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, 1999

                                       OR

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

For the transition period from             to
                               -----------    -----------

                         Commission File Number 1-12368

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


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

                 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 10, 1999
------------------------------          ----------------------------------------
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, 1999


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

                                                                        PAGE NO.
                                                                        --------

PART I.  FINANCIAL INFORMATION

  Item 1.  Financial Statements

    Consolidated Balance Sheets
    June 30, 1999 and December 31, 1998                                      3

    Consolidated Statements of Income (Loss)
    Three and six months ended June 30, 1999 and 1998                        4

    Consolidated Statements of Cash Flows
    Six months ended June 30, 1999 and 1998                                  5

    Consolidated Statements of Stockholders' Equity
    and Comprehensive Income (Loss)
    Six months ended June 30, 1999 and 1998                                  6

    Notes to Consolidated Financial Statements                             7-8

  Item 2.  Management's Discussion and Analysis of Financial
            Condition and Results of Operations                           8-13

  Item 3.  Quantitative and Qualitative Disclosures About Market Risk       13

PART II. OTHER INFORMATION

  Item 4.  Submission of Matters to a Vote of Security Holders              14

  Item 6.  Exhibits and Reports on Form 8-K                                 14

SIGNATURES                                                                  15

EXHIBIT INDEX                                                            16-18


                                       2

<PAGE>

<TABLE>

<CAPTION>

                            THE LEATHER FACTORY, INC.
                           CONSOLIDATED BALANCE SHEETS


                                                                 June 30,     December 31,
                                                                   1999            1998
                                                              ------------    ------------
                                    ASSETS                     (UNAUDITED)
<S>                                                           <C>             <C>
CURRENT ASSETS:
  Cash                                                        $    322,375    $    510,399
  Cash restricted for payment on revolving credit facility         420,631         232,838
  Accounts receivable-trade, net of allowance for
    doubtful accounts of $92,000 and $52,000
    in 1999 and 1998, respectively                               1,815,173       1,582,459
  Inventory                                                      7,323,505       6,956,606
  Prepaid income taxes                                              91,279         228,939
  Deferred income taxes                                            113,555         102,012
  Other current assets                                             566,025         272,993
                                                              ------------    ------------
                         Total current assets                   10,652,543       9,886,246
                                                              ------------    ------------

PROPERTY AND EQUIPMENT, at cost                                  3,065,078       2,671,827
  Less-accumulated depreciation and amortization                (1,980,193)     (1,813,378)
                                                              ------------    ------------
                         Property and equipment, net             1,084,885         858,449

GOODWILL and other, net of accumulated amortization of
  $1,484,000 and $1,246,000 in 1999 and 1998, respectively       5,062,533       5,285,242
                                                              ------------    ------------
                                                              $ 16,799,961    $ 16,029,937
                                                              ============    ============

                     LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES:
  Accounts payable                                            $  1,560,410    $  1,019,069
  Accrued expenses and other liabilities                           609,169         530,789
  Notes payable and current maturities of
    long-term debt                                               6,244,469       6,139,327
                                                              ------------    ------------
                         Total current liabilities               8,414,048       7,689,185
                                                              ------------    ------------

DEFERRED INCOME TAXES                                              104,594         109,085

NOTES PAYABLE AND LONG-TERM DEBT,
  Net of current maturities                                        176,101          61,389

COMMITMENTS AND CONTINGENCIES

STOCKHOLDERS' EQUITY:
     Preferred stock, $0.10 par value; 20,000,000
       shares authorized, none issued or outstanding                     -               -
     Common stock, $0.0024 par value; 25,000,000 shares
       authorized, 9,853,161 shares issued in 1999 and 1998         23,648          23,648
     Paid-in capital                                             3,901,740       3,901,740
     Less:  Notes receivable secured by common stock              (204,185)       (224,750)
     Retained earnings                                           4,409,895       4,495,378
     Accumulated other comprehensive loss                          (25,880)        (25,738)
                                                              ------------    ------------
                         Total stockholders' equity              8,105,218       8,170,278
                                                              ------------    ------------
                                                              $ 16,799,961    $ 16,029,937
                                                              ============    ============

