-----BEGIN PRIVACY-ENHANCED MESSAGE-----
Proc-Type: 2001,MIC-CLEAR
Originator-Name: webmaster@www.sec.gov
Originator-Key-Asymmetric:
 MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen
 TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB
MIC-Info: RSA-MD5,RSA,
 Gopka+/t5x3k0PMEHokee1WVUitC6SYlFgpK+LrPAlDf5pHdYF2PkGC3mEx5sPSQ
 K665KyMN1X6i4pDq+srO9A==

<SEC-DOCUMENT>0001010549-01-500329.txt : 20010815
<SEC-HEADER>0001010549-01-500329.hdr.sgml : 20010815
ACCESSION NUMBER:		0001010549-01-500329
CONFORMED SUBMISSION TYPE:	10-Q
PUBLIC DOCUMENT COUNT:		3
CONFORMED PERIOD OF REPORT:	20010630
FILED AS OF DATE:		20010814

FILER:

	COMPANY DATA:	
		COMPANY CONFORMED NAME:			LEATHER FACTORY INC
		CENTRAL INDEX KEY:			0000909724
		STANDARD INDUSTRIAL CLASSIFICATION:	LEATHER & LEATHER PRODUCTS [3100]
		IRS NUMBER:				752543540
		STATE OF INCORPORATION:			DE
		FISCAL YEAR END:			1231

	FILING VALUES:
		FORM TYPE:		10-Q
		SEC ACT:		1934 Act
		SEC FILE NUMBER:	001-12368
		FILM NUMBER:		1708334

	BUSINESS ADDRESS:	
		STREET 1:		3847 EAST LOOP
		STREET 2:		820 SOUTH
		CITY:			FT WORTH
		STATE:			TX
		ZIP:			76119
		BUSINESS PHONE:		8174964414

	MAIL ADDRESS:	
		STREET 1:		3847 EAST LOOP
		STREET 2:		820 SOUTH
		CITY:			FT WORTH
		STATE:			TX
		ZIP:			76119
</SEC-HEADER>
<DOCUMENT>
<TYPE>10-Q
<SEQUENCE>1
<FILENAME>leather10q063001.txt
<TEXT>

                                    Form 10-Q

                       SECURITIES AND EXCHANGE COMMISSION

                             Washington, D.C. 20549


(Mark One)

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

For the quarterly period ended June 30, 2001

or

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

For the transition period from ___________________ to ___________________

Commission File Number 1-12368

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

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

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

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

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

                                  Yes X  No
                                     ---   ---

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

                                                     Shares outstanding as of
                 Class                                   August 14, 2001
- ----------------------------------------         -------------------------------
Common Stock, par value $.0024 per share                    9,981,161

<PAGE>

Forward-Looking Statements

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

o    changes from anticipated levels of sales, whether due to future national or
     regional economic and competitive  conditions,  including,  but not limited
     to, retail craft buying patterns, and possible negative trends in the craft
     and western retail markets,

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

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

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

o    change in tax or interest rates,

o    change in the commercial banking environment,

o    problems with the  importation  of the products that the Company buys in 22
     countries around the world,  including,  but not limited to, transportation
     problems or changes in the  political  climate of the  countries  involved,
     including the  maintenance by these countries of Most Favored Nation status
     with the United States of America, and

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

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







                                       2
<PAGE>

                            THE LEATHER FACTORY, INC.

                                    FORM 10-Q

                  FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2001


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


                                                                        PAGE NO.
                                                                        --------

PART I.  FINANCIAL INFORMATION

  Item 1.  Financial Statements

    Consolidated Balance Sheets
    June 30, 2001 and December 31, 2000  ..............................    4

    Consolidated Statements of Income
     Three and six months ended June 30, 2001 and 2000  ...............    5

    Consolidated Statements of Cash Flows
     Six months ended June 30, 2001 and 2000  .........................    6

    Consolidated Statements of Stockholders' Equity
     Six months ended June 30, 2001 and 2000  .........................    7

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

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

  Item 3.  Quantitative and Qualitative Disclosures About
            Market Risk  ..............................................   14

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  ...........................  15


SIGNATURES..............................................................  15

 EXHIBIT INDEX..........................................................  16



                                       3
<PAGE>
<TABLE>
<CAPTION>

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

                            THE LEATHER FACTORY, INC.
                           CONSOLIDATED BALANCE SHEETS

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

                                                                           June 30,      December 31,
                                                                              2001            2000
                                                                         ------------    ------------
                                                                          (UNAUDITED)
<S>                                                                      <C>             <C>
                                     ASSETS
CURRENT ASSETS:
     Cash                                                                $        287    $    234,141
     Cash restricted for payment on revolving credit facility                 412,611         390,467
     Accounts receivable-trade, net of allowance for doubtful accounts
         of $344,000 and $338,000 in 2001 and 2000, respectively            2,661,556       2,191,996
     Inventory                                                              8,993,158       9,205,898
     Deferred income taxes                                                    137,688         130,802
     Other current assets                                                     607,877         710,085
                                                                         ------------    ------------
                             Total current assets                          12,813,177      12,863,389
                                                                         ------------    ------------

PROPERTY AND EQUIPMENT, at cost                                             4,189,360       3,657,601
  Less-accumulated depreciation and amortization                           (2,723,332)     (2,494,732)
                                                                         ------------    ------------
                             Property and equipment, net                    1,466,028       1,162,869


GOODWILL, net of accumulated amortization of $1,478,000
     and $1,367,000 in 2001 and 2000, respectively                          4,650,618       4,765,092
OTHER INTANGIBLES, net of accumulated amortization of
     $146,000 and $100,000, in 2001 and 2000, respectively                    571,036         615,647
OTHER assets                                                                  280,562         279,082
                                                                         ------------    ------------
                                                                         $ 19,781,421    $ 19,686,079
                                                                         ============    ============

                      LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
     Accounts payable                                                    $  2,614,312    $  2,159,910
     Accrued expenses and other liabilities                                   945,183       1,290,613
     Income taxes payable                                                      95,965          94,795
     Notes payable and current maturities of  long-term debt                4,541,022       5,759,626
                                                                         ------------    ------------
                             Total current liabilities                      8,196,482       9,304,944
                                                                         ------------    ------------

DEFERRED INCOME TAXES                                                          70,780          72,473

NOTES PAYABLE AND LONG-TERM DEBT, net of current maturities                    11,771          13,025

COMMITMENTS AND CONTINGENCIES                                                    --              --

STOCKHOLDERS' EQUITY:
     Preferred stock, $0.10 par value; 20,000,000
         shares authorized, none issued or outstanding                           --              --
     Common stock, $0.0024 par value; 25,000,000 shares
         authorized, 9,981,161 and 9,908,161 shares issued
         and outstanding at 2001 and 2000, respectively                        23,955          23,780

     Paid-in capital                                                        4,022,407       3,946,608
     Retained earnings                                                      7,590,948       6,471,754
     Less: Notes receivable - secured by common stock                        (104,706)       (120,339)
     Accumulated other comprehensive loss                                     (30,216)        (26,166)
                                                                         ------------    ------------
                             Total stockholders' equity                    11,502,388      10,295,637
                                                                         ------------    ------------
                                                                         $ 19,781,421    $ 19,686,079
                                                                         ============    ============

