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 September 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.

<TABLE>
<S>                                                                             <C>   

              Class                         Shares outstanding as of November 14, 1997
----------------------------------------    ------------------------------------------
Common Stock, par value $.0024 per share                    9,853,161
</TABLE>





<PAGE>


                            THE LEATHER FACTORY, INC.

                                    FORM 10-Q

                FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1997


                                TABLE OF CONTENTS


                                                                        PAGE NO.

PART I. FINANCIAL INFORMATION

  Item 1. Financial Statements

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

    Consolidated Statements of Income
      Three and nine months ended
      September 30, 1997 and 1996...........................................   4

    Consolidated Statements of Cash Flow
      Nine months ended September 30, 1997 and 1996.........................   5

    Consolidated Statement of Stockholders' Equity
      Nine months ended September 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 6. Exhibits and Reports on Form 8-K .................................  12


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


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







<PAGE>

<TABLE>
<CAPTION>

                                           THE LEATHER FACTORY, INC.
                                          CONSOLIDATED BALANCE SHEETS

<S>                                                                             <C>          <C>     

                                                                          September 30,       December 31,
                                                                              1997                 1996
                                                                         --------------       --------------
                                  ASSETS                                  (UNAUDITED)
CURRENT ASSETS:
 Cash                                                                    $    486,114         $    488,192
 Accounts receivable-trade, net of allowance for
     doubtful accounts of $83,000 and $54,000
      in 1997 and 1996, respectively                                        2,292,154            1,947,698
 Inventory                                                                  7,468,535            7,737,320
 Prepaid income taxes                                                         283,663              538,458
 Deferred income taxes                                                        131,196              126,955
 Other current assets                                                         485,174              542,809
                                                                         ------------         ------------
                      Total current assets                                 11,146,836           11,381,432
                                                                         ------------         ------------

PROPERTY AND EQUIPMENT, at cost                                             2,846,288            2,672,253
  Less-accumulated depreciation and amortization                           (1,483,016)          (1,273,609)
                                                                         ------------         ------------
                      Property and equipment, net                           1,363,272            1,398,644

GOODWILL and other, net of accumulated amortization of
 $825,000 and $660,000 in 1997 and 1996, respectively                       5,349,815            5,484,471
                                                                         ------------         ------------
                                                                         $ 17,859,923         $ 18,264,547
                                                                         ============         ============

                   LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
 Accounts payable                                                        $  1,242,987         $    940,549
 Accrued expenses and other liabilities                                       577,865              597,007
 Notes payable and current maturities of
     long-term debt                                                         7,671,740            8,549,366
                                                                         ------------         ------------
                      Total current liabilities                             9,492,592           10,086,922
                                                                         ------------         ------------

DEFERRED INCOME TAXES                                                         122,775              137,310

NOTES PAYABLE AND LONG-TERM DEBT,
 net of current maturities                                                     79,821               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                                                          4,608,389            4,464,277
 Less: Notes receivable - secured by common stock                            (269,305)            (269,305)
 Cumulative translation adjustments                                            (2,609)                (295)
 Less:  Unearned shares held by ESOP, 64,631
     shares in 1997 and 1996                                                 (326,184)            (326,184)
                                                                         ------------         ------------
                      Total stockholders' equity
                                                                            8,164,735            8,022,937
                                                                         ------------         ------------
                                                                         $ 17,859,923         $ 18,264,547
                                                                         ============         ============
</TABLE>


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


<PAGE>

<TABLE>
<CAPTION>

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

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

                                                                   THREE MONTHS                      NINE MONTHS

                                                               1997          1996                1997           1996
                                                            ------------  ------------       -------------- -------------

NET SALES                                                   $  6,353,582  $  7,015,834        $ 19,340,466  $ 21,527,857

COST OF SALES                                                  3,659,591     4,238,206          11,343,380    13,517,603
                                                            ------------  ------------       -------------- -------------

           Gross Profit                                       2,693,991      2,777,628           7,997,086     8,010,254

OPERATING EXPENSES                                            2,293,706      2,522,552           6,995,461     8,283,642
                                                            ------------  ------------       -------------- -------------

INCOME FROM OPERATIONS                                          400,285        255,076           1,001,625      (273,388)

OTHER (INCOME) EXPENSE:
    Interest expense                                            214,871        238,163             633,638       787,517
    Other, net                                                  (17,649)         1,363            (14,361)       (5,781)
                                                            ------------  ------------       -------------- -------------
           Total other (income) expense                         197,222        239,526             619,277       781,736
                                                            ------------  ------------       -------------- -------------

INCOME (LOSS)  BEFORE INCOME TAXES                              203,063         15,550             382,348    (1,055,124)

PROVISION (BENEFIT)  FOR INCOME TAXES                           110,624          1,159             238,236     (236,558)
                                                            ------------  ------------       -------------- -------------

NET INCOME (LOSS)                                            $   92,439   $     14,391       $     144,112  $  (818,566)
                                                                                     
                                                            ============  ============       ==============  ============


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

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


<PAGE>


<TABLE>
<CAPTION>

                            THE LEATHER FACTORY, INC.
                      CONSOLIDATED STATEMENTS OF CASH FLOW
                                   (UNAUDITED)
                  NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996

<S>                                                                             <C>        <C>   


                                                                           1997                 1996
                                                                       -------------       --------------
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net income (loss)                                                     $  144,112          $  (818,566)
                                                                           
  Adjustments to reconcile net income to net
   cash provided by (used in) operating activities-
     Depreciation & amortization                                           390,659              498,371
    (Gain) loss on sales of assets                                         (16,071)              (7,541)
     Deferred financing costs                                                    -              117,937
     Deferred income taxes                                                 (18,776)               21,270
     Other                                                                    (678)                2,457
     Net changes in assets and liabilities, net of effect of acquisitions:
       Accounts receivable-trade, net                                     (344,456)               68,159
       Inventory                                                           268,785              (812,562)
       Income taxes                                                        254,795              (313,252)
       Other current assets                                                 57,635               137,946
       Accounts payable                                                    302,438              (335,822)
       Accrued expenses and other liabilities                              (19,142)              (66,333)
                                                                       -------------       --------------
     Total adjust                                                          875,189              (689,370)
                                                                       -------------       --------------