</TABLE>

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

                                       3

<PAGE>

<TABLE>

<CAPTION>

                            THE LEATHER FACTORY, INC.
                    CONSOLIDATED STATEMENTS OF INCOME (LOSS)
                                   (UNAUDITED)
                THREE AND SIX MONTHS ENDED JUNE 30, 1999 AND 1998



                                                              THREE MONTHS                     SIX MONTHS

                                                          1999            1998            1999            1998
                                                     ------------    ------------    ------------    ------------
<S>                                                  <C>             <C>             <C>             <C>
NET SALES                                            $  6,539,950    $  5,471,463    $ 12,052,950    $ 11,182,295

COST OF SALES                                           3,726,181       3,044,623       6,880,292       6,340,761
                                                     ------------    ------------    ------------    ------------
             Gross Profit                               2,813,769       2,426,840       5,172,658       4,841,534

OPERATING EXPENSES                                      2,584,039       2,192,639       4,822,555       4,492,533
                                                     ------------    ------------    ------------    ------------
INCOME FROM OPERATIONS                                    229,730         234,201         350,103         349,001

OTHER (INCOME) EXPENSE:
     Interest expense                                     168,027         259,702         397,894         500,347
     Other, net                                           (15,063)        (16,040)        (14,381)        (23,801)
                                                     ------------    ------------    ------------    ------------
             Total other (income) expense                 152,964         243,662         383,513         476,546
                                                     ------------    ------------    ------------    ------------

INCOME (LOSS) BEFORE INCOME TAXES                          76,766          (9,461)        (33,410)       (127,545)

PROVISION (BENEFIT) FOR INCOME TAXES                       70,058          24,083          52,073          (5,473)
                                                     ------------    ------------    ------------    ------------
NET INCOME (LOSS)                                    $      6,708    $    (33,544)   $    (85,483)   $   (122,072)
                                                     ============    ============    ============    ============



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

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

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








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

                                       4

<PAGE>

<TABLE>

<CAPTION>

                            THE LEATHER FACTORY, INC.
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                   (UNAUDITED)
                     SIX MONTHS ENDED JUNE 30, 1999 AND 1998




                                                                        1999         1998
                                                                      ---------    ---------
<S>                                                                   <C>          <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net income (loss)                                                   $ (85,483)   $(122,072)
  Adjustments to reconcile net income to net
   cash provided by (used in) operating activities
    Depreciation & amortization                                         271,815      266,570
    (Gain) loss on sales of assets                                            -       (9,118)
    Deferred financing costs                                            125,882      109,582
    Deferred income taxes                                               (16,034)     (25,257)
    Other                                                                  (142)       2,600
    Net changes in operating assets and liabilities:
     Accounts receivable-trade, net                                    (232,714)     (58,195)
     Inventory                                                         (366,899)     107,210
     Income taxes                                                       137,660       (8,959)
     Other current assets                                              (293,032)    (209,048)
     Accounts payable                                                   541,341      395,622
     Accrued expenses and other liabilities                              78,381      (90,959)
                                                                      ---------    ---------
    Total adjustments                                                   246,258      480,048
                                                                      ---------    ---------

    Net cash provided by operating activities                           160,775      357,976
                                                                      ---------    ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
  Purchases of property and equipment                                  (393,251)     (56,642)
  Proceeds from sales of assets                                                -      10,000
  Other intangible costs                                                 (8,174)        (441)
                                                                      ---------    ---------
    Net cash used in investing activities                              (401,425)     (47,083)
                                                                      ---------    ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
  Net increase (decrease) in revolving credit loans                     228,628      141,639
  Proceeds from notes payable and long-term debt                        217,494            -
  Payments on notes payable and long-term debt                         (226,268)    (216,409)
  (Increase) decrease in cash restricted under the revolving credit    (187,793)     118,527
  Payments received on notes secured by common stock                     20,565       23,367
  Deferred financing costs
                                                                              -     (140,627)
                                                                      ---------    ---------
    Net cash used in financing activities                                52,626      (73,503)
                                                                      ---------    ---------
NET INCREASE (DECREASE) IN CASH                                        (188,024)     237,390

