Tandy Leather Factory Annual Report 2008

FY2008 Annual Report · Tandy Leather Factory

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annual report 2008

Tandy Leather Factory, Inc.

To our fellow stockholders….

Did any of you imagine at the beginning of 2008 that we would be where we are now? We went from a softening
economy to a struggling economy to an official recession and it seems like it happened in just a few months! While Tandy
Leather Factory was not immune from the economic challenges, I am fairly pleased with our 2008 results, although lower
sales and profits than in the year before tends to dampen any sense of accomplishment as far as we are concerned. The
general theme these days seems to be “things are not as bad for us as for the company down the street, so somehow
that makes things good.” And while every company is trying to find something good to say, relativity doesn’t go over very
well around here. With that said, here are our highlights – both positive and negative – for 2008:

 Our 2008 sales were lower than 2007 by 4%, ending a 9 year streak of consecutive sales gains.
 2008 was our 12th consecutive year of operating profits, but decreased 7% from 2007.
 Our consolidated gross profit margin improved for the 12th year in a row.
 We were profitable for 2008, although profits were down for the second year in a row.
 We opened 1 new Tandy Leather retail store in 2008 domestically, bringing the store total to 73.
 We opened our first store outside of North America and it generated an operating profit in its first year of

existence.

 We ended the year with the most cash we’ve ever had – almost $11 million. And that’s after spending almost $1
million on a limited stock repurchase program and $3 million on the renovation of our corporate headquarters
facility.

 We have debt on our balance sheet totaling $4.5 million – all related to the purchase of our corporate

headquarters. The amount owed is more than secured by the value of the property.

I think our most significant accomplishment in 2008 is the opening of our first store outside of North America. More
specifically, in February 2008, we opened a store in Northampton, United Kingdom. Despite the economic conditions
there, the store has performed exceptionally well so far as it generated an operating profit by the end of 2008 – a
remarkable accomplishment! We intend to further our expansion internationally although we do not have a specific time
line in place yet. We want to develop a larger customer base in the U.K. first and we are also factoring in the impact of
the global economy in its current condition. As soon as we believe we have sufficient customers to support a second
international store, we will not wait on the economy to correct itself before opening a new store. We remain excited about
the potential to grow our company beyond North America and believe strongly in our ability to do so.

2009 will bring about some changes for us – specifically in our top management team. We have already announced my
plans to resign as Chief Executive Officer effective June 30. I have been considering this move for quite a while and have
been grooming the younger members of our management team for this day. I have confidence that they will do an
excellent job. If I was concerned that the company I co-founded did not have the people in place to continue its growth, I
would not be retiring.

Jon Thompson, the company’s President and Chief Operating Officer, will be taking on the role of CEO starting July 1st,
pending election by our board. Jon knows and understands our business as he has lived through the good and bad
business cycles. He understands what has to be done when things are tough. Jon started as a sales clerk, working his
way up to store manager. He helped develop our craft and metals products lines. He has managed store operations at
the regional and national level, as well as been responsible for the central warehouse operations. He is responsible for
our Information Technology department and is still our senior leather buyer. Suffice it to say that Jon has worked in every
department in our company, with the exception of advertising and accounting.

That brings me to Shannon Greene, our Chief Financial Officer, whom you already know. Shannon has reported our
financial condition to you for the past 9 years. She is the hardest working, most competent CFO I have worked with in my

40 years in business. She joined our company in 1997 as assistant controller and was quickly promoted to controller.
She knows this company, not just because she understands the numbers, but because she insists on being involved in
store operations. She spends time in our stores when possible and has been known to work at a few of our trade shows
to increase her working knowledge of our products and how to sell that product to our customers.

Mark Angus, our Senior Vice President, rounds out the team. His tenure with our company started in 1985 as a store
manager. With his intensive background in art and having been around leathercraft most of his life, Mark has written and
published books and designed patterns for leathercraft work. He has been heavily involved in buckle and metal design
work; in fact, many of those designs comprise a substantial number of the company’s copyrights, as well as several
patents. In addition to his primary responsibility for new product development, Mark is responsible for marketing and
advertising plus oversees our factory, He also manages our sales to larger manufacturers and distributors, as well as
assists with the placement of product to our national account customers.

I have all the confidence in Jon’s ability to lead the company upon my departure, coupled with Shannon and Mark’s
expertise and support. My retirement should have no impact on the company’s financial performance or expansion plans.
The management team is very focused and will continue to execute the strategy we have laid out. I am confident that
they will perform well.

Please consider yourself personally invited to our 2009 Annual Meeting of Stockholders to be held at our corporate offices
on May 12th. It would be a great time to meet Jon, Shannon and Mark.

Thank you for your continued support and commitment to Tandy Leather Factory, Inc.

Ron Morgan
Chief Executive Officer

March 2009

This Annual Report includes or incorporates by reference forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E
of the Securities Exchange Act of 1934. Forward-looking statements broadly involve our current expectations for future results. Our forward-looking statements
generally relate to financial results, growth strategies, product development, competitive strengths, and sales efforts. Words such as “anticipate”, “believe, “could”,
“estimate”, “expect”, “intend”, “may”, “plan”, “possible”, “project”, “should”, or similar expressions generally identify our forward-looking statements. Any statement
that is not a historical fact, including estimates, projections, future trends and the outcome of events that have not yet occurred, are forward-looking statements.

Our ability to actually achieve results consistent with our current expectations depends significantly on certain factors that may cause actual future results to differ
materially from our current expectations. We caution you to consider carefully the specific risk factors discussed in the enclosed annual report of Form 10-K and our
other reports filed with the Securities and Exchange Commission from time to time. These factors, in some cases, have affected, and in the future (together with other
unknown factors) could affect, our ability to implement our business strategy and may cause actual results to differ materially from those contemplated by such forward-
looking statements. We cannot assure you that any expectation, estimate or projection contained in a forward-looking statement can be achieved. It is not possible to
foresee or identify all factors that may affect our forward-looking statements, and you should not consider any list of such factors to be an exhaustive list of all risks,
uncertainties or potentially inaccurate assumptions affecting such forward-looking statements.

You are also cautioned not to place undue reliance on forward-looking statements, which speak only as of the date made. As a general policy, we do not intend to
release publicly any revisions to forward-looking statements as the result of subsequent events or developments.

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

Form 10-K

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

For the fiscal year ended December 31, 2008

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

For the transition period ________ to ________

Commission File Number 1-12368

Tandy Leather Factory, Inc.

(exact name of registrant as specified in its charter)

Delaware
(State or other jurisdiction of incorporation)

75-2543540
(IRS Employer Identification Number)

1900 Southeast Loop 820, Fort Worth, TX 76140
(Address of principal executive offices)

817/872-3200
(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of Each Class
Common Stock, par value $0.0024

Name of Each Exchange on Which Registered
NYSE Amex

Securities registered pursuant to Section 12(g) of the Act: NONE

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act Yes [ ] No [X]

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes [ ] No [X]

Indicate by check mark whether the registrant (1) has filed all reports required to be 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 by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's
knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated
filer” in Rule 12b-2 of the Exchange Act. (Check one): Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [X]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes [ ] No [X]

The aggregate market value of the common stock held by non-affiliates of the registrant was approximately $22,193,469 at June 30, 2008 (the last business day of its most recently
completed second fiscal quarter). At March 10, 2009, there were 10,664,555 shares of the registrant's common stock outstanding.

Portions of the Registrant’s definitive Proxy Statement for the Annual Meeting of Stockholders to be held on May 12, 2009, are incorporated by reference in Part III of this

report.

DOCUMENTS INCORPORATED BY REFERENCE

TABLE OF CONTENTS

Business
Risk Factors
Properties
Legal Proceedings
Submission of Matters to a Vote of Security Holders

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Selected Financial Data
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Quantitative and Qualitative Disclosures about Market Risk
Financial Statement and Supplementary Data
Change in and Disagreements with Accountants on Accounting and Financial Disclosure
Controls and Procedures
Other Information

Directors, Executive Officers and Corporate Governance
Executive Compensation
Security Ownership of Certain Owners and Management and Related Stockholder Matters
Certain Relationships and Related Transactions and Director Independence
Principal Accountant Fees and Services

Exhibits, Financial Statement Schedules

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Item

Part 1
1
1A
2
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4

Part II

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7A
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9A
9B

Part III
10
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Part IV
15

PART I

ITEM 1. BUSINESS

General

We are a retailer and wholesale distributor of a broad line of leather and related products, including leather,
leatherworking tools, buckles and adornments for belts, leather dyes and finishes, saddle and tack hardware, and do-
it-yourself kits. We also manufacture leather lacing and kits. During 2008, our consolidated sales totaled $53.2
million of which approximately 13% were export sales. We maintain our principal offices at 1900 Southeast Loop
820, Fort Worth, Texas 76140. Our common stock trades on the NYSE Amex (formerly the American Stock
Exchange) under the symbol "TLF."

Our company was founded in 1980 as Midas Leathercraft Tool Company, a Texas corporation. Midas' original
business activity focused on the distribution of leathercraft tools. In addition, the founders of Midas entered into a
consulting agreement with Brown Group, Inc., a major footwear retailer, as a result of their proposal to develop a
multi-location chain of wholesale stores known as "The Leather Factory." In 1985, Midas purchased the assets of
The Leather Factory from Brown Shoe Group, which then consisted of six wholesale stores.

In 1993, we changed our name to "The Leather Factory, Inc.", then reincorporated in the state of Delaware in 1994.
In 2005, we changed our name to Tandy Leather Factory, Inc.

Our Development in Recent Years

We have expanded our wholesale chain by opening new stores and by numerous acquisitions of small businesses in
strategic geographic locations including the acquisition of our Canadian distributor, The Leather Factory of Canada,
Ltd., in 1996. By 2000, we had grown to 27 Leather Factory stores located in the United States and two Leather
Factory stores in Canada. In November 2000, we acquired the operating assets of two subsidiaries of Tandycrafts,
Inc. to form Tandy Leather Company. In 2002, we began opening retail stores under the "Tandy Leather" name.
During that year, Tandy Leather purchased four independent leathercraft retail stores and opened another 10. We
also opened our thirtieth Leather Factory store - our third in Canada. In 2003, we opened 12 Tandy Leather retail
stores. In 2004, we purchased three independent leathercraft retail stores and opened an additional nine stores in the
U.S. We also opened another store in Canada which is operating as a Tandy Leather retail store. In November
2004, we acquired all of the issued and outstanding shares of capital stock of Heritan Ltd. and its parent, our
primary Canadian competitor, headquartered in Barrie, Ontario. The acquisition resulted in an additional three retail
stores in Canada, bringing the total locations in Canada to seven - three Leather Factory stores and four Tandy
Leather stores. In 2005, we opened eight Tandy Leather retail stores. In 2006, we opened 11 Tandy Leather retail
stores and converted one wholesale store to a retail store. In 2007, we purchased one independent leathercraft store
and opened an additional nine retail stores – eight in the U.S. and one in Canada. We also purchased Mid-Continent
Leather Sales, Inc., a competitor located in Oklahoma, which became our thirtieth wholesale store. In 2008, we
opened one retail store in the U.S. and one combination wholesale and retail store in Northampton, United
Kingdom.

At December 31, 2008, we operated 30 wholesale stores – 29 operating under the Leather Factory name (26 in the
U.S. and three in Canada) and one operating under the Mid-Continent Leather Sales name. We also operated 73
retail stores operating under the Tandy Leather name (67 in the U.S. and six in Canada) as well as one combination
wholesale and retail store operating under the Tandy Leather Factory name in the United Kingdom. Finally, we also
own and operate Roberts, Cushman and Company, Inc., a distributor of custom hat trims.

Our growth, measured both by our net sales and net income, occurs as a result of the increase in the number of
stores we have and the increase from year to year of the sales in our existing stores. The following tables provide
summary information concerning the additions of facilities for our Leather Factory wholesale stores and Tandy
Leather retail stores in each of our fiscal years from 1999 to 2008.

STORE COUNT
YEARS ENDED DECEMBER 31, 1999 through 2008

Leather Factory wholesale stores
Conversions(1)

Opened

Year Ended
Balance Fwd
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008

4
2
2
1
0
0
0
0
1^
0

0
0
0
(1)
0
0
0
(1)
0
0

Total
22
26
28
30
30
30
30
30
29
30
30

Opened (2)

Tandy Leather retail stores
Closed

1*
0
14
12
16
8
12
10
1

0
0
1*
0
0
0
0
0
0

Total
N/A
N/A
1
1
14
26
42
50
62
72
73

(1) Leather Factory wholesale store converted to a Tandy Leather retail store.

(2) Includes conversions of Leather Factory wholesale stores to Tandy Leather retail stores.

(*) The Tandy Leather operation began as a central mail-order fulfillment center in 2000 which was closed in 2002.

(^) Wholesale store operating as Mid-Continent Leather Sales

No single customer’s purchases represent more than 5% of our total sales in 2008. Sales to our five largest
customers combined to represent 6.2%, 8.3% and 9.5%, respectively, of consolidated sales in 2008, 2007 and 2006.
While management does not believe the loss of one of these customers would have a significant negative impact on
our operations, it does believe the loss of several of these customers simultaneously or a substantial reduction in
sales generated by them could temporarily affect our operating results.

Our Operating Divisions

We service our customers primarily through the operation of four divisions. We identify those divisions based on
management responsibility and customer focus. The Wholesale Leathercraft division consists of thirty wholesale
stores of which 27 are located in the United States and three are located in Canada. As of March 1, 2009, the Retail
Leathercraft division consists of 74 Tandy Leather retail stores of which 68 are located in the United States and six
are located in Canada. Both of these divisions sell leather and leathercraft-related products. The International
Leathercraft division consists of all stores, wholesale or retail, located outside of North America. Currently, we
have one such store located in the United Kingdom. Our fourth business segment, referred to as “Other,” consists
of our hatband manufacturer, Roberts, Cushman & Company, Inc.

Wholesale Leathercraft

The Wholesale Leathercraft operation distributes its broad product line of leather and leathercraft-related products
in the United States and internationally through Leather Factory stores. This segment had net sales of $26.4
million, $29.6 million and $31.0 million for 2008, 2007 and 2006, respectively. The wholesale stores operate under
the name “The Leather Factory”, with the exception of the one store we acquired in February 2007 which operates
under the name “Mid-Continent Leather Sales.”

General We operate wholesale stores in 20 states and three Canadian provinces. The centers range in size from
2,600 square feet to 19,800 square feet, with the average size of a store being approximately 6,000 square feet.
The type of premises utilized for our wholesale stores is generally light industrial office/warehouse space in
proximity to a major freeway or with other similar access. This type of location typically offers lower rents
compared to other more retail-oriented locations.

Business Strategy The Leather Factory business concept centers around the wholesale distribution of leather and
related accessories to retailers, manufacturers and end users. Our strategy is that a customer can purchase the
leather, related accessories and supplies necessary to complete his project from one place. The size and layout of
the centers are planned to allow large quantities of product to be displayed in an easily accessible and visually
appealing manner. Leather is displayed by the pallet where the customer can see and touch it, assessing first-hand
the numerous sizes, styles and grades offered. The location of the stores is selected based on the location of

customers, so that delivery time to customers is minimized. A two-day maximum delivery time for phone, internet
and mail orders is our goal.

Our wholesale stores serve customers through various means including walk-in traffic, phone and mail order. We
also employ a distinctive marketing tactic in that we maintain an internally-developed target customer mailing list
for use in our aggressive direct mail advertising campaigns. We staff our stores with experienced managers whose
compensation is tied to the operating profit of the store they manage. Sales are generated by the selling efforts of
the store personnel, our direct mail advertising, our website (www.tandyleatherfactory.com), our participation at
trade shows and, on a limited basis, the use of sales representative organizations. The sales representative
organizations consist of companies located in specific geographic areas that represent numerous companies in a
similar industry. These organizations call on customers and show multiple products from more than one vendor at a
time.

Our customer base consists of individuals, wholesale distributors, tack and saddle shops,

Customers
institutions (prisons and prisoners, schools, hospitals), western stores, craft stores and craft store chains, other large
volume purchasers, manufacturers and retailers dispersed geographically throughout the world. Wholesale sales
constitute the majority of our business, although retail customers may purchase products from our wholesale stores.
The Wholesale Leathercraft division’s sales generally do not reflect significant seasonal patterns.

Our Authorized Sales Center (“ASC”) program was developed to create a presence in geographical areas where we
do not have a wholesale store. An unrelated person operating an existing business who desires to become an ASC
must submit an application and upon approval, place a minimum initial order. There are also minimum annual
purchase amounts to which the ASC must adhere in order to maintain ASC status. In exchange, the benefits to the
ASC are free advertising in various sale flyers produced and distributed by us, price breaks on many products,
advance notice of new products, and priority shipping and handling on all orders. Our wholesale stores service 151
ASC's: 87 located in the U.S., 42 located in Canada, and 22 located outside North America.