</TABLE>


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

                                       4
<PAGE>
<TABLE>
<CAPTION>

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

                            THE LEATHER FACTORY, INC.
                        CONSOLIDATED STATEMENTS OF INCOME
                                   (UNAUDITED)
                THREE and SIX MONTHS ENDED JUNE 30, 2001 AND 2000

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

                                                        THREE MONTHS                 SIX MONTHS
                                                     2001          2000          2001          2000
                                                 -----------   -----------   -----------   -----------
<S>                                              <C>           <C>           <C>           <C>

NET SALES                                        $ 9,359,893   $ 7,602,405   $18,732,506   $15,007,962

COST OF SALES                                      4,381,098     3,801,372     8,869,495     7,636,338
                                                 -----------   -----------   -----------   -----------

                 Gross profit                      4,978,795     3,801,033     9,863,011     7,371,624

OPERATING EXPENSES                                 3,802,056     2,818,907     7,710,932     5,597,296
                                                 -----------   -----------   -----------   -----------

INCOME FROM OPERATIONS                             1,176,739       982,126     2,152,079     1,774,328

OTHER EXPENSE:
         Interest expense                            124,614       144,905       273,207       314,100
         Other, net                                    4,351        10,864        11,641        16,206
                                                 -----------   -----------   -----------   -----------
                 Total other expense                 128,965       155,769       284,848       330,306
                                                 -----------   -----------   -----------   -----------

INCOME BEFORE INCOME TAXES                         1,047,774       826,357     1,867,231     1,444,022

PROVISION FOR INCOME TAXES                           425,864       332,963       748,037       566,686
                                                 -----------   -----------   -----------   -----------

NET INCOME                                       $   621,910   $   493,394   $ 1,119,194   $   877,336
                                                 ===========   ===========   ===========   ===========





NET INCOME PER COMMON SHARE - Basic              $      0.06   $      0.05   $      0.11   $      0.09
                                                 ===========   ===========   ===========   ===========

NET INCOME PER COMMON SHARE--Assuming Dilution   $      0.06   $      0.05   $      0.11   $      0.09
                                                 ===========   ===========   ===========   ===========


</TABLE>




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

                                       5
<PAGE>
<TABLE>
<CAPTION>

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

                            THE LEATHER FACTORY, INC.
                      CONSOLIDATED STATEMENTS OF CASH FLOW
                                   (UNAUDITED)
                     SIX MONTHS ENDED JUNE 30, 2001 AND 2000

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


                                                                           2001           2000
                                                                       -----------    -----------
<S>                                                                    <C>            <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net income                                                           $ 1,119,194    $   877,336
  Adjustments to reconcile net income to net
   cash provided by operating activities-
     Depreciation & amortization                                           360,862        300,974
     Amortization of deferred financing costs                               26,823          8,594
     Other                                                                 (12,629)        28,444
     Net changes in assets and liabilities:
       Accounts receivable-trade, net                                     (469,559)       (71,253)
       Inventory                                                           212,740        327,365
       Income taxes                                                          1,170       (343,522)
       Other current assets                                                102,209        (81,817)
       Accounts payable                                                    454,403        144,071
       Accrued expenses and other liabilities                             (345,430)       (54,951)
                                                                       -----------    -----------
     Total adjustments                                                     330,589        257,905
                                                                       -----------    -----------

     Net cash provided by operating activities                           1,449,783      1,135,241
                                                                       -----------    -----------

CASH FLOWS FROM INVESTING ACTIVITIES:
  Purchase of property and equipment                                      (531,759)       (67,006)
  Increase in other assets                                                  (1,481)          --
  Other intangible costs                                                      --              457
                                                                       -----------    -----------

     Net cash used in investing activities                                (533,240)       (66,549)
                                                                       -----------    -----------

CASH FLOWS FROM FINANCING ACTIVITIES:
  Net decrease in revolving credit loans                                (1,188,008)      (747,872)
  Proceeds from notes payable and long-term debt                            18,676           --
  Payments on notes payable and long-term debt                             (50,528)      (195,068)
  Change in cash restricted for payment on revolving credit facility       (22,144)        44,139
  Payments received on notes secured by common stock                        15,633          5,876
  Proceeds from issuance of common stock                                    75,974         10,000
                                                                       -----------    -----------

     Net cash used in financing activities                              (1,150,397)      (882,925)
                                                                       -----------    -----------

NET INCREASE (DECREASE) IN CASH                                           (233,854)       185,767

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

CASH, end of period                                                    $       287    $   320,232
                                                                       ===========    ===========

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
  Interest paid during the period                                      $   250,536    $   311,348
  Income taxes paid during the period, net of (refunds)                $   571,601    $   878,623

</TABLE>


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

                                       6
<PAGE>
<TABLE>
<CAPTION>

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

                            THE LEATHER FACTORY, INC.
                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                                   (UNAUDITED)
                     SIX MONTHS ENDED JUNE 30, 2001 AND 2000

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


                                         Common Stock                                            Notes       Accumulated
                                 ---------------------------                                  receivable        Other
                                    Number           Par          Paid-in       Retained     - secured by    Cumulative
                                   of shares        value         capital       Earnings     common stock       Loss
                                 ------------   ------------   ------------   ------------   ------------   ------------
<S>                              <C>            <C>            <C>            <C>            <C>            <C>

BALANCE, December 31, 1999          9,853,161   $     23,648   $  3,901,740   $  4,930,434   $   (153,416)  $    (21,981)

 Payments on notes receivable -
    secured by common stock              --             --             --             --            5,876           --

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

 Net Income                              --             --             --          877,336           --             --

 Translation adjustment                  --             --             --             --             --           (2,793)
                                 ------------   ------------   ------------   ------------   ------------   ------------

BALANCE, June 30, 2000              9,873,161   $     23,696   $  3,911,692   $  5,807,770   $   (147,540)  $    (24,774)
                                 ============   ============   ============   ============   ============   ============


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

 Payments on notes receivable -
    secured by common stock              --             --             --             --           15,633           --

 Shares issued - employee
    Stock options exercised            73,000            175         75,799           --             --             --

 Net Income                              --             --             --        1,119,194           --             --

 Translation adjustment                  --             --             --             --             --           (4,050)
                                 ------------   ------------   ------------   ------------   ------------   ------------

BALANCE, June 30, 2001              9,981,161   $     23,955   $  4,022,407   $  7,590,948   $   (104,706)  $    (30,216)
                                 ============   ============   ============   ============   ============   ============


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

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

 Payments on notes receivable -
    secured by common stock                                           5,876

 Shares issued - employee
    Stock options exercised                                          10,000

 Net Income                                                         877,336        877,336

 Translation adjustment                                              (2,793)        (2,793)
                                                               ------------

BALANCE, June 30, 2000                                         $  9,570,844
                                                               ============

                                                                              ------------
 Comprehensive income for the six months ended June 30, 2000                  $    874,543
                                                                              ============


BALANCE, December 31, 2000                                       10,295,637

 Payments on notes receivable -
    secured by common stock                                          15,633

 Shares issued - employee
    Stock options exercised                                          75,974

 Net Income                                                       1,119,194      1,119,194

 Translation adjustment                                              (4,050)        (4,050)
                                                               ------------

BALANCE, June 30, 2001                                         $ 11,502,388
                                                               ============

                                                                              ------------
 Comprehensive income for the six months ended June 30, 2001                  $  1,115,144
                                                                              ============

</TABLE>


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

                                       7
<PAGE>
<TABLE>
<CAPTION>

                            THE LEATHER FACTORY, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



1.  BASIS OF PRESENTATION

In  the  opinion  of  the  Company,  the  accompanying   consolidated  financial
statements  contain  all  adjustments   (consisting  of  only  normal  recurring
adjustments)  necessary to present fairly its financial  position as of June 30,
2001 and December 31, 2000, and the results of operations and cash flows for the
three  and six month  periods  ended  June 30,  2001 and 2000.  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 2000 Annual Report on Form 10-K ("Annual
Report").