CASH, beginning of period                                               510,399       70,496
                                                                      ---------    ---------
CASH, end of period                                                   $ 322,375    $ 307,886
                                                                      =========    =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
  Interest paid during the period                                     $ 335,139    $ 378,265
  Income taxes paid during the period, net of refunds                   (69,076)      25,507

</TABLE>




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

                                       5

<PAGE>

<TABLE>

<CAPTION>

                            THE LEATHER FACTORY, INC.
                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                         AND COMPREHENSIVE INCOME (LOSS)
                                   (UNAUDITED)
                   SIX MONTHS ENDED JUNE 30, 1999 AND 1998


                                Common Stock                     Notes                                Accumulated
                              ------------------                Receivable                               Other         Total
                               Number    Par      Paid-in     - Secured by  Unearned     Retained    Comprehensive  Stockholders'
                              of Shares  Value    Capital     Common Stock  ESOP Shares  Earnings        Loss         Equity
                              --------- --------  ----------  ------------- ------------ ----------- -------------  ------------
<S>                           <C>       <C>       <C>         <C>           <C>          <C>         <C>            <C>
BALANCE, December 31, 1997    9,853,161 $ 23,648  $4,119,915  $   (257,617) $  (273,851) $4,534,569    $  (14,018)  $8,132,646

   Payments received on
   notes secured by common            -        -           -        23,367            -           -             -       23,367
   stock

   Allocation of suspended
   ESOP shares committed to           -        -     (27,198)            -       30,189           -             -        2,991
   be released

   Net loss                           -        -           -             -            -    (122,072)            -     (122,072)

   Foreign currency
   translation adjustment,
   net of tax of ($2,499)             -        -           -             -            -           -        (4,077)      (4,077)
                              --------- --------  ----------  ------------  -----------  ----------  ------------   ----------

BALANCE, June 30, 1998        9,853,161 $ 23,648  $4,092,717  $   (234,250) $  (243,662) $4,412,497  $    (18,095)  $8,032,855
                              ========= ========  ==========  ============  ===========  ==========  ============   ==========

Comprehensive income (loss) for the six months ended June 30, 1998

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

   Payments received on
   notes secured by common            -        -           -       20,565           -             -             -       20,565
   stock

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

   Net loss                           -        -           -           -            -       (85,483)            -      (85,483)


   Foreign currency
   translation adjustment,
   net of tax of ($87)                -        -           -           -            -             -          (142)        (142)
                              --------- --------  ---------- -----------  -----------  ------------  ------------   ----------
BALANCE, June 30, 1999        9,853,161  $23,648  $3,901,740  $ (204,185) $         -  $  4,409,895 $    (25,880)   $8,105,218
                              ========= ========  ==========  ==========  ===========  ============  ============   ==========

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

BALANCE, December 31, 1998

   Payments received on
   notes secured by common
   stock

   Allocation of suspended
   ESOP shares committed to
   be released

   Net loss                                                               $(122,072)

   Foreign currency
   translation adjustment,
   net of tax of ($2,499)                                                    (4,077)

BALANCE, June 30, 1998

                                                                          =========
   Comprehensive income (loss) for the six months ended June 30, 1998     $(126,149)
                                                                          =========

BALANCE, December 31, 1998

   Payments received on
   notes secured by common
   stock

   Allocation of suspended
   ESOP shares committed to
   be released

   Net loss                                                               $ (85,483)

   Foreign currency
   translation adjustment,
   net of tax of ($87)                                                         (142)

BALANCE, June 30, 1999
                                                                          ---------
   Comprehensive income (loss)for the six months ended June 30, 1999      $ (85,625)
                                                                          =========

</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 Leather Factory,  Inc. (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, 1999 and  December 31, 1998,  and the results of  operations  and
cash flows for the three and six month periods ended June 30, 1999 and 1998. 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  statements  and  disclosures  contained in the Company's  1998 Annual
Report on Form 10-K ("Annual Report").