Merchandise Our products are generally organized into thirteen categories. We carry a wide assortment of
products including leather, lace, hand tools, kits and craft supplies. We operate a light manufacturing facility in
Fort Worth whose processes generally involve cutting leather into various shapes and patterns using metal dies.
The factory produces approximately 20% of our products and also assembles and repackages products as needed.
Products manufactured in our factory are distributed through our stores under the TejasTM brand name. We also
distribute product under the Tandy LeatherTM and Dr. Jackson'sTM brands. We develop new products through the
ideas and referrals of customers and store personnel as well as the tracking of fads and trends of interest in the
market.

We offer an unconditional satisfaction guarantee to our customers. Simply stated, we will accept product returns for
any reason. We believe this liberal policy promotes customer loyalty. We offer credit terms to our non-retail
customers, upon receipt of a credit application and approval by our credit manager. Generally, our open accounts
are net 30 days.

During 2008 and 2007, Wholesale Leathercraft division sales by product category were as follows:

Product Category
Belts strips and straps
Books, patterns, videos
Buckles
Conchos
Craft supplies
Custom tools and hardware
Dyes, finishes, glues
Hand tools
Hardware
Kits
Lace
Leather
Stamping tools

2008 Sales Mix

2007 Sales Mix

2%
1%
4%
5%
6%
0%
6%
12%
7%
8%
9%
36%
4%
100%

3%
2%
4%
4%
4%
0%
5%
12%
8%
7%
10%
37%
4%
100%

In addition to meeting ordinary operational requirements, our working capital demands are a product of the need to
maintain a level of inventory sufficient to fill customer orders as they are received with minimal backorders and the
time required to collect our accounts receivable. Because availability of merchandise and prompt delivery time are
important competitive factors for us, we maintain higher levels of inventory than our smaller competitors. For
additional information regarding our cash, inventory and accounts receivable at the end of 2008 and 2007, see "Item
7. Management's Discussion and Analysis of Financial Condition and Results of Operations."

Suppliers We purchase merchandise and raw materials from approximately 200 vendors dispersed throughout
the United States and in approximately 15 foreign countries. In 2008, our ten largest vendors accounted for
approximately 70% of our inventory purchases.

Because leather is sold internationally, market conditions abroad are likely to affect the price of leather in the United
States. Outbreaks of mad cow and hoof-and-mouth disease (or foot-and-mouth disease) in any part of the world can
influence the price of the leather we purchase. As such an occurrence is beyond our control, we cannot predict
when and to what extent we could be affected in the future. Aside from increasing purchases when we anticipate
price increases (or possibly delaying purchases if we foresee price declines), we do not attempt to hedge our
inventory costs.

Overall, we believe that our relationships with suppliers are strong and do not anticipate any material changes in
these supplier relationships. Due to the number of alternative sources of supply, the loss of any of these principal
suppliers would not have a material impact on our operations.

Operations
Hours of operations vary by location, but generally range from 8:00 am to 6:00 pm Monday
through Friday, and from 9:00 am to 4:00 pm on Saturdays. The stores maintain uniform prices, except where
lower prices are necessary to meet local competition.

Competition Most of our competition comes in the form of small, independently-owned retailers who in most
cases are also our customers. We estimate that there are a few hundred of these small independent stores in the
United States and Canada. We compete on price, availability of merchandise, and delivery time. While there is
competition in connection with a number of our products, to our knowledge there is no direct competition affecting
our entire product line. Our large size relative to most competitors gives us the advantage of being able to purchase
large volumes and stock a full range of products.

Distribution The wholesale stores receive the majority of their inventory from our central warehouse located in
Fort Worth, Texas, although occasionally, merchandise is shipped directly from the vendor. Inventory is shipped to
the stores from our central warehouse once a week to meet customer demand without sacrificing inventory turns.
Customer orders are filled as received, and we do not have backlogs.

We attempt to maintain the optimum number of items in our product line to minimize out-of-stock situations against
carrying costs involved with such an inventory level. We generally maintain higher inventories of imported items to
ensure a continuous supply. The number of products offered changes every year due to the introduction of new
items and the discontinuance of others. We carry approximately 2,800 items in the current lines of leather and
leather-related merchandise. All items are offered in all stores.

Expansion Our wholesale store expansion across the United States has been fairly consistent since we purchased
the original six stores in 1985. We opened our thirtieth store in August 2002. We converted one wholesale
(Leather Factory) store to a retail (Tandy Leather) store in 2006, reducing the number of wholesale stores to29. We
acquired Mid-Continent Leather Sales in 2007, a wholesale store located in Oklahoma, increasing the number of
wholesale stores to 30. While we do not believe there is a significant and immediate opportunity for expansion of
the Leather Factory distribution system in terms of opening additional locations, we do believe expansion could be
achieved by acquiring companies in related areas/markets which offer collaborative advantages based on the local
markets and/or the product lines of the businesses.

Retail Leathercraft

Our Retail Leathercraft division consists of a growing chain of retail stores operating under the name, Tandy
Leather. Tandy Leather Company, established in 1919 as Hinkley-Tandy Leather Company, is the oldest and best-
known supplier of leather and related supplies used in the leathercraft industry. We offer a product line of quality
tools, leather, accessories, kits and teaching materials. This segment had net sales of $25.2 million, $24.7 million
and $22.5 million for 2008, 2007 and 2006, respectively.

General As of March 1, 2009, the Tandy Leather retail chain has 74 stores located in 35 states and five Canadian
provinces with plans to reach 100 to 120 stores as opportunities arise over the next several years. The stores range
in size from 1,200 square feet to 3,800 square feet, with the average size of a store being approximately 2,000
square feet. The type of premises utilized for a retail store is generally an older strip shopping center located at
well-known crossroads, making the store easy to find.

Business Strategy Tandy Leather has long been known for its reputation in the leathercraft industry and its
commitment to promoting and developing the craft through education and customer development. Our commitment
to this strategy is evidenced by our re-establishment of the retail store chain throughout the United States following
our acquisition of the assets of Tandy Leather in 2000. We continue to broaden our customer base by working with
various youth organizations and institutions where people are introduced to leathercraft, as well as hosting classes in
our stores.

The retail stores serve walk-in, mail and phone order customers as well as orders generated from our website,
www.tandyleatherfactory.com. Our retail stores are staffed by knowledgeable sales people whose compensation is
based, in part, upon the profitability of their store. Sales by Tandy Leather are driven by the efforts of the store
staff, trade shows, and our direct mail and e-mail marketing program.

Customers Individual retail customers are our largest customer group, representing more than 65% of Tandy
Leather's 2008 sales. Youth groups, summer camps, schools and a limited number of wholesale customers complete
our customer base. Like the wholesale stores, the retail stores fill orders as they are received, and there is no order
backlog. The retail stores maintain reasonable amounts of inventory to fill these orders. Tandy Leather’s retail
store operations historically generate slightly more sales in the fourth quarter of each year (30-32%), while the other
three quarters remain fairly even at 23-25% per quarter.

Merchandise Our products are generally organized into thirteen categories. We carry a wide assortment of
products including leather, hand tools, kits, dyes & finishes and stamping tools. During 2008 and 2007, Retail
Leathercraft division sales by product category were as follows:

Product Category
Belts strips and straps
Books, patterns, videos
Buckles
Conchos
Craft supplies
Dyes, finishes, glues
Hand tools
Hardwre
Kits
Lace
Leather
Stamping tools

2008 Sales Mix

4%
3%
4%
4%
4%
8%
15%
6%
11%
4%
31%
6%
100%

2007 Sales Mix
4%
3%
4%
4%
3%
8%
16%
6%
11%
4%
31%
6%
100%

As indicated above, the products sold in our retail stores are also sold in our wholesale stores. Therefore, the
discussion above regarding products, their sources and the working capital requirements for the Wholesale
Leathercraft division also apply to the Retail Leathercraft division. Sales at the retail stores are generally made
through cash transactions or through national credit cards. We also sell on open account to selected wholesale
customers including schools and other institutions and small retailers. Our terms are generally net 30 days. Like
the wholesale stores, the retail stores have an unconditional return policy.

Operations Hours of operation are 9:00 am to 6:00 pm Monday through Friday, and from 9:00 am to 4:00 pm on
Saturdays. In addition, most of the stores stay open late one night a week for leathercrafting classes taught in the
stores. Selling prices are uniform throughout the retail store system.

Competition Our competitors are generally small local craft stores that carry a limited line of leathercraft
products. Several national retail chains that are customers in our Wholesale Leathercraft division also carry
leathercraft products on a very small scale relative to their overall product line. To our knowledge, our retail store
chain is the only one in existence solely specializing in leathercraft.

Distribution The retail stores receive their inventory from our central warehouse located in Fort Worth, Texas.
The stores generally restock their inventory once a week with a shipment from the warehouse. Retail Leathercraft’s
inventory turns are higher than Wholesale Leathercraft’s because the Wholesale Leathercraft calculation includes
the central warehouse inventory whereas the Retail Leathercraft calculation includes only the inventory in the
Tandy Leather retail stores.

Expansion We intend to expand the Tandy Leather retail store chain to between 100 and 120 stores throughout
North America as it makes financial sense to do so. 14 stores were opened in 2002; 12 stores were opened in 2003;
16 were opened in 2004 (including four in Canada); eight were opened in 2005, 12 were opened in 2006, ten were
opened in 2007 and one was opened in 2008. Of the 72 stores opened to date, 11 were independent leathercraft
stores that we acquired. Separately, these acquisitions are not material. The other 62 stores have been de novo
stores opened by us. In 2009, we plan to open four retail stores. We have already opened one and anticipate the
remaining three to be opened in the middle to last half of the year.

International Leathercraft

Our International Leathercraft division consists of company-owned stores located outside of North America.
Currently, we have one wholesale and retail combination store located in Northampton, United Kingdom, which we
opened in February 2008. It operates under the Tandy Leather Factory trade name. This segment had net sales of
$836,000 in 2008.

Business Strategy The business concept for our International Leathercraft division is a blending of our Leather
Factory and Tandy Leather business strategies – the wholesale distribution of leather and related accessories to
retailers, manufacturers and other businesses, as well as the promotion and continuance of leathercraft through
education and development of the retail customers. The store is located in a 6,600 square foot building in a light
industrial area. We maintain sufficient inventory so that our customers can purchase the leather, related accessories
and supplies necessary to complete their projects from one supplier. The layout of the store is such that large
quantities of product can be displayed in an easily accessible and visually appealing manner. The store services
walk-in, mail and phone order customers as well as orders generated from its website,
www.tandyleatherfactory.co.uk. Sales are driven by the efforts of the store staff, trade shows, and our direct mail
and e-mail marketing programs.

Customers The growing customer base consists of individuals, wholesale distributors, equine-related shops,
cobblers, dealers, and retailers dispersed geographically throughout the UK and Europe. Retail sales generally
occur via cash transactions or through national credits cards. We also sell on open account to selected wholesale
customers including dealers, manufacturers, and retailers. Like our USA stores, our UK store has an unconditional
return policy.

Merchandise The products sold in our UK store are also sold in our USA stores. Therefore, the discussion above
regarding products, their sources and the working capital requirements for the Wholesale and Retail Leathercraft
divisions also apply here.

Operations Hours of operation are 8:00 am to 5:00 pm Monday through Friday, and from 8:00 am to 2:00 pm on
Saturdays. Selling prices are consistent with the USA store pricing, adjusted for currency fluctuation.

Distribution The UK store receives the majority of its inventory from our central warehouse located in Fort
Worth, Texas, although occasionally, merchandise is shipped directly from the vendor. Inventory is shipped from
our warehouse to the store several times per month to meet customer demand without sacrificing inventory turns.
Customer orders are filled as received, and we do not have backlogs.

Expansion We intend to expand further internationally although have no specific plans or time frame at this time.
We will continue to grow our customer base throughout Europe as well as other parts of the world so that we can
support additional stores.

Other

Roberts, Cushman, founded in 1856, supplies made-to-order trimmings to the headwear industry. This segment had
net sales of $745,000, $1.1 million, and $1.7 million for 2008, 2007 and 2006, respectively. This segment is
immaterial to our overall business strategy.

For more information about our business and our reportable segments, see Item 7 “Management’s Discussion and
Analysis of Financial Condition and Results of Operations” on page 13.

Additional Information

Compliance With Environmental Laws Our compliance with federal, state and local environmental protection
laws has not had, and is not expected to have, a material effect on our capital expenditures, earnings or competitive
position.

Employees As of December 31, 2008, we employed 458 people, 367 of whom were employed on a full-time
basis. We are not a party to any collective bargaining agreements. Overall, we believe that relations with
employees are good.

Intellectual Property We own approximately 20 registered trademarks, including federal trade name
registrations for "The Leather Factory" and "Tandy Leather Company." We also own approximately 20 registered
foreign trademarks worldwide.

We own approximately 500 registered copyrights in the United States covering more than 600 individual works
relating to various products. We also own several United States patents for specific belt buckles and leather-
working equipment. These rights are valuable assets, and we defend them as necessary.

International Operations Information regarding our revenues from the United States and abroad and our long-
lived assets are found in Note 14 to our Consolidated Financial Statements, Segment Information.

Our Website and Availability of SEC Reports We file reports with the Securities and Exchange Commission
("SEC"). These reports include our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current
Reports on Form 8-K and any amendments to these filings. The public may read any of these filings at the SEC's
Public Reference Room at 100 F Street, NE, Washington, DC 20549. In addition, the public may obtain
information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. Further, the
SEC maintains an Internet site that contains reports, proxy and information statements and other information
concerning us. You can connect to this site at http://www.sec.gov.

Our corporate website is located at http://www.tandyleatherfactory.com. We make copies of our Annual Report on
Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, proxy statements and any amendments
filed with or furnished to the SEC available to investors on or through our website free of charge as soon as
reasonably practicable after we electronically file them with or furnish them to the SEC. Our SEC filings can be
found on the Investor Relations page of our website through the "SEC Filings" link. In addition, certain other
corporate governance documents are available on this website through the "Corporate Governance" link.

Executive Officers of the Registrant

The following table sets forth information concerning our executive officers as of March 27, 2009:

Name and Age

J. Wray Thompson, 77

Chairman of the Board since June 1993; Chief Executive Officer
from June 1993 to December 2006

Position and Business Experience
During Past Five Years

Served as Officer
Since

Ronald C. Morgan, 61

Chief Executive Officer since January 2007; President since January
2001; Chief Operating Officer since June 1993

Jon W. Thompson, 47

President since June 2008; Senior Vice President since June 1993

Shannon L. Greene, 43

Chief Financial Officer since May 2000

Mark J. Angus, 48

Senior Vice President since June 2008; Vice President of
Merchandising since June 1993

Robin L. Morgan, 58

Vice President of Administration since June 1993

1993

2008

2000

2008

1993

Wray Thompson has served as our Chairman of the Board since June 1993. He served as Chief Executive Officer
from June 1993 to December 2006. He also served as President from June 1993 to January 2001. Mr. Thompson
was a co-founder of the company.

Ronald C. Morgan has served as our Chief Executive Officer since January 2007. He has also served as President
and Chief Operating Officer from January 2001 to June 2008 and director since June 1993. Mr. Morgan was also a
co-founder of the company. Mr. Morgan is married to Robin L. Morgan, our Vice President.

Jon W. Thompson has served as President and Chief Operating Officer since June 2008, following the resignation
of Ron Morgan. He served as Senior Vice President from June 1993 to June 2008. Mr. Thompson is the son of
Wray Thompson, Chairman of the Board.

Shannon L. Greene has served as our Chief Financial Officer and Treasurer since May 2000 and director since
January 2001. Ms. Greene is also our Chief Accounting Officer. Ms. Greene, a certified public accountant, also
serves on our 401(k) Plan committee. Her professional affiliations include the American Institute of Certified
Public Accountants, the Texas Society of Certified Public Accountants and its Fort Worth chapter, the Fort Worth
Association for Financial Professionals, and the Financial Executives International. She also sits on the Board of
Directors of the U.S. Chamber of Commerce.

Mark J. Angus has served as Senior Vice President since June 2008, following Jon Thompson’s resignation. He
served as Vice President of Merchandising since January 1993.

Robin L. Morgan has served as our Vice President of Administration and Assistant Secretary since June 1993. She
serves as chairman of our 401(k) Plan committee. Ms. Morgan is married to Ronald C. Morgan, our CEO.

All officers are elected annually by the Board of Directors to serve for the ensuing year.

ITEM 1A. RISK FACTORS

You should carefully consider the following risk factors together with all of the other information included in this
annual report, including the financial statements and related notes, when deciding to invest in us. You should be
aware that the occurrence of any of the events described in this Risk Factors section and elsewhere in this annual
report could have a material adverse effect on our business, financial position, results of operations and cash flows.
Some, but not all, of the important risks which could cause actual results to differ materially from those suggested
by forward-looking statements made by us include the following:

 We might fail to realize the anticipated benefits of the opening of Tandy Leather retail stores or we might be

unable to obtain sufficient new locations on acceptable terms to meet our growth plans. Further, we might fail
to hire and train competent managers to oversee the stores opened.



Continued weakness in the economy in the United States, as well as abroad, may cause our sales to decrease or
not to increase or adversely affect the prices charged for our products. Also, hostilities, terrorism or other
events could worsen this condition.

 Negative trends in general consumer-spending levels, including the impact of the availability and level of

consumer debt and levels of consumer confidence could adversely affect our sales.

