 31, 1996  Agreement.  As of December 31, 1996,  NationsBank and the
Company  entered into the Fifth  Amendment to the Second Restated Loan Agreement
(the "Fifth Amendment") whereby NationsBank and the Company agreed to modify the
Loan  Agreement.  In the Fifth  Amendment  the  Company  agreed to employ  Price
Waterhouse to assist in obtaining  alternative  financing of the  obligations to
NationsBank. The Company and Nations Bank also agreed:

    1. To decrease  the amount of the working  capital  line of credit from $7.5
    million to $6.5  million;  2. To modify  the  maturity  date of the  working
    capital  line of credit note to April 30,  1997;  3. To modify the  maturity
    date of the  Roberts  Cushman  &  Company  note to April  30,  1997.  4. The
    financial  covenants under which the Company was in default  previously were
    eliminated or modified.

    Current  Agreement.  Effective  April 30, 1997 the  Company and  NationsBank
entered into the Sixth Amendment to the Second  Restated Loan Agreement  whereby
the maturity  dates of the working  capital line of credit and the term loan are
extended until August 31, 1997. The Company and NationsBank also agreed:

    1.  To modify the interest rate from prime plus 1.5% to prime plus 2.0%;
    2.  To apply all proceeds from expected tax refunds of approximately
        $500,000 to reduce the term note:
    3.  That Wray Thompson, Ron Morgan and Robin Morgan would pledge their stock
        in the Company as collateral on the notes and
    4.  The Company would pay a $15,417 fee for the extension.

    Management  remains  confident  that  the  restructuring  of  our  financing
arrangements on a favorable,  long term basis will be  accomplished.  Currently,
potential  new  senior  and  mezzanine  lenders  are  performing  due  diligence
procedures.  However, in the event alternative financing cannot be arranged, the
Company would enter  negotiations  with  NationsBank to restructure the existing
loans.  If  neither of these  strategies  were  successful,  the  Company  could
experience a material adverse impact.

   While subject to the issues surrounding the Company's financing arrangements,
the Company's  management believes that current sources of liquidity and capital
resources will be sufficient to fund current operations and internal growth.


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

         The disclosures under "-Results of Operations" and "-Capital  Resources
and Liquidity" and in the Notes to Consolidated Financial Statements as provided
elsewhere herein contain forward-looking statements. There are certain important
factors which could cause results to differ materially than those anticipated by
some of the  forward-looking  statements.  Some of the  important  factors which
could   cause   actual   results  to  differ   materially   from  those  in  the
forward-looking statements include, among other things, changes from anticipated
levels of sales,  whether  due to  future  national  or  regional  economic  and
competitive  conditions,  including,  but not limited to,  retail  craft  buying
patterns,  and possible negative trends in the craft and western retail markets,
customer  acceptance  of  existing  and  new  products,  or  otherwise,  pricing
pressures  due to  competitive  industry  conditions,  increases  in prices  for
leather,  which is a world-wide  commodity,  which for some  reason,  may not be
passed on to the  customers  of the  Company's  products,  change in tax  rates,
change in interest  rates,  problems with the  importation of the products which
the Company buys in 14 countries  around the world,  including,  but not limited
to, transportation problems or changes in the political climate of the countries
involved,  including the  maintenance  by said  countries of Most Favored Nation
status with the United States of America, and other uncertainties,  all of which
are  difficult  to  predict  and many of which are  beyond  the  control  of the
Company.
                                       11
<PAGE>


                           PART II. OTHER INFORMATION


Item 4. Submission of Matters to a Vote of Security Holders

        On May 22, 1997 the Annual  Meeting of the  Stockholders  of the Company
was held in the Scott and Van Zandt  rooms at the  Radisson  Hotel,  fort worth,
Texas to consider and act on the following matters:

        (1) To elect the following  individuals to serve as directors  until the
       Company's 1998 Annual Meeting of Stockholders  or until their  successors
       are duly elected and qualified:

                         Wray Thompson         Fred N. Howell
                         Ronald C. Morgan      Luther A. Henderson
                         Robin L. Morgan       H. W. "Hub" Markwardt
                         William M. Warren

        (2) To  ratify  the  appointment  of  Ernst & Young  LLP as  independent
       auditors for the Company for the fiscal year ended December 31, 1997.

        The  stockholders of the Company  approved matter (2) above by a vote of
(i) 5,613,858,  or 57.0% of the total outstanding,  in favor, (ii) 7,134 or .07%
of the total outstanding, against, and (iii) 379 abstained from voting.