      Net cash provided by (used in) operating activities                1,019,301            (1,507,936)
                                                                       -------------       --------------

CASH FLOWS FROM INVESTING ACTIVITIES:
  Purchase of property and equipment                                      (200,976)            (173,591)
  Proceeds from sales of assets                                             26,841                7,444
  Cash paid for acquisitions, net of cash acquired                               -             (300,000)
  Other intangible costs                                                   (32,061)                   -
                                                                       -------------       --------------

      Net cash used in investing activities                                                    (466,147)
                                                                          (206,196)
                                                                       -------------       --------------

CASH FLOWS FROM FINANCING ACTIVITIES:
  Proceeds from notes payable and long-term debt
                                                                            302,957            3,300,000
  Payments on notes payable and long-term debt                           (1,118,140)          (1,584,704)
                                                                       -------------       --------------

      Net cash provided by (used in)financing activities                   (815,183)           1,715,296
                                                                       -------------       --------------

NET INCREASE (DECREASE) IN CASH                                              (2,078)            (258,787)
                                                                           
CASH, beginning of period                                                   488,192              477,159
                                                                       -------------       --------------

CASH, end of period                                                    $    486,114        $     218,372                     
                                                                       =============       ==============

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
  Interest paid during the period                                      $    562,325        $     539,829
  Income taxes paid during the period, net of refunds                         2,217               57,685

</TABLE>






    The accompanying notes are an integral part of these financial statements

<PAGE>



<TABLE>

<CAPTION>

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





<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            Total
                                                                                                      Shares
                   ---------- ----------  --------------  -------------  --------------  ----------  ---------  ------------

BALANCE, December  9,853,161  $  23,648   $   4,130,796   $  4,464,277   $  (269,305)    $   (295)   $(326,184) $  8,022,937
31, 1996

Translation
adjustment                 -          -               -              -              -       (2,314)                   (2,314)

Net Income                 -          -               -        144,112              -            -          -        144,112
                   ---------- ----------  --------------  -------------  -------------   ----------  ---------  ------------
BALANCE, 
September 30, 1997  9,853,161  $  23,648   $   4,130,796   $  4,608,389   $  (269,305)    $  (2,609) $(326,184) $  8,164,735
                   ========== ==========  ==============  =============  =============   ==========  =========  ============

</TABLE>
























    The accompanying notes are an integral part of these financial statements

<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 September
30, 1997 and December 31, 1996, and the results of operations and cash flows for
the three and nine month periods ended  September 30, 1997 and 1996. The results
of  operations  for the  three  and  nine  month  periods  are  not  necessarily
indicative  of the  results  to be  expected  for  the  full  fiscal  year.  The
consolidated  financial  statements  should  be read  in  conjunction  with  the
financial statement disclosures contained in the Company's 1996 Annual Report to
Stockholders.



2.  Inventories


         The components of inventory consist of the following:
<TABLE>

<S>                                                                               <C>                     <C>
                                                                        September 30,            December 31,
                                                                            1997                       1996
                                                                     ------------------        -----------------
                Finished goods held for sale                             $   6,053,121             $  6,516,517
                Raw materials and work in process                            1,415,414                1,220,803
                                                                     ==================        =================
                                                                         $   7,468,535             $  7,737,320
                                                                     ==================        =================
</TABLE>




3.  Notes Payable and Long-Term Debt

        As previously reported in the Company's 1996 Annual Report on Form 10-K,
and  Quarterly  Reports on Form 10-Q for the periods  ended March 31, 1997,  and
June 30, 1997, the Company has certain  financing  arrangements with NationsBank
of Texas, N.A.  ("NationsBank")  which matured on August 31, 1997. On that date,
the  Company  was in the due  diligence  process  with new lenders and has since
obtained  commitments  that will allow the  Company  to pay off the  NationsBank
loans.  The  Company  is not in  default  of any  provision  of the  NationsBank
agreements other than payment of the matured note balances.

        In order to complete the documentation process with the new lenders, the
Company and NationsBank,  effective August 31, 1997,  entered into a Forbearance
Agreement  whereby  NationsBank  agreed to forbear the exercising of their legal
rights  due  to  the  aforementioned  default  until  November  30,  1997  ("the
"Forbearance  Period").  Subsequent  to September  30, 1997,  the Company made a
principal  payment in the amount of $300,000 on the term note in accordance with
the original  amortization schedule and the Company's agreement to apply certain
tax refund  proceeds to that note.  The Company  continues  to pay all  interest
timely.

        During the  Forbearance  Period,  NationsBank has allowed the Company to
continue  to use the letter of credit  feature of its  working  capital  line of
credit.  Management  believes  that the  closing  on the  Company's  new  credit
facilities will occur prior to the expiration of the Forbearance  Period. In the
event the new financing  does not close,  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.



<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 Third Quarter 1997 Compared to Third 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
                                                             September 30,
                                                       1997               1996
                                                       ----               ----

Net sales                                              100.0%             100.0%
Cost of sales                                           57.6               60.4
                                                      ------             ------
Gross profit                                            42.4               39.6
Operating expenses                                      36.1               36.0
                                                      ------             ------
Income (loss) from operations                            6.3                3.6
Interest expense, net                                    3.1                3.4
                                                      ------             -------
Income (loss) before income taxes                        3.2                 .2
Provision for income taxes                               1.7                 .0
                                                      ------             ------
Net income (loss)                                        1.5%                .2%
                                                      ======             ======

Revenues

         The  Company's  net sales  decreased by 9.4% to  $6,353,582  during the
third fiscal quarter ended September 30, 1997 from  $7,015,834  generated in the
third quarter of 1996. The 9.4% decrease in revenues  resulted from 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 13.7% to $3,659,591 during the
third fiscal  quarter  ended  September  30, 1997 from  $4,238,206  in the third
quarter of 1996. This 13.7% reduction resulted primarily from efforts by Company
management  to  increase  manufacturing  productivity,   obtain  better  product
sourcing and sell into higher margin markets.