 Political considerations here and abroad could disrupt our sources of supplies from abroad or affect the prices

we pay for goods.

 Continued involvement by the United States in war and other military operations in the Middle East and other

areas abroad could disrupt international trade and affect our inventory sources.

 As a result of the on-going threat of terrorist attacks on the United States, consumer buying habits could change

and decrease our sales.

 Livestock diseases such as mad cow could reduce the availability of hides and leathers or increase their cost.

Also, the prices of hides and leathers fluctuate in normal times, and these fluctuations can affect us.



If, for whatever reason, the costs of our raw materials and inventory increase, we may not be able to pass those
costs on to our customers.

 Other factors could cause either fluctuations in buying patterns or possible negative trends in the craft and

western retail markets. In addition, our customers may change their preferences to products other than ours, or
they may not accept new products as we introduce them.

 Any change in the commercial banking environment may affect us and our ability to borrow capital as needed.

Other uncertainties, which are difficult to predict and many of which are beyond our control, may occur as well.

ITEM 2. PROPERTIES

We lease all of our store locations premises, with the majority of our stores having initial lease terms of
approximately five years. The leases are generally renewable, with increases in lease rental rates in some cases.
We believe that all of our properties are adequately covered by insurance. The properties leased by our Wholesale
Leathercraft (Leather Factory stores), Retail Leathercraft (Tandy Leather stores), and International Leathercraft
divisions are described in Item 1 in the description of each segment. We also lease a 284 square-foot showroom in
the Denver Merchandise Mart for $5,908 per year. This lease will expire in October 2011.

We own our corporate headquarters, which includes our central warehouse and manufacturing facility, the sales,
advertising, administrative, and executive offices, and the administrative offices of Roberts, Cushman. The facility
consists of 191,000 square feet located on approximately 30 acres.

The following table summarizes the locations of our leased premises as of December 31, 2008:

State

Alabama
Alaska
Arizona
Arkansas
California
Colorado
Connecticut
Florida
Georgia
Idaho
Illinois
Indiana
Iowa
Kansas
Kentucky
Louisiana
Maryland
Massachusetts
Michigan
Minnesota
Missouri
Montana
Nebraska
Nevada
New Mexico
New York
North Carolina
Ohio
Oklahoma
Oregon
Pennsylvania
South Carolina
South Dakota
Tennessee
Texas
Utah
Virginia
Washington
Wisconsin
Wyoming

Wholesale Leathercraft
-
-
2
-
3
1
-
1
-
-
1
-
1
1
-
1
-
-
1
-
1
1
-
-
1
-
-
1
1
1
1
-
-
1
5
1
-
1
-
-

Canadian locations:
Alberta
British Columbia
Manitoba
Nova Scotia
Ontario
Quebec

International locations:
United Kingdom

1
-
1
-
1
-

Retail Leathercraft
1
1
2
1
7
3
1
3
1
1
1
2
-
-
1
-
1
1
1
2
2
-
1
2
2
1
2
2
2
-
2
1
1
3
9
2
1
2
1
1

1
1
-
1
2
1

International
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-

-
-
-
-
-
-

ITEM 3. LEGAL PROCEEDINGS

We are involved in litigation in the ordinary course of business but are not currently a party to any material pending
legal proceedings.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

There were no matters submitted to a vote of our security holders during the fourth quarter of our fiscal year ended
December 31, 2008.

PART II

ITEM 5.
STOCKHOLDER MATTERS

MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED

Our common stock is traded on the NYSE Amex using the symbol “TLF”. The high and low trading prices for each
calendar quarter during the last two fiscal years are as follows:

2008
4th quarter
3rd quarter
2nd quarter
1st quarter

High
$2.75
$3.07
$3.37
$3.32

Low
$1.72
$2.49
$2.63
$2.30

2007
4th quarter
3rd quarter
2nd quarter
1st quarter

High
$7.15
$7.55
$7.50
$8.25

Low
$2.70
$5.80
$6.85
$6.81

There were approximately 526 stockholders of record on March 1, 2009.

We have never declared or paid any cash dividends on the shares of our common stock. Our Board of Directors has
historically followed a policy of reinvesting our earnings in the expansion of our business. This policy is subject to
change based on future industry and market conditions, as well as other factors.

We did not sell any shares of our equity securities during our fiscal year ended December 31, 2008 that were not
registered under the Securities Act.

The following table provides information about purchases we have made of our common stock during the
quarter ended December 31, 2008:

ISSUER PURCHASES OF EQUITY SECURITIES

(a) Total
Number of
Shares
Purchased

(b) Average
Price Paid
per Share

(d) Maximum Number
(or Approximate Dollar
Value) of Shares that
May Yet Be Purchased
Under the Plans or
Programs

194,610

$2.67

194,610

292,180

73,332

$2.35

73,332

218,848

Period

October 1 through
October 31

November 1 through
November 30

December 1 through
December 31

56,595

$1.96

56,595

Total

324,537(1)

$2.47

324,537

-0-

(1) On September 9, 2008, our Board of Directors approved a limited stock repurchase plan whereby all non-officer participants in The
Leather Factory, Inc. Stock Ownership Plan (the “ESOP”) would have the option of selling the shares of our common stock distributed
to them upon termination of the ESOP back to us. The option remained open to the non-officer participants for a period of sixty days
beginning on September 26, 2008 and ending on November 25, 2008. The purchase price of the shares was calculated at a price-per-
share equal to the closing price of a share of our common stock on the American Stock Exchange on the business day each non-officer
participant notified the ESOP administrator of his or her intent to sell his or her shares to us. All of the 324,537 shares we repurchased
between October 1 and December 31, 2008 were repurchased in connection with the termination of the ESOP.

Stockholder Return Performance Graph

The line graph below compares the yearly percentage change in our cumulative five-year total stockholder return on
our common stock with the Standard & Poor’s SmallCap 600 Index and the S&P Specialty Stores Index. The graph
assumes that $100 was invested on December 31, 2003 in our common stock, the Standard & Poor’s SmallCap 600
Index, and the S&P Specialty Stores Index, and that all dividends were reinvested. The returns shown on the graph
are not necessarily indicative of future performance.

COMPARISON OF FIVE-YEAR CUMULATIVE TOTAL RETURNS
Tandy Leather Factory, Inc.

Company Name / Index
TANDY LEATHER FACTORY
S&P SMALLCAP 600 INDEX
S&P SPECIALTY STORES

Dec 03 Dec 04 Dec 05 Dec 06 Dec 07
67.56
151.58
110.87

73.35
122.65
105.20

141.53
132.07
124.25

166.74
152.04
151.04

100
100
100

Dec 08
44.42
104.48
70.30

Data Source: Research Data Group, Inc., San Francisco, CA

ITEM 6. SELECTED FINANCIAL DATA

The selected financial data presented below are derived from and should be read in conjunction with our
Consolidated Financial Statements and related notes. This information should also be read in conjunction with
"Item 7 - Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Data in prior
years has not been restated to reflect acquisitions, if any, that occurred in subsequent years.

Income Statement Data,
Years ended December 31,
Net sales

Cost of sales

Gross profit

Operating expenses

Operating income

2008

2007

2006

2005

$53,237,094

$55,317,002

$55,199,021

$50,719,574

2004
$46,146,284

21,857,800

23,644,599

23,566,251

21,964,530

20,706,239

31,379,294

31,672,403

31,632,770

28,755,044

25,440,045

27,200,150

27,161,402

24,565,056

23,181,633

21,181,599

4,179,144

4,511,001

7,067,714

5,573,411

4,258,446

Operating income per share - basic

Operating income per shares - diluted

$0.38

$0.41

$0.40

$0.65

$0.64

$0.52

$0.51

Other (income) expense

67,072

(316,831)

(98,391)

(134,502)

$0.40

$0.39

44,800

Income (loss) before income taxes

4,112,072

4,827,832

7,166,105

5,707,913

4,213,646

Income tax provision (benefit)

1,507,891

1,739,701

2,389,039

1,994,199

1,559,605

Net income (loss)

$2,604,181

$3,088,131

$4,777,066

$3,713,714

$2,654,041

Earnings (loss) per share

Earnings (loss) per share- assuming dilution

$0.24

$0.28

$0.44

$0.43

$0.35

$0.34

$0.25

$0.24

Weighted average common shares outstanding for:

Basic EPS
Diluted EPS

10,931,306
11,015,657

10,951,481
11,157,775

10,643,004
10,976,240

10,543,994
10,957,518

Balance Sheet Data, as of December 31,
Cash and certificates of deposit
Total assets
Capital lease obligation, including current
Long-term debt, including current portion
Total Stockholders’ Equity

2008

$10,821,298
40,975,913
593,949
3,915,000
$31,264,762

2007

$6,810,396
37,651,506

4,050,000
$29,815,504

2006

$6,739,981
31,916,635
111,723
-

2005

$3,215,727
25,680,473
245,789
-

$26,323,243

$21,257,857

2004
$2,560,202
22,167,163
379,857
505,154
$17,310,233

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS

We intend for the following discussion to provide you with information that will assist you in understanding our
financial statements, the changes in key items in those financial statements from year to year and the primary factors
that accounted for those changes, as well as how particular accounting principles affect our financial statements.
This discussion also provides information about the financial results of the various segments of our business so you
may better understand how those segments and their results affect our financial condition and results of operations
as a whole. Finally, we have identified and discussed trends known to management that we believe are likely to
have a material effect.

This discussion should be read in conjunction with our financial statements as of December 31, 2008 and 2007 and
the two years then ended and the notes accompanying those financial statements. You are also urged to consider the
information under the caption "Summary of Critical Accounting Policies."

Summary

We are the world's largest specialty retailer and wholesale distributor of leather and leathercraft-related items. Our
operations are centered on operating retail and wholesale stores. We have built our business by offering our
customers quality products in one location at competitive prices. The key to our success is our ability to grow our
base business. We grow that business by opening new locations and by increasing sales in our existing locations.
We intend to continue to expand both domestically, in the short-term, and internationally, in the long-term.

We operate in four segments. First, Wholesale Leathercraft, consisting of our Leather Factory stores and our
national account group, is the largest source of our revenues ($26.4 million in 2008). This division has generally
offered steady but modest increases in sales. Sales in 2008 declined 10.6%. The wholesale stores’ sales declined
10% compared to 2007 and national account sales were down 12%. Much of the sales decline at the stores is
attributed to an overall weakness in consumer spending, which results in fewer purchases of our products by small
businesses. The decline in national account sales is related to weaker consumer spending as well as the expected
decline in sales to one customer who stopped purchasing from us in the first quarter of 2008.

Since acquiring its assets in 2000, we have focused on re-establishing Tandy Leather as the operator of retail
leathercraft stores. These retail stores comprise our second segment, Retail Leathercraft. Because of growth
here, this segment has experienced the greatest increases in sales ($25.2 million in 2008, up from $24.6 million in
2007). Our business plan calls for opening an average of 10-12 stores annually as we work toward a goal of
100+ stores from 73 stores at the end of 2008. We have slowed down our new store openings in recent years due
to the general economic conditions in the U.S. We plan to open 4 new stores in 2009, one of which was opened
in the first quarter.

Our third segment is International Leathercraft, which consists of stores located outside of North America.
Currently, we have one retail/wholesale combination store located in the United Kingdom, which was opened in
February 2008. It is our intention to add more stores to this segment once we have a large enough customer base
to support additional stores.

We refer to our fourth segment as “Other”. It consists of Roberts, Cushman, a supplier of trimmings for headwear.
Its operations are not material to us.

On a consolidated basis, a key indicator of costs, gross margin as a percent of total net sales, held steady in 2007
and increased in 2008. Operating expenses as a percent of total net sales in 2008 increased 2.0% from 2007.
Operating expenses increased 4.6% as a percentage of total net sales in 2007 when compared with 2006. The
increase in operating expenses in 2007 was due to our delayed response to cut expenses on weaker than expected
sales, particularly in the second and third quarters. We were much more successful in our control of operating
expenses in 2008, given the continued weak sales environment.

We reported consolidated net income for 2008 of $2.6 million. Consolidated net income for 2007 and 2006 was
$3.1 million and $4.8 million, respectively. We have used our cash flow to fund our operations, to fund the opening
of new Tandy Leather stores, to purchase necessary property and equipment and make acquisitions of small
competitors in the retail and wholesale market. In 2007, we incurred $4.0 million in bank debt to purchase a
191,000 square foot building to house our corporate headquarters and central support units. We moved into that
facility in the first quarter of 2008. At the end of 2009, our stockholders’ equity had increased to $31.3 million
from $29.8 million the previous year.

Comparing the December 31, 2008 balance sheet with the prior year’s balance sheet, we reduced our investment in
inventory from $17.5 million to $16.0 million, while total cash (including certificates of deposit and other short-
term investments) increased from $6.8 million from $10.8 million.

Net Sales

Net sales for the three years ended December 31, 2008 were as follows:

Year

2008
2007
2006

Wholesale
Leathercraft

Retail
Leathercraft

International
Leathercraft

Other

$26,423,858
$29,555,978
$31,068,188

$25,231,145
$24,663,750
$22,520,461

$836,535
-
-

$745,556
$1,097,274
$1,610,372

Total
Company
$53,237,094
$55,317,002
$55,199,021

Incr (Decr) from
Prior Year

(3.8)%
0.2%
8.8%

Our net sales fell by 3.8% in 2008 when compared with 2007 and grew by 0.2% in 2007 when compared with 2006.
The 2008 sales decline resulted primarily from our Wholesale Leathercraft segment, offset somewhat by an increase
in Retail Leathercraft sales and the sales from our new International Leathercraft segment, although sales at our

retail stores have slowed down somewhat due to an overall slowdown in consumer spending in 2007 and 2008. The
reduction in sales in our wholesale stores is also the result of the overall economic slowdown in the U.S.

Costs and Expenses

In general, our gross profit as a percentage of sales (our gross margin) fluctuates based on the mix of customers we
serve, the mix of products we sell and our ability to source products globally. Our negotiations with suppliers for
lower pricing are an on-going process, and we have varying degrees of success in those endeavors. Sales to retail
customers tend to produce higher gross margins than sales to wholesale customers due to the difference in pricing
levels. Therefore, as retail sales increase in the overall sales mix, higher gross margins tend to follow. Finally,
there is significant fluctuation in gross margins between the various merchandise categories we offer. As a result,
our gross margins can vary depending on the mix of products sold during any given time period.

For 2008, our cost of sales decreased as a percentage of total net sales when compared to 2007, resulting in an
increase in consolidated gross profit margin from 57.3% to 58.9%. Our total cost of sales as a percentage of our
total net sales held steady from 2006 to 2007, resulting in a consolidated gross profit margin at 57.3% in both years.
Increases in gross margin are primarily due to increased retail sales from year to year.

Our gross margins for the three years ended December 31, 2008 were as follows:

Year
2008
2007
2006

Wholesale
Leathercraft
56.5%
55.7%
56.1%

Retail
Leathercraft
61.6%
59.7%
60.8%

International
Leathercraft
68.4%
-
-

Other
44.1%
44.8%
32.1%

Total
Company
58.9%
57.3%
57.3%

Our operating expenses increased 2.0% as a percentage of total net sales to 51.1% in 2008 when compared with
49.1% in 2007. This increase indicates that our operating expenses grew faster than our sales during this period.
However, 2008 operating expenses were only $38,000 higher than those of 2007. Significant expense fluctuations
in 2008 compared to 2007 are as follows:

Expense

2008 amount

Incr (decr) over 2007

Employee compensation & benefits
Rent & utilities
Depreciation and amortization
Advertising
Freight out – shipping product to customers
Property taxes
Outside services

$14.0 million
4.1 million
985,000
3.0 million
1.5 million
260,000
260,000

$(160,000)
323,000
350,000
(400,000)
(140,000)
135,000
(240,000)

Our operating expenses increased 4.6% as a percentage of total net sales to 49.1% in 2007 when compared with
44.5% in 2006. Significant expense fluctuations in 2007 compared to 2006 are as follows:

Expense

2007 amount

Incr (decr) over 2006

Employee compensation & benefits
Rent & utilities
Depreciation and amortization
Advertising
Legal & professional fees

Other Income/Expense (net)

$14.1 million
3.8 million
635,000
3.4 million
650,000

$800,000
300,000
240,000
400,000
350,000

Other Income/Expense consists primarily of currency exchange fluctuations, interest income and interest expense.
In 2008, we had other expense (net) of $67,000 compared to other income (net) of $317,000 in 2007. We received
$230,000 for surface damage and additional access related to the oil and gas lease associated with a portion of the
land surrounding our corporate facility. We earned $141,000 in interest income on our cash and paid $332,000 in
interest expense on our bank debt. We had a currency exchange loss of $114,000 in 2008 compared to income of
$9,000 in 2007.

In 2007, we had other income (net) of $317,000 compared to other income (net) of $98,000 in 2006. We received
rental income of $150,000 from our new building as we leased the building to the sellers for 90 days after purchase.
We also received $100,000 as a signing bonus on an oil and gas lease we signed related to a portion of the land we
purchased. We earned $140,000 in interest income on our cash and paid $122,000 in interest expense on our bank
debt. We had a currency exchange gain of $9,000 in 2007 compared to $52,000 in 2006.