        As to item (1) above, the following table depicts the votes cast for and
against, as well as those which abstained from voting, as to the election of the
aforementioned individuals as a director of the Company as noted above:


                                    For         Against    Abstaining
                                    ---         ------     ---------
     Wray Thompson                5,590,407      7,432      23,531
     Ronald C. Morgan             5,590,407      7,432      23,531
     Robin L. Morgan              5,593,232      4,607      23,531
     William M. Warren            5,593,232      4,607      23,531
     Fred N. Howell               5,593,232      4,607      23,531
     Luther A. Henderson          5,593,232      4,607      23,531
     H. W. "Hub" Markwardt        5,593,232      4,607      23,531


Item 6. Exhibits and Reports on Form 8-K

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

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

(b) Reports on Form 8-K

        None

                                       12


<PAGE>


                                   SIGNATURES


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



                                                   THE LEATHER FACTORY, INC.
                                                   (Registrant)


Date: August 14, 1997                               By /s/ Wray Thompson
                                                    --------------------
                                                    Wray Thompson
                                                    Chairman of the Board,
                                                    President and
                                                    Chief Executive Officer



Date:  August 14, 1997                              By   /s/ Fred N. Howell
                                                    -----------------------
                                                     Fred N. Howell
                                                     Chief Financial Officer,
                                                     Treasurer and Director
                                                     (Chief Financial and
                                                      Accounting Officer)





                                       13


<PAGE>


                   THE LEATHER FACTORY, INC. AND SUBSIDIARIES
                                  EXHIBIT INDEX

    Exhibit
    Number                         Description
    -----                          -----------

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

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

     3.3  Amendment to Certificate of Incorporation of The Leather Factory, Inc.
          -- Certificate of  Designation,  Preferences  and Rights of the Senior
          Cumulative  Convertible  Preferred Stock Dated July 24, 1995, filed as
          Exhibit  3.3 to the  Quarterly  Report on Form  10-QSB of The  Leather
          Factory,  Inc. (Commission File No. 1-12368) filed with the Securities
          and  Exchange  Commission  on August 10,  1995,  and  incorporated  by
          reference herein.

     4.1  Second Restated Loan Agreement dated July 24, 1995, by and between The
          Leather  Factory,  Inc., a Delaware  corporation,  and  NationsBank of
          Texas,  N.A.,  filed as Exhibit  4.1 to the  Quarterly  Report on Form
          10-QSB of The Leather  Factory,  Inc.  (Commission  File No.  1-12368)
          filed with the Securities and Exchange  Commission on August 10, 1995,
          and incorporated by reference herein.

     4.2  Promissory  Note (Working  Capital Line of Credit) dated September 30,
          1996, in the principal  amount of $7,500,000,  payable to the order of
          NationsBank of Texas, N.A., which matures March 31, 1997.

     4.3  Promissory  Note  (Acquisition  Line)  dated  July  24,  1995,  in the
          principal  amount of $10,000,000,  payable to the order of NationsBank
          of Texas,  N.A., which matures August 1, 2000, filed as Exhibit 4.3 to
          the  Quarterly  Report on Form  10-QSB of The  Leather  Factory,  Inc.
          (Commission  File No.  1-12368) filed with the Securities and Exchange
          Commission on August 10, 1995, and incorporated by reference herein.

     4.4  Promissory  Note dated  December 28, 1994 in the  principal  amount of
          $5,000,000,  payable to the order of NationsBank of Texas, N.A., which
          matures December 28, 1999, filed as Exhibit No. 4.5 to the 1994 Annual
          Report on Form 10-KSB of The Leather  Factory,  Inc.  (Commission File
          No.  1-12368)  filed with the  Securities  and Exchange  Commission on
          March 27, 1995, and incorporated herein by reference.

     4.5  Stock  Purchase  Agreement  dated as of July 28, 1995,  by and between
          Center Street Capital Partners,  L.P., a Delaware Limited Partnership,
          Stratford Capital Partners, L.P., a Texas Limited Partnership, and The
          Leather Factory, Inc., a Delaware Corporation, filed as Exhibit 4.5 to
          the  Quarterly  Report on Form  10-QSB of The  Leather  Factory,  Inc.
          (Commission  File No.  1-12368) filed with the Securities and Exchange
          Commission on August 10, 1995, and incorporated by reference herein.