Certain   reclassifications  have  been  made  to  conform  the  2000  financial
statements to the presentation in 2001. The  reclassifications  had no effect on
net income.



2.  INVENTORY

The components of inventory consist of the following:

                                                              As of
                                               ---------------------------------
                                                    June 30,       December 31,
                                                       2001              2000
                                               ---------------   ---------------
            Finished goods held for sale           $ 7,860,718       $ 8,175,429
            Raw materials and work in process        1,132,440         1,030,469
                                               ---------------   ---------------
                                                   $ 8,993,158       $ 9,205,898
                                               ===============   ===============


3.  EARNINGS PER SHARE

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

                                                              Three Months Ended           Six Months Ended
                                                                   June 30,                    June 30,
                                                          -------------------------   -------------------------
                                                              2001          2000          2001          2000
                                                          -----------   -----------   -----------   -----------
<S>                                                       <C>           <C>           <C>           <C>
Numerator:
     Net  income                                          $   621,910   $   493,394   $ 1,119,194   $   877,336
                                                          -----------   -----------   -----------   -----------
     Numerator for basic and diluted earnings per share       621,910       493,394     1,119,194       877,336

Denominator:
     Weighted-average shares outstanding-basic              9,971,952     9,873,161     9,960,785     9,866,458

Effect of dilutive securities:
     Stock options                                            159,819       138,192       126,122       123,114
     Warrants                                                 198,045       176,074       180,368       168,145
                                                          -----------   -----------   -----------   -----------
Dilutive potential common shares                              357,864       314,266       306,490       291,259

     Denominator for diluted earnings per share-
     weighted-average shares                               10,329,816    10,187,427    10,267,275    10,157,717
                                                          ===========   ===========   ===========   ===========

     Basic earnings per share                             $      0.06   $      0.05   $      0.11   $      0.09
                                                          ===========   ===========   ===========   ===========

     Diluted earnings per share                           $      0.06   $      0.05   $      0.11   $      0.09
                                                          ===========   ===========   ===========   ===========

</TABLE>

                                       8
<PAGE>
<TABLE>
<CAPTION>

Unexercised  stock options owned by certain  employees and directors to purchase
6,000 shares of common stock as of June 30, 2001 and 2000,  were not included in
the  computations  of diluted  EPS  because the  options'  exercise  prices were
greater than or equal to the average market price of the common stock during the
period.


4.  SEGMENT INFORMATION

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

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

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

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


                                          The Leather    Tandy Leather    Roberts,
                                            Factory        Company      Cushman & Co       Total
                                         ------------    ------------   ------------   ------------
<S>                                      <C>             <C>            <C>            <C>
For the quarter ended June 30, 2001
Net Sales                                $  7,015,764    $  1,787,526   $    556,603   $  9,359,893
Gross Profit                                3,783,271       1,003,657        191,867      4,978,795
Operating earnings                          1,057,657          73,761         45,321      1,176,739
Interest expense                                                                           (124,614)
Other, net                                                                                   (4,351)
                                                                                       ------------
Income before income taxes                                                                1,047,774
                                                                                       ------------
     Depreciation and amortization            129,066          18,723         38,190        185,979
     Total assets                        $ 11,970,568    $  2,744,853   $  5,066,000   $ 19,781,421
                                         ------------    ------------   ------------   ------------

For the quarter ended June 30, 2000
Net Sales                                $  6,908,984            --     $    693,421   $  7,602,405
Gross Profit                                3,539,724            --          261,309      3,801,033
Operating earnings                            849,498            --          132,628        982,126
Interest expense                                                                           (144,905)
Other, net                                                                                  (10,864)
                                                                                       ------------
Income before income taxes                                                                  826,357
                                                                                       ------------
     Depreciation and amortization            112,640            --           38,486        151,126
     Total assets                        $ 12,673,986            --     $  5,225,123   $ 17,899,109
                                         ------------    ------------   ------------   ------------


                                       9
<PAGE>

                                          The Leather    Tandy Leather    Roberts,
                                            Factory        Company      Cushman & Co       Total
                                         ------------    ------------   ------------   ------------
For the six months ended June 30, 2001
Net Sales                                $ 14,119,556    $  3,562,642   $  1,050,308   $ 18,732,506
Gross Profit                                7,547,690       1,981,967        333,354      9,863,011
Operating earnings                          2,061,359          54,097         36,623      2,152,079
Interest expense                                                                           (273,207)
Other, net                                                                                  (11,641)
                                                                                       ------------
Income before income taxes                                                                1,867,231
                                                                                       ------------
     Depreciation and amortization            260,110          54,584         76,366        391,060
     Total assets                        $ 11,970,568    $  2,744,853   $  5,066,000   $ 19,781,421
                                         ------------    ------------   ------------   ------------

For the six months ended June 30, 2000
Net Sales                                $ 13,756,529            --     $  1,251,433   $ 15,007,962
Gross Profit                                6,907,989            --          463,635      7,371,624
Operating earnings                          1,528,131            --          246,197      1,774,328
Interest expense                                                                           (314,100)
Other, net                                                                                  (16,206)
                                                                                       ------------
Income before income taxes                                                                1,444,022
                                                                                       ------------
     Depreciation and amortization            229,967            --           77,636        307,603
     Total assets                        $ 12,673,986            --     $  5,225,123   $ 17,899,109
                                         ------------    ------------   ------------   ------------

</TABLE>


Net sales for geographic areas was as follows:        Quarter ended June 30,
                                                        2001          2000
                                                    -----------   -----------
United States                                       $ 8,719,941   $ 7,275,645
All other countries                                     639,952       326,760
                                                    -----------   -----------
                                                    $ 9,359,893   $ 7,602,405
                                                    ===========   ===========

                                                    Six months ended June 30,
                                                        2001          2000
                                                    -----------   -----------
United States                                       $17,516,958   $14,343,657
All other countries                                   1,215,548       664,305
                                                    -----------   -----------
                                                    $18,732,506   $15,007,962
                                                    ===========   ===========


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

General
- -------

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

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

                                       10
<PAGE>
<TABLE>
<CAPTION>

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


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

Income Statement Comparison

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

                                        % of Net Sales
                                      Three months ended
                                            June 30,                     Change in $ and %
                                -----------------------------     -----------------------------
                                    2001             2000            $ Change        % Change
                                -------------    ------------     -------------    ------------
<S>                             <C>              <C>              <C>              <C>
Net sales                           100.0%          100.0%           $1,757,489        23.12%
Cost of sales                       46.8             50.0               579,727        15.25
                                -------------    ------------     -------------
Gross Profit                        53.2             50.0             1,177,762        30.99
Operating expenses                  40.6             37.1               983,148        34.88
                                -------------    ------------     -------------
Income from operations              12.6             12.9               194,614        19.82
Interest expense and other           1.4              2.0               (26,804)      (17.21)
                                -------------    ------------     -------------
Income before income taxes          11.2             10.9               221,418        26.79
Income tax provision                 4.6              4.4                92,902        27.90
                                -------------    ------------     -------------
Net income                          6.6%              6.5%           $  128,516        26.05
                                =============    ============     =============