2.  INVENTORY

The components of inventory consist of the following:



                                                       June 30,     December 31,
                                                         1999           1998
                                                      -----------   ------------


                Finished goods held for sale          $ 6,211,032   $ 5,564,406
                Raw materials and work in process       1,112,473     1,392,200
                                                      -----------   -----------
                                                      $ 7,323,505   $ 6,956,606
                                                      ===========   ===========

<TABLE>
<CAPTION>

3.  EARNINGS PER SHARE

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


                                                   Three Months Ended               Six Months Ended
                                                        June 30,                        June 30,
                                                --------------------------     -------------------------
                                                  1999            1998            1999           1998
                                                ----------     -----------     ----------     ----------
<S>                                             <C>            <C>             <C>            <C>

     Numerator for basic and
      Diluted earnings per share:
       Net income (loss)                        $    6,708     $  (33,544)     $  (85,483)    $ (122,072)
                                                ==========     ==========      ==========     ==========

Denominator for earnings per share:
Weighted-average shares outstanding-Basic        9,853,161      9,802,259       9,853,161      9,800,832
Weighted-average shares outstanding-Diluted      9,880,340      9,802,259       9,866,751      9,800,832



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

</TABLE>


Unexercised  employee and director stock options to purchase 385,000 and 585,000
shares of common  stock as of June 30,  1999 and  1998,  respectively,  were not
included in the  computations of diluted  earnings per share ("EPS") because the
options' exercise prices were greater than or equal to the average market prices
of the common stock during the respective periods.  The net effect of converting
stock  options to purchase  58,000  shares of common stock at option prices less
than  the  average  market  prices  for the  quarter  has been  included  in the
computation of diluted EPS for the periods ending June 30, 1999.



                                       7

<PAGE>


Warrants to acquire 100,000 and 300,000 shares of common stock were not included
in the computations of diluted EPS because the exercise prices relating to these
warrants were greater than the  average market prices of the common stock during
the  quarters  ended June 30,  1999 and 1998,  respectively  (see also note 9 to
consolidated   financial  statements  in  the  Annual  Report  and  Management's
Discussion and Analysis of Financial Condition and Results of Operations-Capital
Resources and Liquidity under Item 2 of this Quarterly Report on Form 10-Q). The
net effect of  exercising  warrants on 200,000  shares has been  included in the
computation  of diluted EPS for the  period   ended June 30,  1999,  in that the
exercise  price of such warrants was less than the average  market price for the
quarter.

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

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

General

The Company is the premier  distributor of leather and leathercraft  products to
over 40,000  customers  ranging  from the  individual  hobbyist to large  retail
chains.  Customer  groups  served  include:   individual  hobbyists,   wholesale
distributors,  tack and saddle  shops,  shoe-findings  customers,  institutions,
prisons and prisoners,  dealer stores,  western  stores,  craft stores and craft
store chains, hat manufacturers and distributors, other large volume purchasers,
manufacturers,  and retailers.  The Company's products are distributed primarily
through 26  sales/distribution  units in the United States and Canada or through
its  subsidiary,  Roberts,  Cushman & Company,  Inc.  ("Cushman"),  in New York.
Cushman  manufactures and distributes:  hat trims in braids,  leather, and woven
fabrics, and small finished leather goods, such as, cigar cases, picture frames,
wallets and other accessories.