Net Income

During 2008, we earned net income of $2.6 million, a 16% decline over our net income of $3.1 million earned
during 2007. The decline in net income was the result of the decrease in gross profit and the decrease in other
income, partially offset by the reduction in income tax expense.

During 2007, we earned net income of $3.1 million, a 35% decline from our net income of $4.8 million earned
during 2006. The decline in net income was the result of the increase in operating expenses at a higher rate than
that of our sales, partially offset by the reduction in income tax expense.

Wholesale Leathercraft
The increases in net sales, operating income, operating income increases (or decreases) and operating income as a
percentage of sales from our Wholesale Leathercraft stores for the three years ended December 31, 2008 were as
follows:

Net Sales
Incr (Decr)
from Prior Yr
(10.6)%
(3.7)%
(0.1)%

Operating
Income
$1,842,526
$2,826,710
$4,814,240

Operating Income
Incr (Decr)
from Prior Year
(34.8)%
(41.3)%
29.4%

Operating Income as
a Percentage
of Sales
6.9%
9.6%
15.5%

Year
2008
2007
2006

Wholesale Leathercraft, consisting of our 30 wholesale stores and our national account group, accounted for 49.6%
of our consolidated net sales in 2008, which compares to 53.4% in 2007 and 56.2% in 2006. The decrease in this
division's contribution to our total net sales is the result of the growth in Retail Leathercraft and we expect this trend
to continue.

Sales in the wholesale stores decreased 10.4% in 2008 compared to sales in 2007 while the sales decline in our
national account group was 12.2%. By customer group, we had sales declines in all groups. The most significant
decreases were in our wholesale and manufacturer groups. The customers of these groups are small businesses and
have been significantly affected by the weakness in our economy. Our sales mix by customer group in the
Wholesale Leathercraft division was as follows:

Customer Group
Retail
Institution
Wholesale
National Accounts
Manufacturers

2008

2007

2006

26%
8%
41%
17%
8%
100%

23%
8%
42%
15%
12%
100%

25%
7%
39%
19%
10%
100%

The 2008 decrease in operating income as a percentage of divisional sales resulted from a decrease of 9.2% in gross
margin (as a percentage of sales) compared with 2007, offset partially by a decrease of 3.9% in operating expenses
as a percent of sales. Significant operating expense decreases occurred in employee compensation and benefits
($670,000), outside services ($235,000) and freight out ($200,000). These decreases were partially offset by
increases in depreciation expense ($400,000) and property taxes ($230,000), both due to the purchase of our
corporate facility.

The 2007 increase in operating income as a percentage of divisional sales resulted from a decrease of 0.6% in gross
margin (as a percentage of sales) compared with 2006, and an increase of 6.6% in operating expenses as a percent
of sales. Significant operating expense increases occurred in employee compensation and benefits ($500,000),

depreciation expense ($200,000), legal and professional fees ($300,000) and advertising costs ($200,000). These
increases were partially offset by decreases in various insurance expenses ($100,000) and general supplies
($75,000).

Retail Leathercraft

The increases in net sales, operating income, operating income increases (or decreases) and operating income as a
percentage of sales from our Retail Leathercraft stores for the three years ended December 31, 2008 were as
follows:

Net Sales
Increase
from Prior Yr
2.3%
9.5%
25.0%

Operating
Income
$2,188,282
$1,544,320
$2,310,073

Operating Income
Incr (Decr)
from Prior Year
41.7%
(33.2)%
30.7%

Operating Income as
a Percentage
of Sales
8.7%
6.3%
10.3%

Year
2008
2007
2006

Reflecting the growth previously discussed, Retail Leathercraft accounted for 47.4% of our total net sales in 2008,
up from 44.6% in 2007 and 40.8% in 2006.

Growth in net sales for Retail Leathercraft division in 2008 and 2007 resulted primarily from our expansion
program. Expansion during 2008 and 2007 consisted of the opening of 1 and 10 new stores, respectively.

Our sales mix by customer group in the Retail Leathercraft division was as follows:

Customer Group
Retail
Institution
Wholesale
National Accounts
Manufacturers

2008

2007

2006

65%
9%
25%
0%
1%
100%

63%
8%
27%
0%
2%
100%

65%
8%
26%
0%
1%
100%

Operating income as a percentage of sales increased to 8.7% for 2008 compared to 6.3% for 2007. Gross margin
improved to 61.6% in 2008 from 59.7% in 2007. Operating expenses as a percent of sales in 2008 decreased by
0.6%, from 53.5% for 2007 to 52.9% for 2008 as operating expenses grew at a slower pace than that of sales and
gross margin.

Operating income as a percentage of sales decreased to 6.3% for 2007 compared to 10.3% for 2006. Gross margin
fell to 59.7% in 2007 from 60.8% in 2006. Operating expenses as a percent of sales in 2007 decreased by 3.0%,
from 50.5% for 2006 to 53.5% for 2007 as operating expenses grew at a faster pace than that of sales and gross
margin.

We intend to continue the expansion of Tandy Leather’s retail store chain in 2009 by opening approximately 4 new
stores, one of which was opened in the first quarter. We remain committed to a conservative expansion plan for this
division that minimizes risks to our profits and maintains financial stability. In the current economic environment in
the U.S., it is possible that we will change our plans for store openings in 2009 if we determine that the U.S. retail
sector can not support additional store openings at that time.

International Leathercraft

International Leathercraft consists of all stores located outside of North America. Currently, that represents one
retail/wholesale combination store located in the United Kingdom. International Leathercraft accounted for 1.6% of
our total sales in 2008. Operating income was $54,000 in 2008. We expect this segment to become a larger part of
our total operations as time progresses.

Other

Roberts, Cushman accounted for 1.4% of our total sales in 2008 compared with 2.0% and 2.9% in 2007 and 2006,
respectively. Operating income was $94,000 in 2008 compared to operating income of $140,000 in 2007 and an
operating loss of $57,000 in 2006. Roberts, Cushman's sales and profits are immaterial to us as a whole.

Financial Condition

At December 31, 2008, we held $10.8 million of cash and certificates of deposit, $16.0 million of inventory,
accounts receivable of $1.2 million, and $10.3 million of property and equipment. Goodwill and other intangibles
(net of amortization and depreciation) were $966,000 and $355,000, respectively. Net total assets were $40.9
million. Current liabilities were $5.1 million (including $468,000 of current maturities of long-term debt), while
long-term debt was $4.0 million. Total stockholders’ equity at the end of 2008 was $31.2 million.

At December 31, 2007, we held $6.8 million of cash, $17.5 million of inventory, accounts receivable of $2.5
million, and $7.0 million of property and equipment. Goodwill and other intangibles (net of amortization and
depreciation) were $990,000 and $384,000, respectively. Net total assets were $37.6 million. Current liabilities
were $3.8 million (including $135,000 of current maturities of long-term debt), while long-term debt was $3.9
million. Total stockholders’ equity at the end of 2007 was $29.8 million.

Specific ratios on a consolidated basis at the end of each year ended December 31 were as follows:

Solvency Ratios:
Quick Ratio
Current Ratio
Current Liabilities to Net Worth
Current Liabilities to Inventory
Total Liabilities to Net Worth
Fixed Assets to Net Worth

Efficiency Ratios:
Collection Period (Days Outstanding)
Inventory Turnover
Assets to Sales
Sales to Net Working Capital
Accounts Payable to Sales

Profitability Ratios:
Return on Sales (Profit Margin)
Return on Assets
Return on Net Worth (Return on Equity)

Capital Resources and Liquidity

Cash+Accts Rec/Total Current Liabilities
Total Current Assets/Total Current Liabilities
Total Current Liabilities/Net Worth
Total Current Liabilities/Inventory
Total Liabilities/Net Worth
Fixed Assets/Net Worth

Accounts Receivable/Credit Sales x 365
Sales/Average Inventory
Total Assets/Sales
Sales/Current Assets - Current Liabilities
Accounts Payable/Sales

Net Profit After Taxes/Sales
Net Profit After Taxes/Total Assets
Net Profit After Taxes/Net Worth

2008

2007

2006

2.37
5.72
0.16
0.32
0.31
0.33

54.89
3.18
0.77
2.22
0.02

0.05
0.06
0.08

2.48
7.47
0.13
0.22
0.26
0.23

63.42
3.19
0.68
2.27
0.03

0.06
0.08
0.10

1.74
5.19
0.20
0.31
0.21
0.07

53.43
3.36
0.58
2.45
0.03

0.09
0.15
0.18

On July 31, 2007, we entered into a Credit Agreement and Line of Credit Note with JPMorgan Chase Bank, N.A.,
pursuant to which the bank agreed to provide us with a credit facility of up to $5,500,000 to facilitate our purchase
and remodel of real estate consisting of a 195,000 square foot building situated on 30 acres of land located at 1900
SE Loop 820 in Fort Worth, Texas. Proceeds in the amount of $4,050,000 were used to fund the initial purchase of
the property. On April 30, 2008, that amount was rolled into a ten-year term note, and we began making monthly
debt service payments in May 2008.

We are currently in compliance with all covenants and conditions contained in the JPMorgan Chase Credit
Agreement and have no reason to believe that we will not continue to operate in compliance with the provisions of
these financing arrangements. The principal terms and conditions of the Credit Agreement are described in further
detail in Note 6 to the Consolidated Financial Statements, Notes Payable and Long-Term Debt.

Reflecting the borrowing and reduction of bank indebtedness during the periods, our financing activities for 2008,
2007 and 2006 provided (required) net cash of $1.1 million, $4.0 million, and $69,000, respectively.

Our primary source of liquidity and capital resources during 2008 was cash flow provided by operating activities.
Cash flow from operations for 2008 and 2007 was $7.8 million and $2.5 million, respectively, the largest portion
being generated from net income. This net income was partially offset by the decrease in accrued expenses in 2007
and the decrease of accounts receivable and inventory in 2008. Cash flow from operations in 2006 was $3.9
million.

Consolidated accounts receivable decreased significantly to $1.2 million at December 31, 2008 compared to $2.5
million at December 31, 2007. Average days to collect accounts improved from 63.4 days in 2007 to 54.9 days in
2008 on a consolidated basis. As evidenced by the significant reduction in our accounts receivable at the end of
2008, we have tightened our credit policy and are aggressively monitoring our customer accounts to ensure
collectibility. We believe the trend in our collections is the result of the overall slowdown in the U.S. economy.
Many of our customers with open accounts are very small businesses, and they tend to feel the effects of an
economic slowdown more severely than larger businesses.

Inventory decreased from $17.5 million at the end of 2007 to $16.0 million at December 31, 2008. We expect our
inventory to slowly trend upward as we continue our expansion of the Tandy Leather store chain. In 2009, we
expect minimal increases in our inventory due to the expected weaknesses in our sales and the limited number of
retail stores we plan to open. We attempt to manage our inventory levels to avoid tying up excessive capital while
maintaining sufficient inventory in order to service our current customer demand as well as plan for our expected
store growth and expansion. We believe our investment in inventory at the end of 2008 was at a very reasonable
level given our expansion plans as it was in line with our internal targets of optimum inventory levels.

Consolidated inventory turned 3.18 times during 2008, virtually the same as in 2007 at 3.19 times. We compute our
inventory turnover rates as sales divided by average inventory.

By operating division, inventory turns are as follows:

Segment

Wholesale Leathercraft
Retail Leathercraft
International Leathercraft
Roberts, Cushman

2008
2.14
6.05
4.61
17.75

2007
2.37
5.87
n/a
25.88

2006
2.40
6.99
n/a
7.15

Wholesale Leathercraft stores only

7.14

6.87

7.48

Retail Leathercraft inventory turns are significantly higher than that of Wholesale Leathercraft because its inventory
consists only of the inventory at the stores. The retail stores have no warehouse (backstock) inventory to include in
the turnover computation as the stores get their product from the central warehouse. Wholesale Leathercraft’s turns
are expected to be slower because the central warehouse inventory is part of this division and its inventory is held as
the backstock for all of the stores.

Accounts payable decreased slightly to $1.1 million at the end of 2008 compared to $1.5 million at the end of 2007.

As discussed above, the largest use of operating cash in 2008 was in the reduction of accounts payable. Cash paid
for capital expenditures totaled $2.8 million and $1.7 million for the years ended December 31, 2008 and 2007,
respectively. Total capital expenditures (both cash and non-cash) totaled $3.6 million and $5.8 million for the years
ended December 31, 2008 and 2007, respectively. In 2007, the primary capital expenditure was the purchase of the
land and building to house our corporate offices and central support departments for $4.5 million. Other capital
expenditures were factory machines and dies ($110,000); fixtures and equipment for the new Tandy Leather retail
stores ($105,000), various store fixtures and computer equipment at existing stores ($85,000), computer system
upgrade for advertising department ($100,000), computer equipment for future stores ($125,000); and
miscellaneous computer and other office equipment ($250,000). In 2008, the primary capital expenditure was the
remodel and retrofit of the building for $3.2 million. Other capital expenditures were factory machines and dies
($55,000) and computer equipment ($415,000). Although we intend to continue opening or acquiring new Tandy
Leather retail stores and therefore expenditures related to this expansion should continue into 2009, we do expect

our 2009 capital expenditures to be substantially less than that of 2008 as the expenditures related to our building
have been completed.

Cash applied toward stock repurchases in 2008 totaled $802,898.

We believe that cash flow from operations will be adequate to fund our operations in 2009, while also funding our
limited expansion plans. At this time, we know of no trends or demands, commitments events or uncertainties that
will or are likely to materially affect our liquidity, capital resources or results of operations. In addition, we
anticipate that this cash flow will enable us to meet the contractual obligations and commercial commitments. We
could defer expansion plans if required by unanticipated drops in cash flow. In particular, because of the relatively
small investment required by each new retail store, we have flexibility in when we make most expansion
expenditures.

Off-Balance Sheet Arrangements

We did not have any off-balance sheet arrangements during 2008, 2007 and 2006, and we do not currently have any
such arrangements.

Contractual Obligations

The following table summarizes by years our contractual obligations and commercial commitments as of December
31, 2008 (not including related interest expense):

Less than
1 Year

Payments Due by Periods
2 - 3
Years
$405,000
328,838
3,602,368
$4,336,206

4 -5
Years
$405,000
--
1,303,148
$1,708,148

$202,500
265,111
2,468,217
$2,935,828

More than
5 Years
$2,902,500
--
106,484
$3,008,984

Contractual Obligations
Long-Term Debt(1)
Capital Lease Obligations
Operating Leases(2)
Total Contractual Obligations
____________________
(1) Our loan from JPMorgan Chase matures in May 2018.
(2) These are our leased facilities.

Total
$3,915,000
593,949
7,480,217
$11,989,166

Summary of Critical Accounting Policies

We strive to report our financial results in a clear and understandable manner, although in some cases accounting
and disclosure rules are complex and require us to use technical terminology. We follow generally accepted
accounting principles in the U.S. in preparing our consolidated financial statements. These principles require us to
make estimates and apply judgments that affect our financial position and results of operations. We continually
review our accounting policies, how they are applied and how they are reported and disclosed in our financial
statements. Following is a summary of our more significant accounting policies and how they are applied in
preparation of the financial statements.

Basis of Consolidation. We report our financial information on a consolidated basis. Therefore, unless there is an
indication to the contrary, financial information is provided for the parent company, Tandy Leather Factory, Inc.,
and its subsidiaries as a whole. Transactions between the parent company and any subsidiaries are eliminated for
this purpose. We own all of the capital stock of our subsidiaries, and we do not have any subsidiaries that are not
consolidated. None of our subsidiaries are “off balance sheet.”

Revenue Recognition. We recognize revenue for retail (over the counter) sales as transactions occur and other
sales upon shipment of our products, provided that there are no significant post-delivery obligations to the customer
and collection is reasonably assured, which generally occurs upon shipment. Net sales represent gross sales less
negotiated price allowances, product returns, and allowances for defective merchandise.

Allowance for Accounts Receivable. We reduce accounts receivable by an allowance for amounts that may
become uncollectible in the future. This allowance is an estimate based primarily on our evaluation of the
customer's financial condition, past collection history, and the aging of the account. If the financial condition of any

of our customers deteriorates, resulting in an impairment or inability to make payments, additional allowances may
be required.

Inventory. Inventory is stated at the lower of cost or market and is accounted for on the “first in, first out” method.
This means that sales of inventory treat the oldest item of identical inventory as being the first sold. In addition, we
regularly reduce the value of our inventory for slow-moving or obsolete inventory. This reduction is based on our
review of items on hand compared to their estimated future demand. If actual future demand is less favorable than
what we project, additional write-downs may be necessary. Goods shipped to us are recorded as inventory owned
by us when the risk of loss shifts to us from the supplier.

Goodwill. We periodically analyze the remaining goodwill on our balance sheet to determine the appropriateness
of its carry value. As of December 31, 2008, we determined that the present value of the discounted estimated
future cash flows of the stores associated with the goodwill is sufficient to support their respective goodwill
balances. If actual results of these stores differ significantly from our projections, such difference could affect the
present value calculation in the future resulting in an impairment of all or part of the goodwill currently carried on
our balance sheet.