                                        % of Net Sales
                                       Six months ended
                                            June 30,                     Change in $ and %
                                -----------------------------     -----------------------------
                                     2001            2000            $ Change        % Change
                                -------------    ------------     -------------    ------------
Net sales                           100.0%          100.0%           $3,724,544        24.82%
Cost of sales                        47.3            50.9             1,233,157        16.15
                                -------------    ------------     -------------
Gross Profit                         52.7            49.1             2,491,386        33.80
Operating expenses                   41.3            37.3             2,113,636        37.76
                                -------------    ------------     -------------
Income from operations               11.4            11.8               377,750        21.29
Interest expense and other            1.4             2.2               (45,458)      (13.76)
                                -------------    ------------     -------------
Income before income taxes           10.0             9.6               423,208        29.31
Income tax provision                  4.0             3.8               181,350        32.00
                                -------------    ------------     -------------
Net income                            6.0%            5.8%           $  241,858        27.57
                                =============    ============     =============

</TABLE>


                                       11
<PAGE>


Revenues

The Company produced another quarter of strong sales,  totaling $9.4 million for
the second  quarter of 2001  compared to $7.6 million for the second  quarter of
2000.  Tandy  Leather's  sales of $1.8 million  accounted for the increase.  TLF
retail sales appeared virtually flat for the current quarter, compared to second
quarter 2000 retail  sales.  We believe that the primary  reason for the lack of
growth  is  due to the  timing  of the  release  of our  annual  catalog,  which
historically  generates  strong  retail  sales upon its  release.  In 2000,  our
catalog was  distributed in April; in 2001, our catalog was released in July. As
a result,  the 2nd quarter 2001 sales (with no new catalog) is being compared to
2nd quarter 2000 sales (with a new catalog). Based on our history, we anticipate
strong  gains in our 3rd quarter  2001 retail  sales to  compensate  for the 2nd
quarter's lack of growth.

Our craft sales continue to show promising  growth as we continue  through 2001.
Current quarter sales increased 52% over sales in the second quarter a year ago.
Leather  continues to gain  popularity  in the craft market and we have expanded
our craft  programs  with new  products  to our  largest  craft  customers.  Our
Authorized  Sales Center  ("ASC")  program  continues  its growth in the current
quarter  with  an  11%  increase  over  this  same  category  a  year  ago.  Our
institutional  sales  (prisons,  prisoners,  schools,  hospitals)  have suffered
somewhat in the second quarter, particularly in Texas. Following a major escape,
Texas suspended all hobbycrafts sales to its prisons throughout most of 2001. We
are beginning to see this suspension  being lifted in some of the prisons in the
beginning  of the  third  quarter  of 2001 and  expect  this  trend to  continue
throughout the remainder of the year, barring some unforeseen occurrence.  Sales
increases  to  prisons  and  prisoners  in  other  states,  such as  Washington,
California, and North Carolina, have offset some of the decrease in sales to the
Texas prison market.

Costs, Gross Profit, and Expenses

Cost of sales as a  percentage  of revenue  was 46.8% for the second  quarter of
2001 as compared to 50.0% for the same  quarter in 2000.  This  translates  into
gross profit margins of 53.2% and 50.0% for the quarters ended June 30, 2001 and
2000,  respectively.  This improvement is primarily the result of more efficient
and aggressive  purchasing of merchandise.  Inventory  control and costing is an
on-going  process;  however,  the  acquisition of Tandy Leather in November 2000
created the opportunity to analyze and overhaul our entire  inventory line, from
a purchasing standpoint.  We took advantage of the increase in volume purchasing
power  afforded  by the Tandy  Leather  transaction,  and as a  result,  we have
negotiated better pricing with vendors, particularly on some of our most popular
items.  As a result,  we were able to  increase  gross  profit  margins  without
necessarily raising selling prices to our customers.

Operating  expenses were $983,000  higher in the second  quarter of 2001 than in
the same quarter of 2000. Tandy Leather  contributed  $930,000 of this increase.
As a  percentage  of sales,  excluding  the impact of Tandy  Leather,  operating
expenses  increased less than 1% of sales from last year's totals.  The increase
continues to be the result of additional  advertising  efforts toward the retail
market. Tandy Leather's operating efficiency has improved slightly in the second
quarter of 2001 as operating  expenses were 52% of sales (compared to 56% in the
first quarter of 2001).  TLF's  operating  efficiency  remained steady at 38% in
both the first and second quarters of 2001.  Management continues its efforts to
improve  Tandy  Leather's  operating  efficiency,  striving  for  a  ratio  more
consistent with that of TLF.

The Company experienced some increases in its costs of leather during the second
quarter,  and it is possible that leather prices paid by us may increase further
as a result of the foot and mouth and mad cow diseases in Europe. Because of the
uncertainty in leather prices, we have attempted to maintain a certain amount of
stability in availability and price by purchasing  larger  quantities of leather
in bulk in order to minimize the effect of rising prices. Even though it appears
that leather  prices are  beginning to drop as we begin the third  quarter,  the
Company's profit margins may be adversely affected in the next several quarters,
despite our efforts.

                                       12
<PAGE>

Other (Income) Expense

Other  expenses  were down 17.2% in the second  quarter of 2001  compared to the
same quarter of 2000. This reduction is primarily in interest expense due to the
decrease in average  outstanding  debt balances and lower average interest rates
in 2001 as compared to 2000.

Net Income

The Company  reported net income of $622,000  during the second  quarter of 2001
compared  to net  income  of  $493,000  for the  same  period  a year  ago.  The
significant  improvement  was principally due to the higher gross profit margins
earned as a result of more efficient purchasing.


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

The primary  sources of  liquidity  and capital  resources  during the first six
months of 2001 were funds  provided  by  operating  activities  in the amount of
$1,450,000  and the  Company's  Credit and Security  Agreement  with Wells Fargo
Business Credit,  Inc. ("WFBC").  The largest portion of the operating cash flow
was used to pay down debt balances and purchase property and equipment.  Current
year capital expenditures of $532,000 as of June 30, 2001 consist of $280,000 in
computer equipment,  $172,000 in equipment and leasehold improvements related to
the Tandy acquisition, and $80,000 in various equipment and furniture purchases.

The Company also uses a revolving  credit facility under the Credit and Security
Agreement to manage cash flow. In an attempt to apply all available  cash to the
balance on this revolving credit facility,  the Company recorded a small balance
of unrestricted  cash at June 30, 2001. At the same date,  however,  the Company
had in excess of  $900,000  in  available  credit  under  the  revolving  credit
facility.