         Operating  expenses decreased $228,846 or 9.1% to $2,293,706 during the
third fiscal quarter of 1997 from $2,522,552  during the quarter ended September
30, 1996.  This 9.1% decrease  resulted  primarily  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.


Other (Income) Expense

         Other  expenses  decreased  $42,304 or 17.7% to $197,222  for the third
fiscal  quarter  of 1997 from  $239,526  during the same  quarter in 1996.  This
decrease resulted  primarily from lower interest expense due to the reduction in
bank debt of over $800,000.


Net Income

         Net income increased to $92,439 during the third fiscal quarter of 1997
from $14,391  during the quarter  ended  September  30, 1996.  The increased net
income  resulted  from the factors  noted above  regarding  revenues,  costs and
expenses.


                Analysis of Nine Months Ended September 30, 1997
                     to Nine Months Ended September 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:

                                                           Nine Months Ended
                                                             September 30,
                                                          1997             1996
                                                          ----             ----

Net sales                                                 100.0%          100.0%
Cost of sales                                              58.6            62.8
                                                          -----           -----
Gross profit                                               41.4            37.2
Operating expenses                                         36.2            38.5
                                                          -----           -----
Income (loss) from operations                               5.2            -1.3
Interest expense, net                                       3.2             3.6
                                                          -----           -----
Income (loss) before income taxes                           2.0            -4.9
Provision for income taxes                                  1.2            -1.1
                                                          -----           -----
Net income (loss)                                           0.8%          -3.8%
                                                          =====           =====


Revenues

         The Company's net sales  decreased by 10.2% to  $19,340,466  during the
nine months  ended  September  30, 1997 from  $21,527,857  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
continue to replace some of the declines that have been  experienced  in current
markets.

<PAGE>

Costs, Gross Profit, and Expenses

         The Company's cost of sales  decreased by 16.1% to $11,343,380  for the
nine months of 1997 as compared to $13,517,603 for the same nine months in 1996.
This decrease resulted  primarily from efforts by Company management to increase
manufacturing productivity,  obtain better product sourcing and sell into higher
margin markets.

         Operating expenses  decreased  $1,288,181 or 15.6% to $6,995,461 during
the first nine  months of 1997 from  $8,283,642  during the same nine  months of
1996.  This  decrease  resulted  primarily  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.


Other (Income) Expense

         Other  expenses  decreased  $162,459 or 20.8% to $619,277 for the first
nine months ended  September  30, 1997 from  $781,736  during the same period in
1996.  This  decrease  resulted  primarily  from  the  write-off  in 1996 of the
commitment  and  facility  fees   attributable  to  the  acquisition   financing
commitments  which  expired  in July 1996 and lower  interest  expense  due to a
reduction in bank debt.


Net Income

         Net income  increased to $144,112  during the first nine months of 1997
from a net loss of $818,566 during the nine months ended September 30, 1996. The
increased net income resulted from the factors noted above  regarding  revenues,
costs and expenses.


Capital Resources and Liquidity

        The Company  continues to generate  sufficient cash flow from operations
to reduce bank debt and fund normal operations, including interest payments.

        As previously reported in the Company's 1996 Annual Report on Form 10-K,
and  Quarterly  Reports on Form 10-Q for the periods  ended March 31, 1997,  and
June 30, 1997, the Company has certain  financing  arrangements with NationsBank
of Texas, N.A.  ("NationsBank")  and had been in default under certain financial
covenants  contained in their loan agreement from June 30, 1996 through December
31, 1996. Effective December 31, 1996 the Company entered into an agreement with
NationsBank  that cured said  defaults and  shortened the maturity date to April
30, 1997.  In addition  the Company  agreed to obtain  alternative  financing to
replace the obligations to NationsBank.

        Effective  April  30,  1997,  to  provide   additional  time  to  obtain
alternative  financing,  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 were extended until August
31, 1997. On August 31, 1997,  when the loans became due, the Company was in the
due diligence  process with new lenders and has since obtained  commitments that
will allow the Company to pay off the NationsBank loans.

        In order to complete the documentation process with the new lenders, the
Company and NationsBank,  effective August 31, 1997,  entered into a Forbearance
Agreement  whereby  NationsBank  agreed to forbear the exercising of their legal
rights  due  to  the  aforementioned  default  until  November  30,  1997  ("the
"Forbearance  Period").  Subsequent  to September  30, 1997,  the Company made a
principal  payment in the amount of $300,000 on the term note in accordance with
the original  amortization schedule and the Company's agreement to apply certain
tax refund  proceeds to that note.  The Company  continues  to pay all  interest
timely.


<PAGE>

        During the  Forbearance  Period,  NationsBank has allowed the Company to
continue  to use the letter of credit  feature of its  working  capital  line of
credit.  Management  believes  that the  closing  on the  Company's  new  credit
facilities will occur prior to the expiration of the Forbearance  Period. In the
event the new financing  does not close,  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.



<PAGE>


                           PART II. OTHER INFORMATION


Item 3. Defaults Upon Senior Securities

        As previously reported in the Company's 1996 Annual Report on Form 10-K,
and  Quarterly  Reports on Form 10-Q for the periods  ended March 31, 1997,  and
June 30, 1997, the Company has certain  financing  arrangements with NationsBank
of Texas, N.A.  ("NationsBank")  which matured on August 31, 1997. On that date,
the  Company  was in the due  diligence  process  with new lenders and has since
obtained  commitments  that will allow the  Company  to pay off the  NationsBank
loans.  The  Company  is not in  default  of any  provision  of the  NationsBank
agreements  other than  payment of the  matured  note  balances in the amount of
$7,625,000 as of August 31, 1997.