Forward-Looking Statements

Certain statements contained in this annual report and other materials we file with the SEC, or in other written or
oral statements made or to be made by us, other than statements of historical fact, are “forward-looking statements”
as defined in the Private Securities Litigation Reform Act of 1995. Forward-looking statements give our current
expectations or forecasts of future events. Words such as “may,” “assume,” “forecast,” “position,” “predict,”
“strategy,” “expect,” “intend,” “plan,” “estimate,” “anticipate,” “believe,” “project,” “budget,” “potential,” or
“continue,” and similar expressions are used to identify forward-looking statements. They can be affected by
assumptions used or by known or unknown risks or uncertainties. Consequently, no forward-looking statements can
be guaranteed. Actual results may vary materially. You are cautioned not to place undue reliance on any forward-
looking statements. You should also understand that it is not possible to predict or identify all such factors and
should not consider the following list to be a complete statement of all potential risks and uncertainties. Factors that
could cause our actual results to differ materially from the results contemplated by such forward-looking statements
including the risk factors described in Item 1A, “Risk Factors,” of this Annual Report on Form 10-K. Management
cautions that forward-looking statements are not guarantees, and our actual results could differ materially from
those expressed or implied in the forward-looking statements. We do not intend to update forward-looking
statements.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We face exposure to financial market risks, including adverse movement in foreign current exchange rates and
changes in interest rates. These exposures may change over time and could have a material impact on our financial
results. We do not use or invest in market risk sensitive instruments to hedge any of these risks or for any other
purpose.

Foreign Currency Exchange Rate Risk

Our primary foreign currency exposure is related to our subsidiaries in Canada and the United Kingdom as those
subsidiaries have local currency revenue and local currency operating expenses. Changes in the currency exchange
rates impact the U.S. dollar amount of revenue and expenses. See Note 14 to the Consolidated Financial
Statements, Segment Information, for financial information concerning our foreign activities.

Interest Rate Risk

We are subject to market risk associated with interest rate movements on certain outstanding debt. However, our
current credit agreement with JPMorgan Chase includes a fixed interest rate. Therefore, changes in the prime rate
do not impact us in this area.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Tandy Leather Factory, Inc.
Consolidated Balance Sheets
December 31, 2008 and 2007

December 31,
2008

December 31,
2007

$7,810,298
3,011,000

1,180,349
16,011,147
229,501
777,550
29,019,845

15,340,732
(5,019,885)
10,320,847

$6,310,396
500,000

2,538,816
17,473,352
256,938
1,102,836
28,182,338

11,793,317
(4,794,505)
6,998,812

966,655

990,536

355,492
313,074
$40,975,913

384,134
1,095,686
$37,651,506

$1,148,577
3,182,194
271,122
265,111
202,500
5,069,504

$1,497,564
2,072,640
67,150
-
135,000
3,772,354

600,309

148,648

328,838
3,712,500
-

-
3,915,000
-

26,388
5,464,443
26,641,853
(828,385)
(39,537)
31,264,762
$40,975,913

26,359
5,419,477
24,037,672
(25,487)
357,483
29,815,504
$37,651,506

CURRENT ASSETS:

ASSETS

Cash
Short-term investments, including certificates of deposit
Accounts receivable-trade, net of allowance for doubtful accounts
of $43,000 and $104,000 in 2008 and 2007, respectively

Inventory
Deferred income taxes
Other current assets

Total current assets

PROPERTY AND EQUIPMENT, at cost
Less accumulated depreciation and amortization

GOODWILL
OTHER INTANGIBLES, net of accumulated amortization of

$367,000 and $313,000 in 2008 and 2007, respectively

OTHER assets

LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES:

Accounts payable-trade
Accrued expenses and other liabilities
Income taxes payable
Current maturities of capital lease obligation
Current maturities of long-term debt

Total current liabilities

DEFERRED INCOME TAXES

CAPITAL LEASE OBLIGATION, net of current maturities
LONG-TERM DEBT, net of current maturities
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, 10,994,951 and 10,982,951 shares issued at 2008 and 2007,
10,664,555 and 10,977,092 outstanding at 2008 and 2007, respectively

Paid-in capital
Retained earnings
Treasury stock at cost (330,396 shares at 2008; 5,859 shares at 2007)
Accumulated other comprehensive income

Total stockholders' equity

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

Tandy Leather Factory, Inc.
Consolidated Statements of Income
For the Years Ended December 31, 2008, 2007 and 2006

NET SALES
COST OF SALES

Gross Profit

OPERATING EXPENSES
INCOME FROM OPERATIONS

OTHER (INCOME) EXPENSE:
Interest expense
Other, net

Total other expense

INCOME BEFORE INCOME TAXES

PROVISION FOR INCOME TAXES

2008

2007

2006

$53,237,094
21,857,800
31,379,294

$55,317,002
23,644,599
31,672,403

$55,199,021
23,566,251
31,632,770

27,200,150
4,179,144

27,161,402
4,511,001

24,565,056
7,067,714

332,107
(265,035)
67,072

122,209
(439,040)
(316,831)

-
(98,391)
(98,391)

4,112,072

4,827,832

7,166,105

1,507,891

1,739,701

2,389,039

NET INCOME

$2,604,181

$3,088,131

$4,777,066

NET INCOME PER COMMON SHARE – BASIC

NET INCOME PER COMMON SHARE – DILUTED

Weighted Average Number of Shares Outstanding:
Basic
Diluted

$0.24

$0.28

$0.44

$0.43

10,931,306
11,015,657

10,951,481
11,157,775

10,807,316
11,113,855

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

Tandy Leather Factory, Inc.
Consolidated Statements of Cash Flows
For the Years Ended December 31, 2008, 2007 and 2006

CASH FLOWS FROM OPERATING ACTIVITIES:

Net income
Adjustments to reconcile net income to net cash

provided by operating activities -
Depreciation and amortization
Loss (Gain) on disposal of assets
Non-cash stock-based compensation
Deferred income taxes
Other
Net changes in assets and liabilities, net of effect of

business acquisitions:

Accounts receivable-trade, net
Inventory
Income taxes
Other current assets
Accounts payable-trade
Accrued expenses and other liabilities

Total adjustments

Net cash provided by operating activities

CASH FLOWS FROM INVESTING ACTIVITIES:

Purchase of property and equipment
Payments in connection with businesses acquired
Purchases of certificates of deposit
Proceeds from maturities of certificates of deposit
Purchases of marketable securities
Proceeds from sale of marketable securities
Proceeds from sale of assets
Purchase of intangible assets
Decrease (increase) in other assets

Net cash used in investing activities

CASH FLOWS FROM FINANCING ACTIVITIES:

Payments on notes payable and long-term debt
Payments on capital lease obligations
Repurchase of common stock (treasury stock)
Proceeds from issuance of common stock and warrants

Net cash provided by (used in) financing activities

2008

2007

2006

$2,604,181

$3,088,131

$4,777,066

985,549
13,385
30,495
479,098
(373,139)

1,358,467
1,462,205
203,972
325,286
(348,987)
1,109,554
5,245,885
7,850,066

(2,845,548)
-
(3,109,000)
98,000
-
500,000
42,114
(24,708)
122,140
(5,217,002)

(135,000)
(209,764)
(802,898)
14,500
(1,133,162)

634,291
50,114
19,340
(63,893)
241,182

119,293
156,052
7,758
(27,946)
(327,726)
(1,351,369)
(542,904)
2,545,227

(1,705,367)
(771,417)
-
-
(500,000)
-
32,281
-
(26,276)
(2,970,779)

-
(111,723)
-
107,780
(3,943)

392,915
(3,750)
101,080
23,222
(15,696)

(420,431)
(1,500,176)
(140,189)
(731,200)
556,226
873,437
(864,562)
3,912,504

(471,753)
-
-
-
-
-
3,750
-
10,320
(457,683)

-
(134,067)
-
203,410
69,343

NET INCREASE IN CASH

CASH, beginning of period

CASH, end of period

1,499,902

(429,495)

3,524,164

6,310,396

6,739,891

3,215,727

$7,810,298

$6,310,396

$6,739,891

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest paid during the period
Income tax paid during the period, net of (refunds)

$332,107
878,110

$122,209
1,830,688

$ -
2,282,113

NON-CASH INVESTING ACTIVITIES:

Equipment acquired under capital lease financing arrangements
Land and building acquired with long-term debt

$803,713
-

-
$4,050,000

-
-

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

Tandy Leather Factory, Inc.
Consolidated Statements of Stockholders' Equity
For the Years Ended December 31, 2008, 2007 and 2006

Number of
Shares

Par Value

Paid-in
Capital

Treasury
Stock

Retained
Earnings

Accumulated
Other
Comprehensive
Income (Loss)

Total

Comprehensive
Income (Loss)

BALANCE, December 31, 2005

10,735,976

$25,780

$4,988,445

$(25,487)

$16,172,475

$96,645 $21,257,857

Shares issued - stock options and
warrants exercised
Stock-based compensation
Net income
Translation adjustment
BALANCE, December 31, 2006

143,233

-
-
-
10,879,209

344

-
-
-

$26,124

203,066
101,080

-
-
$5,292,591

-
-
-
-
$(25,487)

-
-

4,777,066

-
$20,949,541

-
-
-

203,410
101,080
4,777,066
(16,170)
(16,170)
$80,475 $26,323,243

Comprehensive income for the year ended December 31, 2006

Shares issued - stock options and
warrants exercised
Stock-based compensation
Net income
Translation adjustment
BALANCE, December 31, 2007

97,883
-
-
-
10,977,092

235

-
-
-

$26,359

107,545
19,341
-
-
$5,419,477

-
-
-
-
$(25,487)

-
-

3,088,131

-
$24,037,672

Comprehensive income for the year ended December 31, 2007

-
-
-

107,780
19,341
3,088,131
277,009
$357,484 $29,815,504

277,009

Shares issued - stock options exercised
Stock-based compensation
Purchase of treasury stock
Net income
Translation adjustment
BALANCE, December 31, 2008

12,000
-
(324,537)
-
-
10,664,555

-
-
-
-

$26,388

14,471
30,495
-
-
-
$5,464,443

-
-
(802,898)
-
-
$(828,385)

-
-
-

2,604,181

-
$26,641,853

14,500
-
30,495
-
(802,898)
-
2,604,181
-
(397,021)
(397,021)
$(39,537) $31,264,762

Comprehensive income for the year ended December 31, 2008

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

$4,777,066
(16,170)

$4,760,896

$3,088,131
277,009

$3,365,140

$2,604,181
(397,021)

$2,207,160

TANDY LEATHER FACTORY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2008, 2007, and 2006

1. DESCRIPTION OF BUSINESS

Our primary line of business is the sale of leather, leather crafts and related supplies. We sell our products via
company-owned stores throughout the United States, Canada, and the United Kingdom. Numerous customers
including retailers, wholesalers, assemblers, distributors and other manufacturers are geographically disbursed
throughout the world. We also have light manufacturing facilities in Texas.

2. SIGNIFICANT ACCOUNTING POLICIES

 Management estimates and reporting

The preparation of financial statements in conformity with accounting principles generally accepted in the United
States of America requires us to make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and reported
amounts of revenues and expenses during the periods presented. Actual results could differ from those estimates.
Assets and liabilities with reported amounts based on significant estimates include trade accounts receivables,
inventory (slow-moving), and deferred income taxes.



Principles of consolidation

Our consolidated financial statements include the accounts of Tandy Leather Factory, Inc. and its wholly owned
subsidiaries, The Leather Factory, L.P. (a Texas limited partnership) and its corporate partners, Tandy Leather
Company, L.P. (a Texas limited partnership) and its corporate partners, Mid-Continent Leather Sales, Inc. (an
Oklahoma corporation), Roberts, Cushman & Company, Inc. (a Texas corporation), The Leather Factory of Canada,
Ltd. (a Canadian corporation), and Tandy Leather Factory UK Limited (a UK corporation). All intercompany accounts
and transactions have been eliminated in consolidation.



Foreign currency translation

Foreign currency translation adjustments arise from activities of our Canadian and United Kingdom operations.
Results of operations are translated into U.S. dollars using the average exchange rates during the period, while
assets and liabilities are translated using period-end exchange rates. Foreign currency translation adjustments of
assets and liabilities are recorded in stockholders’ equity. Gains and losses resulting from foreign currency
translations are reported in the statements of income under the caption “Other (Income) Expense”, net, for all periods
presented. We recognized a foreign currency translation loss of $114,000 in 2008 and transaction gains of $9,000
and $52,000 in 2007 and 2006, respectively.

 Revenue recognition

Our sales generally occur via two methods: (1) at the store counter, and (2) shipment by common carrier. Sales at
the counter are recorded and title passes as transactions occur. Otherwise, sales are recorded and title passes when
the merchandise
to
Sales tax is excluded from revenue.

terms are normally FOB shipping point.

the customer.

is shipped

Shipping

We offer an unconditional satisfaction guarantee to all customers and accept all product returns. Net sales represent
gross sales less negotiated price allowances, product returns, and allowances for defective merchandise.

 Discounts

We maintain four price levels on a consistent basis: retail, wholesale, business, and distributor. Gross sales are
reported after deduction of discounts. We do not pay slotting fees or make other payments to resellers. Several
customers require us to participate in their cooperative advertising programs. These programs are a negotiated
percentage of their purchases and are accounted for as a reduction of sales.

 Expense categories

Cost of goods sold includes inbound freight and duty charges from vendors to our central warehouse, freight and
handling charges to move merchandise from our central warehouse to our stores, and manufacturing overhead, as
appropriate.

Operating expenses include all selling, general and administrative costs including wages and related employee
expenses (payroll taxes, health benefits, savings plans, etc.), advertising, outbound freight charges (to ship
merchandise to customers), rent, and utilities.

 Property and equipment, net of accumulated depreciation and amortization

Property and equipment are stated at cost. Depreciation is computed using the straight-line method over the
estimated useful lives of the assets, which are five to ten years for equipment, five to seven years for furniture and
fixtures, five years for vehicles, and forty years for buildings and related improvements. Leasehold improvements are
amortized over the lesser of the life of the lease or the useful life of the asset. Repairs and maintenance costs are
expensed as incurred.



Inventory

Inventory is valued at the lower of first-in, first-out cost or market. In addition, the value of inventory is periodically
reduced for slow-moving or obsolete inventory based on management's review of items on hand compared to their
estimated future demand.



Impairment of long-lived assets

Potential impairments of long-lived assets are reviewed annually or when events and circumstances warrant an earlier
review. In accordance with SFAS No. 144, impairment is determined when estimated future undiscounted cash flows
associated with an asset are less than the asset’s carrying value.

 Earnings per share

Basic earnings per share are computed based on the weighted average number of common shares outstanding
during the period. Diluted earnings per share includes, to the extent inclusion of such shares would be dilutive to
earnings per share, the effect of outstanding options and warrants, computed using the treasury stock method.

BASIC
Net income (loss)

2008

$2,604,181

2007
$3,088,131

2006
$4,777,066

Weighted average common shares outstanding

10,931,306

10,951,481

10,807,316

Earnings per share – basic

$0.24

$0.28

$ 0.44

DILUTED
Net income (loss)

2,604,181

3,088,131

$ 4,777,066

Weighted average common shares outstanding
Effect of assumed exercise of stock options and warrants
Weighted average common shares outstanding, assuming dilution

10,931,306
84,351
11,015,657

10,951,481
206,294
11,157,775

10,807,316
306,539
11,113,855

Earnings per share - diluted

Outstanding options and warrants excluded as anti-dilutive

$0.24

80,500

$0.28

$ 0.43

11,500

For additional disclosures regarding the employee stock options and the warrants, see Note 12. The net effect of
converting stock options and warrants to purchase 232,200, 275,200 and 446,500 shares of common stock at option
prices less than the average market prices has been included in the computations of diluted EPS for the years ended
December 31, 2008, 2007 and 2006, respectively.

 Goodwill and other intangibles

Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets," prescribes a
two-phase process for impairment testing of goodwill, which is performed once annually, absent indicators of
impairment. The first phase screens for impairment, while the second phase (if necessary) measures the impairment.
We periodically analyze goodwill remaining on the balance sheet to determine the appropriateness of its carrying
value and have elected to perform the annual analysis during the fourth calendar quarter of each year. As of
December 31, 2008, we determined that the present value of the discounted estimated future cash flows of the stores
associated with the goodwill is sufficient to support their respective goodwill balances. Under SFAS 142, goodwill
impairment is deemed to exist if the net book value of a reporting unit exceeds its estimated fair value. Our reporting
units are generally the same as the operating segments identified in Note 14 – Segment Information.