Results of Operations

                    Analysis of Second Quarter 1999 Compared
                             To Second Quarter 1998

                           Income Statement Comparison

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


                                                        Quarterly Period Ended
                                                               June 30
                                                        ----------------------
                                                         1999          1998
                                                        -------       --------

       Net sales                                         100.0 %        100.0 %
       Cost sales                                         57.0           55.6
                                                       ---------      ---------
       Gross Profit                                       43.0           44.4
       Operating expenses                                 39.5           40.1
                                                       ---------      ---------
       Income from operations                              3.5            4.3
       Interest and other expense, net                     2.3            4.5
                                                       ---------      ---------
       Income (Loss) before income taxes                   1.2           (0.2)
       (Benefit) provision for income taxes                1.1            0.4
                                                       ---------      ---------
       Net Income (Loss)                                   0.1 %         (0.6)%
                                                       =========      =========


                                       8


<PAGE>


Revenues

Net sales increased 19.5% to $6,539,950  during the quarter ended June 30, 1999,
from  $5,471,463  in the same period of last year.  Second  quarter sales to the
Company's core business and institutional  customers continued the steady growth
shown over the past year and were up nearly 27%  compared to the second  quarter
of 1998. For the first time in three years the Company  experienced  sales gains
in the majority of its customer groups.  Other than planned  reductions in sales
of  low  margin  products  and a  slight  sales  decrease  to  craft  retailers,
principally  because of timing of orders,  sales were up.  Increased  sales were
generated  by many of the  Company's  22 existing  locations,  with the four new
locations posting sales of $92,814. Sales to craft retailers were virtually flat
(down 1%) due to  implementation  issues  involving  new programs as  previously
announced.


Costs, Gross Profit, and Expenses

Cost of sales as a  percentage  of revenue  was 57.0% for the second  quarter of
1999 as compared to 55.6% for the same quarter in 1998. The higher relative cost
of sales meant that gross profit as a percentage of sales  declined to 43.0% for
the three months  ended June 30, 1999,  as compared to 44.4% for the same period
in 1998. This increase in cost of sales as a percentage of revenue resulted from
the Company's strategic efforts to remain competitively priced while Tandycrafts
Inc.  continued its  announced   liquidation in order to close 121 Tandy Leather
retail stores.

Operating  expenses  increased $391,400 or 17.9% to $2,584,039 during the second
quarter  of 1999  from  $2,192,639  during  the  quarter  ended  June 30,  1998;
furthermore,  this total for the second  quarter  increased by $345,523 over the
first quarter operating expense of $2,238,516, or a 15.4% rise. The cost for the
quarter  of  operating  four  new  sales/distribution  units  was  $96,396.  The
remaining  increase in  operating  expenses of $249,127  over the first  quarter
resulted mainly from personnel,  salary and  payroll-related  costs necessary to
support the increased  level of sales as discussed  above.  However,  due to the
Company's  efforts to  judiciously  control  these costs,  operating  costs as a
percentage of sales  decreased from 40.1% in the second quarter of 1998 to 39.5%
during the second quarter of 1999.

Other (Income) Expense

Other expense  decreased  $90,698 or 37.2% to $152,964 for the second quarter of
1999 from $243,662  during the same quarter in 1998.  The decrease is due to the
Company's lower average outstanding  indebtedness for the quarter ended June 30,
1999, as compared to the same period in 1998,  reduced  amortization  of certain
deferred financing costs and lower prevailing interest rates.

Net Income

The  Company  reported  net income of $6,708  during the second  quarter of 1999
compared to a net loss of $33,544  for the same  period a year ago.  The gain in
net income was principally due to the increase in gross profit from higher sales
in the second quarter of 1999 and the reduction in borrowing costs.