        In order to complete the documentation process with the new lenders, the
Company and NationsBank,  effective August 31, 1997,  entered into a Forbearance
Agreement  whereby  NationsBank  agreed to forbear the exercising of their legal
rights  due  to  the  aforementioned  default  until  November  30,  1997  ("the
"Forbearance  Period").  Subsequent  to September  30, 1997,  the Company made a
principal  payment in the amount of $300,000 on the term note in accordance with
the original  amortization schedule and the Company's agreement to apply certain
tax refund proceeds to that note. Therefore,  the total arrearage as of November
14, 1997 was reduced to  $7,325,000.  The Company  continues to pay all interest
timely.

        During the  Forbearance  Period,  NationsBank has allowed the Company to
continue  to use the letter of credit  feature of its  working  capital  line of
credit.  Management  believes  that the  closing  on the  Company's  new  credit
facilities will occur prior to the expiration of the Forbearance  Period. In the
event the new financing  does not close,  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.


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




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



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






<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.




<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.




<PAGE>


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

          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.

          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.

         *4.15 Forbearance  Agreement  effective  as of August  31,  1997 by and
               between The Leather Factory,  Inc., a Delaware  Corporation,  and
               NationsBank  of Texas,  N.A.  filed as  Exhibit  No.  4.15 to the
               Quarterly  Report  on Form  10-Q  of The  Leather  Factory,  Inc.
               (Commission  File No.  1-12368)  filed  with the  Securities  and
               Exchange  Commission on November 14, 1997,  and  incorporated  by
               reference herein.

          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.


<PAGE>


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

          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.

          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.



<PAGE>


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

         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
               (Commission  File No.  1-12368)  filed  with the  Securities  and
               Exchange Commission on March 27, 1995, and incorporated herein by
               reference.

         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  (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.


<PAGE>























                                  EXHIBIT 4.15



















<PAGE>


                              FORBEARANCE AGREEMENT


         This FORBEARANCE AGREEMENT  ("Agreement") is made as of the 31st day of
August  1997,   among  THE  LEATHER  FACTORY,   INC.,  a  Delaware   Corporation
("Borrower"),  THE LEATHER  FACTORY,  INC.,  a Texas  Corporation  and  ROBERTS,
CUSHMAN & CO.,  INC., a New York  corporation  (collectively  "Guarantors")  and
NATIONSBANK OF TEXAS, N.A., a national banking association ("Bank").

                                 R E C I T A L S

         A.  Borrower  is  indebted  to Bank as  evidenced  by (i) that  certain
promissory  note dated September 30, 1996, in the original  principal  amount of
$7,500,000.00 (the "Revolving Note") and (ii) that certain promissory note dated
December 28, 1994, in the original principal amount of $5,000,000.00 (the "R,C &
Co. Note" and together with the Revolving  Note, the "Notes").  As of August 31,
1997, the outstanding principal balance of the R, C & Co. Note was $2,500,000.00
and the outstanding  principal balance of the Revolving Note was  $5,125,000.00.
The Notes are secured by certain security agreements ("Security Agreements"),  a
Deed  of  Trust  (the  "Deed  of  Trust"),  and  two  or  more  guaranties  (the
"Guaranties"). The Notes, Deed of Trust, Security Agreements, Guaranties and all
other  written  documents  executed in connection  therewith,  together with any
written  renewals,  modifications  and/or  extensions  thereof are  collectively
referred to as the "Loan Documents."

         B. Borrower is in default in the  performance of certain  provisions of
the Notes and other Loan Documents.  Borrower and Guarantors have requested that
Bank forebear from  exercising  its rights and remedies under the Loan Documents
for a period  of time as  specified  herein  in  reliance  upon  the  covenants,
representations,  and warranties of Borrower and Guarantors herein and for other
good and valuable consideration.

                                A G R E E M E N T

         For and in consideration of the mutual covenants  contained herein, Ten
Dollars  ($10.00),  and other good and valuable  consideration,  the receipt and
sufficiency of which are hereby  acknowledged,  Borrower,  Guarantors,  and Bank
agree as follows:

                  1.  Recitals.  The  foregoing  recitals  are  confirmed by the
parties  as true and  correct  and are  incorporated  herein by  reference.  The
recitals are a substantive, contractual part of this Agreement.

                  2. No Waiver. The execution,  delivery and performance of this
Agreement  by Bank and the  acceptance  by Bank of  performance  of Borrower and
Guarantors hereunder (a) shall not constitute a waiver or release by Bank of any
default that may now or hereafter exist under the Loan Documents,  (b) shall not
constitute  a novation of the Loan  Documents as it is the intent of the parties
to modify  the Loan  Documents  as  expressly  set out  herein and (c) except as
expressly provided in this Agreement,  shall be without prejudice to, and is not
a waiver or release of,  Bank's rights at any time in the future to exercise any
and all rights  conferred upon Bank by the Loan Documents or otherwise at law or
in equity,  including but not limited to the right to accelerate  the Notes,  if
not already  accelerated or matured,  and to institute  foreclosure  proceedings
against the property  secured by the Loan Documents (the  "Property")  and/or to
institute  collection  proceedings against Borrower and/or Guarantors and/or any
right  against  any  other  person  or  entity  not a party  to this  Agreement.
Similarly,  the  execution,  delivery,  and  performance  of this  Agreement  by
Borrower and Guarantors  and the  acceptance by Borrower,  and Guarantors of the
performance by Bank hereunder  shall not,  subject to the express  provisions of
this  Agreement,  constitute  a  waiver  or  release  of  any of  Borrower's  or
Guarantors' rights under the Loan Documents;  provided,  however,  that Borrower
and Guarantors, jointly and severally, waive any and all claims now or hereafter
arising  from or  related  to any  delay by Bank in  exercising  any  rights  or
remedies under the Loan Documents,  including,  without limitation, any delay in
foreclosing on the Property or any other collateral securing any of the Note.