A summary of changes in our goodwill for the years ended December 31, 2008 and 2007 is as follows:

Balance, December 31, 2006
Acquisitions and adjustments
Foreign exchange gain/loss
Impairments
Balance, December 31, 2007
Acquisitions and adjustments
Foreign exchange gain/loss
Impairments
Balance, December 31, 2008

Leather Factory

Tandy Leather

$362,733
225,000
19,397
-
$607,130
-
(23,871)
-
583,259

$383,406
-
-
-
$383,406
-
-
-
$383,406

Total
$746,139
225,000
19,397
-
$990,536
-
(23,871)
-
966,655

As of December 31, 2008 and 2007, our intangible assets and related accumulated amortization consisted of the
following:

Trademarks, Copyrights
Non-Compete Agreements

As of December 31, 2008
Accumulated
Amortization

$319,776
46,809
366,585

As of December 31, 2007
Accumulated
Amortization

$283,485
29,750
$313,235

Gross

$544,369
177,708
$722,077

Gross

$544,369
153,000
$697,369

Net
$224,593
130,899
$355,492

Net
$260,884
123,250
$384,134

Excluding goodwill, we have no intangible assets not subject to amortization under SFAS 142. Amortization of
intangible assets of $53,350 in 2008, $51,542 in 2007, and $38,291 in 2006 was recorded in operating expenses.
The weighted average amortization period is 15 years for trademarks and copyrights, and 4.22 years from non-
compete agreements. Based on the current amount of intangible assets subject to amortization, the estimated
amortization expense for each of the succeeding 5 years are as follows:

2009
2010
2011
2012
2013

Leather
Factory
$29,190
29,190
26,204
1,250
-

Tandy
Leather
$30,337
30,337
30,337
30,337
30,337

Total
$59,527
59,527
56,541
31,587
30,337

During 2007 and 2008, we acquired non-compete agreements in the amounts of $75,000 and $24,708, respectively.



Fair value of financial Instruments

The principal financial instruments held consist of accounts receivable, accounts payable, notes payable and long-
term debt. The carrying value of accounts receivable and accounts payable approximate their fair value due to the

relatively short-term nature of the accounts. The terms of the long-term debt are considered reasonable for this type
of financing; therefore, the carrying amount approximates fair value.

 Deferred taxes

Deferred income taxes result from temporary differences in the basis of our assets and liabilities reported for book and
tax purposes.

 Stock-based compensation – Change in Accounting Principle

We had two stock option plans which provided for stock option grants to officers, key employees and directors. Both
plans expired in the 4th quarter of 2005. The expiration of the plans have no effect on the options previously granted.
Options outstanding and exercisable were granted at a stock option price which was not less than the fair market
value of our Common Stock on the date the option was granted and no option has a term in excess of ten years.
Additionally, options vest and become exercisable either six months from the option grant date or in equal
installments over a five year period. Prior to fiscal 2006, we accounted for stock-based compensation using the
intrinsic value method prescribed in Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees, and related Interpretations and provided the required pro forma disclosures of SFAS No. 123, Accounting
for Stock-Based Compensation.

On January 1, 2006, we adopted SFAS No. 123(R), “Share-Based Payment,” and elected to adopt the standard using
the modified prospective transition method. Under this transition method, compensation cost associated with stock
options recognized in 2006 includes: (1) amortization related to the remaining unvested portion of all share based
payments granted prior to, but not vested as of December 31, 2005, based on the grant date fair value estimated in
accordance with the original pro forma footnote disclosure provisions of FASB Statement No. 123 and (2)
amortization related to all share based payments granted subsequent to December 31, 2005, based on the grant date
fair value estimated in accordance with the provisions of FASB Statement No. 123(R). Accordingly, stock
compensation award expense is recognized over the requisite service period using the straight-line attribution
method. Previously reported amounts have not been restated.

We recognized share based compensation expense of approximately $30,000, $19,000, and $101,000 for the years
ended December 31, 2008, 2007 and 2006, respectively, as a component of operating expenses.

During the years ended December 31, 2008 and 2007, the stock option activity under our stock option plans was as
follows:

Outstanding, January 1, 2007
Granted
Cancelled
Exercised
Outstanding, December 31, 2007
Exercisable, December 31, 2007

Outstanding, January 1, 2008
Granted
Cancelled
Exercised
Outstanding, December 31, 2008
Exercisable, December 31, 2008

Weighted
Average
Exercise
Price

$2.05
-
-
1.81
$2.11
$1.97

Weighted
Average
Exercise
Price

$2.11
-
-
1.21
$2.16
$215

#
of
shares

296,200
-
-
(59,500)
236,700
220,770

#
of
shares

236,700
-
-
(12,000)
224,700
220,770

Weighted Average
Remaining
Contractual Term
(in years)

Aggregate
Intrinsic
Value

4.23
4.11

$270,780
$237,740

Weighted Average
Remaining
Contractual Term
(in years)

Aggregate
Intrinsic
Value

3.09
3.07

$262,001
$259,461

Other information pertaining to option activity during the twelve month periods ended December 31, 2008, 2007 and
2006 are as follows:

Weighted average grant-date fair value of stock options granted
Total fair value of stock options vested
Total intrinsic value of stock options exercised

2008
N/A
$30,500
$8,779

2007
N/A
$30,500
$62,280

2006
N/A
$89,915
$90,780

As of December 31, 2008, there was $3,000 of total unrecognized compensation cost related to nonvested stock
options, which is expected to be recognized in 2009.

Stock options to purchase our common stock are granted at prices at or above the fair market value on the date of
grant. For employees, options become exercisable in five equal installments beginning a year from the date of grant.
For non-employee directors, options become exercisable six months after the date of grant. All options expire 10
years from the date of grant.

Cash received from the exercise of stock options and warrants for the years ended December 31, 2008, 2007 and
2006 was $14,500, $107,780, and $203,410, respectively.

The fair value of each stock option granted is estimated on the date of grant using the BSM option valuation model.
The assumptions used to calculate the fair value of options granted are evaluated and revised, as necessary, to
reflect market conditions and our experience. Compensation expense is recognized only for those options expect to
vest, with forfeitures estimated at the date of grant based on our historical experience and future expectations.

 Comprehensive income

Comprehensive income represents all changes in stockholders’ equity, exclusive of transactions with stockholders.
The accumulated balance of foreign currency translation adjustments is presented in the consolidated financial
statements as “accumulated other comprehensive income or loss”.

 Shipping and handling costs

All shipping and handling costs incurred by us are included in operating expenses on the statements of income.
These costs totaled approximately $1,500,000, $1,641,000 and $1,611,000 for the years ended December 31, 2008,
2007 and 2006, respectively.

 Advertising

With the exception of catalog costs, advertising costs are expensed as incurred. Catalog costs are capitalized and
expensed over the estimated useful life of the particular catalog in question, which is typically twelve to eighteen
months. Such capitalized costs are included in other current assets and totaled $137,000 and $218,000 at December
31, 2008 and 2007, respectively. Total advertising expense was $3,036,346 in 2008; $3,440,762 in 2007; and
$3,087,943 in 2006.

We agree to list the names and addresses of our Authorized Sales Centers (ASCs) in certain mailing pieces
produced. The inclusion of these names and addresses are at our sole discretion. The production and distribution of
direct mailings is the primary method of advertising we use and normally consists of 95 to 100 unique mailing pieces
annually. Generally, the ASCs are listed in six to eight of those pieces. We believe that the inclusion of these ASC
locations in the flyers has no impact on our financial statements.

 Cash flows presentation

For purposes of the statement of cash flows, we consider all highly liquid investments with initial maturities of three
months or less from the date of purchase to be cash equivalents.

 Reclassifications

Certain reclassifications have been made to the 2007 financial statements to conform to the 2008 presentation.

3. SHORT-TERM INVESTMENTS

All current fixed maturity securities are classified as “available for sale” and are reported at carrying value, which
approximates fair value. We have determined that our investment securities are available to support current
operations and, accordingly, have classified such securities as current assets without regard to contractual maturities.
Investments at December 31, 2008 consisted of certificates of deposit. Investments at December 31, 2007 consisted
of auction rate securities. The contractual maturities of the certificates of deposit as of December 31, 2008 are shown
below. Actual maturities may differ from the contractual maturities because debtors may have the right to call
obligations with or without call penalties.

Due within one year
Due between one and five years
Due between five and ten years
Due between ten and fifteen years
Due between fifteen and twenty years

$2,417,000
99,000
99,000
198,000
198,000
$3,011,000

4. VALUATION AND QUALIFYING ACCOUNTS

 Allowance for uncollectible accounts

We maintain allowances for bad debts based on factors such as the composition of accounts receivable, the age of
the accounts, historical bad debt experience, and our evaluation of the financial condition and past collection history of
each customer. Accounts are written off as they are deemed uncollectible based on a periodic review of accounts.
Our allowance for doubtful accounts was $43,014 and $104,634, respectively, at December 31, 2008 and 2007. The
following is a roll forward of the allowance for doubtful accounts:

Year ended:
December 31, 2008
December 31, 2007
December 31, 2006

Balance at
beginning of
year
$104,634
$149,172
$137,587

Reserve
"purchased"
during year

-
(11,918)
-

Additions (reductions)
charged to costs and
expenses

Foreign
exchange
gain/loss

Write-offs

65,921
98,508
85,439

(2,768)
3,192
241

(124,773)
(134,320)
(74,095)

Balance
at end of
year
$43,014
$104,634
$149,172

 Sales returns and defective merchandise

Product returns are generally recorded directly against sales as those returns occur. Historically, the amount of
returns is immaterial and as a result, no reserve is recorded in the financial statements.

 Slow-moving and obsolete inventory

The majority of inventory items maintained by us have no restrictive shelf life. We review all inventory items annually
to determine what items should be eliminated from the product line. Items are selected for several reasons: (1) the
item is slow-moving; (2) the supplier is unable to provide an acceptable quality or quantity; or (3) to maintain a
freshness in the product line. Once an item has been selected to discontinue, we devalue the cost of the item by 25%
of its original value each quarter until its value has been reduced to zero. Reductions in inventory for slow-moving
and obsolete inventory are recorded directly against inventory.

5. BALANCE SHEET COMPONENTS

INVENTORY
On hand:
Finished goods held for sale
Raw materials and work in process
Inventory in transit

PROPERTY AND EQUIPMENT
Building
Land
Leasehold improvements
Equipment and machinery
Furniture and fixtures
Vehicles
Construction in progress

Less: accumulated depreciation

December 31, 2008

December 31, 2007

$14,867,830
415,644
727,673
$16,011,147

$5,160,522
1,451,132
669,329
5,725,442
2,288,328
45,979
-
15,340,732
(5,019,885)
$10,320,847

$16,482,845
633,188
357,319
$17,473,352

$3,060,194
1,451,132
1,163,947
4,431,432
1,238,731
69,713
378,168
11,793,317
(4,794,505)
$6,998,812

TOTAL

OTHER CURRENT ASSETS
Accounts receivable – employees
Accounts receivable – other
Prepaid expenses
Payments for merchandise not received

OTHER ASSETS
Security deposits - utilities, locations, etc.
Leather art collection
Long-term portion of note receivable
Computer software not implemented yet

ACCRUED EXPENSES AND OTHER LIABILITIES
Accrued bonuses
Accrued payroll
Deferred revenue
Sales and payroll taxes payable
Inventory in transit
Other

TOTAL

$42,217
126,074
575,295
33,964
$777,550

$61,074
252,000
-
-
$313,074

$1,068,426
327,816
488,305
169,985
727,673
399,989
$3,182,194

$38,972
265,400
588,004
210,460
$1,102,836

$74,057
252,000
109,157
660,472
$1,095,686

$760,113
220,555
421,908
177,786
357,318
134,960
$2,072,640

Depreciation expense was $932,199, $577,405, and $348,797 for the years ended December 31, 2008, 2007 and
2006, respectively.

6. NOTES PAYABLE AND LONG-TERM DEBT

On July 31, 2007, we entered into a Credit Agreement and Line of Credit Note with JPMorgan Chase Bank, N.A.,
pursuant to which the bank agreed to provide us with a credit facility of up to $5,500,000 to facilitate our purchase of
real estate consisting of a 195,000 square foot building situated on 30 acres of land located at 1900 SE Loop 820 in
Fort Worth, Texas. Under the terms of the Line of Credit Note, we could borrow from time to time until April 30, 2008,
up to the lesser of $5,500,000 or 90% of the cost of the property and make monthly interest payments. On April 30,
2008, the principal balance was rolled into a 10-year term note with an interest rate of 7.10% per annum.

Proceeds in the amount of $4,050,000 were used to fund the purchase of the property from Standard Motor Products,
Inc. under an Agreement of Purchase and Sale, dated June 25, 2007, which closed on July 31, 2007. No further
borrowings were drawn.

At December 31, 2008 and 2007, the amount outstanding under the above agreement consisted of the following:

Credit Agreement with JPMorgan Chase Bank – collateralized by real
estate; payable as follows:

Line of Credit Note dated July 31, 2007, converted to a 10-year term note
on April 30, 2008; $16,875 monthly principal payments plus interest at
7.1% per annum; matures April 30, 2018

Less - Current maturities

2008

2007

$ 3,915,000

$ 4,050,000

3,915,000
(202,500)
$3,712,500

4,050,000
(135,000)
$3,915,000

The terms of the credit facility contain various covenants which among other things require the Company to maintain a
debt service coverage ratio of not less than 1.2 to 1.0. Scheduled maturities of the Company’s notes payable and
long-term debt are as follows:

2009
2010
2011
2012
2013
2014 and thereafter

$202,500
202,500
202,500
202,500
202,500
2,902,500
$3,915,000

7. CAPITAL LEASE OBLIGATIONS

We lease certain HVAC equipment under a capital lease agreement. The asset subject to the agreement totaling
$803,713 is included in Property and Equipment as of December 31, 2008. Accumulated depreciation on the asset at
that date was $60,278. Amortization of the capitalized cost is charged to depreciation expense.

At December 31, 2008, the amounts outstanding under capital lease obligation consisted of the following:

Capital Lease secured by certain HVAC equipment – total monthly principal payments of
$24,328, 5.7% interest, maturing February 2011
Less amount representing interest
Total obligation under capital lease
Less - Current maturities

2008

$632,538
38,589
593,949
265,111
$328,838

8. EMPLOYEE BENEFIT AND SAVINGS PLANS

We had an Employee Stock Ownership Plan (the "Plan") for employees with at least one year of service (as defined
by the Plan) and who have reached their 21st birthday. In December 2006, the Board of Directors decided to
terminate the Plan effective December 31, 2006. As a result, all participants became 100% vested in their accounts.
No further contributions were made to the Plan and the accounts were fully distributed to participants in 2008.

We apply Statement of Position 93-6 (SOP 93-6), "Employers’ Accounting for Employee Stock Ownership Plans," of
the Accounting Standards Division of the American Institute of CPAs. During 2008, 2007, and 2006, respectively, we
contributed $0; $0; and $225,350 in cash as current year contributions to the plan and recognized compensation
expense related to these payments.

The following table summarizes the number of shares held by the Plan and the market value as of December 31,
2008, 2007, and 2006:

Allocated
Unearned
Total

Number of Shares
2007
844,381

2006
929,069

844,381

929,069

2008
-
-
-

Market Value
2007

$2,761,126
-
$2,761,126

2006
$7,497,587
-
$7,497,587

We have a 401(k) plan to provide retirement benefits for our employees. As allowed under Section 401(k) of the
Internal Revenue Code, the plan provides tax-deferred salary contributions for eligible employees and allows
employees to contribute a percentage of their annual compensation to the Plan on a pretax basis. Employee
contributions are limited to a maximum annual amount as set periodically by the Internal Revenue Code. In 2008 and
2006, we matched pretax employee contributions up to 50% on the first 4% of eligible earnings that are contributed by
employees. In 2007, we matched pretax employee contributions up to 100% on the first 3% of eligible earnings and
50% on the next 2% of eligible earnings.

Year Ended December 31,

Maximum Matching
Contribution per Participant*

Total Matching
Contribution

2008
2007
2006

$4,600
$9,000
$4,400

$120,025
$240,774
$108,565

** Due to the annual limit on eligible earnings imposed by the Internal Revenue

The plan allows employees who meet the age requirements and reach the plan contribution limits to make a catch-up
contribution. The catch-up contributions are not eligible for matching contributions. In addition, the plan provides for
discretionary matching contributions as determined by the Board of Directors. There were no discretionary matching
contributions made in 2008, 2007 or 2006.

We currently offer no postretirement or postemployment benefits to our employees.