The  Company's  investment in accounts  receivable  was $2.7 million at June 30,
2001,  up $470,000  from $2.2 million at year-end  2000.  This is primarily  the
result of increased  sales to our large craft  customers  who have open accounts
with us. Inventory decreased $213,000 to $9.0 million at June 30, 2001 from $9.2
million at year-end 2000.  Inventory turnover increased to an annualized rate of
4.12 times during the first six months of 2001, an improvement over the turnover
of 3.64 times for all of 2000.  Compared to the  annualized  inventory  turnover
rate of 4.26 times as of March 31, 2001, we experienced a slight decrease in the
rate as of June 30, 2001. As discussed previously,  management expected a slight
reduction  in  inventory  turns in the second  quarter  due to the  increase  in
leather purchases during the quarter.

Accounts payable increased 21% to $2.6 million at the end of the second quarter,
due primarily to the increased  purchases of leather in the second quarter.  The
additional  purchases  were  transacted  in an attempt to  minimize  potentially
significant  price  increases as a result of the foot and mouth  disease and the
mad cow scare.

Under the Credit and  Security  Agreement,  WFBC  agreed to provide a  revolving
credit  facility of up to $8,500,000.  On November 30, 2000, the Company entered
into the First  Amendment to the Credit and Security  Agreement  ("Amendment 1")
with WFBC.  There,  WFBC consented to the Tandy leather  transaction and amended
certain  financial tests to reflect the acquisition of the Tandy Leather assets,
to make  previously  contemplated  extensions  of these tests,  and to raise the
standards  required  in those tests based on the  Company's  improved  financial
performance since the credit agreement was originally signed.

On February 7, 2001, the Company entered into the Second Amendment to the Credit
and Security Agreement  ("Amendment 2") with WFBC. There, WFBC granted a special
accommodation  advance of a maximum  of  $300,000  to be used by the  Company as
needed  through  July  2001.  At the  time  of  Amendment  2,  the  Company  was
anticipating  significant  cash  requirements  for  payment of income  taxes and
annual ESOP contribution and manager bonuses.  However,  the Company was able to
generate  adequate  cash flow from its  operations  to meet  these  annual  cash
payments and the special accommodation advance was not needed.

                                       13
<PAGE>

On June 14, 2001, the Company entered into the Third Amendment to the Credit and
Security  Agreement  ("Amendment 3") with WFBC. There, WFBC reduced the interest
rate on the revolving  credit facility from prime + 1/2% to prime (6.75% at June
30,  2001).  In  addition,  the capital  expenditure  limit was  increased  from
$500,000  to  $650,000  for  2001 to  accommodate  the  additional  expenditures
incurred following the acquisition of Tandy Leather.

The revolving credit facility with WFBC is based upon the level of the Company's
accounts  receivable and inventory.  At June 30, 2001 and December 31, 2000, the
available and unused portion of the credit facility was  approximately  $912,000
and $885,000, respectively.

The Company believes that the current sources of liquidity and capital resources
will be sufficient to fund current  operations  and the opening of any potential
new  sales/distribution  units.  In 2001, the funding for the opening of any new
units is expected to be provided by operating leases,  cash flows from operating
activities,  and the revolving credit facility. As previously  disclosed,  a new
unit is to be opened in the third  quarter of 2001.  Historically,  the  Company
invests  approximately  $125,000  in  opening  a new unit.  However,  management
expects the new unit  (located in  Toronto,  Ontario)  opening in July 2001 will
require slightly less capital to open.


Item 3.  Quantitative and Qualitative Disclosures About Market Risk.

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


PART II. OTHER INFORMATION

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

On May 24, 2001, the Annual Meeting of the  Stockholders of the Company was held
in the Longhorn Room at The Stockyards Hotel, Fort Worth,  Texas to consider and
act on the following manner:

     (1)  To elect the  following  individuals  to serve as directors  until the
          Company's  2002  Annual  Meeting  of   Stockholders   or  until  their
          successors are duly elected and qualified:

          Shannon L. Greene          Michael A. Markwardt     Anthony C. Morton
          Joseph R. Mannes           Robin L. Morgan          Wray Thompson
          H.W. "Hub" Markwardt       Ronald C. Morgan         William M. Warren

As to item (1) above,  the following table shows the votes cast for and against,
as well as those that abstained from voting,  the election of these  individuals
as directors of the Company:

                                                For       Against    Abstaining
                                                ---       -------    ----------
              Shannon L. Greene              9,528,502        101         6,000
              Joseph R. Mannes               9,527,997        606         6,000
              H.W. "Hub" Markwardt           9,528,502        101         6,000
              Michael A. Markwardt           9,526,997      1,606         6,000
              Robin L. Morgan                9,527,481      1,122         6,000
              Ronald C. Morgan               9,527,502      1,101         6,000
              Anthony C. Morton              9,527,502      1,101         6,000
              Wray Thompson                  9,527,502      1,101         6,000
              William M. Warren              9,527,502      1,101         6,000



                                       14
<PAGE>

The foregoing  matters are described in detail in the Company's  proxy statement
dated April 24, 2001, for the 2001 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


                                   SIGNATURES

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

                                          THE LEATHER FACTORY, INC.
                                                (Registrant)


Date:  August 14, 2001                    By: /s/ Wray Thompson
                                              --------------------------
                                              Wray Thompson
                                                  Chairman of the Board and
                                                  Chief Executive Officer

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




                                       15
<PAGE>

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

      *4.1        Amendment to Loan and  Security  Agreement  dated  February 7,
                  2001,  by and  between The  Leather  Factory,  Inc. a Delaware
                  corporation,  The Leather Factory,  Inc., a Texas corporation,
                  The Leather Factory,  Inc., an Arizona  corporation,  Roberts,
                  Cushman & Company, Inc., Hi-Line Leather & Manufacturing,  and
                  Tandy Leather  Company,  Inc. (f/k/a Leather Tan  Acquisition,
                  Inc.) and Wells Fargo Business Credit, Inc.

      *4.2        Amendment to Loan and Security  Agreement dated June 14, 2001,
                  by  and  between  The   Leather   Factory,   Inc.  a  Delaware
                  corporation,  The Leather Factory,  Inc., a Texas corporation,
                  The Leather Factory,  Inc., an Arizona  corporation,  Roberts,
                  Cushman & Company, Inc., Hi-Line Leather & Manufacturing,  and
                  Tandy Leather  Company,  Inc. (f/k/a Leather Tan  Acquisition,
                  Inc.) and Wells Fargo Business Credit, Inc.





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




                                       16


</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-4.1
<SEQUENCE>3
<FILENAME>leather10q63001ex41.txt
<DESCRIPTION>SECOND AMENDMENT TO CREDIT & SECURITY AGREEMENT
<TEXT>

                                   EXHIBIT 4.1

                SECOND AMENDMENT TO CREDIT AND SECURITY AGREEMENT

         This Amendment,  dated as of February 7, 2001, is made by and among The
Leather Factory,  Inc., a Delaware  corporation,  The Leather  Factory,  Inc., a
Texas corporation,  The Leather Factory, Inc., an Arizona corporation,  Roberts,
Cushman & Company, Inc., a New York corporation, Hi-Line Leather & Manufacturing
Company, a California  corporation,  and Leather Tan Acquisition,  Inc., a Texas
corporation  (collectively,  the  "Borrowers")  and Wells Fargo Business Credit,
Inc., a Minnesota corporation (the "Lender").