                  3. Payment. Prior to the execution of this Agreement, Borrower
will have delivered to Bank a cash payment in the amount of  $250,000.00,  to be
applied  by  Bank  to  the R,  C & Co.  Note  in the  order  and  manner  deemed
appropriate  by Bank.  Borrower  agrees to pay to Bank  beginning  on October 1,
1997,  and  continuing  on the 1st  day of  each  month  thereafter  during  the
Forbearance  Period, all interest which has accrued on the Notes.  Interest will
continue to accrue and be computed on the outstanding  principal  balance of the
Notes from time to time during the  Forbearance  Period in  accordance  with the
terms thereof .

                  4.  Fees.   Contemporaneously   with  the  execution  of  this
Agreement,  Borrower  will pay to Bank a fee in the  amount of  $2,000.00  to be
applied  by Bank for  payment  of legal  and  other  costs  associated  with the
preparation, execution and delivery of this Agreement.

                  5. Stock Pledge.  Contemporaneously with the execution of this
Agreement,  Wray Thompson, Ron Morgan and Robin Morgan shall pledge all stock of
The Leather Factory,  Inc. which is currently owned by them to secure the Notes.
The pledge  shall be  evidenced  by such  documents  and  instruments  as may be
required by the Bank.

                  6. Letters of Credit/Banker's Acceptances. Notwithstanding the
fact that the Notes are in  default,  Bank will  continue  to issue  letters  of
credit and banker's acceptances subject to availability under the Revolving Note
as determined  by the  borrowing  base, in an amount not to exceed an additional
$200,000.00.  Such requests must be supported by monthly  borrowing base reports
and financial statements as provided in the Loan Documents.

                  7. Amounts Due/Waiver of Notice. Bank and Borrower acknowledge
that (a) the outstanding balance of the Notes is as previously specified in this
Agreement;  (b) the  current  maturity  date for each of the Notes is August 31,
1997;  and (c) default has occurred and is continuing in  performance of certain
terms of the Notes.  Borrower and  Guarantors  waive any and all rights to other
notice of payment  default or any other default,  protest and notice of protest,
dishonor,  diligence in  collecting  and the bringing of suit against any party,
notice of intention to accelerate,  notice of  acceleration,  demand for payment
and  any  other  notices  whatsoever  regarding  the  Notes  or the  other  Loan
Documents,  and further waive any claims that any notices  previously  given are
insufficient for any reason.

                  8. Forbearance. So long as this Agreement is not terminated as
provided  herein,  Bank agrees not to  foreclose  or attempt to foreclose on the
Property  or any  other  collateral  securing  the  Notes,  institute  suit  for
collection of the Notes against  Borrower or  Guarantors,  or exercise any other
remedies  available to it under the Loan Documents or under applicable law for a
period from the date hereof until November 30, 1997, or until the Notes are paid
in full ("Forbearance  Period").  Upon termination of the Forbearance Period, or
otherwise  under the  provisions  of this  Agreement,  or if all amounts due and
owing  under the Notes are not paid in full on or before the  expiration  of the
Forbearance  Period,  then Bank may seek to  foreclose  upon the Property or any
other  collateral for the Notes and to exercise any other remedies to which Bank
may be entitled under the Loan  Documents or applicable  law to collect  amounts
due under the Notes, Guaranty, or other Loan Documents.  Borrower and Guarantors
agree that neither Borrower nor Guarantors,  jointly or severally,  will, during
the  Forbearance  Period,  initiate  any  action of any kind  against  Bank with
respect to the Notes,  exercise any remedy available under the Loan Documents or
otherwise, or make any type of demand upon Bank with respect to the indebtedness
evidenced by the Note.

                  9. Limitation on Interest. No provision of this Agreement, the
Notes, any of the other Loan Documents, or any instrument evidencing or securing
the Notes,  or otherwise  relating to the  indebtedness  evidenced by the Notes,
shall require the payment or permit the  collection,  application  or receipt of
interest in excess of the maximum rate permitted by applicable  state or federal
law. If any excess of  interest  in such  respect is herein or in any such other
instrument provided for, or shall be adjudicated to be so provided for herein or
in any such  instrument,  the  provisions of this  paragraph  shall govern,  and
neither  Borrower  nor any  endorsers of the Notes nor their  respective  heirs,
personal  representatives,  successors  or assigns shall be obligated to pay the
amount of such interest to the extent it is in excess of the amount permitted by
applicable  law.  It is  expressly  stipulated  and  agreed to be the  intent of
Borrower and Bank at all times to comply with the usury and other laws  relating
to the Notes and the other Loan Documents and any subsequent revisions,  repeals
or judicial  interpretations  thereof,  to the extent applicable to the Notes or
the other Loan Documents.  In the event Bank ever receives,  collects or applies
as interest any such excess, such amount which would be excessive interest shall
be applied to the reduction of the unpaid principal  balance of the Notes,  and,
if upon such  application  the principal  balance of the Notes are paid in full,
any remaining  excess shall be paid  forthwith to Borrower and the provisions of
the Notes,  the other Loan Documents and any demand or other  charging  document
shall  immediately  be deemed  reformed and the amounts  thereafter  collectible
thereunder reduced,  without the necessity of execution of any new document,  so
as to comply with the then  applicable  law,  but so as  otherwise to permit the
recovery of the fullest amount called for thereunder.  In determining whether or
not the  interest  paid or payable  under any specific  contingency  exceeds the
maximum rate of interest  allowed to be charged by applicable law,  Borrower and
Bank shall,  to the maximum extent  permitted under  applicable  law,  amortize,
prorate,  allocate and spread the total amount of interest throughout the entire
term of the respective  Notes so that the amount or rate of interest charged for
any and all  periods  of time  during  the term of the Notes is to the  greatest
extent  possible less than the maximum amount or rate of interest  allowed to be
charged by law during the relevant  period of time.  Notwithstanding  any of the
foregoing,  if at any time  applicable  laws  shall be changed so as to permit a
higher  rate or amount of interest to be charged  than that  permitted  prior to
such  change,  then  unless  prohibited  by  law,  references  in  the  Bank  to
"applicable  law" for purposes of  determining  the maximum  interest or rate of
interest that can be charged shall be deemed to refer to such  applicable law as
so amended to allow the greater amount or rate of interest.