                                       9

<PAGE>


                   Analysis of Six Months Ended June 30, 1999
                        To Six Months Ended June 30, 1998

                           Income Statement Comparison

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



                                                   Six Months Ended
                                                       June 30,
                                                 --------------------
                                                  1999          1998
                                                 -------      -------
       Net sales                                 100.0 %      100.0 %
       Cost sales                                 57.1         56.7
                                                 -------     --------
       Gross Profit                               42.9         43.3
       Operating expenses                         40.0         40.2
                                                 -------     --------
       Income from operations                      2.9          3.1
       Interest and other expense, net             3.2          4.3
                                                 -------     --------
       (Loss) before income taxes                 (0.3)        (1.2)
       (Benefit) provision for income taxes        0.4         (0.1)
                                                 -------     --------
       Net Income (Loss)                          (0.7)%       (1.1)%
                                                 =======     ========


Revenues

Net sales  increased  7.8% to  $12,052,950  during the six months ended June 30,
1999 from $11,182,295 in the same period of last year. For the six months, sales
to the Company's core business and institutional  customers continued the steady
growth shown over the past year and were up nearly 20% compared to the first six
months of 1998.  However,  these gains were  partially  offset by the  Company's
ongoing efforts to reduce sales of low-margin  items and by an anticipated  drop
in craft market sales (down 37% and 7%, respectively,  from the first six months
of 1998). The drop in craft market sales was expected due to industry conditions
affecting some of the Company's craft  retailers and certain  negative trends in
the decorative  apparel consumer market. In addition,  the results of efforts to
improve this segment of business  have been  delayed  because of  implementation
issues involving new programs as previously announced.

Costs, Gross Profit, and Expenses

Cost of sales as a  percentage  of revenue was 57.1% for the first six months of
1999 as compared to 56.7% for the same period in 1998. The higher  relative cost
of sales meant that gross profit as a percentage of sales  declined to 42.9% for
the six months ended June 30, 1999,  as compared to 43.3% for the same period in
1998. This 0.4 percentage point difference is not significant from  management's
perspective.

Operating expenses increased $330,022 or 7.3% to $4,822,555 during the six month
period of 1999 from $4,492,533  during the six month period ended June 30, 1998.
The increase in operating  expenses  between the two six month periods  resulted
mainly from an increase in personnel,  salary and  payroll-related  costs, rent,
and supplies necessary to open four new sales/distribution  units and to provide
the necessary infrastructure to support the Company's increased volume of sales.
There was  virtually no  difference  in operating  cost as a percentage of sales
between the quarters ended June 30, 1998, and June 30, 1999.






                                       10


<PAGE>


Other (Income) Expense

Other  expense  decreased  $93,033 or 19.5% to $383,513 for the six months ended
June 30, 1999, from $476,546 during the same period in 1998. The decrease is due
to the Company's lower average outstanding indebtedness for the six months ended
June 30, 1999, as compared to the same period in 1998,  reduced  amortization of
certain deferred financing costs and lower prevailing interest rates.

Net Income

The Company  reported a net loss of $85,483  during the first six months of 1999
compared to a net loss of $122,072 for the same period a year ago. The reduction
in loss was principally due to the increase in gross profit from higher sales in
the first half of 1999 and the reduction in borrowing costs.


Capital Resources and Liquidity

The primary sources of liquidity and capital resources during the second quarter
of 1999 were funds  provided by operating  activities in the amount of $160,775,
borrowings  from  FINOVA  Capital  Corporation  ("FINOVA"),  and a  subordinated
debenture  with The Schlinger  Foundation  ("Schlinger"),  and capital leases to
finance investment in new computer equipment.

The Company's  investment in net accounts  receivable was $1,815,173 at June 30,
1999, up $232,714 from  $1,582,459 at year-end 1998. The addition to the average
accounts  receivable  balance is due to the Company's  increasing  sales levels.
Inventory  increased $366,899 to $7,323,505 at June 30, 1999, from $6,956,606 at
year-end  1998.  Although  inventories  were  increased to support the volume of
sales  reported  in the six  months  ended  June 30,  1999,  inventory  turnover
improved to an annual rate of 1.9 times during the first half of 1999,  which is
above the ratios of 1.81 for the first quarter of 1999 and 1.74 for all of 1998.
Management's  ongoing  implementation of new information systems assisted in the
monitoring of sales and inventory levels which contributed to improved inventory
management.