                                    Recitals
                                    --------


       The  Borrowers  and the Lender have  entered  into a Credit and  Security
Agreement  dated as of November  22, 1999,  and a First  Amendment to Credit and
Security  Agreement  dated  as of  November  30,  2000 (as so  supplemented  and
amended, the "Credit Agreement").

       The  Borrowers  have  requested  that certain  amendments  be made to the
Credit Agreement,  which the Lender is willing to make pursuant to the terms and
conditions set forth herein.

       ACCORDINGLY, the parties hereto hereby agree as follows:

       1.     Defined Terms.  Capitalized terms used in this Amendment which are
              defined in the Credit  Agreement  shall have the same  meanings as
              defined  therein,  unless otherwise  defined herein.  In addition,
              Section  1.1 of the  Credit  agreement  is  amended  by  adding or
              amending, as the case may be, the following definitions:

       "'Borrowing Base' means, at any time the lesser of:

               (a)  the Maximum Line; or

               (b)  subject  to change  from time to time in the  Lender's  sole
                    discretion, the sum of:

                    (i)  85% of Eligible Accounts, plus
                    (ii) the lesser of (A) the Eligible  Inventory  Advance Rate
                         times Eligible  Inventory or (B) the Eligible Inventory
                         Cap, plus
                    (iii) the Special Accommodation Component."

       "'Default Rate' means, with respect to the Revolving  Advances other than
Special Accommodation  Advances, an annual rate equal to three percent (3%) over
the Revolving  Floating Rate,  which rate shall change when and as the Revolving
Floating Rate changes,  with respect to the Term Advances,  an annual rate equal
to three percent (3%) over the Term Floating Rate,  which rate shall change when
and as  the  Term  Floating  Rate  changes,  and  with  respect  to the  Special
Accommodation  Advances,  an annual  rate equal to three  percent  (3%) over the
Special  Accommodation  Floating  Rate,  which rate shall change when and as the
Special Accommodation Floating Rate changes."

                                       17
<PAGE>

       "'Special  Accommodation  Advances'  means the portion of the outstanding
Revolving  Advances  that is less  than or  equal to the  Special  Accommodation
Component."

       "'Special Accommodation  Component' means during each month listed below,
the amount set forth across from it:

          ------------------------------------------------ ---------------------
                             Month                                Amount
          ------------------------------------------------ ---------------------
                         February 2001                           $300,000
          ------------------------------------------------ ---------------------
                           March 2001                            $250,000
          ------------------------------------------------ ---------------------
                           April 2001                            $200,000
          ------------------------------------------------ ---------------------
                            May 2001                             $150,000
          ------------------------------------------------ ---------------------
                           June 2001                             $100,000
          ------------------------------------------------ ---------------------
                           July 2001                             $50,000
          ------------------------------------------------ ---------------------
                 August 1, 2001 and thereafter                     $0"
          ------------------------------------------------ ---------------------

       "'Special  Accommodation Floating Rate' means an annual rate equal to the
sum of the Prime Rate plus one and one half  percent  (1.5%),  which annual rate
shall change when and as the Prime Rate changes."

       2.     Revolving Note.  Section 2.9(a) of the Credit  Agreement is hereby
              amended to read as follows:

                     "(a) Revolving Note. Except as set forth in Sections 2.9(d)
              and 2.9(f), the portion of the outstanding Revolving Advances that
              is not a Special  Accommodation Advance shall bear interest at the
              Revolving  Floating  Rate and the Special  Accommodation  Advances
              shall bear interest at the Special Accommodation Floating Rate."

       3.     No Waiver of Default. The execution and delivery of this Amendment
              does not  constitute  a waiver  of any  Event of  Default  and the
              Lender  reserves  the right to enforce  its  rights  and  remedies
              provided  in the Credit  Agreement  including  its right to charge
              interest at the  Default  Rate from the  beginning  of the Default
              Period.

       4.     No Other Changes.  Except as explicitly amended by this Amendment,
              all of the terms and  conditions  of the  Credit  Agreement  shall
              remain in full force and effect and shall  apply to any advance or
              letter of credit thereunder.

       5.     Fee.  The  Borrowers  shall pay to the  Lender a fully  earned and
              non-refundable fee of $3,000 due and payable upon the execution of
              this Amendment.

       6.     Conditions  Precedent.  This Amendment shall be effective when the
              Lender shall have received an executed  original hereof,  together
              with each of the following,  each in substance and form acceptable
              to the Lender in its sole discretion:

              (a)    The  Acknowledgement  and Agreement of Guarantors set forth
                     at  the  end of  this  Amendment,  duly  executed  by  each
                     Guarantor.

                                       18
<PAGE>

              (b)    A certificate of the Secretary of the Borrowers  certifying
                     as to (i) the resolutions of the boards of directors of the
                     Borrowers  approving  the  execution  and  delivery of this
                     Amendment, (ii) the fact that the articles of incorporation
                     and  bylaws  of  the  Borrowers,   which  were   previously
                     certified  and  delivered  to the  Lender  pursuant  to the
                     Certificates  of Authority of the  Borrowers'  secretary or
                     assistance  secretary  each dated as of  November 22, 1999,
                     continue in full force and effect and have not been amended
                     or   otherwise   modified   except  as  set  forth  in  the
                     Certificate to be delivered,  and (iii) certifying that the
                     officers  and  agents  of  the   Borrowers  who  have  been
                     certified to the Lender,  pursuant to the  Certificates  of
                     Authority  of  the   Borrowers'   secretary  or  assistance
                     secretary  each dated as of  November  22,  1999,  as being
                     authorized  to sign and to act on behalf  of the  Borrowers
                     continue to be so  authorized  or setting  forth the sample
                     signatures  of  each  of the  officers  and  agents  of the
                     Borrowers  authorized to execute and deliver this Amendment
                     and all other  documents,  agreements and  certificates  on
                     behalf of the Borrowers.
              (c)    Payment of the fee as described in paragraph 5 hereof.
              (d)    Such other matters as the Lender may require.

       7.     Representations and Warranties. The Borrowers hereby represent and
              warrant to the Lender as follows:

              (a)    The  Borrowers  have all  requisite  power and authority to
                     execute  this   Amendment  and  to  perform  all  of  their
                     obligations  hereunder and under the Loan Document and this
                     Amendment has been duly executed and delivered on behalf of
                     the Borrowers and constitutes the legal,  valid and binding
                     agreement  of the  Borrowers,  enforceable  against them in
                     accordance with its terms.
              (b)    The execution, delivery and performance by the Borrowers of
                     the  Amendment  has been duly  authorized  by all necessary
                     action and does not (i) require any authorization,  consent
                     or approval  by any  governmental  department,  commission,
                     board,  bureau,  agency  or  instrumentality,  domestic  or
                     foreign  (ii)  violate any  provision  of any law,  rule or
                     regulation  or of any  order,  writ,  injunction  or decree
                     presently in effect, having applicability to the Borrowers,
                     or  the   organizational   agreements   applicable  to  the
                     Borrowers,  or (iii) result in a breach of or  constitute a
                     default  under any  indenture  or credit  agreement  or any
                     other agreement,  lease or instrument to which any Borrower
                     is a party or by which any  properties  of any Borrower may
                     be bound or affected.