                  10. Representations and Warranties. In order to induce Bank to
execute,  deliver,  and perform this Agreement,  Borrower and Guarantors warrant
and represent to Bank that:

                    (a) this  Agreement  is not being made or entered  into with
               the actual  intent to  hinder,  delay,  or defraud  any entity or
               person,  and the Borrower and  Guarantors are solvent and are not
               bankrupt;

                    (b) this  Agreement  is not  intended by the parties to be a
               novation of the Loan Documents and, except as expressly  modified
               herein, all terms, conditions,  rights and obligations as set out
               in the Loan Documents are hereby  reaffirmed and shall  otherwise
               remain in full force and effect as originally written and agreed;

                    (c) no action or proceeding,  including, without limitation,
               a voluntary  or  involuntary  petition for  bankruptcy  under any
               chapter of the Federal  Bankruptcy  Code, has been  instituted or
               threatened  by  or  against  Borrower  or  Guarantors;   

                    (d)  the  execution  of  this   Agreement  by  Borrower  and
               Guarantors  and the  performance  by Borrower and  Guarantors  of
               their  obligations  hereunder  will not  violate  or  result in a
               breach or constitute a default under any  agreements to which any
               of them is a party; and

                    (e) all  information  provided by Borrower and Guarantors to
               Bank prior to the date hereof, including, without limitation, all
               financial  statements,  balance sheets, and cash flow statements,
               was, at the date of delivery, and is, as of the date hereof, true
               and correct in all respects.  Borrower and  Guarantors  recognize
               and  acknowledge  that Bank is entering into this Agreement based
               in part on the financial  information provided to Bank by each of
               them  and  that  the  truth  and  correctness  of that  financial
               information  is a material  inducement  to Bank in entering  into
               this Agreement.  During the term of this Agreement,  Borrower and
               Guarantors  agree to advise  Bank  promptly in writing of any and
               all new information, facts, or occurrences which would in any way
               materially  supplement,   contradict,  or  affect  any  financial
               statements,  balance  sheets,  cash flow  statements,  or similar
               items furnished to Bank.

                    (f) This  Agreement and the Loan  Documents  constitute  the
               entire agreement among Bank, Guarantors and Borrower with respect
               to this matter.

                  11.  Termination  of  this  Agreement.   This  Agreement  will
terminate  upon the  expiration  of the  Forbearance  Period  unless  terminated
earlier by Bank,  at Bank's sole  option,  upon  written  notice to Borrower and
Guarantors of the occurrence of any of the following:

                    (a)  Borrower   and/or   Guarantors   file  a  petition  for
               bankruptcy  under any chapter of the Federal  Bankruptcy  Code or
               takes advantage of any other debtor relief law, or an involuntary
               petition  for  bankruptcy   under  any  chapter  of  the  Federal
               Bankruptcy Code is filed against Borrower and/or  Guarantors,  or
               any other  judicial  action is taken  with  respect  to  Borrower
               and/or Guarantors by any creditor;

                    (b) Bank discovers that any  representation or warranty made
               herein by Borrower or Guarantors  was or is untrue,  incorrect or
               misleading in any material respect;

                    (c)  any  lien,   claim  or   charge,   including,   without
               limitation,   any  mechanic's  or  materialman's   lien,  or  any
               judgment,  is filed  against  or with  respect  to the  Property,
               whether or not naming Borrower as a defendant;

                    (d) an event of  default  occurs  under the Loan  Documents,
               other than the  defaults  known by Bank to exist as of this date;
               or

                    (e) Borrower or Guarantors  breach or default in performance
               of any covenant or agreement  contained  in this  Agreement. 

 
                  12. Waiver of  Claims.  Borrower  and Guarantors  warrant  and
represent  to Bank that the  Notes  are not  subject  to any  credits,  charges,
claims,  or rights of offset or deduction  of any kind or character  whatsoever;
and Borrower and  Guarantors  release and discharge Bank from any and all claims
and causes of action,  whether  known or unknown  and  whether  now  existing or
hereafter arising,  including without limitation, any usury claims, that have at
any time been  owned,  or that are  hereafter  owned,  in tort or in contract by
Borrower or Guarantors  and that arise out of any one or more  circumstances  or
events that occurred prior to the date of this Agreement.