                                       14



<PAGE>


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

     4.6  Commitment  Agreement  dated July 28,  1995,  by and among The Leather
          Factory, Inc., a Delaware Corporation, Center Street Capital Partners,
          L.P., a Delaware Limited Partnership,  and Stratford Capital Partners,
          L.P.,  a  Texas  Limited  Partnership,  filed  as  Exhibit  4.6 to the
          Quarterly  Report  on  Form  10-QSB  of  The  Leather  Factory,   Inc.
          (Commission  File No.  1-12368) filed with the Securities and Exchange
          Commission on August 10, 1995, and incorporated by reference herein.

     4.7  Registration  Rights  Agreement  dated July 28,  1995,  by and between
          Center Street Capital Partners,  L.P., a Delaware Limited Partnership,
          Stratford Capital Partners, L.P., a Texas Limited Partnership, and The
          Leather Factory, Inc., a Delaware Corporation, filed as Exhibit 4.7 to
          the  Quarterly  Report on Form  10-QSB of The  Leather  Factory,  Inc.
          (Commission  File No.  1-12368) filed with the Securities and Exchange
          Commission on August 10, 1995, and incorporated by reference herein.

     4.8  Shareholders  Agreement  dated  July 28,  1995,  by and  between  Wray
          Thompson,  an individual and resident of the State of Texas,  Sally A.
          Thompson,  an individual and resident of the State of Texas, Ronald C.
          Morgan,  an  individual  and resident of the State of Texas,  Robin L.
          Morgan,  an  individual  and  resident  of the State of Texas,  Center
          Street  Capital  Partners,   L.P.,  a  Delaware  Limited  Partnership,
          Stratford Capital Partners, L.P., a Texas Limited Partnership, and The
          Leather Factory, Inc., a Delaware Corporation, filed as Exhibit 4.8 to
          the  Quarterly  Report on Form  10-QSB of The  Leather  Factory,  Inc.
          (Commission  File No.  1-12368) filed with the Securities and Exchange
          Commission on August 10, 1995, and incorporated by reference herein.

     4.9  First  Amendment to Second  Restated  Loan  Agreement  effective as of
          December  31,  1995,  by and  between  The Leather  Factory,  Inc.,  a
          Delaware Corporation, and NationsBank of Texas, N.A., filed as Exhibit
          No.  4.9 to the 1995  Annual  Report  on Form  10-KSB  of The  Leather
          Factory, Inc. (Commission File No. 1-12368), filed with the Securities
          and Exchange  Commission on March 28, 1996, and incorporated herein by
          reference.

     4.10 Second  Amendment to Second  Restated Loan  Agreement  effective as of
          March 31, 1996, by and between The Leather  Factory,  Inc., a Delaware
          Corporation, and NationsBank of Texas, N.A., filed as Exhibit No. 4.10
          to the  Quarterly  Report on Form 10-Q of The  Leather  Factory,  Inc.
          (Commission  File No.  1-12368) filed with the Securities and Exchange
          Commission on May 20, 1996, and incorporated by reference herein.

     4.11 Forbearance  Agreement and Third Amendment to the Second Restated Loan
          Agreement  effective as of June 30,  1996,  by and between The Leather
          Factory, Inc., a Delaware Corporation, and NationsBank of Texas, N.A.,
          filed as Exhibit No. 4.11 to the Quarterly  Report on Form 10-Q of The
          Leather  Factory,  Inc.  (Commission  File No. 1-12368) filed with the
          Securities   and  Exchange   Commission   on  August  19,  1996,   and
          incorporated by reference herein.

     4.12 Forbearance  Agreement  and Fourth  Amendment to Second  Restated Loan
          Agreement  effective  as of  September  30,  1996,  by and between The
          Leather  Factory,  Inc., a Delaware  Corporation,  and  NationsBank of
          Texas, N.A.

                                       15


<PAGE>


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

     4.13 Fifth  Amendment to Second  Restated  Loan  Agreement  effective as of
          December  31,  1996,  by and  between  The Leather  Factory,  Inc.,  a
          Delaware Corporation, and NationsBank of Texas, N.A.

     4.14 Sixth  Amendment to Second  Restated  Loan  Agreement  effective as of
          April 30, 1997, by and between The Leather  Factory,  Inc., a Delaware
          Corporation, and NationsBank of Texas, N.A.