              (c)    All of the  representations  and  warranties  contained  in
                     Article V of the Credit  Agreement are correct on and as of
                     the date  hereof  as  though  made on and as of such  date,
                     except  to  the  extent  that  such   representations   and
                     warranties relate solely to an earlier date.

       8.     References.  All  references  in the  Credit  Agreement  to  "this
              Agreement"  shall be deemed to refer to the  Credit  Agreement  as
              amended  hereby;  and any and all references in the Loan Documents
              hereto  to the  Credit  Agreement  shall be deemed to refer to the
              Credit Agreement as amended hereby.

                                       19
<PAGE>

       9.     Release.  The  Borrowers  and  each  Guarantor,   by  signing  the
              Acknowledgment and Agreement of Guarantors set forth below, hereby
              absolutely and  unconditionally  release and forever discharge the
              Lender,  and  any  and  all  participants,   parent  corporations,
              subsidiary,   affiliated  corporations,   insurers,   indemnitors,
              successors  and  assigns,  together  with all of the  present  and
              former  directors,  officers,  agents and  employees of any of the
              foregoing, from any and all claims, demands or causes of action of
              any kind, nature or description,  whether arising in law or equity
              or upon  contract  or tort or under  any state or  federal  law or
              otherwise,  which any of the Borrowers or such  Guarantor has had,
              or now has, or has made claim to have  against any such person for
              or by  reason  of  any  act,  omission,  matter,  cause  or  thing
              whatsoever arising from the beginning of time to and including the
              date of this Amendment,  whether such claims demands and causes of
              action are matured or unmatured or known or unknown.

       10.    Costs and Expenses.  The Borrowers hereby reaffirm their agreement
              under the  Credit  Agreement  to pay or  reimburse  the  Lender on
              demand  for all  costs  and  expenses  incurred  by the  Lender in
              connection  with  the  Loan  Documents  and  all  other  documents
              contemplated thereby,  including without limitation all reasonable
              fees and  disbursements  of legal  counsel.  Without  limiting the
              generality of the foregoing,  the Borrowers  specifically agree to
              pay all fees and  disbursements  of  counsel to the Lender for the
              services   performed  by  such  counsel  in  connection  with  the
              preparation  of this  Amendment and the documents and  instruments
              incidental hereto. The Borrowers hereby agree that the Lender may,
              at any  time or from  time to  time  in its  sole  discretion  and
              without further  authorization by the Borrowers,  make a Revolving
              Advance to the  Borrowers,  or apply the proceeds of any loan, for
              the  purpose  of paying any such  fees,  disbursements,  costs and
              expenses.

       11.    Counterparts.  This Amendment and the Acknowledgment and Agreement
              of Guarantors may be executed in any number of counterparts,  each
              of  which  when so  executed  and  delivered  shall be  deemed  an
              original  and all of which  counterparts,  taken  together,  shall
              constitute one in the same instrument.


       IN WITNESS  WHEREOF,  the parties hereto have caused this Amendment to be
duly executed as of the day and year first above written.

WELLS FARGO BUSINESS CREDIT, INC.     THE LEATHER FACTORY, INC., a Delaware
                                      corporation, THE LEATHER FACTORY, INC., an
                                      Arizona corporation, THE LEATHER FACTORY,
By   /s/ Thomas Kruger                INC., a Texas corporation, ROBERTS,
     -----------------                CUSHMAN &  COMPANY, INC., HI-LINE LEATHER
     Thomas Krueger                   & MANUFACTURING COMPANY, TANDY LEATHER
     Its Vice President               COMPANY, INC. f/k/a Leather Tan
                                      Acquisition, Inc.

                                            By  /s/Wray Thompson
                                            --------------------
                                                 Wray Thompson
                                                 Its President



                                       20


</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-4.2
<SEQUENCE>4
<FILENAME>leather10q63001ex42.txt
<DESCRIPTION>THIRD AMENDMENT TO CREDIT & SECURITY AGREEMENT
<TEXT>

                                   EXHIBIT 4.2

                THIRD AMENDMENT TO CREDIT AND SECURITY AGREEMENT
                             AND WAIVER OF DEFAULTS

              This  Amendment,  dated as of June 14, 2001,  is made by and among
The Leather Factory, Inc., a Delaware corporation;  The Leather Factory, Inc., a
Texas corporation;  The Leather Factory, Inc., an Arizona corporation;  Roberts,
Cushman & Company, Inc., a New York corporation; Hi-Line Leather & Manufacturing
Company,  a California  corporation;  and Tandy Leather  Company,  Inc., a Texas
corporation f/k/a Leather Tan Acquisition, Inc. (collectively, the "Borrowers"),
and Wells Fargo Business Credit, Inc., a Minnesota corporation (the "Lender").

                                    Recitals
                                    --------

       The  Borrowers  and the Lender have  entered  into a Credit and  Security
Agreement  dated as of  November  22,  1999,  a First  Amendment  to Credit  and
Security  Agreement  dated as of November  30, 2000,  and a Second  Amendment to
Credit and Security  Agreement  dated as of February 7, 2001 (as so supplemented
and amended, the "Credit Agreement").

       The  Borrowers  have  requested  that certain  amendments  be made to the
Credit Agreement and certain Events of Default be waived.  The Lender is willing
to grant the Borrowers'  requests pursuant to the terms and conditions set forth
herein.

       ACCORDINGLY, the parties hereto hereby agree as follows:

1. Defined Terms.  Capitalized terms used in this Amendment which are defined in
the Credit  Agreement  shall have the same meanings as defined  therein,  unless
otherwise  defined herein.  In addition,  Section 1.1 of the Credit Agreement is
amended by adding or amending, as the case may be, the following definitions:

              "`Revolving Floating Rate' means an annual rate equal to the Prime
       Rate, which annual rate shall change when and as the Prime Rate changes."

2. Audit Fees.  Section  2.10 (f) of the Credit  Agreement is amended to read as
follows:


       "(f) Audit Fees. The Borrowers shall pay to the Lender, on demand,  audit
       fees in  connection  with any  audits  or  inspections  conducted  by the
       Lender,  or any third party on behalf of the Lender, of any Collateral or
       the Borrowers'  operations or business at the rates established from time
       to time by the Lender as its audit fees  (which fees are  currently  $600
       per day per auditor),  together with all reasonable  out-of-pocket  costs
       and  expenses  incurred  in  conducting  any such  audit  or  inspection;
       provided, however, that except during Default Periods, the Borrower shall
       not have to  reimburse  the  Lender  for such  fees,  costs and  expenses
       incurred in  connection  with more than (i) two audits  conducted  by the
       Lender per fiscal year and (ii) two audits  conducted by a third party on
       behalf of the Lender per fiscal year."

3. New  Covenants.  Section 6.15 of the Credit  Agreement is amended by deleting
the date  "December 31, 2000" and inserting  the phrase  "December  31st of each
year".


                                       21
<PAGE>

4. Financial Covenant. Section 7.11 of the Credit Agreement is hereby amended in
its entirety to read as follows:

              "Section 7.11 Capital  Expenditures.  The Borrowers will not incur
       or contract to incur  Capital  Expenditures  of more than $650,000 in the
       aggregate  during the fiscal year ending  December 31, 2001, and not more
       than $500,000 in the aggregate during any fiscal year thereafter."