                  13.  ARBITRATION.  EXCEPT AS SET OUT BELOW, ANY CONTROVERSY OR
CLAIM  BETWEEN OR AMONG THE PARTIES  HERETO  INCLUDING  BUT NOT LIMITED TO THOSE
ARISING OUT OF OR RELATING TO THIS DOCUMENT OR ANY RELATED DOCUMENTS,  INCLUDING
ANY CLAIM  BASED ON OR ARISING  FROM AN ALLEGED  TORT  (COLLECTIVELY,  "CLAIM"),
SHALL BE  DETERMINED  BY BINDING  ARBITRATION  IN  ACCORDANCE  WITH THE  FEDERAL
ARBITRATION ACT (OR IF NOT APPLICABLE,  THE APPLICABLE  STATE LAW), THE RULES OF
PRACTICE  AND  PROCEDURE  FOR  THE   ARBITRATION   OF  COMMERCIAL   DISPUTES  OF
J.A.M.S./ENDISPUTE  OR ANY  SUCCESSOR  THEREOF  ("J.A.M.S."),  AND THE  "SPECIAL
RULES" SET FORTH BELOW.  IN THE EVENT OF ANY  INCONSISTENCY,  THE SPECIAL  RULES
SHALL CONTROL.  JUDGMENT UPON ANY ARBITRATION  AWARD MAY BE ENTERED IN ANY COURT
HAVING JURISDICTION. ANY PARTY TO THIS DOCUMENT MAY BRING AN ACTION, INCLUDING A
SUMMARY OR EXPEDITED PROCEEDING, TO COMPEL ARBITRATION OF ANY CLAIM IN ANY COURT
HAVING  JURISDICTION  OVER SUCH ACTION.  THE  INSTITUTION  AND MAINTENANCE OF AN
ACTION FOR ANY JUDICIAL RELIEF SHALL NOT CONSTITUTE A WAIVER OF THE RIGHT OF ANY
PARTY, INCLUDING THE PLAINTIFF,  TO SUBMIT THE CLAIM TO ARBITRATION IF ANY OTHER
PARTY CONTESTS SUCH ACTION FOR JUDICIAL RELIEF.

                    (a) SPECIAL RULES. ANY ARBITRATION SHALL BE CONDUCTED IN THE
               COUNTY OF THE BORROWER'S DOMICILE AT THE TIME OF THE EXECUTION OF
               THIS  DOCUMENT,   OR  IF  THERE  IS  REAL  OR  PERSONAL  PROPERTY
               COLLATERAL, IN THE COUNTY WHERE SUCH REAL OR PERSONAL PROPERTY IS
               LOCATED,  AND  ADMINISTERED  BY  J.A.M.S.  WHO  WILL  APPOINT  AN
               ARBITRATOR;  IF  J.A.M.S.  IS UNABLE OR  LEGALLY  PRECLUDED  FROM
               ADMINISTERING  THE  ARBITRATION,  THEN THE  AMERICAN  ARBITRATION
               ASSOCIATION  WILL  SERVE.   ALL  ARBITRATION   HEARINGS  WILL  BE
               COMMENCED WITHIN 90 DAYS OF THE DEMAND FOR ARBITRATION;  FURTHER,
               THE ARBITRATOR  SHALL ONLY, UPON A SHOWING OF CAUSE, BE PERMITTED
               TO  EXTEND  THE  COMMENCEMENT  OF  SUCH  HEARING  FOR  UP  TO  AN
               ADDITIONAL  60 DAYS.  ANY  DISPUTE  CONCERNING  THIS  ARBITRATION
               PROVISION OR WHETHER A CLAIM IS ARBITRABLE SHALL BE DETERMINED BY
               THE  ARBITRATOR.  THE  ARBITRATOR  SHALL  HAVE THE POWER TO AWARD
               LEGAL FEES PURSUANT TO THE TERMS OF THIS DOCUMENT.

                    (b)  RESERVATION  OF  RIGHTS.  NOTHING  IN THIS  ARBITRATION
               PROVISION SHALL BE DEEMED TO (I) LIMIT THE  APPLICABILITY  OF ANY
               OTHERWISE  APPLICABLE  STATUTES OF  LIMITATION  OR REPOSE AND ANY
               WAIVERS  CONTAINED IN THIS DOCUMENT;  OR (II) BE A WAIVER BY BANK
               OF THE  PROTECTION  AFFORDED  TO IT BY 12 U.S.C.  SEC.  91 OR ANY
               SUBSTANTIALLY  EQUIVALENT  STATE LAW; OR (III) LIMIT THE RIGHT OF
               ANY PARTY HERETO (A) TO EXERCISE  SELF HELP REMEDIES SUCH AS (BUT
               NOT LIMITED TO) SETOFF,  OR (B) TO FORECLOSE  AGAINST OR SELL ANY
               REAL OR  PERSONAL  PROPERTY  COLLATERAL,  OR (C) TO OBTAIN FROM A
               COURT PROVISIONAL OR ANCILLARY  REMEDIES SUCH AS (BUT NOT LIMITED
               TO) INJUNCTIVE RELIEF, WRIT OF POSSESSION OR THE APPOINTMENT OF A
               RECEIVER. ANY PARTY MAY EXERCISE SUCH SELF HELP RIGHTS, FORECLOSE
               OR SELL  COLLATERAL  OR  OBTAIN  SUCH  PROVISIONAL  OR  ANCILLARY
               REMEDIES BEFORE,  DURING OR AFTER THE PENDENCY OF ANY ARBITRATION
               PROCEEDING  BROUGHT  PURSUANT  TO THIS  DOCUMENT.  NONE OF  THESE
               ACTIONS  SHALL  CONSTITUTE  A WAIVER OF THE  RIGHT OF ANY  PARTY,
               INCLUDING  THE  CLAIMANT IN ANY SUCH  ACTION,  TO  ARBITRATE  THE
               MERITS  OF THE  CLAIM  OCCASIONING  RESORT  TO SUCH  REMEDIES  OR
               PROCEDURES.

                    (c) WAIVER OF CERTAIN DAMAGES.  THE PARTIES HERETO WAIVE ANY
               RIGHT OR REMEDY  EITHER  MAY HAVE  AGAINST  THE OTHER TO  RECOVER

<PAGE>

               PUNITIVE OR EXEMPLARY  DAMAGES  ARISING OUT OF ANY CLAIM  WHETHER
               THE CLAIM IS RESOLVED BY ARBITRATION OR BY JUDICIAL ACTION.