9. INCOME TAXES

The provision for income taxes consists of the following:

Current provision:

Deferred provision (benefit):

2008

2007

2006

Federal
State

$826,157
202,636
1,028,793

429,854
49,244
479,098

$1,494,181
309,413
1,803,594

$2,167,141
198,676
2,365,817

(57,153)
(6,740)
(63,893)

19,447
3,775
23,222

$1,507,891

$1,739,701

$2,389,039

Income before income taxes is earned in the following tax jurisdictions:

United States
United Kingdom
Canada

2008
$3,716,554
(176,257)
571,775
$4,112,072

2007
$4,407,361
-
420,471
$4,827,832

2006

$6,560,994
-
605,111
$7,166,105

The income tax effects of temporary differences that give rise to significant portions of deferred income tax assets and
liabilities are as follows:

Deferred income tax assets:
Allowance for doubtful accounts
Capitalized inventory costs
Warrants and stock-based compensation
Accrued expenses, reserves, and other
Total deferred income tax assets

Deferred income tax liabilities:
Property and equipment depreciation
Goodwill and other intangible assets amortization
Total deferred income tax liabilities

2008

2007

$13,351
128,591
55,739
87,559
285,240

549,465
106,583
656,048

$29,360
144,099
42,989
83,478
299,926

78,567
113,069
191,636

Net deferred tax asset (liability)

$(370,808)

$108,290

The net deferred tax liability is classified on the balance sheets as follows:

Current deferred tax assets
Long-term deferred tax liabilities
Net deferred tax asset (liability)

2008
$229,501
(600,309)
$370,808

2007
$256,938
(148,648)
$108,290

The effective tax rate differs from the statutory rate as follows:

Statutory rate
State and local taxes
Other
Effective rate

2008

2007

2006

34%
9%
(6%)
37%

34%
6%
(4%)
36%

34%
2%
(3%)
33%

The Company files a consolidated U.S. income tax return as well as state tax returns on a consolidated, combined or
stand-alone basis, depending on the jurisdiction. The Company is no longer subject to U.S. federal income tax

examinations by tax authorities for years prior to the tax year ended December 2006. Depending on the jurisdiction,
the Company is no longer subject to state examinations by tax authorities for years prior to the December 2005 and
December 2006 tax years.

10. COMMITMENTS AND CONTINGENCIES

Operating Leases

We lease our store locations under five-year lease agreements that expire on dates ranging from April 2009 to April
2016. Rent expense on all operating leases for the years ended December 31, 2008, 2007, and 2006, was
$2,575,642, $2,682,574 and $2,495,380, respectively.

Future minimum lease payments under noncancelable operating leases at December 31, 2008 were as follows:

Year ending December 31:

2009
2010
2011
2012
2013
2014 and thereafter

Total minimum lease payments

$2,468,217
2,061,710
1,540,658
995,635
307,513
106,484
$7,480,217

Litigation

We are involved in various litigation that arise in the ordinary course of business and operations. There are no such
matters pending that we expect to have a material impact on our financial position and operating results.

11. SIGNIFICANT BUSINESS CONCENTRATIONS AND RISK

Major Customers

Our revenues are derived from a diverse group of customers primarily involved in the sale of leathercrafts. While no
single customer accounts for more than 6% of our consolidated revenues in 2008, 2007 and 2006, sales to our five
largest customers represented 6.2%, 8.3% and 9.5%, respectively, of consolidated revenues in those years. While
we do not believe the loss of one of these customers would have a significant negative impact on our operations, we
do believe the loss of several of these customers simultaneously or a substantial reduction in sales generated by
them could temporarily affect our operating results.

Major Vendors

We purchase a significant portion of our inventory through one supplier. Due to the number of alternative sources of
supply, loss of this supplier would not have an adverse impact on our operations.

Credit Risk

Due to the large number of customers comprising our customer base, concentrations of credit risk with respect to
customer receivables are limited. At December 31, 2008 and 2007, 21% and 38%, respectively, of our consolidated
accounts receivable were due from two nationally recognized retail chains. We do not generally require collateral for
accounts receivable, but we do perform periodic credit evaluations of our customers and believe the allowance for
doubtful accounts is adequate. It is our opinion that if any one or a group of customer receivable balances should be
deemed uncollectable, it would not have a material adverse effect on our results of operations and financial condition.

We maintain our cash in bank deposit accounts that, at times, may exceed federally insured limits. We have not
experienced any losses in such accounts. We believe we are not exposed to any significant credit risk on our cash
and cash equivalents.

12. STOCKHOLDERS' EQUITY

Stock Option Plans



2007 Director Non-Qualified Stock Option Plan

The 2007 Director Non-Qualified Stock Option Plan was adopted by the Board of Directors effective March 22,
2007 subject to stockholder approval at the Company’s 2007 Annual Meeting of Stockholders. Pursuant to the
plan, options to acquire an aggreagate of 100,000 common shares may be granted to each individual who is
serving as an outside Director of the Company on the date of grant, at the rate of 3,000 shares of Common Stock
on March 22 of each calendar year. No options have been awarded as of December 31, 2008 as the Form S-8,
Registration Statement under the Securities Act of 1933, has not been filed with the Securities and Exchange
Commission yet.



1995 Stock Option Plan

In connection with the 1995 Stock Option Plan for officers and key management employees, we have outstanding
options to purchase our common stock. The plan provides for the granting of either qualified incentive stock
options or non-qualified options at the discretion of the Stock Option Committee of the Board of Directors.
Options are granted at the fair market value of the underlying common stock at the date of grant and vest over a
five-year period. We reserved 1,000,000 shares of common stock for issuance under this plan. The plan expired
in the 4th quarter of 2005 with 20,000 ungranted options remaining.

 1995 Director Non-Qualified Stock Option Plan

In connection with the 1995 Director Non-qualified Stock Option Plan for non-employee directors, we have
outstanding options to purchase our common stock. The plan provides for the granting of non-qualified options
at the discretion of the Directors Stock Option Committee of the Board of Directors. Options are granted at the
fair market value of the underlying common stock at the date of grant and vest after six months. We reserved
100,000 shares of common stock for issuance under this plan. The plan expired in the 4th quarter of 2005 with
18,000 ungranted options remaining.

 Stock Option Summary

All options expire ten years from the date of grant and are exercisable at any time after vesting. Of the combined
1,100,000 shares available for issuance under the two plans, due to the expiration of the plan in 2005, there are
no un-optioned shares available for future grants.

A summary of stock option transactions for the years ended December 31, 2008, 2007, and 2006, is as follows:

2008

2007

Outstanding at January 1
Granted
Forfeited or expired
Exchanged
Exercised
Outstanding at December 31

Exercisable at end of year

Weighted-average fair value of
options granted during year

Weighted
Average
Exercise
Price

$2.11
-
-
-

1.21
$2.16

$2.15

Option
Shares

236,700

-
-
-

(12,000)
224,700

222,700

Option
Shares

296,200

-
-
-

(59,500)
236,700

220,700

Weighted
Average
Exercise
Price

Option
Shares

2006

Weighted
Average
Exercise

Price

$2.05
-
-
-

1.81
$2.11

$1.97

421,000

-
-
-

(124,800)
296,200

266,200

$1.93
-
-
-

1.63
$2.05

$1.82

The following table summarizes outstanding options into groups based upon exercise price ranges at December 31,
2008:

Options Outstanding
Weighted
Average
Exercise
Price

Weighted
Average
Maturity
(Years)

$0.690
0.943
1.350
1.900
3.270
4.241
$2.160

0.74
1.70
2.39
2.74
5.31
4.91
3.09

Option
Shares
2,000
42,000
105,700
2,000
12,000
61,000
224,700

Options Exercisable

Weighted
Average
Exercise

Price

Weighted
Average
Maturity
(Years)

Option
Shares

2,000
42,000
105,700
2,000
10,000
61,000
222,700

$0.690
0.943
1.350
1.900
3.248
4.241
$2.150

0.74
1.70
2.39
2.74
5.24
4.91
3.07

Exercise Price Range
$0.75 or Less
$0.76 to $1.125
$1.126 to $1.69
$1.70 to $2.55
$2.56 to $3.84
$3.85-$4.96

b) Warrants

Warrants to acquire up to 100,000 shares of common stock at $3.10 per share were issued in conjunction with a
consulting agreement to an unrelated entity in February 2003. The warrants expired on February 12, 2008.

Warrants to acquire up to 50,000 shares of common stock at $5.00 per share were issued in conjunction with a
consulting agreement to an unrelated entity in February 2004. The warrants expired on February 24, 2009.

A summary of warrant transactions for the years ended December 31, 2008, 2007, and 2006, is as follows:

2008

2007

2006

Outstanding at January 1
Granted
Forfeited or expired
Exchanged
Exercised
Outstanding at December 31

Exercisable at end of year

Weighted-average fair value of
warrants granted during year

Weighted
Average
Exercise
Price

$3.620
-
-
-
-
$3.620

$3.620

Warrant
Shares

27,500
-
-
-
-
27,500

27,500

Weighted
Average
Exercise
Price

$3.650
-
-
-
3.658
$3.620

$3.620

Warrant
Shares

98,300
-
-
-
(70,800)
27,500

27,500

Weighted
Average
Exercise

Warrant
Shares

140,000
-
-
-
(41,700)
98,300

Price
$3.7786
-
-
-
4.089
$3.650

98,300

$3.650

The following table summarizes outstanding warrants into groups based upon exercise price ranges at December 31,
2008:

Warrants Outstanding

Weighted Weighted
Average
Average
Maturity
Exercise
(Years)
Price

Warrant

Warrants Exercisable
Weighted
Average
Exercise

Weighted
Average
Maturity
(Years)

Warrant

Price

20,000

$3.10

7,500
27,500

5.00
$3.62

0.12

1.15
0.40

20,000

$3.10

7,500
27,500

5.00
$3.62

0.12

1.15
0.40

Exercise Price Range
$3.00 or Less

More than $3.00 and
Less Than $5.00

$5.00 or More

c) Stock Repurchase Program

On September 9, 2008, our Board of Directors approved a limited stock repurchase plan whereby all non-officer
participants in Tandy Leather Factory, Inc. Stock Ownership Plan (the “ESOP”) would have the option of selling the
shares of our common stock distributed to them upon termination of the ESOP back to us. The option remained open

to the non-officer participants for a period of sixty days beginning on September 26, 2008 and ending on November
25, 2008. The purchase price of the shares was calculated at a price-per-share equal to the closing price of a share of
our common stock on the American Stock Exchange on the business day each non-officer participant notified the
ESOP administrator of his or her intent to sell his or her shares to us. We repurchased a total of 324,537 shares at a
total purchase price of $802,898 in the fourth quarter of 2008.

13. BUSINESS ACQUISITIONS

On January 31, 2007, we acquired all of the issued and outstanding shares of capital stock of Mid-Continent Leather
Sales, Inc., an Oklahoma corporation. The total purchase price was $575,000 which was funded with cash generated
from operations. For financial reporting purposes, the transaction was accounted for under the purchase method,
effective February 1, 2007. We also entered into a non-compete agreement with the former owner totaling $75,000
for a period of five years. This company is included in our Wholesale Leathercraft segment.

14. SEGMENT INFORMATION

We identify our segments based on the activities of four distinct operations:

a. Wholesale Leathercraft, which consists of a chain of warehouse distribution units operating under the

name, The Leather Factory, located in North America;

b. Retail Leathercraft, which consists of a chain of retail stores operating under the name, Tandy Leather

Company, located in North America;

International Leathercraft, sells to both wholesale and retail customers. It carries the same products as
North American stores. We started this operation in February 2008 and have one store located in
Northampton, United Kingdom; and

d. Other, which consists of Roberts, Cushman and Co., a producer of decorative hat trims sold directly to hat

manufacturers.

Our reportable operating segments have been determined as separately identifiable business units and we measure
segment earnings as operating earnings, defined as income before interest and income taxes.

For the year ended December 31, 2008

Net Sales
Gross Profit
Operating earnings
Interest expense
Other, net
Income before income taxes
Depreciation and amortization
Fixed asset additions
Total assets

For the year ended December 31, 2007
Net Sales
Gross Profit
Operating earnings
Interest expense
Other, net
Income before income taxes
Depreciation and amortization
Fixed asset additions
Total assets

Wholesale
Leathercraft

Retail
Leathercraft

International
Leathercraft

Other

Total

$26,423,858
14,935,331
1,842,526
332,107
(501,697)
2,012,116
844,305
3,481,851
$33,657,764

$25,231,145
15,543,293
2,188,282
-
5,872
2,182,410
126,326
74,550
$6,404,198

$836,535
571,735
54,532
-
230,790
(176,258)
13,443
92,859
$778,721

$745,556
328,935
93,804
-
-
93,804
1,475
-
$135,230

$53,237,094
31,379,294
4,179,144
332,107
(265,035)
4,112,072
985,549
3,649,260
$40,975,913

$29,555,979
16,446,853
2,826,710
122,209
(425,145)
3,129,646
485,506
5,538,803
$32,217,748

$24,663,751
14,733,478
1,544,320
-
(11,975)
1,556,295
143,123
207,455
$5,272,466

-
-
-
-
-
-
-
-
-

$1,097,272
492,071
139,971
-
(1,920)
141,891
5,662
9,109
$161,292

$55,317,002
31,672,402
4,511,001
122,209
(439,040)
4,827,832
634,291
5,755,367
37,651,506

For the year ended December 31, 2006
Net Sales
Gross Profit
Operating earnings
Interest expense
Other, net
Income before income taxes
Depreciation and amortization
Fixed asset additions
Total assets

$31,068,188
17,463,398
4,814,240
-
118,381
4,932,621
245,838
298,689
$26,529,796

$22,520,461
13,690,030
2,310,073
-
(21,220)
2,288,853
141,070
172,902
$5,112,188

-
-
-
-
-
-
-
-
-

$1,610,372
479,342
(56,599)
-
1,230
(55,369)
6,007
162
$274,651

$55,199,021
31,632,770
7,067,714
-
98,391
7,166,105
392,915
471,753
$31,916,635

Net sales for geographic areas was as follows:

United States
Canada
All other countries

2008

$46,316,115
4,740,722
2,180,257
$53,237,094

2007
$48,756,696
4,698,510
1,861,796
$55,317,002

2006

$49,188,609
4,287,180
1,723,232
$55,199,021

Geographic sales information is based on the location of the customer. Net sales from no single foreign country,
except for Canada, was material to our consolidated net sales for the years ended December 31, 2008, 2007 and
2006. We do not have any significant long-lived assets outside of the United States.

15. RECENT ACCOUNTING PRONOUNCEMENTS

In September 2006, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 157, Fair Value
Measurements (“SFAS 157”). SFAS 157 defines fair value, creates a framework within GAAP for measuring fair
value, and expands disclosures about fair value measurements. In defining fair value, SFAS 157 emphasizes a
market-based measurement approach that is based on the assumptions that market participants would use in pricing
an asset or liability. SFAS 157 does not require any new fair value measurements, but does generally apply to other
accounting pronouncements that require or permit fair value measurements. In February 2008, FASB issued FSP
FAS 157-2, Effective Date of FASB Statement No. 157, which delays for one year the effective date of SFAS 157 for
most nonfinancial assets and nonfinancial liabilities. Nonfinancial instruments affected by this deferral include assets
and liabilities such as reporting units measured at fair value in a goodwill impairment test and nonfinancial assets
acquired and liabilities assumed in a business combination. Effective January 1, 2008, we adopted SFAS 157 for
financial assets and financial liabilities recognized at fair value on a recurring basis. The adoption of SFAS 157 for
these items did not have a material impact on our financial position, results of operations and cash flows.

In February 2007, FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities —
including an amendment of FASB Statement No. 115. This statement permits entities to choose to measure many
financial instruments and certain other items at fair value. This statement is effective for financial statements issued
for fiscal years beginning after November 15, 2007, including interim periods within that fiscal year. We did not elect
the fair value option for any of our existing financial instruments. The adoption of SFAS 159 did not have a material
impact on our financial position, results of operations and cash flows.

In December 2007, FASB issued SFAS No. 141 (revised 2007), Business Combinations (“SFAS 141R”). SFAS 141R
defines a business combination as a transaction or other event in which an acquirer obtains control of one or more
businesses. Under SFAS 141R, all business combinations are accounted for by applying the acquisition method
(previously referred to as the purchase method), under which the acquirer measures all identified assets acquired,
liabilities assumed, and noncontrolling interests in the acquiree at their acquisition date fair values. Certain forms of
contingent consideration and certain acquired contingencies are also recorded at their acquisition date fair values.
SFAS 141R also requires that most acquisition related costs be expensed in the period incurred. SFAS 141R is
effective for us in January 2009. SFAS 141R will change our accounting for business combinations on a prospective
basis.

In December 2007, FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements – an
amendment of ARB No. 51 (“SFAS 160”). SFAS 160 requires a company to recognize noncontrolling interests
(previously referred to as “minority interests”) as a separate component in the equity section of the consolidated

statement of financial position. It also requires the amount of consolidated net income specifically attributable to the
noncontrolling interest be identified in the consolidated statement of income. SFAS 160 also requires changes in
ownership interest to be accounted for similarly, as equity transactions; and when a subsidiary is deconsolidated, any
retained noncontrolling equity investment in the former subsidiary and the gain or loss on the deconsolidation of the
subsidiary be measured at fair value. SFAS 160 is effective for us in January 2009. We are currently evaluating the
impact, if any, SFAS 160 will have on our financial position, results of operations and cash flows.

In March 2008, FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities (“SFAS
161”). SFAS 161 requires a company with derivative instruments to disclose information that should enable financial
statement users to understand how and why a company uses derivative instruments, how derivative instruments and
related hedged items are accounted for under SFAS No. 133, Accounting for Derivative Instruments and Hedging
Activities, and how derivative instruments and related hedged items affect a company’s financial position, financial
performance, and cash flows. SFAS 161 is effective for us in January 2009.