The largest uses of cash beyond debt payments in the second quarter of 1999 were
for capital expenditures, which totaled $154,362 and were principally related to
the Company's ongoing computer system implementation.

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

The  revolving  credit  facility  with  FINOVA  is based  upon the  level of the
Company's accounts receivable and inventory.  At June 30, 1999, and December 31,
1998, the Company had additional  availability on the revolving  credit facility
of approximately $859,000 and $475,000, respectively. As the Company's sales and
operations  expand  requiring  larger  investments  in accounts  receivable  and
inventory,  the Company could have in excess of  $1,000,000 in additional  funds
available under the revolving credit facility.

The Senior Debt Facility  contains  certain  financial  covenants  which include
requirements to 1) maintain a certain level of earnings before interest,  taxes,
depreciation and amortization ("EBITDA"), 2) limit capital expenditures,  and 3)
maintain certain debt service coverage ratios.  Decreases in sales, earnings and
cash  flow  during  1998,  and the first two  months of 1999,  resulted  in debt
service coverage ratios falling below target amounts in the financial  covenants
of the Senior Debt Facility for the 12-month period ending June 30, 1999.  Prior
to the June 30  measurement  date,  the Company  requested that FINOVA amend the
targets in the financial covenants,  and FINOVA agreed to the Company's request.
The Company and FINOVA  entered into an  amendment  to the Senior Debt  Facility
dated August 12, 1999,  effective as of June 30, 1999. The amendment reduces the
targets  for the  12-month  period  ending  June 30,  1999,  for the Senior Debt
Coverage  Ratio from 1.35 to 1.25 and for the Total Debt Service  Coverage Ratio
for the same period from 1.10 to 1.05. In addition,  the EBITDA  requirement  of
$900,000  for the first six  months of 1999 was  reduced  to  $700,000,  and the
capital expenditure maximum was set to $600,000 for the 1999 year. The amendment
is filed as Exhibit 4.15 to this Form 10-Q.

                                       11


<PAGE>


The Company believes that the current sources of liquidity and capital resources
will be sufficient to fund ongoing  operations  and open new  sales/distribution
units.  In 1999, the funding for the opening of four new units has been provided
by  operating  leases,  cash flows from  operating  activities,  the Senior Debt
Facility  and  the  Subordinated   Debenture.   The  opening  of  the  Company's
sales/distribution  units is not capital  intensive.  Historically,  the Company
invested  approximately  $125,000 in opening a new unit.  The four units  opened
this year each  required  substantially  less to open the unit than the $125,000
historically  invested in a new unit. Beyond funding ongoing  operations and the
opening of new  locations,  the Company  anticipates  financing  for software to
complete the installation of new information systems in remaining locations will
be provided by cash flows from operating activities.

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

Year 2000 Issue

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

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

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

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

The Company  has  managed  its Y2K  compliance  program  using  mostly  internal
salaried staff.  For this reason and the fact that much of the replacement  cost
of  non-compliant  IT systems  would have been  incurred in the normal course of
business,  it is  difficult to quantify the actual Y2K  remediation  costs.  The
Company invested approximately $368,037 for new computer systems and software in
1998 and the  first  two  quarters  of 1999.  This  investment  includes  system
upgrades  that  will  facilitate  completion  of  the  Y2K  compliance  program.
Management  believes that the majority of the total expected system  remediation
cost  has  already  been  incurred.   Additional  hardware  purchases,  software
purchases,  and licenses are expected to not exceed $70,000 during the remainder
of the year.


                                       12


<PAGE>


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

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

Cautionary Statement

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

Item 3.  Quantitative and Qualitative Disclosures About Market Risk.