                    (d)  WAIVER  OF  JURY   TRIAL.   BY   AGREEING   TO  BINDING
               ARBITRATION,   THE   PARTIES   HERETO   KNOWINGLY,   IRREVOCABLY,
               VOLUNTARILY, AND INTENTIONALLY WAIVE ANY RIGHT THEY MAY HAVE TO A
               TRIAL BY JURY IN  RESPECT  OF ANY  CLAIM  BETWEEN  OR  AMONG  THE
               PARTIES  HERETO.  FURTHERMORE,  WITHOUT  INTENDING  IN ANY WAY TO
               LIMIT THIS  AGREEMENT TO ARBITRATE,  TO THE EXTENT ANY SUCH CLAIM
               BETWEEN  OR AMONG  THE  PARTIES  HERETO  IS NOT  ARBITRATED,  THE
               PARTIES   HERETO   KNOWINGLY,   IRREVOCABLY,   VOLUNTARILY,   AND
               INTENTIONALLY WAIVE ANY RIGHT THEY MAY HAVE TO A TRIAL BY JURY IN
               RESPECT OF SUCH CLAIM.  THIS  PROVISION IS A MATERIAL  INDUCEMENT
               FOR THE PARTIES ENTERING INTO THIS DOCUMENT.

                    14. Miscellaneous.

                    (a) This Agreement may be executed in multiple counterparts,
               each of which shall constitute an original instrument, but all of
               which shall constitute one and the same agreement.

                    (b) Any future waiver, alteration, amendment or modification
               of any of the  provisions of the Loan Documents or this Agreement
               shall not be valid or enforceable unless in writing and signed by
               all  parties,  it being  expressly  agreed that  neither the Loan
               Documents, or this Agreement can be modified orally, by course of
               dealing or by implied agreement.  Moreover,  any delay by Bank in
               enforcing  its rights  after an event of  default  shall not be a
               release or waiver of the event of default and shall not be relied
               upon by the Borrower or  Guarantors as a release or waiver of the
               default.

                    (c) This Agreement  shall be binding upon and shall inure to
               the  benefit  of the  parties  hereto,  their  heirs,  executors,
               administrators, successors, legal representatives, and assigns.

                    (d) The headings of  paragraphs  in this  Agreement  are for
               convenience of reference only and shall not in any way affect the
               interpretation or construction of this Agreement.

                    (e)  THIS  AGREEMENT  SHALL BE  GOVERNED  BY THE LAWS OF THE
               STATE OF TEXAS AND FEDERAL LAW, AS APPLICABLE.

                    (f) The  warranties  and  representations  of the parties in
               this Agreement shall survive the termination of this Agreement.

                    (g) The terms and conditions set forth in this Agreement are
               the product of joint  draftsmanship  by all  parties,  each being
               represented by counsel,  and any ambiguities in this Agreement or
               any documentation prepared pursuant to or in connection with this
               Agreement  shall  not be  construed  against  any of the  parties
               because of draftsmanship.

                    (h) For purposes of this  Agreement and the Loan  Documents,
               the addresses for notice to Borrower, Guarantors, and Bank are as
               follows:

                                    BORROWER:

                                    The Leather Factory, Inc.
                                    3847 East Loop 820 South
                                    Fort Worth, Texas  76119
                                    ATTN:  Fred N. Howell
<PAGE>



                                    GUARANTORS:

                                    The Leather Factory, Inc.
                                    3847 East Loop 820 South
                                    Fort Worth, Texas  76119
                                    ATTN: Fred N. Howell


                                    Roberts, Cushman & Co., Inc.
                                    119 West 24th Street, 10th Floor
                                    New York, New York  10011
                                    ATTN:  Fred N. Howell


                                    BANK:

                                    NationsBank of Texas, N.A.
                                    901 Main Street -- 11th Floor
                                    Dallas, Texas  75202
                                    ATTENTION:  Mark Henze

Notice shall be in writing,  and shall be deemed to have been given (i) 72 hours
after being sent by certified or  registered  mail,  return  receipt  requested,
postage  prepaid  and  addressed  as set forth  above;  or (ii) when  personally
delivered to a party or any other  officer,  partner,  agent or employee of such
party at the address set forth above.  Rejection  or other  refusal to accept or
inability  to deliver  because of a changed  address of which no notice has been
received shall also constitute service of notice. Borrower,  Guarantors and Bank
may change such  address by sending  written  notice to the other in  accordance
with the  foregoing;  however,  no written  notice of change of address shall be
effective until the date of receipt  thereof.  The parties hereto agree that any
notice sent to the Borrower or Guarantors  shall be deemed notice to all general
partners in the event that the Borrower or Guarantors are general partnerships.

THIS AGREEMENT  REPRESENTS THE FINAL AGREEMENT AMONG THE PARTIES WITH RESPECT TO
THE SUBJECT MATTER HEREOF AND MAY NOT BE  CONTRADICTED BY EVIDENCE OF PRIOR ORAL
OR WRITTEN,  CONTEMPORANEOUS,  OR SUBSEQUENT ORAL AGREEMENTS  AMONG THE PARTIES.
THERE ARE NO UNWRITTEN ORAL AGREEMENTS AMONG THE PARTIES.



<PAGE>


Executed on the date first set forth above.

                                         Borrower:

                                         The Leather Factory, Inc.
                                         a Delaware Corporation


                                         By: /s/ Fred N. Howell
                                         Printed Name: Fred N. Howell
                                         Title: Chief Financial Officer


                                         Guarantors:

                                         The Leather Factory, Inc.,
                                         a Texas Corporation

                                         By: /s/ Fred N. Howell
                                         Printed Name: Fred N. Howell
                                         Title: Chief Financial Officer


                                         Roberts, Cushman & Co., Inc.
                                         a New York Corporation

                                         By: /s/ Fred N. Howell
                                         Printed Name: Fred N. Howell
                                         Title:  Chief Financial Officer



                                         Bank:

                                         NationsBank of Texas, N.A.

                                         By: /s/ Mark L. Henze
                                         Printed Name:  Mark L. Henze
                                         Title: Vice president




<PAGE>





















                                  EXHIBIT 27.1