16. QUARTERLY FINANCIAL DATA (UNAUDITED)

2008

Net sales
Gross profit
Net income
Net income per common share:

Basic
Diluted

Weighted average number of common
shares outstanding:

Basic
Diluted

2007

Net sales
Gross profit
Net income
Net income per common share:

Basic
Diluted

Weighted average number of common
shares outstanding:

First
Quarter
$13,260,160
7,741,022
584,498

Second
Quarter
$13,847,964
8,011,652
655,250

Third
Quarter
$12,251,990
7,143,157
421,014

Fourth
Quarter
$13,876,980
8,483,463
943,419

0.05
0.05

0.06
0.06

0.04
0.04

0.09
0.09

10,977,092
11,067,863

10,981,378
11,076,340

10,988,092
11,073,942

10,779,703
10,845,517

First
Quarter
$14,507,805
8,597,953
1,346,355

Second
Quarter
$13,376,987
7,685,669
396,692

Third
Quarter
$12,806,333
6,941,634
171,606

Fourth
Quarter
$14,625,877
8,447,147
1,173,478

0.12
0.12

0.04
0.04

0.02
0.02

0.11
0.11

Basic
Diluted

10,893,359
11,150,246

10,915,061
11,114,466

10,945,661
11,129,757

10,974,222
11,160,034

REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders
Tandy Leather Factory, Inc. and Subsidiaries

We have audited the accompanying consolidated balance sheets of Tandy Leather Factory, Inc.
and Subsidiaries (the Company) as of December 31, 2008 and 2007, and the related
consolidated statements of income, stockholders’ equity and cash flows for each of the years in
the three-year period ended December 31, 2008. The Company’s management is responsible
for these financial statements. Our responsibility is to express an opinion on these financial
statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of material
misstatement. The Company is not required to have, nor were we engaged to perform, an audit
of its internal control over financial reporting. Our audit included consideration of internal control
over financial reporting as a basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the effectiveness of the
Company’s internal control over financial reporting. Accordingly, we express no such opinion.
An audit also includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects,
the consolidated financial position of the Tandy Leather Factory, Inc. and Subsidiaries as of
December 31, 2008, and 2007 and the consolidated results of its operations and its cash flows
for each of the years in the three-year period ended December 31, 2008, in conformity with
accounting principles generally accepted in the United States of America.

WEAVER AND TIDWELL, L.L.P.

Fort Worth, Texas
March 31, 2009

ITEM 9.
ACCOUNTING AND FINANCIAL DISCLOSURE

CHANGE IN AND DISAGREEMENTS WITH ACCOUNTANTS ON

None.

ITEM 9A. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures. Our management, with the participation of our Chief Executive
Officer and Chief Financial Officer, evaluated the design and operation of our “disclosure controls and procedures”
(as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) as of the end
of the period covered by this report. Based upon their evaluation of these disclosure controls and procedures, our
Chief Executive Officer and Chief Financial Officer have concluded that the disclosure controls and procedures
were effective as of the date of such evaluation in ensuring that information required to be disclosed in the reports
that we file or submit under the Exchange Act is (1) recorded, processed, summarized and reported in a timely
manner, and (2) accumulated and communicated to our management, including our principal executive and
principal financial officers, as appropriate, to allow timely decisions regarding required disclosure.

Management’s Report on Internal Control over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting.
Our internal control system was designed to provide reasonable assurance to management and the board of directors
regarding the effectiveness of our internal control processes over the preparation and fair presentation of our
published financial statements.

All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems
determined effective can provide only reasonable assurance with respect to financial statement preparation and
presentation.

We have assessed the effectiveness of our internal controls over financial reporting as of December 31, 2008. In
making this assessment, we used the criteria set forth by the Committee of Sponsoring Organizations of the
Treadway Commissions (COSO) in Internal Control – Integrated Framework. Based on our assessment, we
believe that, as of December 31, 2008, our internal control over financial reporting is effective based on that criteria.

This annual report does not include an auditor’s attestation report regarding the effectiveness of our internal control
over financial reporting and our independent registered public accounting firm has not attested to management’s
report on our internal control over financial reporting. Management’s report was not subject to attestation by the
company’s registered public accounting firm pursuant to temporary rules of the Securities and Exchange
Commission that permit us to provide only management’s report in this annual report.

Changes in internal control. There was no change in our internal control over financial reporting that occurred
during the fiscal quarter ended December 31, 2008 that has materially affected, or is reasonably likely to materially
affect, our internal control over financial reporting.

ITEM 9B. OTHER INFORMATION

None

PART III

Certain information required by Part III is omitted from this annual report as we will file a proxy statement for our
2009 Annual Meeting of Stockholders, pursuant to Regulation 14A of the Securities Exchange Act of 1934, as
amended, not later than 120 days after the end of our fiscal year covered by this report, and certain information
included in that proxy statement is incorporated herein by reference.

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

The information required by this item is contained under the heading "Executive Officers of the Registrant" in Part I
of this Annual Report on Form 10-K, and the remainder is contained in our proxy statement for our 2009 Annual
Meeting of Stockholders under the heading "Election of Directors," and is incorporated herein by reference.
Information relating to filings on Forms 3, 4 and 5 will be contained in our 2009 proxy statement under the heading
"Section 16(a) Beneficial Ownership Reporting Compliance," and is incorporated herein by reference. Information
required by this item pursuant to Items 401(h), 401(i) and 401(j) of Regulation S-K relating to an audit committee
financial expert, the identification of the audit committee of our board of directors and procedures of security
holders to recommend nominees to our board of directors will be contained in our 2009 proxy statement under the
heading "Corporate Governance" and is incorporated herein by reference.

We have adopted a written code of ethics that applies to our employees, including our principal executive officer
principal financial officer, principal accounting officer, controller, or persons performing similar functions. It is
available on our website (http://www.tandyleatherfactory.com).

ITEM 11. EXECUTIVE COMPENSATION

The information required by this item is contained in our proxy statement for our 2009 Annual Meeting of
Stockholders under the heading "Report of the Compensation Committee,” which is incorporated herein by
reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCKHOLDER MATTERS

The information required by this item is contained in our proxy statement for our 2009 Annual Meeting of
Stockholders under the headings "Stock Ownership by Directors and Executive Officers” and “Principal Holders of
Stock,” which is incorporated herein by reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND
DIRECTOR INDEPENDENCE

The information required by this item is contained in our proxy statement for our 2009 Annual Meeting of
Stockholders under the heading “Other Relationships Involving Directors, Executive Officers, or their Associates”
and is incorporated herein by reference.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

The information required by this item is contained in our proxy statement for our 2009 Annual Meeting of
Stockholders under the headings "Audit Committee” and “Report of the Audit Committee” and is incorporated
herein by reference.

PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES

(a)

The following are filed as part of this Annual Report on Form 10-K:

1. Financial Statements

The following consolidated financial statements are included in Item 8:

 Consolidated Balance Sheets at December 31, 2008 and 2007
 Consolidated Statements of Income for the years ended December 31, 2008, 2007 and 2006
 Consolidated Statements of Cash Flows for the years ended December 31, 2008, 2007 and 2006
 Consolidated Statements of Stockholders' Equity for the years ended December 31, 2008, 2007 and 2006

2. Financial Statement Schedules

All financial statement schedules are omitted because the required information is not present or not present in
sufficient amounts to require submission of the schedule or because the information is reflected in the consolidated
financial statements or notes thereto.

3. Exhibits

The exhibits listed in the Exhibit Index immediately preceding such exhibits are filed as part of this Annual Report
on Form 10-K.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the
Registrant has duly caused this Annual Report on Form 10-K to be signed on its behalf by the
undersigned, thereunto duly authorized.

TANDY LEATHER FACTORY, INC.
By:

Ronald C. Morgan
Chief Executive Officer

By:

Shannon L. Greene
Chief Financial Officer, Chief Accounting Officer and Treasurer

Dated: March 31, 2009

In accordance with the Securities Exchange Act of 1934, this Report has been signed below by the
following persons on behalf of Tandy Leather Factory, Inc. and in the capacities and on the dates
indicated.

Signature

Title

/s/ Wray Thompson

Chairman of the Board and Director

Wray Thompson

Date

March 31, 2009

/s/ Ronald C. Morgan

Chief Executive Officer and Director

March 31, 2009

Ronald C. Morgan

/s/ Shannon L. Greene

Shannon L. Greene

Chief Financial Officer, Chief Accounting Officer,
Treasurer and Director

March 31, 2009

President and Chief Operating Officer

March 31, 2009

Senior Vice President

/s/ Jon W. Thompson
Jon W. Thompson

/s/ Mark J. Angus
Mark J. Angus

/s/ T. Field Lange

Director

T. Field Lange

/s/ Joseph R. Mannes

Director

Joseph R. Mannes

/s/ L. Edward Martin III
L. Edward Martin III

Director

March 31, 2009

/s/ Robin L. Morgan

Vice President and Assistant Secretary

March 31, 2009

Robin L. Morgan

/s/ Michael A. Nery

Director

Michael A. Nery

/s/ William M. Warren
William M. Warren

Secretary

March 31, 2009

Exhibit
Number

TANDY LEATHER FACTORY, INC. AND SUBSIDIARIES
EXHIBIT INDEX

Description

3.1

3.2

4.1

10.1

10.2

10.3

10.4

10.5

10.6

10.7

10.8

14.1

21.1

*23.1

*31.1

*31.2

*32.1

Certificate of Incorporation of The Leather Factory, Inc., and Certificate of Amendment to Certificate of Incorporation of The Leather Factory, Inc.
filed as Exhibit 3.1 to Form 10-Q filed by Tandy Leather Factory, Inc. with the Securities and Exchange Commission on August 12, 2005 and
incorporated by reference herein.

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.

Financial Advisor’s Warrant Agreement, dated February 24, 2004, between The Leather Factory, Inc. and Westminster Securities Corporation filed as
Exhibit 4.1 to Form 10-Q filed by The Leather Factory, Inc. with the Securities and Exchange Commission on May 14, 2004 and incorporated by
reference herein.

Consultation Agreement, dated January 1, 2008, between Tandy Leather Factory, Inc. and J. Wray Thompson, filed as Exhibit 10.1 to Form 8-K filed
with the Securities and Exchange Commission on April 1, 2008 and incorporated by reference herein.

2007 Director Non-qualified Stock Option Plan of Tandy Leather Factory, Inc. dated March 22, 2007, filed as an Exhibit to Tandy Leather Factory,
Inc.’s Definitive Proxy Statement, filed with the Securities and Exchange Commission on April 18, 2007 and incorporated by reference herein.

Agreement of Purchase and Sale, dated June 25, 2007, by and between Standard Motor Products, Inc. and Tandy Leather Factory, L.P., filed as
Exhibit 10.4 to Form 8-K filed with the Securities and Exchange Commission on August 6, 2007 and incorporated by reference herein.

Credit Agreement, dated July 31, 2007, by and between The Leather Factory, L.P. and JPMorgan Chase Bank, N.A., filed as Exhibit 10.2 to Tandy
Leather Factory’s Current Report on Form 8-K filed with the Securities and Exchange Commission on August 6, 2007 and incorporated by reference
herein.

Line of Credit Note, dated July 31, 2007, by and between The Leather Factory, L.P. and JPMorgan Chase Bank, N.A., filed as Exhibit 10.1 to Tandy
Leather Factory’s Current Report on Form 8-K filed with the Securities and Exchange Commission on August 6, 2007 and incorporated by reference
herein.

Deed Of Trust, Assignment of Leases and Rents, Security Agreement and Financing Statement, dated as of July 31, 2007, by and among The Leather
Factory, L.P., Randall B. Durant and JPMorgan Chase Bank, N.A., filed as Exhibit 10.3 to Tandy Leather Factory’s Current Report on Form 8-K filed
with the Securities and Exchange Commission on August 6, 2007 and incorporated by reference herein.

Consultation Agreement, dated as of January 1, 2008, by and between Tandy Leather Factory, Inc. and J. Wray Thompson, filed as Exhibit 10.1 to
Tandy Leather Factory’s Current Report on Form 8-K filed with the Securities and Exchange Commission on April 7, 2008 and incorporated by
reference herein.

Consultation Agreement, dated as of January 1, 2009, by and between Tandy Leather Factory, Inc. and J. Wray Thompson, filed as Exhibit 10.1 to
Tandy Leather Factory’s Current Report on Form 8-K filed with the Securities and Exchange Commission on February 17, 2009 and incorporated by
reference herein.

Code of Business Conduct and Ethics of The Leather Factory, Inc., adopted by the Board of Directors on February 26, 2004, filed as Exhibit 14.1 to
the Annual Report on Form 10-K of The Leather Factory, Inc. (Commission File No. 1-12368) filed with the Securities and Exchange Commission on
March 29, 2004 and incorporated by reference herein.

Subsidiaries of Tandy Leather Factory, Inc. filed as Exhibit 21.1 to the Annual Report on Form 10-K of The Leather Factory, Inc. for the year ended
December 31, 2002 filed with the Securities and Exchange Commission on March 28, 2003, and incorporated by reference herein.

Consent of Weaver & Tidwell LLP dated March 31, 2009

Certification by the Chief Executive Officer and President pursuant to Rule 13a-14(a) or 15d-14(a) under the Securities Exchange Act of 1934

Certification by the Chief Financial Officer and Treasurer pursuant to Rule 13a-14(a) or 15d-14(a) under the Securities Exchange Act of 1934

Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

_________________
*Filed herewith.

Board of Directors
Wray Thompson
Chairman of the Board

T. Field Lange (1)
President
Lange & Associates, PC

Joseph R. Mannes (1)
Managing Director
SAMCO Capital Markets

Shannon L . Greene
Chief Financial Officer & Treasurer
Tandy Leather Factory, Inc.

L. Edward Martin (1)

Michael A. Nery (1)

Buis & Company

Manager

Nery Capital Partners

Ronald C. Morgan
Chief Executive Officer
Tandy Leather Factory, Inc.

(1) Member of Audit Committee,
Compensation Committee, and
Nominating Committee

Executive Officers of Tandy Leather Factory, Inc.
Wray Thompson
Chairman of the Board

Robin L. Morgan
Vice President – Administration

Mark Angus
Senior Vice President

Shannon L. Greene
Chief Financial Officer

Ronald C. Morgan
Chief Executive Officer

Other Information
Corporate Headquarters
Tandy Leather Factory, Inc.
1900 SE Loop 820
Fort Worth, Texas 76140
817/872-3200
www.tandyleatherfactory.com

Investor Relations
Information requests should
be forwarded to:
Shannon L. Greene, CFO

Transfer Agent
Computershare Trust Company
350 Indiana Street, Suite 800
Golden, CO 80401
303/262-0600

Jon Thompson
President and Chief Operating Officer

William M. Warren
Secretary and General Counsel

Stock Listing
Symbol: TLF
NYSE Amex

Independent Public Accountants
Weaver & Tidwell, LLP
Fort Worth, Texas

Annual Meeting of Stockholders
May 12, 2009
10:00 am
Corporate Headquarters
Tandy Leather Factory, Inc.
1900 SE Loop 820
Fort Worth, Texas 76140

TANDY LEATHER FACTORY LOCATIONS

United States
Anchorage, AK
Montgomery, AL
Little Rock, AR
Phoenix, AZ
Phoenix, AZ
Tempe, AZ
Tucson, AZ
Tucson, AZ
Orange Country, CA
Fresno, CA
San Bernardino, CA
San Diego, CA
Los Angeles, CA
Sacramento, CA
San Mateo, CA
Union City, CA
Ventura, CA
Van Nuys, CA
Colorado Springs, CO
Denver, CO
Denver, CO
Denver, CO
East Hartford, CT
Jacksonville, FL
Lauderhill, FL
Tampa, FL
Orlando, FL
Atlanta, GA
Boise, ID
Chicago, IL
Peoria, IL
Merrillville, IN
Indianapolis, IN
Des Moines, IA
Wichita, KS

Austin, TX
Dallas, TX
El Paso, TX
Fort Worth, TX
Fort Worth, TX
Houston, TX
Houston, TX
Irving, TX
Lubbock, TX
Mesquite, TX
San Antonio, TX
San Antonio, TX
Roy, UT
Salt Lake City, UT
Salt Lake City, UT
Richmond, VA
Seattle, WA
Spokane, WA
Tacoma, WA
Cheyenne, WY

Canada
Calgary, AB
Edmonton, AB
Vancouver, BC
Winnipeg, MB
Halifax, NS
Barrie, ON
Scarborough, ON
Toronto, ON
Montreal, QC

United Kingdom
Northampton

Mid-Continent Leather Sales
Coweta, OK

Louisville, KY
New Orleans, LA
Baltimore, MD
Boston, MA
Grand Rapids, MI
Detroit, MI
Minneapolis, MN
St Paul, MN
Kansas City, MO
Springfield, MO
St Louis, MO
Billings, MT
Omaha, NE
Reno, NV
Albuquerque, NM
Albuquerque, NM
Syracuse, NY
Charlotte, NC
Raleigh, NC
Cincinnati, OH
Cleveland, OH
Columbus, OH
Oklahoma City, OK
Tulsa, OK
Portland, OR
Allentown, PA
Pittsburgh, PA
Harrisburg, PA
Columbia, SC
Rapid City, SD
Chattanooga, TN
Knoxville, TN
Memphis, TN
Nashville, TN
Amarillo, TX

Tandy Leather Factory, Inc.