     10.1 Stock Exchange  Agreement dated July 9, 1993, by and among The Leather
          Factory,  Inc.,  a Texas  corporation,  National  Transfer  & Register
          Corp.,  a  Colorado  corporation,  J. Wray  Thompson,  Sr.,  Ronald C.
          Morgan, Robin L. Morgan and The Leather Factory, Inc. Employees' Stock
          Ownership Plan & Trust,  filed as Exhibit No. 10.1 to the Registration
          Statement on Form 10-SB of The Leather Factory,  Inc. (Commission File
          No.  0-22128),  including  any  amendments  thereto,  filed  with  the
          Securities and Exchange  Commission on July 22, 1993, and incorporated
          herein by reference.

     10.2 Stock Exchange  Agreement dated July 10, 1993, by and between National
          Transfer & Register  Corp.,  a Colorado  corporation  and Vicki  Byrd,
          filed as Exhibit No. 10.2 to the Registration  Statement on Form 10-SB
          of The Leather Factory, Inc. (Commission File No. 0-22128),  including
          any  amendments  thereto,  filed  with  the  Securities  and  Exchange
          Commission on July 22, 1993, and incorporated herein by reference.

     10.3 Stock Purchase Agreement dated as of June 30, 1993, by and between The
          Leather Factory, Inc., a Texas corporation and Steve Lindley, filed as
          Exhibit No. 10.3 to the  Registration  Statement  on Form 10-SB of The
          Leather Factory,  Inc.  (Commission  File No. 0-22128),  including any
          amendments thereto,  filed with the Securities and Exchange Commission
          on July 22, 1993, and incorporated herein by reference.

     10.4 Amendment to Stock Purchase  Agreement executed September 20, 1993, to
          be effective June 30, 1993, by and between The Leather Factory,  Inc.,
          a Texas  corporation  and Steve Lindley,  filed as Exhibit No. 19.1 to
          the 1993 Annual  Report on Form 10-KSB of The  Leather  Factory,  Inc.
          (Commission File No. 1-12368),  filed with the Securities and Exchange
          Commission on March 30, 1994,  and  incorporated  herein by reference.


     10.5 Stock Purchase Agreement dated as of June 30, 1993, by and between The
          Leather  Factory,  Inc.,  a Texas  corporation  and Kevin F. White and
          Durham Hefta, filed as Exhibit No. 10.4 to the Registration  Statement
          on Form  10-SB  of The  Leather  Factory,  Inc.  (Commission  File No.
          0-22128),  including any amendments thereto, filed with the Securities
          and Exchange  Commission on July 22, 1993, and incorporated  herein by
          reference.

     10.6 Stock Purchase Agreement dated as of June 30, 1993, by and between The
          Leather  Factory,  Inc., a Texas  corporation and James Durr, filed as
          Exhibit No. 10.5 to the  Registration  Statement  on Form 10-SB of The
          Leather Factory,  Inc.  (Commission  File No. 0-22128),  including any
          amendments thereto,  filed with the Securities and Exchange Commission
          on July 22, 1993, and incorporated herein by reference.


                                       16


<PAGE>


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

     10.7 The Leather Factory,  Inc. 1993  Non-Qualified  Incentive Stock Option
          Plan,  filed as Exhibit  No.  10.6 to the 1993  Annual  Report on Form
          10-KSB of The Leather  Factory,  Inc.  (Commission  File No.  1-12368)
          filed with the Securities  and Exchange  Commission on March 30, 1994,
          and incorporated herein by reference.

     10.8 Acquisition Agreement dated as of January 10, 1994, by and between The
          Leather  Factory,  Inc., a Colorado  corporation and Hi-Line Leather &
          Manufacturing  Company, filed as Exhibit No. 2.1 to the Current Report
          on Form 8-K of The Leather Factory, Inc. (Commission File No. 1-12368)
          filed with the Securities and Exchange Commission on January 10, 1994,
          and incorporated herein by reference.

     10.9 Asset Purchase  Agreement dated as of April 15, 1994, by and among The
          Leather Factory,  Inc., a Colorado corporation,  The Leather Warehouse
          Company, a Michigan corporation, Daniel W. Holbert, Linda S. McCleary,
          Richard J. Hill,  and the Richard J. Hill Trust,  filed as Exhibit No.
          2.1 to the  Current  Report on Form 8-K of The Leather  Factory,  Inc.
          (Commission  File No.  1-12368) filed with the Securities and Exchange
          Commission on April 15, 1994, and incorporated herein by reference.