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













                                       13


<PAGE>



                           PART II. OTHER INFORMATION

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

On May 26, 1999, the Annual Meeting of the  Stockholders of the Company was held
in the Scott Van Zandt room at the Radisson  Plaza Hotel,  Fort Worth,  Texas to
consider and act on the following matter:

        (1) To elect the following  individuals to serve as directors  until the
            Company's  2000  Annual  Meeting  of  Stockholders  or  until  their
            successors are duly elected and qualified:



             Wray Thompson                          Anthony C. Morton
             Ronald C. Morgan                       H.W. "Hub" Markwardt
             Robin L. Morgan                        Joseph R. Mannes
             William M. Warren                      John Tittle, Jr.



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             9,503,991       10,862          23,561
             Ronald C. Morgan          9,458,991       55,862          23,561
             Robin L. Morgan           9,458,991       55,862          23,561
             William M. Warren         9,514,558        1,712          23,561
             Anthony C. Morton         9,497,341       17,512          23,561
             H.W. "Hub" Markwardt      9,497,341       17,512          23,561
             Joseph R. Mannes          9,458,991        1,712          23,561
             John Tittle, Jr.          9,469,336       45,517          23,561


The foregoing  matters are described in detail in the Company's  proxy statement
dated April 26, 1999, for the 1999 Annual Meeting of Stockholders.

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







                                       14

<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 13, 1999             /s/Wray Thompson
                                  ---------------------------------
                                  Wray Thompson
                                  Chairman of the Board, President,
                                  Chief Executive Officer, and
                                  Chief Accounting Officer

















                                       15




<PAGE>



                   THE LEATHER FACTORY, INC. AND SUBSIDIARIES
                                  EXHIBIT INDEX


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

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

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

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

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

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

     4.4  Term  Loan C Note  (Term  Loan C)  dated  November  21,  1997,  in the
          principal  amount  of  $1,500,000,  to the  order  of  FINOVA  Capital
          Corporation,  which  matures  December 1, 1999 filed as Exhibit 4.5 to
          the  Current  Report  on  Form  8-K  of  the  Leather  Factory,   Inc.
          (Commission  File No.  1-12368) filed with the Securities and Exchange
          Commission of February 6, 1998, and incorporated by reference herein.

     4.5  Subordination Agreement dated November 21, 1997, by and between FINOVA
          Capital Corporation, The Schlinger Foundation,  The  Leather  Factory,
          Inc.,  a  Delaware  corportation,  The Leather Factory, Inc.,  a Texas
          corporation,  The  Leather  Factory,  Inc.,  an  Arizona  corporation,
          Hi-Line Leather & Manufacturing Company, a California corporation, and
          Roberts,  Cushman &  Company,  Inc.  a New York  corporation  filed as
          Exhibit 4.6 to the Current Report of Form 8-K of The Leather  Factory,
          Inc.  (Commission  File No.  1-12368)  filed with the  Securities  and
          Exchange Commission on February 6, 1998, and incorporated by reference
          herein.

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

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





                                       16



<PAGE>


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



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

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

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

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

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


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


     4.14 Second Amendment to Loan and Security Agreement dated May 13, 1999, by
          and between The Leather  Factory,  Inc., a Delaware  corporation,  The
          Leather Factory, Inc., a Texas corportation, The Leather Factory, Inc.
          an Arizona  corporation,  Hi-Line Leather & Manufacturing  Company,  a
          California  corporation,  Roberts,  Cushman & Company, Inc. a New York
          corporation, and FINOVA Capital Corporation  effective as of March 31,
          1999 filed as Exhibit 4.14 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 17, 1999, and  incorporated
          by reference herein.


    *4.15 Third Amendment to Loan and Security  Agreement dated August 12, 1999,
          by and between The Leather Factory, Inc., a Delaware corporation,  The
          Leather Factory, Inc., a Texas corportation, The Leather Factory, Inc.
          an Arizona  corporation,  Hi-Line Leather & Manufacturing  Company,  a
          California  corporation,  Roberts,  Cushman & Company, Inc. a New York
          corporation, and FINOVA Capital Corporation   effective as of June 30,
          1999.

                                       17

<PAGE>


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


      *27.1        Financial Data Schedule

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


*Filed herewith.

                                       18