5. Waiver of Defaults.  The Borrower is in default of the following provision of
the Credit Agreement (the "Existing Default"):


       ---------------------- ------------------- --------------- -------------
               Covenant               Date           Required         Actual
       ---------------------- ------------------- --------------- -------------
        Section 7.11 Capital   December 31, 2001   not more than   $513,890.91
        Expenditures                               $500,000
       ---------------------- ------------------- --------------- -------------

Upon the terms and subject to the  conditions set forth in this  Amendment,  the
Lender hereby waives the Existing  Default.  This waiver shall be effective only
in this  specific  instance and for the specific  purpose for which it is given.
This waiver shall not entitle the Borrower to any other or further waiver in any
similar or other circumstances.

6. No Other Changes. Except as explicitly amended by this Amendment,  all of the
terms and  conditions  of the Credit  Agreement  shall  remain in full force and
effect and shall apply to any advance or letter of credit thereunder.

7. Conditions Precedent. This Amendment shall be effective when the Lender shall
have received an executed original hereof,  together with each of the following,
each in substance and form acceptable to the Lender in its sole discretion:

       (a) The  Acknowledgment  and Agreement of Guarantors set forth at the end
of this Amendment, duly executed by each Guarantor.

       (b) A Certificate of the Secretary of the Borrowers  certifying as to (i)
the  resolutions  of the boards of  directors  of the  Borrowers  approving  the
execution  and  delivery of this  Amendment,  (ii) the fact that the articles of
incorporation and bylaws of the Borrowers,  which were previously  certified and
delivered  to the  Lender  pursuant  to the  Certificates  of  Authority  of the
Borrowers'  secretary or assistant secretary each dated as of November 22, 1999,
continue  in full  force  and  effect  and have not been  amended  or  otherwise
modified  except  as set forth in the  Certificate  to be  delivered,  and (iii)
certifying that the officers and agents of the Borrowers who have been certified
to the Lender,  pursuant to the  Certificates  of  Authority  of the  Borrowers'
secretary or assistant  secretary  each dated as of November 22, 1999,  as being
authorized  to sign and to act on  behalf  of the  Borrowers  continue  to be so
authorized  or setting  forth the sample  signatures of each of the officers and
agents of the Borrowers authorized to execute and deliver this Amendment and all
other documents, agreements and certificates on behalf of the Borrowers.

       (c) Such other matters as the Lender may require.


                                       22
<PAGE>

8. Representations and Warranties. The Borrowers hereby represent and warrant to
the Lender as follows:

       (a) The Borrowers have all requisite  power and authority to execute this
Amendment and to perform all of their  obligations  hereunder and under the Loan
Documents  and this  Amendment has been duly executed and delivered on behalf of
the  Borrowers and  constitutes  the legal,  valid and binding  agreement of the
Borrowers, enforceable against them in accordance with its terms.

       (b) The  execution,  delivery and  performance  by the  Borrowers of this
Amendment  has been duly  authorized  by all  necessary  action and does not (i)
require any authorization,  consent or approval by any governmental  department,
commission,  board, bureau, agency or instrumentality,  domestic or foreign (ii)
violate any  provision of any law,  rule or  regulation  or of any order,  writ,
injunction or decree presently in effect, having applicability to the Borrowers,
or the organizational agreements applicable to the Borrowers, or (iii) result in
a breach of or constitute a default  under any indenture or credit  agreement or
any other agreement,  lease or instrument to which any Borrower is a party or by
which any properties of any Borrower may be bound or affected.

       (c) All of the representations  and warranties  contained in Article V of
the Credit  Agreement are correct on and as of the date hereof as though made on
and as of  such  date,  except  to the  extent  that  such  representations  and
warranties relate solely to an earlier date.

9. No Waiver of Default.  Except as set forth in paragraph  5, the  execution of
this  Amendment  and  acceptance of any  documents  related  hereto shall not be
deemed to be a waiver  of any  Default  or Event of  Default  under  the  Credit
Agreement or breach,  default or event of default under any Security Document or
other  document  held by the  Lender,  whether  or not known to the  Lender  and
whether or not existing on the date of this Amendment.

10. References. All references in the Credit Agreement to "this Agreement" shall
be deemed to refer to the Credit  Agreement as amended  hereby;  and any and all
references in the Loan Documents  hereto to the Credit Agreement shall be deemed
to refer to the Credit Agreement as amended hereby.

11. Release. The Borrowers and each Guarantor, by signing the Acknowledgment and
Agreement of Guarantors set forth below,  hereby absolutely and  unconditionally
release and forever discharge the Lender,  and any and all participants,  parent
corporations,   subsidiary,  affiliated  corporations,   insurers,  indemnitors,
successors and assigns,  together with all of the present and former  directors,
officers, agents and employees of any of the foregoing, from any and all claims,
demands or causes of action of any kind, nature or description,  whether arising
in law or equity or upon  contract  or tort or under any state or federal law or
otherwise,  which any of the Borrowers or such Guarantor has had, or now has, or
has made  claim to have  against  any such  person  for or by reason of any act,
omission,  matter,  cause or thing whatsoever arising from the beginning of time
to and including  the date of this  Amendment,  whether such claims  demands and
causes of action are matured or unmatured or known or unknown.

12. Costs and Expenses.  The Borrowers hereby reaffirm their agreement under the
Credit  Agreement  to pay or  reimburse  the  Lender on demand for all costs and
expenses  incurred by the Lender in connection  with the Loan  Documents and all
other  documents   contemplated   thereby,   including  without  limitation  all
reasonable  fees  and  disbursements  of legal  counsel.  Without  limiting  the
generality of the foregoing,  the Borrowers  specifically  agree to pay all fees
and  disbursements  of counsel to the Lender for the services  performed by such
counsel in connection  with the  preparation of this Amendment and the documents
and instruments  incidental  hereto.  The Borrowers hereby agree that the Lender
may, at any time or from time to time in its sole discretion and without further
authorization by the Borrowers,  make a Revolving  Advance to the Borrowers,  or
apply the  proceeds  of any loan,  for the  purpose  of  paying  any such  fees,
disbursements, costs and expenses.

                                       23
<PAGE>

13.  Counterparts.  This  Amendment  and the  Acknowledgment  and  Agreement  of
Guarantors may be executed in any number of counterparts,  each of which when so
executed  and   delivered   shall  be  deemed  an  original  and  all  of  which
counterparts, taken together, shall constitute one in the same instrument.

       IN WITNESS  WHEREOF,  the parties hereto have caused this Amendment to be
duly executed as of the day and year first above written.

WELLS FARGO BUSINESS CREDIT, INC.     THE LEATHER FACTORY, INC., a Delaware
                                      corporation, THE LEATHER FACTORY, INC., an
By  /s/ Thomas Krueger                Arizona corporation, THE LEATHER FACTORY,
    ------------------                INC., a Texas corporation, ROBERTS,
     Thomas Krueger                   CUSHMAN &  COMPANY, INC., HI-LINE LEATHER
     Its Vice President               & MANUFACTURING COMPANY, TANDY LEATHER
                                      COMPANY, INC. f/k/a Leather Tan
                                      Acquisition, Inc.

                                      By  /s/ Wray Thompson
                                         ------------------
                                         Wray Thompson
                                         Its President









                                       24

</TEXT>
</DOCUMENT>
</SEC-DOCUMENT>
-----END PRIVACY-ENHANCED MESSAGE-----