    10.10 Acquisition  Agreement  by and among The  Leather  Factory,  Inc.  and
          David  Lieberman,  Individually  and as the  Shareholder  of  Roberts,
          Cushman & Company,  Inc., related to the acquisition of the issued and
          outstanding capital stock of Roberts,  Cushman & Company,  Inc., filed
          as Exhibit  No. 2.1 to the  Current  Report on Form 8-K of The Leather
          Factory,  Inc. (Commission File No. 1-12368) filed with the Securities
          and Exchange Commission on January 9, 1995, and incorporated herein by
          reference.

    10.11 The Leather  Factory,  Inc.  Employees' Stock Ownership Plan and Trust
          (Restated),  dated February 22, 1994, effective as of October 1, 1993,
          filed as Exhibit No. 4.1 to the Registration  Statement on Form S-8 of
          The Leather Factory,  Inc.  (Commission File No. 33-81214),  including
          any  amendments  thereto,  filed  with  the  Securities  and  Exchange
          Commission on July 5, 1994, and incorporated herein by reference.

    10.12 Amendment  No.  1  to  The  Leather  Factory,  Inc.  Employees'  Stock
          Ownership  Plan and Trust  (Restated  as of  October 1,  1993),  dated
          October 5, 1994 to be effective  December  28, 1990,  filed as Exhibit
          No.  10.12 to the 1994  Annual  Report on Form  10-KSB of The  Leather
          Factory,  Inc. (Commission File No. 1-12368) filed with the Securities
          and Exchange  Commission on March 27, 1995, and incorporated herein by
          reference.

    10.13 Participation  Agreement in The Leather Factory, Inc. Employees' Stock
          Ownership  Plan and Trust  (Restated  as of  October 1,  1993),  dated
          February  28, 1995 to be effective  January 2, 1995,  filed as Exhibit
          No.  10.13 to the 1994  Annual  Report on Form  10-KSB of The  Leather
          Factory,  Inc. (Commission File No. 1-12368) filed with the Securities
          and Exchange  Commission on March 27, 1995, and incorporated herein by
          reference.


                                       17



<PAGE>


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

    10.14 Indemnification  Agreement  dated  October 17, 1994,  by and among The
          Leather Factory,  Inc., a Delaware  corporation,  Securities  Transfer
          Corporation,  a Texas corporation,  and Halter Capital Corporation,  a
          Texas  corporation,  filed as  Exhibit  No.  10.14 to the 1994  Annual
          Report on Form 10-KSB of The Leather  Factory,  Inc.  (Commission File
          No.  1-12368)  filed with the  Securities  and Exchange  Commission on
          March 27, 1995, and incorporated herein by reference.

    10.15 Guaranty, as amended,  dated July 24, 1995, by and between NationsBank
          of Texas,  N. A., The Leather  Factory,  Inc.,  Wray Thompson,  Ronald
          Morgan, and Robin Morgan,  filed as Exhibit No. 10.15 to the Quarterly
          Report on Form 10-QSB of The Leather  Factory,  Inc.  (Commission File
          No.  1-12368)  filed with the  Securities  and Exchange  Commission on
          November 9, 1995, and incorporated herein by reference.

    10.16 The Leather  Factory,  Inc. 1995 Director  Non-Qualified  Stock Option
          Plan and Stock Option  Agreement,  effective as of September 26, 1995,
          subject to approval by the Company's  stockholders  at the 1996 Annual
          Meeting of  Stockholders,  filed as Exhibit No. 10.16 to the Quarterly
          Report on Form 10-QSB of The Leather  Factory,  Inc.  (Commission File
          No.  1-12368)  filed with the  Securities  and Exchange  Commission on
          November 9, 1995, and incorporated herein by reference.

    10.17 The Leather  Factory,  Inc.  1995 Stock  Option Plan and Stock  Option
          Agreements, effective as of September 26, 1995, subject to approval by
          the Company's stockholders at the 1996 Annual Meeting of Stockholders,
          filed as Exhibit No. 10.17 to the  Quarterly  Report on Form 10-QSB of
          The Leather Factory, Inc. (Commission File No. 1-12368) filed with the
          Securities   and  Exchange   Commission  on  November  9,  1995,   and
          incorporated herein by reference.

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

       * 27.1     Financial Data Schedule

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

                                       18
<PAGE>